703 Leavitt v. Ballard Expl. Co., Inc., 540 S.W.3d 164 (Tex. App.—Houston [1st Dist.] 2017, no pet.)

Tuesday, September 4th, 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.

Leavitt v. Ballard Expl. Co., Inc., 540 S.W.3d 164 (Tex. App.—Houston [1st Dist.] 2017, no pet.) held that a dispute between royalty owners was a title dispute and that lessee could suspend payment of the disputed royalties without interest. The dispute between the parties produced twelve years of litigation in multiple courts with multiple motions for summary judgment and multiple appeals. Simplified, the litigants aligned as successors to the parties to a “1966 Deed” and a subsequent oil and gas lease. The 1966 Deed reserved a nonparticipating royalty interest to the grantor (“NPRI Owner”) and conveyed the executive rights over the NPRI to the grantee, who ultimately became “Lessor.” Lessor leased to “Lessee” a 38-acre tract burdened by the NPRI. Lessee drilled an off-lease well and pooled the 38-acre tract into a 234.6-acre unit. The unit well began producing in 1999, everyone was oblivious as to the existence of the NPRI, and Lessee paid the NPRI interest in production to Lessor. The NPRI Owner was a trust. In 2002, the original beneficiary of the trust died, the successor beneficiary became aware of the well, the successor beneficiary made a claim, and Lessee suspended payment of the NPRI interest. The successor beneficiary assumed automatic vesting and ratified the lease and the pooled unit, but the NPRI Owner raised a claim going back to date of first production and contested automatic vesting in the successor beneficiary. Lessor then claimed that NPRI Owner was entitled to nothing until NPRI Owner ratified the lease and pooling agreement.

During the subsequent litigation, in 2012, NPRI Owner apparently acquired any interest the successor beneficiary had in the dispute. In December 2014, NPRI Owner and Lessor settled, and Lessor went out of the case. Lessee promptly obtained a lease ratification and division order from NPRI Owner and paid over all of the suspended funds to NPRI Owner. NPRI Owner amended the petition to claim interest, attorney’s fees, and costs from 1999 through 2014 against Lessee. The issue on this appeal was whether Lessee was permitted to suspend payment of royalties, without interest, until the dispute regarding who was entitled to receive the royalties was over.

The Texas Natural Resources Code provides that payment of proceeds from the sale of oil and gas production must commence within 120 days after the end of the month of first sale of production, and, unless a lease provides otherwise, subsequent payments must be made within 60 days after the month of production for oil and within 90 days after the month of production for gas. If payments are not made in accordance with the time limits in Section 91.402(a), the payor must pay interest, unless the payor suspends payment based on one of the enumerated exceptions found in Section 91.402. One “safe harbor” exception allows payments to be withheld without interest beyond the statutory time limits if there is “a dispute concerning title that would affect distribution of payments.” NPRI Owner contended that a title dispute did not exist, because it was undisputed that the NPRI Owner owned the NPRI, and therefore, Lessee owed interest. However, the court disagreed with the NPRI Owner’s characterization of the dispute and determined that this was the classic situation under which the payor (Lessee) was entitled to withhold royalties without interest because of “a dispute concerning title that would affect distribution of payment.”

The court cited a number of cases that are controlling for this issue. In Montgomery v. Rittersbacher, the Supreme Court determined that the owner of an NPRI was only entitled to royalties from the date the owner ratified the lease. In Concord Oil Co. v. Pennzoil Expl. & Prod. Co., the Supreme Court found a title dispute involving payments when “two different fractional oil and gas royalty interests appear[ed] within the conveying instrument, and the ultimate legal question was who was entitled to receive particular royalty payments.”

Additionally, in Gore Oil Co. v. Roosth, the Eastland Court of Appeals addressed the issue of which party should bear outstanding lease burdens under an ambiguous deed. That court “held that prejudgment interest was ‘not recoverable when reasonable doubt exists regarding a title dispute’ under Section 91.402(b), and ‘[a] title dispute clearly existed in this case, and prejudgment interest was not authorized.’” Lastly, in Headington Oil Co. v. White, the Houston Court of Appeals found a “disagreement among the fractional royalty interest owners regarding the correct amount of their interest.” “It held, ‘[b]ecause the disagreement affected [the oil company operator’s] abilities to distribute royalty payments in accordance with Section 91.402(a), it was a title dispute.’”

Here, like in Headington Oil, the existence of the NPRI was undisputed. However, the NPRI Owner, successor beneficiary, and the Lessor asserted competing interests in the royalties payable on the 38-acre tract, which affected Lessee’s ability to pay the proceeds in accordance with the statutes, and ultimately, constituted a “title dispute.” “This is a classic situation under which the payor [(Lessee)] was entitled to withhold royalty payments without incurring interest during the delay in payment because of ‘a dispute concerning title that would affect distribution of payments,’ namely a dispute over whether the [NPRI Owner] was entitled to the royalty payments or the [Lessor was].” Because the court concluded NPRI Owner was not entitled to interest, it followed the Trust was not entitled to attorney’s fees.

“[N]othing in Natural Resources Code [S]ection 91.402(b) requires a payor . . . to evaluate the legal merit of a dispute, only that such a dispute exists.” The core question is focused on whether there is a title dispute that “would affect distribution of payments,” not on the merits or validity of the claims.