088 Mitchell Energy Corp. v. Samson Resources Co.

Friday, September 4th, 2015

Richard F. Brown

 
The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.
 
Mitchell Energy Corp. v. Samson Resources Co., 80 F.3d 976 (5th Cir. 1996) considers the duties owed by a unit operator which fails to pay unleased cotenants and which fails to pay lessors. Samson operated a unit which produced about fifteen million dollars in gross revenues. Samson did not pay the owners of approximately 10% of unit production. Why Samson did not pay was a contested fact question at trial, but apparently the jury did not like Sampson’s explanation. Sampson was stuck with three million dollars in actual damages and fifty million dollars in punitives. The verdict was based on fraud and conversion.
 
Mitchell was clearly an unleased cotenant. Some of the lessors contended they were also unleased cotenants, because Samson had repudiated their leases by failing to pay royalties. The Court found that mere nonpayment of royalty does not terminate an oil and gas lease, and that the remedy for nonpayment lies in an action for damages based on contract. Therefore, the leases were still in effect and the lessors were to be treated as lessors, not as unleased cotenants.
 
As to the lessors, Samson had the right to take the production without being liable for conversion. It was equally certain that any cotenant has the right to extract minerals from the common property, without the consent of the cotenant and without being liable for conversion. The cotenant’s remedy is a right to an accounting, which is not a tort remedy. Similarly, not paying the royalty owners was not conversion. There was no tort of conversion to support the award of punitive damages.
 
The other basis for a tort remedy was fraud. The finding of fraud was based on Samson’s failure to disclose material facts, i.e., that Samson owed money. Absent a fiduciary or confidential relationship, the failure to disclose information is not actionable as fraud. Because under Texas law neither a cotenancy nor a lessor/lessee relationship imports a fiduciary relationship, there was no tort or fraud to support the award of punitive damages. Both tort claims having failed, the award of punitive damages was reversed.
 
Samson’s ultimate liability to its unpaid unleased cotenant was measured by the value of the gas produced less drilling and operating expenses. Liability to the royalty owners was measured by the royalty payments owed under the leases.  Plaintiffs also recovered interest and attorney’s fees.
 
The case is significant because it is apparently the first case addressing the issues of fraud, conversion and punitive damages in the context of an operator failing to pay other unit owners.