Co-author Gunner West

“He who comes for the inheritance is often made to pay for the funeral”.* When heirs inherit property together and can’t agree on its use, Texas courts strongly prefer dividing the land physically rather than forcing a sale, even when one owner wants to cash out.

Atkinson v. Land Endeavors held that under the Uniform Partition of Heirs’ Property Act, courts must order partition in kind unless the party opposing physical division proves substantial prejudice to all cotenants, not just themselves.

Three Sisters, Two Sales, One Standoff

Joseph Atkinson devised the surface estate of his 152-acre tract in equal, undivided one-third shares to his three daughters. Two sold their interests to Evans and Rossi; heir Paula Atkinson held her share.

Evans and Rossi filed a partition action against Atkinson in accordance with the Act. Atkinson declined the cotenant buyout option under Section 23A.007.

At trial, Atkinson, a California lawyer appearing pro se (after running through three different counsel), requested partition by sale rather than physical division. She contended that carving the tract into smaller parcels would erode its investment value, complicate ongoing oil‑and‑gas operations, and invite surface‑use conflicts with mineral owners.

Despite her challenge, the trial court ruled that the property was susceptible to partition in kind, confirmed each party’s undivided one‑third interest, and appointed a surveyor and three commissioners to divide it into contiguous parcels wherever feasible. Atkinson appealed.

Evidence Supporting Partition in Kind

The appellate court affirmed the trial court, grounding its analysis in Section 23A.008’s directive that, in the event of an unsuccessful buyout, the court shall order partition in kind unless the court, after consideration of the seven factors listed in Section 23A.009, concludes that sale is proper. The trial court found that partition in kind would not result in substantial prejudice to the cotenants as a group.

The court applied the seven factors:

  • Practical divisibility: the property—a rectangular, fully wooded, vacant tract in an un‑zoned area—could be divided practicably; appraisal maps and testimony from Evans and Rossi confirmed workable physical boundaries.
  • Value impact: Atkinson offered no evidence demonstrating that subdividing the wooded land would depress aggregate fair‑market value below the proceeds of a unitary sale. Rather, the appraisals characterized the tract’s highest and best use as recreational, rural‑residential, or agricultural, not commercial timber.
  • Duration of ownership favored neither side, as the land had been held jointly by all three heirs before they conveyed their shares;
  • Atkinson’s sentimental attachment was outweighed by her own request to liquidate the asset;
  • Alleged interference with oil‑and‑gas operations was unsubstantiated, and minerals are presumed equally distributed absent contrary proof — none was offered;
  • No evidence showed unequal contributions to taxes, insurance, or improvements; and
  • Miscellaneous considerations (wetlands, existing easements, limited access points) did not foreclose a fair geographic split.

Because Atkinson bore the burden to prove the tract was incapable of equitable division and failed to supply contrary valuations or operational impediments, the court concluded that partition in kind would not substantially prejudice any cotenant.

Atkinson’s several other points of error were overruled. One was unpreserved because she never raised the issue or obtained a ruling in the trial court. The other, including a “laundry list of multifarious complaints,” (the legal term is “bellyaching”) lacked supporting legal authority or adequate briefing and thus was waived (which looks like what you get when you represent yourself).

Your musical interlude.

*Said to be a proverb. We got it from the internet.

Co-author Gunner West

It seems to be fairly well settled that you can’t use trespass-to-try-title to recover a nonpossessory royalty interest in Texas. What if you call the interest a “mineral interest stripped of every attribute except the right to receive royalty”? The result is the same; you can’t.

In Devon Energy Production Company, L.P. v. McClure Oil Company, a Texas appellate court held that parties seeking title to a nonpossessory interest must pursue declaratory relief, not trespass-to-try-title claims (which we will refer to as TTT). This procedural miscalculation proved fatal for nearly all parties who prevailed at the trial court. Deficiencies in the movants’ pleadings undermined the relief they obtained.

Competing Deeds

The dispute originated from two 1928 deeds from J.V. Heyser concerning mineral interests in five Glasscock County sections:

  • the “Dean Deed” (January 17, recorded February 14), conveyed a 3/8ths interest in oil, gas, and other minerals to Dean;
  • the “Boston Deed” (February 1, recorded February 4), conveyed Heyser’s remaining interest to Boston, reserving a 3/8ths NPRI and rentals under existing oil and gas leases and a 3/8ths NPRI of the standard 1/8th royalty on future leases.

Operator Laredo Petroleum (now Vital Energy) interpleaded royalties due to uncertainty over which deed controlled and how to calculate the Boston reservation’s royalty. The Boston Deed reserved a double‑fraction NPRI and current leases paid more than 1/8th. So, should the NPRI be calculated as fixed or floating?

Many successors in title joined the litigation, tracing title through one deed or the other.

  • The Dean Deed successors sought to recover their mineral estates.
  • The Boston Deed successors sought bona‑fide‑purchaser protection under the Texas recording acts and argued that the Boston Deed could not convey interests already granted to Dean.

After a marathon of summary judgment filings determining deed priority, construing the Boston reservation, adjudicating TTT claims and defenses, and awarding ownership interests—the trial court held the Dean Deed (first-executed, second-recorded) prevailed over the Boston Deed, rejected the Boston Deed successors’ affirmative defenses, and granted title and royalty rights to the Dean Deed successors.

A strategy gone wrong

Dean Deed successor SH Permian’s deed-priority MSJ argued explicit alternative theories: TTT if the Dean Deed prevailed, declaratory relief if the Boston Deed prevailed. Despite opportunities to correct course, including the trial court’s invitation to “clean up [its] pleadings,” SH Permian maintained its position.

The Dean Deed appellees – winners at the trial court – ultimately asserted claims for trespass to try title only, if the Dean Deed prevailed, and thoroughly briefed their positions before and after the deed-priority ruling. Thus, when the trial court ruled the Dean Deed took priority, those parties were bound by the parameters of the order that locked in the trespass-to-try-title theory.

The defect surfaced at final judgment. SH Permian asserted it owned “a mineral interest equal to an undivided 1/8th royalty interest,” while Devon claimed “an undivided 4% floating royalty interest.” Through summary judgment grounded in their trespass‑to‑try‑title pleadings, the trial court awarded the Dean parties nonpossessory interests.

Procedural Mismatch

On appeal by the Boston Deed successors the appellate court determined that the prevailing parties’ pleadings failed to support the nonpossessory interests awarded in the trial court’s partial summary judgment favoring the Dean Deed.

The court emphasized the procedural mismatch, reminding the parties (and anyone reading this blog) that TTT is generally not the appropriate action to be asserted when recovery is for nonpossessory interests. TTT requires possession. No possession = no trespass.

The court rejected arguments that the error was harmless. Even when characterized as “mineral interests stripped of every attribute except the right to receive royalty”, the interests at issue were “in the nature of a royalty”. Such interests cannot support possessory remedies, regardless of how they’re labeled.

The dominos fall

Once the trial court had ruled on deed priority based on TTT claims, that determination infected all subsequent proceedings. Even when SH Permian later attempted to amend its pleadings to add declaratory relief two and a half years late ( one imagines after a few sleepless nights), the court denied the motion; the amendment came too late to cure the deficiency.

The “pleadings‑relief” deficiency cascaded through the litigation, affecting the other Dean-Deed appellees as well. Devon Energy “hitched its wagon to SH Permian’s filings” by joining the deed-priority motion, and the “Birds parties” adopted SH Permian’s pleadings throughout. Vital later acquired a portion of another parties’ claimed interest and reentered the case but sought the interest through TTT.

The appellate court reversed and remanded on all issues—deed priority, affirmative defenses, and title determinations. Only one Dean Deed successor escaped reversal because its pleadings matched its prayer.

Your musical interlude.

State of Texas. V. Reimer et al. studied lawyer-nerdy questions of standing to bring a lawsuit and statutes of limitations as applied to inverse condemnation suits.  Spoiler alert: To the chagrin of the landowners, waiting over 30 years to assert your takings claim is not the best course of action.     

The facts

In 1965 the Sanford Dam created Lake Meredith, significantly reducing downstream flow of the Canadian River through the six-mile stretch at issue. The reduction exposed previously submerged land.

Beginning in 1982 the State granted oil and gas leases on portions of the riverbed to Huber. The 10-year leases were consistently renewed for decades with Huber establishing numerous productive wells. During the litigation Huber operated 21 wells in the area. The litigation began in 1993 when the State sued a Reimer forefather for trespass when he erected a fence blocking oil and gas lessee Huber’s access to producing wells. The Landowners asserted an unconstitutional taking of their oil and gas interests without compensation sometime between October 1999 and April 2000.

The Legislature at one time directed the GLO to make a survey marking the boundary of the river, which the GLO never did. Instead, Huber commissioned his own survey. In January 1982 Huber’s surveyor Shine filed his survey, which the GLO adopted. The survey identified the gradient boundary of the river locating the last natural riverbed before the dam’s completion. According to the Court, January 28, 1982, was the day when the State began taking the Landowners’ mineral interests.

Standing – constitutional or prudential?   

The state challenged the Landowners’ standing to bring the suit on three grounds:

  • they did not own the land when the taking occurred and had no assignment;
  • existing mineral leases prevented the Landowners from developing minerals themselves;
  • Huber acquired ownership through adverse possession, the Landowners had no compensable interest.

The Landowners satisfied constitutional standing by alleging concrete injuries to claimed property interests, traceable to the State’s conduct, with likelihood of redress through favorable judgment. Thus, the challenge was not to subject matter jurisdiction (Had the Court found there was none, it would be compelled to dismiss the case without addressing the merits).

The State’s challenge was to prudential jurisdiction because it involved the general prohibition on a litigant raising a claim on another person’s legal rights without proper assignment or authority. It is not standing as much as it is a substantive limitation on the landowner’s legal capacity. Regardless, the Landowners’ claim was barred as a matter of law.

Limitations

The Landowners’ claims were barred by limitations as a matter of law. Texas has no dedicated statute of limitations for inverse condemnation claims. Using the law of adverse possession as an analogy, Texas courts have concluded that inverse condemnation claims are barred by expiration of the 10-year limitations period in Texas Civil Practice & Remedies Code §16.026. The taking begins when the physical taking occurs or entry on land is made. The Landowners claimed the 25-year limitations in §16.028 governed. The 25-year limitations did not apply.

Simply put, the Court looked at the plain language of the two statutes and gave the unambiguous statutory language its plain meaning. The Court declined to judicially amend the statute by adding words that are not implicitly contained in the language of the statute.

The Court denied the Landowners’ aggregation theory (involving separate properties owned by different landowners) because it could lead to an absurd result.

The judgment

Reversing the trial court, the Court rendered judgment that the Landowners take nothing.

Your musical interludes, lady singers now and before. Pick as many as you want:

Calista Clark

Arleigh Kincheloe

The Castellows

Peggy Lee

Janice Joplin

Nina Simone

Dow Construction, LLC v. BPX Operating Company resolved a bundle of issues arising out of a drilling unit established by the Louisiana Commissioner of Conservation: who has the right to a drilling cost report, the operator’s right to deduct post-production costs, forfeiture of the operator’s right to reimbursement of drilling costs, and prescription.

The facts

BPX is operator of a drilling unit. Dow is a lessee of property within the unit. BPX was deducting PPCs from Dow’s share of production proceeds. Dow sued on several claims, arguing that BPX forfeited the right to demand contribution for drilling costs from Dow as an owner of unleased interests and BPX improperly deducted PPC’s from Dow’s proceeds. BPX responded that Dow’s interest was not an “unleased interest”, and Dow’s claims were time-barred.

The statutory scheme

Each non-operator of a drilling unit is responsible for its share of development and operating costs of unit wells. Upon request, the operator must issue a report containing sworn statements about drilling and operating costs, production volumes, and sales prices. The operator who fails to timely respond forfeits its right to recover costs. BPX was burdened by previous operator Petrohawk’s failure to respond to Dow’s requests for well cost information.

FOUR QUESTIONS

Standing and the “unleased interest”

LA. R.S. 30:10(A)(3) refers to “unleased interests” in establishing who has the right to demand a drilling cost report from the operator. The Court found the statute to be ambiguous; having different meanings depending on the context. Based on Civil Code art. 12 and the context in which the words occur and the text of the law as a whole, the Court read “unleased interests” to be unleased to the as to the operator rather than having no lease whatsoever. Dow had the right under the statute to demand a report and the operator risked forfeiture of the right to recover drilling costs if it failed to comply with the statute.

Negotiorum gestio and deduction of PPCs

Without significant comment the Court vacated and remanded the trial court’s application of the doctrine of negotiorum gestio, which would authorize the operator to deduct PPC’s from non-operators’ proceeds on the basis of Civil Code art. 2292. This was consistent with the Louisiana Supreme Court’s recent opinion in Self v. BPX Operating Company.

PPCs and recovery of costs

Per La. R.S. 30:103.2 the operator’s right to demand contribution for drilling costs from owners of unleased interests is forfeited when it fails deliver the proper reports. The question: What costs are included in drilling operations? The Court followed a Louisiana Third Circuit opinion that under La. R.S. 30:103.1 “drilling operations” refers to the total cost of drilling and completing the unit well and “all other unit costs” allocable to an owner. “All other unit costs” encompasses PPCs. PPCs should be categorized as operational costs and expenses as they form an integral part of the overall business operation.

Prescription

Whether Dow’s claims were governed by one-year or 10-year prescription depended on whether the damages were contractual or delictual. The courts treat causes of action as delictual unless the plaintiff alleges a violation of a specific contractual provision. In an action arising out of the breach of duty imposed by law damages are delictual and are extinguished by the prescription of one year. Dow’s allegation of a breach of the notice provision of 30:103.1 did not arise from a contractual obligation. Thus, the prescriptive period was one year.

Your musical interlude

Co-author Stephen Cooney

In Cactus Water v. COG Operating, the Supreme Court affirmed that mineral lessee COG, not water rights owner Cactus (who derived it rights from the surface owner), has the right to possession, custody, control, and disposition of constituent water in liquid waste – so-called produced water – from its hydrocarbon production.

Homework is recommended.  See these previous posts on the subject.  We will pick up from there.

Texas Supreme Court Will Review Produced Water Case | Energy & the Law

Who Owns Produced Water in Texas? | Energy & the Law

Ownership of produced water depended on the scope of the language employed in the granting clauses of COG’s leases, which specifically named only “oil and gas” or “oil, gas, and other hydrocarbons.”

According to the Court, resolution of the ownership question depended not on uncertainty about the lease language but on what set of established principles governs conveyance of an unnamed substance: produced water. Water is not part of the mineral estate. Unless expressly severed, subsurface water remains part of the surface estate subject to the mineral estate’s implied right to use the surface—including water—as reasonably necessary to produce the minerals. A conveyance of water is not effected by implication. But if an unnamed substance is part and parcel of an oil-and-gas conveyance, there is no need to list it separately because the substance would already be included in what was expressly conveyed regardless of whether their presence or value was known at the time of conveyance.

The Court said that there is no dispute that produced water is, and was at the time of the leases, oil-and-gas waste. That the leases did not mention or define “waste” or “produced water,” was not unexpected. The production of liquid waste is an inevitable and unavoidable byproduct of oil-and-gas operations. Granting the right to produce hydrocarbons necessarily encompasses the right to produce and manage the resulting waste.

The Court rejected Cactus’ reliance on groundwater cases, which do not address waste by-products of oil-and-gas production. The Court observed that while produced water contains molecules of water, both from injected fluid and subsurface formations, the solution itself is waste – which is “a horse of an entirely different color.”

Statutes and regulations treat water and produced water differently and distinctly because they are distinct and different. The Court relied on the same statutes and regulations cited by the lower court to conclude that Texas laws define “oil-and-gas waste” in terms that include produced water.

The Court also rejected Cactus’ argument that COG’s possession of the produced water was usufructuary in nature.  The right to destroy, dispose of, or consume property is generally inconsistent with a usufructuary right. Instead, the right to the capital value of property, including by means of consumption, waste, or destruction, is inherent in property ownership.

Several of the leases explicitly restrict COG’s water usage. From this Cactus posited that the leases are clear that no water produced from the land could have been included in the conveyance. But those express limitations further emphasized to the Court the distinction between water molecules entrained in hydrocarbon production and the common understanding of water.

Remember freedom of contract

Surface-estate owners can take comfort in the Court’s observation that parties are free to make their own contract with respect to incidentally produced liquid-waste if surface owners intend to retain ownership. Here they did not, and courts cannot employ a backward-looking construction of conveyances that is informed by new technologies that were not within the parties’ contemplation at the time of the conveyances.

In a concurring opinion three justices agreed with the result but identified questions the opinion did not resolve. In particular, the ruling does not address unleased minerals and, having held that the leases at issue include groundwater produced with hydrocarbons, the Court does not go on to address the mineral lessee’s obligations to the landowners with respect to this leased groundwater. What does that mean? Litigation over water in Texas is far from over.

Your musical interlude, change Boston to Austin and there you have it.  That one was to easy. How about a dose of optimism.

In Franklin v. Regions Bank the Fifth Circuit concluded that a royalty clause in a mineral lease resulted in a gross proceeds royalty; the royalty owners did not bear their proportionate share of post-production costs. Read on if you want to know how the Court reached this conclusion.

The form lease said,

  • Royalty on gas would be “the market value at the well of one eighth of the gas so sold or used, provided that on gas sold at the wells the royalty shall be one eighth of the amount realized from such sale”.

An addendum (Exhibit “A”) said,

  • “In the event of a conflict between the language as stated in Exhibit A and the language stated hereinabove, the language in Exhibit “A” shall prevail.
  • [W]henever the term one-eighth (1/8) appears in the printed lease form … said term is hereby deleted and the term 25% is inserted and substituted therefore.
  • There shall be no cost charged to the royalty interest created under this lease.  

The ambiguity

The Fifth Circuit deemed the royalty provision to be ambiguous and allowed extrinsic evidence to determine the parties’ intent. The form provided the royalties would be paid on the “market value at the well” but the addendum included inconsistent limiting language: PPC’s would not be charged to the royalty interest.

The parties’ failed by express language in the addendum to alter the royalty calculation from market-value-at-the-well to gross proceeds. That would have fixed it. And the addendum did not make it apparent at what point in the post-extraction process the royalty would be calculated. The meaning of the agreement was fairly susceptible to more than one interpretation and therefore was ambiguous.

The trial court considered conflicting testimony from witnesses, expert and otherwise, and previous lessee Petrohawk’s history of paying royalties without deducting PPC’s. Per La. CC art. 2053, Petrohawk’s course of dealing gave particular meaning to and supplemented or qualified the terms of the agreement.

The Louisiana Rule

The Court discussed Warren v. Chesapeake Exploration, and Heritage v. NationsBank, but those were Texas cases. The Louisiana default rule is that the royalty owner shares responsibility for PPC’s, but the allocation is discretionary between the parties.

According to the Court, Louisiana has identified two methods for determining market value at the well: The method that has meaning here is to reconstruct market value by starting with gross proceeds from the sale of the minerals and deducting costs of taking the minerals to the point of sale. The increase in the sales value attributable to the expenses incurred in transporting and processing the commodity ordinarily must be deducted from the royalty. But here the addendum’s controlling language demanded a different result.

The result

The District Court awarded Franklin $3.4 million in past damages and $954,000 in estimated “future royalty damages”. The Fifth Circuit affirmed the District Court’s ruling that the royalty clauses created gross-proceeds leases and reversed and remanded the rejection of evidence of actual future losses. The evidence was available at trial but ignored, which was reversible error.

There was more

No room here to discuss other issues:

  • A previous suit by Franklin against Matador to rescind a 2007 extension of a 2004 lease and a previous trip to the Fifth Circuit in this case,
  • This suit was against Regions for mishandling the lease extension which caused them to receive 20% royalties on the extended lease instead of 25% under two 2008 Petrohawk leases,
  • Region’s prescription, law-of-the=case, and exculpatory clause defenses (all failed),
  • Calculation of pre-judgment interest,.
  • The Court’s several references to Louisiana Mineral Leases: A Treatise, by Lafayette lawyer Patrick Ottinger.

Your surprising musical interlude … and the (incomparable, sorry Mick) original.

Your Legislature has adjourned after enacting significant bills affecting the energy industry. To sum it up, the industry has friends in high places whenever the Lege is in session (Alternative energy was in jeopardy for a while with regulatory burdens in SB 715 and 819 that would make California proud. My guess: Back in the day the bills’ several cosponsors preferred to picket abortion clinics rather than remain in civics class to absorb the virtues of limited government.)

HB 49 Produced Water

Operators who sell produced water for beneficial use, companies who treat the water, and landowners who pay to treat the water and then sell it will not be liable for personal injury, death, or property damage. The protections do not extend to gross negligence, intentional, wrongful acts of omission, breaking state and federal laws, or failing to meet TCEQ standards. The bill directs the commission to write rules outlining how produced water should be treated and used.

SB 1172 Landman Licensing  

Amends the Occupations Code to eliminate licensing requirements by the Texas Real Estate Commission for land work. The bill is in response to a Texas Attorney General opinion that “a person negotiating a lease for property of a wind power project on behalf of another, for compensation, is required to hold a license issued by the Commission.” The new definition in the Occupations Code includes a nonexhaustive list of energy sectors that would have required licensing.

SB 1150 Plugging Inactive Wells

Requires that a well older than 25 years and that has been inactive for more than 15 years be plugged by the operator.  The Bill allows extensions based on a number of factors, allows for a two-year implementation period and allows the RRC to promulgate a rulemaking by 12/26. There is also a financial hardship exception.

SB 1146 Plugging Orphan Wells

Allows operators in good standing, mineral owners, or surface owners to voluntarily plug or replug orphaned wells without assuming legal liability or operational responsibility for the well. The Bill ensures that such voluntary actions do not imply an obligation to plug the well and protects participants from liability for damages related to the plugging activity. The Bill aims to encourage cleanup of orphaned wells by reducing legal and financial risks for those willing to participate in remediation efforts.

HB 48 Oil Field Theft   

Requires the director of DPS to create an organized oilfield theft prevention unit to enforce laws pertaining to the theft of oil, gas, and related equipment, develop and deploy specialized training, resources, and policing strategies tailored to investigating and preventing organized oilfield theft, among other activities. See also SB 494 and HB 1806

HB 3619 Surface Restoration

Requires the Railroad Commission to restore the surface of land on which it has plugged a well and forbids anyone working under this statute from interfering with the surface owner’s access to the land.

HB 3159 Severance Tax Exemption

Provides a severance tax incentive for hydraulic re-fracturing of inactive oil and gas wells that have been inactive for at least two years prior to re-stimulation. The incentive exempts production from severance tax for up to 36 months or until the exemption equals the lesser of actual re-fracturing costs or $750,000.

SB 1759 Limitation of Liability in Emergencies

Authorizes the Railroad Commission to declare an oil or gas emergency in response to incidents such as uncontrolled releases from wells. Anyone providing assistance, advice, or resources during an emergency at the request of a government agency will be immune from civil liability, except in cases of gross negligence, recklessness, or intentional misconduct.

HB 14 Nuclear Energy

Establishes within the governor’s office the Texas Advanced Nuclear Energy Office. The Bill will provide strategic leadership, coordination and support for the development of advanced nuclear reactor technologies. The Bill also creates the Texas Advanced Nuclear Development Fund and Grant Program and establishes a Nuclear Permitting Coordinator and an Advanced Nuclear Energy Workforce Development Program.

Your musical interlude

The takeaway from DDR Weinert, Limited et al v. Ovintiv USA Inc. is that equitable recoupment rescued a royalty payor from its mistaken payment of royalties. But first,

The events.

The Richters were mineral lessors in land in Karnes County. In 2016 lessee Ovintiv mistakenly adjusted gas flow on the property resulting in overpayment to some royalty owners and underpayment to others. Ovintiv did not catch the error until 2018. Meanwhile, in 2017 in their estate planning the Richters conveyed their minerals to plaintiffs Weinert and Williams. Ovintiv prepared division orders and plaintiffs became the successor lessors under the oil and gas lease on the property. Before catching the error Ovintive mistakenly overpaid the Richters $608,000 in royalties. Upon discovering the overpayment Ovintiv notified Weinert and Williams that it would make a prior period adjustment and then deducted Richters’ overpayments from Weinert’s and Williams’ royalty payments.

Plaintiffs sued for breach of contract, violations of the Texas Natural Resources Code and conversion. Ovintiv claimed that it was entitled to recover its overpayment to the Richters from Weinert and Williams. The federal court granted summary judgment for Ovintiv. The Fifth Circuit affirmed.

Equitable recoupment saves the day

The court identified two general requirements for equitable recoupment: (1) some type of overpayment must have been made, and (2) both the creditor’s claim and the amount owed to the debtor must arise from a single transaction. The plaintiffs conceded that recoupment is a valid, commonly accepted remedy in the oil and gas industry. The question was whether each month’s royalty obligation was part of the same transaction. The court deternined that each payment obligation under the same oil and gas lease was part of a single transaction for the purpose of recoupment.

The court discussed Gavenda v. Strata Energy, which concerned the applicability of the default rule that division and transfer orders bind underpaid royalty owners until revoked. Under that rule, division and transfer orders would have been binding during the entire period of underpayment, estopping the underpaid royalty owner’s claim against the operator. In Gavenda the operator kept some of the underpaid royalties and thus profited at the underpaid royalty owner’s expense. Gavenda did not help the plaintiffs in this case.

Equitable recoupment barred the plaintiff’s claim here. But for the doctrine, Ovintiv would have to pay the amount of overpayment twice, once to the overpaid Richters and again to the underpaid plaintiffs. Here Ovintiv did not profit by underpaying the plaintiffs.

A wrinkle that informed the result?

The court noted that it “cannot ignore” that the overpaid Richters control the underpaid plaintiffs. Both the plaintiffs and the Richters would be unjustly enriched if plaintiffs prevailed. What would be “equitable” about such an outcome? Plaintiffs still have a remedy. They have the right to pursue reimbursement from the Richters, the only parties that were unjustly enriched.

RIP Sylvester Stone

RIP Brian Wilson

Two brilliant and troubled individuals.

Co-author Gunner West

In American Midstream (Alabama Intrastate), LLC v. Rainbow Energy Marketing Corporation, the Texas Supreme Court held that the trial court improperly inserted the words “scheduled” and “physical” into a contract. By blue‐penciling these terms, the trial court improperly altered the plain text of the contract. This opinion was issued on the same day as Cromwell v. Anadarko, leaving no doubt about the Court’s approach to contract interpretation.

The contract

AMID owns the Magnolia pipeline, linked to the Transco pipeline. Producer Rainbow contracted under “MAG‑0001”, a “firm” transportation agreement requiring AMID to accept Rainbow’s gas nominations (unlike “interruptible”, where the pipeline may refuse nominations). When Rainbow nominated equal volumes in and out of Magnolia, AMID scheduled the same amount into Transco, which Rainbow then withdrew to sell to a downstream customer.

A “single‐point imbalance” occurs if scheduled volumes into Transco don’t match physical flow at the interconnect. Under an Operational Balancing Agreement, AMID could carry daily imbalances (treated as received) that do not exceed 5 percent of nominations or cause operational concerns, at which point Transco could issue an Operational Flow Order (OFO) forcing AMID to limit the imbalance.

Balancing Arbitrage in MAG‑0005

Seeking to leverage AMID’s balancing flexibility, Rainbow negotiated MAG‑0005, a 20,000 MMBtu/day “Firm Gas Transportation Agreement” whose practical purpose was for AMID to provide Rainbow with balancing services.

Section 9.1 states: “[Rainbow] shall not be obligated to balance receipts and deliveries of gas on a daily basis unless, on or for any Day, either [AMID] or [Rainbow] is requested or required by an upstream or downstream party [e.g., Transco] to balance receipts and deliveries of gas attributable to [Rainbow].

Thus, Rainbow could create “point‐to‐point imbalances” with monthly settlement. Rainbow viewed this agreement as an insurance policy for forward‐sales contracts: By paying a daily demand rate it could withdraw gas during price spikes and replace gas later when prices fell.

Trial Court

AMID limited Rainbow’s imbalanced nominations on specific days, citing Transco OFOs and operational concerns. Rainbow sued for breach, repudiation, and tort claims, seeking lost profits for disrupted trading.

The trial court read “scheduled” into Section 9.1, excusing AMID from providing balancing services only if Transco instructed to balance “scheduled” quantities with “physical” deliveries. This excluded physical‐only imbalances. The court found that AMID breached MAG-0005 on seven identified days (and on several unspecified occasions) and repudiated the “firm” nature of the contract by describing it as “interruptible” on a conference call between the parties. The trial court awarded Rainbow $6.1 million; the court of appeals affirmed.

Supreme Court

The Court focused on one textual question: Did Section 9.1 excuse AMID’s balancing obligation on any day Transco issued an OFO, regardless of naming or imbalance type?

Under MAG-0005 there could be point-to-point imbalances of two types: either “scheduled” or “physical”. But 9.1 makes no such distinction. Nowhere in the text of 9.1 do those words appear. By improperly inserting two words the trial court narrowed AMID’s excuse for nonperformance to only scheduled point-to-point imbalances.

Properly read, 9.1 allows AMID to refuse balancing whenever Transco requires either party to limit any Rainbow imbalance—scheduled or physical. As all but one contested day coincided with an OFO, the $6.1 million judgment could not stand. The Court remanded to decide liability and damages for the single non‐OFO day.

Reversing contract interpretation also wiped out Rainbow’s ancillary claims. Because 9.1 permitted refusals during an OFO, AMID’s remark that MAG‑0005 was “interruptible” simply asserted a contractual right, not repudiation. The repudiation claim failed. For the same reason Rainbow’s fraud‑based tort claims collapsed.

Lastly, the Court offered guidance on the proper measure of lost-profits damages: Speculative futures‐trading profits are not recoverable without a concrete usage history and reliable market data.

Your traveling interludes:

Going

Leaving.

On the highway.

In Cromwell v. Anadarko E & P Onshore LLC the Supreme Court of Texas did what it so often does: In order to provide “legal certainty and predictability”, the Court considered the plain language of a contract in order to arrive at the parties’ intent.

At issue were habendum clauses in two oil and gas leases written in the passive voice; that is, the clauses did not specify who has to do the producing in order to perpetuate the lease beyond its primary term.  The Court reversed a court of appeals ruling that it had to be lessee, Cromwell himself, to cause production in order to keep the leases alive.

The facts

After Anadarko drilled three wells on a tract, Cromwell obtained two leases on the same tract. Under the habendum clause, the Ferrer lease would be in effect for three years “and as long thereafter as oil, gas or other minerals are produced from said land, or land with which said land is pooled hereunder, … .”

The Tantalo lease was for a primary term of five years “and as long thereafter as oil, gas liquid hydrocarbons or their constituent products or any of them is produced in commercial paying quantities from the land … .”

The Court identified Cromwell’s repeated efforts to participate in operations, all of which were rebuffed by Anadarko. But, among other actions, Anadarko sent him an AFE and monthly JIBs and after the first well paid out referred to him as a working interest owner. Anadarko asserted that all of this was a mistake (Given the size and complexity of large organizations, that is not difficult to imagine).

Anadarko produced oil and gas at all relevant times. After the primary terms of the two leases ended Anadarko asserted that the leases terminated because Cromwell himself failed to obtain production. Anadarko did not tell Cromwell his leases had expired and continued sending JIBs. Anadarko then acquired top leases.

The result

The plain language of the habendum clauses does not specify who must produce to maintain the leases beyond the primary term. The clauses could have said the leases continue as long as oil or gas is produced by the lessee, but the leases were not written that way. The Court refused to write in a term specifying which party must do the producing.

The Court did not accept the court of appeals’ reasoning that the leases’ stated purpose was drilling and declined to ensure that every provision in a contract comports with some grander theme or purpose, particularly when the parties have not said which purpose matters most, and that everything in the contract should be subject to that purpose.

Paragraph 16 of the Tantalo lease would be extended beyond the primary term “if Lessee has completed a well as a producer  … .” That clause was expressly subject to other paragraphs having passive voice language. The Court found Paragraph 16 to be ambiguous and therefore governed by the default rule against forfeiture of mineral interests. Texas courts decline to impose a special limitation on a grant unless the language is so clear, precise and unequivocal that it can be given no other meaning. Neither habendum clause met that standard, so the Court declined to imply such a requirement to cause forfeiture of Cromwell’s interest.

In reversing the court of appeals, the Court disapproved of a line of cases to the extent that they hold otherwise: Mattison v. Trotti, Hughes v. Cantwell, and Cimarex Energy Co. v. Anadarko Petroleum Corp.

A query – not an opinion

We’re into extra innings here, but there are some who will question whether this is the correct result or the best result for the industry. The Ferrer lease was “for the purpose of exploring by geological, geophysical and all other methods, and of drilling, producing and operating wells for the recovery of oil, gas and other hydrocarbons … .” The Tantalo lease was “for the sole and only purpose of exploring, drilling, operating power stations, and construction of roads and structures thereon to produce, save, care for, treat and transport oil, gas and liquid hydrocarbons … .”

The Supreme Court faulted the court of appeals for “unduly focusing” on the purpose of the leases set forth in the granting clauses, and cited the 1923 case of Texas Co. v. Davis for the proposition that the “vital consideration” in an oil-and-gas lease is royalties on mineral production. That wasn’t what the parties here agreed to.  

The doubters might also be concerned that the opinion will embolden free-riders who will seek to benefit from operations without sharing in the drilling risk.

Musical interludes; everybody loves to sing about Memphis

JJ Cale

Chuck Berry

Lyle Lovett

John Hiatt