The Texas Supreme Court has agreed to answer two certified questions from the U.S. Court of Appeals for the Fifth Circuit arising from a class action dispute between a producer and royalty owners.
Anne Carl, as Co-Trustee of The Carl/White Trust, on behalf of itself and a class of similarly situated persons; Anderson White, as Co-Trustee of The Carl/White Trust, on behalf of itself and a class of similarly situated persons v. Hilcorp Energy Company (No. 24-0036; accepted January 19, 2024) arose from a class action brought by the trustees of the Carl/White Trust against Hilcorp Energy Company for underpayment of royalties on gas produced from two leases in Brazoria County. Plaintiffs allege that Hilcorp failed to pay royalties on gas used off the lease for post-production processing. The lease contains an “off-lease clause” requiring Hilcorp “to pay royalties for gas ‘sold or used off the presmises.’” It further contains a “free use clause” that allows Hilcorp the free use of gas for “operations” on premises only. Plaintiffs argue that the off-lease clause applies to Hilcorp’s use of the gas for processing, and thus requires it to pay royalties on that gas, and that free use clause restricts “free use” to the premises. Hilcorp filed a Rule 12(b)(6) motion for failing to state a claim, arguing that plaintiffs were not entitled to royalties on the off-premises use because the lease based royalty payments on the market value of gas at the wellhead (determined using the “workback method,” which calculates market value by deducting post-production costs). The district granted the motion. Plaintiffs appealed.
The 5th Circuit determined that Texas law is not yet settled the questions presented by this case. The heart of the dispute is “whether, under the workback method, the lessee must pay royalties on gas used off-lease as part of the post-production process.” Plaintiffs contend that the Texas Supreme Court’s decision in BlueStone Nat. Res. II, LLC v. Randle, 620 S.W.3d 380 (Tex. 2021) “does not limit or affect the off-lease and free-use clauses,” and even if Hilcorp could deduct the gas, “the deduction can only be applied to the value per unit of the gas, not “to reduce the number of units of gas on which royalties must be paid.” Hilcorp, on the other hand, asserts that Randle does not apply here “because it concerned a gross-value-received lease, rather than a value-at-the-well lease.”
The 5th Circuit determined that Randle, while it addresses free-use clauses, does not address what happens when a free-use clause interacts with an off-lease clause and market valuation at the wellhead. In this instance, the court decided that it could not make an Erie guess and certified two questions to SCOTX: (1) after Randle, can a market-value-at-the-well lease containing an off-lease-use-of-gas clause and free-on-lease-use clause be interpreted to allow for the deduction of gas used off lease in the post production process, and (2) if such gas can be deducted, does the deduction influence the value per unit of the gas, the units of gas on which royalties must be paid, or both?
SCOTX has scheduled oral arguments on March 19.
