The Texas Supreme Court has reversed a Corpus Christi Court of Appeals decision holding that the owner of a non-participating royalty interest did not convert his fixed interest into a floating one when he entered into a stipulation and cross-conveyance agreement with another royalty owner in a pooled interest.
ConocoPhillips Company v. Kenneth Hahn (No. 23-0024; December 31, 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 and cross-conveyance 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 not 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, Conoco 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. This time SCOTX granted Conoco’s petition for review.
In an opinion by Justice Busby, SCOTX reversed and rendered judgment for Conoco. First, the Court agreed with the court of appeals that Hahn’s ratification of the Conoco/Gips lease did not convert his fixed 1/8 NPRI to a floating interest, as Conoco argued. While it is true, Justice Busby wrote, that “a ratifier is bound to the ‘entire transaction’ and ‘may not, in equity, ratify those parts of the transaction that are beneficial and disavow those which are detrimental” (citation omitted), the Gips lease’s royalty provision did not apply to Hahn’s non-possessory interest because “of the different nature of the property interests involves.” In other words, Hahn’s non-participating interest conveyed a fractional interest based on a fixed share of production, which remains constant “regardless of the amount of royalty stated in the subsequently negotiated Gips lease.”
The court of appeals went wrong, however,, because it failed to apply SCOTX’s holding in Concho Resources, Inc. v. Ellison, 627 S.W.3d 226 (Tex. 2021) to the effect of Hahn’s stipulation and cross-conveyance of royalty interests in Tract A. The Court rejected Hahn’s arguments that the stipulation was unenforceable under the Statute of Frauds, determining rather that it sufficiently identified the owners of the interests, described the royalty interest involved, and specified the parties’ subjective intent to convey the interest (i.e., the 1/8 NPRI reserved to Hahn). In short, by conveying his NPRI in the stipulation agreement, Hahn agreed to convert his 1/8 fixed share of production to floating 1/8 NPRI. This conversion, Justice Busby added, did not have to identify “the specific quantum of royalty conveyed,” especially in light of the stipulation’s quitclaim deed language of which the Court “ha[s] long recognized the validity [], even if it turns out that they convey nothing” (citation omitted).
Those looking to geek out on a thorough and detailed discussion of the legal effects of pooling agreements, ratification agreements, and stipulated cross-conveyance between owners of different types of royalty interests, this case is definitely for you. In a broader sense, the case maintains the Court’s longstanding position that parties are bound by the agreements they make, as long as those agreements are valid in accordance with contract law principles.
