After declining to review a Corpus Christi Court of Appeals’ decision in favor of a royalty owner, the Texas Supreme Court has agreed to hear a second decision from the same court arising from a dispute that arose on remand of the original case.
ConocoPhillips Company v. Kenneth Hahn (No. 23-0024; granted June 21, 2024) arose from a series of transactions involving two tracts of land and their minerals in DeWitt County. In 2002 Hahn and his brother partitioned a 74-acre tract in which they owned undivided one-half interests in the surface estate (Tracts A and B). The brothers, along with two other siblings, owned undivided one-quarter interests in the mineral estate. Shortly after the executing the partition deeds, Hahn sold his interest in Tract A to the Gips, in which he reserved a one-eighth royalty in any future oil and gas production. In 2010 the Gips executed an oil and gas lease with Conoco, under which they reserved a one-fourth landowner’s royalty interest. The lease also authorized Conoco to pool Tract A with surrounding properties. In July 2011 Hahn ratified the Concoco/Gips lease “as fully and completely as if I had originally been named as Lessor in the Lease . . .” Shortly thereafter, Conoco pooled Tract A into a unit consisting of about 307 acres, and both the Gips and Hahn signed stipulation agreements.
As to Tract B, Hahn leased his one-quarter interest to Conoco in 2011. Conoco subsequently pooled the lease into the unit that likewise included Tract A. At this point the problems began. Reviewing the partition deeds, Conoco came to the conclusion that Hahn had no conveyed both his surface and mineral estate interests in Tract B to his brother and was not entitled to royalty payments. Hahn sued Conoco and the Gipses to confirm his one-quarter interest in Tract B and his one-eighth interest in Tract A. The trial court granted summary judgment in favor of Conoco. On appeal, the Corpus Christi Court of Appeals reversed, holding that: (1) the partition deeds between Hahn and his brother conveyed only the surface; (2) Hahn reserved a fixed one-eighth royalty interest in Tract A; and (3) Hahn’s 2011 stipulation of interest had no effect on Hahn’s fixed one-eighth. On remand, however, Hahn and Conoco got into another argument over the calculation of Hahn’s one-eighth fixed royalty interest in Tract A. This dispute arose over the calculation of Tract A’s participation rate in the pooled unit, which Conoco calculated as a floating (as opposed to a fixed) one-eighth because, it argued, it had to be reduced by the Gipses’ one-quarter landowner’s interest by virtue of Hahn’s ratification of the Conoco/Gips lease. Conoco thus filed a counterclaim asserting a declaratory judgment claim. Once again, the trial court ruled for Conoco, affirming the company’s interpretation of the effect of the ratification agreement on Hahn’s interest. It also awarded Conoco attorney’s fees under the UDJA. Once again, Hahn appealed.
And, once again, the Corpus Christi Court of Appeals reversed. In an opinion by Chief Justice Contreras, the court held that its 2016 opinion resolved that Hahn was entitled to a fixed one-eighth interest in Tract A, regardless of the subsequent ratification agreement. The 2002 deed was unambiguous, and nothing that happened since then modified its terms. Moreover, SCOTX denied Conoco’s petition for review of the court’s prior opinion. Turning to Conoco’s argument that the ratification agreement “converted” Hahn’s fixed one-eighth interest into a floating interest, the Court rejected the company’s argument that Hahn could not simply “ratify its lease with the Gipses for pooling purposes only.” Rather, by ratifying the Gipses’ lease as if he had been the lessor, as the agreement provided, he agreed to reduce his interest by the Gipses’ one-quarter landowner’s interest. Unpersuaded by Conoco’s argument and authorities, the court stuck to its guns that “a fixed non-possessory royalty interest [NPRI] is not diminishable by a landowner’s royalty.” According to the court, in the absence of express language to the contrary the only effect of the ratification agreement was to ratify the lease’s pooling provision. Finally, the court reversed the trial court order awarding Conoco its attorney’s fees on the basis that Conoco’s counterclaim raised an affirmative defense and could not be properly brought as a UDJA claim. But the court did remand Hahn’s claim for attorney’s fees under Chapter 38, CPRC, for further consideration.
SCOTX granted Conoco’s petition for review but has not yet scheduled oral argument. S what makes this iteration of the case different enough that SCOTX saw something it needed to address? One possibility is the effect of its intervening decision in Concho Resources, Inc. v. Ellison, 627 S.W.3d 226 (Tex. 2021). In its petition for review, Conoco takes the court of appeals to task for not giving effect to express language in the ratification agreement that, Conoco argues, modified Hahn’s royalty interest. Chief Justice Contreras went to great lengths in her opinion to distinguish Concho Resources, which reversed a 2019 Corpus Christi Court of Appeals decision that utilized the same logic as that court’s 2016 opinion in this case, i.e., that a subsequent agreement cannot correct a pre-existing deed if the terms of the underlying deed are unambiguous. In Concho Resources, SCOTX held rather than the subsequent boundary agreement was enforceable whether the original deed was unambiguous or not. Sticking to her guns, Chief Justice Contreras opined that since it involved a boundary dispute, Concho Resources did not apply here. She also points (rather vaguely, in our reading) to “ambiguity in the minds of the parties as to the correct boundary separating the properties” raising a “question” as to the proper boundary, but it is unclear what that speculation has to do with anything.
In any event, this could be a very important case, particularly in the context of determining the appropriate distribution of royalties under pooling agreements that are subsequently ratified by NPRI owners. While we can’t tell how much money is at stake, there is clearly a question of principle involved. We applaud Conoco for its dogged pursuit of that principle in this case.
