Dimock Operating Company, and Joe W. Dimock, D/B/A Dimock Petroleum v. Sutherland Energy Co., LLC ( 2015 )

ACCEPTED
07-15-00297-cv
SEVENTH COURT OF APPEALS
AMARILLO, TEXAS
10/19/2015 10:03:21 PM
Vivian Long, Clerk
No. 07-15-00297-CV
FILED IN
COURT OF APPEALS 7th COURT OF APPEALS
AMARILLO, TEXAS
SEVENTH DISTRICT OF TEXAS
10/19/2015 10:03:21 PM
________________________ VIVIAN LONG
CLERK
DIMOCK OPERATING COMPANY, and
JOE W. DIMOCK, D/BA DIMOCK PETROLEUM,
Appellants,
v.
SUTHERLAND ENERGY CO., LLC
Appellee.
________________________
On appeal from Cause No. 11,098
th
46 District Court, Hardeman County, Texas
Hon. Dan Mike Bird, Judge Presiding
BRIEF OF APPELLANT
Respectfully submitted,
Lovell, Lovell, Newsom & Isern, L.L.P.
John H. Lovell, SBN 12609300
(john@lovell-law.net)
Barbara A. Bauernfeind, SBN 08190500
(barbara@lovell-law.net)
112 West 8th Avenue, Suite 1000
Amarillo, Texas 79101-2314
Telephone: (806) 373-1515
Facsimile: (806) 379-7176
ATTORNEYS FOR APPELLANT
ORAL ARGUMENT REQUESTED (TEX.R.APP.P. 39.1)
i
IDENTITY OF PARTIES AND COUNSEL
The following is a list of parties and counsel to the trial court’s judgment, as
required by Rule 38.1(a), of the Texas Rules of Appellate Procedure.
TRIAL JUDGE: Honorable Dan Mike Bird
46th Judicial District - Hardeman County
1700 Wilbarger Street, Room 34A
Vernon, Texas 76384
Telephone: (940) 552-7051
Facsimile: (940) 552-0305
APPELLANT (DEFENDANT): Dimock Operating Company, and Joe W.
Dimock, d/b/a Dimock Petroleum.
TRIAL COUNSEL: Lovell, Lovell, Newsom & Isern, L.L.P.
John H. Lovell, SBN 12609300
(john@lovell-law.net)
Barbara A. Bauernfeind, SBN 08190500
(barbara@lovell-law.net)
112 West 8th Avenue, Suite 1000
Amarillo, Texas 79101-2314
Telephone: (806) 373-1515
Facsimile: (806) 379-7176
Cornell D. Curtis, P.C.
Cornell Curtis, SBN 24007069
(vernonlaw@sbcglobal.net)
1716 Main Street
Vernon, Texas 76384
Telephone: (940) 552-9100
Facsimile: (940) 552-2655
ii
APPELLATE COUNSEL: Lovell, Lovell, Newsom & Isern, L.L.P.
John H. Lovell, SBN 12609300
(john@lovell-law.net)
Barbara A. Bauernfeind, SBN 08190500
(barbara@lovell-law.net)
112 West 8th Avenue, Suite 1000
Amarillo, Texas 79101-2314
Telephone: (806) 373-1515
Facsimile: (806) 379-7176
Cornell D. Curtis, P.C.
Cornell Curtis, SBN 24007069
(vernonlaw@sbcglobal.net)
1716 Main Street
Vernon, Texas 76384
Telephone: (940) 552-9100
Facsimile: (940) 552-2655
APPELLEE (PLAINTIFF): Sutherland Energy Co., LLC
TRIAL COUNSEL: Malone Law Firm
Chris Lehman, SBN 24046286
(clehman@malonelawtx.com)
1901 Lamar Street
P.O. Box 953
Vernon, Texas 76385
Telephone: (940) 552-9946
Facsimile: (940) 552-9925
Walters, Balido & Crain, L.L.P.
Jerry L. Ewing, Jr., SBN 06755470
Nathan R. Cash, SBN 24072026
Meadow Park Tower, 15th Floor
10440 North Central Expressway
Dallas, Texas 75231
Telephone: (214) 749-4805
Facsimile: (214) 760-1670
iii
APPELLATE COUNSEL: Malone Law Firm
Chris Lehman, SBN 24046286
(clehman@malonelawtx.com)
1901 Lamar Street
P.O. Box 953
Vernon, Texas 76385
Telephone: (940) 552-9946
Facsimile: (940) 552-9925
Walters, Balido & Crain, L.L.P.
Jerry L. Ewing, Jr., SBN 06755470
Nathan R. Cash, SBN 24072026
Meadow Park Tower, 15th Floor
10440 North Central Expressway
Dallas, Texas 75231
Telephone: (214) 749-4805
Facsimile: (214) 760-1670
iv
TABLE OF CONTENTS
IDENTITY OF PARTIES AND COUNSEL ........................................................... II
TABLE OF CONTENTS .......................................................................................... V
TABLE OF AUTHORITIES ................................................................................ VIII
STATEMENT OF THE CASE .................................................................................. 1
STATEMENT REGARDING ORAL ARGUMENT ............................................... 2
ISSUES PRESENTED...............................................................................................2
A. ISSUES AS TO JULY 7, 2015 TEMPORARY INJUNCTION ....................... 2
B. ISSUES AS TO JULY 9, 2015 ORDER............................................................ 6
STATEMENT OF FACTS ........................................................................................6
SUMMARY OF THE ARGUMENT ......................................................................22
ARGUMENT ...........................................................................................................23
A. Standard of Review ..........................................................................................23
B. Rules of Construction and Contract Interpretation ..........................................24
C. Sutherland “Interpretation” Not Consistent With Texas Law .........................26
D. After Trial Court Erroneously Authorized Unlimited Spending,
Injunction Now Authorizes Unlimited Time to Drill ....................................28
E. Trial Court Action Constitutes an Erroneous Pretrial Forfeiture of
Leasehold .......................................................................................................30
F. Contract Construction Harmonizing and Giving Effect to All
Provisions ......................................................................................................31
G. Limits on Project Costs Common in Operating Agreements...........................32
H. Partial Assignment of Oil, Gas and Mineral Lease Was Subject to
Parties’ November 20, 2012 Agreement including the
Operating Agreement.....................................................................................36
I. Trial Court Erroneously Rewrote Contract ......................................................37
v
J. Lack of Probable Right to Recover ..................................................................38
K. Mandatory Provisions Are Abuse of Discretion ..............................................39
L. Injunction Erroneously Compels Assignment Even If Well Is Not
Drilled and Completed Within Contract Deadline ........................................40
M. Lack of Imminent Harm ...................................................................................41
N. Injunction Erroneously Has No Provision Requiring Compliance
with Contract by Sutherland ..........................................................................41
O. Injunction Order Erroneously Provided Investment Assurance ......................42
P. Pending Suit and Lis Pendens Already Made Drilling Additional
Wells a Risk for Sutherland, and is Privileged, So There Is No
Imminent Harm..............................................................................................42
Q. Appellant Entitled to Maintain that Sutherland has Breached
Contract and to File Lis Pendens ...................................................................46
R. Destroyed Status Quo .......................................................................................47
S. Violated Statute of Frauds ................................................................................49
T. Violated Statute of Conveyances .....................................................................49
U. Erroneous Order of Specific Performance of Non-Existent
Contract..........................................................................................................50
V. Illegal Prior Restraint on Speech......................................................................51
W. Prior Breaches of Contract Bar Injunctive Relief ............................................53
X. Injunctive Relief Not Available to Party Guilty of Inequitable
Conduct, Laches, and Unclean Hands ...........................................................60
Y. No “Repudiation” by Dimock ..........................................................................60
Z. Injunction Improperly Restrains Right to Relief for Future
Breaches of Contract......................................................................................62
vi
AA. Injunction Erroneously Granted Without Joinder of Necessary
Parties.............................................................................................................63
BB. Inadequate Bond ...............................................................................................63
CC. Error to Deny Dimock Injunctive Relief..........................................................65
CONCLUSION AND PRAYER .............................................................................66
CERTIFICATE OF COMPLIANCE .......................................................................68
CERTIFICATE OF SERVICE ................................................................................69
vii
TABLE OF AUTHORITIES
Federal Cases
Alexander v. U.S., 509 U.S. 544, 113 S. Ct. 2766 (1993) ........................................52
Ashcroft v. Mattis, 431 U.S. 171 (1977) ..................................................................39
Grace Holdings, L.P. v. Sunshine Mining and Refining, 901 F. Supp.
853 (D.Del.1995) ...........................................................................................42
Near v. Minnesota ex rel. Olson, 283 U.S. 697, 51 S. Ct. 625 (1930) .....................51
Organization for a Better Austin v. Keefe, 402 U.S. 415, 91 S. Ct. 1575
(1971) .............................................................................................................51
Texas Cases
Atkinson Gas Co. v. Albrecht, 878 S.W.2d 236 (Tex.App.-Corpus
Christi 1994, writ denied) ..............................................................................61
Atlantic Richfield Co. v. W.O. Hilton, 437 S.W.2d 347 (Tex.Civ.App.-
Tyler 1969, no writ) .................................................................................60, 61
Aurora Petroleum, Inc. v. Cholla Petroleum, Inc., 2011 WL 652843
(Tex. App.—Amarillo 2011, no pet.) ............................................................37
Beaumont Bank, NA v. Buller, 806 S.W.2d 223 (Tex. 1991) ..................................24
Blaschke v. Wiede, 649 S.W.2d 749 (Tex.App.—Texarkana 1983, writ
ref’d n.r.e.) ...............................................................................................40, 41
Borders v. KRLB, Inc., 727 S.W.2d 357 (Tex.App.-Amarillo 1987,
writ ref’d n.r.e.) ........................................................................................24, 25
Burrow v. Arce, 997 S.W.2d 229 (Tex. 1999) .........................................................58
Butnaru v. Ford Motor Co., 84 S.W.3d. 198 (Tex.2002) ........................................23
Casanova v. Falstaff Beer, Inc., 304 S.W.2d 207 (Tex.Civ.App.‒
Eastland, 1957, writ ref’d n.r.e.) ....................................................................53
viii
Computek Computer & Office Supply v. Walton, 156 S.W.3d 217
(Tex. App.–Dallas 2005, no pet.) ..................................................................51
Cone v. Fagadau Energy Corp., 68 S.W.3d 147 (Tex. App. – Eastland,
2001, pet. den.) ..................................................................................32, 33, 58
Cox v. Davison, 397 S.W.2d 200, 203 (Tex. 1965) .................................................32
Cross Timbers Oil Co. v. Exxon Corp., 22 S.W.3d 24 (Tex.App.-
Amarillo, 2000, no pet.).....................................................................25, 30, 35
Cundiff v. McLean & Miller, 8 S.W. 43 (Tex. 1888) ..............................................46
Eberts v. Businesspeople Pers., 620 S.W.2d 861 (Tex.Civ.App.-Dallas
1981, no writ)...........................................................................................50, 55
El Paso Dev. Co. v. Berryman, 729 S.W.2d 883 (Tex.App.-Corpus
Christi 1987, no writ).....................................................................................64
Emmer v. Petroleum Co., 668 S.W.2d 487 (Tex.App.-Amarillo 1984,
no writ)...........................................................................................................25
Griffin v. Rowden, 702 S.W.2d 692 (Tex.App.-Dallas 1986, writ ref’d
n.r.e.) ..............................................................................................................47
Guffey v. Utex Exploration Co., 376 S.W.2d 1 (Tex.Civ.App.-San
Antonio 1964, writ ref’d n.r.e.) .....................................................................50
Halbert v. Standley, 488 S.W.2d 887, 889 (Tex.Civ.App.-Waco 1972,
writ ref’d n.r.e.) ..............................................................................................53
Hammonds v. Hammonds, 313 S.W.2d 603 (Tex.1958) .........................................55
HECI Explor. Co. v. Neel, 982 S.W.2d 881 (Tex.1998) .........................................25
Hill v. Heritage Resources, Inc., 964 S.W.2d 89 (Tex. App. – El Paso,
1997, pet. den.) ..................................................................................27, 28, 33
IMCO Oil & Gas Co. v. Mitchell Energy Corp., 911 S.W.2d 916 (Tex.
App. – Fort Worth 1995, no writ)..................................................................35
King Ranch, Inc. v. Chapman, 118 S.W.3d 742 (Tex. 2003) ..................................60
ix
Kropp v. Prather, 526 S.W.2d 283 (Tex.Civ.App.-Tyler 1975, writ
ref’d n.r.e.) .....................................................................................................47
Ladner v. Reliance Corp., 293 S.W.2d 758 (Tex. 1956) .........................................63
Landry’s Seafood Inn & Oyster Bar - Kemah, Inc. v. Wiggins, 919
S.W.2d 924 (Tex. App.–Houston [14th Dist.] 1996, no writ) ........................60
Langdon v. Progress Laundry Cleaning Co., 105 S.W.2d 346
(Tex.Civ.App.-Dallas 1937, writ ref’d) .........................................................53
LeFaucheur v. Williams, 807 S.W.2d 20 (Tex.App.—Austin 1991, no
writ)................................................................................................................40
Liles v. Thompson, 85 S.W.2d 784 (Tex. Civ.App.-El Paso 1935, writ
dismissed) ......................................................................................................64
Marketshare Telecom, LLC v. Ericson, Inc., 198 S.W.3d 908
(Tex.App.-Dallas 2006, no pet.) ........................................................23, 39, 52
Mattern v. Herzog, 367 S.W.2d 312 (Tex. 1963) ....................................................28
McCharen v. Bailey, 87 S.W.2d 284 (Tex. App. - Eastland 1935, no
writ)................................................................................................................63
Mengden v. Penisula Prod. Co., 544 S.W.2d 643 (Tex. 1976) ...............................32
Michelin North America, Inc. v. First Industrial NLF 12 JV, LLC,
2014 WL 586228 (Tex. App. – Houston (1st Dist.) 2014, no pet.
history) ...........................................................................................................29
Myers v. Gulf Coast Minerals Mgmt. Corp., 361 S.W.2d 193 (Tex.
1962) ..............................................................................................................25
Paint Rock Operating, LLC v. Chisholm Exploration, Inc., 339
S.W.3d 771 (Tex.App.—Eastland 2011, no pet.)....................................32, 34
Petro Pro, Ltd. v. Upland Resources, Inc., 279 S.W.3d 743 (Tex. App.
– Amarillo 2007, pet. den.) ......................................................................25, 36
Phillips Pet. Co. v. American Trading and Prod. Corp., 361 S.W.2d
942 (Tex. Civ. App. – El Paso, 1962, writ ref’d n.r.e.) .................................43
x
Phillips Petroleum Co. v. Gillman, 593 S.W.2d 152 (Tex.Civ.App.-
Amarillo 1980, writ ref’d n.r.e.) ....................................................................24
Phillips v. Latham, 523 S.W.2d 19 (Tex.Civ.App.-Dallas 1975, writ
ref’d n.r.e.) .....................................................................................................55
Pirmantgen v. Feminelli, 745 S.W.2d 576 (Tex.App.-Corpus Christi,
no writ)...........................................................................................................46
Questa Energy Corp. v. Vantage Point Energy, Inc., 887 S.W.2d 217
(Tex.App.-Amarillo 1994, writ denied) ........................................................24
Rhodia, Inc. v. Harris County, 470 S.W.2d 415 (Tex.Civ.App.-
Houston [1st Dist.] 1971, no writ) ..................................................................40
Ross v. McLelland, 281 S.W.2d 773 (Tex.Civ. App. - Fort Worth,
1955, writ ref’d n.r.e.)....................................................................................46
Royal Indem. Co. v. Marshall, 388 S.W.2d 176 (Tex.1965) ...................................38
Sakowitz, Inc. v. Steck, 669 S.W.2d 105 (Tex. 1984) ..............................................47
Schmidt v. Richardson, 420 S.W.3d 442 (Tex.App.-Dallas 2014, no
writ)................................................................................................................41
Shadow Dance Ranch Partnership v. Weiner, 2005 WL 3295664
(Tex. App. – San Antonio, 2005, no pet.) .....................................................27
Springer Ranch, Ltd. v. Jones, 421 S.W.3d 273 (Tex. App. – San
Antonio 2013, no pet.) ...................................................................................26
Sun Operating, Ltd. v. Holt, 984 S.W.2d 277 (Tex.App.-Amarillo
1998, pet. denied) ..........................................................................................24
T.O. Stanley Boot Co. v. Bank of El Paso, 847 S.W.2d 218
(Tex. 1992) ....................................................................................................37
Tanebaum Textile Co., Inc. v. Sidran, 423 S.W.2d 635 (Tex. Civ.
App. – Dallas 1967, writ ref’d n.r.e.) ............................................................28
Texas Independent Exploration, Ltd. v. Peoples Energy Petroleum-
Texas, L.P., 2009 WL 2767037 (Tex. App. – San Antonio,
2009, no. pet.) ................................................................................................36
xi
Texstar North America, Inc. v. Ladd Petroleum Corp., 809 S.W. 672
(Tex. App. – Corpus Christi 1991, writ den.)................................................32
Tri-Star Petroleum Co. v. Tipperary Corp., 101 S.W.3d 583
(Tex.App.-El Paso, 2003, pet. denied) ..........................................................48
Valance Operating Co. v. Dorsett, 164 S.W.3d 656 (Tex. 2005)
(concurring opinion) ......................................................................................33
Walling v. Metcalfe, 863 S.W.2d 56 (Tex.1993) ...............................................23, 24
Webb v. Glenbrook Owners Ass’n., Inc., 298 S.W.3d 374 (Tex.App.-
Dallas 2009, no pet.) ......................................................................................24
Texas Rules and Statutes
TEX. BUS. & COM. CODE §26.01(b)(4) ....................................................... 49, 50
TEX. BUS. & COM. CODE §26.01(b)(6) ....................................................... 49, 50
TEX. PROP. CODE §5.002 .....................................................................................50
TEX. PROP. CODE §5.021 .....................................................................................50
TEX. PROP. CODE ANN. §12.007 (Vernon 1984) ...............................................47
TEX. R. APP. P. 38.1(e) ...............................................................................................2
Tex. R. App. P. 39.1(c) ..............................................................................................2
Tex. R. App. P. 39.1(d) ..............................................................................................2
Tex. R. Civ. P. 39 .....................................................................................................16
Tex. R. Civ. P. 682 ...................................................................................................23
Tex. R. Civ. P. 684 ............................................................................................ 23, 63
Tex. R. Civ. P. 76a(1) ..............................................................................................46
Secondary Authorities
The Chicago Manual of Style R. 5.57 (14th Ed. 1993) ..............................................9
xii
TO THE HONORABLE SEVENTH COURT OF APPEALS:
Appellants/Defendants, Dimock Operating Company, and Joe W. Dimock,
d/b/a Dimock Petroleum, will be referred to as “Dimock”. Appellee/Plaintiff,
Sutherland Energy Co., LLC will be referred to as “Sutherland”. This is an appeal
of an order granting a temporary injunction to Sutherland, and of an order denying
a temporary injunction to Dimock. CR 1590, 1599.
STATEMENT OF THE CASE
This suit arises from a disputed oil and gas farmout agreement, with an
incorporated operating agreement. CR 12-62. Dimock first sought injunctive
relief by Application for Temporary Injunction on August 1, 2014. CR 126.
Sutherland sought injunctive relief by Application for Temporary Injunction, and
then an Amended Application, filed on June 11, 2015 and June 29, 2015,
respectively. CR 1296, 1361. Dimock’s Application was initially set for hearing
for September 22, 2014, CR 167, but, at the hearing, the Trial Court deferred
action on such Application. RR 2:4, 62. The Trial Court granted a Partial
Summary Judgment in favor of Sutherland on October 21, 2014, based on its
erroneous legal interpretation of the farmout agreement, but that order was vacated
in December, 2014 and replaced by a December 19, 2014 order. CR 1268, 1282,
1285, 1286, 1613. Dimock filed a Motion for Permissive Appeal of the Partial
Summary Judgment, but the Trial Court denied the Motion. CR 1269, 1284. The
1
Trial Court finally heard Dimock’s Application for Temporary Injunction along
with Sutherland’s Amended Application for Temporary Injunction on July 2, 2015.
RR 3:7. At the hearing, the Trial Court granted Sutherland’s Amended
Application for Temporary Injunction and denied Dimock’s Application for
Temporary Injunction, signing the order granting an injunction on July 7, 2015.
RR 4:131, 140, CR 1590. The order denying Dimock’s Application for Temporary
Injunction was signed on July 9, 2015. CR 1599. A Writ of Injunction was issued
July 7, 2015, CR 1595, and Sutherland’s Bond was filed on July 7, 2015. CR
1593. Dimock filed his Notice of Appeal on July 21, 2015. CR 1609. The trial
court judge is Judge Dan Mike Bird, 46th Judicial District Court, Hardeman
County, Texas.
STATEMENT REGARDING ORAL ARGUMENT
The Court should grant oral argument because it will give the Court a more
complete understanding of the facts, will allow the Court to better analyze the legal
issues, and will significantly aid the Court in deciding this case. See TEX. R. APP.
P. 38.1(e), Tex. R. App. P. 39.1(c), and Tex. R. App. P. 39.1(d).
ISSUES PRESENTED
A. ISSUES AS TO JULY 7, 2015 TEMPORARY INJUNCTION
ISSUE NO. 1: The Trial Court erred in entering the Temporary
Injunction Order.
2
ISSUE NO. 2: The Trial Court erred because there is no evidence,
or insufficient evidence, of a cause of action
against Dimock for the injunctive relief sought.
ISSUE NO. 3: The Trial Court erred because there is no evidence,
or insufficient evidence, of the existence of a
wrongful act by Dimock.
ISSUE NO. 4: The Trial Court erred because there is no evidence,
or insufficient evidence, of imminent harm to
Sutherland.
ISSUE NO. 5: The Trial Court erred because there is no evidence,
or insufficient evidence, of irreparable injury to
Sutherland.
ISSUE NO. 6: The Trial Court erred because there is no evidence,
or insufficient evidence, of the absence of an
adequate remedy at law.
ISSUE NO. 7: The Trial Court erred because there is no pleading
by Sutherland of repudiation of the Seismic
Exploration and Farmout Agreement by Dimock.
ISSUE NO. 8: The Trial Court erred in finding repudiation
because there is no evidence, or insufficient
evidence, of repudiation of the Seismic
Exploration and Farmout Agreement.
ISSUE NO. 9: The Trial Court erred because there is no evidence,
or insufficient evidence, that Dimock has
interfered with drilling operations that are
underway, or has withheld any required
assignment of drilling unit acreage after Sutherland
has drilled and completed an additional well.
ISSUE NO. 10: The Trial Court erred because there is no evidence
Sutherland has drilled and completed an additional
well under the Agreement, or has requested an
3
assignment of acreage from Dimock after drilling
an additional well.
ISSUE NO. 11: The Trial Court erred because it destroyed the
status quo rather than preserving the status quo.
ISSUE NO. 12: The Trial Court erred because the trial court
rewrote the term of the Agreement.
ISSUE NO. 13: The Trial Court erred because the Temporary
Injunction Order violates the Statute of Frauds
and/or the Statute of Conveyances.
ISSUE NO. 14: The Trial Court erred because it failed to require
Sutherland to comply with the Agreement, and to
preserve Dimock’s remedies for breach of the
Agreement.
ISSUE NO. 15: The Trial Court erred because it commanded and
prohibited actions of Dimock after November 19,
2015 (the end of the 3 year term of the contract).
ISSUE NO. 16: The Trial Court erred because the Temporary
Injunction Order prevents Dimock from drilling
wells on its own leases after November 19, 2015,
and it prevents Dimock from stopping Sutherland
from drilling a new well or conducting new
operations on a Dimock leasehold after November
19, 2015.
ISSUE NO. 17: The Trial Court erred because it enjoins Dimock
from withholding a lease acreage assignment after
November 19, 2015 and/or from withholding a
lease acreage assignment as to a well drilled and
completed after November 19, 2015.
ISSUE NO. 18: The Trial Court erred because the Temporary
Injunction Order is an unconstitutional illegal prior
restraint on free speech and does not satisfy the
4
requirements of Davenport v. Garcia, 834 S.W.2d
4 (Tex.1992).
ISSUE NO. 19: The Trial Court erred because a party who has
breached a contract provision favorable to the
other party cannot secure by injunction the
enforcement of another contract provision
favorable to it.
ISSUE NO. 20: The Trial Court erred in entering the Temporary
Injunction Order after evidence was presented of
Sutherland breaching the Agreement by charging
its own lawsuit expenses to “operating expense” of
the Hamrick #3.
ISSUE NO. 21: The Trial Court erred in entering the Temporary
Injunction Order after evidence was presented of
Sutherland breaching the Agreement by spending
and charging to the Hamrick #3 $2.4 million on
land and seismic expenses, none of which was for
the Hamrick #3.
ISSUE NO. 22: The Trial Court erred because the Agreement is
ambiguous, and there are fact issues as to whether
land and seismic costs are limited to $25,000.00,
whether the land and seismic costs charged by
Sutherland were reasonable or necessary for the
Hamrick #3, and whether the Hamrick #3 paid out
in 2014.
ISSUE NO. 23: The Trial Court erred because Sutherland failed to
join and give notice to all parties whose rights are
affected by the writ of injunction.
ISSUE NO. 24: The Trial Court erred in ordering an inadequate
bond in the Temporary Injunction Order.
5
B. ISSUES AS TO JULY 9, 2015 ORDER
ISSUE NO. 25: The Trial Court erred in denying Dimock’s
Application for Temporary Injunction.
ISSUE NO. 26: The Trial Court erred because the requested
injunction would have preserved 51% of working
interest proceeds of the Hamrick #3 for the rightful
owner of the proceeds until final judgment.
ISSUE NO. 27: The Trial Court erred because, as a matter of law,
the Seismic Exploration and Farmout Agreement
does not authorize unlimited spending on land and
seismic costs to be charged to Dimock and/or
payout of the Hamrick #3.
ISSUE NO. 28: The Trial Court erred, as a matter of law, because
the Seismic Exploration and Farmout Agreement
limits expenditures for land and seismic costs to
$25,000.00 unless Dimock authorizes further
expenditures.
ISSUE NO. 29: The Trial Court erred because, as a matter of law,
the Hamrick #3 reached payout in March 2014.
STATEMENT OF FACTS
1. On November 20, 2012, Dimock and Sutherland executed a Seismic
Exploration and Farmout Agreement (“Agreement”), including Exhibit C, an
Operating Agreement (“Operating Agreement”). CR 12-62. Pursuant to Section
3.1, Sutherland was obligated to drill the Initial Earning Well. CR 13. The
Hamrick #3 was drilled and completed as a producing oil well in June, 2013. CR
70. On Nov. 11, 2013, Dimock executed a Partial Assignment of Oil, Gas, and
Mineral Lease to Sutherland including the Hamrick #3. CR 320.
6
2. In the Operating Agreement, the parties agreed in Article VI, D, as
follows:
Operator shall not undertake any single project reasonably estimated
to require an expenditure in excess of twenty-five thousand Dollars
($25,000.00) except in connection with the drilling, Sidetracking,
Reworking, Deepening, Completing, Recompleting, or Plugging Back
of a well that has been previously authorized by or pursuant to this
agreement, provided, however, that, in the case of explosion, fire,
flood or other sudden emergency, whether of the same or different
nature, Operator may take such steps and incur such expenses as in its
opinion are required to deal with the emergency to safeguard life and
property but Operator, as promptly as possible, shall report the
emergency to the other parties.
CR 36, emphasis added. Paragraph 2.1 of Exhibit A of the Agreement states that
“All operations conducted by Farmee regarding the Initial Earning Well, until such
time as “project payout” is reached … shall be at Farmee’s sole cost and risk.”
CR 17. Paragraph 6.1 of the Agreement states: “The Operating Agreement shall
apply to all Earned Wells”. CR 14, emphasis added.
3. Despite the $25,000 limit for any “project” that is not drilling, etc.,
beginning in 2014 Sutherland sent lease operating statements to Dimock showing
that Sutherland was charging leasehold acquisition costs for other property
(bonuses, etc.), charging seismic option costs for other property, and charging his
own and his employee time obtaining leases and seismic options on other property,
in sums far in excess of $25,000, to “land” costs and “seismic” costs of the
7
Hamrick #3, even though the Hamrick #3 had been completed in June, 2013. CR
229, 276-277, 324-325.
4. Land costs (in house, or for leasehold acquisitions) and seismic option
costs for other properties are not “drilling, Sidetracking, Reworking, Deepening,
Completing, Recompleting, or Plugging Back” expenses and are, therefore, subject
to the $25,000 limit on expenses for any project in Exhibit C. Sutherland has
admitted in Response to Request for Admissions that seismic costs and land costs
are not Sidetracking, Reworking, Deepening, Completing, Recompleting, or
Plugging Back costs. CR 343. In his Affidavit, Dimock, an operator, stated that
land and seismic costs are not drilling costs. CR 324. No evidence was presented
at any hearing that land and seismic costs are “drilling” costs.
5. Pursuant to Section 4.1 of the Agreement, “upon “project payout” of
the Initial Earning Well, Farmee shall deliver to Farmor possession and operations
of the Initial Earning Well and a fifty-one percent (51%) working interest, at
Farmor’s election, in the appropriate Earned Assignment defined in Paragraph 3.2
above.” CR 13.
6. Paragraph 4.2 of Exhibit A, the Agreement states:
Project Payout and Monthly Statements. Beginning within six (6) months of
completion of Initial Earning Well Farmee shall provide a monthly statement to
Farmor reflecting the “project payout” status.
8
(a) The Farmee’s capital cost is defined as cost incurred by Farmee for land and
seismic for the Hamrick Area 3D Shoot (a 15 square mile area defined in
Exhibit B), a fifty thousand dollar ($50,000) prospect fee, and cost for
drilling, testing, completing, and equipping, the Initial Earning Well 1.
(b) The Farmee’s revenue, which is the gross value of production as defined in
Paragraph 4.1 above, less (i) applicable production or severance taxes, and
any federal excise taxes; (ii) all royalties, overriding royalties, and other
payments out of production which, as of the effective date of this
Agreement, burden the interest assigned to Farmee; and, (iii) the cumulative
monthly operating cost of the well, including ad valorem taxes.
(c) When the Farmee’s cumulative revenue equals two (2) times the Farmee’s
capital cost the Initial Earning Well will have reached “project payout”. At
that time, as stated in Paragraph 4.1 of this Agreement, the Farmee will
turnover operations of the Initial Earning Well and assign fifty-one percent
(51%) working interest, at Farmor’s election, in the Initial Earning Well and
drilling unit to the Farmor.
(d) Concurrent to the “project payout” in Paragraph 4.2(c) above the Farmee
will also assign the remaining forty-nine percent (49%) working interest to
one or more 501(c)(3) nonprofit organizations of its choice subject to the
Operating Agreement described in 6.1 of the Agreement.
CR 19-20, emphasis added.
7. Accordingly, when Sutherland’s cumulative revenue from the
Hamrick #3 (the “Initial Earning Well”) equaled two (2) times Sutherland’s capital
costs, the Hamrick #3 reached project payout. With its Application for Temporary
Injunction, Dimock presented to the trial court documents produced by Sutherland
demonstrating that the drilling and completion cost of the Hamrick No. 3 well was
1
One of the ambiguities in the Agreement is whether or not the phrase, “…, the Initial Earning
Well” was intended to qualify or describe all the items in that sentence (i.e., land and seismic
costs). In construing this sentence, this comma may, or may not, be determined by a jury to have
been intended as an “oxford comma.” The Chicago Manual of Style R. 5.57 (14th Ed. 1993).
9
$1,004,521. CR 142-146. After the initial well was spudded, the prospect fee
(referenced in Section 4.2 (a) of Exhibit A of the Agreement) of $50,000 was
refunded to Sutherland by Dimock on August 28, 2013. CR 326; CR 1533. Using
the $25,000 limit in Exhibit C, Para. VI (D) for any project that is not drilling, etc.,
when the Hamrick #3 gross working interest revenue (less the specified items in
Section 4.2(b) of Exhibit A, like taxes, royalties, and monthly operating expenses)
is two times $1,029,521, or $2,059,042, the Hamrick #3 reached “project payout”.
CR 13, 20.
8. Through March, 2014, the cumulative net working interest income of
the Hamrick #3 was $2,195,166.75, well in excess of the $2,059,042 amount for
project payout of the Hamrick #3. CR 140, 141. The March, 2014 Lease
Operating Statements (LOS), and Drilling and Completion Costs statements,
prepared by Sutherland, were attached as Exhibit A to Defendant’s Application for
Temporary Injunction. CR 126-146.
9. Dimock objected in writing to the land and seismic costs, and
demanded that no further capital costs for the initial earning well be incurred. CR
63-66, 327. By letter dated April 21, 2014, Dimock notified Sutherland that the
Hamrick #3 had reached project payout, as per the March LOS of the Hamrick #3,
10
and Dimock made the election, and demanded 2, that Sutherland deliver operations
and possession of the Hamrick #3, and assign a 51% working interest in the
Hamrick #3 and drilling unit to Dimock. CR 65.
10. Instead of complying with the Agreement, Sutherland refused to
assign the working interest to Dimock and the charities, refused to turnover
possession and operations, and has wrongfully converted all the post March, 2014
working interest proceeds of the Hamrick #3. Sutherland continued to incur land
costs (none of which were to acquire an oil or gas lease to drill the Initial Earning
Well, because Dimock already owned that leasehold), and huge seismic expenses
for a 15 square mile seismic shoot. See CR 488-1255, an Affidavit of Greggory D.
Morgan, CPA, with his spreadsheet of these unrelated costs [CR 488-489 is the
Affidavit; CR 491-498 is the spreadsheet outlining these unrelated costs]. The
unrelated “land costs” were $951,176.99, and the unrelated seismic costs were
$102,899.80, as of the time of the Affidavit was prepared. Following the Affidavit
and spreadsheet are copies presented to the trial court of the dozens of Sutherland-
obtained oil and gas leases, top leases, and seismic options, for itself only, of
nearby sections of land not leased by Dimock. CR 499-1255. Sutherland used the
working interest proceeds of the initial earning well to lease 9 other sections of
land for itself only and obtain seismic options as to such other land, and “charged”
2
At that point, the Christian charities were also entitled to receive an assignment of a 49%
working interest.
11
that “land cost” and “seismic cost” for additional earning wells to the Initial
Earning Well (Hamrick #3) to “extend” payout of the Hamrick #3 for over a year,
all in breach of the Agreement. The only seismic was shot in the summer of 2014,
approximately one year after the Hamrick #3 was drilled. RR 6:Def Exh. 4, P. 39.
11. Rod Sutherland, is the sole owner of Appellee, and admits that as of
July, 2015, Sutherland had spent $2.4 million for such land costs and seismic costs,
and has charged that amount to “payout” of the Hamrick #3. RR 5: Pl. Exh. 2; RR
4:83-84; RR 3: 41-42; CR 1471.
12. By its Original Answer and Counterclaim, Dimock alleged Breach of
Contract, sought Declaratory Judgment, alleged a suit for debt, and alleged Breach
of Fiduciary Duty. CR 69. Dimock filed its Application for Temporary Injunction
on August 1, 2014 (CR 126). Refusing to rule on Defendant’s 2014 request for
injunctive relief, the trial court entered an erroneous Partial Summary Judgment in
favor of Sutherland. CR 1268, 1285, 1286.
13. In its Responses to Request for Admissions, Sutherland admitted that
throught payments received in July, 2014, Sutherland had received a totoal amount
of $3,173,162.13 in working interest revenue from the Hamrick #3. CR 343.
14. As demonstrated in Sutherland’s own documents, the Hamrick #3
reached project payout in March 2014. In March, 2014, Dimock and the Christian
Charities were entitled to receive assignments. Dimock was then equitable owner
12
of 51% of the working interest in the Hamrick #3 and drilling unit, and the
Christian Charities 49%. And as of March, 2014, Sutherland had no legal right to
possess or use any of the working interest proceeds from the Hamrick #3, or to
charge any well operations fees to the Hamrick #3 payout. Instead, an additional
$2.4 million in land costs and seismic costs were charged by Sutherland to the
Initial Earning Well payout by the time of the July, 2015 injunction hearing, and
Sutherland retained an additional $2.4 million under Sutherland’s 2 x costs payout
theory.
15. In the trial court, Sutherland chose to totally ignore and/or disregard
the Operating Agreement that Sutherland admits it signed, and under which
Sutherland is operating the subject well. In its pleadings, Sutherland offered no
reading of the Operating Agreement “other operations” provision that would
authorize unlimited expenditures for “land costs” and “seismic costs” to be charged
to Dimock, and claimed the Agreement is not ambiguous. Sutherland obtained a
partial summary judgment without citing any legal authority in support of
Sutherland’s interpretation of the contract. Dimock’s responses (with all exhibits)
to Sutherland’s partial summary judgment motion are incorporated herein by
reference. CR 232, 368, 1256.
16. In addition to the ambiguities, there is a fact and/or legal issue
whether the $25,000 limit in Exhibit C applies to land costs and seismic costs,
13
which would preclude awarding injunctive relief in favor of Sutherland. Further,
given Dimock’s ambiguity pleading, there are fact issues about Hamrick #3
“payout”. CR 1348-1350. Both at the summary judgment hearing in September,
2014 and the injunction hearing in July, 2015, Sutherland had the burden of proof
as to its factual and legal claims.
17. In addition, in April, 2014, shortly after filing the lawsuit, Sutherland
began breaching the Agreement by charging to the initial well as “operating”
expenses, its own attorney’s fees and expenses and personal expenses incurred in
this lawsuit, including charging $800 per day for Rod Sutherland’s own time spent
on this lawsuit. RR 4:74-76; See also CR 1493, 1580-1587. See also CR 141, the
LOS Statement for April, 2014 when Sutherland began charging his lawsuit
expenses, his attorney’s $5000 retainer (CR 444), to “miscellaneous expense” on
the LOS. Sutherland has never cited in the trial court any authority to charge his
lawsuit expenses to operating expenses of the Hamrick #3. Sutherland admits that
every dollar he spends on these “capital costs” [all of which are for some potential
well other than the Initial Earning Well], the Initial Earning Well payout jumps by
two dollars; and, when he charges to “operating expense” his own company time,
expenses and attorney’s fees for this lawsuit, he is reducing the working interest
revenue of the initial earning well by another dollar, which also extends payout of
the Initial Earning Well. RR 4:84.
14
18. Sutherland’s continuing wrongful conduct irreparably harms Dimock,
the Christian Charities, and their property rights.
19. As a direct and proximate result of Sutherland’s wrongful actions,
Dimock has suffered, and has continued to suffer, imminent and on-going injury in
sums now in excess of $1,500,000, that is irreparable, and for which no adequate
remedy at law exists, without the protection of a temporary injunction to preserve
51% of the working interest proceeds until final trial of the case. Such injunctive
relief would have preserved the status quo, and preserved the disputed working
interest proceeds, but the trial court delayed until July, 2015 to rule on Plaintiff’s
Application for Temporary Injunction (filed in August, 2014) and then erroneously
denied it. CR 1599. Dimock also unsuccessfully sought a jury trial in 2015. CR
1291, 1295.
20. Dimock’s requested injunction would have prevented Sutherland from
using litigation to delay payment of well proceeds and using litigation as an excuse
to charge his attorney’s fees, and internal time spent on this lawsuit to “operating
expense” of the Hamrick #3, all delaying payout of the Hamrick #3.
21. As shown in Dimock’s (a) Application for Temporary Injunction, (b)
Answer and Counterclaim; and, in (c) Dimock’s pleadings and evidence
incorporated into its responses to Sutherland’s applications for injunctive relief,
Dimock has a cause of action against Sutherland for breach of contract and for
15
conversion, a probable right to the relief sought, and is incurring probable,
imminent, and irreparable injury in the interim, now in excess of $1,500,000.
22. In the alternative, Dimock requested that the trial court appoint a
receiver to protect the working interest owners and to take charge of and hold the
subject well, and working interest proceeds, subject to the final disposition of this
litigation. That request was denied when the Dimock’s temporary injunction
request was denied. CR 126, 1599.
23. Dimock’s well was depleted by Sutherland’s production of the subject
well with no revenue from that production being paid to Dimock or the Christian
Charities. Dimock’s and the Christian Charities’ damages for their real property
interests cannot be adequately measured by a certain pecuniary standard and
cannot be adequately compensated for in damages.
24. In the summer of 2015, about 4 months before the end of the three
year term of the Agreement, which ends on November 19, 2015, Appellee filed an
Application for Temporary Injunction. CR 1296.
25. Appellants specially excepted and objected to Plaintiff's Application
for Temporary Injunction because Appellee failed to join all indispensable
parties. Tex. R. Civ. P. 39. CR 1304. Sutherland has granted interests in the
Hamrick #3 and drilling unit to other parties, his employee Wade Tidmore,
and his wife’s relatives, Woody and Judy Thompson, and Joe and Vivian Revese.
16
CR 1457. Additionally, according to the testimony of Rod Sutherland, each of the
following are intended beneficiaries of the Agreement, because they are the
entities to whom the 49% working interest in the Hamrick #3 is to be conveyed on
project payout, namely, Focus on the Family (Jim Dobson), Insight for Living
(Chuck Swindell), Dallas Leadership Foundation, First United Methodist Church,
and National Christian Foundation. CR 1466-1467. None of these persons or
entities were joined, or given notice of the injunction hearing.
26. The term of the Agreement is stated in Section 9 of Exhibit A to the
Agreement, as follows:
The Agreement shall be in effect for three (3) years from
the effective date or until such time as: (i) Farmee's rights
to earn as assignment of interest have expired without
Farmee having earned as assignment; (ii) Farmee has earned
an assignment of interest and neither Farmee nor Farmor
have any further rights or obligations under the Agreement;
or (iii) this Agreement terminates pursuant to Paragraph 3.4
above as a consequence of Farmee's default. CR 22,
emphasis added.
27. The "term" of the Agreement is clearly defined. Under (ii), if an
Initial Well is drilled and completed as a producer, and an assignment of the
working interest in the acreage including the drilling unit around that Initial
Well is made, which occurred in this case, the Agreement as to any other acreage
of the Dimock leaseholds ends if Farmee does not drill and complete additional
producing well(s) within 3 years of November 20, 2012, because Farmee had no
17
contractual obligation to drill any other wells and had a limited option time (3
years from November 20, 2012) to drill additional well(s) on that other acreage, if
it chose to do so. CR 13 [Section 5.1 of the Agreement], 22.
28. As of the date of the injunction hearing and orders, Sutherland had
drilled no additional wells. 3 RR4:92, CR 1464. As Rod Sutherland admitted
at his deposition, S u t h e r l a n d had no obligation to drill any more wells and
only had an option to drill other wells during the term of the Agreement. CR
1463, 1464.
29. Contrary to the stated term of the Agreement, Sutherland requested
injunctive relief that the term of the Agreement be rewritten by the Court from 3
years to an indefinite period of years; i.e. "until Dimock’s allegations in this
lawsuit have been finally adjudicated and all applicable deadlines have expired.”
CR 1364. Dimock objected to the proposed injunction because it creates a new,
indefinite term of the Agreement, it does not preserve the status quo, it does not
enforce the term of the Agreement as written, and it rewrites the term of the
Agreement directly contrary to the express term agreed to by the parties. CR
1439.
30. When Rod Sutherland signed the Agreement, he knew that his
exclusive right to drill new wells ended on November 19, 2015. Nowhere in the
3
After the injunction was entered, Sutherland drilled three additional wells on the property.
Sutherland has already decided to plug one of the new wells.
18
Agreement is there a right of the Farmee to extend the term of Agreement, and
possibly earn a right to an Assignment of any additional acreage from the Dimock
leaseholds beyond November 19, 2015 (the end of the three year term) unless a
new well is drilled and completed as a producer in paying quantities during the
stated 3 year term. Because Sutherland failed to show it had a probable right to
recover on the claim asserted, or that it was entitled to rewrite the contract to
extend the term of the Agreement indefinitely, the Plaintiff’s Amended Application
for Temporary Injunction should h a v e b e e n denied.
31. In Paragraph 1.14 of the Amended Application for Temporary
Injunction, Sutherland further claimed “Dimock is deliberately obstructing
additional development of the Subject Leases and attempting to deprive Sutherland
of the right to timely drill additional wells.” CR 1363. Contrary to the assertion,
the evidence at the hearing showed Dimock had not stopped Sutherland from
drilling any well. RR 4: 97-99. Sutherland had not then drilled or completed any
additional well as a producer in paying quantities. Sutherland has made no request
for an assignment of any additional acreage from Dimock after drilling and
completing an additional well. Dimock had taken no action whatsoever to
“deliberately obstruct” any development. No gate had been locked. No one had
been physically restricted from any property. Id. The only “wrong” Dimock had
19
committed was to take a contractual position in a judicial proceeding, which
Sutherland did not like.
32. Sutherland, a start-up company owned solely by Rod Sutherland, has
done no internal suspense on behalf of Mr. Dimock or the Christian Charities from
any of the income from the Hamrick # 3 well, and doubts it has sufficient funds
available to pay Mr. Dimock or the Christian Charities back if the eventual legal
decision in this case is that payout occurred in March of 2014. CR 1472,
1511.
33. Dimock tried to have this matter adjudicated by permissive appeal of
the erroneous Partial Summary Judgment order to the Amarillo Court of Appeals,
but Sutherland opposed the motion for permissive appeal. CR 1269. The legal
issues at the heart of this dispute could have been resolved but for the opposition
of, and delays caused by, Sutherland and the trial court to resolve this case.
34. The delay in obtaining a final appellate decision about the proper
calculation of "project payout" is a dilemma of Sutherland’s own making. It is
Sutherland who objected to an interlocutory appeal of the trial court's ruling on the
parties' motions for summary judgment. CR 1273. It is Sutherland who obtained a
continuance of the trial setting. CR 1288, 1294.
35. The judicially extended option of Sutherland's right to drill wells
enjoins Dimock from drilling wells on his own leaseholds after November 19,
20
2015. Dimock did not contract to give up the right to drill a well on his own
leaseholds after November 19, 2015. The injunction directly and irreparably
damages Dimock because it prevents him from drilling wells on his own
leaseholds after November 19, 2015. And, what does Sutherland pay Dimock for
the privilege to extend the term of the exclusive option to drill additional wells?
Nothing, if this Court upholds the erroneous trial court injunction.
38. Dimock also incorporated into its Response to Amended Application
for Temporary Injunction [CR 1439], excerpts from the May 21, 2015 Deposition
of Rod Sutherland [CR 1452-1499]. Significant portions of such Sutherland
testimony are included as Exhibit J in the Appendix to this Brief. In summary, as
is evident from the noted portions of the deposition of Rod Sutherland, Sutherland
admits it has charged at least $2.4 million in claimed “land” and “seismic”
expenses to payout of the Hamrick #3, none of which was used to acquire acreage,
locate, or drill the Hamrick #3. Sutherland planned to continue the spending spree
indefinitely. In addition, Sutherland further delayed payout of the Hamrick #3 by
charging his own and his various employees’ time and expenses as to this lawsuit
(at salary rates for petroleum engineers, and landmen) to “miscellaneous” expenses
in the operating expenses for the Hamrick #3, which expenses are deducted from
well proceeds (to further delay payout of the Hamrick #3), all in breach of the
Agreement.
21
39. Since March 2014, when the Hamrick #3 paid out, Sutherland has
spent over $2 million more for nothing benefitting the subject well, and has put an
additional $2 million in his pocket. After doing all these admitted actions,
Sutherland obtained a trial court injunction to enjoin Dimock’s speech and conduct
after his option period had expired, possibly indefinitely, and continue the
unlimited spending spree with Hamrick #3 proceeds. The trial court erroneously
granted such injunction.
40. The trial court injunction destroyed the status quo. The status quo
was the right to drill additional wells as stated in the term of the Agreement.
41. The trial court’s order rewriting the term of the Agreement
indefinitely until this case is finally resolved, was an action it was not
authorized to do, and is an abuse of discretion. A court is to construe
contracts, not rewrite them. And, in this case, the party who drafted the contract
(See CR 1477) got the trial court to rewrite the term of his own farmout
agreement to favor the author, all to the detriment and irreparable damage of
Dimock.
SUMMARY OF THE ARGUMENT
The trial court erred in denying Dimock’s temporary injunction because it
would have preserved 51% of the working interest proceeds of the Hamrick #3
until a final legal determination of payout of the subject well could be made. And,
22
the trial court erred in entering the Temporary Injunction Order in favor of
Sutherland because it rewrote the term of the farmout agreement, enjoining
Dimock’s speech and conduct beyond the end of the contractually determined
option period effectively extending the time to drill and complete additional wells
beyond the stated term of the Agreement. The order prohibits Dimock from
drilling wells on its own leases after November 19, 2015. And, because the order
prohibits Dimock’s speech, it violates Dimock’s right to free speech under the
Texas Constitution.
ARGUMENT
A. Standard of Review
1. The trial court’s grant or denial of a temporary injunction is reviewed
on an abuse of discretion standard. Butnaru v. Ford Motor Co., 84 S.W.3d. 198,
204 (Tex.2002); Walling v. Metcalfe, 863 S.W.2d 56, 58 (Tex.1993). The Court is
to review de novo any determinations on questions of law that the trial court made
in support of an injunction order. Marketshare Telecom, LLC v. Ericson, Inc., 198
S.W.3d 908, 916 (Tex.App.-Dallas 2006, no pet.).
2. To obtain a temporary injunction, the applicant must plead and prove:
a) a cause of action against the defendants; b) a probable right to the relief sought;
and, c) a probable, imminent, and irreparable injury in the interim. Id; Walling,
863 S.W.2d at 57; Tex. R. Civ. P. 682, 684.
23
3. A trial court's clear failure to analyze and apply the law correctly
constitutes an abuse of discretion. Webb v. Glenbrook Owners Ass’n., Inc., 298
S.W.3d 374, 380 (Tex.App.-Dallas 2009, no pet.). Further, sufficiency of the
evidence is a relevant factor in determining whether the trial court had sufficient
evidence to exercise its discretion in the manner it did. Beaumont Bank,
NA v. Buller, 806 S.W.2d 223, 226 (Tex. 1991).
4. A temporary injunction’s purpose is to preserve the status quo
pending a trial on the merits. Walling v. Metcalfe, 863 S.W.2d 56, 57 (Tex.1993).
B. Rules of Construction and Contract Interpretation
5. When a dispute involves the interpretation of oil and gas contracts,
and the contract is not ambiguous [which is what Sutherland contends], this
Honorable Court applies “settled rules of law”, including the following:
The first mandates that construing an unambiguous contract involves a
question of law. Borders v. KRLB, Inc., 727 S.W.2d 357, 359 (Tex.App.-
Amarillo 1987, writ ref’d n.r.e.). Thus, we need not defer to any
interpretation afforded by the trial court. Second, when interpreting an
instrument, we strive to give effect to its parties’ intent. Id. Furthermore,
that intent is garnered from the language of the contract, which language is
considered in its entirety. Id. That is, we peruse the complete document to
understand, harmonize, and effectuate all its provisions. Questa Energy
Corp. v. Vantage Point Energy, Inc., 887 S.W.2d 217, 221 (Tex.App.-
Amarillo 1994, writ denied). So too must we afford the words contained in
the agreement their plain, ordinary, and generally accepted meaning, unless
the instrument requires otherwise. Sun Operating, Ltd. v. Holt, 984 S.W.2d
277, 285 (Tex.App.-Amarillo 1998, pet. denied); Phillips Petroleum Co. v.
Gillman, 593 S.W.2d 152, 154 (Tex.Civ.App.-Amarillo 1980, writ ref’d
n.r.e.).
24
Finally, in applying the foregoing rules we may not rewrite the agreement to
mean something it did not. Borders v. KRLB, Inc., 727 S.W.2d at 359.
Simply put, we cannot change the contract merely because we or one of the
parties comes to dislike its provisions or thinks that something else is needed
in it. HECI Explor. Co. v. Neel, 982 S.W.2d 881, 888-89 (Tex.1998). This
is so because parties to the contract are considered masters of their own
choices. They are entitled to select what terms and provisions to include in a
contract before executing it. And, in so choosing, each is entitled to rely
upon the words selected to demarcate their respective obligations and rights.
In short, the parties strike the deal they choose to strike and, thus, voluntarily
bind themselves in the manner they choose. And, that is why parties are
bound by their agreement as written. Emmer v. Petroleum Co., 668 S.W.2d
487, 490 (Tex.App.-Amarillo 1984, no writ). For a court to change the
parties’ agreement merely because the Court did not like the agreement, or
because one of the parties subsequently found it distasteful, would be to
undermine not only the sanctity afforded the contract but also the
expectations of those who created and relied upon it.”
Cross Timbers Oil Co. v. Exxon Corp., 22 S.W.3d 24, 26-27 (Tex.App.-Amarillo,
2000, no pet.), emphasis added.
8. The court is to “analyze the entire instrument to understand and
harmonize all parts of the instrument so as to give effect to all of its provisions.”
Petro Pro, Ltd. v. Upland Resources, Inc., 279 S.W.3d 743, 748 (Tex. App. –
Amarillo 2007, pet. den.). “No single provision taken alone will be given
controlling effect; rather, all the provisions must be considered with reference to
the whole instrument.” Myers v. Gulf Coast Minerals Mgmt. Corp., 361 S.W.2d
193, 196 (Tex. 1962).
25
C. Sutherland “Interpretation” Not Consistent With Texas Law
9. Sutherland’s “interpretation” that he can run up unlimited sums in land
and seismic costs on lands other than Section 168 [where the Hamrick No. 3 well
is located], and thereby forever delay payout of the Hamrick No. 3 well, is not
consistent with the Operating Agreement to which Sutherland agreed on November
20, 2012. Sutherland’s interpretation renders meaningless the operating agreement
limitation on expenses for a non-drilling, etc. project. Sutherland’s interpretation
also does not “avoid when possible and proper a construction which is
unreasonable, inequitable, and oppressive.” Springer Ranch, Ltd. v. Jones, 421
S.W.3d 273, 280 (Tex. App. – San Antonio 2013, no pet.), emphasis added. The
way to construe the subject contract which harmonizes and gives effect to all the
provisions so that none is rendered meaningless, and which avoids an
unreasonable, inequitable, and oppressive construction, was for the court to enforce
the $25,000 limit on land costs and seismic costs. In Springer Ranch, the court
referred to a case wherein a party’s construction of a partnership agreement “taken
to its logical conclusion, would allow [the party] to ignore [partnership] dissolution
notices indefinitely and continue to demand capital until [the other party’s]
ownership interest is eliminated . . . thus produc[ing] an unjust, unreasonable, and
oppressive result.” Springer Ranch, 421 S.W.3d at 288, citing Shadow Dance
Ranch Partnership v. Weiner, 2005 WL 3295664, at P. 4 (Tex. App. – San
26
Antonio, 2005, no pet.). Sutherland’s “unlimited” land and seismic costs
interpretation, taken to its logical conclusion, has allowed Sutherland to: 1) ignore
the dollar limitation on such expenses in the Operating Agreement indefinitely and
charge over $2.4 million in land and seismic costs, 2) keep an additional $5
million of Hamrick #3 revenue, and 3) effectively eliminate Dimock and the non-
profit entities’ ownership interest in the subject 160 acre drilling unit. Dimock and
the Christian Charities have not benefitted from the land or seismic spending spree.
So, under Sutherland’s interpretation, he obtained all the rights he obtained in this
contract without any consideration retained by Dimock. No reasonable person
would assign all his interest in existing oil and gas leases on 3 sections of land for a
payment he immediately has to return, with no realistic chance to ever regain any
interest in the oil and gas leaseholds.
10. Sutherland tries to ignore that express contractual non-drilling, etc.
cost limitation, and, instead, inserted “all” or “unlimited” in front of “capital
costs”, or in front of “costs incurred by Farmee for land and seismic”. But, the
contract does not say all or unlimited “capital costs”, or all or unlimited “land and
seismic costs”. “Basic to the purpose of the [joint operating agreement] is … what
proportional obligations and interests are borne by the respective working interest
owners ….” Hill v. Heritage Resources, Inc., 964 S.W.2d 89, 113 (Tex. App. – El
Paso, 1997, pet. den.). Dimock had, and has, nothing to gain from Sutherland
27
spending Hamrick No. 3 well proceeds on lands or seismic as to lands outside of
the preexisting Dimock leases. The trial court should have recognized that
Sutherland “has failed to present sufficient evidence of a meeting of the minds of
all parties...sufficient to “authorize it” to charge Dimock “unlimited” sums on land
or seismic costs on other lands. Hill at 115. That was especially true when the
Court was faced with an ambiguity pleading by Dimock.
D. After Trial Court Erroneously Authorized Unlimited Spending,
Injunction Now Authorizes Unlimited Time to Drill
11. First, the trial court erroneously authorized unlimited spending on land
and seismic costs for unrelated wells to be charged to the Hamrick #3 payout.
Then, in the subject Temporary Injunction Order, the trial court further gutted
Dimock’s legal rights by ordering an indefinite term to the farmout agreement.
Courts do not imply indefinite terms, or unlimited amounts, into terms used in a
contract. A construction of a contract wherein a definite term is enforced is
favored over an interpretation which includes the implication of an indefinite or
unlimited term. Tanebaum Textile Co., Inc. v. Sidran, 423 S.W.2d 635, 637 (Tex.
Civ. App. – Dallas 1967, writ ref’d n.r.e.). In this case, Sutherland argued and the
trial court erroneously found that an unlimited amount can be spent by Sutherland
on land costs and seismic costs. The idea that a court will not imply an unlimited
term into a contract is also seen in court construction of option contracts and will
provisions. Mattern v. Herzog, 367 S.W.2d 312, 219 (Tex. 1963). Unlimited
28
terms are not implied because doing so will “destroy the validity of the option
provision”. Id. In this case, implying and/or finding that an unlimited amount of
land costs and seismic costs can be incurred effectively has destroyed Dimock’s
vested right of reverter as to the Hamrick #3 and leasehold. Then, by an injunction
order “creating” an indefinite term for the drilling option in the farmout agreement,
the trial court expanded the destruction of Dimock’s legal and property rights to
the remainder of its leaseholds by expanding Sutherland’s option to drill and
complete additional earning wells, and restrained Dimock’s right to drill on his
own leases, beyond the stated three year term.
12. The trial court erred when it ignored the express three year term of the
Agreement, and created an indefinite term of the Agreement. “Absurd,
inequitable, or oppressive interpretations are to be eschewed unless they prove
unavoidable.” Michelin North America, Inc. v. First Industrial NLF 12 JV, LLC,
2014 WL 586228, at P. 3 (Tex. App. – Houston (1st Dist.) 2014, no pet. history).
The trial court’s interpretation of the Agreement is absurd, inequitable, and
oppressive. There is no evidence, or legally insufficient evidence, that Sutherland
was entitled to a determination that the term of the Agreement is for an indefinite
period of years “until the allegations in this lawsuit are finally resolved.” The trial
court erroneously found a probable right to such absurd injunctive relief.
29
13. In granting Sutherland’s Amended Application for Temporary
Injunction, the trial court erroneously changed the written “term” of the subject
Agreement just because Sutherland has now found that “term” distasteful. It
should not be forgotten that Sutherland drafted the Agreement with the subject
“term” in it. CR 1477. By rewriting the “term” of the Agreement, the trial court
did exactly what it was not supposed to do, it took an action to favor one party that
did “undermine not only the sanctity afforded the contract but also the expectations
of those who created and relied upon it”. Cross Timbers, 22 S.W.3d at 27,
emphasis added.
E. Trial Court Action Constitutes an Erroneous Pretrial Forfeiture of
Leasehold
15. “Courts will not [construe a contract to] declare a forfeiture unless
they are compelled to do so by language which can be construed in no other way.”
Reilly v. Rangers Management, Inc., 727 S.W.2d 527, 530 (Tex. 1987). In Reilly,
a managing partner tried to dilute limited partners’ ownership shares by passing
“amendments” to the partnership agreement. The court recognized that the
managing partner’s interpretation of the contract would work “a practical
forfeiture” to the limited partners’ interest. The trial court’s legal “interpretation”
of the Agreement in this case works a practical forfeiture of Dimock’s property
rights. At the least, there is a fact issue and legal issue whether land costs and
seismic costs are expenses subject to the $25,000 limit agreed to by the parties. At
30
the least, there is a fact issue and a legal issue before any ruling should find the
term of the drilling option, and the inability of Dimock to drill upon his own leases,
extends beyond November 19, 2015 (the end of the three year stated term). Before
Dimock’s property rights are, effectively, forfeited, a jury trial on the merits, as
demanded, should be conducted.
F. Contract Construction Harmonizing and Giving Effect to All Provisions
16. When all the contract interpretation rules cited above are applied to
the Agreement with its attached, and immediately effective, Operating Agreement,
the obligations of the parties are evident, and the limitations on Sutherland to incur
costs chargeable to Dimock and to payout of the “initial earning well”, are evident.
Sutherland could charge up to $25,000 of “land costs” and “seismic costs” to the
initial well payout. And, assuming no breach of contract by Sutherland, Sutherland
had the exclusive option to drill and complete additional wells as producers in
paying quantities during an express 3 year term, but not afterwards.
17. After applying the appropriate contract interpretation rules, the trial
court should have also determined that the Hamrick #3 reached payout in March of
2014, as pleaded by Dimock. When a court is making a farmout “payout”
determination, the court is to review the subject contract and the subject well(s)
production proceeds and relevant costs to determine the date when the farmor’s
31
reversionary interest takes effect. Mengden v. Penisula Prod. Co., 544 S.W.2d
643, 648 (Tex. 1976).
G. Limits on Project Costs Common in Operating Agreements
18. An oil and gas operating agreement can prohibit undertaking certain
operations unless consent of non-operators is obtained. Texstar North America,
Inc. v. Ladd Petroleum Corp., 809 S.W. 672 (Tex. App. – Corpus Christi 1991,
writ den.). In other cases, the operation can proceed, but, due to a dollar limit on
the type of operation or project, no amounts for that operation or project above the
specified limit can be charged to non-operators. Cone v. Fagadau Energy Corp.,
68 S.W.3d 147 (Tex. App. – Eastland, 2001, pet. den.); Paint Rock Operating, LLC
v. Chisholm Exploration, Inc., 339 S.W.3d 771 (Tex.App.—Eastland 2011, no
pet.).
19. Texas courts have not ordered recoupment from well proceeds for
other costs the drilling party might like to incur or charge against well production.
Cox v. Davison, 397 S.W.2d 200, 203 (Tex. 1965). An “obligation” of another
party to “pay” or “incur” an “expense” and to deduct it from oil or gas well
production proceeds is not implied under Texas law. Id. The operator must prove
that he is entitled to “charge” such specific expense under the terms of the
Operating Agreement, or else such “expense” is not chargeable to the other party.
Id.
32
20. The A.A.P.L. Form 610 Model Form Operating Agreement, which was
used in this case, is a standard oil and gas agreement. Hill v. Heritage Resources
Inc., 964 S.W.2d 89 (Tex. Civ. App. – El Paso 1997, no writ). It sets forth a
procedure for the parties to decide whether or not to pay for “other operations”, or
“projects” above a specified limit. Valance Operating Co. v. Dorsett, 164 S.W.3d
656, 666 (Tex. 2005) (concurring opinion). An operator may breach an operating
agreement by improperly assessing charges above the specified limit to a non-
operator. Cone v. Fagadau Energy Corp., 68 S.W.3d 147 (Tex. Civ. App. –
Eastland 2002, pet. den.).
21. In Cone, the court found the $15,000 contract limitation on “other
projects” was “a limitation on the non-operator’s exposure to liability for expenses
incurred by the operator.” Cone, 68 S.W.3d at 157. In objecting to the excess
expenses, the non-operator “is attempting to obtain the benefit of his bargain as
provided by the operating agreement.” Id. at 161. If the limit is not enforced, the
non-operator may never receive the benefit of his bargain. Id. Such is the case here
where Sutherland continues to extravagantly incur seismic and land expenses
(already in excess of $2,400,000) for other properties and other, undrilled, wells,
and claims he can take all the Hamrick #3 production proceeds to pay for those
expenses, take an additional equal amount for himself, (under the 2x payout
formula) from well proceeds, and forever delay payout of the initial earning well.
33
22. In Paint Rock Operating, LLC v. Chisholm Exploration, Inc., 339
S.W.3d 771, 775-776 (Tex. App. – Eastland 2011, no. pet.), the Court held the
operator was not entitled to be charged or reimbursed for the excess cost of the
non-drilling, etc. operation. Id., see also footnote 3 on 777. The limitation on
expenditures for non-drilling, etc. projects makes sense when viewed from the
perspective of the non-operator. As to expenses from which he may, someday,
benefit, like drilling expenses, Dimock’s right to a reassignment of the lease is
delayed until two times such unlimited expense is recouped from working interest
proceeds. But, as to “other expenditures”, like buying oil and gas leases in only
Sutherland’s name (an alleged “land cost”) and from which Dimock receives no
benefit now or in the future, the amount of those “expenditures” is limited to
$25,000, so that the “expenditures” for such other “projects” do not, in effect,
render his right of reverter worthless.
23. The limitation on expenditures for non-drilling, etc. projects is also
consistent with the fact the parties did not agree to an area of mutual interest.
There is no benefit to Dimock of Sutherland leasing 9 other sections of land for
himself.
24. The Operating Agreement, is dated November 20, 2012, the same date
as the Agreement. It expressly says (contrary to the trial court ruling) “this
agreement shall be effective as of the 20th day of November 2012.” CR 45. When
34
the parties sign such an operating agreement, it is binding between whichever
parties sign the agreement and is effective on the day therein indicated. IMCO Oil
& Gas Co. v. Mitchell Energy Corp., 911 S.W.2d 916, 920 (Tex. App. – Fort
Worth 1995, no writ).
25. Reinforcing such an integration of the Agreement that limits
Sutherland to recouping up to $25,000 of non-drilling, etc. costs, is the contract
provision that states “The Operating Agreement shall apply to all Earned Wells.”
CR 14.
26. The operating agreement has a limited payment obligation as to non-
drilling, etc. “projects”. A limited payment obligation is to be enforced by a court.
American Manufacturers Mutual Ins. Co. v. Schaefer, 124 S.W.3d 154, 157
(Tex.2003) (the payment obligation of the insuror was limited and it did not owe
its insureds for diminished market value of their repaired vehicles). If the court
disregards a payment obligation provision, it renders such provision meaningless.
Id. at 159. The court’s ruling disregards the limited payment obligation signatory
non-operator Dimock undertook. The subject limited payment obligation
expressly itemizes the projects for which unlimited sums can be spent (drilling,
etc.). The “itemization is telling for it provides evidence as to what was intended
by the parties when the contracts were drawn.” Cross Timbers Oil Co., 22 S.W.3d
at 27, emphasis added.
35
H. Partial Assignment of Oil, Gas and Mineral Lease Was Subject to
Parties’ November 20, 2012 Agreement including the Operating
Agreement
27. The Partial Assignment of Oil, Gas and Mineral Lease from Dimock
to Sutherland for the Hamrick #3 [CR 320], stated in the granting clause, and in the
“subject to” conditions, that the Partial Assignment was made subject to the terms
and conditions of the prior Agreement between the parties. When such “subject
to” language is inserted in an assignment, the limitations in the various provisions
of the referenced documents are “inserted” into the assignment. Texas
Independent Exploration, Ltd. v. Peoples Energy Petroleum-Texas, L.P., 2009 WL
2767037, at p. 4 (Tex. App. – San Antonio, 2009, no. pet.). “The phrase “subject
to” is a limitation of grant, defining the nature, extent, and character of the estate
conveyed.” Petro Pro, Ltd. v. Upland Res., Inc., 279 S.W.3d 743, 750 (Tex. App.
– Amarillo 2007, pet. den.).
28. Further, the Agreement states: “Except as may be otherwise provided
in this [Agreement], Farmee [Sutherland] shall be bound by any written and
appropriately executed agreement which affects the subject leases at the time of
assignment [of any leasehold interest] to [Sutherland].” CR 14 (Parag. 8.1). The
Operating Agreement applies to the Agreement and to the November, 2013 Partial
Oil and Gas Lease Assignment to Sutherland of the interest in the Hamrick #3 and
36
drilling unit. Sutherland’s determinable fee is subject to the terms of the parties’
Operating Agreement.
I. Trial Court Erroneously Rewrote Contract
29. To be enforceable, the parties must agree to the material terms of a
contract. T.O. Stanley Boot Co. v. Bank of El Paso, 847 S.W.2d 218 (Tex. 1992);
Aurora Petroleum, Inc. v. Cholla Petroleum, Inc., 2011 WL 652843 at *2 (Tex.
App.—Amarillo 2011, no pet.) When that “agreement” never occurs, the contract
is not binding on the parties. Aurora, 2011 WL 652843 at *2. In this case, there is
no “obligation” to drill any additional wells, only a stated 3 year option to drill
such wells.
30. In Aurora, a farmout agreement was held unenforceable as a matter of
law when a material term was not agreed. Id. The time within which to drill was
found to be material, if not pivotal, to the “existence of the accord” and was more
than an “incidental detail.” Aurora, 2011 WL 652843 at *2. The “contract”
rewritten by the trial judge in the injunction order in this case is, as a matter of law,
unenforceable because Dimock did not agree to such material and pivotal term,
authorizing the drilling of additional wells on a Dimock leasehold beyond
November 19, 2015. In Aurora, this Honorable Court also noted: “we may not
rewrite the agreement of the parties.” Id. at *3, Footnote 2. The trial court
37
erroneously rewrote the term of the subject farmout agreement, and that is an abuse
of discretion.
31. An important item not to be overlooked in the Agreement is the
“Whereas” sentence. The “Whereas” sentence states as follows:
Whereas, Farmor and Farmee desire to enter into an agreement
pursuant to which Farmee shall have the right to earn certain of
Farmor’s rights under the oil and gas leases described below, subject
to all terms, reservations and conditions set forth herein. CR 12,
emphasis added.
The expressed primary purpose was to enter into a farmout agreement under which
Sutherland might earn the right to an assignment of part of Dimock’s oil and gas
leases subject to the terms, reservations and conditions stated.
32. A trial court is not authorized to “rewrite the parties’ contract nor add
to its language.” American Manufacturers Mutual Ins. Co. v. Schaefer, 124
S.W.3d 154, 162 (Tex.2003); Royal Indem. Co. v. Marshall, 388 S.W.2d 176, 181
(Tex.1965). “Courts cannot make new contracts between the parties, but must
enforce the contracts as written.” Royal Indem., 388 S.W.2d at 181.
J. Lack of Probable Right to Recover
33. To have a probable right to recover, a party must plead and present
proof to support at least one valid legal theory. Marketshare, 198 S.W.3d at 922.
If that “theory” is breach of contract, the applicant must show: (1) the existence of
a valid contract; (2) the Plaintiff’s performance or tendered performance, (3) the
38
Defendant’s breach of the contract; and, (4) damages as a result of the breach. Id.
at 923. Sutherland presented no evidence, or insufficient evidence, of each of
these elements of a breach of contract. Sutherland had then drilled no additional
well. Dimock had not failed to make an assignment of a lease, nor refused to do
so. Sutherland had never performed, nor tendered performance of, any of its
obligations as to an additional well, a condition precedent to any right to an
assignment of any additional acreage. Dimock had breached no duty as to any
additional well; as that situation had not then arisen. Sutherland “jumped the gun”
when it filed the Application for Temporary Injunction.
As this court is well aware, courts generally refuse to declare rights between
parties based on future, hypothetical, or speculative facts. A court is to adjudicate
present rights upon established facts, not hypothetical facts. Ashcroft v. Mattis,
431 U.S. 171, 172 (1977), emphasis added.
K. Mandatory Provisions Are Abuse of Discretion
34. The subject injunction prohibits Dimock from communicating with
anyone other than Sutherland about Sutherland lacking authority to drill additional
wells. It prohibits Dimock from “physically interfering” “with any drilling
operations or other activities” on Dimock’s own leases indefinitely. It commands
Dimock to sign lease assignments to Sutherland indefinitely, and the wording of
those to-be-prepared documents is unknown. The issuance of a temporary
39
mandatory injunction is proper only if a mandatory order is necessary to prevent
irreparable injury or extreme hardship. LeFaucheur v. Williams, 807 S.W.2d 20,
22 (Tex.App.—Austin 1991, no writ). A mandatory injunction should be denied
absent a clear and compelling presentation of extreme necessity or hardship.
Rhodia, Inc. v. Harris County, 470 S.W.2d 415, 419 (Tex.Civ.App.-Houston [1st
Dist.] 1971, no writ). Sutherland failed to present evidence, and/or presented
insufficient evidence, of “extreme necessity or hardship”. Sutherland had not
spudded an additional well or presented an assignment when the trial court entered
such mandatory injunction.
L. Injunction Erroneously Compels Assignment Even If Well Is Not
Drilled and Completed Within Contract Deadline
35. The injunction order compels Dimock to give Sutherland an
assignment of leasehold acreage even if a well is drilled after November 19, 2015
(the end of the 3 year term). The injunction is an order to “specifically perform” a
contract which Dimock did not sign. In Blaschke v. Wiede, 649 S.W.2d 749
(Tex.App.—Texarkana 1983, writ ref’d n.r.e.), the parties signed a one year lease
with an option to buy property. After the one year expired, the court found the
holdover tenant’s one year option to buy had expired and the tenant had no cause
of action to compel the property owner to sell the property after the one year term.
Id. In this case, the order allows Sutherland to holdover indefinitely and drill
wells indefinitely, and compel Dimock to assign leasehold acreage indefinitely
40
beyond November 19, 2015, the end of the contract term. Like the holdover
tenant in Blaschke, Sutherland has no cause of action for an unlimited option to
acquire more leasehold acreage from Dimock, no cause of action to prohibit
Dimock from drilling on his own leases after November 19, 2015, and no right to
specific performance against Dimock as to any well drilled and completed on a
Dimock leasehold after November 19, 2015.
M. Lack of Imminent Harm
36. It is an abuse of discretion to grant a temporary injunction based upon
alleged “imminent harm” arising from “the mere existence of unexercised
contractual rights.” Schmidt v. Richardson, 420 S.W.3d 442, 446, 447 (Tex.App.-
Dallas 2014, no writ). Numerous contractual prerequisites to Sutherland being
entitled to an assignment of any additional acreage have not been met, but the trial
court erroneously found “imminent harm”. As the Dallas Court of Appeals found
in Schmidt, the trial court abused its discretion when it granted Sutherland a
temporary injunction.
N. Injunction Erroneously Has No Provision Requiring Compliance with
Contract by Sutherland
37. Another glaring problem with the trial court injunction is it wrongly
authorizes Sutherland to drill wells indefinitely whether or not Sutherland
performs the contract provisions as agreed. Rewriting the term of the contract
coupled with ordering the other party to, unconditionally, take certain actions,
41
effectively guts Sutherland’s obligations to comply with the contract. Under the
erroneous order, Dimock cannot stop performing and assigning its leasehold
acreage even in the face of blatant contract breaches by Sutherland.
O. Injunction Order Erroneously Provided Investment Assurance
38. Why did the trial court take such drastic action in the temporary
injunction order? Because Sutherland was “afraid” that if he drills another well,
Dimock may not sign a lease assignment. RR 3:57. A trial court cannot and
should not make that investment decision for Sutherland. When a party asks a
court for investment advice, the court should decline to provide it. Grace
Holdings, L.P. v. Sunshine Mining and Refining, 901 F. Supp. 853, 863
(D.Del.1995).
P. Pending Suit and Lis Pendens Already Made Drilling Additional Wells
a Risk for Sutherland, and is Privileged, So There Is No Imminent
Harm
39. The only alleged “imminent harm” Sutherland presented at the
hearing was a letter exchange between counsel for the opposing parties. First,
Sutherland’s lawyer wrote a letter (and demanded a response) asking if Dimock
contested Sutherland’s right to drill additional wells. RR 5: Pl. Exh. 7. In response
to Appellee’s invitation and command to respond, Appellant’s counsel sent a letter
to Appellee’s counsel dated June 3, 2015 (which is consistent with Appellant’s
pleadings) wherein he stated his opinion that the Hamrick #3 paid out in the spring
42
of 2014, that Sutherland has breached the Agreement by retaining the Hamrick #3
and all its working interest proceeds, and stated that Sutherland drills additional
wells on Dimock’s leases at its own risk. RR 5: Pl. Exh. 8. The June, 2015
correspondence exchange between counsel revealed no “imminent” harm.
40. Any well that Sutherland drills on a Dimock leasehold after the lis
pendens was filed is, as a matter of law, subject to all legal claims of Dimock in
this lawsuit. That is decades-old Texas law, not a new revelation in June, 2015.
Further, even with the injunction improperly authorizing indefinite term drilling of
wells, under Texas law, Sutherland would drill any new well at the risk of losing it
if Dimock ultimately prevails in this lawsuit. See Phillips Pet. Co. v. American
Trading and Prod. Corp., 361 S.W.2d 942 (Tex. Civ. App. – El Paso, 1962, writ
ref’d n.r.e.). Such well would be drilled while the temporary injunction order is
being appealed, during pending litigation over whether the underlying contract has
been breached, and while a lis pendens is on file.
41. The trial court erroneously granted the Temporary Injunction Order
even after Sutherland conceded at the hearing that the June, 2015 letter of Attorney
Lovell did not matter. Rod Sutherland, the sole member of Appellee (See RR
3:100), admitted he wanted his lawyer to write the letter that led to Attorney
Lovell’s June response. RR 4: 72. He further admitted he did not like the Lovell
response, so he wanted an injunction. Id. He admitted there is a filed lis pendens
43
by Dimock as to the subject suit and acreage. RR 3: 66, 67. He admitted that
anyone acquiring an interest while a lis pendens is on file, takes that interest
subject to the outcome of the lawsuit. RR 3: 69-70. He further admitted that if the
lis pendens refers to the 15 sections at issue [which the amended lis pendens does],
then the Lovell letter in July 2015 would not matter. Id. Later, Rod Sutherland
admitted the filed Amended Notice of Lis Pendens listed all 15 sections at issue.
RR 4:78. The “harm” posed by the privileged Lovell letter is a red herring.
42. The Notice of Lis Pendens in this lawsuit was filed and recorded on
July 31, 2014. RR 4:77; RR 6: Def. Exh. 1. The amended Notice of Lis Pendens,
including all 15 sections at issue, was filed on September 19, 2014. RR 4:77-78;
RR 6: Def. Exh. 2. The UCC Financing Statement was filed with the Texas
Secretary of State on July 28, 2014. RR 6: Def. Exh. 3; RR 4:92.
43. Sutherland also tried to claim its “investors” might be scared off by
the Lovell letter (which, of course, was only sent to Sutherland’s lawyer). The
only “investors” who allegedly have refused to invest in Sutherland’s additional
wells are Wade Tidmore, and Judy Thompson. RR 4:89. According to Rod
Sutherland, Woody and Judy Thompson, Joe and Vivian Revesz, and Wade
Tidmore and his wife are working interest owners, through Sutherland, in the
Hamrick #3. Sutherland only has a separate Operating Agreement with them. RR
6: Def. Exh. 4, P. 22-23. Judy Thompson is Rod Sutherland’s wife’s cousin. RR
44
6: Def. Exh. 4, P. 25. Vivian Revesz is Rod Sutherland’s wife’s niece. Id. Wade
Tidmore is an employee of Sutherland whose time spent on this lawsuit is being
erroneously billed to “operating expense” of the Hamrick #3 (CR 1583), so as to
delay the payout. Wade Tidmore helped Sutherland draft the subject Agreement.
RR6:Def. Exh. 4, P. 104. Just because Rod Sutherland’s relatives and employees,
are not enamored with the idea of giving Rod Sutherland money to drill a new well
on a Dimock leasehold, is not “imminent harm” caused by any wrongful act of
Dimock.
44. The trial judge also had before him the Defendant’s Second Amended
Answer and Counterclaim. RR 4:113-114; CR 1336. As is apparent from that
pleading (beginning at CR 1336), Dimock was alleging Sutherland was in breach
of the Agreement, that Sutherland was converting Dimock’s and the Christian
Charities’ working interest proceeds, and Dimock sought to foreclose its lien under
the Operating Agreement. CR 1345. Dimock’s claims against Sutherland have
been of record since Dimock filed its Original Answer and Counterclaim on June
13, 2014. CR 12. Attorney Lovell’s privileged comments as to Dimock’s legal
position in July 2015 were neither new nor novel.
45. The bottom line is Sutherland wanted an injunction specifically
“because [Rod Sutherland] didn’t like the content of the Lovell letter that
Sutherland requested”. RR 4:72. A party’s unhappiness that the opposing party
45
disagrees with his legal interpretation of a contract, and that the opposing party
asserts a contrary legal position which includes the consequences of his breach of a
contract, is not a legal basis for a temporary injunction. “There is no power in
courts to make one person speak only well of another.” Pirmantgen v. Feminelli,
745 S.W.2d 576, 578 (Tex.App.-Corpus Christi, no writ). Dimock’s counsel’s
opinion letter re-iterating Dimock’s pleadings does not threaten Sutherland with
any imminent danger, and may not be the subject of a temporary injunction. Id. at
578-579. Court records, including all Dimock’s pleadings “are presumed to be
open to the general public.” Tex. R. Civ. P. 76a(1).
46. Further, the uncertainties caused by the continuation of this lawsuit,
and the delay in obtaining a final appellate decision about the proper determination
of “payout” of the Hamrick #3, is an uncertainty of Sutherland’s own making. It
is Sutherland who objected to an interlocutory appeal. It is Sutherland who
obtained a continuance of the trial setting.
Q. Appellant Entitled to Maintain that Sutherland has Breached Contract
and to File Lis Pendens
47. When a party has breached a contract, the other party is entitled to
treat the contract as rescinded. Halbert v. Standley, 488 S.W.2d 887, 889
(Tex.Civ.App.-Waco 1973, writ ref’d n.r.e.); Cundiff v. McLean & Miller, 8 S.W.
43 (Tex. 1888); Ross v. McLelland, 281 S.W.2d 773 (Tex.Civ. App. - Fort Worth,
1955, writ ref’d n.r.e.). Dimock’s attorney’s letter expressing an opinion
46
consistent with the above line of cases is neither improper, nor a basis for a
temporary injunction.
48. Good faith litigants are assured access to the judicial system.
Sakowitz, Inc. v. Steck, 669 S.W.2d 105, 107 (Tex. 1984). Whether or not Dimock
prevails on its claims, Dimock is entitled to maintain its legal position until this
case is resolved through the court system. Id.
49. Further, Dimock is privileged to file a notice of lis pendens. TEX.
PROP. CODE ANN. §12.007 (Vernon 1984). The filing of a notice of lis pendens
is part of a “judicial proceeding.” Kropp v. Prather, 526 S.W.2d 283, 287
(Tex.Civ.App.-Tyler 1975, writ ref’d n.r.e.). Further, any communications, oral or
written, uttered or published in the due course of any judicial proceeding is
absolutely privileged. Id. at 286; See also Griffin v. Rowden, 702 S.W.2d 692, 694
(Tex.App.-Dallas 1986, writ ref’d n.r.e.). All Dimock has done by filing a lis
pendens, and Dimock’s counsel sending a letter to Sutherland’s counsel (which
Sutherland’s counsel requested) indicating his opinions are all communications in
a judicial proceeding that are privileged as a matter of law. None of such acts are
“wrongful” conduct on which to base the granting of a temporary injunction.
R. Destroyed Status Quo
50. “The status quo is defined as the last, actual, peaceable, non-contested
status that preceded the controversy.” Tri-Star Petroleum Co. v. Tipperary Corp.,
47
101 S.W.3d 583, 588 (Tex.App.-El Paso, 2003, pet. denied). The term of the
option to drill additional wells under the Agreement is 3 years from November 20,
2012. The subject temporary injunction destroys that status quo. Under the
temporary injunction, Sutherland can drill additional wells on Dimock leaseholds
until further order of the court, and Dimock is enjoined from drilling on his own
leases after November 19, 2015. The trial is not set until February 2016, over two
months after the end of the 3 year contract term. Who knows if Sutherland will
obtain another continuance?
51. Besides being a direct violation of the Agreement to authorize
Sutherland to drill after November 19, 2015, the temporary injunction restrains
Dimock from drilling on his own leases after November 19, 2015, another
violation of the status quo.
52. The Temporary Injunction Order also destroys the status quo because
it also authorizes Sutherland to drill additional wells on the “subject leases and any
lands pooled therewith” for the same indefinite term into the future. CR 1597.
The right to drill wells indefinitely into the future is not just on Dimock’s
leaseholds, but also on any lands that Sutherland in the future might decide to pool
with any part of a Dimock leasehold.
48
S. Violated Statute of Frauds
53. By eliminating the 3 year stated term of the Agreement, the trial court
abused its discretion and created a “contract” which violates the Statute of Frauds.
Such a “rewrite” violates the Statute of Frauds. No agreement which is not to be
performed within one year is enforceable against a party unless that agreement is in
writing and signed by the parties. TEX. BUS. & COM. CODE §26.01(b)(6).
Further, the new, unsigned, “agreement” created by the trial court is a court-
created, unenforceable, contract for the sale of real estate, an oil and gas leasehold,
which also violates the Statute of Frauds. TEX. BUS. & COM. CODE
§26.01(b)(4). Under the order, Sutherland could drill a well in January 2016 (after
the 3 year signed contract term) and claim he is entitled to an assignment of
acreage from Dimock’s oil and gas leasehold. If the appeal in this case extends
into 2017 and Sutherland is still drilling new wells on a Dimock leasehold,
Sutherland could claim he is entitled to a leasehold assignment in 2017 and compel
Dimock to provide an assignment. Dimock signed no such agreement, and it is
enforceable under the Statute of Frauds.
T. Violated Statute of Conveyances
54. For the same reasons outlined above as to the Statute of Frauds, the
temporary injunction order also violates the Statute of Conveyances because it is
not signed by Dimock or any authorized agent of Dimock. TEX. PROP. CODE
49
§5.021. A conveyance of real property must be in writing and signed by the
conveyor or his agent authorized in writing. Id. Judge Bird is not an authorized
agent of Dimock. When an instrument purports to convey an interest in real estate,
but fails to comply with the statute of conveyances, the instrument is unenforceable
to convey the property or interest. TEX. PROP. CODE §5.002. The “contract”
created by the injunction order that purports to authorize and compel the
conveyance of an interest in Dimock’s oil and gas leasehold beyond November 19,
2015, is an abuse of discretion and is void. TEX. BUS. & COM. CODE
§26.01(b)(4) and §26.01(b)(6) [Statute of Frauds]; TEX. PROP. CODE §5.021
[Statute of Conveyances]; Guffey v. Utex Exploration Co., 376 S.W.2d 1, 4-5
(Tex.Civ.App.-San Antonio 1964, writ ref’d n.r.e.).
U. Erroneous Order of Specific Performance of Non-Existent Contract
55. The Temporary Injunction Order is also an erroneous order of specific
performance. It compels Dimock to assign leasehold acreage for a well drilled
after November 19, 2015. “[A]n injunction has the effect of a decree of specific
performance.” Eberts v. Businesspeople Pers., 620 S.W.2d 861, 864
(Tex.Civ.App.-Dallas 1981, no writ).
56. Further, the Temporary Injunction Order is erroneous because it
precludes Dimock from lawful activities that are a proper exercise of its rights.
Computek Computer & Office Supply v. Walton, 156 S.W.3d 217, 220-21 (Tex.
50
App.–Dallas 2005, no pet.). Dimock is expressly precluded from stopping
Sutherland from drilling new wells after November 19, 2015, or drilling his own,
both lawful activities of Dimock that would be a proper exercise of its legal rights
under the Agreement.
V. Illegal Prior Restraint on Speech
57. The temporary injunction enjoins Defendants from “Communicating
to investors, lenders, partners, mineral owners, surface owners, working
interest owners, employees, contractors, service providers, purchasers of
production, and other third parties not involved in the litigation that Plaintiff
is a trespasser or lacks the authority to drill and produce additional wells on
the Subject Leases, or on acreage pooled therewith.” CR 1591, emphasis
added.
58. The injunction is an illegal prior restraint on speech. Near v.
Minnesota ex rel. Olson, 283 U.S. 697, 51 S. Ct. 625 (1930); Organization for a
Better Austin v. Keefe, 402 U.S. 415, 91 S. Ct. 1575 (1971). Further, such
injunction violates Art. 1, Sec. 8, of the Texas Constitution, which provides:
“Every person shall be at liberty to speak, write or publish his opinions on any
subject, being responsible for the abuse of that privilege; no law shall ever be
passed curtailing the liberty of speech or of the press.” The subject order
51
erroneously prohibits Dimock from communicating about this lawsuit and his
contentions in the lawsuit.
59. A “judicial order that forbids certain communications before they
occur constitutes a prior restraint.” Alexander v. U.S., 509 U.S. 544, 550, 113 S. Ct.
2766 (1993); Marketshare Telecom, LLC v. Ericson, Inc., 198 S.W.3d 908, 917
(Tex.App.-Dallas 2006, no pet.). Prior restraints on speech are presumptively
unconstitutional. Davenport v. Garcia, 834 S.W.2d 4, 10 (Tex.1992). The trial
court in this case failed to meet the requirements of Davenport before it issued the
subject injunction. There is nothing in the record that the parties discussed or
presented evidence concerning whether the injunction was the least restrictive
means to prevent the alleged harm. Marketshare, 198 S.W.3d at 917; Davenport,
834 S.W.2d at 10. The subject injunction gag order does not satisfy the
requirements of Davenport.
60. Communications by a litigant as to its beliefs and its position in a
lawsuit, which are not false or misleading, cannot constitutionally be enjoined.
Marketshare, 198 S.W.3d at 920. A prior restraint of a party’s statement of
position in a lawsuit, does not justify imposition of a gag order by temporary
injunction. Id.
52
W. Prior Breaches of Contract Bar Injunctive Relief
61. A party who breaches a contract provision favorable to the other party
cannot secure, by injunction, the enforcement of another contract provision
favorable to it. Langdon v. Progress Laundry Cleaning Co., 105 S.W.2d 346, 347
(Tex.Civ.App.-Dallas 1937, writ ref’d); Chapman Air Conditioning v. Franks, 732
S.W.2d 737, 740 (Tex.Civ.App.-Dallas 1987, no writ) The burden is on
Sutherland to establish contract compliance before injunctive relief can be
considered. Halbert v. Standley, 488 S.W.2d 887, 889 (Tex.Civ.App.-Waco 1972,
writ ref’d n.r.e.); citing Casanova v. Falstaff Beer, Inc., 304 S.W.2d 207
(Tex.Civ.App.‒Eastland, 1957, writ ref’d n.r.e.).
62. Dimock has pleaded and presented proof, as outlined in this Brief, that
Sutherland has breached the Agreement. Therefore, injunctive relief for
Sutherland should have been denied.
63. The evidence shows Sutherland has violated the subject Agreement by
charging over $2 million in unrelated “seismic” costs, and “land” costs to the
Hamrick #3. The most recent “Hamrick Prospect Payout Estimation” [created by
Sutherland] shows Sutherland’s claimed “cumulative expenditures” of
$3,439,371.00. RR 5: P1. Exh. 2. That figure includes the erroneously charged
$2.4 million in land and seismic costs for wells other than the Hamrick #3. See
also RR 5: P1. Exh. 3. Sutherland admits none of the “seismic cost” was used to
53
locate the Hamrick #3. No seismic was even shot before that well was drilled and
completed. RR 4:87; RR 6:Def Exh. 4, P. 38. Sutherland admits none of the “land
cost” was used for pooling, drilling, or locating the Hamrick #3. RR 4:87. None of
the seismic cost or land cost charged by Sutherland was a cost of “the Initial
Earning Well” as required by the Agreement to be chargeable to such well. CR 19.
64. Further, the evidence shows Sutherland is charging his and his
employee’s own time as “land” expenses, labeled as “company labor” to the
Hamrick#3 well and its payout. RR 5: P1. Exh. 3. It is time Sutherland and his
employees, allegedly spent getting leases on other land. RR3:45-46; RR4:87,90;
RR6:Def. Exh. 4, P. 51-52. The Agreement does not authorize those in-house
expenses be charged to the Hamrick #3 or its payout.
65. Further, Sutherland admits it is charging all of its attorney’s fees in
this lawsuit to “operating expenses” of the Hamrick #3. RR 4:74-75. Sutherland
has charged to “operating expenses” of the Hamrick #3 “this entire lawsuit
basically.” RR 4:76. Also, Sutherland admitted he is billing out his time spent on
the lawsuit at $800 per hour, and employee Wade Tidmore’s time at $400 per hour,
to the Hamrick #3 “operating expense”. Id. Sutherland admits that every dollar he
spends on this lawsuit he is reducing the revenue of the Hamrick #3 by one dollar
in the payout calculation. RR 4:84. Sutherland cavalierly believes it has total
“discretion on expenditures” it attributes to the Hamrick #3 payout. RR 4:85-86.
54
Through the end of May, 2015, Sutherland, had charged approximately
$103,000.00 in lawsuit expenses and Sutherland employee time and expenses
regarding the lawsuit to the initial earning well payout calculation. RR 4:88. No
authority was presented to the trial court to justify such charges. Sutherland’s
external and internal litigation expenses are being charged as part of the
“miscellaneous” expense line item under well “operating expense.” RR5: P1. Exh.
4-6; RR6:Def. Exh. 4, P. 89-90. In months when that line item exceeds $80.00,
litigation expenses are being charged as “operating expense” and delaying the
Hamrick #3 payout. Id. Examples of such improper charges are in Exhibits 94-99,
101 to Sutherland’s deposition [“litigation” expense charge]. CR 1580-1585,
1587; RR6:Def. Exh. 94-99, 101. Showing how Sutherland decided (on a salary
plus benefits basis) to charge his time, and his employees’ time shown in Exh. 100
to Sutherland’s deposition. CR 1586.
66. Expenses of litigation are not recoverable from an adverse party
unless expressly provided by statute or contract. Eberts v. Businesspeople Pers.,
620 S.W.2d 861, 864 (Tex.Civ.App.-Dallas 1981, no writ); Hammonds v.
Hammonds, 313 S.W.2d 603, 605 (Tex.1958). “This rule applies to a litigant’s
loss of time.” Eberts, 620 S.W.2d at 863; Phillips v. Latham, 523 S.W.2d 19, 27
(Tex.Civ.App.-Dallas 1975, writ ref’d n.r.e.). There is no contract provision that
55
authorizes Sutherland’s charging of external or internal litigation costs to the
Hamrick #3 payout.
67. The “effect” of Sutherland’s above-cited breaches of contract are in
evidence. Sutherland admitted the Hamrick #3 working interest well revenue
exceeded the cost to drill and complete the well by early November, 2013.
RR6:Def. Exh. 4, P. 141-142. He also admitted that two times payout would have
been reached by April 2014, if Sutherland had not spend money on something else.
Id; See also Exh. 77 to Sutherland’s Deposition, CR 1546; RR6:Def. Exh. 77. In
creating “payout statements” beginning in early 2014, Sutherland improperly
coached his employees how to attribute their “time” to the “Hamrick Prospect” and
then charge it such well. Exhs. 80, 84, 85, 86 to Sutherland’s deposition, CR 1549,
1553, 1554, 1555. Rod Sutherland displayed his attitude when he said “in essence
half the money we spend is being paid for by Mr. Dimock and the other half is
being paid by some Christian charity.” Exh. 87 to Sutherland’s deposition, CR
1556. He further referred to it as “good return on the money we spend.” Id. He
expressly sanctioned the unlimited spending spree with Hamrick #3 proceeds and
delighted in pocketing another dollar for every dollar he spent.
68. Further, Sutherland admits it has duty to act in good faith as to
Dimock (CR 1474), but proceeded to spend Dimock’s and the Christian Charities’
money and endlessly delay payout of the Hamrick #3. The nature of the needed
56
limited seismic represented by Sutherland to Dimock leading up to the 2012
Agreement is reflected in an email of Rod Sutherland which is Exh. 40 to
Sutherland’s Deposition (CR 1501), which Deposition was attached to Defendants’
Response to Plaintiff’s Amended Application for Temporary Injunction (CR
1439). Limited seismic was represented as being needed to “determine an
optimum location” for the Roy Hamrick #1 replacement well, which turned out to
be the Hamrick #3. See also, Exhibits 41 and 42 to Sutherland’s deposition, CR
1503, CR 1505. Dimock’s position is that seismic and land costs were included in
the initial earning well payout in case Sutherland had to pay some land or seismic
costs for that initial earning well. RR 5:Pl. Exh. 11, P. 202. The evidence shows
no such land expenses or seismic expenses were even needed for such Initial
Earning Well. Sutherland’s unending spending spree for unrelated land and
seismic costs is breach of the duty to act in good faith under the Operating
Agreement and is also a breach of Sutherland’s fiduciary duties to Dimock as to
the Hamrick #3 proceeds.
69. Sutherland violated Article VI, D, of the Operating Agreement by
charging to the subject well, and Dimock, sums in excess of $25,000 (in fact, over
$2.4 million) for a project that was not drilling, sidetracking, reworking,
deepening, completing, recompleting, or plugging back of the Hamrick #3, the
Initial Earning Well.
57
70. Further, Sutherland has violated Section 2.1 of Exhibit A to the
Agreement, that “all operations conducted by Farmee regarding the Initial Earning
Well, until such time as “project payout” is reached . . shall be at Farmee’s sole
cost and risk.” CR 17. Sutherland has not borne the cost and risk of his land
acquisitions outside the Dimock leasehold, and the cost and risk of his seismic
expenses. Dimock and the charities have been erroneously charged all those
expenses and have received zero benefit from them.
71. There is a fact issue every month of 2014 and 2015 whether
Sutherland breached the Agreement with Dimock by charges which exceed the
$25,000 limit on non-drilling, etc. expenses or projects. Cone v. Fagadau Energy
Corp., 68 S.W.3d 147 (Tex. App. – Eastland 2001, pet. den.).
72. There is a fact issue each month, beginning in April 2014, whether
Sutherland breached the Agreement by charging and/or recouping from the
working interest proceeds of the Hamrick #3, Sutherland’s legal expenses and
costs in this lawsuit, including “internal” lawsuit expenses and external legal
expenses.
73. There is also a fact issue as to Hamrick #3 payout. An expert’s
opinion testimony can defeat a summary judgment claim as a matter of law.
Burrow v. Arce, 997 S.W.2d 229, 235 (Tex. 1999). Dimock attached to its
summary judgment response, the Affidavit of Gregg Morgan, a CPA. CR 333. As
58
was stated in Mr. Morgan’s report, he reviewed the evidence in this case and he is
of the opinion that the Hamrick #3 reached payout in March, 2014. Further, the
Affidavit of Joe W. Dimock, raises fact issues as to breach of contract and breach
of fiduciary duty by Sutherland. His Affidavit, which was attached to his summary
judgment response, was later incorporated into Dimock’s injunction response. CR
324. As shown in that Affidavit, the intent was for the Agreement and Operating
Agreement to constitute a single agreement. Part of the agreement was the parties
agreed to a $25,000 non-drilling, etc. project limit. Further, Dimock, who is an oil
and gas lease operator, confirmed that “land costs” and “seismic costs” are not
costs that are “drilling, Sidetracking, Reworking, Deepening, Completing,
Recompleting or Plugging Back” costs as those terms are used in the oil and gas
industry. Further, Dimock expressed his opinion that payout of the Hamrick No. 3
well occurred in March, 2014. Such evidence raises fact issues which should have
precluded the trial court from granting the erroneous partial summary judgment to
Sutherland, and from granting the subject erroneous injunction when fact issues
were present as to breach of contract.
74. No evidence was ever presented by Sutherland that land expenses or
seismic expenses are Adrilling@ expenses. Sutherland admitted in Response to
Requests for Admission that land expenses and seismic expenses are not any of the
other 6 categories of expenses not subject to the $25,000 project limit. Therefore,
59
the subject disputed expenses (in sums already in excess of $2.4 million), are either
judicially admitted not to be, or not proven to be, the types of expenses that are not
subject to the $25,000 limit. All such charges in excess of the $25,000 limit are
evidence of a breach of contract by Sutherland, and a breach of Sutherland’s
fiduciary duty to Dimock as to Hamrick #3 proceeds.
X. Injunctive Relief Not Available to Party Guilty of Inequitable Conduct,
Laches, and Unclean Hands
75. The evidence outlined in this Brief also shows Sutherland is guilty of
inequitable conduct, laches and unclean hands, which also precludes a grant of
injunctive relief. Landry’s Seafood Inn & Oyster Bar - Kemah, Inc. v. Wiggins, 919
S.W.2d 924, 927 (Tex. App.–Houston [14th Dist.] 1996, no writ).
Y. No “Repudiation” by Dimock
76. In the findings stated in the Temporary Injunction Order, the court
found that Dimock has repudiated the Agreement. CR 1596. Repudiation is a
question of fact. King Ranch, Inc. v. Chapman, 118 S.W.3d 742, 756 (Tex. 2003).
To establish repudiation, first a party has to plead repudiation, and then the party
has the “affirmative burden of establishing that they had actual notice of [the
repudiation] and that, in reliance thereon, operations were suspended…” Atlantic
Richfield Co. v. W.O. Hilton, 437 S.W.2d 347, 355 (Tex.Civ.App.-Tyler 1969, no
writ). In this case, Appellee has not pled repudiation, and there is, at the very least,
a fact issue whether there has been repudiation. Sutherland’s only presented
60
“proof” of unpleaded repudiation is the June, 2015 letter from Attorney Lovell
discussed in detail in Section ___ of this Brief. That letter merely expresses
counsel’s opinion that Sutherland has breached the parties’ contract and his client
will continue to pursue its lawful remedies for such breaches.
77. Repudiation requires evidence that “the lessor must have asserted a
clear, unequivocal challenge to the lessee’s title to, and interest in the lease.”
Atkinson Gas Co. v. Albrecht, 878 S.W.2d 236, 239 (Tex.App.-Corpus Christi
1994, writ denied). Texas courts have a narrow view of what constitutes
unequivocal notice of forfeiture or a positive challenge to lessee’s title to the lease,
refusing to find unequivocal notice in the recording of top-leases, the remittance of
letters stating opinions about the status of leases, or the act of shutting in a well.
Atkinson Gas, 878 S.W.2d at 239; Atlantic Richfield, 437 S.W.2d at 354-55.
78. In Atlantic Richfield, the court found that the statement by lessors’
attorney that the lessors were of the opinion that Atlantic did not have a lease was
not a repudiation. Id. at 353. The lessors were merely informing the lessee of their
subjective opinion regarding the status of lessee’s lease. The statements did not
repudiate the lease. Id.
79. The court went further to find that Atlantic Richfield’s continued
operations on the lease showed a lack of repudiation. Id. at 355. At the time of
the injunction hearing, Sutherland had continued operating the Hamrick #3, and
61
retaining its the working interest proceeds, for over a year after Dimock alleged
that Sutherland is in breach of the Agreement. There is no evidence, or insufficient
evidence, of repudiation of the Agreement by Dimock.
Z. Injunction Improperly Restrains Right to Relief for Future Breaches of
Contract
80. The temporary injunction order fails to provide for the possibility that
Sutherland may breach the agreement after the date of the injunction order, and
fails to protect Dimock’s legal right to seek redress in court for such breach,
including termination of the contract. B & A Pipeline Co. v. Dorney v. Enserch
Corporation, 904 F.2d 996, 1002 (5th Cir.1990). The trial court wholly failed to
consider that Dimock and Sutherland are still doing business and to protect
Dimock from future breaches of contract by Sutherland. Future breaches could
affect and/or eliminate any “option” of Sutherland to drill an additional well.
81. Further, the provisions compelling an assignment of acreage also
violate this legal principle. Sutherland could drill a well after November 19, 2015
or a well that does not produce in paying quantities and still demand a lease
assignment from Dimock (i.e. an assignment not available under the Agreement).
If Sutherland breaches the Agreement or the Operating Agreement after the date of
the order and before “final hearing and determination of this cause,” the order
compels Dimock to still assign his leasehold acreage to a breaching party. And,
62
who knows what language Sutherland might insert into such as-of-yet, non-existent
document? Such order is an abuse of discretion.
AA. Injunction Erroneously Granted Without Joinder of Necessary Parties
82. All parties whose rights will be directly affected by the writ of
injunction are to be included in any injunction proceeding. Ladner v. Reliance
Corp., 293 S.W.2d 758, 764-65 (Tex. 1956). All parties to a contract are to be
included in an injunction proceeding if the applicant is seeking to restrain
enforcement of a contract. McCharen v. Bailey, 87 S.W.2d 284-85 (Tex. App. -
Eastland 1935, no writ). Despite Dimock’s objection that Sutherland failed to join
or even notify necessary parties (CR 1304), the trial court erroneously granted a
Temporary Injunction without notification to the parties to whom Sutherland
contracted to assign a working interest in the Hamrick #3, and without notification
to the charities who own 49% of the working interest in the Hamrick #3 because
the subject well paid out in 2014.
BB. Inadequate Bond
83. The trial court erred in entering the Temporary Injunction Order with
a bond of only $15,000.00. RR 4:138. Dimock had requested that the bond be at
least $1,000,000.00. RR 4:136. The amount of the bond is subject to appellate
court review. Tex. R. Civ. P. 684. To protect the adverse party, the amount of the
bond must relate to the potential damages in the lawsuit. El Paso Dev. Co. v.
63
Berryman, 729 S.W.2d 883, 888-89 (Tex.App.-Corpus Christi 1987, no writ). At
the time of the July, 2015 injunction hearing, Sutherland had already withheld
from Dimock and the Christian Charities over $3,000,000.00 in working interest
revenue from the Hamrick #3, and the trial court was authorizing unlimited drilling
into the future (beyond the end of the stated term of the Agreement) on Dimock’s
oil and gas leaseholds, over the express objection of Dimock. Further, Dimock
showed Sutherland did not have assets to pay back the sums already withheld from
Dimock if the case is reversed on appeal, much less the additional sums owed as to
wells the trial court was “authorizing” Sutherland to drill into the indefinite future.
The subject order authorizes unlimited drilling, unlimited charging of expenses for
additional wells, and authorizes Sutherland to keep the working interest revenue
from such future wells. When a well is drilled by a trespasser who has notice of
the objection of the oil and gas leaseholder, the oil and gas leaseholder does not
owe the drilling and completion costs of such a well. Liles v. Thompson, 85
S.W.2d 784 (Tex. Civ.App.-El Paso 1935, writ dismissed). There is no legal basis
for Sutherland to recoup from Dimock any costs of new wells drilled on Dimock’s
leaseholds after November 19, 2015, or to retain any well revenue from such wells,
but the trial court erroneously authorized such extra-contractual drilling, without a
sufficient bond to repay Dimock when such erroneous injunction is reversed.
64
84. A $15,000.00 bond is wholly inadequate to compensate Dimock as to
new wells the court authorized Sutherland to drill outside the term of the
Agreement, and to compensate Dimock for the loss of the right to drill wells on his
own leases after November 19, 2015.
CC. Error to Deny Dimock Injunctive Relief
85. As shown by the evidence outlined in this Brief, the trial court erred
when it denied Dimock’s Application for Temporary Injunction. Such Injunction
would have upheld the Agreement of the parties, and preserved the status quo by
preventing Sutherland from obtaining and spending Dimock’s 51% and the
Christian Charities’ 49% working interest revenue of the Hamrick #3. Such
Injunction would have stopped Sutherland from charging Dimock for land and
seismic costs in excess of $25,000 (which are now $2.4 million and still climbing).
Dimock established that Sutherland, a start-up company, does not have the assets
to repay Dimock and the Christian Charities when Dimock prevails on appeal as to
the interpretation of the Agreement and as to Sutherland’s breaches of contract,
and Sutherland has made no attempt whatsoever to do an internal suspense of
Hamrick #3 revenue to repay Dimock, or the Christian Charities. Dimock
established breaches of contract by Sutherland on a monthly basis from April 2014
until the date of the injunction hearing in July 2015. Damages to Dimock in excess
of $1.5 million had already been caused by Sutherland, which has insufficient
65
assets to repay those damages. Further, as the evidence outlined above showed, if
a receiver had been appointed to operate the well, as was requested by Dimock in
its Application for Temporary Injunction, the improper charging of Sutherland’s
legal expenses and internal “lawsuit expenses” (already in excess of $100,000) to
“operating expenses” of the Hamrick #3 would be stopped.
CONCLUSION AND PRAYER
Dimock prays that, upon hearing, this Court reverse the Temporary
Injunction Order of July 7, 2015, reverse the July 9, 2015 Order denying Dimock’s
Application for Temporary Injunction and grant such injunction, and Dimock prays
that this Court find that, as a matter of law, the $25,000 limit in the Agreement
applies to land and seismic expenses, find that the Hamrick #3 paid out in March,
2014, and remand this cause for further proceedings consistent with such rulings.
Dimock prays for such other and further relief to which Dimock may be entitled.
DATED this 19th day of October, 2015.
66
Respectfully submitted,
Lovell, Lovell, Newsom & Isern, L.L.P.
John H. Lovell, SBN 12609300
(john@lovell-law.net)
Barbara A. Bauernfeind, SBN 08190500
(barbara@lovell-law.net)
112 West 8th Avenue, Suite 1000
Amarillo, Texas 79101-2314
Telephone: (806) 373-1515
Facsimile: (806) 379-7176
By: /s/ John H. Lovell
John H. Lovell
ATTORNEYS FOR DIMOCK
67
CERTIFICATE OF COMPLIANCE
1. This brief complies with the type-volume limitation of Tex. R. App. P. 9.4
because it contains 14,590 words as determined by the computer software’s
word-count function, excluding the parts of the brief exempted by Tex. R.
App. P. 9.4(i)(2)(B).
2. This brief complies with the typeface requirements of Tex. R. App. P. 9.4(e)
because it has been prepared in a proportionally spaced typeface using
Microsoft Word 2007 in 14 point Times New Roman font.
Dated: October 19, 2015.
/s/ John H. Lovell
John H. Lovell
68
CERTIFICATE OF SERVICE
I hereby certify that a true and correct copy of the foregoing document was
delivered, as certified below, this 19th day of October, 2015 to:
Cornell Curtis via email: vernonlaw@sbcglobal.net
CORNELL D. CURTIS, P.C.
1716 Main Street
Vernon, TX 76384
Jerry L. Ewing, Jr. via email: jerry.ewing@wbclawfirm.com
Nathan R. Cash via email: nathan.cash@wbclawfirm.com
WALTERS, BALIDO & CRAIN, L.L.P.
10440 North Central Expressway
Dallas, TX 75231
Chris Lehman Via email: clehman@malonelawtx.com
MALONE LAW FIRM
1901 Lamar Street
P. O. Box 953
Vernon, TX 76385
Stanley Watson Via email: srwatson1@att.net
307 Main Street
P. O. Box 506
Quanah, TX 79252-0506
Mr. Ryan S. Mindell Via email: ryan.mindell@texasattorneygeneral.gov
Texas Attorney General
P. O. Box 12548
Austin, TX 78701
/s/ John H. Lovell
John H. Lovell
69
No. 07-15-00297-CV
COURT OF APPEALS
SEVENTH DISTRICT OF TEXAS
________________________
DIMOCK OPERATING COMPANY, and
JOE W. DIMOCK, D/BA DIMOCK PETROLEUM,
Appellants,
v.
SUTHERLAND ENERGY CO., LLC
Appellee.
________________________
On appeal from Cause No. 11,098
th
46 District Court, Hardeman County, Texas
Hon. Dan Mike Bird, Judge Presiding
APPENDIX TO BRIEF OF APPELLANT
A Temporary Injunction Order dated July 7, 2015 CR 1590-92
B Order Denying Defendant’s Application for CR 1599
Temporary Injunction dated July 9, 2015
C Seismic Exploration and Farmout Agreement dated CR 12-62
November 20, 2012 with Joint Operating Agreement
D Partial Summary Judgment dated December 19, CR 1286-87
2014
E Sutherland Lease Operating Statement for the CR 140, 141
Hamrick #3 well through March, 2014.
F Sutherland Authority for Expenditure of Drilling and CR 142-146
Completion Costs for the Hamrick #3 well
G Dimock letter demanding 51% working interest and CR 65-66
operations of the Hamrick #3 well dated April 21,
2014
H Sutherland “Hamrick Prospect Payout Estimation” as RR 5:PL EX.2
of the end of May, 2015.
I Sutherland “Hamrick Prospect Capital Costs” as of RR 5:PL EX.
the end of May, 2015. 3
J Excerpts of Rod Sutherland’s Deposition.
Respectfully submitted,
Lovell, Lovell, Newsom & Isern, L.L.P.
John H. Lovell, SBN 12609300
(john@lovell-law.net)
Barbara A. Bauernfeind, SBN 08190500
(barbara@lovell-law.net)
112 West 8th Avenue, Suite 1000
Amarillo, Texas 79101-2314
Telephone: (806) 373-1515
Facsimile: (806) 379-7176
By: /s/ John H. Lovell
John H. Lovell
ATTORNEYS FOR APPELLANTS
Cause No. 11098
Sutherland Energy Co., LLC, IN THE DISTRICT COURT
Plaintiff,
v.
HARDE!v1AN COUNTY, TEXAS
Dimock Operating Company and
Joe W. Dimock d/b/a Dimock
Petroleum,
Defendants. 46th JUDICli\.L DISTRICT
Temporary Injunction Order
On July 2, 2015, the Court heard Plaintiffs Amended \pplication for Temporary
Injunction. Plaintiff and Defendants appeared in pero.on and or through their
attorneys and announced ready.
After considering the pleadings, Plaintiffs sworn amended applicatton for
injunctiYe relief, the evidence, and arguments of counsel, the Coun is of the opiruon
that the application should be GRANTED.
The Court FINDS that Defendants have repudiated the parties' respective rights
and obligations under the Seismic Exploration and Farmout Agreement regarding the
drilling of additional wells on the Subject Leases, or on acreage pooled therewith,
intending to harm Plaintiff and effectively depriving Plaintiff of the ability to drill such
additional wells before the expiration of the drilling deadline.
The Court FINDS that if Defendants were to interfere with drilling operations that
are underway or withhold the required assignment of drilling unit acreage after Plaintiff
has drilled and completed a well as a producer, the consequences would be disastrous
to Plaintiff and irreparably deprive it of ib benefit of the bargain under the \greement.
The Court FINDS that the harm to Plamuff is unminent, and that if Defendants
are not immediately enjoined as provided here1n. Plaintiffs ume for drilling additional
P \Gl 1 01 3
1590
wells on the Subject Leases, o.r on acreage pooled therew1th, will exptre before a full
trial can be held on the merits of the parties' claims.
The Court FINDS that if Defendants are not immediately enjoined as provided
herein, Plaintiff will be irreparably injured because the loss of the right and opportunity
to drill additional wells on the Subject Leases, or on acreage pooled therewid1, 1s
unique, irreplaceable, and cannot be measured by any certain pecuniary standard
IT IS THEREFORE ORDERED, ADJUDGED, AND DECREED that the clerk
of this Court issue a writ of injunction pending final hearing and deterrntnauon of this
cause enjoining Defendants and their officers, agents, servants, employees,
representatives, and those persons in active concert or parue1pauon wtth them who
receive actual notice of this Order from:
1. Communicating to investors, lenders, partners, mineral owners, surface owners,
working interest owners, employees, contractors, serv1ce prO\ tder'., purchasers
of production, and other third parties not invoh ed m the lmgauon that Plainuff
is a trespasser or lacks the authority to drill and produce add1uonal wells on d1e
Subject Leases, or on acreage pooled therew1th;
2. Physically interfermg with Plaintiff's drilling operauons or other activities on the
Subject Leases, or on acreage pooled therew1th;
3. Attempting to deny Plaintiff access to the SubJect Leasec-, or on acreage pooled
d1erew1th;
4. Withholding the act:eage assignment required b:. Secuon 5.4 of the Seismic
Exploration and Farmout Agreement in d1c event Plamuff completes an
additional well as a producer of oil or gas in paymg quanoue~
P \Gl 2 01 .3
1591
Pnor to the 1ssuance of the wnt of 1!1Junct1on, Plamuff shall file \Vith the clerk a
bond in the sum of $15,000 payable to Defendants, approved and conditioned as the
law requires.
It is further ordered that the cause be set for tnal on the merits with respect to the
ultimate relief sought in the 46th District Court of Hardeman County at 9:00a.m. on
February 8, 2016.
SIGNED on july 7, 2015.
P \G£ 3 01 3
1592
Cause No. 11098
Sutherland Energy Co., LLC,
IN THE DISTRICT COURT
Plaintiff,
v.
Dimock Operating Company and HARDEI\1AN COUNTY, TEXAS
Joe W. Dimock d/b I a Dimock
Petroleum,
Defendants.
46th JUDICIAL DISTRICT
Order Denying Defendants' Application for Temporary Injunction
On July 2, 2015, the Court heard Defendants' application for temporary injunction.
After considering the pleadings, Defendants' application for injunctive relief, the
evidence, and arguments of counsel, the Court is of the opinion that the application
should be DENIED.
lt \~,therefore, ORDERED, ADJUDGED AND DECREED that Defendants'
request for temporary injunctive relief is DENIED.
Signed Ju'f015.
~};d£if
Honorable Dan Mike Bird
PRESIDING JUDGE
1599
SEISMIC EXPLORATION AND FARMOUT AGREEMENT
This agreement is by and between Dimock Operating Company, including Joe W.
Dimock and also dba Dimock Petroleum, (Farmor) whose address is 4245 Kemp Blvd., Suite
518, Wichita Falls, TX 76308 and Sutherland Energy Co., LLC (Farmee) whose address is 500
Lamar Court, Irving, Texas 75038.
Whereas, Farmor and Farmee desire to enter into an agreement pursuant to which Farmee
shall have the right to earn certain of Farmor's rights under the oil and gas leases described
below, subject to all terms, reservations and conditions set forth herein. lbis Seismic
Exploration and Farmout Agreement ("Agreement") is between Farmor and Farmee and shall be
effective on the date it is executed by Farmee as provided in Section 9.
Now, therefore, in consideration of the mutual covenants and agreements herein
contained, Farmor and Farmee agree as follows:
I. LANDS AND LEASES.
1.1 Subject Leases. Farmor represents, but does not warrant title expressly or
impliedly, they are the owner of certain rights in and to the Oil and Gas Mineral Leases (Subject
Leases) described on Exhibit "B" attached hereto.
1.2 Exclusive Right to Explore and Lease. As of the Effective Date and until the termination
of this Agreement, Farmee shall have the sole, exclusive, absolute, and irrevocable right to lease
oil and gas interests in and under the Lands, and Farmor shall not grant, let, or lease (including
any renewals, extensions, amendments or modifications of Existing Leases) to any Person (other
than Farmee) the right to investigate, explore, prospect, or drill for or produce oil and/or gas or
conduct exploration, geologic operations and geophysical surveys on the Subject Leases (except
in accordance with the terms and conditions of existing Subject Leases) without Farmee's prior
written consent, which consent may be granted or withheld by Farmee in its sole discretion.
1.3 Reservations. Farmor expressly reserves and excepts from the terms of this Agreement
any and all rights and interests to and operations of existing well bores, disposal wells, and
surface equipment and personalty located in, on or under the Subject Leases (except as provided
in 10.2 of Exhibit A).
II. SEISMIC EXPLORATION.
2.1 Ouerations. Farmor grants to Farmee the sole, exclusive, and irrevocable right to conduct
Seismic Exploration Operations on, under, and in the Subject Leases during the term of this
Agreement, including any appropriate or necessary related rights of ingress and egress. In
conducting all operations under this Agreement, Farmee shall use its sole discretion to determine
the type, nature, timing, and extent of all Seismic Exploration Operations.
Farmee shall pay for damages, as appropriate, to the owner(s) of the surface on which the
Seismic Exploration Operations are being conducted,
2.2 Ownership and Disclosure of Generated Information. Farmor and Farmee shall each own
full rights and interests in the Generated Information (raw seismic data). Farmee shall provide
one (1) copy of the Generated Information to Farmor. Farmee shall retain possession and control
of the original copies of the Generated Information. For three (3) years from the effective date of
this Agreement and upon at least ten (10) days written notice, Farmor (including a
representative) may have reasonable access to examine and review the Generated Information at
Farmee's principal place of business or any other convenient place designated by Farmee.
From the effective date of this Agreement, both Farmor and Farmee acknowledge and agree that
the Generated Information, Evaluation Material and all derivatives therefrom (including, without
limitation, maps and other analyses), is and shall remain at all times secret, proprietary, and
12
confidential, and agree to disclose that information only in conformance with the confidentiality
provisions as stated in Paragraph 2.5 of Exhibit A, or as otherwise agreed by the parties in
writing.
III. DRILLING OBLIGATION.
3.1 Initial Earning Well. Farmee shall drill a well, (the "Initial Earning Well"), with the spud
date being within two hundred forty (240) days of the effective date of this agreement (Deadline
Date). The surface location of the well must be within two thousand (2000) feet of the Farmor's
Roy Hamrick No. 1 well surface location. In the absence of a condition or event of force
majeure, or termination of this Agreement prior to the Deadline Date, in accordance with the
terms and conditions of this Agreement, Farmee agrees to drill or cause to be drilled a well to a
depth of at least eight thousand seven hundred (8700) vertical feet from the surface of the ground
or sufficient to test the Chappel formation, whichever is less. If Farmee decides to sidetrack the
wellbore of the Initial Earning Well to adequately test the Chappel formation the sidetrack hole
will still be considered the Initial Earning Well for this Agreement. However, if mechanical
problems or impenetrable strata or other conditions in the hole make further drilling
impracticable, under generally accepted oil field practices, a substitute well may be drilled as
defmed in Paragraph 2.6 of Exhibit A. Completion operations for the Initial Earning Well must
commence within thirty (30) days after the drilling rig is moved off location.
3.2 Earned Assignment. As soon as practicable after Farmor is satisfied Farmee has
complied with all of its obligations under this Agreement with regard to the completion of the
Initial Earning Well as a producer of oil and/or gas in paying quantities, including the foregoing
specifications, Farmor shall deliver to Farmee an acreage assignment as described in Paragraph
3.3 of all Farmor's interest within the "drilling unit", as defmed in Paragraph 3.2 of Exhibit A,
formed for the Initial Earning Well, from the surface to a depth of three hundred (300) feet below
the deepest depth drilled in the Initial Earning Well, subject to Farmor reserving the back in
interest described in Paragraph 4.1 below. Such Assignment will be without warranty of any
kind including title, whether express or implied.
3.3 Acreage Assignment. If an acreage assignment is earned for the Initial Earning Well
under Paragraph 3.2 it shall be limited to the "drilling unit" as defined in Paragraph 3.2 in
Exhibit A.
IV. INITIAL RESERVED INTEREST.
4.1 Conversion. Upon "project payout" of the Initial Earning Well, as defined in Paragraph
4.2 of Exhibit A, Farmee shall deliver to Farmor operations of the Initial Earning Well and a
fifty-one percent (51%) working interest, at Farmor's election, in the appropriate Earned
Assignment defined in Paragraph 3 .2 above.
V. ADDITIONAL EARNING WELLS.
5.1 Farmee's Option. Farmee shall have the right, but not the obligation, to drill additional
wells (Additional Earning Well) on, or acreage pooled with, Subject Leases.
5.2 Vertical Wells. For any "vertical" Additional Earning Well drilled, Farmee shall carry
Farmor for a twenty-five percent (25%) working interest to production casing point. Farmor will
then have a casing point election as to whether to participate on a cost forward basis. Production
casing point shall mean such time as the well has been drilled, logged, evaluated and sufficient
tests have been run in order that a determination may be made to either set production casing or
to plug and abandon the well as a dry hole.
5.3 Horizontal Wells. For any "horizontal" Additional Earning Well drilled, Farmee shall
carry Farmor for a twelve and one half percent (12.5%) working interest through installation of
production facilities or, at Farmor's option, Farmee shall assign to Farmor a net revenue interest
of 8% as an overriding royalty interest (i.e. a net revenue interest of 8% of 8/8ths).
13
5.4 Additional Earned Assignment. As soon as practicable after Fannee has completed an
Additional Earning Well as a producer of oil and/or gas in paying quantities, Fannor shall deliver
to Farmee an acreage assignment of all Farmor's interest within the "drilling unit" formed for the
Additional Earning Well, from the surface to a depth of three hundred (300) feet below the
deepest true vertical depth drilled in the Additional Earning Well, subject to Farmor reserving
the carried interest described above. Such Assignment will be without warranty of any kind
including title, whether express or implied.
5.5 Acreage Assignment. If an acreage assignment is earned for an Additional Earning Well
under Paragraph 5.4 it shall be limited to the "drilling unit" as defmed in Paragraph 3.2 in
Exhibit A.
VI. OPERATING AGREEMENT.
6.1 Form. An AAPL Model Form 610-1989 Joint Operating Agreement is attached as
Exhibit C of this agreement and the parties shall execute such Operating Agreement or an exact
duplicate of same. The Operating Agreement shall apply to all Earned Wells. The Operating
Agreement shall be subject to this Agreement so that in the event of any conflict between the
Operating Agreement and this Agreement, this Agreement shall be the governing Agreement.
Vll. NOTICES AND WELL INFORMATION.
7.1 General. All well data, information and notices to be given to Fannor as provided in this
Agreement shall be given as follows:
Farmor: Mr. Joe W. Dimock Farmee: Mr. Rod Sutherland
Dimock Operating Co. Sutherland Energy Co., LLC
4245 Kemp Blvd., Suite 518 500 Lamar Court
Wichita Falls, TX 76308 Irving, TX 75038
(940) 761-1071 (469) 586-4393
Farmor or Farmee may change their address at any time by furnishing a written notice of change
of address to the other party.
VIII. AGREEMENTS AFFECTING FARMOUT LANDS.
8.1 Farmee Bound. Except as may be otherwise provided in this Agreement, Farmee shall be
bound by any written and appropriately executed agreement which affects the Subject Leases at
the time of assignment to Farmee.
8.2 Other Agreements. Subject to the disclaimer of liability contained in Section 8.1 above,
Farmor believes in good faith that the only other agreements affecting any interest to be assigned
to Farmee are the oil and gas leases described in Exhibit B and the following agreements:
None known other than those that may have been filed of record.
14
IX. EXECUTION.
9.1 Execution. Duplicate originals of this Agreement are being signed. This Agreement
shall be null and void at Farmor's option if one of the duplicate originals of this Agreement is not
signed by Farmee and returned to Farmor within ten (10) days after the date shown below
Farmor's signature.
FARMOR: Dimock Operating Co. FARMEE: Sutherland Energy Co., LLC
Joe W. Dimock dba
Dimock Petroleum
By: lJA.~
Rod A. Sutherland
Title: Individually and DBA Dimock Petroleum Title: President
And as President of Dimock Operating
Company
Date: 1/ W ~. J 0j rJ&/'k
ACKNOWLEDGMENT
STATE OF TEXAS
COUNTY OF l ,l) ~
This instrument was acknowledged before me on this __dL day of November, 2012 by
Joe W. Dimock in the capacities stated.
~;¥.~'~;.;~ SHIRAH SHARP
{-~-,o\
\:~~~1 My Commission Expires
Notary Public, State of Texas
~,,,&~,l" August 13, 2016
NOTARY PUBLIC, STATE OF TEXAS
ACKNOWLEDGMENT
STATE OF TEXAS
COUNTY OF DALLAS
This instrument was acknowledged before me on this ?..EJ day of November, 2012 by
Rod A. Sutherland in the capacity stated.
~%~ JENNIFER L NERIA
My Commission Expires
June 5. 2016
NOTARY PUBLIC, STATE OF TEXAS
15
EXHIBIT A
TO SEISMIC EXPLORATION AND FARMOUT AGREEMENT
GENERAL TERMS AND CONDITIONS
TABLE OF CONTENTS
Paragraph
1. Title and Access to Farmout Lands
1.1 Title Information
1.2 Other Information in Farmor's Possession
1.3 Access by Farmee and Farmor
2. Conduct of Operations
2.1 Cost and Risk
2.2 Performance Standards
2.3 Lease Obligations
2.4 Well Information
2.5 Confidentiality
2.6 Substitute Wells
3. Earned Assignment
3.1 Scope of Assignment
3.2 Drilling Unit
3.3 Pooling and Spacing
3.4 Default by Farmee
4. Initial Earning Well Reversionary Working Interest
4.1 Production Revenue
4.2 Project Payout and Monthly Statements
4.3 Audits
5. Liability and Insurance
5.1 Relationship of Parties
5.2 Farmee's Indemnity
5.3 Required Insurance Coverage
6. Assignments, Encumbrances and Restrictions
7. Reassignment Rights ofFarmor
7.1 Termination or Cancellation of Leases
7.2 Abandonment of Wells
8. Renewals and Extensions
9. Term of Seismic Exploration and Farmout Agreement
10. Miscellaneous
10.1 Electric Logs
10.2 Existing Tank Battery
10.3 Taxes
10.4 Income Tax Provisions
10.5 Furnishing Data
10.6 Severability
10.7 Force Majeure
10.8 Information Provided
10.9 Farmee's Experience
10.10 Disclaimer
16
GENERAL TERMS AND CONDITIONS
1. Titles and Access to Farmout Lands.
1.1 Title Information. Upon request by Farmee, Fannor shall make available to Farmee
copies of all title opinions, abstracts of title, and other title information in Fannor's possession
with respect to the Subject Leases. Providing such items shall not be construed as a warranty or
representation by Farmor of title or ownership. Any curative work or additional title
examination required by Fannee shall be conducted by Farmee at its sole cost and risk. On
request, Farmee shall provide Farmor with a copy of all curative work, title information, and title
opinions resulting from any additional title examinations conducted by Farmee.
1.2 Other Information in Fannor's Possession. Farmor agrees to provide to Farmee (at
Fannee's sole cost and expense) all information of the nature generally described as follows
which relates to the Subject Leases which the Farmor may have in its possession or control: oil
and gas leases, maps, plats, geological and geophysical information, well logs, and land records.
1.3 Access by Fannee and Farmor. To the extent Farmor can authorize it, Farmee and its
contractors and subcontractors shall be entitled to exercise all of Farmor's rights of ingress and
egress pertaining to the Subject Leases for the purpose of conducting operations. Fannor shall
advise Farmee of any unusual !imitations or restrictions on ingress or egress, known to Farmor,
and Fannee and its contractors and subcontractors shall comply with such limitations or
restrictions. During Farmee's operations Fannor and Farmor's representatives shall have access
at all times to the well-site, including the derrick floor, for the purpose of observation. All
information requested by Fannor concerning operations shall be promptly furnished by Fannee.
2. Conduct of Operations.
2.1 Cost and Risk. All operations conducted by Farmee regarding the Initial Earning Well,
until such time as "project payout" is reached (as defmed in Exhibit A, 4.2 (c)) shall be at
Fannee's sole cost and risk. All operations conducted by Fannee regarding Additional Earning
Wells up to production casing point for a vertical well and through installation of production
facilities for a horizontal well shall be at Fannee's sole cost and risk.
2.2 Performance Standards. Farmee's operations shall be conducted in a diligent and
workmanlike manner, and in accordance with applicable federal, state and local laws,
regulations, and orders. Whether or not the Initial Earning Well, and any other well drilled by
Farmee, is completed as a producer of oil and/or gas in order to earn an assignment, Fannee shall
use its best efforts, in accordance with good oil and gas practice, to complete the well as a
producer of oil and/or gas in paying quantities. If the well cannot reasonably be completed as a
producer of oil and/or gas, Farmee shall promptly plug the well and perform all necessary
surface restoration work.
2.3 Lease Obligations. Except as otherwise provided in the body of this Agreement, Fannee
shall at its sole cost, risk, and expense comply with all of the express and implied covenants and
other obligations of the oil and gas leases covering the Subject Leases, including the payment of
royalties, shut-in royalties, and delay rentals, and the cost of any renewals or extensions of the
leases.
2.4 Well Information. During Fannee's operations, Fannee shall promptly furnish Fannor
the following information pertaining to the Initial Earning Well and any other well drilled by
Fannee:
(a) Written notice of the time and date on which the well is spud.
(b) A daily drilling report for operations conducted during the immediately
preceding day.
17
(c) Written reports on all cuttings and cores taken in the well.
(d) Reasonable advance notice of any production tests, pressure tests, cores, and
logs to be run in the well so that Fannor may witness the operations.
(e) Copies of all reports and other forms filed with any federal, state, or local
governmental authority concerning the well.
(f) A complete copy of any mud log and a complete copy of any electrical logs
run on the well.
(g) Copies of all fluid analyses and other reports or information obtained during
drilling and completion of the well.
(h) Any other information specifically required by Fannor as part of this Farmout
Agreement.
2.5 Confidentiality. The terms provided herein replace and supersede the previously
executed Confidentiality Agreement by and between Sutherland Energy Co., LLC and Dimock
Operating Company, including Joe W. Dimock personally and dba Dimock Petroleum, dated
July 3, 2012. Fannee agrees to treat any information provided by or on behalf ofFannor and any
derivative information prepared by or for Fannee based on the information in accordance with
the provisions of this Agreement and to take or abstain from taking certain other actions
hereinafter set forth.
a. The term "Evaluation Material" shall be deemed to include (i) Generated
Information as defmed in Paragraph 2.2 of this Agreement, (ii) any workover reports, well logs,
title opinions, lease descriptions, maps, interpretations, evaluations and reports regarding Subject
Leases provided by Fannor to Fannee under this Agreement, and (iii) all notes, analyses,
compilations, studies, interpretations or other documents prepared by or for Fannee which,
contain, reflect, or are based upon, the information furnished to Fannee under this Agreement.
b. The term Evaluation Material includes information in whatever form it may exist,
whether oral, written, graphic, or electronic. The term Evaluation Material does not include
information which becomes generally available to the public other than as a result of a disclosure
by Fannee, or becomes available to Fannee on a non-confidential basis from a source other than
Fannor or any of its Representatives.
c. Fannee has the right to show Evaluation Material only to potential investors and
working interest owners to promote participation in drilling wells within the Hamrick Area 3D
Shoot. Prior to viewing the Evaluation Material any potential investor or working interest owner
must sign a confidentiality agreement with terms similar to this Agreement. The Evaluation
Material can only be viewed at Fannee's office or office of a contract geoscientist designated by
Fannee or Fannor and no copies of the Evaluation Material shall be disseminated. It is
incumbent upon the Farmee to protect the confidential nature of the Evaluation Material to the
benefit of both the Farmor and Fannee notwithstanding termination of this Agreement.
d. If Fannee is required to disclose such information by a court of law or other
governmental entity having jurisdiction, Farmee will timely notify Fannor so that Farmor may
take action to obtain the protection necessary to preserve the confidentiality of the Evaluation
Material. Farmor reserves the right to assign all of its rights, powers and privileges under this
Agreement, including, without limitation, the right to enforce all of the terms of this Agreement.
In addition, this Agreement shall inure to the benefit of Farmor, its parent corporation, if any,
and all subsidiaries thereof.
2.6 Substitute Wells. If Farmee has failed to earn an assignment under the terms of this
Agreement, either (i) because the Initial Earning Well failed to reach the required depth as a
result of mechanical problems or impenetrable strata or other conditions in the hole which make
further drilling impracticable, under generally accepted oil field practices; or (ii) because the
Initial Earning Well was drilled to the required depth but it is not capable of producing in paying
quantities, Farmee shall have the option, but not the obligation, to drill one or more substitute
wells subject to the following provisions:
18 (j)
(a) Farmee shall give Farmor written notice describing the status of the well and
stating whether or not Farmee elects to drill a substitute well. This notice shall be given while
the drilling rig or completion unit is on the well. Failure to timely make such an election shall be
deemed to be an election by Farmee not to drill a substitute well.
(b) If Farmee elects to drill a substitute well it shall spud within sixty (60) days
after Farmee's election to drill it, and the well shall be drilled, tested, and completed or plugged
and abandoned in accordance with all of the requirements specified for the Initial Earning Well,
and with the same consequences. The substitute well shall be considered as the Initial Earning
Well for all purposes of this Agreement.
3. Earned Assignment.
3.1 Scope of Assignment. Any assignment of interest earned by Farmee shall be subject to
all of the provisions of the Agreement and all its Exhibits, whether or not any of the provisions
are recited in the assigrunent. Farmor shall retain all rights and interests not expressly assigned
to Farmee. The assigrunents shall be without warranty of title, express or implied, but the
assigned interest shall be free and clear of all royalties, overriding royalties and other such
payments out of production, except those in existence as of the effective date of the Agreement.
3.2 Drilling Unit. Whenever an assignment relates to the "drilling unit" for an Earning Well
(Initial or Additional Earning Well), the term "drilling unit" is deemed to mean the area within
the surface boundaries of the drilling unit, spacing unit or proration unit, as the case may be,
established or prescribed as of the date of the Agreement by field rules or special order of the
appropriate regulatory authority for the objective reservoir to be tested or the reservoir in which
the Earning Well is completed. In no case shall the unit size exceed one hundred sixty (160)
acres for a well. However, for a horizontal drainhole well the unit size can be increased (above
160 acres) based upon the displacement of the horizontal drainhole as specified by the
appropriate regulatory authority.
3.3 Pooling and Spacing. Farmor agrees to allow pooling of Subject Leases, if permitted by
the existing Oil and Gas Mineral Lease(s), with adjacent leases but only for any Additional
Earning Wells. The pooled unit must consist of acreage from which at least half is contributed
by the Subject Leases if sufficient non-producing acreage on the Subject Leases is available. By
signing this Agreement Farmor is not waiving its right to protest a Statewide Spacing Rule 3.37
exception as defined in Title 16, Part1, Chapter 3 of the Texas Administrative Code.
3.4 Default by Farmee. Concurrent with approval of this document, by both parties, Farmee
shall make a fifty thousand dollar ($50,000) deposit with Farmor. If Farmee spuds the Initial
Earning Well by the Deadline Date the deposit will be refunded. If not, it will be forfeited and
this Agreement shall automatically terminate without notice, effective as of the Deadline Date.
4. Initial Earning WeU Reversionary Working Interest.
4.1 Production Revenue. Income to be applied toward the project payout of the Initial
Earning Well shall be based on the gross value of oil and gas produced and saved from the Initial
Earning Well in proportion to the interest assigned. For the purpose of this Agreement, "gross
value" means the gross proceeds actually received by Farmee in an arm's length sale of the
production.
4.2 Project Payout and Monthly Statements. Beginning within six (6) months of
completion of Initial Earning Well Farmee shall provide a monthly statement to Farmor
reflecting the "project payout" status.
(a) The Farmee's capital cost is defined as cost incurred by Farmee for land and
seismic for the Hamrick Area 3D Shoot (defined in Exhibit B), a fifty thousand dollar ($50,000)
prospect fee, and cost for drilling, testing, completing, and equipping, the Initial Earning Well.
(b) The Farmee's revenue, which is the gross value of production as defined in
Paragraph 4.1 above, less: (i) applicable production or severance taxes, and any federal excise
19
taxes; (ii) all royalties, overriding royalties, and other payments out of production which, as of
the effective date of this Agreement, burden the interest assigned to Farmee; and, (iii) the
cumulative monthly operating cost of the well, including ad valorem taxes.
(c) When the Farmee's cumulative revenue equals two (2) times the Farmee's
capital cost the Initial Earning Well will have reached "project payout". At that time, as stated in
Paragraph 4.1 ofthis Agreement, the Farmee will turnover operations of the Initial Earning Well
and assign fifty-one percent (51%) working interest, at Farmor's election, in the Initial Earning
Well and drilling unit to the Farmor.
(d) Concurrent to the "project payout" in Paragraph 4.2(c) above the Farmee will
also assign the remaining forty-nine percent (49%) working interest to one or more 50l(c)(3)
nonprofit organizations of its choice subject to the Operating Agreement described in 6.1 of the
Agreement.
4.3 Audits. Upon written notice to Farmee, Farmor may, during normal business hours,
audit Farmee's books and records relating to working interest payments and/or the calculation of
payout. Such audit rights may be exercised at any time while project well(s) are producing and
for a period of 24 months after project payout status has been achieved, despite an earlier
termination of this Farmout Agreement.
5. Liability and Insurance.
5.1 Relationship of Parties. In performing its obligations, Farmee shall be an independent
contractor and not the agent ofFarmor. Nothing in this Agreement shall be construed as creating
a partnership or otherwise establishing joint or collective liability. The relationship of the parties
for federal and state income tax purposes shall be as set forth in Paragraph 11.2 below, and shall
be effective from and after the effective date of this Agreement.
5.2 Farmee's Indemnitv. Farmee shall indemnifY and hold harmless Farmor and its
employees and agents from all claims, demands, losses, and liabilities of every kind and
character arising out of Farmee's performance or failure to perform under this Agreement, or the
acts of or failure to act by Farmee's employees, agents, contractors and/or subcontractors.
5.3 Required Insurance Coverage. At all times while Farmee has the right to earn an
assignment of interest or is conducting operations on the Farmout Lands, Farmee shall maintain,
at its sole cost, the following insurance coverage for its operations:
(a) Worker's Compensation Insurance in full compliance with all applicable state
and federal laws, unless the necessary insurance is carried by the Farmee's
subcontractors.
(b) Employer's Liability Insurance with limits of one million dollars ($1 ,000,000)
per accident covering injury or death to any employee who may be outside the
scope of the Worker's Compensation statute in the State of Texas.
(c) Commercial (or Comprehensive) General Liability Insurance with combined
single limits per occurrence (and general aggregate, if Applicable) of one
million dollars ($1,000,000) for Bodily Injury and Property Damage, Including
Property Damage from Blowout and Cratering, Completed Operations, and
Broad Form Contractual Liability with respect to any contract that Operator
may enter into hereunder.
(d) Automobile Liability Insurance covering non-owned and hired automotive
equipment with limits for Bodily Injury and Property Damage of not less than
one million dollars ($1,000,000) covering all automobile equipment used in the
operations contemplated hereunder.
(e) Control of Well Insurance with total loss coverage for up to three million
dollars ($3,000,000).
20
6. Assignments, Encumbrances and Restrictions.
This Agreement shall be binding on the respective heirs, successors, and assigns of
Fannor and Fannee. Fannor may freely assign or encumber its interest at any time, but Fannee
shall not assign or encumber its interest in the Initial Earning Well without the prior written
consent of Fannor, which consent shall not be unreasonably withheld. Any attempt by Fannee
to assign or encumber its interest without Fannor's prior written consent shall constitute a default
under Paragraph 3.3 above. When an assignment or encumbrance is made, Fannee shall
promptly furnish a copy to Fannor. Any rights to reassignment retained by Farmor shall be
superior to all liens, encumbrances, debts, judgments, claims, overriding royalty interests, and
production payment burdens and other obligations created or incurred by Farmee and asserted
against any oil and gas lease that is the subject of this Agreement. Any interest in any oil and
gas lease included in the Subject Leases reverting to Farmor or reassigned to Farmor shall be free
and clear of all such liens, encumbrances, debts, judgments, claims, overriding royalty interests,
and production payment burdens and other obligations.
7. Reassignment Rights of Farmor.
7.1 Termination or Cancellation of Leases. If at any time after an interest in any oil and gas
lease is assigned to Farmee, and Farmee elects to surrender its interest in the lease, or allow the
lease to expire by its terms, or subjects the lease to possible cancellation for failure to comply
with any express or implied covenant, Fannee shall notify Farmor in writing at least sixty (60)
days before the intended date of surrender or expiration, or as soon as practicable in the event of
possible cancellation, and Fannor shall then have thirty (30) days to notify Fannee in writing of
Fannor's election to reacquire such interest. If Farmor elects to reacquire the interest, Fannee
shall promptly assign it to Fannor free and clear of all royalties, overriding royalty interests, and
other payments out of production and any other lease burden, except those in existence as of the
effective date of this Agreement and except those to which Fannor has consented. Upon such
assignment, Fannor shall reimburse Farmee for Farmee's share of the estimated salvage value of
any salvable equipment in and on any wells covered by the assignment, less estimated salvage
costs. Farmor's failure to notify Fannee in writing shall be deemed an election to not reacquire
the interest.
7.2 Abandonment of Wells. Farmee shall not plug and abandon any well without giving
Fannor written notice at least sixty (60) days before the intended plugging date. Farmor shall
then have fifteen (15) days to notify Farmee in writing ofFarmor's election to take over the well.
Upon giving that notice, Fannor shall own Farmee's interest in the well and the related
equipment, along with any and all interest Fannee owns in the drilling unit for the well taken
over, excluding any other producing wells and related equipment in the drilling unit, and
excluding any depth intervals or formations which would not have been earned under this
Agreement. As soon as practicable after that time, Fannee shall make such assignment to
Farmor as may be necessary to evidence the foregoing. At that time, Farmor shall reimburse
Fannee for the estimated salvage value of Farmee's salvable equipment in and on the well, less
estimated salvage costs. Fannee shall have no further rights or obligations under this
Agreement, except Farmee shall be liable for all actions which occurred prior to the effective
date of the takeover. Fannor's failure to notify Farmee in writing shall be deemed an election by
Farmor to not take over the well.
If Farmor's election to take over results in a diversity of ownership giving rise to a commingling
of production with uncommon ownership, in Farmee's storage tanks, Farmor shall be responsible
for and shall bear all cost of setting and connecting tanks and pipelines for production from the
well taken over by Farmor, unless otherwise agreed upon.
21
@
8. Renewals and Extensions.
If any oil and gas lease included in the Subject Leases is extended or renewed in whole or
in part by either party or their agents, during the term of the Agreement, this Agreement shall
apply to such extension or renewal to the same extent as it would have applied to the original
lease. For this purpose, any new lease covering an interest originally included in the Subject
Leases and acquired within ninety (90) days after the termination of the original lease shall be
considered an extension or renewal.
9. Term of Seismic Exploration and Farmout Agreement.
The Agreement shall be in effect for three (3) years from the effective date or until such
time as: (i) Farmee's rights to earn an assignment of interest have expired without Farmee
having earned an assignment; (ii) Farmee has earned an assignment of interest and neither
Farmee nor Farmor have any further rights or obligations under the Agreement; or, (iii) this
,.
Agreement terminates pursuant to Paragraph~J'above as a consequence ofFarmee's default.
10. Miscellaneous.
I 0.1 Electric Logs. Farmee shall run an open hole electric log suite consisting of at least a
gamma ray, induction, density, and neutron logs on the vertical section of any newly drilled well.
The density and neutron logs may be limited to only potentially productive intervals. If the frrst
attempt to log the hole is unsuccessful a hole conditioning trip with drill pipe must be made and a
second attempt made to obtain electric logs. If well control or adverse hole conditions arise this
requirement may be disregarded.
10.2 Existing Tank Battery. Farmor shall allow Farmee free use of the currently existing
tank battery and production facility near the Roy Hamrick #1 well as the production facility for
the Initial Earning Well for up to ninety (90) days after initial production is obtained. If Farmee
elects to continue using the production facility beyond the ninety (90) days Farmee shall make
payment of twenty-five thousand dollars ($25,000) to Farmor to purchase the production facility.
The Bill of Sale of such production facility will be on an "AS IS WHERE IS WITH ALL
FAULTS" basis with no warranty whatsoever, whether express or implied.
10.3 Taxes. Farmee shall pay when due all taxes, including, but not limited to, federal excise
taxes, and state and local ad valorem, occupation, severance, excise, privilege or regulatory
taxes, now or hereafter lawfully assessed against Farmee's interest in the Farmout Lands or the
production attributable to Farmee's interest.
10.4 Income Tax Provisions. If this Agreement is or may be construed as creating a
partnership for federal or state income tax purposes, then, unless the parties expressly provide for
a tax partnership in this Agreement, Farmee is authorized and directed to execute and file on
behalf of all parties an election to be excluded from application of the provisions of Subchapter
K, Chapter 1, Subtitle A of the current United States Internal Revenue Code, and any
amendments, or to be excluded from application of any comparable provisions of state law.
Each party agrees to furnish such additional evidence of that election as may be necessary or
proper.
10.5 Furnishing Data. Each party has the affrrmative duty to timely supply adequate data to
the other party when such data is necessary to comply with Federal, State or local reporting
requirements.
10.6 Severability. Any term or provision of this Agreement that is invalid or unenforceable in
jurisdiction in which the Subject Leases are located shall be ineffective to the extent of the
invalidity or unenforceability, without rendering invalid or unenforceable the remaining terms
and provisions of this Agreement or affecting the validity or enforceability of any terms and
provisions of this Agreement. If any provision of this Agreement is so broad as to be
unenforceable, each provision shall be interpreted to be only as broad as is enforceable.
22
10.7 Force Majeure. Conditions of force majeure shall limit the Farmee's obligation to
perform under this Agreement for the duration of such condition, and shall extend the term of
this Agreement by a period equal to the relevant force majeure period effected. "Force Majeure"
shall mean any conditions or events which prevent Farmee from performing its obligations under
this Agreement and that are not reasonably within the control of Farmee, and that by the exercise
of due diligence, the Farmee shall not have been able to avoid or overcome, including without
limitation, acts of God, rules, laws, and regulations, wars or warlike action (whether actual or
impending), arrests, and other restraints of goverrunent (civil or military), blockages,
insurrections, riots, epidemics, earthquakes, fires, sabotage or seizure by any goverrunent or
other public authority, and any other such causes, whether of the kind herein enumerated or
otherwise.
10.8 Information provided. Farmor and Farmee acknowledge and agree that, notwithstanding
anything herein to the contrary, all information made available to Farmee by Farmor is without
representation or warranty as to the accuracy or completeness thereof.
10.9 Farmee's Experience. Farmee represents that it is a knowledgeable and experienced oil
and gas operator and investor, and is acquiring the Subject Leases for investment and not with a
view to the resale or other distribution thereof. On or before the Closing, Farmee shall be in full
compliance with all laws, orders, rules and regulations applicable to operators of oil and gas
properties in the State of Texas including, without limitation, licensing, permitting, bonding and
insurance requirements.
Farmee represents that it is sophisticated in the evaluation, purchase, ownership and operation of
oil and gas properties. In entering into this Agreement and consummating the transactions
contemplated by this Agreement, Farmee has relied and shall rely solely on Farmee's
independent investigation of and judgment with respect to the Subject Leases and the advice of
Farmee's own legal, tax, economic, environmental, engineering, geological and geophysical
advisors and not on any comments or statements of any representatives of, or consultants or
advisors engaged byFarmor.
10.10 Disclaimer. THE INTERESTS SUBJECT TO THIS AGREEMENT ARE BEING
ASSUMED BY FARMEE WITHOUT WARRANTY OF ANY KIND, EXPRESS,
IMPLIED, STATUTORY, COMMON LAW OR OTHERWISE, AND THE PARTIES
HEREBY EXPRESSLY DISCLAIM, WAIVE AND RELEASE ANY EXPRESS
WARRANTY OF MERCHANTABILITY, CONDITION OR SAFETY AND ANY
EXPRESSED WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE; AND
FARMEE ACCEPTS THE SUBJECT INTERESTS "AS IS, WHERE IS, WITH ALL
FAULTS." ALL DESCRIPTIONS/DOCUMENTATION OF ANY KIND AND
CHARACTER HERETOFORE OR HEREAFTER FURNISHED TO FARMEE BY
FARMOR HAVE BEEN AND SHALL BE FURNISHED SOLELY FOR FARMEE'S
CONVENIENCE, AND HAVE NOT CONSTITUTED AND SHALL NOT CONSTITUTE
A REPRESENTATION OR WARRANTY OF ANY KIND BY FARMOR. THE PARTIES
HEREBY ACKNOWLEDGE AND AGREE THAT, TO THE EXTENT REQUIRED BY
APPLICABLE LAW, THE DISCLAIMERS CONTAINED IN THIS AGREEMENT ARE
"CONSPICUOUS" FOR THE PURPOSES OF SUCH APPLICABLE LAW.
23
@
EXIDBITB
TO SEISMIC EXPLORATION AND FARMOUT AGREEMENT
DESCRIPTION OF SUBJECT LEASES
The Subject Leases covered by the Seismic Exploration and Farmout Agreement, in which
Farmee shall have the right to earn an Assignment under the terms of the Agreement, are
described as follows:
All leases, to all depths, pertaining to the following wells in Hardeman County, Texas:
I. Roy Hamrick Well No.1
2. Mabry-Hamrick Unit 2 Well No.1, and
3. Georgia-Pacific Well No. 1.
The wells are located in Sections 144, 147, and 168 of Block H of the W. & NW. R.R. Co.
Survey. The Hamrick Area 3D Shoot is defmed as these three sections and also includes all the
immediately adjoining sections.
24
®
A.A.P.L. FORM 610 ~ 1989
MODEL FORM OPERATING AGREEMENT
Exhibit C
Of Seismic Exploration and Farmout Agreement
Between Dimock Operating Company, including Joe W. Dimock
And also dba Dimock Petroleum and
Sutherland Energy Co., LLC
Dated November 20, 2012.
OPERATING AGREEMENT
DATED
November 20 2012
OPERATOR Sutherland Energy Co., LLC
CONTRACT AREA The following Sections of Block H of theW. & NW. RR. Co. Survey:
122~124, 143~148, 167~169, and 174~176.
COUNTY OR PARISH OF ....:H=a:..:rd~eo=m=-:a==n=--------- , STATE OF _T.=...::.:ex=a=s_ _ __
COPYRJGIIT 1989 - ALL RIGIITS RESERVED
AMERICAN ASSOCIATION OF PETROLEUM
LANDMEN, 4100 FOSSIL CREEK BLVD.
FORT WORTH, TEXAS, 76137, APPROVED FORM.
A.A.P.L. NO. 610-1989
25
A.A.P.L. FORM 610- MODEL FORM OPERATING AGREEMENT- 1989
TABLE OF CONTENTS
Miill_ Iitk fru:!;
L DEFINITIONS ................................................................................................................................................ 1
IL EXHIBITS ....................................................................................................................................................... 1
DL INTERESTS OF PARTIES ........................................................................................................................... 2
A. OIL AND GAS INTERESTS: ................................................................................................................... 2
B. INTERESTS OF PARTIES IN COSTS AND PRODUCTION: ................................................................ 2
C. SUBSEQUENTLY CREATED INTERESTS: .......................................................................................... 2
IV. TITLES ........................................................................................................................................................... 2
A. TITLE EXAMINATION: ........................................................................................................................... 2
B. LOSS OR FAILURE OF TITLE: ............................................................................................................... 3
1. Failure of Title .................................................................................................................................... 3
2. Loss by Non-Payment or Erroneous Payment of Amount Due .......................................................... 3
3. Other Losses ....................................................................................................................................... 3
4. Curing Title ........................................................................................................................................ 3
V. OPERATOR ................................................................................................................................................... 4
A. DESIGNATION AND RESPONSIBILITIES OF OPERATOR: ............................................................... 4
B. RESIGNATION OR REMOVAL OF OPERA TOR AND SELECTION OF SUCCESSOR: .................. 4
I. Resignation or Removal of Operator .................................................................................................. 4
2. Selection of Successor Operator ......................................................................................................... 4
3. Effect of Bankruptcy .......................................................................................................................... 4
C. EMPLOYEES AND CONTRACTORS: ................................................................................................... 4
D. RIGHTS AND DUTIES OF OPERATOR: ............................................................................................... 4
I. Competitive Rates and Use of Affiliates ............................................................................................ 4
2. Discharge of Joint Account Obligations ............................................................................................. 4
3. Protection from Liens ......................................................................................................................... 4
4. Custody ofFunds ................................................................................................................................ 5
5. Access to Contract Area and Records ................................................................................................ 5
6. Filing and Furnishing Governmental Reports .................................................................................... 5
7. Drilling and Testing Operations ......................................................................................................... 5
8. Cost Estimates .................................................................................................................................... 5
9. Insurance ............................................................................................................................................ 5
VI. DRILLING AND DEVELOPMENT ............................................................................................................ 5
A. INITIAL WELL: ........................................................................................................................................ 5
B. SUBSEQUENT OPERATIONS: ............................................................................................................... 5
1. Proposed Operations ........................................................................................................................... 5
2. Operations by Less Than All Parties .................................................................................................. 6
3. Stand-By Costs ................................................................................................................................... 7
4. Deepening ........................................................................................................................................... 8
5. Sidetracking ........................................................................................................................................ 8
6. Order of Preference of Operations ...................................................................................................... 8
7. Conformity to Spacing Pattern ........................................................................................................... 9
8. Paying Wells ....................................................................................................................................... 9
C. COMPLETION OF WELLS; REWORKING AND PLUGGING BACK: ................................................ 9
1. Completion ......................................................................................................................................... 9
2. Rework, Recomplete or Plug Back ..................................................................................................... 9
D. OTHER OPERATIONS: ............................................................................................................................ 9
E. ABANDONMENT OF WELLS: ................................................................................................................ 9
1. Abandonment of Dry Holes ................................................................................................................ 9
2. Abandonment of Wells That Have Produced .................................................................................... I 0
3. Abandonment of Non-Consent Operations ........................................................................................ tO
F. TERMINATION OF OPERATIONS: ....................................................................................................... 10
G. TAKINGPRODUCTIONINKIND: ........................................................................................................ lO
(Option 1) Gas Balancing Agreement .................................................................................................... 10
(Option 2) No Gas Balancing Agreement.. ............................................................................................. II
VII. EXPENDITURES AND LIABILITY OF PARTIES ................................................................................. 11
A. LIABILITY OF PARTIES: ...................................................................................................................... !!
B. LIENS AND SECURITY INTERESTS: ................................................................................................... 12
C. ADVANCES: ............................................................................................................................................ 12
D. DEFAULTS AND REMEDIES: ............................................................................................................... 12
I. Suspension of Rights ......................................................................................................................... 13
2. Suit for Damages ............................................................................................................................... 13
3. Deemed Non-Consent ........................................................................................................................ l3
4. Advance Payment .............................................................................................................................. l3
5. Costs and Attorneys' Fees ................................................................................................................. 13
E. RENTALS, SHUT-IN WELL PAYMENTS ANDMINIMUMROYALTIES: ........................................ l3
F. TAXES: ...................................................................................................................................................... I3
VIII. ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST .................................................... 14
A. SURRENDER OF LEASES: ..................................................................................................................... I4
B. RENEWAL OR EXTENSION OF LEASES: ........................................................................................... 14
C. ACREAGE OR CASH CONTRIBUTIONS: ............................................................................................ 14
26
A.A.P.L. FORM 610- MODEL FORM OPERA TlNG AGREEMENT- 1989
TABLE OF CONTENTS
D. ASSIGNMENT; MAINTENANCE OF UNIFORM INTEREST: .................................................... 15
E. WAIVER OF RIGHTS TO PARTITION: .......................................................................................... I5
F. PRBFHRENTlAL RIGHT TO PURCHASE: ..................................................................................... 15
IX. INTERNAL REVENUE CODE ELECTION ...................................................................................... 15
X. CLAIMS AND LAWSUITS .................................................................................................................. 15
XI. FORCE MAJEURE ............................................................................................................................... 16
XII. NOTICES ................................................................................................................................................ I6
XIII. TERM OF AGREEMENT .................................................................................................................... 16
XIV. COMPLIANCE WITH LAWS AND REGULATIONS ..................................................................... 16
A. LAWS, REGULATIONS AND ORDERS: ........................................................................................ 16
B. GOVERNINGLAW: .......................................................................................................................... l6
C. REGULATORY AGENCIES: ........................................................................................................... 16
XV. MISCELLANEOUS ............................................................................................................................... I7
A. EXECUTION: ..................................................................................................................................... l7
B. SUCCESSORS AND ASSIGNS: ....................................................................................................... 17
C. COUNTERPARTS: ............................................................................................................................ 17
D. SEVERABILITY ................................................................................................................................ 17
XVI. OTHER PROVISIONS .......................................................................................................................... 17
ii
27
A.A.P .L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
OPERATING AGREEMENT
THJS AGREEMENT, entered into by and between _,.Su,.,tlt"""erula..,n.,d._E..,p.,r,_..oo"'-C,_,.o....,.L"'L"'C~-----------~
3 hereinafter designated and referred to as "Opentor," and the signatory party or parties other than Opemtor. sometimes
4 hereinafkr referred to individually as 'Non.Opemtor,' and collectively as 'Non-Operators.'
WITNESSETH:
WHEREAS, the parties to this agreement are owners of Oil and Gas Leases and/or Oil and Gas Interests in the land
identified in Exhibit 'A, • and the parties hereto have reached an agreement to explore and develop these Leases and/or Oil
and Gas Interests for the production of Oil 11nd Gas to the extent and as hereinafter provided,
9 NOW. THEREFORE, it is agreed as follows:
10 ARTICLE I.
II DEFINITIONS
12 As used in this agreement, the following words and terms shall have the meanings here ascribed to them:
13 A. The term 'AFE" shall mean an Authority for Expenditure prepared by a party to this agreement for the purpose of
14 estimating the costs to be incurred in conducting an operation hereunder.
I5 B. The term 'Completion' or 'Complete" shall mean a single operation intended to complete a well as a producer of Oil
16 11nd Gas in one or more Zones, including, but not limited to, the setting of production casing, perforating, well stimulation
17 and production testing conducted in such operation.
18 C. The term 'Contmct Area' shall mean all of the lands, Oil and Gas Leases and/or Oil and Gas Interests intended to be
19 developed and operated for Oil BDd Gas purposes under this agreement. Such lands, Oil and Gas Leases and Oil and Gas
20 Interests are described in Exhibit 'A"
21 D. The term 'Deepen" shall mean a single operation whereby a well is drilled to an objective Zone below the deepest
22 Zone in which the well was previously drilled, or below the Deepest Zone proposed in the associated AFE, whichever is the
23 lesser.
24 E. The terms "Drilling Party" and 'Consenting Party" shall mean a party who agrees to join in and pay its share of the
25 cost of any operation conducted under the provisions of this agreement.
26 F. The term "Drilling Unit" shall mean the area fixed for the drilling of one well by order or rule of any state or federal
27 body having authority. If a Drilling Unit is not fixed by any such rule or order, a Drilling Unit shall be the drilling unit as
28 established by the pattern of drilling in the Contract Area unless fixed by express agreement of the Drilling Parties.
29 G. The term "Drillsite' shall mean the Oil and Gas Lease or Oil and Gas Interest on which a proposed well is to be
30 located.
31 H. The term "Initial Well" shall mean the well required to be drilled by the parties hereto as provided in Article VI.A.
32 I. The term "Non-Consent Well' shall mean a well in which less than all parties have conducted an operation as
33 provided in Article VI.B.2.
34 J. The terms "Non-Drilling Party" and 'Non-Consenting Party" shall mean a party who elects not to participate in a
35 proposed operation.
36 K. The term 'Oil and Gas' shall mean oil. gas, casinghead gas, gas condensate, and/or all other liquid or gaseous
37 hydrocarbons and other marketable substances produced therewith, unless an intent to limit the inclusiveness of this term is
38 specifically stated.
39 L. The term "Oil and Gas Interests" or "Interests" shall mean unleased fee and mineral interests in Oil and Gas in tmcts
40 ofland lying within the Contract Area which are owned by parties to this agreemenl
41 M. The terms "Oil and Gas Lease," 'Lease" and 'Leasehold' shall mean the oil and gas leases or interests therein
42 covering tmcts of land lying within the Conlrll"t Area which are owned by the parties to this agreement.
43 N. The term 'Plug Back" shall mean a single operation whereby a deeper Zone is abandoned in order to anempt a
44 Completion in a shallower Zone.
45 0. The term "Recompletion" or "Recomplele' shall mean an operation whereby a Completion in one Zone is abandooed
46 in order to attempt a Completion in a different Zone within the existing wellbore.
47 P. The term "Rework' shall mean an operation conducted in the wellbore of a well after it is Completed to secure,
48 restore, or improve production in a Zone which is currently open to production in the wellbore. Such operations include, but
49 are not limited to, well stimulation operations but exclude any routine repair or maintenance work or drilling, Sidetracking,
SO Deepening, Completing, Recompleting, or Plugging Back of a well.
5l Q. The term "Sidetrack' shall mean the directional control and intentional deviation of a well from vertical so as to
52 change the bottom bole location unless done to straighten the hole or drill around junk in the hole to overcome other
53 mechanical difficulties.
54 R. The term 'Zone" shall mean a stnllum of earth containing or thought to contain a common accumulation of Oil and
55 Gas separately producible from any other common accumulation of Oil and Gas.
56 Unless the context otherwise clearly indicates, words used in the singular include the plural, the word 'person' includes
57 natural and artificial persons. the plural includes the singular, and any gender includes the masculine, feminine, and neuter.
58 ARTICLE II.
59 EXHIBITS
60 The following exhibits, as indicated below and attached hereto, are incorporated in and made a part hereof:
61 X_ A Exhibit 'A. • shall include the following information:
__
62 (I) Description of lands subject to this agreement,
63 (2) RoolrietiBBs 1if OR}, as te ileplks, feR>UIIieRs, •• ""bstJulses,
64 (3) Parties to agreement with addresses and telephone numbers for notice purposes,
65 (4) Pereenl!ig06 er ffoetieRol intoA!&Is efpllflios Ill lllis agreeme!H;
66 (5) Oil and Gas Leases and/or Oil and Gas Interests subject to this agreemen~
67 (6) Bllf!'~nty-fou~ (l!l)
~ llowt, Ollolusi, o of Sotllrday, SIHlday aad Jogal helid~o. Failure of a party to whom such notice is delivered to reply
7 within the period above fixed shall constitute an election by that party not to participate in the cost of !he proposed operation.
8 Any proposal by a party to conduct an operation conflicting with the operation initially proposed shall be delivered to all ponies
within the time and in the manner provided in Article VI.B.6.
10 If all ponies to whom such notice is delivered elect to participate in such a proposed operation, the ponies shall be
II contractually committed to participate therein provided such operations are commenced within the time period hereafter set
12 forth, and Operator shal~ no later than ninety (90) days after ~~~~Y of the notice period of thirty (30) days (or as
13 promptly as practicable after the expiration of the felty ei~~~ 'l:o".J-period when a driUing rig is on location, as the case
14 may be), acmally commence the proposed operation and thereafter complete it with due diligence at the risk and expense of
IS the ponies participating therein; provided, however, said commencement date may be extended upon written notice of same
16 by Operator to the other panics, for a period of up to thirty (30) additional days if, in the sole opinion of Operator, such
17 additional time is reasonably necessary to obtain permits from governmental authorities, surface rights (including rights-of-
18 way) or appropriate drilling equipment, or to complete title examination or curative matter required for title approval or
19 acceptance. If the actual operation has not been commenced within the time provided (including any extension thereof as
20 specifically permitted herein or in the force majeure provisions of Article XI) and if any party hereto still desires to conduct
21 said operation, written notice proposing same must be resubmitted to the other panics in accordance herewith as if no prior
22 proposal had been made. Those ponies that did not participate in the drilling of a well for which a proposal to Deepen or
23 Sidetrack is made hereunder shall, if such ponies desire to participate in the proposed Deepening or Sidetracking operation,
24 reimburse the Drillin& Panics in accordance with Article VI.B.4~ in the event of a Deepening operation and in accordance
25 with Article VI.B.S. in the event of a Sidetracking operation.
26 2. Operations by Less Than All Parties·
27 (a) Detennjnation of Participation If any party to whom such notice is delivered as provided in Article VI.B.I. or
28 VI.C.I. (Option No. 2) elects not to panicipate in the proposed operation, then, in order to be entitled to the benefits of this
29 Article, the party or panics giving the notice and such other panics as shall elect to panicipate in the operation shall, no
30 later than ninety (90) days after th~.C:.XJ!}Tolon .of_ the OO!lce period of thirty (30) days (or as promptly as practieable after the
31 !~pg,.~~J~en a drilhng ng IS on location, as the case may be) actually commence the
exp1111llon of the felty oighl (48)
32 proposed operation and complete it with due diligence. Operator shall perform all work for the account of the Consenting
33 Ponies; provided, however, if no drilling rig or other equipment is on location, and if Operator is a Non-Consenting Party,
34 the Consenting Ponies shall either: (i) request Operator to perform the work required by such proposed operation for the
35 account of the Consenting Parties, or (ii) designate one of the Consenting Parties as Operator to perform such work. The
36 rights and duties granted to and imposed upon the Operator under this agreement are granted to and imposed upon the party
37 designated as Operator for an operation in which the original Operator is a Non-Consenting Party. Consenting Parties, when
38 cooducting operations on the Contract Area pursuant to this Article Vl.B.2., shall comply with all terms and conditions of this
39 agreement.
40 If less than all ponies approve any proposed operation, the proposing party, immediately after the expiration of the
41 applicable notice period, shall advise all Ponies of the total interest of the parties approving such operation and its
42 recommendation as to whether the Consenting Parties should proceed with the operation as proposed. Each Consenting Party,
43 within forty-eight (48) hours (exclusive of Saturday, Sunday, and legal holidays) after delivery of such notice, shall advise the
44 proposing party of its desire to (i) limit participatioo to such party's interest as shown on Exhibit "A" or (ii) carry only its
45 proportionate part (determined by dividing such party's interest in the Contract Area by the interests of all Consenting Parties in
46 the Contract Area) of Non-Consenting Panics' interests, or (iii) carry its proportionate part (determined as provided in (ii)) of
47 Non-Consenting Ponies' interests together with all or a portion of its proportionate part of any Non-Consenting Ponies'
48 interests that any Consenting Party did not elect to take. Any interest of Non-Consenting Panics that is not carried by a
49 Consenting Party shall be deemed to be carried by the party proposing the operation if such party does not withdtaW its
50 proposal. Failure to advise the proposing party within the time required shall be deemed an election under (i). In the event a
51 drilling ri~ on l~fj notice may be given by telephone, and the time permitted for such a response shall not exceed a
52 total of 1 ~'X;~ hOU!li (llf·
9
lO may request and receive up to five (5) additional days after expiration of the tw gg~r(~~ponse peri<>d specified in
II Article VI.B.l. within which to respond by paying for all stand-by costs and other costs incurred during such extended
12 response period; Operator may require such party to pay the estimated staod-by time in advance as a condition to extending
13 the response period. If more than one party elects to take such additional time to respond to the notice, standby costs shall be
14 allocated between the parties taking additional tilne to respond on a day-to-day basis in the proportion each electing party's
15 interest as shown on Exhibit" A" bears to the total interest as shown on Exhibit "A' of all the electing parties.
16 4. ~ If less than all parties elect to participate in a drilling, SidetriU:lcing, or Deepening operation proposed
17 pursuant to Article VI.B.l., the in~J:rest relinquished by the Non-Consenting Parties to the Consenting Parties under Article
18 VJ.B.2. shall relate only and be limited to the lesser of (i) the total depth ~U:tually drilled or (ii) the objective depth or Zone
19 of which the parties were given notice under Article Vl.B.l. ("Initial Objective"). Such well shall not be Deepened beyond the
20 Initial Objective without fU'St complying with this Article to afford the Non-Consenting Parties the opponunity to participate
21 in the Deepening operation.
22 In the event any Consenting Party desires to drill or Deepen a Non-Consent Well to a depth beklw the Initial Objective,
23 such party shall give notice thereof, complying with the requirements of Article VI.B.l., to all parties (including Non-
24 Consenting Parties). Thereupon, Articles VI.B.I. and 2. shall apply and all parties receiving such notice shall have the right to
25 participate or not participate in !he Deepening of such well pW'Suant to said Articles VI.B.I. and 2. If a Deepening operation
26 is approved pursuant to such provisions, and if any Non-Consenting Party elects to participate in the Deepening operation,
27 such Non-Consenting party shall pay or make reimbursement (as the case may be) of the following costs and expenses.
28 (a) If the proposal to Deepen is made prior to the Completion of such well as a well capable of producing in paying
29 quantities, such Non-Consenting Party shall pay (or reimburse Consenting Parties for, as the case may be) that share of costs
30 and expenses incurred in connection with the drilling of said well from the surface to the Initial Objective which Non-
31 Consenting Party would have paid had sucfl Non-Consenting Party agreed to participate therein, plus the Non-Consenting
32 Party's share of the cost of Deepening and of participating in any further operations on the well in ~U:eordance with the other
33 provisions of this Agreement; provided, however, all costs for testing and Completion or attempted Completion of the well
34 incurred by Consenting Parties prior to the point of IU:tual operations to Deepen beyond the Initial Objective shall be for the
35 sole account of Consenting Parties.
36 (b) If the proposal is made for a Non-Consent Well that has been previously Completed as a well capable of producing
37 in paying quantities, but is no longer capable of producing in paying quantities, such Non-Consenting Party shall pay (or
38 reimburse Consenting Parties for, as the case may be) its proportionate share of all costs of drilling, Completing, and
39 equipping said well from the surface to the Initial Objective, calculated in the manner provided in paragraph (a) above, less
40 those costs recouped by the Consenting Parties from the sale of production from the well. The Non-Consenting Party shall
41 also pay its proportionate share of all costs of re-entering said well. The Non-Consenting Parties' proportionate part (based
42 on the percentage of such well Non-Consenting Party would have owned had it previously participated in such Non-Consent
43 Well) of tbe costs of salvable materials and equipment remaining in the hole and salvable surface equipment used in
44 connection with such well shall be determined in IU:COrdance with Exhibit •c." If the Consenting Parties have recouped the
45 cost of drilling, Completing, and equipping the well at the time such Deepening operation is conducted, then a Non-
46 Consenting Party may participate in the Deepening of the well with no payment for costs inc~d prior to re-entering the
47 well for Deepening
48 The foregoing shall not imply a right of any Consenting Party to propose any Deepening for a Non-Consent Well prior
49 to the drilling of such well to its Initial Objective without the consent of the other Consenting Parties as provided in Article
50 VI.F.
51 5. Sidetracking: Any party having the right to participate in a proposed SidettiU:king operation that does not own an
52 interest in the affected wellhore at the time of the notice shall, upon electing to participate, tender to the wellhore owners its
53 proportionatJ: share (equal to its interest in the Sidetracking operation) of the value of that portion of the existing wellbore
54 to be utilized as follows:
55 (a) If the proposal is for Sidetr~U:king an existing dry hole, reimbursement shall be on the basis of the acrual costs
56 incurred in the initial drilling of the well down to the depth at which the Sidetracking operation is initiated.
57 (h) If the proposal is for Sidetracking a well which has previously produced, reimbursement shall be on the basis of
58 such party's proportionate share of drilling and equipping costs incurred in the initial drilling of the well down to the depth
59 at which the Sidetracking operation is conducted, calculated in the manner described in Article VI.B.4(h) ahove. Such party's
60 proportionate share of the cost of the well's salvable materials and equipment down to the depth at which the Sidetracking
61 operation is initiated shall be determined in accordance with the provisions of Exhibit •c."
62 6. Order of Preference of Operations Except as otherwise specifically provided in this agreement. if any party desires to
63 propose the conduct of an operation that conflicts with a proposal that has been made by a party under this Article VI, such
64 party shall have fifteen (15) days from delivery of the initial proposal, in the case of a proposal to drill a well or to perform
65 an operation on a well where no drilling rig is on locabon, or twenty-four (24) hours, exclusive of Saturday, Sunday and legal
66 holidays, from delivery of the irritial proposal, if a drilling rig is on location for the well on which such operation is to be
67 conducted, to deliver to all parties entitled to participate in the proposed operation such party's alternative proposal, such
68 al~J:mate proposal to contain the same information required to be included in the initial proposal. Each party receiving sucfl
69 proposals shall elect by delivery of notice to Operator within five (5) days after expiration of the proposal period, or within
70 twenty-four (24) hours (oKohiSi'•• of SlllS) if a drilling rig is on location for the well that is the
71 subject of the proposals, to participate in one of the competing proposals. Any party not electing within the time required
72 shall be deemed not to have voted. The proposal receiving the vote of parties owning the largest aggregate percentage
73 interest of the parties voting shall have priority over all other competing proposals; in the case of a tie vote, the
74
-8-
35
A.A.P.L. FORM 610- MODEL FORM OPERATING AGREEMENT- 1989
1 initial proposal shall prevail. Operator shall deliver notice of such result to all parties entitled to participate in the operation
2 within five (5) days after expiration of the election period (or within twcnty·four (24) hours, olEslusi"e af SlilliRlll)', Slil!dllj'
3 and legal holideys, if a dfillillg rig is OR laeolioa). Each party shall then have two (2) days (or twenty·four (24) hours if a rig
4 is on location) from receipt of such notice to elect by delivery of notice to Operator to participate in such operation or to
relinquish interest in the affected well pursuant to the provisions of Article VI.B.2.; failure by a party to deliver notice within
6 such period shall be deemed an election llll! to participate in the prevailing proposal.
7 7. Conformity to SpliCing Pattern. Notwithstanding the provisions of this Article VLB.2., it is agreed that no wells shall be
8 proposed to be drilled to or Completed in or produced from a Zone from which a well located elsewhere on the Contract
9 Area is producing, unless such well conforms to the then-<:xisting well spacing pattern for such Zone.
10 8. Paying Wells. No party shall conduct any Reworking, Deepening. Plugging Back, Completion, Recompletion, or
11 Sidctracldng operation uoder this agreement with respect to any well then capable of producing in paying quantities except
!2 with the consent of all parties that have not relinquished interests in the well at the time of such operation.
13 C. Completion of Wells; Reworking and Plugging Back:
14 1. Completion· Without the consent of all parties, no well shall be drilled, Deepened or Sidetracked, except any well
15 drilled, Deepened or Sidetracked pursuant to the provisions of Article Vl.B.2. of this agreement Consent to the drilling,
16 Deepening or Sidetracking shall include:
17 0 Ootion No. l: All necessary expendirures for the drilling, Deepening or Sidetracking, testing, Completing and
18 equipping of the well, including necessary tankage and/or surface facilities.
19 li1l Option No. 2: All necessary expendiwres for the drilling, Deepening or Sidetracking and testing of the well. When
20 such well has reached its authorized depth, and all logs, cores and other tests have been completed, B!ld the results
21 thereof furnished to the parties, Operator shall give immediate notice to the Non-Operators having the right to
22 participate in a Completion attempt whether or not Operator recommends attempting to Complete the well,
23 together with Operator's AFE for Completion costs if not previously provided. The parties ~eiving such notice
24 shall have forty-eight (48) hours (exclusive of Saturday, SWlday and legal holidays) in which to elect by delivery of
25 notice to Operator to participate in a recommended Completion attempt or to make a Completion proposal with an
26 IICCO!tlpanying AFE. Operator shall deliver any such Completion proposal, or any Completion proposal conflicting
27 with Operator's proposal, to the other parties entitled to participate in such Completion in accordance with the
28 procedures specified in Article VI.B.6. Election to participate in a Completion attempt shall include consent to all
29 necessary expenditures for the Completing md equipping of such well, including necessary tankage and/or surface
30 facilities but excluding any stimulation operation not contained on the Completion AFE. Failure of any party
3\ receiving such notice to reply within the period above fixed shall constitute 811 election by that party not to
32 participate in the cost of the Completion attempt; provided, that Article Vl.B.6. shall control in the case of
33 conflicting Completion proposals. If one or more, but less than all of the parties, elect to attempt a Completion, the
34 provision of Article VI.B.2. hereof (the phrase "Reworl< orders of the Department of Energy or Federal Energy Regulatocy Commission
or predecessor or successor agencies to the extent such interprctalion or application was made in good faith and does not
7 constitote gross negligence. Each Non-Operator further agrees to reimburse Operator for such Non..Qperator's share of
8 production or any refund, fme, levy or other governmental sanction that Operator may be require 0 \ J=
22 Tax!DorS.S.No. l{S) -S'-1-7177
23
24
25 By ________________________________
26 Type or print name
27
Title-----------------
28
Date------------------
29
Tax lD or S.S. No.
30
31
32
By _______________________________
33
Typeorprintnarne
34
Title __________________
35
Date _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __
36
Tax ID or S.S. No.
37
-18.
45
A.A.P.L. FORM 610- MODEL FORM OPERATING AGREEMENT- 1989
ACKNOWLEDGMENTS
2 Note: The following fonns of acknowledgment are the short fonns approved by the Unifol1ll Law on Notarial Acts.
The validity and effect of these fol1lls in any state will depend upon the statutes of that state.
4
Individual acknowledgment:
6 State of Texas
) ss.
County of_~D""•,l.,l•..,s__
9 This instrument was acknowledged before me on
10 __,__\LLI/_20_.,!_(_,__/_L_ _ _ _ _ _ by b,k L MJ'i~
II
12 (Seal, if any)
13
JENNIFER l NEAlA Title (and Rank) ~J Pu\o\;t..
My CommJslion Expires
14 June 5. 2016 My commission expires: ~M. S" LDII.:.
15
16 Acknowledgment in representative capacity:
17 State of le "f... ClS
18 ) ss.
19 County of \).) ~
20 This instrument was acknowledged before me on
21 ----'-'\1'-t,/..!£61 the advance is required, whichever is later. The Opcralor shall adjust each monthly billing to reflect advances
received from the Non..Qperators for such month. If a refund is due, the ()perntor shall apply the amount to be refunded to the
subsequent month's billing or advance, unless the Non..()perator sends the Operator a written request for a cash refund. The Operator
shall remit the refund to the Non.Qperator within fifteen (15) days of receipt of such written request
B. Except as provided below, each Party shall pay its proportionate share of all bills in full within fifteeo (15) days of receipt date. If
10
payment is not made within such time, the unpaid balance shall bear interest compounded monthly al the prime rate published by the
II
Wall Street JoUI'IU2i on the first day of each mooth the payment is delinquent, plus three percent (3%), per annwn, or lhe maximum
12
contract rate permitted by the applicable usury Laws governing the Joint Property, whichever is the lesser, plus altomey's fees, court
13
costs, and other costs in connection with the collection of unpaid amounts. If the Wall Street Journal ceases to be published or
14
discontinues publishing a prime rate, the unpaid balance shall bear interest compounded monthly at the prime rate published by the
15
Federal Reserve plus three percent (3%), per annum. Interest shaU begin accruing on the first day of the month in which the payment
16
was due. Payment shall not be reduced or delayed as a result of inquiries or anticipated credits unless the Operator has agreed.
17
Notwithstanding the foregoing, the Non-operator may reduce payment, provided it furnishes documentation and eXJ)Ianation to the
IS
Operalor at the time payment is made, to the extent such reduction is caused by:
19
20
(l) being billed at an incorrect working interest or Participating Interest that is higher than such Non-Operator's actual walking
21
interest or Participating Interest, as applicable; or
22
(2) being billed for a project or AFE requiring approval of the Parties under the Agreement that the Non.()peralor has not approved
23
or is not otherwise obligated to pay under lhe Agreement; or
24
(3) being billed for a property in which the Non-Openttor no longer owns a working interest, provided the Non.()perator has
25
furnished !he Operator a copy of the recorded assignment or letter in-lieu. Notwithstanding the foregoing, the Non-Operator
26
shall remain responsible for paying bills attributable to the interest it sold or transferred for any bills rendered during the thirty
27
(30) day period following the Operator's receipt of such written notice; or
28
(4) charges outside the adjustment period, as provided in Section 1.4 (Ans provided in this Accounting Procedure. If the Non-Operators fail to comply with
II
the additional deadlines in Section 1.5.B or 1.5.C, the Opera1or's waiver of its rights to assert a statute of limitations defense against
12
the claims brought by the Non-Operators shall lapse, and such claims shall then be subject to the applicable staOJte of limitations,
13
provided that such waiver shall not lapse in the event that the Operator has failed to comply with the deadlines in Section 1.5.B or
14
I.S.C.
15
16
B. The Operator shall provide a written response to all exceptions in an audit report within one hundred eighty (180) days after Operalor
17
receives such report. Denied exceptions should be accompanied by a substantive response. If the Operator fails to provide substantive
18
response to an exception within this one hundred eiglrty (180) day period, the Operator will owe interest on that exception or portion
19
thereof; if ultimately granted, from the date it received the audit report. Interest shall be calculated using the rate set forth in Section
20
1.3.B (Advances and Payments l(y the Parties).
21
22
C. The lead audit company shall reply to the Operator's response to an audit report within ninety (90) days of receipt, and the Operator
23
shall reply to the lead audit company's follow-up response within ninety (90) days of receipt; provided, however, each Non-Operator
24
shall have the right to represent itself if it disagrees with the lead audit complllly's position or believes the lead audit company is not
25
adequately fulfilling its duties. Unless otherwise provided for in Section I.S.E, if the Operator fails to provide substantive response
26
to an exception within this ninety (90) day period, the Operator will owe interest on that exception or portion thereof, if ultimately
27
granted, from the date it received the audit report. Interest shall be calculated using the rate set forth in Section 1.3.B (Advances and
28
Payments l(y tire Parties).
29
30
D. If WJY Party flllls to meet the deadlines in Sections I.S.B or l.S.C or if any audit issues are outstanding fifteen (IS) months after
31
Operator rece1ves the audit report, the Operator or any Non-Operator patticipaiing in the audit has the right to call a resolution
32
meeting, as set forth in this Section LS.D or it may invoke the dispute resolution procedures included in the Agreemen~ 1f applicable.
33
The meeting will require one month's written notice to the Operator and all Non-Operators participating in the audit. The meeting
34
shall be held at the Operator's office or mutually agreed location, and shall be attended by representatives of the Parties with
35
authority to resolve such outstanding issues. Any Party who fails to attend the resolution meeting shall be bmw! by any resolution
36
reached at the meeting. The lead audit company will make good faith efforts to coordinate the response and positions of the
37
Non-Dperator parti<:ipants throughout the resolution process; however, each Non-Operator shall have the right to represent itself.
38
Attendees will make good faith efforts to resolve outstanding issues, and each Party will be required to present substantive information
39
supporting its position. A resolution meeting may be held as often as agreed to by the Patties. Issues unresolved at one meeting may
40
be discussed at subsequent meetings until each such issue is resolved.
41
42
If the Agreement contains no dispute resolution procedures and the audit issues cannot be resolved by negotiation, the dispute shall
43
be submitted to mediation. In such event, promptly following one Party's written request for mediation, the Parties to the dispute
« shall choose a mutually acceptable mediator and share the costs of mediation services equally. The Patties shall each have present
45
at the mediation at least one individual who has the authority to sertle the dispute. The Parties shall make reasonable efforts to
46
ensure that the mediation commences within sixty (60) days of the date of the mediation request. Notwithstanding the above, any
47
Party may file a lawsuit or oomplaint (I) if the Parties are unable after reasonable efforts, to commence mediation within sixty (60)
48
days of the date of the mediation request, (2) for statute of limitations reasons, or (3) to seck a preliminary injunction or other
49
provisional judicial relief, if in its sole judgment an injWlctiOD or other provisional relief is necessary to avoid irreparable damage or
50
to preserve the status quo. Despite such action, the Parties shall continue to tty to resolve the dispute by mediation.
51
52
&--8 {Qfllislflll Pr9l i6lso Gll'ftitMre ."eeHHIIies)
53
If lite ld81f ()pe ttlrJM/tlill6 Jffl!elt'te deadline ilf SeeRs" [.§.C; I!M} t1ouesel1efi HeepliBM t'will•e•e ttBt tlfitjeMXf S, t'Je }(sl'f
54
Qpe lilfth:s uu;~;,. 8118 (.') )Ml ja!.'euiJtg .eeeipt 8f#re 16181 a~~hsltll'ttiu eBps w 8jt'te Ope al81' atiJI Be tleeMet/16 lttfle heelt
55
u U~fAJM 1rJ the ''BI'f 0Jae, s/6 ~. Jftrts QpeM«Jo jai!sl6 mee: lite dem/ltne1 in See/18" l.J.R 87 'J.C, liM) M"lll!ll60ed eeepllslf8 tWI
56
· e,.e 1t6l sddJ esseti IJy lite OpeNIBr 1itJiiR eKe (l) )BSr folie 1iJtg f'teeipl eflhe tltl8ifJieflSrl BP reeelfll ejlhe IMt ftlbstmtm e reo9}3sJMe
51
efthe Ns,. Qpe :aleM, uhieltt!'\eo M laW, shall be deei'NNI Js hate ~ee1t gM~tleti A, lite G)peMI!W arttl sdjl181Me'fla s'ts'l he rffillile,
58
1 itltewt iffle est, tB lite J8i141 Aeetlt41fl.
59
60
6. APPROVAL BY PARTIES
61
62
A. GENERALMAITERS
63
64
Where an approval or other agreement of the Patties or Non-Operators is expressly required under other Sections of this Accounting
65
Procedure and if the Agreement to which this Accounting Procedure is attached contains no contrary provisions in regard thereto, the
66
COPYRIGI:IT 0 2005 by Council of Petroleum Accountants Societies, Inc. (COPAS)
4
51
0
cop as
COPAS 2005 Accounting Procedure
Recommended by COPAS, Inc.
Operator shall notify all Non.()perators of the Operator's proposal and the agreement or approval of a majority in interest of the
Non-Operators shall be controlling on all Non.()pcrators.
This Section 1.6A applies to specific situations of limited duration where a Party proposes to change the accounting for charges from
mat pn:scribed in this Accounting Procedure. This provision docs not apply to amendments to this Accounting Procedure, which are
covered by Section L6.B.
B. AMENDMENTS
If the Agreement to which this Accounting Procedure is attached contains no contrary provisions in regard thereto, this Accounting
lO
Procedure can be amended by an affirmative vote of two (_____J__) or more Parties, one of which is the Operator,
II
having a combined working interest of at least fiJly percent ~%), which approval shall be binding on all Parties,
12
provided, however, approval of at least one (I) Non.()peralor shall be required.
13
14
C. AFFILIATES
15
16
For the purpose of administering the voting procedures of Sections 1.6.A and 1.6.B, if Parties to this Agreement are Affiliates of each
17
other, then such Affiliates shall be combined and treated as a single Party having the combined working interest or Participating
18
Interest of such Affiliates.
19
20
For the purposes of administering the voting procedun:s in Section 1.6.A, if a Non.()perator is an Affiliate of the Operator, votes
21
under Section 1.6.A shall require the majority in interest of the Non.()perator(s) after excluding the interest of the Operaror's
22
Affiliate.
23
24
II. DIRECf CHARGES
25
26
The Operator shall charge the Joint Account with the following items:
27
28
L RENTALSANDROYALTlES
29
30
Lease rentals and royalties paid by the Operator, on behalf of all Parties, for the Joint Operations.
31
32
2. LABOR
33
34
A. Salaries and wages, including in=tive compensation programs as set forth in COPAS MFI-3 7 (''Chargeability of Incentive
35
Compensation Programs"), for:
36
37
(!) Operator's field employees directly employed On-.;ite in the conduct ofJoint Operations,
38
39
(2) Operator's employees directly employed on Shore Base Facilities, Offshore Facilities, or other facilities serving the Joint
40
Property if such costs are not charged under Section Il.6 (Equipment and Facrlitie. Furmslw.d by Operator) or are not a
41
function covered under Section Ill (Overhead),
42
43
(3) Operator's employees providing First Level Supervision,
44
45
( 4) Operator's employees providing On-site Tecbnical Services for the Joint Property if such cluuges are excluded ftom the
46
overhead rates in Section Ill (Overhead),
47
48
(5) Operator's employees providing OtT-site Technical Services for the Joint Property if such charges are excluded from the
49
overhead rates in Section Ill (Overlw.ad).
so
51
Charges for the Operator's employees identified in Section Il.2.A may be made based on the employee's actual salaries and wages,
52
or in lieu thereof, a day rate representing the Operator's average salaries and wages of the employee's specific job category.
53
54
Charges for personnel chargeable under this Section Il.2.A who are foreign nationals shall not exceed comparable compensation paid
55
to an equivalent U.S. employee pursuant to this Section Il.2, unless otherwise approved by the Parties pursuant to Section
56
!.6.A (General Matters).
57
58
B. Operator's cost of holiday, vacation, sickness, and disability benefits, and other customary allowances paid to employees whose
59
salaries and wages are chargeable to the Joint Account under Section 11.2.A, excluding severance payments or other termination
60
allowances. Such COSts under this Section 11.2.B may be charged on a "when and as-paid basis" or by upercentage assessment" on the
61
amount of salaries and wages chargeable to the Joint Account under Section Il.2.A If percentage assessment is used, the rate shall
62
be based on the Operator's cost experience.
63
64
C. Expenditun:s or contributions made pursuant to assessments imposed by governmental authority that are applicable to costs
65
chargeable to the Joint Account under Sections !1.2.A and B.
66
COPYRIGIIT 0 2005 by Council of Petroleum Accountants Societies, Inc. (COPAS)
5
52
@ COPAS 2005 Accounting Procedure
Recommended by COP AS, Inc.
cop as
D. Personal Expenses of personnel whose salaries and wages are chargeable to the Joint Account under Section JI.2.A when the
expeases are incurred in connection with directly chargeable activities.
E. Reasonable relocation costs incurred in transferring to the Joint Property personnel whose salaries and wages are chargeable to the
Joint Account under Section 11.2.A. Notwithstanding the foregoing, relocation costs that result from reorganization or merger of a
Party, or that are for the primary benefit of the Operator, shall not be chargeable to the Joint Account. Extraordinary relocation
costs, such as those incurred as a result of transfers from remote locations, such as Alaska or overseas, shall not be charged to the
Joint Account unless approved by the Parties pursuant to Section 1.6.A (General Matters).
10
F. Training costs as specified in COPAS MFJ-35 ("Charging of Training Costs to the Joint Accounf') for personnel whose salaries and
II
wages arc chargeable under Section IL2.A. This troining charge shall include the wages, salaries, training cow.e cost, and Personal
11
Expenses incurred during the training session. The training cost shall be charged or allocated to the property or properties directly
13
benefiting from the training. The cost of the training course shall not exceed prevailing commercial rates, where such rates are
available.
14
IS
16
G. Operator's current cost of established plans for employee benefits, as described in COPAS MFI-27 ("Employee Benefits Chargeable
17
to Joint Operations and Subject to Percentage Limitation''), applicable to the Operator's labor costs chargeable to the Joint Account
under Sections !1.2.A and B based on the Operator's actual cost not to exceed the employee benefits limitation percentage most
18
recently recommended by COPAS.
19
20
H. Award payments to employees, in aecordance with COPAS MFI-49 ("Awards to Employees and Contractors") for personnel whose
11
salaries and wages are chargeable under Section li.2.A.
22
23
3. MATERIAL
14
25
Material purchased or furnished by the Operator for use on the Joint Property in the conduct of Joint Operations as provided under Section
26
IV (Material Purchases, Tran.ifers, and Dispositions). Only such Material shall be purchased for or transferred to the Joint Property as
27
may be required for immediate use or is reasonably practical and consistent with efficient and economical operations. The accumulation
28
of surplus stocks shall be avoided.
29
30
4. TRANSPORTATION
31
32
A. Transportation of the Operator's, Operator's Affiliate's, or contractor's personnel necessary for Joint Operations.
33
34
B. Transportation of Material between the Joint Property and another property, or from the Operator's warehouse or other storage point
35
to the Joint Property, shall be charged to the receiving property using one of the methods listed below. Transportation of Material
36
from the Joint Property to the Operator's warehouse or other storage point shall be paid for by the Joint Property using one of the
37
methods listed below:
38
39
( 1) If the actual trucking charge is less than or equal to the Excluded Amount the Operator may charge actual trucking cost or a
40
theoretical charge from the Railway Receiving Point to the Joint Property. The basis for the theoretical charge is the per
41
hundred weight charge plus fuel surcharges from the Railway Receiving Point to the Joint Property . The Operator shall
42
consistently apply the selected alternative.
43
44
(2) If the actual trucking charge is greater than the Excluded Amount, the Operator shall charge Equalized Freight. Accessorial
45
charges such as loading and unloading costs, split pick-up costs, detention, call out charges, and permit fees shall be charged
46
directly to the Joint Property and shall not be included when calculating the Equalized Freight.
47
48
5. SERVICES
49
so
The cost of contract services, equipment, and utilities used in the conduct of Joint Operations, except for contract services, equipment, and
51
utilities covered by Section lll (Ol>erhead), or Section 11.7 (Affiliates), or excluded under Section Jl.9 (Legal Expense). Awards paid to
52
contractors shall be chargeable pursuant to COPAS MFI-49 ("Awards to Employees and Contractors").
53
54
The costs of third party Technical Services are chargeable to the extent excluded from the overncad rates under Section Ill (Ol>erhead).
55
56
6. EQUIPMEJI.T AND FACILITIES FURNISHED BY OPERATOR
57
58
In the absence of a separately negotiated agreement, equipment and facilities furnished by the Operator will be charged as follows:
59
60
". lfle ~aRtter shall ehar:ge die Jetnt '\Qge\lnt far HSe ef ()peratar B"'M~ BtlUipmeot Rftd faeilities, iaetuBHtg But aet limited te
61
pFoduelioR lileililies, ShaN BilBo Fae~ilios, Olfsho"' Faeililies, and Field Olllees, Ill 181<19 eommeRSIIFIIIo idi Ilk! oosl5 of o /I!OFShip
62
and opolllliGR. Tho east af Field ()l'fieos shall be ehqealllo '" lho ••aeAtlho Field Ql'fieiiB pw;ido diFeet '"" iee to pol5eAROI mba
63
""' elwirgeehle piH'SYBill te Seetian ll2.A (bflho ). SHoll Flllo& "'"l illeiYde labaF, Rlai!llea ...ee, repai!S, olheF ape!llliRg OJ'fiOBSo,
64
inSHAmee, l&Xes? dep~eeiatieo usiBg S~n~igat line Sepft1eiati9fl IRethetl, BAd ifttRst ea grass in e~eot less &eetBRVIaled d8JlRt&i!tlien
65
ROllo enseed poFGoRI ( ~'l poF OIIRIIRI; preuided, BO"'e' BF, depFeoillliaa shall ROt bo eharged bOll !lie
6 or systems
23
serving the Joint Property are Operator-owned, charges to the Joint Account shall be made as provided in Section 11.6 (Equipmtmr and
24
Facilities Furni.Jhed by Operator). If the communication facilities or systems serving the Joint Pmperty are owned by the Operator's
25
Affiliate, charges to the Joint Account shall not exceed average commercial rates prevailing in the area of the Joint Property. The Operator
26
shall adequately document and support commercial rates and shall periodically review and update the rate and the supponing
27
documentatioo.
28
29
13. ECOLOGICAL, ENVIRONMENTAL, AND SAFETY
30
31
Costs incurred for Teehnical Services and drafting to comply with ecological, environmental and safety Laws or standards recommended by
32
Occupational Safety and Health Adrninisl:n!!ion (OSHA) or other regulatory authorities. All other labor and fimctioos incurred for
33
ecological, environmental and safety matters, includiog management, administration, and permitting, shall be covered by Sections 11.2
34
(Labor), 11.5 (Services), or Section Ill (Overhead), as applicable.
35
36
Costs to provide or have available pollution containment and removal equipment plus actual costs of control and cleanup and resulting
37
responsibilities of oil and other spills as well as discharges from permitted outfalls as required by applicable Laws, or other pollution
38
containment and removal equipment deemed appropriate by the Operator fur prudent operations, are directly chargeable.
39
40
14. ABANDONMENT AND RECLAMATION
41
42
Costs incurred for abandooment and reclamation of the Join! Property, including costs required by lease agreements or by Laws.
43
44
IS. OTHER EXPENDITURES
45
46
Any other expenditure not covered or dealt with in the foregoing provisions of this Section II (Direct Charges), or in Section Ill
47
(Overhead) and which is of direct benefit to the Joint Property and is incurred by the Operator in the necessary and proper conduct of the
48
Joint Operntions. Charges made tmder this Section 11.15 shall require approval of the Partie>, pursuant to Section 1.6.A (Gern!ral Matters).
49
50
51
m.OVERHEAD
52
53
As compensation for costs not specifically identified as chargeable to the Joint Account pursuant to Section II (Direct Charges), the Operator
54
shall charge the Joint Account in accordance with this Section Ill.
55
56
Functions included in the overhead rates regardless of whether performed by the Operator, Operator's Affiliate> or third parties and regardless
57
of location, shall include, but not be limited to, costs and expenses of:
58
59
warehousing, other than for warehouses that are jointly owned under this Agreement
60
design and drafting (except when allowed as a direct charge tmder Sections 11.13, ITI. l.A(ii), and lll.2, Option B)
61
inventory costs not chargeable under Section V (lnveltlories a/Controllable Material)
62
procurement
63
administration
64
• accouming and auditing
65
gas dispatching and gas chart integration
66
COPYRIGHT 0 2005 by Council ofPetrolewn Accountants Societies, Inc. (COPAS)
8 55
@ COPAS 2005 Accounting Procedure
Recommended by COPAS, Inc.
cop as
human resources
management
supervision not directly charged under Section 11.2 (Labor)
legal services not directly chargeable under Section ll.9 (Legal Erpe,...,)
taxation, other than those costs identified as directly chargeable under Section ll.l 0 (Taxes and Permits)
pn:paralion and monitoring of permits and certifications; preparing regulatory n:ports; appearances before or meetings with
governmental agencies or other authorities having jurisdiction over the Joint Property, other than On-site inspections; reviewing,
interpreting, or submitting comments on or lobbying with respect to Laws or proposed Laws.
Overhead charges shall include the salaries or wages plus applicable payroll burdens, benefits, and Personal Expenses of personnel performing
10
overhead functions, as well as office and other related expenses of overhead functions.
II
12
l. OVERHEAD-DRILLING AND PRODUCING OPERATIONS
13
14
ll
As compensation for costs incurred but not chargeable uoder Section n (Direct Charges) and not covered by other provisions of this
Section Ill, the Operator shall charge on either:
16
17
IS
1i:J (Alternative 1) Fixed Rate Basis, Section lli.I.B.
19
0 (Alternativel) Percentage Basis, Section lll.l.C.
20
A. TECHNICAL SERVICES
21
22
(i) Except as otherwise provided in Section ll.l3 (Ecological Environmental, and Safety) and Section lll.2 (Overhead- Mqjor
23
Constrnction and Catastrophe), 01' by approval of the Parties pursuant to Section l.6.A (General Maners), the salaries, wages,
24
related payroll burdens IUld benefits, and Per.;onal Expenses for On-site Technical Services, including third patty Technical
25
Services:
26
27
0 (Alternative 1- Direct) shall be charged~ to the Joint Account.
28
29
0 {Aiteroativt 2- Overhead) shall be covered by the~ rates.
30
31
(ii) Except as otherwise provided in Section 11.13 (&ologicol, Environmental, and Safety) and Section Ill.2 (Overhead- Major
32
Construction and Catastroplw), or by approval of the Parties pursuant to Section L6.A {General Matters), the salaries, wages,
33
related payroll burdens and benefits, and Personal Expenses for Off-site Technical Services, including third party Technical
34
Services:
35
36
0 (Alternadve 1 -All Overhead) shall be covered by the~ rates.
37
38
0 (Aiteraative 2- All Direct) shall be charged mtl,to the Joint Accouot
39
40
41
1i:J (Alternative 3- Drilling Direct) shall be charged lli!:lli to the Joint Account.!!!!!Y to the extent such Technical Services
are directly attributable to drilling, redrilting, deepening, or sidetracking operations, through completion. temporary
42
abandonment, or abandonment if a dry hole. Off-site Technical Services for all other operations, including worl!1HEAD PllRCI*IVGil BASIS
ll
32
(I) Opera!ar sllall el!orge lila Joint A&ilo·e~ and 1!.9 (Leg.o' &pe,.); all Hlllerial sai'RigO orodi.t&; IRe "allio
39
af suhslaAaas purehased fer en1wmaed "'"" efY; all prepe~ ORd ad • alera111 taus, and an~ etl!er ta,.es and as.....,.enl5 111&1
40
Bf8 ltwied, asse:S6ed, and paid wpeR the mineral iAteFest in Bnd te dt11 JeiRt PFepeFty.
41
42
f2) \pplielllieR efO.omeBII Pereentage Basis shall be as felle s:
43
44
(a) The Q.,•elepllleAI Rate shall be "''Plie:
45
46
fij drilling, R!drilling; sideiRIMing efa well
47
[iij 0 ollUOOOf~iRgplugbll8k O 2005 by Council of Petroleum Accountants Societies, Inc. (COPAS)
10
57
0
cop as
COPAS 2005 Aroounting Procedure
Recommended by COPAS. Inc.
Major Construction shall mean the construction and installation of fixed assets, the expansion of fiXed assets, and any other project clearly
discernible as a fixed asset required fur the development and operation of the Joint Property, or in the dismantlernen~ abandonmen~
removal, and restoration of platforms, production equipment, and other operating facilities.
Catastrophe is defined as a sudden calamitous event bringing damage, loss, or destruction to property or the environm<:nt, such as an oil
spill, blowout, explosion, fire, storm, hurricane, or other disaster. The overhead rate shall be applied to those costs necessary to restore the
Joint Property to the equivalent conditioo that existed prior to the event
A If the Operator absorbs the engineering, design and drafting costs related to the project:
10
(I) --"'-----%of total costs if such costs are less than $100,000; plus
II
12
(2) _ _.,_ _% oftotal costs in excess of$100,000 but less than $1,000,000; plus
13
14
(3) _ __,_ _ %of total costs in excess of$1,000,000.
15
16
B. If the Operator charges engineering, design and drafting costs related to the project directly to the Joint Account:
17
18
(I) _ __,5_ _% of total costs if such costs are less than SI 00,000; plus
19
20
(2) _ __,__ _% of total costs in excess of $100,000 but less than S1,000,000; plus
21
22
(3) _ ___,_5_ _% of total costs in excess of S 1,000,000.
23
24
Total cost shall mean the gross cost of any one project For the purpose of this paragraph, the component parts of a single Major
25
Construction project shall not be treated separately, and the cost of drilling and worlt be reduced by salvage or
33
insurance recoveries. Expenditures that qualify fnr Major Construction or Catastrophe Overhead shall not qualify for overhead under any
34
other overhead provisions.
35
36
In the event of any conflict between the provisions of this Section III.2 and the provisions of Sections ll.2 (Labor), TI.5 (Services), or U.7
37
(Affiliales), the provisioos of this Section lll.2 shall govern.
38
39
3. AMENDMENT OF OVERHEAD RATES
40
41
The overhead rates provided for in this Section III may be amended from time to time if, in practice, the rates are found to be insufficient
42
or excessive, in accordance with the provisions of Section 1.6.B (Amendmenl>).
43
44
45
IV. MATERIAL PURCHASES. TRANSFERS, AND DISPOSITIONS
4li
47
Tbe Operator is responsible for Joint Account Material and shall make proper and timely charges and credits for direct purchases, tnnsfers, and
48
dispositions. The Operator shall provide all Material fnr use in the conduct of Joint Operations; however, Material may be supplied by the Non-
49
Operators, at the Operator's option. Material furnished by any Party shall be furnished without any express or implied warranties as to quality,
50
fitness for use, or any other matter.
ll
52
I. DIRECT PURCHASES
53
54
Direct purchases shall be charged to the Joint Account at the price paid by the Operator after deduction of all discounts received, The
55
Operator shall make good faith efforts to take discounts offered by suppliers, but shall not be liable for failure to take discounts except to
56
the extent such failure was the result of the Operator's gross negligence or willful misconduct A direct purchase shall be deemed to occur
lJ
when an agreement is made between an Operator and a third party for the acquisition of Material for a specific well site or location.
58
Material provided by the Operator under "vendor stocking programs," where the initial use is for a Joint Property and title of the Material
59
does not pass from the manufacturer, distributor, or agent until usage, is considered a direct purchase. lf Material is found to be defective
60
or is returned to the manufacturer, distributor, or agent for any other reason, credit shall be passed to the Joint Account within sixty (60)
61
days after the Operator has received adjustment from the manufacturer, distributor, or agent
62
63
64
65
66
COPYRIGfiT 0 2005 by Council ofPetrolewn Accountants Societies, inc. (COPAS)
11
58
0
cop as
COP AS 2005 AccoWJting Plwedure
Recommended by COPAS, Inc.
2. TRANSFERS
A transfer is determined to occur when the Operator (i) furnishes Material from a storage facility or from another openlled property, (ii) has
assumed liability for the storage costs and changes in value, and (iii) has previously secured and held title to the transferred Material.
Similarly, the removal of Material from the Joint Property to a storage facility or to another operated property is al•o considered a transfer;
provided, however, Material that is moved from the Joint Property to a storage location for safe-keeping pending disposition may remain
charged to the Joint Account and is not considered a transfer. Material shall be disposed of in accordance with Section IV.3 (Disposition af
Surplus) and the Agreement to which this AccoWJting Plwedure is attached.
A. PRICING
10
II
The value of Material transferred to/from the Joint Property should generally reflect the IllllrlId., emphasis added.
e. Rather than using any valuation method related to the type of work at issue
(like the customary cost of a secretary if reproduction work is performed and
charged), Sutherland is charging to operating costs of the Hamrick No. 3
well the amount of time he (a petroleum engineer), or Wade Tidmore
(another engineer), spends on this lawsuit based on the salary he chooses to
pay himself and his employees. CR 1456, 1460.
f. Sutherland did not shoot any seismic prior to drilling the Hamrick No. 3
well. Id.
g. The seismic was shot in the summer of 2014, after the Hamrick No. 3 had
been in production for approximately a year. Id.
h. The information used to drill the Hamrick No. 3 was information already in
Dimock’s files that were given to Sutherland, and Sutherland’s pre-existing
personal knowledge of the area. CR 1462.
i. None of the money allocated by Sutherland to “land” cost on the Hamrick
No. 3 well payout was incurred to obtain any land rights to drill the Hamrick
No. 3 well, because Dimock already had the rights under his pre-existing oil
and gas lease. Id.
j. Sutherland admits he has spent roughly a million dollars on “seismic”,
and $1.4 million on “land” costs. CR 1471.
k. Under the two-for-one payout formula Sutherland claims, with that
level of spending for “land” and “seismic”, Sutherland has obtained and
retained $2.4 million of additional revenue. CR 1471-1472.
l. Sutherland used funds he kept from the Hamrick No. 3 well production to
help pay for drilling wells not on Dimock’s leasehold, the Howard well and
the Panhandle Compress well [two dry holes]. CR 1472.
m. Sutherland has done no internal suspense of funds in behalf of the
charities or Dimock of the well proceeds from the Hamrick #3 well. Id.
n. If the eventual legal decision in this case is that payout of the Hamrick #3
well occurred in March 2014, Sutherland doubts he has sufficient funds
to pay back Dimock and the charities. Id.
o. Sutherland admits Sutherland has a contractual obligation to deal with
Dimock in good faith. CR 1474.
p. Sutherland admits Plaintiff has an obligation to act as a reasonably prudent
operator as to any well drilled under the subject contract. CR 1474-1475.
q. Sutherland admits that Sutherland has a fiduciary duty to non-operators in
regard to handling proceeds of the Hamrick #3 well. CR 1476.
r. By early November 2013, the Hamrick #3 well production had essentially
paid back the cost to drill and complete it and Sutherland knew if he did not
spend money on something else that 2X payout would be reached by April
2014. CR 1487.
s. Sutherland billed his own personal expenses for trips to Quanah for this
litigation as miscellaneous expense, as part of “operating costs” he is
subtracting from the Hamrick #3 well production. Id.
t. As Sutherland phrased it, “whether it’s a dollar in my left pocket or a
dollar in my right, it’s the same” when he was asked about reimbursing
himself from Hamrick #3 well production for his own personal expenses.
Id.
u. Sutherland has no budget for how much he plans to spend on seismic in
the future. CR 1495.
v. Sutherland believes the seismic analysis will last for years to come and
there is really almost no end to how much time will be spent on it. Id.