EPEX » Topics » Item 1 - Legal Proceedings

This excerpt taken from the EPEX 10-Q filed May 7, 2009.
Item 1 - Legal Proceedings

 

From time to time we are a party to various legal proceedings arising in the ordinary course of our business.  While the outcome of lawsuits cannot be predicted with certainty, we are not currently a party to any proceeding that we believe, if determined in a manner adverse to us, could have a material adverse effect on our financial condition, results of operations or cash flows, except as set forth below.

 

David Blake, et al. v. Edge Petroleum Corporation — On September 19, 2005, David Blake and David Blake, Trustee of the David and Nita Blake 1992 Children’s Trust, filed suit against us in state district court in Goliad County, Texas alleging breach of contract for failure and refusal to transfer overriding royalty interests to plaintiffs in several leases in the Nita and Austin prospects in Goliad County, Texas and failure and refusal to pay monies to Blake pursuant to such overriding royalty interests for wells completed on the leases. The plaintiffs seek relief of (1) specific performance of the alleged agreement, including granting of overriding royalty interests by us to Blake; (2) monetary damages for failure to grant the overriding royalty interests; (3) exemplary damages for his claims of business disparagement and slander; (4) monetary damages for tortious interference; and (5) attorneys’ fees and court costs. Venue of the case was transferred to Harris County, Texas by agreement of the litigants. Our subsidiaries, Edge Petroleum Exploration Company, Edge Petroleum Operating Company and Edge Petroleum Production Company, were also added as defendants. We filed a counterclaim against plaintiff and joined various related entities that are controlled by Blake, seeking lease interests in which we contend it had been wrongfully denied participation and also claiming that proprietary information was misappropriated. The parties have moved for summary judgment on each other’s claims and counterclaims, which the trial court has denied as to both sides.  In November 2007, we filed a separate motion for summary judgment based on the statute of frauds and; the court has not yet ruled on this separate motion. In June 2008, the Plaintiffs filed a Sixth Amended Petition conditionally adding claims for certain prospects that had been previously settled by means of a Compromise and Settlement Agreement (the “Settlement Agreement”), entered in settlement of prior litigation among some of the parties, but only to the extent that rescission of the prior Settlement Agreement was being sought by us. We are not seeking rescission of the prior Settlement Agreement and responded accordingly in our Fourth Amended Original Counterclaim and Claims Against Additional Parties filed on October 16, 2008.  On October 17, 2008, the plaintiffs filed their Seventh Amended Petition adding a claim for breach of the Settlement Agreement. The trial, originally scheduled to begin September 10, 2007, has been reset several times, most recently for December 8, 2008, and will be reset in 2009 by the newly-elected judge of the 215th Judicial District Court in Harris County.  In December 2008, one of the Blake counter-defendants filed a motion to arbitrate, which motion has not been heard by the court.  Extensive written discovery has occurred in the case, and the parties are engaging in fact and expert witness depositions. We have responded and will continue to respond aggressively to this lawsuit, and believe we have meritorious defenses and counterclaims.

 

Mary Jane Carol Trahan Champagne, et al. v. Edge Petroleum Exploration Company, et al. — On September 19, 2008 we were sued in state district court in Vermilion Parish, Louisiana by Mary Jane Trahan, Carol Trahan Champagne and 29 other plaintiffs alleging breach of obligations under mineral leases in Vermilion Parish regarding the Trahan No. 1 well and the Trahan No. 3 well (MT RC SUB reservoir). Plaintiffs are seeking unspecified damages for lost revenue, lost royalties and devaluation of property interest sustained as a result of the defendants’ alleged negligent and improper drilling operations on the Trahan No. 1 well and the Trahan No. 3 well, including alleged failure to prevent underground water from flooding and destroying plaintiffs’ portion of the reservoir beneath plaintiffs’ property.  Plaintiffs also allege defendants failed to “block squeeze” sections of the Trahan No. 3 well as would a prudent operator. This lawsuit, previously removed from the state court to the federal district court for the Western District of Louisiana, Lafayette Division, has been remanded to state court. Our insurance carrier has retained counsel to represent us in this matter. We have not established a reserve with respect to this claim and it is not possible to determine what, if any, our ultimate exposure might be in this matter. We intend to vigorously defend ourselves in this lawsuit.

 

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John Lemke, et al. v. Edge Petroleum Corporation - In October 2008, we were sued by alleged assignees of Continental Seismic over an alleged contract to receive a royalty of two-tenths of one percent in certain alleged areas developed for oil and gas in South Louisiana. We have filed an answer generally denying the allegations and raising the defenses of the statute of limitations bar and laches. No discovery has been served. The court recently entered a docket control order which establishes a discovery timetable and a trial date of November 30, 2009. We have not established a reserve with respect to this claim and have not determined what, if any, our ultimate exposure might be in this matter.  We will respond aggressively to this lawsuit, and believe we have meritorious defenses.

 

 Item 1A — Risk Factors

 

In addition to the other information and risk factors set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our 2008 Annual Report on Form 10-K, which could materially affect our business, financial condition or future results. The risks described in our 2008 Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

 

Item 2 - Unregistered Sale of Equity Securities and Use of Proceeds

 

None

 

 

 

Item 3 - Defaults Upon Senior Securities

 

 

The Company's Board of Directors did not declare a dividend on the Company’s 5.75% Series A cumulative convertible perpetual preferred stock ("Convertible Preferred Stock") for the fourth quarter of 2008 or the first quarter of 2009, which dividends would have been paid on January 15 and April 15, 2009. Therefore, as of May 7, 2009, the Company has Convertible Preferred Stock dividends in arrears that total approximately $4.1 million.

 

 

 

 

 

Item 4 - Submission of Matters to a Vote of Security Holders

 

None

 

 

 

Item 5 - Other Information

 

None

 

This excerpt taken from the EPEX 10-Q filed Aug 11, 2008.
Item 1 - Legal Proceedings

 

From time to time we are a party to various legal proceedings arising in the ordinary course of our business.  While the outcome of lawsuits cannot be predicted with certainty, we are not currently a party to any proceeding that we believe, if determined in a manner adverse to us, could have a material adverse effect on our financial condition, results of operations or cash flows, except as set forth below.

 

David Blake, et al. v. Edge Petroleum Corporation — On September 19, 2005, David Blake and David Blake, Trustee of the David and Nita Blake 1992 Children’s Trust filed suit against us in state district court in Goliad County, Texas alleging breach of contract for failure and refusal to transfer overriding royalty interests to plaintiffs in several leases in the Nita and Austin prospects in Goliad County, Texas and failure and refusal to pay monies to Blake pursuant to such overriding royalty interests for wells completed on the leases. The plaintiffs seek relief of (1) specific performance of the alleged agreement, including granting of overriding royalty interests by us to Blake; (2) monetary damages for failure to grant the overriding royalty interests; (3) exemplary damages for his claims of business disparagement and slander; (4) monetary damages for tortious interference; and (5) attorneys’ fees and court costs. Venue of the case was transferred to Harris County, Texas by agreement of the litigants.  We filed a counterclaim against Plaintiff Blake and joined various related entities that are controlled by Blake, seeking lease interests in which we contend we had been wrongfully denied participation. The parties have moved for summary judgment on each others’ claims and counterclaims, which the trial court has denied as to both sides.  In November 2007, we filed a separate motion for summary judgment based on the statute of frauds; the court has not ruled on this separate motion.  The trial, originally scheduled to begin September 10, 2007, and reset for March 3, 2008 and August 20, 2008, has been continued until November 17, 2008. Extensive written discovery has occurred in the case, and the parties are scheduling and commencing to take fact and expert witness depositions.  In June 2008, the Blake Plaintiffs filed a Sixth Amended Petition conditionally adding claims for certain prospects that had been settled, but only to the extent that rescission of the prior settlement and release was being sought by us. We are not seeking rescission of the prior settlement and release and will respond appropriately to this amended petition. We have responded aggressively to this lawsuit, and believe we have meritorious defenses and counterclaims.

 

Diana Reyes, et al. v. Edge Petroleum Operating Company, Inc., et al.  On January 8, 2008, we were served with a wrongful death action filed in Hidalgo County, Texas.  Plaintiffs allege negligence and gross negligence resulting from a fatality accident at the Slick State B-12 well site, on our Bloomberg Flores lease in Starr County, Texas.  The plaintiffs are the widow and minor children of Mr. Reyes, who was killed in a one-car fatality accident on August 5, 2007.   Mr. Reyes was an employee of Payzone Logging, a vendor of ours. No specific amount of damages has been alleged to date; plaintiffs are asserting damages from loss of companionship, pecuniary loss, pain and mental anguish, loss of inheritance and funeral and burial expenses.  We may have insurance coverage for all or part of this claim.  Our insurance carrier has retained local counsel to represent us in this matter.  We filed an answer on January 30, 2008 denying plaintiffs’ allegations and asserting defenses and trial has been set for February 16, 2009.  We have not established a reserve with respect to this claim and it is not possible to determine what, if any, our ultimate exposure might be in this matter.  We will continue to respond aggressively to this lawsuit, and believe that we have meritorious defenses.

 

Lexington Insurance Company v. Edge Petroleum Exploration Company, et al. - On March 13, 2008, Lexington Insurance Company (“Lexington”) filed a declaratory judgment action in the 125th Judicial District Court of Harris County, Texas.  Lexington seeks a judgment that it is not obligated to pay any claims of ours and the Sfondrini Partnerships (as defined below) in connection with a consolidated suit that we and the Sfondrini Partnerships settled with the all of the plaintiffs in 2007.  The suit that was settled, Wade and Joyce Montet, et al., v. Edge Petroleum Corp of Texas, et al., consolidated with Rolland L. Broussard, et al., v. Edge Petroleum Corp of Texas, et al., and the settlement thereof, is described in detail in “Item 3. Legal Proceedings” of our Annual Report on Form 10-K for the year ended December 31, 2007. In general, the action was a consolidated suit by mineral/royalty owners under two wells, who claimed that the third party operator of the wells had failed to “block squeeze” the sections of one of the wells, as a prudent operator, according to their allegations, would have done, to protect the gas reservoir from being flooded with water from adjacent underground formations, and was negligent in

 

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not creating a field-wide unit to protect their interests.  Along with the Sfondrini Partnerships, we were defendants in the suit as working interest owners in the wells, owning 2.8% and 14.7%, respectively, at the time of the alleged acts or omissions.  In the case of the settlements with some, but not all, of the plaintiffs, two other insurers covered the settlement amounts in exchange for mutual releases. We and the Sfondrini Partnerships bore the costs of the settlements with the remaining plaintiffs in accordance with their proportionate interests.  The Sfondrini Partnerships are partnerships that are directly or indirectly controlled by John Sfondrini, a director of ours.  Vincent Andrews, also a director of ours, owns a minority interest in the corporate general partner one of the partnerships.

 

Lexington asserts that it is not obligated to pay any claims of ours and the Sfondrini Partnerships under its commercial, general liability insurance policy as related to the lawsuit that was settled because there was no “occurrence,” under the terms of their policy, of physical injury to or destruction of tangible property and other reasons.  Our position is that the damages to the reservoir and attendant losses incurred by the defendants were losses covered by Lexington’s policy, for which Lexington is legally obligated to pay.  By agreement of the parties, an answer is due 30 days from notice of termination of settlement discussions.  Because we have already settled the underlying claims and have not recognized any amount for possible future recoveries against Lexington, we do not, in any event, expect the declaratory judgment action by Lexington to have a material adverse affect on us.

 

        In June 2008, we and the Sfondrini Partnerships reached a settlement in principle with Lexington pursuant to which Lexington would pay us and the Sfondrini Partnerships $75,000 (proportionate to their interests in the underlying mineral leases that were the subject of the prior action) in return for a complete release.

 

This excerpt taken from the EPEX 10-Q filed May 12, 2008.
Item 1 - Legal Proceedings

 

From time to time we are a party to various legal proceedings arising in the ordinary course of our business.  While the outcome of lawsuits cannot be predicted with certainty, we are not currently a party to any proceeding that we believe, if determined in a manner adverse to us, could have a material adverse effect on our financial condition, results of operations or cash flows, except as set forth below.

 

David Blake, et al. v. Edge Petroleum Corporation – On September 19, 2005, David Blake and David Blake, Trustee of the David and Nita Blake 1992 Children’s Trust filed suit against us in state district court in Goliad County, Texas alleging breach of contract for failure and refusal to transfer overriding royalty interests to plaintiffs in several leases in Goliad County, Texas and failure and refusal to pay monies to Blake pursuant to such overriding royalty interests for wells completed on the leases. The plaintiffs seek relief of (1) specific performance of the alleged agreement, including granting of overriding royalty interests by the Company to Blake; (2) monetary damages for failure to grant the overriding royalty interests; (3) exemplary damages for his claims of business disparagement and slander; (4) monetary damages for tortuous interference; and (5) attorneys’ fees and court costs. Venue of the case was transferred to Harris County, Texas by agreement of the litigants.  We have served plaintiffs with discovery and have filed a counterclaim and an amended counterclaim joining various related entities that are controlled by plaintiffs.  In addition, plaintiffs have filed an amended complaint alleging claims of slander of title and tortuous interference related to its alleged right to receive an overriding royalty interest from a third party.  Plaintiffs currently have on file an amended motion for summary judgment, to which we have filed a response.  In addition, we have filed a motion for summary judgment on the plaintiffs’ case.  In December 2006, the court denied our motion for summary judgment.  The court has not ruled on Blake’s motion.  In November 2007, we filed a separate motion for summary judgment based on the statute of frauds; the court has not ruled on this separate motion. The trial, originally scheduled to begin September 10, 2007, and reset for March 3, 2008, has been continued until August 20, 2008.  Discovery in the case has commenced and is continuing.  We have responded aggressively to this lawsuit, and believe we have meritorious defenses and counterclaims.

 

Diana Reyes, et al. v. Edge Petroleum Operating Company, Inc., et al.  On January 8, 2008, we were served with a wrongful death action filed in Hidalgo County, Texas.  Plaintiffs allege negligence and gross negligence resulting from a fatality accident at the State B-12 well site, on our Bloomberg Flores lease in Starr County, Texas.  The plaintiffs are the widow and minor children of Mr. Reyes, who was killed in a one-car fatality accident on August 5, 2007.   Mr. Reyes was an employee of our vendor, Payzone Logging.  No specific amount of damages has been alleged to date; plaintiffs are asserting damages from loss of companionship, pecuniary loss, pain and mental anguish, loss of inheritance and funeral and burial expenses.  We may have insurance coverage for all or part of this claim.  Our insurance carrier has retained local counsel to represent us in this matter.  We filed an answer on January 30, 2008 denying plaintiffs’ allegations and asserting defenses and trial has been set for February 16, 2009.  We have not established a reserve with respect to this claim and it is not possible to determine what, if any, our ultimate exposure might be in this matter.  We will continue to respond aggressively to this lawsuit, and believe we have meritorious defenses.

 

Lexington Insurance Company v. Edge Petroleum Exploration Company, et al. - On March 13, 2008, Lexington Insurance Company (“Lexington”) filed a declaratory judgment action in the 125th Judicial District Court of Harris County, Texas.  Lexington seeks a judgment that it is not obligated to pay any of our  claims nor those of the Sfondrini Partnerships (as defined below) in connection with a consolidated suit that we and the Sfondrini Partnerships settled with the all of the plaintiffs in 2007.  The suit that was settled, Wade and Joyce Montet, et al., v. Edge Petroleum Corp of Texas, et al., consolidated with Rolland L. Broussard, et al., v. Edge Petroleum Corp of Texas, et al., and the settlement thereof, is described in detail in Item 3. Legal Proceedings of our Annual Report on Form 10-K for the year ended December 31, 2007.  In general, the action was a consolidated suit by mineral/royalty owners under two wells, who claimed that the third party operator of the wells had failed to “block squeeze” the sections of one of the wells, as a prudent operator, according to their allegations, would have done, to protect the gas reservoir from being flooded with water from adjacent underground formations, and was negligent in not creating a field-wide unit to protect their interests. We, along with the Sfondrini Partnerships, were defendants in the suit as

 

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working interest owners in the wells, owning 2.8% and 14.7%, respectively, at the time of the alleged acts or omissions.  In the case of the settlements with some, but not all, of the plaintiffs, two other insurers covered the settlement amounts in exchange for mutual releases. We, along with the Sfondrini Partnerships, bore the costs of the settlements with the remaining plaintiffs in accordance with their proportionate interests.  The Sfondrini Partnerships are partnerships that are directly or indirectly controlled by John Sfondrini, a director of ours.  Vincent Andrews, also a director of ours, owns a minority interest in the corporate general partner one of the partnerships.

 

Lexington asserts that it is not obligated to pay any claims of ours or the Sfondrini Partnerships under its commercial, general liability insurance policy as related to the lawsuit that was settled because there was no “occurrence,” under the terms of their policy, of physical injury to or destruction of tangible property and other reasons.  Our position is that the damages to the reservoir and attendant losses incurred by the defendants were losses covered by Lexington’s policy, for which Lexington is legally obligated to pay.  By agreement of the parties, an answer is due 30 days from notice of termination of settlement discussions.  Because we have already settled the underlying claims and have not recognized any amount for possible future recoveries against Lexington, we do not, in any event, expect the declaratory judgment action by Lexington to have a material adverse affect on us.

 

 Item 1A - Risk Factors

 

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our 2007 Annual Report on Form 10-K, which could materially affect our business, financial condition or future results.  The risks described in our 2007 Annual Report on Form 10-K are not the only risks facing our Company.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

 

Item 2 - Unregistered Sale of Equity Securities and Use of Proceeds

 

None

Item 3 - Defaults Upon Senior Securities

 

None

Item 4 - Submission of Matters to a Vote of Security Holders

 

None

Item 5 - Other Information

 

None

 

These excerpts taken from the EPEX 10-K filed Mar 13, 2008.

ITEM 3.    LEGAL PROCEEDINGS

        From time to time we are a party to various legal proceedings arising in the ordinary course of our business. While the outcome of lawsuits cannot be predicted with certainty, we are not currently a party to any proceeding that we believe, if determined in a manner adverse to us, could have a material adverse effect on our financial condition, results of operations or cash flows, except as set forth below.

        Wade and Joyce Montet, et al., v. Edge Petroleum Corp of Texas, et al., consolidated with Rolland L. Broussard, et al., v. Edge Petroleum Corp of Texas, et al.—This was a consolidated suit, filed in state court in Vermilion Parish, Louisiana in September 2003. Plaintiffs were mineral/royalty owners under the Norcen-Broussard No. 1 and 2 wells, Marg Tex Reservoir C, Sand Unit A (Edge's old Bayou Vermilion Prospect). They claimed the operator at the time, Norcen Explorer, now Anadarko E&P Company ("Anadarko"), failed to "block squeeze" the sections of the No. 2 well, as a prudent operator, according to their allegations, would have done, to protect the gas reservoir from being flooded with water from adjacent underground formations. Plaintiffs further alleged Norcen Explorer was negligent in not creating a field-wide unit to protect their interests. The allegations related to actions taken beginning in the early 1990's. Plaintiffs named us and other working interest owners in the leases as defendants, including Norcen Explorer's successors in interest, Anadarko. Plaintiffs originally sought damages, including interest, as high as $63 million for lost royalties and damages due to alleged devaluation of their mineral and property interests, plus attorneys' fees. Of the 18.75% after-payout working interest that was originally reserved in the leases, we owned a 2.8% working interest at the time of the alleged acts or omissions. On September 6, 2005, we filed a third-party demand to join the other working interest owners who hold the remainder of the 18.75% working interest as third-party defendants in this case. These third-parties consist, for the most part, of partnerships that are directly or indirectly controlled by John Sfondrini, a director of Edge, and hold an aggregate 14.7% working interest (the "Sfondrini Partnerships"). Vincent Andrews, also a director of Edge, owns a minority interest in the corporate general partner of one of the partnerships. The Sfondrini Partnerships consist of (1) Edge Group Partnership, a general partnership composed of limited partnerships of which Mr. Sfondrini and a company controlled by Mr. Sfondrini are general partners; (2) (A) Edge Option I Limited Partnership, (B) Edge Option II Limited Partnership and (C) Edge Option III Limited Partnership, limited partnerships of which Mr. Sfondrini and a company controlled by Mr. Sfondrini are general partners; and (3) BV Partners Limited Partnership, a limited partnership of which a company controlled by Messrs. Sfondrini and Andrews is general partner and of which Mr. Sfondrini is manager (and of which company Mr. Andrews is an officer). These partnerships were among the third party

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defendants that we have sought to join in the case, and these partnerships have for the most part filed answers denying any liability to us.

Broussard Plaintiff Settlement.

        On December 19, 2006, we, along with the other defendants in this suit, reached a settlement agreement with the Broussard Plaintiffs in full settlement of their 72% of the total claims made in this consolidated action. This settlement was finalized in January 2007. Our share of this settlement totaled approximately $208,000, which was recorded in December 2006, and the Sfondrini Partnerships' share totaled $1,109,759. The settlement with the Broussard Plaintiffs was finalized on February 1, 2007, and the defendants and the third-party defendants including the Sfondrini Partnerships were released from all claims by the Broussard Plaintiffs.

        The Sfondrini Partnerships did not have sufficient cash to fund their respective full portion of the settlement. Therefore, in order to facilitate the settlement, we purchased certain oil and gas properties from certain of the Sfondrini Partnerships, with the proceeds of such sale and purchase generally being directed to payment of the Broussard settlement, in full satisfaction of the Sfondrini Partnerships' share of such settlement. The oil and gas properties that we purchased from the Sfondrini Partnerships and their respective purchase prices are as follows:

    (1)
    100% of each of Edge Group Partnership's, Edge Option I Limited Partnership's, Edge Option II Limited Partnership's and Edge Option III Limited Partnership's interest in the Ilse Miller No. 2 Well and leases, Wharton County, Texas, for a total combined value of $51,243.

    (2)
    100% of each of Edge Group Partnership's, Edge Option I Limited Partnership's, Edge Option II Limited Partnership's and Edge Option III Limited Partnership's interest in the Wm Baas 2-16 No. 1 Well and leases, Monroe County, Alabama, for a total combined value of $14,407.

    (3)
    55.953% of Edge Group Partnership's interest in certain wells and leases in our Austin and Nita prospects, for a total value of $1,044,109.

        In the purchase and sale transaction between us and the Sfondrini Partnerships, BV Partners Limited Partnership, whose 2.48% share of the Broussard settlement amount was $186,000 (as determined by us and Mr. Sfondrini on behalf of the BV Partners Limited Partnership), did not sell any assets to us and did not have sufficient funds to satisfy its share of the settlement amount. In addition, the Edge Option I, II and III Limited Partnerships did not have sufficient assets to satisfy their respective .34%, .34% and 2.25% shares of the settlement amount, which we and Mr. Sfondrini determined to be $25,750, $25,750 and $169,102, respectively. The shortfall amounts of Edge Option I, II and III Limited Partnerships were, net of assets that they sold to us, determined by us and Mr. Sfondrini to be $24,333, $24,333 and $163,276, respectively. As a result, Edge Group Partnership sold additional properties (over the amount necessary to fund its portion of the settlement) to us at fair market value in an amount sufficient to allow it to have proceeds from such sale to fund BV Partners Limited Partnership's share of the settlement and the remaining shortfall amounts owed by Edge Option I, II and III. In return, BV Partners and Edge Option I, II and III contributed all of their interest in the Bayou Vermilion Prospect leases and the Trahan No. 3 well located thereon to Edge Group Partnership. The fair market value of these interests contributed to Edge Group by BV Partners Limited Partnership and Edge Option I, II and III were determined by us and Mr. Sfondrini on behalf of such partnerships to be $27,793, $3,847, $3,847 and $25,263, respectively.

        The valuations of the interests of the Sfondrini Partnerships purchased by us and the interests contributed to Edge Group Partnership by BV Partners and Edge Option I, II and III were made at an agreed value, using a PV10 model and assuming $7.50/MMBtu gas and $60/BBl oil, which we believed represented current pricing levels for oil and gas properties at the time, and were agreed to by us and Mr. Sfondrini, on behalf of the Sfondrini Partnerships.

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Montet Plaintiff Settlement.

        We and the other oil company defendants participated in a mediation regarding the remaining claims in this lawsuit with the Montet plaintiffs on May 10, 2007. All remaining claims were settled for a total agreed payment to the Montet plaintiffs of $3.5 million. Our and the Sfondrini Partnerships' share of the settlement amount were $118,333 and $502,917, respectively, for a total of $621,250, which amounts were paid by insurance. As part of the settlement, Mid-Continent Casualty Company and one other insurer agreed to cover and pay the full share of the Montet settlement amount attributable to us and the Sfondrini Partnerships in return for mutual releases under the policies involved and for a joint dismissal of all claims asserted by the parties in the suit for declaratory judgment filed by Mid-Continent against us and the Sfondrini Partnerships in federal district court in Houston. Also as part of the settlement, we reimbursed the Sfondrini Partnerships for certain attorneys' fees in the amount of $62,500. The settlement with the Montet plaintiffs was finalized in writing in June 2007, all defendants have paid their respective shares of the amounts owed, and the court entered an order to dismiss on August 3, 2007. A final judgment dismissing all claims with prejudice was filed on June 29, 2007 in the related Mid-Continent suit for declaratory judgment in federal district court in Houston.

        David Blake, et al. v. Edge Petroleum Corporation—On September 19, 2005, David Blake and David Blake, Trustee of the David and Nita Blake 1992 Children's Trust filed suit against us in state district court in Goliad County, Texas alleging breach of contract for failure and refusal to transfer overriding royalty interests to plaintiffs in several leases in Goliad County, Texas and failure and refusal to pay monies to Blake pursuant to such overriding royalty interests for wells completed on the leases. The plaintiffs seek relief of (1) specific performance of the alleged agreement, including granting of overriding royalty interests by the Company to Blake; (2) monetary damages for failure to grant the overriding royalty interests; (3) exemplary damages for his claims of business disparagement and slander; (4) monetary damages for tortuous interference; and (5) attorneys' fees and court costs. Venue of the case was transferred to Harris County, Texas by agreement of the litigants. We have served plaintiffs with discovery and have filed a counterclaim and an amended counterclaim joining various related entities that are controlled by plaintiffs. In addition, plaintiffs have filed an amended complaint alleging claims of slander of title and tortuous interference related to its alleged right to receive an overriding royalty interest from a third party. Plaintiffs currently have on file an amended motion for summary judgment, to which we have filed a response. In addition, we have filed a motion for summary judgment on the plaintiffs' case. In December 2006, the court denied our motion for summary judgment. The court has not ruled on Blake's motion. In November 2007, we filed a separate motion for summary judgment based on the statute of frauds; the court has not ruled on this separate motion. The trial, originally scheduled to begin September 10, 2007, and reset for March 3, 2008, has been continued until August 20, 2008. Discovery in the case has commenced and is continuing. We have responded aggressively to this lawsuit, and believe we have meritorious defenses and counterclaims.

        Diana Reyes, et al. v. Edge Petroleum Operating Company, Inc., et al.—On January 8, 2008, we were served with a wrongful death action filed in Hidalgo County, Texas. Plaintiffs allege negligence and gross negligence resulting from a fatality accident at the State B-12 well site, on our Bloomberg Flores lease in Starr County, Texas. The plaintiffs are the widow and minor children of Mr. Reyes, who was killed in a one-car fatality accident on August 5, 2007. Mr. Reyes was an employee of our vendor, Payzone Logging. No specific amount of damages has been alleged to date; plaintiffs are asserting damages from loss of companionship, pecuniary loss, pain and mental anguish, loss of inheritance and funeral and burial expenses. We may have insurance coverage for all or part of this claim. Our insurance carrier has retained counsel to represent us in this matter. We filed an answer on January 30, 2008 denying plaintiffs' allegations and asserting defenses. We have not established a reserve with respect to this claim and it is not possible to determine what, if any, our ultimate exposure might be in this matter. We will continue to respond aggressively to this lawsuit, and believe we have meritorious defenses.

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ITEM 3.    LEGAL PROCEEDINGS



        From time to time we are a party to various legal proceedings arising in the ordinary course of our business. While the outcome of lawsuits cannot be predicted
with certainty, we are not currently a party to any proceeding that we believe, if determined in a manner adverse to us, could have a material adverse effect on our financial condition, results of
operations or cash flows, except as set forth below.



        Wade and Joyce Montet, et al., v. Edge Petroleum Corp of Texas, et al., consolidated with Rolland L. Broussard, et al., v. Edge Petroleum Corp of
Texas, et al
.
—This was a consolidated suit, filed in state court in Vermilion Parish, Louisiana in September 2003. Plaintiffs were mineral/royalty
owners under the Norcen-Broussard No. 1 and 2 wells, Marg Tex Reservoir C, Sand Unit A (Edge's old Bayou Vermilion Prospect). They claimed the operator at the time, Norcen Explorer, now
Anadarko E&P Company ("Anadarko"), failed to "block squeeze" the sections of the No. 2 well, as a prudent operator, according to their allegations, would have done, to protect the gas reservoir
from being flooded with water from adjacent underground formations. Plaintiffs further alleged Norcen Explorer was negligent in not creating a field-wide unit to protect their interests.
The allegations related to actions taken beginning in the early 1990's. Plaintiffs named us and other working interest owners in the leases as defendants, including Norcen Explorer's successors in
interest, Anadarko. Plaintiffs originally sought damages, including interest, as high as $63 million for lost royalties and damages due to alleged devaluation of their mineral and property
interests, plus attorneys' fees. Of the 18.75% after-payout working interest that was originally reserved in the leases, we owned a 2.8% working interest at the time of the alleged acts or omissions.
On September 6, 2005, we filed a third-party demand to join the other working interest owners who hold the remainder of the 18.75% working interest as third-party defendants in this case. These
third-parties consist, for the most part, of partnerships that are directly or indirectly controlled by John Sfondrini, a director of Edge, and hold an aggregate 14.7% working interest (the "Sfondrini
Partnerships"). Vincent Andrews, also a director of Edge, owns a minority interest in the corporate general partner of one of the partnerships. The Sfondrini Partnerships consist of (1) Edge
Group Partnership, a general partnership composed of limited partnerships of which Mr. Sfondrini and a company controlled by Mr. Sfondrini are general partners; (2) (A) Edge
Option I Limited Partnership, (B) Edge Option II Limited Partnership and (C) Edge Option III Limited Partnership, limited partnerships of which Mr. Sfondrini and a company
controlled by Mr. Sfondrini are general partners; and (3) BV Partners Limited Partnership, a limited partnership of which a company controlled by Messrs. Sfondrini and Andrews is
general partner and of which Mr. Sfondrini is manager (and of which company Mr. Andrews is an officer). These partnerships were among the third party



34











defendants
that we have sought to join in the case, and these partnerships have for the most part filed answers denying any liability to us.



Broussard Plaintiff Settlement.



        On December 19, 2006, we, along with the other defendants in this suit, reached a settlement agreement with the Broussard Plaintiffs in full settlement of
their 72% of the total claims made in this consolidated action. This settlement was finalized in January 2007. Our share of this settlement totaled approximately $208,000, which was recorded in
December 2006, and the Sfondrini Partnerships' share totaled $1,109,759. The settlement with the Broussard Plaintiffs was finalized on February 1, 2007, and the defendants and the third-party
defendants including the Sfondrini Partnerships were released from all claims by the Broussard Plaintiffs.



        The
Sfondrini Partnerships did not have sufficient cash to fund their respective full portion of the settlement. Therefore, in order to facilitate the settlement, we purchased certain
oil and gas properties from certain of the Sfondrini Partnerships, with the proceeds of such sale and purchase generally being directed to payment of the Broussard settlement, in full satisfaction of
the Sfondrini Partnerships' share of such settlement. The oil and gas properties that we purchased from the Sfondrini Partnerships and their respective purchase prices are as follows:





    (1)
    100%
    of each of Edge Group Partnership's, Edge Option I Limited Partnership's, Edge Option II Limited Partnership's and Edge Option III Limited Partnership's interest in the Ilse
    Miller No. 2 Well and leases, Wharton County, Texas, for a total combined value of $51,243.


    (2)
    100%
    of each of Edge Group Partnership's, Edge Option I Limited Partnership's, Edge Option II Limited Partnership's and Edge Option III Limited Partnership's interest in the Wm Baas
    2-16 No. 1 Well and leases, Monroe County, Alabama, for a total combined value of $14,407.


    (3)
    55.953%
    of Edge Group Partnership's interest in certain wells and leases in our Austin and Nita prospects, for a total value of $1,044,109.



        In
the purchase and sale transaction between us and the Sfondrini Partnerships, BV Partners Limited Partnership, whose 2.48% share of the Broussard settlement amount was $186,000
(as determined by us and Mr. Sfondrini on behalf of the BV Partners Limited Partnership), did not sell any assets to us and did not have sufficient funds to satisfy its share of the
settlement amount. In addition, the Edge Option I, II and III Limited Partnerships did not have sufficient assets to satisfy their respective .34%, .34% and 2.25% shares of the settlement amount,
which we and Mr. Sfondrini determined to be $25,750, $25,750 and $169,102, respectively. The shortfall amounts of Edge Option I, II and III Limited Partnerships were, net of assets that they
sold to us, determined by us and Mr. Sfondrini to be $24,333, $24,333 and $163,276, respectively. As a result, Edge Group Partnership sold additional properties (over the amount necessary to
fund its portion of the settlement) to us at fair market value in an amount sufficient to allow it to have proceeds from such sale to fund BV Partners Limited Partnership's share of the
settlement and the remaining shortfall amounts owed by Edge Option I, II and III. In return, BV Partners and Edge Option I, II and III contributed all of their interest in the Bayou Vermilion
Prospect leases and the Trahan No. 3 well located thereon to Edge Group Partnership. The fair market value of these interests contributed to Edge Group by BV Partners Limited Partnership
and Edge Option I, II and III were determined by us and Mr. Sfondrini on behalf of such partnerships to be $27,793, $3,847, $3,847 and $25,263, respectively.



        The
valuations of the interests of the Sfondrini Partnerships purchased by us and the interests contributed to Edge Group Partnership by BV Partners and Edge Option I, II and III
were made at an agreed value, using a PV10 model and assuming $7.50/MMBtu gas and $60/BBl oil, which we believed
represented current pricing levels for oil and gas properties at the time, and were agreed to by us and Mr. Sfondrini, on behalf of the Sfondrini Partnerships.



35









Montet Plaintiff Settlement.



        We and the other oil company defendants participated in a mediation regarding the remaining claims in this lawsuit with the Montet plaintiffs on May 10,
2007. All remaining claims were settled for a total agreed payment to the Montet plaintiffs of $3.5 million. Our and the Sfondrini Partnerships' share of the settlement amount were $118,333 and
$502,917, respectively, for a total of $621,250, which amounts were paid by insurance. As part of the settlement, Mid-Continent Casualty Company and one other insurer agreed to cover and
pay the full share of the Montet settlement amount attributable to us and the Sfondrini Partnerships in return for mutual releases under the policies involved and for a joint dismissal of all claims
asserted by the parties in the suit for declaratory judgment filed by Mid-Continent against us and the Sfondrini Partnerships in federal district court in Houston. Also as part of the
settlement, we reimbursed the Sfondrini Partnerships for certain attorneys' fees in the amount of $62,500. The settlement with the Montet plaintiffs was finalized in writing in June 2007, all
defendants have paid their respective shares of the amounts owed, and the court entered an order to dismiss on August 3, 2007. A final judgment dismissing all claims with prejudice was filed on
June 29, 2007 in the related Mid-Continent suit for declaratory judgment in federal district court in Houston.



        David Blake, et al. v. Edge Petroleum Corporation—On September 19, 2005, David Blake and
David Blake, Trustee of the David and Nita Blake 1992 Children's Trust filed suit against us in state district court in Goliad County, Texas alleging breach of contract for failure and refusal to
transfer overriding royalty interests to plaintiffs in several leases in Goliad County, Texas and failure and refusal to pay monies to Blake pursuant to such overriding royalty interests for wells
completed on the leases. The plaintiffs seek relief of (1) specific performance of the alleged agreement, including granting of overriding royalty interests by the Company to Blake;
(2) monetary damages for failure to grant the overriding royalty interests; (3) exemplary damages for his claims of business disparagement and slander; (4) monetary damages for
tortuous interference; and (5) attorneys' fees and court costs. Venue of the case was transferred to Harris County, Texas by agreement of the litigants. We have served plaintiffs with discovery
and have filed a counterclaim and an amended counterclaim joining various related entities that are controlled by plaintiffs. In addition, plaintiffs have filed an amended complaint alleging claims of
slander of title and tortuous interference related to its alleged right to receive an overriding royalty interest from a third party. Plaintiffs currently have on file an amended motion for summary
judgment, to which we have filed a response. In addition, we have filed a motion for summary judgment on the plaintiffs' case. In December 2006, the court denied our motion for summary judgment. The
court has not ruled on Blake's motion. In November 2007, we filed a separate motion for summary judgment based on the statute of frauds; the court has not ruled on this separate motion. The trial,
originally scheduled to begin September 10, 2007, and reset for March 3, 2008, has
been continued until August 20, 2008. Discovery in the case has commenced and is continuing. We have responded aggressively to this lawsuit, and believe we have meritorious defenses and
counterclaims.



        Diana Reyes, et al. v. Edge Petroleum Operating Company, Inc., et al.—On January 8,
2008, we were served with a wrongful death action filed in Hidalgo County, Texas. Plaintiffs allege negligence and gross negligence resulting from a fatality accident at the State B-12
well site, on our Bloomberg Flores lease in Starr County, Texas. The plaintiffs are the widow and minor children of Mr. Reyes, who was killed in a one-car fatality accident on
August 5, 2007. Mr. Reyes was an employee of our vendor, Payzone Logging. No specific amount of damages has been alleged to date; plaintiffs are asserting damages from loss of
companionship, pecuniary loss, pain and mental anguish, loss of inheritance and funeral and burial expenses. We may have insurance coverage for all or part of this claim. Our insurance carrier has
retained counsel to represent us in this matter. We filed an answer on January 30, 2008 denying plaintiffs' allegations and asserting defenses. We have not established a reserve with respect to
this claim and it is not possible to determine what, if any, our ultimate exposure might be in this matter. We will continue to respond aggressively to this lawsuit, and believe we have meritorious
defenses.



36









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This excerpt taken from the EPEX 10-Q filed Nov 8, 2007.
Item 1 - Legal Proceedings

 

From time to time we are a party to various legal proceedings arising in the ordinary course of business. While the outcome of lawsuits cannot be predicted with certainty, we are not currently a party to any proceeding that we believe, if determined in a manner adverse to us, could have a material adverse effect on our financial condition, results of operations or cash flows, except as set forth below.

 

Wade and Joyce Montet, et al., v. Edge Petroleum Corp of Texas, et al., consolidated with Rolland L. Broussard, et al., v. Edge Petroleum Corp of Texas, et al. - This was a consolidated suit, filed in state court in Vermilion Parish, Louisiana in September 2003. Plaintiffs were mineral/royalty owners under the Norcen-Broussard No. 1 and 2 wells, Marg Tex Reservoir C, Sand Unit A (Edge’s old Bayou Vermilion Prospect).  They claimed the operator at the time, Norcen Explorer, now Anadarko E&P Company (“Anadarko”), failed to “block squeeze” the sections of the No. 2 well, as a prudent operator, according to their allegations, would have done, to protect the gas reservoir from being flooded with water from adjacent underground formations. Plaintiffs further alleged Norcen was negligent in not creating a field-wide unit to protect their interests.  The allegations related to actions taken beginning in the early 1990’s. Plaintiffs named us and other working interest owners in the leases as defendants, including Norcen Explorer’s successors in interest, Anadarko. Plaintiffs originally sought damages, including interest, as high as $63 million for lost royalties and damages due to alleged devaluation of their mineral and property interests, plus attorneys’ fees. Of the 18.75% after-payout working interest that was originally reserved in the leases, we owned a 2.8% working interest at the time of the alleged acts or omissions. On September 6, 2005, we filed a third-party demand to join the other working interest owners who hold the remainder of the 18.75% working interest as third-party defendants in this case. These third-parties consist, for the most part, of partnerships that are directly or indirectly controlled by John Sfondrini, a director of ours, and hold an aggregate 14.7% working interest (the “Sfondrini Partnerships”). Vincent Andrews, also a director of ours, owns a minority interest in the corporate general partner of one of the partnerships.  The Sfondrini Partnerships consist of (1) Edge Group Partnership, a general partnership composed of limited partnerships of which Mr. Sfondrini and a company controlled by Mr. Sfondrini are general partners; (2) (A) Edge Option I Limited Partnership, (B) Edge Option II Limited Partnership and (C) Edge Option III Limited Partnership, limited partnerships of which Mr. Sfondrini and a company controlled by Mr. Sfondrini are general partners; and (3) BV Partners Limited Partnership, a limited partnership of which a company controlled by Messrs. Sfondrini and Andrews is general partner and of which Mr. Sfondrini is manager (and of which company Mr. Andrews is an officer).  These partnerships were among the third party defendants that we have sought to join in the case, and these partnerships, for the most part, filed answers denying any liability to us.

 

On December 19, 2006, we, along with the other defendants in this suit, reached a settlement agreement with the Broussard Plaintiffs in full settlement of their 72% of the total claims made in this consolidated action. This settlement was finalized in January 2007.  Our share of this settlement totaled approximately $208,000, which was recorded in December 2006.  The settlement with the Broussard Plaintiffs was finalized on February 1, 2007, and the defendants and the third-party defendants including the Sfondrini Partnerships were released from all claims by the Broussard Plaintiffs.  A joint motion to dismiss was filed with the court on March 24, 2007.

 

We and the other oil company defendants participated in a mediation regarding the remaining claims in this lawsuit with the Montet plaintiffs on May 10, 2007. All remaining claims were settled for a total agreed payment to the Montet plaintiffs of $3.5 million. Ours and the Sfondrini Partnerships’ share of the settlement amount were $118,333 and $502,917, respectively, for a total of $621,250, which amounts were paid by insurance. As part of the settlement, Mid-Continent Casualty Company and one other insurer agreed to cover and pay the full share of the Montet settlement amount attributable to us and the Sfondrini Partnerships in return for mutual releases under the policies involved and for a joint dismissal of all claims asserted by the parties in the suit for declaratory judgment filed by Mid-Continent against us and the Sfondrini Partnerships in federal district court in Houston. Also as part of the settlement, we reimbursed the Sfondrini Partnerships for certain attorneys’ fees in the amount of $62,500. The settlement with the Montet plaintiffs was finalized in writing in June 2007, all defendants have paid their respective shares of the amounts owed, and the court entered an order to dismiss on August 3, 2007. A final judgment

 

51



 

dismissing all claims with prejudice was filed on June 29, 2007 in the related Mid-Continent suit for declaratory judgment in federal district court in Houston.

 

David Blake, et al. v. Edge Petroleum Corporation – On September 19, 2005, David Blake and David Blake, Trustee of the David and Nita Blake 1992 Children’s Trust filed suit against us in state district court in Goliad County, Texas alleging breach of contract for failure and refusal to transfer overriding royalty interests to plaintiffs in several leases in Goliad County, Texas and failure and refusal to pay monies to Blake pursuant to such overriding royalty interests for wells completed on the leases. The plaintiffs seek relief of (1) specific performance of the alleged agreement, including granting of overriding royalty interests by us to Blake; (2) monetary damages for failure to grant the overriding royalty interests; (3) exemplary damages for his claims of business disparagement and slander; (4) monetary damages for tortuous interference; and (5) attorneys’ fees and court costs. Venue of the case was transferred to Harris County, Texas by agreement of the litigants.  We have served plaintiffs with discovery and have filed a counterclaim and an amended counterclaim joining various related entities that are controlled by plaintiffs.  In addition, plaintiffs have filed an amended complaint alleging claims of slander of title and tortuous interference related to its alleged right to receive an overriding royalty interest from a third party.  Plaintiffs currently have on file an amended motion for summary judgment, to which we have filed a response.  In addition, we have filed a motion for summary judgment on the plaintiffs’ case.  In December 2006, the court denied our motion for summary judgment.  The court has not ruled on Blake’s motion.  The trial was scheduled to begin September 10, 2007, but has been passed and the new trial has been set for March 3, 2008.  Discovery in the case has commenced and is continuing. We have responded aggressively to this lawsuit, and believe we have meritorious defenses and counterclaims.

 

This excerpt taken from the EPEX 10-Q filed May 9, 2007.
Item 1 - Legal Proceedings

From time to time we are a party to various legal proceedings arising in the ordinary course of business.  While the outcome of lawsuits cannot be predicted with certainty, we are not currently a party to any proceeding that we believe, if determined in a manner adverse to the Company, could have a material adverse effect on our financial condition, results of operations or cash flows, except as set forth below.

Wade and Joyce Montet, et al., v. Edge Petroleum Corp of Texas, et al., consolidated with Rolland L. Broussard, et al., v. Edge Petroleum Corp of Texas, et al. - This is a consolidated suit, filed in state court in Vermilion Parish, Louisiana in September 2003. Plaintiffs are mineral/royalty owners under the Norcen-Broussard No. 1 and 2 wells, Marg Tex Reservoir C, Sand Unit A (Edge’s old Bayou Vermilion Prospect).  They claim the operator at the time, Norcen Explorer, now Anadarko E&P Company (“Anadarko”), failed to “block squeeze” the sections of the No. 2 well, as a prudent operator, according to their allegations, would have done, to protect the gas reservoir from being flooded with water from adjacent underground formations. Plaintiffs further allege Norcen was negligent in not creating a field-wide unit to protect their interests.  The allegations relate to actions taken beginning in the early 1990’s. Plaintiffs have named us and other working interest owners in the leases as defendants, including Norcen Explorer’s successors in interest, Anadarko. Plaintiffs originally sought unspecified damages for lost royalties and damages due to alleged devaluation of their mineral and property interests, plus interest and attorneys’ fees. In early 2005, we filed a motion for summary judgment in the case asserting, among other defenses, that:  (i) there has been no breach of contract, (ii) there is no express or implied duty imposed on us to block squeeze the well or form a field-wide unit, (iii) the units were properly formed by the Conservation Commissioner in accordance with the statutory scheme in Louisiana, (iv) plaintiffs’ claims are barred by limitations, and (v) other defenses. Along with the other defendants, we also filed a special peremptory challenge of no cause of action under the leases and the Louisiana Mineral Code for failure to exhaust administrative remedies and due to lack of a demand. In May and June 2005, the court ruled against us on the motion for summary judgment and the peremptory challenges. Of the 18.75% after-payout working interest that was originally reserved in the leases, we owned a 2.8% working interest at the time of the alleged acts or omissions. On September 6, 2005, we filed a third-party demand to join the other working interest owners who hold the remainder of the 18.75% working interest as third-party defendants in this case. These third-parties consist, for the most part, of partnerships that are directly or indirectly controlled by John Sfondrini, a director of Edge, and hold an aggregate 14.7% working interest (the “Sfondrini Partnerships”). Vincent Andrews, also a director of Edge, owns a minority interest in the corporate general partner of one of the partnerships.  The Sfondrini Partnerships consist of (1) Edge Group Partnership, a general partnership composed of limited partnerships of which Mr. Sfondrini and a company controlled by Mr. Sfondrini are general partners; (2) (A) Edge Option I Limited Partnership, (B) Edge Option II Limited Partnership and (C) Edge Option III Limited Partnership, limited partnerships of which Mr. Sfondrini and a company controlled by Mr. Sfondrini are general partners; and (3) BV Partners Limited Partnership, a limited partnership of which a company controlled by Messrs. Sfondrini and Andrews is general partner and of which Mr. Sfondrini is manager (and of which company Mr. Andrews is an officer).  These partnerships were among the third party defendants that we have sought to join in the case, and these partnerships have for the most part filed answers denying any liability to the Company. We participated for our 2.8% share of the well costs and revenues for the Broussard No. 2 well, as did the other defendants for their share, including the third-party defendant partnerships who participated for 14.7%. We strongly believe the parties should only be liable for their proportionate share of any damages awarded, should a finding of liability occur in the case. We intend to vigorously contest the plaintiffs’ claims.

As of the date of this report, it is not possible to determine what, if any, our ultimate exposure might be in this matter. Prior to the settlement described below, plaintiffs had asserted damages, including interest, to be as high as $63 million.  The plaintiffs’ expert witness, in his December 2005 deposition, offered his theory that plaintiffs’ gross damages are in the range of $19 to $22 million. That number is based on his theory that the alleged failure to block squeeze the well resulted in the under-production of gas worth $300 million. Plaintiffs’ royalty share of that figure yields the $19 to $22 million range of alleged damages. Based on the expert’s testimony, damages attributable to the full 18.75% interest would be in the range of $3.75 million gross or net to our 2.8% share would be in the range of $560,000 (excluding interest and attorneys’ fees). Along with the other defendants, we hired its own expert witnesses who have refuted these claims, particularly the expert’s assertions that failure to block squeeze the well

44




 

caused any damages to the reservoir. The deposition of a Norcen engineer who prepared the completion plan for the Broussard No. 2 well and supervised the completion operations, taken in April 2006, confirms the testimony of the defense experts as to why the well was not block squeezed.  The plaintiffs have also retained a damages expert who has given a report that the damages in this case are in the range of $30 million, excluding interest and attorneys’ fees.  Our share of that amount based on the full 18.75% would be approximately $5.6 million and net to our 2.8% share would be approximately $840,000. We participated in mediation of this lawsuit on July 18, 2006 but the parties failed to reach an agreement.  In July 2006, the plaintiffs’ attorney sent a demand to the defendants for total damages claimed by plaintiffs, with legal interest, totaling $63 million. Our share of that amount based on the full 18.75% interest would be approximately $12.2 million and net to our 2.8% interest would be approximately $1.8 million. On July 31, 2006, the Judge granted the defendant groups’ motion for partial summary judgment dismissing plaintiffs’ tort-based claims. Also on the same date, the Judge granted the defendant groups’ motion for partial summary judgment seeking to deny the plaintiffs an award of attorneys’ fees and also to dismiss any claim of plaintiffs that defendants had an obligation to form a field-wide unit.

On December 19, 2006, we, along with the other defendants in this suit, reached a settlement agreement with the Broussard Plaintiffs in full settlement of their 72% of the total claims made in this consolidated action. This settlement was finalized in January 2007. Our share of this settlement totaled approximately $208,000, which was recorded in December 2006, and the Sfondrini Partnerships’ share totaled $1,109,759.  The settlement with the Broussard Plaintiffs was finalized on February 1, 2007, and the defendants and the third-party defendants including the Sfondrini Partnerships were released from all claims by the Broussard Plaintiffs.

We will participate in a mediation regarding the remaining claims in this lawsuit with the Montet plaintiffs on May 10, 2007.  If this matter is not resolved at mediation, the trial on the remaining claims of the Montet plaintiffs (approximately 28% of the original aggregate claims in the case) will begin on August 27, 2007.  The Montet plaintiffs’ calculation of their alleged damages has not changed.  If the jury were to adopt the plaintiffs’ damage figures, the total damages attributable to the Montet plaintiffs could be approximately $17.6 million. The defendants’ exposure for an 18.75% share of that number would be approximately $3.31 million.  The exposure for our 2.8% share would be approximately $493,000.  If there were a damage award against the defendants, we believe that ultimately it should only be liable for its 2.8% share of any such award unless a co-party defendant, including any of the third-party defendants, cannot satisfy their share of any final judgment or settlement amount or are found not to be liable to us on its third-party demand.  In that event, we could be held responsible for more than our 2.8% share.  We believe we have meritorious defenses and intend to continue to vigorously contest this suit and our third-party demands against the partnerships.  We have not established a reserve with respect to these claims.

We may have insurance coverage for all or part of this claim up to the policy limits of $1 million per occurrence and $2 million in the aggregate.  A claim was submitted to Mid-Continent Casualty Company, our casualty carrier, who is currently providing a defense under a reservation of rights letter.  However, on July 3, 2006, Mid-Continent filed a suit for declaratory judgment against us in federal district court in Houston, Texas seeking to determine whether it has a duty to indemnify us and certain other defendants for this loss under the policies at issue.  Mid-Continent has asked the court to declare they have no obligation to indemnify us and the third-party defendants based on certain technical definitions under the policies and the fact that the plaintiffs’ claims are based on alleged breaches of contract.  We are both vigorously defending the declaratory judgment action, and actively seeking indemnity under the policies at issue for its potential liabilities, if any, to the plaintiffs in the Louisiana actions.  We are also pursuing coverage claims under other insurance policies that could cover a portion of our share of a loss in this case.

David Blake, et al. v. Edge Petroleum Corporation — On September 19, 2005, David Blake and David Blake, Trustee of the David and Nita Blake 1992 Children’s Trust filed suit against Edge in state district court in Goliad County, Texas alleging breach of contract for failure and refusal to transfer overriding royalty interests to plaintiffs in at least five leases in Goliad County, Texas and failure and refusal to pay monies to Blake pursuant to such overriding royalty interests for wells completed on the leases. The plaintiffs seek relief of (1) specific performance of the alleged agreement, including granting of overriding royalty interests by the Company to Blake; (2) monetary damages for failure to grant the overriding royalty interests; (3) exemplary damages for his claims of business disparagement and slander; (4) monetary damages for tortuous interference; and (5) attorneys’ fees and court costs. Venue of the case was transferred to Harris County, Texas by agreement of the litigants.  We have served plaintiffs with discovery and have filed a counterclaim and an amended counterclaim joining various related

45




entities that are controlled by plaintiffs.  In addition, plaintiffs have filed an amended complaint alleging claims of slander of title and tortuous interference related to its alleged right to receive an overriding royalty interest from a third party.  Plaintiffs currently have on file an amended motion for summary judgment, to which we have filed a response.  In addition, we have filed a motion for summary judgment on the plaintiffs’ case.  In December 2006, the court denied our motion for summary judgment.  The court has not ruled on Blake’s motion.  The trial is scheduled to begin September 15, 2007.    Discovery in the case has commenced and is continuing. We have responded aggressively to this lawsuit, and believe we have meritorious defenses and counterclaims.

This excerpt taken from the EPEX 10-Q filed Nov 9, 2006.
Item 1 - Legal Proceedings

From time to time we are a party to various legal proceedings arising in the ordinary course of business.  While the outcome of lawsuits cannot be predicted with certainty, we are not currently a party to any proceeding that we believe, if determined in a manner adverse to the Company, could have a material adverse effect on our financial condition, results of operations or cash flows, except as set forth below.

Texas Comptroller Audit - During the second quarter of 2004, we received notice that a subsidiary’s franchise tax returns for the State of Texas would be audited for the tax years 1999 through 2002. After reviewing the documents submitted, the agent representing the Office of the Comptroller of the State of Texas proposed adjustments to the calculation that would result in an increased franchise tax liability.  The agent maintained that transfers by us to this subsidiary, which we had classified as intercompany loans, should instead be classified as equity investments in the subsidiary. The State of Texas originally proposed that the franchise tax liability of the subsidiaries would be increased by approximately $3.0 million for the four-year period under audit.

During the third quarter of 2006, with the Comptroller, we agreed upon a method of computing our franchise tax liability to the State of Texas for tax years 1999 through 2002 that resulted in a total one-time payment of $144,474, plus penalties of $9,228, which was taken in full during the nine months ended September 30, 2006.  We anticipate that interest on this settlement will amount to approximately $55,000, which was accrued at September 30, 2006.

Wade and Joyce Montet, et al., v. Edge Petroleum Corp of Texas, et al., consolidated with Rolland L. Broussard, et al., v. Edge Petroleum Corp of Texas, et al. - This is a consolidated suit, filed in state court in Vermilion Parish, Louisiana in September 2003. Plaintiffs are mineral/royalty owners under the Norcen-Broussard No. 1 and 2 wells, Marg Tex Reservoir C, Sand Unit A (Edge’s old Bayou Vermilion Prospect).  They claim the operator at the time, Norcen Explorer, now Anadarko, failed to “block squeeze” the sections of the No. 2 well, as a prudent operator, according to their allegations, would have done, to protect the gas reservoir from being flooded with water from adjacent underground formations. Plaintiffs further allege Norcen was negligent in not creating a field-wide unit to protect their interests. The allegations relate to actions taken beginning in the early 1990’s.  Plaintiffs have named us and other working interest owners in the leases as defendants, including Norcen Explorer’s successors in interest, Anadarko. Plaintiffs originally sought unspecified damages for lost royalties and damages due to alleged devaluation of their mineral and property interests, plus interest and attorneys’ fees. In early 2005, we filed a motion for summary judgment in the case asserting, among other defenses, that:  (i) there has been no breach of contract, (ii) there is no express or implied duty imposed on us to block squeeze the well or form a field-wide unit, (iii) the units were properly formed by the Conservation Commissioner in accordance with the statutory scheme in Louisiana, (iv) plaintiffs’ claims are barred by limitations, and (v) other defenses. Along with the other defendants, we also filed a special preemptory challenge of no cause of action under the leases and the Louisiana Mineral Code for failure to exhaust administrative remedies and due to lack of a demand. In May and June 2005, the court ruled against us on the motion for summary judgment and the preemptory challenges. Of the 18.75% after-payout working interest that we originally reserved in the leases, we owned a 2.8% working interest at the time of the alleged acts or omissions. On September 6, 2005, we were granted leave by the court to file a third-party demand to join the other working interest owners who hold the remainder of the 18.75% working interest as thirds-party defendants in this case, and those pleadings have been served on the parties. These third-parties consist, for the most part, of partnerships that are directly or indirectly controlled by John Sfondrini, a director of the Company, and hold an aggregate 14.7% working interest. Vincent Andrews, also a director of the Company, owns a minority interest in the corporate general partner of one of the partnerships. These partnerships were among the third party defendants that we have sought to join in the case, and these partnerships have for the most part filed answers denying any liability to us. We participated for our 2.8% share of the well costs and revenues for the Broussard No. 2 well, as did the other defendants for their share, including the third-party defendant partnerships who participated for 14.7%. We strongly believe the parties should only be liable for their proportionate share of any damages award should a finding of liability occur in the case. We intend to vigorously contest the plaintiffs’ claims.

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As of the date of this report, it is not possible to determine what, if any, our exposure might be in this matter. Plaintiffs have asserted damages, including interest, to be as high as $63 million.  The plaintiffs’ expert witness, in his December 2005 deposition, offered his theory that plaintiffs’ gross damages are in the range of $19 to $22 million. That number is based on his theory that the alleged failure to block squeeze the well resulted in the under-production of gas worth $300 million. Plaintiffs’ royalty share of that figure yields the $19 to $22 million range of alleged damages. Based on the expert’s testimony, damages attributable to the full 18.75% interest would be in the range of $3.75 million gross or net to our 2.8% share would be in the range of $560,000 (excluding interest and attorneys’ fees). Along with the other defendants, we hired our own expert witnesses who have refuted these claims, particularly the expert’s assertions that failure to block squeeze the well caused any damages to the reservoir. The deposition of a Norcen engineer who prepared the completion plan for the Broussard No. 2 well and supervised the completion operations, taken in April 2006, confirms the testimony of the defense experts as to why the well was not block squeezed. The plaintiffs have also retained a damages expert who has given a report that the damages in this case are in the range of $30 million, excluding interest and attorneys’ fees.  Our share of that amount based on the full 18.75% would be approximately $5.6 million and net to our 2.8% share would be approximately $840,000.  We participated in mediation of this lawsuit on July 18, 2006 but the parties failed to reach an agreement.  In July 2006, plaintiffs’ attorney sent a demand to the defendants for total damages claimed by plaintiffs, with legal interest, totaling $63 million.  Our share of that amount based on the full 18.75% interest would be in the range of $12.2 million and net to our 2.8% interest would be in the range of $1.8 million.  In September 2006, the defendant group offered $4.5 million to settle the case.  Following this meeting, the parties have engaged in negotiations but have failed to reach agreement on a settlement amount.  Consequently, the Company is preparing to proceed to trial.  The trial date, originally set for August 28, 2006, has been postponed until the week of December 11, 2006 when the case is now set for trial. On July 31, 2006 the Judge granted the defendant groups’ motion for partial summary judgment dismissing plaintiffs’ tort-based claims. Also on the same date, the Judge granted the defendant groups’ motion for partial summary judgment seeking to deny the plaintiffs an award of attorneys fees and also to dismiss any claim of plaintiffs that defendants had an obligation to form a field-wide unit, but denied the defendants’ motion to exclude evidence of pre-suit damages based on failure of plaintiffs to give notice of their claims as required by the Louisiana Mineral Code and also denied defendants’ motion in limine to exclude testimony of plaintiffs’ expert witness.

We may have insurance coverage for all or part of this claim up to the policy limits of $1 million per occurrence and $2 million in the aggregate. A claim was submitted to Mid-Continent Casualty Company, our casualty carrier, who is currently providing a defense under a reservation of rights letter.   However, on July 3, 2006, Mid-Continent filed a suit for declaratory judgment against us in federal district court in Houston, Texas seeking to determine whether it has a duty to indemnify us and certain other defendants for this loss under the policies at issue. Mid-Continent has asked the court to declare they have no obligation to indemnify us and the third-party defendants based on certain technical definitions under the policies and the fact that the plaintiffs’ claims are based on alleged breaches of contract.  We intend to vigorously dispute the coverage issues with Mid-Continent and have filed an answer and counterclaim for breach of contract.  We are also pursuing coverage claims under other insurance policies that could cover a portion of our share of a loss in this case.

We continue to believe that an unfavorable outcome in this case is not probable.  If, however, there is a finding of liability and damages are awarded, we believe that ultimately we should only be liable for our 2.8% share of any damage award unless a co-party defendant, including any of the third-party defendants, cannot satisfy their share of any final judgment or settlement amount or are found not to be liable to us on our third-party demand.  In that event, we could be held responsible for more than our 2.8% share.  We believe we have meritorious defenses and intend to continue to vigorously contest this suit and our third-party demands against the partnerships, and we have not established any reserve with respect to these claims.

David Blake, et al. v. Edge Petroleum Corporation – On September 19, 2005, David Blake and David Blake, Trustee of the David and Nita Blake 1992 Children’s Trust filed suit against us in state district court in Goliad County, Texas alleging breach of contract for failure and refusal to transfer overriding royalty interests to plaintiffs in at least five leases in Goliad County, Texas and failure and refusal to pay monies to Blake pursuant to such overriding royalty interests for wells completed on the leases. The plaintiffs seek relief of (1) specific performance of the alleged agreement, including granting of overriding royalty interests by the Company to Blake; (2) monetary damages for failure to grant the overriding royalty interests; (3) exemplary damages for his claims of business disparagement and slander; (4) monetary damages for tortuous interference; and (5) attorneys’ fees and

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court costs. Venue of the case was transferred to Harris County by agreement of the litigants.  We have served plaintiffs with discovery and has filed a counterclaim and an amended counterclaim joining various related entities that are controlled by plaintiffs.  In addition, plaintiffs have filed an amended complaint alleging claims of slander of title and tortuous interference related to its alleged right to receive an overriding royalty interest from a third party. Plaintiffs currently have on file an amended motion for summary judgment, to which we have filed a response.  In addition, we have filed a motion for summary judgment on the plaintiffs’ case.  The court has not ruled on either motion.  Discovery in this case has commenced.  We have responded aggressively to this lawsuit, and believe we have meritorious defenses and counterclaims.

 Item 1A — Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our 2005 Annual Report, which could materially affect our business, financial condition or future results.  The risks described in our 2005 Annual Report are not the only risks facing our Company.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Item 2 - Unregistered Sale of Equity Securities and Use of Proceeds

 

None

Item 3 - Defaults Upon Senior Securities

 

None

Item 4 - Submission of Matters to a Vote of Security Holder

 

None

Item 5 - Other Information

 

None

 

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