221 Boldrick v. BTA Oil Producers

Richard F. Brown

 
The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.
 
Boldrick v. BTA Oil Producers, 222 S.W.3d 672 (Tex. App.—Eastland 2007, no pet.), holds that an overriding royalty interest subject to an operating agreement (“JOA”) and burdening a non-consenting interest is not payable until costs are recouped under the JOA. Paragraph 31(b) of the JOA provided that any subsequently created interest should be made specifically subject to all the terms and conditions of the JOA, and it defined a subsequently created interest so as to include a royalty interest created by a working interest owner out of its working interest. BTA, a non-operator subject to the JOA, assigned an overriding royalty to Boldrick, and the assignment provided that the overriding royalty interest “shall be free and clear of all costs of development and operation” and “[t]his Assignment shall not imply any leasehold preservation, drilling, or development obligation on the part of Assignor.” It was apparently uncontested that Boldrick had notice of the JOA. BTA then elected to go non-consent on the Stallings Gas Unit 2H Well, which was drilled and completed. Paragraph 31(b) of the JOA further provided that subsequently created interests shall be chargeable with a pro rata portion of all costs and expenses chargeable under the JOA against a non-consenting interest in the same manner as if it were a working interest. The operator stopped paying Boldrick, and Boldrick sued BTA for Boldrick’s share of production “free and clear of all costs” on theories of breach of contract, unjust enrichment and conversion.
 
The court held that Boldrick’s overriding royalty was created out of BTA’s working interest subsequent to the JOA and the overriding royalty was subject to all the terms and provisions of the JOA. Because BTA went non-consent, Boldrick’s overriding royalty interest was chargeable like a working interest as mandated by the JOA. Such a use could not constitute a breach of contract between Boldrick and BTA when that contract was subject to the JOA, and it could not constitute unjust enrichment or conversion. However, the court was not required and did not address whether BTA has such a liability in the future, after all non-consent penalties have been paid, and BTA and Boldrick are receiving payments for their respective interests.
 
The court reasoned that BTA has no present obligation to pay Boldrick for his overriding royalty interest which is currently being used to discharge the non-consent penalty under paragraph 31(b) of the JOA. The court rejected Boldrick’s argument that the overriding royalty was not a subsequently created interest. The overriding royalty was not included on Exhibit A to the JOA, and it was assigned after the JOA was executed. Boldrick pointed to the exception in paragraph 13 of the JOA for overriding royalty interests, but the court rejected this distinction because paragraph 13 pertains to the right to take production in-kind and only pertains to overriding royalty interests scheduled on Exhibit A. Moreover, paragraph 31(b) is applicable “notwithstanding anything herein to the contrary.” Boldrick argued that even if the interest BTA relinquished to the operator during payout under the JOA included Boldrick’s overriding royalty interest, BTA was nevertheless not excused form the specific language of its overriding royalty grant to Boldrick. The court was unmoved. BTA had no duty to pay anything, because under the  JOA,  BTA  was  getting  nothing.    Regardless  of  the  ownership  or  continuing  rights  of Boldrick in the production, nothing could change the fact that Boldrick’s interest was expressly chargeable with a pro rata share of all costs and expenses until payout.
 
The significance of the case is that an assignment of a cost-free overriding royalty subject to a JOA may assign nothing, if assignor then goes non-consent under the JOA. The significance of the case may be limited, because it does not appear that the JOA litigated was one of the common A.A.P.L. model form operating agreements. For example, the A.A.P.L. 1982 M.F.O.A. generally requires disclosure of all overriding royalties, fixes a minimum net revenue interest as to all leases subject to the JOA, and fixes liability for “excess” burdens. Undisclosed and subsequently created burdens must be borne by the party contributing the lease or creating the interest, which is supported by an indemnity. Article VI then provides that “During the period of time Consenting Parties are entitled to receive Non-Consenting Party’s share of production . . . Consenting Parties shall be responsible for the payment of all . . . overriding royalty . . . applicable to Non-Consenting Party’s share of production not excepted by Article III.D.