So, you found all the heirs and you have an agreed judgment stipulating title. Time to pay royalties? Maybe. And you have signed division orders. Surely, you can pay now? Maybe. These were the questions facing the parties in Perdido Properties LLC v. Devon Energy Production Company et al.

Facts and events

Ross Brady dies, bequeathing a royalty interest in Ector County, 75% to wife Pauline and 12.5% each to his two sisters.

Pauline dies intestate survived by next `husband Smitherman, Sr. and her siblings Claire Bremer and William Watson.

A title opinion for Devon the operator links Pauline to the Brady interest.

Enerlex acquires 1/4th of the interest in the royalty from William. That was all he owned.

William’s conservator, Devon and Enerlex execute an agreed judgment setting aside the Enerlex deed and a release of claims. Devon prepares and the conservator signs division orders reflecting that 100% of the Brady interest is payable to Watson and his lawyer De León. Devon pays William and De Leon.

William dies and his interest goes to the Watson Group (descendants, it appears).

Perdido sues Devon and the Watson Group on behalf of Smitherman, Jr./Bremer for failure to pay royalties, claiming they own 50% of the Brady interest, and asserts alternative claims against Watson Group.

Watson Group obtains summary judgment on Perdido’s claims based on limitations. Devon obtains summary judgment that Smitherman/Bremer’s claims are precluded because Devon paid royalties under a division order, limitations, and no evidence of fraudulent inducement.

What about the judgment?

An agreed judgment is an adjudication and a contract, but only applies to the parties who are before the court. That does not include the Watson Group.

Aren’t division orders binding?

Not always. In Gavenda v. Strata Energy the producer who prepared erroneous division orders and then underpaid royalty owners retained part of the proceeds for itself was liable to the underpaid owners, overcoming the general rule that DO’s are binding until revoked.

One of the principles underlying the general rule is detrimental reliance. Generally, when there are proper division orders the underpaid royalty owner is entitled to recover royalties from the overpaids, not the operator.

In Gavenda the producer was liable to the underpaid owner for the portion of the royalties the producer retained, although it was not liable for royalties paid to other royalty owners. Here, Smitherman/Bremer did not sign DO’s. They were only signed by Watson.

The basis of the result in Gavenda was unjust enrichment. Here, Devon argued that it had paid all the royalties to Smitherman/Bremer under DO’s executed by other royalty owners. Relying on several North Dakota cases, the appellate court held that Gavenda did not preclude Smitherman/Bremer’s claim against Devon even though it would result in double payment from Devon. Devon was not unjustly enriched, but it could not have detrimentally relied on the actions of Smitherman/Bremer because they did not sign the DO’s.

Limitations and other issues

Interesting as it might be to those of us who procrastinate, space does not allow for the court’s analysis of limitations.

Mispayment of the royalties to the Watson Group did not occur as a result of a change in ownership and failure of notice under the lease’s change of ownership clause. The failure to pay was not the result of a change of ownership.   

The release agreement did not release Smitherman/Bremer’s claim royalties on past production. See the opinion for a detailed analysis of the agreement’s language and of emails on the issue of whether Devon acknowledged a debt to Smitherman/Bremer.

The result

Judgment for Devon on limitations reversed and remanded. Judgment affirmed on all other claims.

Your musical interlude.