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Hahn v. ConocoPhillips — another case on fractional vs. fraction of royalty

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.

The property was included in a pooled unit operated by ConocoPhillips, and Hahn ratified the lease covering the tract, which reserved a 1/4th royalty. Conoco also requested that Hahn and the lessor sign a stipulation of their ownership, which they did. The stipulation provided that “it was the intent of the parties in the deed from [Hahn] to [his grantee] that the interest reserved was a one-eighth (1/8) ‘of royalty’.

The court concluded that the deed reserved to Hahn a fixed 1/8 royalty. And the court concluded that the stipulation did not change the royalty into a floating share of royalty because using the stipulation to construe the reservation violated the ‘four corners rule’ and there was no evidence that there was any controversy at the time over what Hahn owned. The Texas Supreme Court declined to hear the case.

After the case was remanded, Conoco revised its pleadings to again seek a ruling that Hahn owned 1/8th of the royalty, rather than a 1/8th royalty (1/8 of ¼ rather than 1/8). It argued for the first time that, by ratifying the lease, Hahn had agreed that he would get 1/8th of the royalty reserved in the lease. (Apparently Conoco had paid the mineral owner based on this interpretation and so was trying to avoid having to pay the same royalty twice.) And Conoco again raised the stipulation as a basis for its argument.

Again the court disagreed with Conoco. It held that Conoco could not re-litigate the court’s previous construction of the reservation and confirmed that the stipulation did not change the result.

Conoco based its new argument on Montgomery v. Rittersbacher, 424 S.W.2d 210 (Tex. 1968), a famous Supreme Court case to oil and gas lawyers. In that case Montgomery sold 80 acres, with the following reservation:

Out of the grant hereby made there is, however, excepted and reserved unto the Grantor herein, his heirs and assigns, forever, the equal one-half part of the usual royalty of one-eighth of all the oil, gas and other minerals on, in and under the premises hereby conveyed, such one-half part to be paid and delivered under and by the terms of the present or any future oil, gas and mineral lease or leases outstanding on said premises. But Grantor, his heirs and assigns, shall not participate in, and no reservation is here made of the lease or annual rentals and/or bonus money received by Grantee, his heirs and assigns for any future lease or leases given on said premises, and it is understood and agreed that it shall not be necessary for said Grantor, his heirs and assigns to join in any such lease or leases so made.

Rittersbacher later acquired the 80 acres (“first tract”) and included it in a lease with other land, the “second tract.” The second tract was pooled into a unit and a well completed. Montgomery ratified the lease, but he was not credited with any of the royalty from the pooled unit because none of his first tract was included in the unit. The lease contained an ‘entirety clause’:

If the leased premises are now or shall hereafter be owned in severalty or in separate tracts, the premises, nevertheless, shall be developed and operated as one lease, and all royalties accruing hereunder shall be treated as an entirety and shall be divided among and paid to such separate owners in the proportion that the acreage owned by each such separate owner bears to the entire leased acreage.

Montgomery claimed that, under this clause, he was entitled to share in production from the pooled unit based on his royalty interest in the combined tract covered by the lease. The court agreed with Montgomery.

In Hahn, Conoco argued that Hahn’s royalty should be reduced because of his ratification of the lease, just as Montgomery’s royalty in tract one was reduced by his ratification of the lease. The court of appeals disagreed; the court’s decision in Montgomery did not transform Montgomery’s royalty interest into a floating royalty interest.

Maybe some day lawyers will learn the difference between a fixed royalty and a floating royalty and how to draft a clear royalty reservation.


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