Face Challenges Confidently

055 Wilson v. United Texas Transmission Co.

Thursday, September 3rd, 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.
Wilson v. United Texas Transmission Co., 797 S.W. 2d 231 (Corpus Christi 1990, no writ), reviews the liability of a gas purchaser to a royalty owner when the lessee fails to pay the royalty on gas production. The mineral lease had common royalty provisions plus a clause that recited that lessee:

. . . may dispose of Lessor’s royalty gas or gaseous hydrocarbons in accordance with any proposed agreement submitted to Lessor by Lessee and approved by Lessor; and thereafter during the life of such agreement Lessee shall account to Lessor for said royalty gas on the basis of such agreement.

No gas contract was ever submitted to lessor. Wilson’s lessee went bankrupt without paying all of the royalty due Wilson.  Wilson sued the gas purchasers on contract for conversion.
Held: The gas purchasers were not liable to the royalty owner. There was no contract between the royalty owner and the gas purchaser. The gas sales contract was only between the lessee and the gas purchaser. There was no tort of conversion. Conversion is the wrongful taking of the property of another. Here, the mineral lease was a typical form that provided for oil royalties in kind, but gas royalties in value (money). When the royalty is payable in money, the lease itself passes title to all of the gas to the lessee. The lessee, holding the full title, sold gas under contract to the gas purchasers.  The gas purchasers had no obligation to account to the gas royalty owner.
The significance of the case is as a reminder of one of the many ways in which oil and gas royalties are treated differently because of this fundamental distinction in ownership originating in the lease itself. It is the historic reason why gas purchasers can frequently proceed safely on “100% division orders” payable to lessee, and oil purchasers cannot. For royalty owners, the case says that more explicit language is required if lessor approval of a gas contract is to be a condition on the right to sell royalty gas. For gas purchasers, the case is a warning that small differences in the royalty clause may determine liability for conversion.