Articles Posted in Recent Cases

Herein of a case that will probably be of interest only to law professors and title attorneys.

Leo Trial had six brothers and sisters. They inherited 237 acres in Karnes County. In 1983 Leo gave his wife Ruth one-half of his 1/7th interest in the property. In 1992, Leo and his siblings sold the land to the Dragons, reserving the minerals for a term of 15 years. But Leo’s wife Ruth did not join in the deed. The deed included a general warranty of title. The Dragons did not get a title policy and did not investigate the title.

Leo Trial died in 1996 and willed his estate to a trust for Ruth’s life and then to their two sons, Joseph and Michael. Ruth died in 2010, and Ruth’s 1/14th interest in the 237 acres passed to her sons.

The Trials’ 15-year term mineral interest expired in 2008. At the time there was production from the property, and the Dragons contacted the operator to transfer all royalties to them. The operator did so, not realizing that Ruth still had an interest in the property, a fact was not discovered until 2014. The operator then put Ruth’s interest in suspense, and the Dragons filed suit against the Trial sons, seeking to acquire their 1/14th interest in the property under the Duhig doctrine and the doctrine of estoppel by deed. Continue reading →

A reader alerted me to a Texas Supreme Court mandamus proceeding about unpaid royalties, In Re The Estate of Ebbie Edward Allen, Jr., No. 19-0027. Lawyers for the Relator asked the court to require the Texas Comptroller to audit Chesapeake and require it to deposit royalties not paid to Mr. Allen’s estate into the state’s unclaimed properties fund. The Supreme Court refused to take the case. The facts illustrate a little-known aspect of what can happen when royalties owed are not paid.

According to the petition, Ebbie Allen was an elderly man who lived alone on his 705-acre property in Brazos County and who signed an oil and gas lease in 1993, which was assigned to Chesapeake. In 1994, Chesapeake completed a horizontal well on the property and produced it until 2009, when it sold the lease to Envervest. Chesapeake produced 26,000 barrels and 2 Bcf of gas from the well. It sent a division order to Mr. Allen but he refused to sign it because he disagreed with the royalty decimal on the division order. Mr. Allen made attempts to resolve the royalty issue but never succeeded, and he subsequently passed away. Neither he nor his estate ever received any royalties on Chesapeake’s production. (After Enervest purchased the lease, the royalty issue was resolved and Mr. Allen’s estate received royalties from Enervest’s production, including some $15,000 in royalties that Enervest had deposited to the Comptroller’s unpaid properties fund.)

Chesapeake refused the Estate’s demands for payment, based on the four-year statute of limitations for royalty claims. Chesapeake also failed to deposit any of the royalties with the Comptroller. The Comptroller refused the Estate’s request that it audit Chesapeake’s records for unclaimed royalties that by law must be remitted to the Comptroller. In response to the Estate’s mandamus petition, the Comptroller responded that it had complete discretion whether and when to conduct audits and so could not be compelled to do so.

Last week the Texas Supreme Court handed down its opinion in Texas Outfitters, Limited, LLC v. Nicholson, No. 17-0509, once again addressing the duty of the holder of executive rights to minerals owned by another. The Court affirmed a judgment of $867,654.32 plus interest and costs against Texas Outfitters for breaching that duty.

Dora Jo Carter owned the surface estate of 1,082 acres of land in Frio County. She and her two children owned 50% of the minerals; the other 50% were owned by the Hindes Family. In 2002 the Carters sold the land to Texas Outfitters, owned by Frank Fackovec, for $1 million, financing a part of the purchase price. Fackovec intended to live on the ranch and operate a hunting business. The Carters sold Texas Outfitters 1/24 of the minerals along with the land, and also conveyed to Texas Outfitters the exclusive right to lease the 11/24 mineral interest retained by the Carters. Fancovec wanted the right to lease the entire 50% mineral interest to be sure his surface estate was protected if and when oil and gas development took please. This right to lease the Carters’ minerals, the executive right, became the source of the later controversy.

In June 2010 the Hindes family leased their 50% mineral interest in the ranch to El Paso Exploration for $1,750 per acre and 25% royalty. El Paso made the same offer to Fackovec, but he declined the offer, despite the Carters’ request that he accept it. The Carters and Facovec then had settlement negotiations, resulting in a tentative settlement in which (1) Texas Outfitters would convey back to the Carters the executive rights to their 11/24 mineral interest, (2) the parties would agree to as-yet unspecified restrictive covenants burdening the mineral estate for the protection of the surface estate, (3) the Carters would forgive $263,000 of the note they held from Texas Outfitters, and the parties would sign a lease to El Paso. This settlement later fell apart over failure to reach agreement on the terms of the restrictive covenants. The Carters sued Texas Outfitters and Fackovec in June 2011, alleging that he had breached his duty as holder of their executive rights by refusing to lease to El Paso. Continue reading →

In Bell v. Chesapeake Energy Corporation, No. 04-18-00129-CV, the San Antonio Court of Appeals heard a permissive accelerated appeal of an issue addressed by the trial court in a multi-district litigation brought by many royalty owners in the Eagle Ford against Chesapeake, In re: Chesapeake Eagle Ford Royalty Litigation, involving multiple claims against Chesapeake for breach of the plaintiffs’ oil and gas leases. The Court issued its opinion last week. The issue addressed by the Court was the interpretation of clauses in two oil and gas leases requiring the lessee to either drill and offset well or pay compensatory royalty.

The trial court in the multi-district litigation was asked to construe offset clauses in several oil and gas leases, among them the Bell and Ward leases. Those two leases contain similar clauses regarding protection against drainage by wells drilled on adjacent leases. I will quote the Bell lease here:

In the event a well (“Adjacent Well”) producing Oil or Gas in Paying Quantities is drilled and completed after the date of this Lease on land under which Lessor does not own the quantity of minerals or royalty as under the lands covered by this Lease, and such Adjacent Well is draining the Leased Premises or is deemed draining if the adjacent Well is located within three hundred thirty (330) feet of the Leased Premises, or, when Lessee has an economic interest in said Adjacent Well and said Adjacent Well is located within four hundred sixty seven (467) feet of the Leased Premises (in the case of a Vertical Well, distance will be measured from the surface location or bottom hole location of the Adjacent Well, whichever is closer; in the case of a Horizontal Well distance will be measured from the surface location or the subsurface path of a horizontal drainbore, from its point of entry into the productive horizon to its terminus, whichever is closer), then Lessee agrees to drill such offset wells which is[sic]reasonably designed to protect the Leased Premises from drainage, or at the option of Lessee, shall pay to Lessor the Compensatory Royalties set forth below, or execute and deliver to Lessor a release in recordable form releasing acreage in an amount equivalent to the number of acres required or permitted by the Texas Railroad Commission to drill an offset well to the formation of such Adjacent Well. Lessee shall have ninety (90) days from the date of first production of such Adjacent Well within which to Commence Actual Drilling Operations of an offset well or release offsetting acreage, and thereafter, Lessee’s sole obligation shall be to pay Compensatory Royalties as set forth herein. …

In lieu of Drilling an Offset well required hereunder or releasing acreage as provided above, then Lessee shall pay to Lessor as a Compensatory Royalty an amount equal to the Royalty Share of Gross Proceeds of production from the Adjacent Well. Continue reading →

The Texas Supreme Court denied the landowners’ motion for rehearing last Friday in Murphy v. Adams, rejecting their claim that Murphy Exploration had breached their oil and gas lease by failing to drill an offset well or pay liquidated damages. The Court was divided 5-4 on the issue when it issued its original opinion, and the court remained divided 5-4 on rehearing, but both the majority and the dissent issued corrected opinions.

Our firm represented the landowners in the case, so I must admit that it is difficult for me to be objective in reporting on this case. I wrote about the case when the Court of Appeals ruled in favor of the landowners, reversing a summary judgment in Murphy’s favor issued by the trial court.

The landowners’ lease contains the following provision:

It is hereby specifically agreed and stipulated that in the event a well is completed as a producer of oil and/or gas on land adjacent and contiguous to the leased premises, and within 467 feet of the premises covered by this lease, that Lessee herein is hereby obligated to, within 120 days after the completion date of the well or wells on the adjacent acreage, as follows:

(1) to commence drilling operations on the leased acreage and thereafter continue the drilling of such off-set well or wells with due diligence to a depth adequate to test the same formation from which the well or wells are producing from on the adjacent acreage; or

(2) pay the Lessor royalties as provided for in this lease as if an equivalent amount of production of oil and/or gas were being obtained from the off-set location on these leased premises as that which is being produced from the adjacent well or wells; or

(3) release an amount of acreage sufficient to constitute a spacing unit equivalent in size to the spacing unit that would be allocated under the lease to such well or wells on the adjacent lands, as to the zones or strata producing in such adjacent well.

Continue reading →

The U.S. Court of Appeals for the Fifth Circuit recently handed down its opinion in Seeligson v. Devon Energy Production Co., Cause No. 17-10320. The case is an appeal from a decision in the District Court for the Northern District of Texas certifying a class of royalty owners to sue Devon for breach of the duty to market gas produced under the royalty owners’ leases. The Fifth Circuit affirmed all but one of the trial court’s findings on the appropriateness of allowing the class action to proceed.

The question of whether class actions are appropriate in federal courts are governed by federal rules and cases, but the class certification rules are very similar to those applied by Texas state courts. Although class actions are common in other contexts, such as suits by shareholders against their companies, they have not generally been successful in suits by royalty owners. The barriers created by the requirements to certify a class have usually been too great.

In Seeligson v. Devon, the plaintiffs claim that Devon breached its implied duty to market their gas. Devon’s wells in the Barnett Shale field are connected to a gathering system called the Bridgeport System, owned by an affiliate of Devon called Devon Gas Services. The gas is gathered and transported to the Bridgeport Gas Processing Plant, owned and operated by Devon Gas Services. Under a contract between Devon Energy and Devon Gas Services, Devon Gas Services takes delivery of the gas at the well and runs it through the plant, which separates the dry gas from the natural gas liquids and sells the dry gas and NGLs separately.  Under the contract, Devon Gas Services pays Devon Energy 82.5% of a published industry index price for the dry gas and NGLs. Devon Gas Services thus retains 17.5% of the value of the dry gas and NGLs to compensate it for the gathering and processing of the gas. Plaintiffs claim that this arrangement breaches Devon Energy’s duty to market because the 17.5% is in effect a processing fee that is far greater than the market rate for processing. Continue reading →