Tuesday, December 21, 2010
It's Settled: Court Of Appeals of Texas Finds Burden Is On Party Raising Rule 408 To Prove Settlement Negotiations
Evidence of (1) furnishing or offering or promising to furnish or (2) accepting or offering or promising to accept, a valuable consideration in compromising or attempting to compromise a claim which was disputed as to either validity or amount is not admissible to prove liability for or invalidity of the claim or its amount. Evidence of conduct or statements made in compromise negotiations is likewise not admissible. This rule does not require the exclusion of any evidence otherwise discoverable merely because it is presented in the course of compromise negotiations. This rule also does not require exclusion when the evidence is offered for another purpose, such as proving bias or prejudice or interest of a witness or a party, negativing a contention of undue delay, or proving an effort to obstruct a criminal investigation or prosecution.
As the recent opinion of the Court of Appeals of Texas, Fort Worth, in Vinson Minerals, Ltd. v. XTO Energy, Inc., 2010 WL 6118649 (Tex.App.-Fort Worth 2010), makes clear, however, the burden is on the party objecting to evidence under Rule 408 to show that it was a part of settlement negotiations and not offered for another purpose.
XTO Energy involved oil and gas leases that
originated in 2001 between Johnny Vinson, Vinson Minerals, Ltd., and others as lessors and Threshold Development Company as lessee. Threshold is a Vinson family company in that the owners, officers, and directors are members of the Vinson family. In 2003, Antero Resources Corporation bought Threshold's interests as lessee in the leases for $25 million.
In early 2005, the Vinsons began disputing Antero's calculations of royalty payments to the Vinsons from 2003 to 2005 and commenced an audit of Antero's accounting records of royalties. By letter of January 25, 2005, the Vinsons informed Antero that they were "waiting on requested information to complete [the] audit of production and royalty payments" and that the Vinsons' "potential claim" for royalty underpayment was $2 million. In March 2005, the Vinsons provided Antero with audit exceptions listing, among other complaints, improper deductions from royalty payments for compression, fuel, treating, and transportation charges by an "affiliated" pipeline owned by Antero "to be determined" but "estimated...to be in the range of $600,000."
The relationship between the parties deteriorated as the Vinsons raised other issues, including claims for reassignment of undeveloped acreage, drill site issues, and road and surface damage issues. On July 11, 2005, the Vinsons filed suit against Antero for numerous claims-including trespass, breach of contract, incorrect calculation and underpayment of royalties and other production costs, surface damages, and failure to develop-seeking an unspecified amount of damages and attorney fees.
In the meantime, two months before the Vinsons filed suit, XTO acquired Antero and the leases.
On March 16, 2006, XTO's counsel wrote the Vinsons' counsel, summarizing the current status of the ongoing settlement discussions on all issues and proposing that XTO recalculate all prior royalties under a revised methodology and format and "in due course, make a retroactive payment to bring all prior periods up to the new payment methodology." The letter requested that the Vinsons present a settlement demand "to resolve all issues in the case" as follows:
Please discuss these issues with your client and present XTO a settlement demand to resolve all issues in the case. If we have misunderstood your pleading in any respect, or if you would need to discuss any of these issues prior to submitting a demand, please call me at your convenience.
The Vinsons' attorney responded with a three page letter dated May 12, 2006, which closed with the following paragraph:
Considering each of these factors, [the Vinsons] conservatively believe [ ]this case has a value greatly in excess of $30,000,000. Recognizing the risks of litigation and the costs associated therewith, I have been authorized to settle all claims in exchange for a payment in the amount of $9,500,000 and XTO bringing itself into compliance with the Barnett Shale Project Agreement by signing JOA's correctly identifying Threshold's before and after payout working interests after XTO acquired Sinclair Oil Corporation's interest in said agreement, in the same manner as all previously executed JOA's.
XTO later filed a motion to exclude this May 12th letter under Texas Rule of Evidence 408, and the trial court granted the motion. The Vinsons later appealed, claiming, inter alia, that this "letter was not a compromise settlement demand but was clearly a "Demand Letter" notifying XTO of its obligation to pay an amount that XTO knew it owed but was withholding until all issues could be resolved."
The Court of Appeals of Texas, Fort Worth, disagreed, first noting that "[t]he burden is on the party objecting to evidence under rule 408 to show that it was a part of settlement negotiations and not offered for another purpose." The court then agreed with the trial court, concluding that
The May 12 letter speaks for itself. It begins with a discussion of settlement, states that it is in response to XTO's request for a settlement demand, clearly and unambiguously concludes with a settlement demand for "all claims," and was written during the parties' ongoing negotiations for settlement of an existing lawsuit that included the Vinsons' claim for underpayment of royalties. The May 12 letter also concludes by conceding a right to which the Vinsons believe they are entitled.