675 ConocoPhillips Company v. Ramirez, 534 S.W.3d 490 (Tex. App.—San Antonio 2017, pet. filed),

Wednesday, August 1st, 2018

Richard F. Brown

The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.

ConocoPhillips Company v. Ramirez, 534 S.W.3d 490 (Tex. App.—San Antonio 2017, pet. filed), held that: (1) absent an express reservation, the mineral estate is included in a devise of the surface estate; (2) unleased contingent remaindermen are not bound to previously executed oil and gas leases; (3) unleased contingent remaindermen are unleased cotenants entitled to cotenancy accounting; and (4) attorney’s fees are recoverable under the Texas Natural Resources Code in a suit for the unpaid share of the oil and gas proceeds. Grandfather owned the surface of a tract known as the Las Piedras Ranch (including 1,058 acres) and an undivided 1/2 interest in the minerals in the Las Piedras Ranch and the original, larger family ranch (totaling 7,016 acres in Zapata County). In 1966, Grandfather died and devised 1/2 to his wife (“Grandmother”) and 1/2 to his three “Children,” equally, including his son Leon. In 1987, when Grandmother executed her Will, Grandmother owned an undivided 1/2 of the surface in the Las Piedras Ranch and an undivided 1/4 of the minerals in the Las Piedras Ranch and the larger family ranch. The son, Leon, owned the other undivided 1/2 of the surface in the Las Piedras Ranch and an undivided 1/12 mineral interest in the Las Piedras Ranch and the larger family ranch. In 1990, Grandmother’s Will was probated, and she devised to son Leon “all of my right, title and interest in and to Ranch ‘Las Piedras’ out of Porciones 21 & 22 . . . during the term of his natural life,” and upon Leon’s death, “the title shall vest in his children then living [“Grandchildren”] in equal shares”. There was a residuary clause that devised the residue of Grandmother’s estate to the three Children equally.

In 1993 and 1997, the Children executed leases, and in 1995, ConocoPhillips (“Operator”) first acquired leases executed by the Children together with a producing well drilled by a prior operator. The Grandchildren (Leon’s children) did not execute any of the leases. In 2006, son Leon died. In 2010, the Grandchildren sued the Operator for waste of the life estate corpus, for an accounting, and for recovery of unpaid gas proceeds. The Grandchildren contended that they were contingent remaindermen in the minerals in the Las Piedras Ranch, that they were unleased, that they were entitled to an accounting as unleased cotenants, and for attorney’s fees. The trial court found for Grandchildren on multiple motions for summary judgment and awarded attorney’s fees after a bench trial. The total judgment against Operator was approximately $11.7 million.

The threshold title question was whether the Grandchildren acquired the minerals in the Las Piedras Ranch. The Children had a long history of keeping the mineral ownership across the entire family ranch unchanged. Operator contended that “Ranch Las Piedras” was not defined and that evidence of surrounding circumstances showed that the family had a history of severing the surface from the mineral estate. Therefore, the Will should be construed as conveying only the surface to the Grandchildren. The court held that the Will was unambiguous, “all” means “all,” and without an express reservation of the mineral interest, it is devised along with the surface. Therefore, the Grandchildren conclusively established their record title to their Grandmother’s undivided 1/4 mineral interest in the Las Piedras Ranch as a matter of law.

Operator raised limitations as a defense, asserting that the Children, and perhaps some of the Grandchildren, had actual or constructive knowledge of the leases in the 1990’s. The court of appeals dealt with the issue swiftly—stating “the statutes of limitation as to an interest in land, which one owns as a remainderman, subject to the life estate of another, do not begin to run in favor of one in possession until the death of the life tenant.” Therefore the limitations period did not start running until November 27, 2006, the date of son Leon’s death, and the Grandchildren’s lawsuit was timely filed on November 19, 2010.

The Grandchildren sought an equitable accounting of the production and recovery of unpaid gas proceeds under Chapter 91 of the Texas Natural Resources Code. Because the Grandchildren were unleased contingent remaindermen, the court applied the general provision that “a life tenant who is the grantor on an oil and gas lease can only convey what he owns to the lessee, and may not bind the contingent remaindermen’s interest without their joinder.” Because the Grandchildren were unleased contingent remaindermen, they were unleased cotenants in the wells drilled on Las Piedras Ranch, which entitled them to a cotenancy accounting. The “operator . . . became the producing cotenant to the non-signing remaindermen’s interest, and its production triggered its duty under Texas law to account to the remainder interests for the minerals produced, less proportionate reasonable costs.”

With respect to the start date of the accounting, the court began in 1995, when Operator first acquired its interest, rather than 2006, when the contingent interest vested. “It is the non-binding nature of the Leases that requires the Grandchildren to be treated as unleased cotenants from 1995 forward.” There was no record on costs prior to 1995, apparently because Operator assumed the start date would be 2006. There was also no record on the value of production prior to 1995. It appears the court assumes that the prior operator would be liable to account for value and costs in that time period. However, Operator first acquired the property with a producing well, so it is obvious Operator effectively paid something to the prior operator for the costs of drilling the first well.

The court also refused to allow Operator to deduct the lease royalties paid to the Children. The court reasoned that there was no valid lease binding on the Grandchildren, and thus no royalty payable. The court allowed deductions for non-participating royalties burdening the Grandchildren’s mineral interest. The court refused to allow the deduction of the “monthly weighted average cost of capital” [interest].

Operator contended attorney’s fees were not recoverable in trespass to try title. The court held that Grandchildren also prevailed under Tex. Nat. Res. Code Ann. § 91.401 through 91.409, that a 3x multiplier was justified to offset the agreed contingent fee, and therefore the award of $2.25 million in attorney’s fees was sustained.

The court affirmed the award of almost $1 million in interest calculated beginning on the father’s date of death (2006) until payment for unpaid proceeds. The court specifically held that there was no legitimate title dispute (which would have eliminated interest under Tex. Nat. Res. Code Ann. § 91.402(b)).

The significance of the case is the risk placed on the operator. The recovery claim may go back decades, the “unpaid” owner is never going to be the operator, and it appears that the protection afforded in trespass to try title against the award of attorney’s fees can be easily circumvented by also pleading the Natural Resources Code. The case does not address claims operator may have against the overpaid party (in this case the Children, including the estate of the Grandchildren’s father).