Face Challenges Confidently

054 Exploration Co. v. Vega Oil & Gas Co.

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 some significance to you.
Exploration Co. v. Vega Oil & Gas Co., 843 S.W. 2d 123 (Tex. App. –Houston [14th Dist.] 1992, writ den.), concerns the application of an overriding royalty to a renewal lease. The overriding royalty was created by reservation in an assignment of the original lease which recited that the overriding royalty would be applicable to all “extensions and renewals of any of said leases hereafter secured by assignee, its successors or assigns.” The assignment also contained a provision requiring notice to the overriding royalty owner of an intent to let the lease terminate and granting to the overriding royalty owner an option to require a reassignment of the lease. AAA Operating Company (the lease assignee) went bankrupt. The lease terminated for failure to produce in paying quantities. Vega got a lease assignment from the Trustee in Bankruptcy. Vega also obtained ma new lease from the landowner. The overriding royalty owner contended the override was applicable to the new lease because a fiduciary relationship existed between it and AAA Operating Company and its assignees.
Held: The overriding royalty did not apply. Even if Vega was an assignee of AAA Operating Company, no fiduciary relationship ever existed. A renewal clause does not automatically impose a fiduciary relationship. This is true even if the instrument creating the overriding royalty does not have the common provision that assignor is under no duty to keep the lease in force and effect. Although a fiduciary relationship could exist if the parties had worked together in the joint acquisition of property before entering into this particular transaction, there was no evidence of such a relationship in this case. The “notice and reassignment” clause also did not create a fiduciary relationship. If there was a duty to give notice, the failure to give notice does not constitute fraud, and only fraud will support a constructive trust.
The significance of the case is that the court refuses to impose a fiduciary duty based on the creation of an overriding royalty interest, even thought the instrument creating the overriding royalty contains a notice and reassignment clause.