Face Challenges Confidently

016 Williams v. Baker Explor. Co.

Wednesday, September 2nd, 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.
Williams v. Baker Exploration Co., 767 S.W.2d 193 (Tex. App.–Waco 1989, writ den. 9/6/89) is another division order case which appears to limit the protection accorded to the lessee by division orders. Williams was a landowner and McMurrey Petroleum, Inc. was the operator. Williams signed division orders which contained the common provision that Williams, by executing the division order, agreed to sell his royalty oil to McMurrey, the operator. McMurrey was then to account to Williams in accordance with the division of interest shown on the division order. McMurrey sold the royalty oil, but did not pay the royalty. Williams sued the nonoperators for nonpayment of royalty and for conversion.
The nonoperators contended that the division order superseded the lease royalty provisions. That is, the division order sold the royalty oil to McMurrey, McMurrey agreed to pay for it, and only McMurrey was liable for nonpayment and conversion. The nonoperators relied on the recent cases of Cabot Corporation v. Brown, 754 S.W.2d 104 (Tex. 1987) [PPROA News Bulletin of March/April 1988] and Exxon Corp. v. Middleton, 613 S.W.2d 240 (Tex. 1981), which hold that a division order can alter and excuse the terms of a lease royalty provision.
Held: execution of the division order did not excuse the lessees from payment of royalty. The Court recited that the Brown and Middleton cases do not hold that the division order supplants the lease contract; merely that to the extent payments are made in reliance upon unrevoked division orders they are binding upon the royalty owner. Here no payments were made, and therefore the division orders were not binding.
Until 1981, there were almost no cases construing the effect of division orders. Since then we have seen a number of reported cases. The protection accorded by division orders is now considerably muddled and certainly less comprehensive than once presumed. Perhaps the lease form itself should be changed to incorporate more precise payment terms as a part of the initial leasing transaction. This particular case is significant because it eliminates the division order as a defense for the nonoperators when the operator takes the royalty production and fails to pay royalty. The case may have equal application under other circumstances. For example, there are many properties burdened by large overriding royalty or production payment interests which are payable by the “lessee,” but commonly paid by the operator.