Oil and Gas Lawyer Blog
Landowners are often faced with a conundrum: can they accept a royalty check if they believe it is in the wrong amount?
Ms. Strickhausen owns a half interest in the minerals under a tract of land in La Salle County. Her minerals are subject to a lease owned by BPX (then Petrohawk, subsequently acquired by BPX). Her lease expressly prohibits pooling without her consent. The lease of the other half interest in her tract permits pooling. (Ms. Strickhausen’s lease also prohibits commingling of production: “Commingling of production from the Leased Premises with production from other lands or leases shall be prohibited prrior to such accurate metering, measuring and testing, unless commingling is consented to, in writing, by Lessor and each royalty owner.”) BPX filed a pooled unit designation for the WK Unit 4 No. 1H Well and drilled a horizontal well located partly under Ms. Strickhausen’s tract and partly under other tracts. It then asked Ms. Strickhausen to ratify the pooled unit.
Ms. Strickhausen’s lawyer then engaged in a series of communications with BPX seeking to negotiate terms under which Ms. Strickhausen would agree to ratify the pooled unit. The attorney asked BPX how it would propose to pay Ms. Strickhausen if she refused to ratify the unit. BPX replied that it would pay her “based on the length of productive wellbore on the subject tract over the total length of productive wellbore.” BPX claimed that Ms. Strickhausen would receive a larger royalty interest in the well by ratifying the pooled unit than she would if she were paid on a productive-wellbore basis. BPX concluded by saying that, if Ms. Strickausen did not ratify the unit “the royalties will require being placed in suspense.”
Some two months later BPX send Ms. Strickhausen a check for $249,907.73. The check bore the notation “WK Unit 4 1H.” A few days thereafter her lawyer made a settlement offer to Petrohawk: she will ratify the unit if BPX pays her $300,000 and agrees that Ms. Strickhausen can deposit the check. Three days later Ms. Strickhausen deposited the check, although she never received a response to her settlement offer. BPX continued to send royalty checks to Ms. Strickhausen, which she continued to deposit. Finally, about four months later, Ms. Strickhausen filed suit for breach of her lease. In her suit Ms. Strickhausen argues that, because her lease requires the lessee to pay royalties on all production from any well on her tract, BPX owes her royalties on all production from the well; having commingled the production in violation of her lease and unable to show how much of the well’s production is from her tract, the lessee owes royalties on all production from the well.
In the trial court, BPX argued that, by depositing royalty checks, Ms. Strickhausen had ratified the pooled unit and her suit was therefore barred. Ms. Strickhausen’s lawyer testified by affidavit that he made it clear to BPX that Ms. Strickhausen would not ratify the unit without some kind of settlement. Ms. Strickhausen testified by affidavit that she accepted the checks because she believed she was entitled to royalties on all production from the well and that she never intended to ratify the unit. The trial court agreed with BPX and held that, having ratified the unit, Ms. Strickhausen’s claims for breach of the lease were barred. That ruling was appealed to the Corpus Christi Court of Appeals, which held there was a fact issue whether Ms. Strickhausen intended to ratify the unit when she deposited the checks. Yesterday, the Texas Supreme Court, in a 5-to-4 decision, affirmed the decision of the Court of Appeals, in BPX Operating Co. v. Strickhausen, No. 19-0567. The majority opinion is by Justice Blacklock, joined by Justices Guzman, Lehrmann, Devine, and Busby. The dissenting opinion is by Justice Boyd, joined by Chief Justice Hecht and Justices Bland and Huddle. The case is remanded to the trial court for trial on Ms. Strickhausen’s claims for breach of the lease.
In the Supreme Court, BPX (along with amici from industry advocates) argued for a bright-line rule: a lessor’s acceptance of royalties calculated on a pooled basis always amounts to ratification of a pooled unit as a matter of law. A lessor in Ms. Strickhausen’s position, BPX argued, must make an election; either accept the check and thereby ratify the unit or refuse the payment and challenge the deal. Neither the majority opinion nor the dissent agreed with BPX’s position. The majority held that “actions that evidence an intent to ratify–such as depositing the checks–may in some cases be enough to overcome express indications of an objective intent not to ratify, but only if the facts and circumstances as a whole ‘clearly evidence an intention to ratify.”
Strickhausen … has a reasonable explanation for her acceptance of the checks that does not imply her acceptance of the pooling. She knew BPX owed her significant royalties regardless of whether she agreed to the pooling. BPX continued to send royalty check despite the parties’ mutual acknowledgment that Strickhausen had not consented to the unauthorized pooling and despite BPX’s knowledge that Strickhausen believe BPX owed her significant royalties with or without the pooling. Under these circumstances, her acceptance of the checks does not necessarily point towards ratification at all. She could reasonably have viewed the checks as payment towards what she believed she was owed without pooling. BPX, for its part, knew Strickhausen objected to the pooling and had every reason to expect she would view the checks as payment toward what she believed to be her “true” royalty. It sent her the checks anyway.
The opinion notes that Ms. Strickhausen denies knowing that the checks had been calculated on a pooled basis. It also notes that Ms. Strickhausen’s lease expressly prohibits pooling “under any circumstances.”
The dissent would reach the opposite result on the same facts. The dissent says “Strickhausen knew that the payments were made and calculated based on her participation in the pooled unit.” (This seems to be contradicted by Ms. Strickhausen’s affidavit.)
Her knowledge of the nature of the payments makes her acceptance of those payments inconsistent with an intent to reject the pooling, regardless of the amount. Strickhausen knew BPX calculated the payments on a tract-participation basis, reflecting her position as a participant in the pooled unit. She had full knowledge, in other words, that the payments were the “direct, certain, and proximate result” of the unauthorized act of pooling. She cannot now, after accepting those payments with such knowledge, treat them as if they were calculated on a perforated-wellbore basis or on some other method of calculation, or as if they constituted the undisputed portion of a larger amount she later claimed.
The dissent also appears to reject BPX’s bright-line rule:
Strickhausen could have indicated her disagreement with the royalty payments by refusing the checks, demanding that the royalties be held in suspense, or perhaps even by making it known to BPX that she was disputing BPX’s calculations as she accepted the checks. But the record contains no evidence that Strickhausen ever claimed to accept the checks under some form of protest.
(emphasis added) The dissenting opinion acknowledges Ms. Strickhausen’s commingling theory of royalty owed but says she never made that argument to BPX before cashing her checks:
Strickhausen argued in the trial court, and the Court repeats here, that BPX owed her royalties totaling twice the amount BPX paid her, because BPX had commingled her gas with others’ and could not reasonably allocate the amount that was hers, making BPX liable for royalties on all of the gas produced from the well. Thus, the Court claims, Strickhausen’s acceptance of the royalty checks was not inconsistent with an intent to reject the pooling because she was entitled to more royalties than she accepted. But the record contains o evidence that she ever communicated that position to BPX before she filed suit, some seventeen months after she began accepting BPX’s payments.
The dissent concludes:
The summary judgment evidence conclusively establishes that Strickhausen knew that her lease had been pooled, that the well on her property was a horizontal well drilled through the pooled unit, and that the royalty payments from BPX were for royalties from the horizontal well on the pooled unit, calculated on a tract-participation basis. Strickhausen cannot now claim that she did not know that the royalties were paid based on her participation in the pooling agreement.