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The Texas Division Order Statute: How It Works and Who It Serves to Protect By Madison Schrutka, Oliva Gibbs LLP
Texas
Introduction
reliance. Generally, detrimental reliance protects payors, while unjust enrichment protects underpaid payees. This binding rule serves as a safeguard for payors who would otherwise be unfairly subjected to double liability 8 .Typically, that danger arises when payors, relying on division orders, “pay out the correct total of proceeds owed, but err in the distribution, overpaying some royalty owners and underpaying others.” 9 If the resulting lawsuits were not estopped, payors “would pay the amount of the overpayment twice—once to the overpaid royalty owner under the division order and again to the underpaid royalty owner through his suit.” 10 In this scenario, the division order remains binding and the underpaid signatory royalty owner’s only relief lies in a suit to recover from the overpaid royalty owner. The basis of that recovery is unjust enrichment: the overpaid royalty owner has erroneously claimed, and is not entitled to, the sum of overpaid royalties that rightfully belongs to the underpaid payee. 11 Therefore, under these 1). Gavenda v. Strata Energy, Inc., 705 S.W.2d 690, 691 (Tex. 1986). 2). Tex. Nat. Res. Code Ann. § 91.402(c)(1) (Vernon); Prize Energy Res., L.P. v. Cliff Hoskins, Inc., 345 S.W.3d 537, 560 (Tex. App.— San Antonio 2011, no pet.), abrogated on other grounds by Nath v. Tex. Children’s Hosp., 576 S.W.3d 707 (Tex. 2019). 3). Joseph Shade & Ronnie Blackwell, Primer on the Texas Law of Oil & Gas 62 (5th ed. 2013). 4). § 91.402(g) (Vernon). 5). Id. at (c)(2). 6). Id. at (h). 7). Gavenda, 705 S.W.2d at 690. 8). Id. at 692. 9). Id.
A division order is a statement executed by all owners of interests in an oil and gas well. The division order’s essential purpose is to “authorize and direct to whom and in what proportion to distribute” proceeds from the sale of produced oil and gas. 1 While, in Texas, the payor is entitled to a signed division order from the payee as a prerequisite for payment, it is the payor’s burden to submit the order to the payee for its signature. 2 Upon the division order’s execution, “the payor is [generally] protected from liability even if there is a mistake as to who receives what percentage of production.” 3 Creating a contractual relationship, the signed division order is binding from the moment, and to the extent it has been acted on. 4 However, it “does not amend any lease or operating agreement between the interest owner and the lessee or operator or any other contracts for the purchase of oil or gas.” 5 Moreover, any provision within the division order that is “in contradiction with any provision of an oil and gas lease is invalid to the extent of the contradiction.” 6 Erroneous Division Orders: Handling the Danger of Double Liability In the landmark case of Gavenda v. Strata Energy, Inc. , the Supreme Court of Texas (SCOT) addressed whether division orders are “binding until revoked when an operator prepares erroneous division orders [and] underpays royalty owners.” 7 Texas’ standard rule is that until revoked, division orders bind underpaid royalty owners – subject to the principles of unjust enrichment and detrimental
10). Id. 11). Id.
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N at i onal A ssociation of D i v i s i on O rder A nalys t s
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