In a royalty nonpayment case teeming with legal issues, the Eastland Court of Appeals has reversed a trial court judgment in favor of an oil and gas operator and remanded the case to an Ector County district court for trial.
Perdido Properties LLC, On Behalf of and as Attorney-in-Fact for Paul H. Bremer, Jr. and Leon C. Smitherman, Jr. v. Devon Energy Production Company, L.P., et al. (No. 11-21-00060-CV; filed May 18, 2023) arose from Devon’s withholding of royalty payments pending the identification of heirs to interests originally conveyed in 1945. Ross Bray, the original grantee, bequeathed his interest to his wife (75%) and two sisters (12.5% each). When Bray’s wife died intestate in 1969, she was survived by her husband, Smitherman, Sr., and her siblings, Bremer and Watson. The plaintiffs in the suit are Smitherman, Jr., claiming through his father Smitherman Sr. and Bremer, Jr., claiming through his mother, Ross Bray’s sister.
Devon was operator of the leases covering the Bray Interest from 2008 to 2016. In 2009 Devon received a title opinion linking Ross Bray’s wife, Pauline, to the interest. Unable to identify her heirs, however, Devon held the royalty payments in suspense. In 2010 Devon received an email from Enerlex, Inc., informing Devon that it had acquired ¼ of Pauline Bray’s interest from Watson and attaching a recorded affidavit of heirship identifying Pauline’s heirs as Smitherman, Sr., Watson, and Bremer. Shortly thereafter, Watson’s daughter contacted Devon to the effect that Watson’s dementia may have deprived him of the capacity to convey his interest to Enerlex. Consequently, Devon continued to hold the royalty payments in suspense. This went on for another year or so until Watson’s court-appointed conservator filed suit against Devon and Enerlex to set aside the 2009 deed. In October 2021, Watson, Devon, and Enerlex entered into an agreed judgment setting aside the deed and requiring Watson to deliver a properly executed division order to Devon. The division order, however, erroneously stated that 100% of the proceeds of the Bray Interest were payable to Watson and his law firm. Relying on this order, Devon released more than $800,000 in payments to Watson and the firm. The firm then assigned its interest to P&J Energy, which, along with Devon, executed a new division order. All in all, by 2016 Devon had paid more than $1 million in royalties to the Watson and the law firm.
Then things went sideways in a hurry. Perdido, the plaintiff in this action, sent a demand letter to Devon on behalf of Smitherman, Jr. claiming 50% of the Bray Interest. A couple of months later, Perdido and Devon executed a release agreement under which Devon paid Smitherman $50,000 towards the total amount of proceeds later determined to be owed to him (Devon never paid Smitherman any additional money). A few months after that, Perdido sent another demand letter on behalf of Bremer for 25% of the interest. Negotiations ensued, but no similar release agreement occurred, and Devon did not pay anything to Bremer. Perdido proceeded to file suit in October 2017, asserting claims for nonpayment of royalties and breach of fiduciary duty. Devon asserted limitations and that Smitherman’s claim was barred by the release agreement. Devon cross-claimed against Watson for overpayment of royalties. It also alleged breach of contract against Smitherman based on the release. In competing motions for summary judgment, the trial court awarded partial summary judgment to Devon on its limitations defense as to claims accruing before October 3, 2013 (four-year statute of limitations). The court further granted Devon’s motion for summary judgment on the basis that Devon paid the royalties to Watson in accordance with the division order, which precluded Smitherman’s and Bremer’s claims. Perdido appealed.
We apologize for this lengthy statement of the facts, but every bit of it is relevant to the court of appeals’ decision. We will deal with each of the issues in turn.
- Perdido challenged the trial court’s grant of summary judgment on the nonpayment of royalties claim based on § 91.402, Natural Resources Code. The statute requires a plaintiff seeking payment of royalties to establish the identities of the payee and payor and that: (1) the payor failed to pay royalties owed, (2) the payee(s) notified the operator of the failure to pay, (3) the payor didn’t pay within 30 days of receiving notice, and (6) the payee(s) were injured as a result. Reviewing the summary judgment evidence, the court of appeals determined that plaintiff established each element of the statutory cause of action.
- Turning to Devon’s argument that the agreed judgment in the Enerlex case and prior division order in favor of Watson relieved it of its duty to pay Smitherman and Bremer, who Devon contended were collaterally attacking the judgment. Noting that Smitherman and Bremer were not parties to or otherwise bound by that judgment and that the Enerlex case simply returned Watson’s interest to him, the court found that it did not preclude Perdido’s claims.
The division order claim, however, involved the court in an extended analysis of the application of SCOTX’s decision in Gavenda v. Strata Energy, Inc., 705 S.W.2d 690 (Tex. 1986) to the facts of this case. In Gavenda, SCOTX observed the general rule that “division orders are biding until revoked and that they bind underpaid royalty owners,” but likewise “recognized that when the operator prepares erroneous division orders and retains the benefits, Texas courts have held that the division orders were not binding.” In Gavenda, the operator prepared the erroneous division order and underpaid royalties to the Gavendas, thus “profiting at their expense.” The operator was thus liable for the underpayment. Devon contended that Gavenda shielded it from liability, since it didn’t profit from any underpayment owed to Smitherman or Bremer. Finding no direct Texas authority for the facts in this case, in which Smitherman and Bremer were nonsignatories to the division order at issue, the court turned to precedent from the North Dakota Supreme Court. In a series of cases, that court held that where the royalty owners seeking payment did not execute the division orders, as is the case here, the operator “could not rely on the division orders executed by the other parties to absolve it from underpaying” the royalties. Moreover, the court held, the royalty owners were not limited to suing the royalty owner who was overpaid for unjust enrichment, as Devon claimed. Detrimental reliance on the part of the operator was precluded because the operator did not rely on the actions of the non-signatories. Gavenda does not apply.
- Devon next contended that a “change in ownership” clause in the its lease precluded Smitherman’s and Bremer’s claims for breach of the lease. This provision generally relieves an operator of liability for “mispayment [] caused by a change in ownership and no notice is given to the lessee of such change” (citations omitted). In this case, however, there was no change of ownership since Watson was never entitled to 100% of the royalty payments to begin with.
- The release agreement was up next. Devon argued that when it paid Smitherman $50,000, it “satisfied its entire obligation for royalties on past production owed to Smitherman and barred him from bringing any claims for past due royalties.” Only Smitherman’s claims for future royalties, rather, that were reserved. The court of appeals rejected this argument based on the plain language of the release, which by its terms “indicate[d] that Smitherman did not release his claim for royalties for past production,” only that the $50,000 payment “will be applied as a credit towards any amount due and owing to Smitherman,” either past, present, or future. The release further provided that Devon could recover the $50,000 if it was later determined that Smitherman was not entitled to any royalties. The agreement thus did not release Smitherman’s claims for royalties on past production.
- As to the limitations issues for both Smitherman’s and Bremer’s claims, the court of appeals agreed with the trial court that their claims accrued on a monthly basis beginning when Devon obtained the lease in 2008. Under Texas law, the accrual date for payments under an oil and gas lease generally roll forward on a monthly basis. Perdido tried to avoid the general rule by claiming that Devon’s withholding of the royalty payments changed the accrual date until Devon released payments to Watson in early 2013. The court of appeals found this irrelevant to the question. Nothing stopped Smitherman or Bremer from bringing a nonpayment suit at any time from 2008 forward. The statute of limitations thus cut off claims accrued prior to October 3, 2013, four years back from the date Perdido filed this action. The court further rejected Perdido’s argument that Devon misrepresented that it was going to pay Smitherman and Bremer in hopes of running out the limitations period. It determined that Perdido did not establish that Devon was estopped from pleading limitations because limitations had already expired at the time of the misrepresentation and could not be relied on to the detriment of the royalty owners.
- But not so fast: Perdido alleged that Devon acknowledged its indebtedness to Bremer, thus negating its limitations defense. The court reviewed a string of emails between Perdido and Devon, which, taken as a whole, “constitute[] an acknowledgement of its indebtedness to Bremer for unpaid royalties irrespective of limitations.” As to the issue of whether the acknowledgement was “signed by the party to be charged,” the court held that the signature block of an email, which is created by the email owner, is the functional equivalent of a written signature for purposes of an acknowledgment of the justness of a claim theory.
The court made short work of Smitherman’s claim for fraudulent inducement based on the release, remarking that the release itself referred to Devon’s reservation of a limitations claim in the event of future litigation. It also held that Devon could pursue its cross-claim against on remand, even though that claim was not before the court of appeals. To sum up, the court reversed summary judgment for Devon on Smitherman’s claim for unpaid royalties for production occurring after 2013 and Bremer’s claim for unpaid royalties and remanded for further proceedings.
This case is very much worth reading for oil and gas lawyers for its discussion (and distinction) of Gavenda and its holding on plaintiff’s theory that Devon acknowledged the justice of Bremer’s claim, defeating its limitations defense. It would not be surprising to see Devon file a petition for review, particularly as the court of appeals’ decision turns on an interpretation of Gavenda in concert with North Dakota authority.
