Tuesday, June 29, 2010

What Will Be the Impact of the Recent Ferrara/Questar Verdict?

At the end of last week, Judge Charles B. Adams ruled in favor of the plaintiff in a case where a landowner sued Questar E&P to be released from a shallow lease that was holding the deep rights on his land.  In the case, Santo Ferrara, who owns 47 acres in DeSoto Parish, had a 1988 lease with Questar.  Since signing the lease, Questar has drilled a single well to the Hosston formation.  I guess the lease did not have a vertical Pugh clause, so Questar was able to tie up the mineral rights to the Haynesville Shale by operating the single Hosston well.  In his ruling, the judge canceled the lease to all depths below the Hosston formation.

In his ruling, Judge Adams said,
"Clearly, Questar has been attempting to hold plaintiffs' lease for its own benefit until someone else came forward to unitize and drill. This is not developing the property for the mutual benefit of Questar and the Ferraras, it is delaying for the benefit of Questar...It is clear to this court that Questar has never had any intention to develop the plaintiffs' deep rights."
The judge also was perturbed that Questar mounted little defense other than objecting to the plaintiff's evidence and was unresponsive to the plaintiff's demands before he filed suit.  The company clearly dropped the ball, and in the process may have set a very unfavorable precedent for fellow E&P companies in Louisiana.  The Questar guys are going to have to buy a lot of drinks at industry events to smooth things out with their E&P buddies.

The big question is how much of a difference will this ruling make?  Will it set off a new land rush?  Is the ruling too narrow to apply to many others? 

My legal background mostly comes from primetime TV shows, but I do know nothing is going to happen until the case winds its way through the appeals process.  I'm sure Questar has realized the magnitude of its mistake and will mount a vigorous appeal.  If the ruling is upheld, I imagine it will lead to a flood of similar lawsuits on the same grounds.  While similar, each of these cases will have a different set of facts that likely will have to be adjudicated individually, so I think a class action suit is unlikely.   I don't think landowners are will be magically set free from bad leases. They are going to have to fight it out in the legal system. 

On the other hand, if the ruling sets a clear enough precedent, production companies might be willing (albeit reluctantly) to release lessees on the basis of a demand letter. 

It is important to note that this case is a Louisiana civil case and has no bearing in Texas, but I wonder about the implications across the state line.  I note that a number of producers have large leaseholds that are held by production but are not very active Haynesville drillers.  That implies that the leases are held by shallow production.  I'm a Louisianan, so I know little about Texas mineral law but I have to assume that more than a few Texas landowners are watching the Louisiana case with interest.


Anonymous said...

Robert--it looks like Questar used the old dog-in-the-manger defense, unsuccessful. The judge's rationale could be stated in one phrase: use it, or lose it.

Anonymous said...

It has been appointed out that any appeal will be limited to the facts presented in the original trial. New expert witnesses and new evidence will not be permissable. As Questar failed to mount an aggressive defense they will likely be quite hampered upon appeal.

Robert Hutchinson said...

Regarding appeal: Indeed, Questar will not be able to re-argue the case, but there are lots of procedural gimmicks that a smart legal team might be able to pursue. Not having mounted much of a defense might actually be a good thing for Questar if the court took actions that a more active defense may have complained about the first time around.

You never know what may happen in appeals court. There is no given that the verdict will be upheld.