Face Challenges Confidently

076 Heritage Resources, Inc. v. Nations Bank

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 significance to you.
Heritage Resources, Inc. v. Nationsbank, 895, S.W.2d 833 (Tex. App.–El Paso 1995, writ requested) is a division order case holding that royalty owners were not bound by division orders allowing the lessee to deduct transportation costs. The royalty clauses in the leases at issue expressly provided that the royalty owners would not bear any marketing costs. Lessee deducted a prorata portion of the transportation charges charged by the gas transporter from the lessor’s royalty. The lessee asserted a defense based on its division orders, which expressly provided that he royalty payments would be subject to transportation costs. After apparently conceding that the division orders ordinarily would be defense until revoked, the court held that division orders are not binding on royalty owners when the operator benefits from an error in the orders and is thereby unjustly enriched.
The El Paso Court concluded that there was evidence upon which the trial court could properly conclude that Heritage profited from the error in the division orders, and therefor the royalty owners were not bound by the division orders. The lessee and the transporter of the gas were under common ownership, but the transporter did have a minority interest owned by an unrelated party. There is nothing else in the opinion explaining how the lessee Heritage profited, except the observation that the sole shareholder of the lessee also happened to be the majority shareholder of the gas transporter. Profit to the transporter would appear to be unrelated to the lessee, unless the corporate distinctions are ignored. It appears the court may have been more taken with its first reason for ignoring the division orders. There was a disclaimer on the division order that nothing in the division order was intended to alter or to amend the lease.
The court also chose to ignore the express provision of the division order which limited liability for wrongful payment to a cause of action against the over-paid party. The reason given for ignoring the provision was again that division orders should be ignored when the lessee benefits from the error.
The case is significant because it is another in a series of cases which have tended to reduce the protection given to lessees who make payments in accordance with division orders. The reasoning in the case is weak, and it is possible the Supreme Court will write on it.