Face Challenges Confidently

423 Ohrt v. Union Gas Corporation

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.
Ohrt v. Union Gas Corp., 398 S.W.3d 315 (Tex. App.—Corpus Christi 2012, pet. denied) held that a lessor was precluded from recovering the undiluted royalties accruing to lessor prior to the designation of a pooled unit because the lessor executed and accepted payments under a unit division order.  In September 2000, Lessee drilled and completed a well on the leased premises of its Lessor and commenced production.  On January 15, 2001, Lessee filed a Designation of Pooled Unit, pooling Lessor’s lease with other leases, and the designation recited that it was effective as of the date of first production from the well.  Lessor executed a division order which calculated Lessor’s decimal interest on a unit basis, and the division order recited that it was effective as of the date of first production from the well.  In March 2001, Lessor began to receive and cash monthly royalty checks paying royalties on a unit basis as provided in the division order.  On October 30, 2001, Lessor sent a demand letter to Lessee demanding 100% of the royalties from the date the well first started to produce through January 14, 2001 (the day before the Designation of Pooled Unit was filed).  The “pre-pooling royalty” in controversy was in the amount of $838,399.26.  Lessee suspended payment of all unit royalties and this lawsuit ensued.
In Texas, the lessee does not have the power to voluntarily pool any portion of an oil and gas lease without the lessor’s express consent.  To validly pool a lease with other leases, the lessee must strictly comply with the express methodology and purposes specified in the document that authorizes the lessee to pool.
In the present case, Lessor’s express authorization to pool, and the method for effectuating the pooling, was contained in the pooling clause of the lease.  Under the pooling clause, Lessee was granted the right to pool any land covered by the lease with any other land, lease, or leases, and the “Lessee shall exercise said option as to each desired unit [to pool] by executing an instrument identifying such unit and filing it for record. . . .”  Although the lease specified that filing a unit designation effectuates the pooling, Lessee dated its Designation of Pooling effective as of the date of first production from the well.  The court agreed with Lessor that the “pooling is effectuated upon recordation of an instrument identifying the pooled unit and the lessee cannot effect pooling on a date prior to the recordation.”   However, notwithstanding the fact that Lessor was paid improperly, the court held that the evidence was sufficient to support the jury finding that Lessor’s conduct constituted ratification, waiver, and/or estoppel, which excused Lessee from paying the pre-pooling royalties to Lessor.
The facts in this case showed that the Designation of Pooled Unit included the size of the unit, the specific lands included in the unit, and the declared effective date of the unit, and Lessor or Lessor’s counsel was actively involved in structuring and monitoring the designation.  After the Designation of Pooled Unit was filed, Lessee sent a division order to Lessor which was executed and returned.  The division order referenced the designation of gas unit, delineated its size, and stated that it was effective the date of first production.  Further, the decimal of interest in the division order was calculated on a unit basis.  Lessor did not object to the Designation of Pooled Unit by notifying Lessee of an objection.  Instead, Lessor accepted and cashed royalty checks for approximately eight months without objecting.  The checks included statements that provided production volumes during the relevant time period and the methodology for the calculation of the royalty interests.  Without further applying the foregoing facts to the elements of ratification, waiver, and estoppel, the court concluded that the “jury’s finding that [Lessor’s] conduct excused [Lessee’s] payment of a full 3/16th royalty are supported by legally and factually sufficient evidence.”
In addition to challenging the sufficiency of the evidence, Lessor asserted that as a matter of law the affirmative defenses of waiver, estoppel, and ratification did not apply under the terms of the Texas division order statute specifying the form of the division order, which did not statutorily require “effective as of the date of first production.”  However, the court noted that the date of the division order is permitted under Section 91.402 with no limitations or prohibitions on wording.  Lessor also asserted that Tex. Nat. Res. Code Ann. § 91.402(h) precluded Lessee’s excuse defense.  The statute provides:
The execution of a division order between a royalty owner and lessee or between a royalty owner and a party other than lessee shall not change or relieve the lessee’s specific expressed or implied obligations under an oil and gas lease . . . Any provision of a division order between payee and its lessee which is in contradiction with any provision of an oil and gas lease is invalid to the extent of the contradiction.
The court declined to apply Lessor’s construction of the statute as it applies to the facts of the case.  Without offering a detailed analysis of the words of the statute and the facts of the case, the court simply noted that “[d]ivision orders are binding until terminated,” and, therefore, “Section 91.402(h) of the Texas Natural Resources Code does not render obsolete the “excuse” defense.”  Apparently the court reasoned that the division orders were binding until revoked, no revocation occurred until after the Designation of Unit was filed, and all of Lessee’s affirmative defenses arose while the division order was in effect.
This case illustrates the importance of division orders.  Properly prepared division orders, drafted and executed in accordance with applicable case law and statutory provisions, covering all of the interest owners and disposing of 100% of the proceeds, may offer significant protection to the lessee against inadvertent wrongful payment.  As courts continue the present trend of requiring lessors to be diligent in discovering and asserting claims, it is important that lessors carefully review their division orders before executing them.