Face Challenges Confidently

328 Lyle v. Jane Guinn Revocable Trust

Tuesday, September 1st, 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.
Lyle v. Jane Guinn Revocable Trust, 365 S.W.3d 341 (Tex. App.—Houston [1st Dist.] 2010, pet. denied) held that an oil and gas assignment in which the assignee agreed to “carry [the assignors] for a working interest of one-fourth (1/4) of the net money profit realized by it from its operations” created a net profits interest (not a production payment) that was binding upon assignees. Dan Japhet, an owner of 52/60 of an oil and gas lease in Brazoria County (“Hogg- Japhet Lease”), along with all other owners of record, assigned the Hogg-Japhet Lease  to Humble Oil in 1919 for $200,000 pursuant to a written assignment (“1919 Assignment”). The 1919 Assignment provided that “in further consideration of this transfer [Humble Oil] further agrees to carry [Dan Japhet and the other assignors] for a working interest of one-fourth (1/4) of the net money profit realized by it from its operations . . . accountings to be had monthly.” The 1919 Assignment also provided that the 1/4 working interest was not subject to overhead expenses.
The Hogg-Japhet Lease was assigned several times between 1919 and 1991, and each subsequent assignment contained a clause that the “Assignee take[s] the property subject to [the 1919 Assignment].” In 2004, after Lyle (the current owner and operator of the Hogg-Japhet Lease) refused to give an accounting or pay the heirs of Dan Japhet (“Japhet Heirs”), the Japhet Heirs filed suit to quiet title and recover possession of their reserved interest. The Japhet Heirs contended they were entitled to an accounting for 52/60 of 1/4 of all net profits from the Hogg- Japhet Lease. Lyle contended that the interest reserved in the 1919 Assignment was a production payment or oil payment, not a royalty interest, that ceased when the total consideration of $200,000 was paid out in 1928.
A royalty interest is “the right to receive, either in kind or its equivalent in money, a stipulated fraction of the oil or gas produced and saved from property covered by the lease, free of all costs of development and production.” A production payment or oil payment is “a share of the oil produced from the . . . premises, free of costs of production, terminating when a given volume of production has been paid over, or when a specified sum from the sale of such oil has been realized.”
The court found that the 1919 Assignment “by its plain and unambiguous language, provided for Humble Oil to purchase all of the interest in the lease for $200,000 paid at the time the agreement was made with the reservation of a one-fourth royalty interest in the net profits.” It “did not provide any indication that the interest was to terminate when a certain quantity of production or amount of profit was realized.”
The court held that because Lyle took his interest in the Hogg-Japhet Lease subject to the 1919 Assignment, he was obligated to provide monthly accountings of 52/60 of the 1/4 royalty to the Japhet Heirs.   Lyle was bound by the terms of the 1919 Assignment because the 1919 Assignment was recorded in his chain of title, prior assignments made reference to it, and the provisions of the 1919 Assignment were covenants that ran with the land. Moreover, the Japhet Heirs supported their claim by an abstract of title. Lyle’s defense of laches was denied, because, even though the Japhet Heirs had not been paid in over sixty years, Lyle had made no change in his position to his detriment. Lyle’s limitations defense was good as to back payments accruing more than four years before suit was filed.
The language from the 1919 Assignment is not likely to be encountered in contemporary documents, but the case clearly articulates the distinctions between royalties, overriding royalties, and production payments in considering the scope of a net profits interest. The rulings on the laches and limitations defenses define the limits of the successor-assignee’s liability.