Articles Posted in Recent Cases

Last month the El Paso Court of Appeals issued its opinion in a long-running dispute over royalties on a section of land in Upton County. Davis et al. v. COG Operating, LLC, et al., No. 08-20-00205-CV. The court addressed several issues, one of which was the construction of a 1939 deed that reserved a royalty interest described as “one-fourth of the 1/8 royalty usually reserved by and to be paid to the land owner in event of execution of oil and gas leases, so that 1/4 of the 1/8 royalty to be paid to us, our heirs or assigns, if, as and when produced from the above described land ….” The court concluded that this was a “floating” royalty equal to 1/4th of the royalty reserved in the lease, not a fixed 1/4 of 1/8 royalty. This appears to be the correct result based on other recent cases construing similar language.

I have a bone to pick, however, with the language in the opinion describing the royalty reserved. To be fair, other courts have made the same error, and the same error was made by the appellants in their brief. The court concluded that the grantors reserved “a floating, 1/4 NPRI in Section 45.” A 1/4 NPRI is a 1/4th royalty interest, not 1/4th of the royalty reserved in the lease. A 1/4th royalty is equivalent to one out of every four barrels produced. One-fourth of the royalty under a lease reserving a 1/4th royalty is 1/4 of 1/4, or 1/16 royalty interest, not a 1/4th NPRI. Clearly, in using the term “floating, 1/4 NPRI” the court meant to conclude that the deed reserved 1/4th of the royalty reserved in any future lease. But referring to it as a 1/4 NPRI is confusing.

Last week the Corpus Christi Court of Appeals issued a decision on a long-running dispute over reservation of a royalty interest in a deed. This is the court’s second opinion in the case.

In the court’s first opinion in 2018, the court construed the following royalty reservation:

SAVE AND EXCEPT and there is hereby reserved to [Hahn] herein, his heirs and assigns, an undivided one-half (1/2) non-participating interest in and to all of the royalty [Hahn] now owns, (same being an undivided one-half (1/2) of [Hahn’s] one-fourth (1/4) or an undivided one-eighth (1/8) royalty) in and to all of the oil royalty, gas royalty and royalty in other minerals in and under and that may be produced from the herein described property.

Ridgefield Permian v. Diamondback is another case arising out of the same tax foreclosure suit that was addressed in Mitchell v. MAP Resources, decided earlier this year by the Texas Supreme Court. My discussion of Mitchell can be found here. Both Ridgefield and Mitchell were initially decided by the El Paso Court of Appeals. While Mitchell’s appeal to the Supreme Court was pending the El Paso Court handed down its opinion in Ridgefield, 2021 WL 1783260 (May 5, 2021). In Ridgefield, the El Paso Court held that the taxing authorities’ lien attached only to the royalty interest reserved in the lease; once the lease terminated, the purchaser of the royalty interest foreclosed upon owned no interest in the mineral estate. This week, the Texas Supreme Court declined to hear Ridgefield’s appeal of the El Paso Court’s judgment.

Alberta Griffith owned a 1/7^th interest in the surface and minerals in a section of land in Reeves County. When she died her interest passed to her two sons, Albert and David, subject to a life estate interest in her surviving husband. In 1975, the husband and sons signed an oil and gas lease to Billings, reserving a 1/8th royalty. A well, the Meriwether No. 1, was completed on the lease.

In 1998, there was a small tax debt owed by Mr. Griffith and Albert on their royalty in the Meriwether lease. That year the taxing districts filed suit to foreclose tax liens against several hundred defendants, including Mr. Griffith and Albert. In the suit their interests were each described as a .005952 decimal interest in the Meriwether lease (each owning a royalty of 1/3 of 1/7 of 1/8 royalty). Judgment was entered foreclosing the lien, the interests were sold at Sheriff’s sale, and the interests came to be owned by Magnolia, LLC.

Four interesting recent cases on oil and gas issues:

Energy Transfer Fuel v. 660 North Freeway, 2021 WL 1569702

Energy Transfer owns an easement across North Freeway’s property in Fort Worth. The easement provided that the owner “hereby reserves the right to use the land in any manner that will not prevent or interfere with the exercise by [the easement holder] of its rights, privileges and easements hereunder, provided, however, that OWNER shall not construct or permit to be constructed any house, building or structure of any kind whatsoever on the easement.”

The Texas Supreme Court handed down its opinion in Mitchell v. MAP Resources, Inc., setting aside a default judgment in a tax foreclosure suit granted more than 16 years ago, on the ground that the defendant’s due process rights were violated when she was served by posting notice on the courthouse door.

Mitchell is the result of one of many tax foreclosure cases brought by taxing districts to collect delinquent taxes on royalty interests. In the late 1990s an attorney and two mineral buyers got together and proposed to taxing districts that they would handle tax foreclosure suits for delinquent taxes on royalty interests for them. The tax foreclosure suits named hundreds of defendants in a single suit, who were all served by posting notice of the suit at the courthouse. Texas law allows notice of suit by posting or publication where the plaintiff has tried diligently to locate the defendant and has been unable to do so. The two mineral buyers, Joe Hughes and Duke Edwards, searched the tax records for owners with delinquent taxes, and the lawyer proposed to represent the taxing districts in foreclosing the tax liens on those owners’ interests. The lawyer’s fee was paid out of the proceeds from the sheriff sale of the royalty interests foreclosed on. Hughes and Edwards were hired to try to locate the delinquent royalty owners so they could be served with the tax suit. For those they could not locate, they provided testimony in the foreclosure suit that they diligently looked for the missing owners and were unable to find them, so the court could authorize service by posting. Hughes and Edwards received an “abstractor’s fee” for each “unlocateable” owner for whom they searched, also paid out the proceeds of the sheriff sale. At the sheriff sale, Duke and Edwards bid on and purchased some of the royalty interests sold.

In Mitchell, the lawyer, representing the Pecos-Barstow-Toyah Independent School District, Reeves County Hospital District, and Reeves County, sued some 500 owners of more than 1600 mineral interests totaling tens of thousands of acres in Pecos County, in a single suit to collect delinquent property taxes on those mineral interests. The lawyer later filed an affidavit seeking court permission to serve the defendants by posting on the courthouse door. He swore that the names or residences of the listed defendants were unknown and could not be ascertained after diligent inquiry. For those defendants who had an address listed with the appraisal district, he swore that citation was issued to those defendants at those addresses. The court authorized notice by posting; the notice required the named defendants to answer within 42 days. The court appointed an attorney ad litem to represent the interests of the defendants who were served by posting.

Foote v. Texcel Exploration, decided by the 11th Court of Appeals in Eastland, provides a lesson to surface owners.

Foote grazed cattle on land in Knox County under a lease with Styles. He put 650 head of cattle on the property, grazing winter wheat.

Texcel operated oil and gas wells on the property. Foote’s agent told Texcel it would be putting cattle on the property. Although the oil and gas lease did not require Texcel to fence its equipment, Texcel had a one-strand electric fence around its equipment. The cattle kept breaking through the fence, and Texcel’s pumper kept putting it back up. Finally, the cattle broke through again and knocked over a pipe coming out of a tank, resulting in an oil spill. The cattle ingested the oil, and 132 head of cattle died.