Lessor, Should You Cash That Royalty Check?

Originally published by Charles Sartain.

Did the lessor’s deposit of royalty checks for production from a pooled unit that she contends was improper ratify the improper pooling? In Strickhausen v. Petrohawk et al, a jury will have to sort out the answer. Her case will be aided by exculpatory language in her oil and gas lease and her complaints from the beginning that her lease was improperly pooled.

 

The “Future Documents” clause and other facts

 

Strickhausen’s lease on 50 percent of the minerals on land in LaSalle County, Texas, prohibited pooling without her express written consent. An unusual “Future Documents” provision said (to paraphrase): If the lessee requires her to execute any document, such as a division order, such execution does not constitute waiver, acceptance, ratification, reviver, or adoption or waiver of any claim or demand, unless the document expressly states that as its purpose.

 

While the land department must have been debilitated after three days at NAPE, the lessees pooled Strickhausen’s lease and the lease on the other 50 percent (which had no such prohibition) into the WK Unit #4 without obtaining her consent. Strickhausen’s lawyer and Petrohawk traded demands, communications and settlement offers, during which time Strickhausen received and deposited royalty checks totaling over $590,000 for production from the pooled unit.

 

 Strickhausen sued. Petrohawk alleged as defenses that she ratified the improper pooling and was estopped from denying that she ratified the pooling.

 

The law

 

 A pooled unit that does not comply with the terms of a lease’s pooling authority is invalid and unenforceable absent the lessor’s ratification. There was no doubt Petrohawk breached the pooling provision.

 

Victory based on the defense of ratification requires evidence establishing:

 

• approval by act, word or conduct,

• with full knowledge of the facts of the earlier act, and

• with the intention of giving validity to the earlier act.

 

How the court saw it

 

After being tossed by the trial court, Strickhausen lives to fight another day. The court of appeal based its analysis on two recent Supreme Court cases, Hooks v. Samson Lone Star, LP  and Sampson Exploration v. T S Reed Properties, LLC. In those cases, Hooks ratified a pooling amendment. Having full knowledge that something had changed from the original, Hooks consented to the amendment by his actions. He didn’t challenge or deny the validity of the new unit and therefore couldn’t later assert that he should also receive royalties from the old unit.  The important distinction between this case and Hooks is that Strickhausen immediately challenged the pooling.

 

Strickhausen’s Future Documents clause addressed documents that the lessee required Strickhausen to execute. The court observed that Petrohawk did not require her to execute the royalty checks. We’ll see if that plays a part in the final result.

 

The court reversed summary judgment in favor of Petrohawk on the defense of ratification as it relates to the no-pooling clause.

 

The court of appeal said it didn’t understand the trial court’s ruling on estoppel. In any event, there was a fact question on one of the elements defined by Hooks. Petrohawk’s summary judgment on estoppel was also reversed.  

 

For our musical interlude, dead guitar players you should pay more attention to: Hubert Sumlin, Michael Bloomfield, John Fahey.

 

 

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

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