SCOTX Rules In Cross-Conveyance Case: A Deal’s A Deal

© 2016 The Texas Lawbook.

By Janet Elliott (AUSTIN) – In a long-running dispute over payments from a gas well mistakenly included in two separate pooled drilling units, the Texas Supreme Court last Friday sided with the royalty owners.

The court disagreed with Samson Exploration that a contract with T.S. Reed Properties Inc. and other mineral-rights owners should be voided because title to the property cannot be conveyed twice in the same way that a house cannot be sold twice. The company said its contract to pay the royalties is invalid to the overlap created when Samson reconfigured two pooled units.

Justice Eva Guzman, writing June 23 for a unanimous court, said that under Texas law, pooling implicates both contract and property law because authority to pool emanates from a contract but pooling agreements also give rise to property interests. However, she said, Samson’s reliance on property law in the case “is a theoretical construct that holds no water.”

“Considering the pertinent authority, we discern no impediment to enforcing Samson’s obligations in this case under a contract theory even if the pooling designation failed to effect a conveyance of title,” Guzman said.

Paul Simpson, who represents the royalty owners, said he is pleased that the Supreme Court followed the rule of law and made Samson honor its agreements.

“The court emphasized Samson’s what it called ‘contract avoidance’ theories to justify breaking its word. I hope Oklahoma-based Samson learns that in Texas a deal is still a deal,” said Simpson, a Houston partner at McGinnis Lochridge.

Samson was represented by Cynthia Keely Timms, a Dallas partner at Locke Lord.

The disputed royalty payments in the 13-year-old case are expected to amount to about $4.2 million plus interest. The case is one of three similar disputes involving pooled units between Samson and groups of royalty owners.

The Supreme Court upheld Beaumont’s 9th Court of Appeals, which affirmed the trial court’s award of payments to one group of royalty owners on the contract-breach issue, but reversed for another group that had ratified the pooled unit by accepting royalty payments.

Samson admitted that the overlap occurred when it retroactively designated a new unit covering the depth at which a well was producing. It disclaimed any intent to create overlapping units and asserted the failure to designate a depth limitation to avoid any overlap was a mistake.

Energy producers filed two amicus letters at the court in support of Samson. Writing for the Independent Petroleum Association of America, Craig Enoch said the lower court rulings converted the Texas approach to pooling from a property law approach to a contractual approach.

“This case sets a dangerous precedent, especially in situations where a lessee inadvertently designates units that include the same land and productive horizons,” Enoch said. “Given that it is frequently a breach of the lease to ‘undesignate’ a unit or substantially amend it without the consent of all the unit participants, any error in designating a unit could give rise to overlapping payment obligations greatly exceeding the normal royalties.”

Read the court’s opinion here.

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