In a year dominated by the landmark cases Devon v. Sheppard and Van Dyke v. Navigator, the Texas Supreme Court's 2023 decision in Freeport-McMoRan Oil & Gas v. 1776 Energy Partners may tend to be overlooked. (Freeport-McMoRan Oil & Gas v. 1776 Energy Partners, 672 S.W.3d 391 (Tex. 2023).)

Freeport is, however, a substantially important decision concerning two of the safe harbor provisions in chapter 91.402 of the Texas Natural Resources Code. Those allow the payment of proceeds to be withheld, i.e., placed in suspense, without interest when there is:

1. A dispute concerning title that would affect distribution of payments.
2. A reasonable doubt that the payee … has clear title to the interest in the proceeds of production.

The facts of the Freeport case can be boiled down as follows:

• Ovintiv and 1776 were parties to joint operating agreements in Karnes County which required payment of proceeds from Ovintiv to 1776, with 1776 being billed by Ovintiv for its proportionate share of operating expenses. 

• Separate to this relationship but covering the same assets, 1776 was sued by Longview Energy Company, alleging that two Longview directors acquired assets for 1776 when their fiduciary duties instead required them to acquire those assets for Longview.

• Longview won its lawsuit and the 1776 assets at issue were placed in a constructive trust.

• Once Ovintiv learned of the Longview judgment and the apparent question over 1776's entitlement to proceeds under the Ovintiv-1776 JOAs, Ovintiv placed 1776's proceeds under the JOA in suspense. 

1776 appealed the Longview judgment and ultimately won a reversal at the court of appeals, which was affirmed by the Texas Supreme Court. Ovintiv subsequently paid over the contents of the suspense account to 1776 without interest. 1776 claimed it was entitled to interest on these amounts because Ovintiv was not operating within section 91.402's safe harbors. 1776 lost this claim at the trial court and again at the Supreme Court.