Unit Operator Pays For a Problem of its Own Making

Originally published by Charles Sartain.

Co-author Chance Decker

How many times must an operator suffer for a mistake in a unit declaration? Samson Exploration LLC v. T. S. Reed Properties Inc. makes it twice. (See Hooks v. Samson Lone Star for the first round). The Texas Supreme Court ruled that a lessee could not avoid a contractual obligation to pay royalties from a zone shared by two pooled units.

The facts: Pooled unit, wells, amended unit, well, new unit

Samson designated a unit comprising certain depths and drilled two producers. After one lessor exercised its right to reject pooling Samson amended the unit and changed the depth designation and surface acreage, excluding the first well from the amended unit. Samson did not attribute production from the first well to the new unit. Samson completed a third well on the amended unit and retroactively designated a new unit covering the depth at which the third well was producing. The new unit designation overlapped the depths of the amended unit. Samson didn’t pay royalties to the stakeholders in the amended unit.

The “Overlapping Unit Owners” sued for breach of the pooling provisions of their leases and for underpayment of royalties. The court considered several defenses asserted by Samson.

Defenses Rejected

Samson’s defenses were based on a mistake. The amended unit should have had a depth limitation to prevent the overlapping boundaries. The court noted that is has never determined whether pooled units may overlap.

Impracticability? Not when it’s your own fault that you created a unit and unilaterally defined its boundaries without including a depth limitation.

Cross-conveyancing doomed the second unit? An interest owner cannot transfer its property twice, which means the second unit designation never actually came into existence. No. The fact that a cross-conveyance of title may fail does not excuse an operator from paying royalties under a breach of contract claim.

Scrivener’s error? No. A party is excused from the terms of its contract if there is a mutual mistake. Samson alone was responsible for failing to include a depth limitation in the second pooling designation.

Samson claimed reimbursement from the amended unit stakeholders rather than paying royalties owed to the Overlapping Unit Owners. No. Voluntary payment on a claim of right with full knowledge of the facts in the absence of fraud, deception, duress or compulsion cannot be recovered merely because the party at the time of payment was ignorant of or mistook the law as to its liability. Samson failed to correct the error in the amended designation although it could have done so.

Wins for Samson

Ratification: The “Unpooling Stakeholders” also sued. But they were aware that something had changed in the unit designation even if not exactly how. After notice, they continued to accept payments without challenging the amended unit. Thus, they ratified the amendment. They should have stopped accepting the payments.  (See Hooks again)

Samson was entitled to proportionate reduction: A description of the “leased premises” was to outline the boundaries of the land so it could be located on the ground, not to define the estate conveyed.

A musical interlude for Samson.

Curated by Texas Bar Today. Follow us on Twitter @texasbartoday.

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