Court Opinion

ID: 9396320
Source: CourtListenerOpinion
Date Created: 2023-05-21 14:06:32.10274+00
Date Added: 2024-06-11T17:19:16.093668
License: Public Domain

Supreme Court of Texas
                            ══════════
                             No. 22-0095
                            ══════════

    Freeport-McMoRan Oil & Gas LLC and Ovintiv USA Inc.,
                              Petitioners,

                                    v.

                     1776 Energy Partners, LLC,
                              Respondent

   ═══════════════════════════════════════
               On Petition for Review from the
       Court of Appeals for the Fourth District of Texas
   ═══════════════════════════════════════

                      Argued February 1, 2023

      JUSTICE BOYD delivered the opinion of the Court.

      An operator of oil-and-gas wells withheld production payments it
was contractually obligated to make to one of the wells’ owners. It did so
in reliance on a statutory provision—commonly referred to as a “safe
harbor” provision—that permits operators to withhold payments
“without interest” under certain circumstances. The owner sued the
operator to recover the payments, with interest, and the operator
ultimately made the payments, but without interest. The trial court held
that, as a matter of law, the safe-harbor provision applies and relieves
the operator from any obligation to pay interest on the amounts
withheld. The court of appeals reversed, concluding that the trial court
must resolve certain fact issues to determine whether the safe-harbor
provision applies. Because we agree with the trial court that the
safe-harbor provision applies as a matter of law, we reverse the court of
appeals’ judgment and reinstate the trial court’s judgment.
                                   I.
                               Background
       Two energy-production companies, which we will refer to as
Ovintiv1 and 1776 Energy,2 entered into a series of agreements to jointly
develop and produce minerals from oil-and-gas leases they owned in
Karnes County. These joint-operating agreements designated Ovintiv as
the operator and required 1776 Energy to pay its proportionate share of
the operating expenses in return for its share of the revenue produced
from the wells.
       Another company, Longview Energy Company, later sued 1776
Energy,3 alleging that two of Longview’s directors breached fiduciary
duties they owed to Longview by acquiring the Karnes County
investment opportunity for 1776 Energy when they should have

       1 The original predecessor to Ovintiv’s interests in these transactions
was Plains Exploration & Production Company. Plains transferred its
interests to Freeport-McMoRan Oil & Gas LLC, which later assigned the
interests to Encana Oil & Gas (USA) Inc., which later changed its name to
Ovintiv.
       1776 Energy Partners, LLC was previously called Riley-Huff Energy
       2

Group LLP.
       3 Longview’s lawsuit involved additional parties, but they are not
relevant to the issues in this case.

                                      2
acquired it for Longview.4 That suit went to trial, and the jury agreed
with Longview. Based on the jury’s verdict, the trial court rendered a
final judgment (the Longview Judgment) that, among other things,
ordered 1776 Energy to transfer its interests in the Karnes County
leases to Longview and imposed a constructive trust on those interests
until the transfer occurred. Specifically, the judgment:
       -   declared that Longview “has an equitable interest in and is
           granted a constructive trust (the ‘Constructive Trust’)[5] over
           all” of 1776 Energy’s “right, title, and interest . . . in and to”
           the leases;
       -   ordered 1776 Energy “to do all acts and things as may be
           necessary to fully transfer, convey, grant, or assign to
           Longview the legal title to all” of those leases and interests
           within thirty days;
       -   ordered that, until 1776 Energy “fully” transfers the leases
           and interests to Longview, 1776 Energy “holds the properties,
           rights, and interests . . . only to the extent of legal title as a
           constructive trustee for Longview’s use and benefit and that
           [1776 Energy] holds no equitable interest therein”; and
       -   ordered that 1776 Energy pay Longview “the production
           revenues” from the leases “and an additional $95,500,000.00.”

       4See Huff Energy Fund, L.P. v. Longview Energy Co., 482 S.W.3d 184,
187–88 (Tex. App.—San Antonio 2015) (en banc), aff’d, 533 S.W.3d 866 (Tex.
2017).
       5A constructive trust is “an equitable, court-created remedy designed
to prevent unjust enrichment.” KCM Fin. LLC v. Bradshaw, 457 S.W.3d 70, 87
(Tex. 2015) (citing Meadows v. Bierschwale, 516 S.W.2d 125, 131 (Tex. 1974)).
“The theory underlying the constructive-trust remedy is the equitable notion
that the ‘acquisition or retention of the property is wrongful and that the
possessor of the property would be unjustly enriched if the possessor were
permitted to retain the property.’” Id. (quoting Baker Botts, L.L.P. v. Cailloux,
224 S.W.3d 723, 736 (Tex. App.—San Antonio 2007, pet. denied)).

                                       3
1776 Energy appealed and posted $25 million in cash in lieu of a
supersedeas bond to suspend enforcement of the judgment.6
       When Ovintiv learned of the Longview Judgment, it began
withholding the production payments it owed to 1776 Energy under
their joint-operating agreements. Ovintiv advised 1776 Energy and
others that it would deliver the payments to their rightful owner once
Longview’s suit against 1776 Energy was resolved. Every month
thereafter, Ovintiv sent 1776 Energy an updated account of the funds it
was withholding, including an offset for 1776 Energy’s proportionate
share of the ongoing development and operating costs. 1776 Energy then
filed this suit against Ovintiv, alleging that it breached the parties’
joint-operating agreements by withholding production payments and
demanding delivery of the payments with interest and attorney’s fees.
       While this suit was pending, the court of appeals reversed the
Longview Judgment, holding that Longview’s pleadings and evidence
did not support it. Huff Energy Fund, 482 S.W.3d at 235. We granted
Longview’s petition for review, and ultimately affirmed the court of
appeals’ judgment. Longview Energy Co. v. Huff Energy Fund LP, 533
S.W.3d 866, 869 (Tex. 2017). We then denied Longview’s motion for

       6  A supersedeas bond is used “to stay execution on a judgment during
the pendency of the appeal.” Bond, BLACK’S LAW DICTIONARY (11th ed. 2019)
(citing FED. R. CIV. P. 62(d); FED. R. APP. P. 8(b)); see also TEX. R. APP. P. 24.1(f)
(“Enforcement of a judgment must be suspended if the judgment is
superseded.”). The bond is meant to “preserve[] the status quo of the matters
in litigation as they existed before the issuance of the order or judgment from
which an appeal is taken.” In re Fuentes, 530 S.W.3d 244, 250 (Tex. App.—
Houston [1st Dist.] 2017, orig. proceeding) (quoting Alpert v. Riley, 274 S.W.3d
277, 297–98 (Tex. App.—Houston [1st Dist.] 2008, pet. denied)).

                                          4
rehearing and issued our mandate. Ovintiv paid the withheld funds to
1776 Energy shortly thereafter.
       1776 Energy accepted the previously withheld payments but
continued to pursue this suit to collect the interest that accrued during
the time Ovintiv withheld the funds. Ovintiv filed a series of
summary-judgment motions, arguing that a statutory safe-harbor
provision allowed it to withhold the funds without interest until the
Longview lawsuit was resolved. After denying Ovintiv’s first two
motions, the trial court granted the third. The trial court then rendered
a final judgment, which incorporated the summary judgment and
dismissed 1776 Energy’s claims.7 1776 Energy appealed, and the court
of appeals reversed and remanded the case to the trial court, holding
that the court needed to resolve certain fact issues to decide whether the
statutory safe-harbor provision applied. ___ S.W.3d ___, 2021 WL
6127930, at *4 (Tex. App.—San Antonio Dec. 29, 2021). We granted
Ovintiv’s petition for review.
                                  II.
                         Safe-Harbor Provision
       The Texas Natural Resources Code requires a “payor” to
distribute oil-and-gas-production proceeds to each “payee” within

       7 The final judgment also incorporated a pretrial ruling in which the
trial court found that Ovintiv was the prevailing party as a matter of law and
thus entitled to its attorney’s fees under the parties’ joint-operating
agreements. The judgment awarded Ovintiv reasonable and necessary
attorney’s fees, as found by a jury.

                                      5
certain deadlines after the oil or gas is sold.8 TEX. NAT. RES. CODE
§ 91.402(a). If the payor fails to timely pay the proceeds, the payee is
entitled to recover interest on the late payments, along with its
attorney’s fees. Id. §§ 91.403, .406. Section 91.402(b), however, permits
payors to withhold payments “without interest beyond the time limits”
under certain circumstances. See id. § 91.402(b). Ovintiv contends that
two of those circumstances existed during the time it withheld payments
from 1776 Energy.
       The first provision on which Ovintiv relies permits a payor to
withhold payments if “there is . . . a dispute concerning title that would
affect distribution of payments.” Id. § 91.402(b)(1)(A). The second
permits withholding if “there is . . . a reasonable doubt that the
payee . . . has clear title to the interest in the proceeds of production.”
Id. § 91.402(b)(1)(B)(ii). Ovintiv contends it conclusively established
that both provisions apply as a matter of law. We agree.
A.     Dispute Concerning Title
       The first safe-harbor provision requires Ovintiv to establish two
facts: (1) that a “dispute concerning title” existed during the time it
withheld production payments and (2) that dispute “would affect
distribution of payments.” See id. § 91.402(b)(1)(A). 1776 Energy does
not dispute in this Court that a “dispute concerning title” existed for
most of the time Ovintiv withheld payments, but it contends Ovintiv did

       8 A “payor” is defined as “the party who undertakes to distribute oil and
gas proceeds” to the payee. TEX. NAT. RES. CODE § 91.401(2). A “payee” is “any
person or persons legally entitled to payment from the proceeds derived from
the sale of oil or gas from an oil or gas well located in this state.” Id. § 91.401(1).

                                          6
not conclusively establish that the dispute “would affect distribution of
payments.”
       Specifically, 1776 Energy argues that, because Ovintiv began
withholding payments in response to the Longview Judgment,9 the
terms of that judgment establish the facts that govern whether the
dispute between 1776 Energy and Longview “would affect the
distribution of production payments.” And, according to 1776 Energy,
the Longview Judgment did not affect the distribution of production
payments because at all times from and after the date of that judgment,
1776 Energy retained legal and equitable title to the leases and interests
giving rise to the payments. More specifically, 1776 Energy reasons as
follows:
       1. Under the Longview Judgment, 1776 Energy retained legal
          title to the interests as the trustee for the benefit of Longview
          under a constructive trust, at least until it fully transferred
          legal title to Longview;
       2. 1776 Energy never transferred legal title to Longview because
          it quickly appealed the Longview Judgment;
       3. The Longview Judgment never transferred equitable title to
          Longview because 1776 Energy quickly tendered $25 million
          in lieu of a supersedeas bond, thereby preserving the
          prejudgment status quo pending final resolution of the appeal;
       4. The court of appeals reversed the Longview Judgment and
          this Court affirmed, thus confirming 1776 Energy was the
          legal title holder throughout the time Ovintiv withheld the
          payments; and

       9 Although a dispute between 1776 Energy and Longview existed at
least as early as the date on which Longview first filed suit against 1776
Energy, Ovintiv did not begin withholding payments until after the trial court
rendered the Longview Judgment.

                                      7
       5. As long as it was the legal title holder, 1776 Energy was
          entitled to receive the payments, even if it was required to hold
          them in trust for Longview.
The court of appeals essentially agreed with 1776 Energy, concluding
that 1776 Energy was always entitled to receive the production
payments “either: (1) as owner of legal and equitable title; or (2) as
trustee, under the Longview Judgment, for the benefit of Longview
Energy until 1776 Energy could transfer legal title to Longview Energy.”
___ S.W.3d at ___, 2021 WL 6127930, at *3.
       Even assuming 1776 Energy and the court of appeals correctly
construe    the    Longview      Judgment,      they    misconstrue      section
91.402(b)(1)(A). That provision requires that the dispute existing
between 1776 Energy and Longview when Ovintiv withheld the
payments “would affect” distribution of the production payments. Under
its common, ordinary usage,10 the term “would” can carry a variety of
meanings depending on its context. Section 91.402(b)(1)(A) uses “would”
in its auxiliary form11 to express “a contingency or possibility” or a

       10 Because the Natural Resources Code does not define the terms
“would” or “affect,” we must apply their common, ordinary meaning unless a
contrary meaning is apparent from the statute’s language. Tex. State Bd. of
Exam’rs of Marriage & Fam. Therapists v. Tex. Med. Ass’n, 511 S.W.3d 28, 34
(Tex. 2017) (citing Univ. of Tex. at Arlington v. Williams, 459 S.W.3d 48, 52
(Tex. 2015)). We typically do this by looking first to dictionaries. Id. at 35
(citing Epps v. Fowler, 351 S.W.3d 862, 866 (Tex. 2011)).
       11A verb used in its auxiliary form is commonly referred to as a modal
auxiliary. See Modal Auxiliary, WEBSTER’S NINTH NEW COLLEGIATE
DICTIONARY (1984). It is a verb such as “can, must, might, [or] may” that is
characteristically used with a verb of predication. Id. While a regular verb is
usually the “grammatical center of a predicate and expresses an act,
occurrence, or mode of being . . . [and] typically has [a] rather full descriptive

                                        8
“probability or presumption in past or present.” Would, WEBSTER’S
NINTH NEW COLLEGIATE DICTIONARY (1984). And the term “affect”
means “to produce an effect upon,” “to produce a material influence upon
or alteration in,” or “to act upon . . . so as to effect a response.” Affect,
WEBSTER’S NINTH NEW COLLEGIATE DICTIONARY (1984). The inclusion of
“would” as an auxiliary verb with “affect” as a predicate verb alters the
sentence’s meaning so that, instead of requiring a “current effect,” the
provision requires only an expected future effect. In other words,
because the sentence includes “would,” it does not require that the
dispute currently alter or influence distributions at the time the payor
withholds the distributions. Section 91.402(b)(1)(A) thus permitted
Ovintiv to withhold the payments without interest if the dispute
concerning title was, at that time, at least expected or likely to influence
or alter the distribution of the payments Ovintiv owed to 1776 Energy
under the joint-operating agreements. In our view, as a matter of law, it
“would.”
       If, for example, the Longview lawsuit ultimately resulted in a
decision that Longview was entitled to receive the production payments,
that judgment would have required that the payments—those Ovintiv
withheld as well as those that would come due in the future—be
distributed to Longview. Because the lawsuit ultimately resulted in a
decision that 1776 Energy was entitled to receive the payments, it
required the payments—those Ovintiv withheld as well as those that

meaning and characterizing quality,” an auxiliary verb tends to be “devoid” of
that meaning. See Verb, WEBSTER’S NINTH NEW COLLEGIATE DICTIONARY
(1984).

                                      9
would become due in the future—to be distributed to 1776 Energy.
Either way, the dispute that existed when Ovintiv withheld the
payments “would affect the distribution of payments,” either by ordering
that they be made to Longview or by ordering that they be made to 1776
Energy.
       By contrast, 1776 Energy and the court of appeals construe the
section to permit withholding only if the dispute “currently alters the
distribution of the payments” or “requires the payor to distribute the
payments to a different payee.” But section 91.402(b)(1)(A) does not
permit withholding without interest if, at the time the payor withholds
the payments (the present), “there is” a dispute “that affects” or “that
currently affects” (in the present) the distribution. Instead, it permits
withholding without interest if at that time (the present) “there is” a
dispute “that would affect” distribution, thus referring to a future time
from a past point of view.12 Any other interpretation ignores the role
“would” plays in the statutory text and how it modifies the word “affect.”
The fact that 1776 Energy always retained legal—and even equitable—
title does not alter the fact that the dispute existed or that the dispute
“would affect distribution of the payments.” Section 91.402(b)(1)(A) thus
permitted Ovintiv to withhold production payments “without interest.”
       Alternatively, 1776 Energy argues that its dispute with Longview
“was cleared” and “terminated” when the court of appeals reversed the
Longview Judgment and rendered judgment for 1776 Energy, or at least

       12  Would, CAMBRIDGE DICTIONARY, https://dictionary.cambridge.org
/dictionary/english/would (last visited May 9, 2023) (defining “would” as “used
to refer to future time from the point of view of the past”).

                                      10
when we issued our opinion affirming the court of appeals’ judgment.
But a court of appeals’ decision is not final until it issues a mandate, 13
see Clark v. ConocoPhillips Co., 465 S.W.3d 720, 726 (Tex. App.—
Houston [14th Dist.] 2015, no pet.), which it never did here because
Longview filed a petition for review in this Court. See TEX. R. APP.
P. 18.1(a) (stating that courts of appeals issue mandates only if no
petition for review was filed or if the petition was denied or dismissed
and the time to file a motion for rehearing of that decision has passed).
And our decisions become final when we issue a mandate, which we can
do “[t]en days after the time has expired for filing a motion to extend
time to file a motion for rehearing if no timely filed motion for rehearing
or motion to extend time is pending.” TEX. R. APP. P. 18.1(b). Until then,
the dispute still existed because Longview could file a motion for
rehearing and convince us to change our opinion and judgment. In short,
the dispute between 1776 Energy and Longview existed at least until
the day we issued our mandate after affirming the court of appeals’
judgment.14

       13 A mandate is the means of enforcing an appellate court’s judgment.
See Saudi v. Brieven, 176 S.W.3d 108, 116–17 (Tex. App.—Houston [1st Dist.]
2004, pet. denied). It acts as “the official notice of the action of the appellate
court, directed to the court below, advising it of the action of the appellate court
and directing it to have its judgment duly recognized, obeyed and executed.”
Id. (quoting Lewelling v. Bosworth, 840 S.W.2d 640, 642 (Tex. App.—Dallas
1992, orig. proceeding)).
       141776 Energy notes in its brief that Ovintiv did not distribute the
withheld payments until nine days after this Court issued its mandate in the
Longview litigation, but it has not argued or prayed for relief related to that
nine-day period in this Court or, as far as we can tell, in the courts below.

                                        11
B.    Reasonable Doubt Regarding Clear Title
      The second safe-harbor provision applies if Ovintiv had a
“reasonable doubt” that 1776 Energy had “clear title to the interest in
the   proceeds        of    production.”     See   TEX.    NAT.   RES.   CODE
§ 91.402(b)(1)(B)(ii). The parties primarily disagree about the import of
the phrase “reasonable doubt.” According to 1776 Energy, issues of
reasonableness must be resolved by a factfinder as a question of fact
rather than by a court as a matter of law. The court of appeals agreed,
explaining that the determination as to “whether something is
reasonable is often an issue of fact that should be adjudicated by the
factfinder        because    it   requires    comparison     to   surrounding
circumstances.” ___ S.W.3d at ___, 2021 WL 6127930, at *4. Based on
evidence it identified as casting doubt on the reasonableness of Ovintiv’s
belief that 1776 Energy did not have “clear title” to the production
proceeds, the court of appeals reversed the trial court’s judgment. Id. We
disagree.
      Reasonableness has always entailed an objective inquiry. See
Crosstex N. Tex. Pipeline, L.P. v. Gardiner, 505 S.W.3d 580, 596 (Tex.
2016) (“[U]nreasonableness must be determined based on an objective
standard of persons of ordinary sensibilities.”); see also RESTATEMENT
(SECOND)     OF   TORTS § 283 cmt. c (AM. LAW INST. 1965) (describing the
“reasonable man” standard as “an objective and external one”). While
questions of reasonableness must be submitted to a factfinder when a
genuine disagreement about the facts prevents the law from generating
an objective answer, see Collora v. Navarro, 574 S.W.2d 65, 68 (Tex.
1978) (citing Najera v. Great Atl. & Pac. Tea Co., 207 S.W.2d 365, 367

                                        12
(Tex. 1948)), no case citing that proposition can be understood to say
that a factfinder must resolve all issues touching on reasonableness.
Rather, the legal standard for reasonableness remains objective even if
the “controlling facts” are in doubt.15 Thus, reasonableness may present
a question of law “when from the facts in evidence but one rational
inference can be drawn.” Lang v. Henderson, 215 S.W.2d 585, 357 (Tex.
1948); see also Reliance Nat’l Indem. Co. v. Advance’d Temps., Inc., 227
S.W.3d 46, 60 (Tex. 2007); EXLP Leasing v. Galveston Cent. Appraisal
Dist., 554 S.W.3d 572, 581 (Tex. 2018).
       As a result, when the material facts are undisputed and lead to
but    one    rational    conclusion,      courts   may     resolve    section
91.402(b)(1)(B)(ii)’s “reasonable doubt” prong as a matter of law.
Applying that prong here, we hold as a matter of law that Ovintiv had a
“reasonable doubt” that 1776 Energy had “clear title to the interest in
the   proceeds     of    production.”      See   TEX.   NAT.    RES.    CODE
§ 91.402(b)(1)(B)(ii). The reason is straightforward: Longview’s claims
and pending lawsuit, which sought (and eventually obtained) a
judgment imposing a constructive trust over 1776 Energy’s interests,
clouded 1776 Energy’s title to the production proceeds.
       1776 Energy contends that the “constructive trust” established its
title to the production proceeds, but the opposite is true. A court may
impose a constructive trust only if the court concludes the owner
possesses the property wrongfully or unlawfully. See KCM Fin., 457

       15 When the controlling facts are disputed, the court properly instructs
the jury about the objective legal standard and the jury then determines, based
on what it finds to be the true facts, whether the party acted in conformance
with that standard. If so, the party acted reasonably; if not, it did not.

                                      13
S.W.3d at 87; Meadow, 516 S.W.2d at 131 (“Constructive trusts, being
remedial in character, have the very broad function of redressing wrong
or unjust enrichment in keeping with basic principles of equity and
justice.”). By imposing a constructive trust, a court concludes the party
should not be holding the property at all, which makes the party’s title
anything but “clear.”
       In any event, the very existence of the underlying dispute, so long
as it was not frivolous, would cloud the title, even though we ultimately
reversed the court of appeals’ judgment.16 For these reasons, 1776
Energy objectively could not have had “clear title” under section
91.402(b)(1)(B)(ii) and Ovintiv, in turn, objectively held at least a
“reasonable doubt” regarding clear title.
       1776 Energy’s various objections cannot overcome this legal
conclusion. 1776 Energy highlights, for example, the deposition
testimony of Ovintiv’s corporate representative, who said she was aware
that 1776 Energy was holding the disputed assets for the benefit of
Longview (by virtue of the constructive trust) and that Ovintiv
continued billing 1776 Energy for its share of the development and
operating costs. And according to an affidavit by 1776 Energy’s
president, “out of all the parties that 1776 Energy was in business with

       16 On appeal in the Longview suit, 1776 Energy conceded that its “title
to the assets encompassed within the constructive trust remains clouded, and
the judgment materially impacts the day-to-day operations.” 1776 Energy was
correct, as our cases recognize that a claim against a party’s title to property
can create a cloud on that title. See Lance v. Robinson, 543 S.W.3d 723, 738
(Tex. 2018); Brumley v. McDuff, 616 S.W.3d 826, 835 (Tex. 2021); see also
Cloud on Title, BLACK’S LAW DICTIONARY (11th ed. 2019) (“A defect or potential
defect in the owner’s title to a piece of land arising from a claim or
encumbrance, such as a lien, an easement, or a court order.”).

                                      14
before, after, and during the” Longview suit, Ovintiv was the only one
that suspended payment. Based on this evidence, 1776 Energy argues
Ovintiv’s doubt about clear title could not have been reasonable or—at
the very least—whether it was reasonable presents a fact issue.
      Assuming this evidence is true and viewing it in the light most
favorable to 1776 Energy, a reasonable doubt existed as a matter of law.
A corporate representative’s acknowledgement of how a constructive
trust works only confirms that 1776 Energy itself lacked clear title.
Likewise, Ovintiv’s continued billing of 1776 Energy is not inconsistent
with the belief that 1776 Energy lacked clear title to the proceeds; bills
can be sent to an entity with clouded title. If anything, the constructive
trust justified sending those bills.
                                  III.
                               Conclusion
      For these reasons, we hold that Ovintiv established as a matter
of law that it was entitled to withhold distribution of production
payments without interest under the statutory safe-harbor provisions in
section 91.402(b)(1)(A) and (b)(1)(B)(ii) of the Texas Natural Resources
Code. We therefore reverse the court of appeals’ judgment and reinstate
the trial court’s final judgment for Petitioners.

                                            Jeffrey S. Boyd
                                            Justice

OPINION DELIVERED: May 19, 2023

                                       15