Howard v. Matterhorn Energy, LLC

MICHAEL C. HOWARD AND VIRGINIA D. HAMILTON, Appellants v. MATTERHORN ENERGY, LLC, AND MIKE CHERRY, Appellees

No. 06-20-00085-CV

Court of Appeals Sixth Appellate District of Texas at Texarkana

Date Submitted: March 31, 2021

May 4, 2021

On Appeal from the 71st District Court Harrison County, Texas

Trial Court No. 19-0998

Before Morriss, C.J., Burgess and Stevens, JJ.

Opinion by Justice Stevens

OPINION

Michael C. Howard and Virginia D. Hamilton appeal the trial court's denial of their motion to dismiss counterclaims filed by Matterhorn Energy, LLC, and Mike Cherry under the Texas Citizenship Participation Act (TCPA). See TEX. CIV. PRAC. & REM. CODE ANN. §§ 27.001-.011.¹

We conclude that the TCPA does not apply to counterclaims based on communications directly made to third parties or to the breach of contract counterclaim and, as a result, affirm the trial court's judgment denying the TCPA dismissal on these counterclaims. Even so, we find that the TCPA applies to, and the judicial proceedings privilege bars, counterclaims based on communications made in this lawsuit and in a related lis pendens and reverse the portion of the trial court's judgment that failed to dismiss these claims.

I. Factual and Procedural Background

Howard and Hamilton (collectively Lessors) own approximately 46.75 percent of the mineral rights in 1,183.585 acres of land that is considered Tier 1 of the Haynesville Shale Play located in Harrison County, Texas (the Property). They were approached by Kyle R. Mayden, a broker for Matterhorn Energy, LLC, and Mike Cherry (collectively Lessees) for the purpose of negotiating a lease for mineral rights to the Property. Because Lessors "were only interested in leasing their minerals to an operator that had the necessary experience [and] financial wherewithal to fully develop the mineral[s]," Lessees allegedly made the followingrepresentations to induce the deal: (1) that Lessees had the funding to drill and develop eight to ten 3,000-acre prospects; (2) that Lessees would drill and develop all production horizons on the leasehold and would execute a full-scale development plan; (3) that Lessees would not flip the lease during the primary term; (4) that Lessees would drill at least one well each year during the primary term of the lease; and (5) that Lessees would pay Lessors $100,000.00 for each well they failed to drill during the primary term. In reliance on these terms, a lease agreement was executed on November 28, 2017, (the Lease Agreement) which contained a primary term of three years, unless extended. In relevant part, the Lease Agreement contained a "CONTINUOUS DELVELOPMENT COMMITMENT," which stated:

(A) Notwithstanding any provisions to the contrary herein, if LESSEE has drilled three (3) wells provided for below, and if on or before the expiration of the primary term as described herein, Lessee is engaged in the actual drilling of a well on the leased premises, or on lands pooled therewith, or shall have completed such a well (either as a well capable of producing or as a dry hole), this lease shall continue in force as to all depths covered hereby and it shall not terminate as to any such depths for as long as Lessee prosecutes operations with due diligence on said well or commences the drilling of another well within one hundred and eighty (180) days after so completing such prior well and, thereafter, commences continuing drilling operations on succeeding wells within one hundred and eighty (180) days after the completion or plugging and abandonment of any prior well.

(B) Lessee does hereby agree to commence drilling operations on an initial (1^st well) Test Well within 12 months of the Effective Date herein; should Lessee fail to begin drilling efforts of the Test well thereon, Lessee shall pay to Lessors herein a sum of $100,000.00 as a penalty; which penalty amount shall be divided among the Lessors in proportion to the actual Net Mineral Interest ownership of each Lessor to the total acreage Leased herein.

(C) Lessee does hereby agree to commence drilling operations on the second (2^nd well) Test Well within twenty-four (24) months of the Effective Date herein; should Lessee fail to begin drilling efforts of the Test well thereon, Lessee shall pay to Lessors herein a sum of $100,000.00 as a penalty; which penalty amountshall be divided among the Lessors in proportion to the actual Net Mineral Interest ownership of each Lessor to the total acreage Leased herein.

(D) Lessee does hereby agree to commence drilling operations on an additional (3^rd well) Test Well within 36 months of the Effective Date herein; should Lessee fail to begin drilling efforts of the Test well thereon, Lessee shall pay to Lessors herein a sum of $100,000.00 as a penalty; which penalty amount shall be divided among the Lessors in proportion to the actual Net Mineral Interest ownership of each Lessor to the total acreage Leased herein.

Paragraph 9 of the Lease Agreement contained the following notice provisions and prerequisites to suit:

In the event lessor considers that lessee has not complied with all its obligations hereunder, both express and implied, lessor shall notify lessee in writing, setting out specifically in what respects lessee has breached this contract. Lessee shall then have sixty (60) days after receipt of said notice within which to meet or commence to meet all or any part of the breaches alleged by lessor. The service of said notice shall be precedent to the bringing of any action by lessor on said lease for any cause, and no such action shall be brought until the lapse of sixty (60) days after service of such notice on lessee.

On February 6, 2019, an amendment to the Lease Agreement kept provision (A) of the Lease Agreement, deleted provision (D), and modified provisions (B) and (C) as follows:

(B) Lessee does hereby agree to commence drilling operations on the First (1^st) and Second (2^nd well) Test Wells before December 1, 2019, should Lessee fail to begin drilling efforts of the First (1^st) and/or the Second (2^nd) Test Wells, before December 1, 2019, Lessee shall pay to Lessors herein a sum of $100,000.00 as a penalty for each Test Well that Lessee fails to begin drilling efforts on as per the provisions of this section 19[] herein; which penalty amount shall be divided among the Lessors in proportion to the actual Net Mineral Interest ownership of each Lessor to the total acreage Leased herein.

(C) Lessee does hereby agree to commence drilling operations on an additional (3^rd well) Test Well within 36 months of the Effective Date of the Original Lease should Lessee fail to begin drilling efforts of the Test well thereon, Lessee shall pay to Lessors herein a sum of $100,000.00 as a penalty; which penalty amount shall be divided among the Lessors in proportion to the actual Net Mineral Interest ownership of each Lessor to the total acreage Leased herein.

As a result, the amendment gave Lessees two years to drill both the first and second wells.

According to Cherry's affidavit, he told Lessors before the lease was executed that he would "solicit funds from individual investors, as needed, to fund the drilling program." "After the . . . [Lease Agreement] was executed, gas prices dropped and were too low to drill an economical well on the [Property], or Matterhorn's other leases in the Haynesville area. Therefore, Matterhorn decided to exercise its right to sell all of its lease interests, including the . . . lease" covered by the Lease Agreement.

On September 25, 2019, before the Lease Agreement's term expired and before any penalties under the Lease Agreement were due, Lessors sued Matterhorn Energy, LLC, and its president, Cherry (collectively Matterhorn), for common-law fraud, fraud by non-disclosure, negligent misrepresentation, and breach of contract, among other things, and sought both damages and recission of the Lease Agreement. The gravamen of Lessors' complaints focused on the lack of drilling and development activity by Matterhorn. On September 26, Lessors filed a notice of lis pendens that provided notice of the lawsuit, said that Lessors sought recission of the Lease Agreement, and claimed, "The action is for a declaration that the Leases purporting to encumber the Property are void as a matter of law and are of no force and effect on the Property."

Because the lawsuit was filed before the expiration of the lease term, Lessees counterclaimed for breach of the Lease Agreement and its notice provisions, for anticipatory breach, and for equitable estoppel on Lessors' alleged representations that they would give Matterhorn three years to develop and market oil, gas, and other minerals on the Property.Lessees argued that force majeure provisions absolved them of liability because of unforeseen complications like the inability to obtain pipelines and other methods to transport oil, gas, and other minerals. For example, Lessees alleged that Lessors were informed that Matterhorn had to obtain a commitment from a mid-stream high pressure gas purchaser to lay a pipeline across the Property to secure a market for the gas. Because the earliest commitment Lessees could secure was in 2020, they informed Lessors that there was no market for the gas and that an event of force majeure occurred that excused them from the continuous drilling provision. Lessees answered that Cherry could not be sued in his individual capacity and included a statutory claim to expunge Lessors' lis pendens as wrongful pursuant to Chapter 12 of the Texas Property Code.

Lessees also included facts and counterclaims that triggered Lessors' TCPA dismissal motion. Their counterpetition stated that Matterhorn contracted with EnergyNet.com, LLC (EnergyNet), on September 9, 2019 (the Sales Agreement), to market its production and put up its interest in the lease for sale when Lessors allegedly became aware of a proposed sale and attempted to intervene by filing a lawsuit and a notice of lis pendens. Lessees claimed that Howard had made...