Plains Exploration & Prod Co v. Torch Enerfy Advisors Inc., Texas Supreme Court June 12, 2015, 2015 Tex. LEXIS 558

In the third case handed down by the Court on June 12, the Court interpreted a purchase and sale agreement as not permitting a refund of lease costs to be the property of the seller under the excluded asset provisions of a purchase and sale agreement.

Torch obtained an undeveloped lease off the California coast that it sold to Plains’ predecessor. Plains was the owner when it was determined that, due to California law prohibiting the drilling of offshore wells, the federal government was required to refund the millions in bonus money paid for the leases. Torch claimed that the excluded asset provisions entitled it to a portion of the refunded bonus money.

The excluded asset provision at issue excluded claims and causes of action “arising” or “attributable to periods of time” before the contracts effective date of October 1, 1995 and all revenue attributable to the assigned leases for any period prior to the effective date of the contract. Due to actions of the California legislature seeking to ban offshore drilling and subsequent legal proceeds, Plains’ predecessor, along with others, instituted suit against the federal government seeking a return of the bonus paid.

While the facts are somewhat complicated, the Court held that the triggering fact was not the 1990 amendments to the applicable statute, but a court order applying the statute to the underlying leases, which the parties did not believe to be the case. The Court held that the terms of the PSA “require a pre-effective date causal nexus.”

Torch took the position that the terms of the PSA imposes a relatedness requirement that is satisfied by a “but for” connection. Plains advocated an interpretation adopting a “substantial factor” connection. The Court agreed with Plains that there must be a substantial factor relationship. And the event giving rise to the refund here only relates to the bonus payments paid “in the theoretical sense that there would be no leases to enforce without them.”