circumstances, the statute’s purpose is to protect the payor who detrimentally relied on the signed division order, but also the underpaid payee from an unjustly enriched, overpaid payee. Nonetheless, payors are the parties most routinely protected by the rule that division orders are binding until revoked. This trend was validated five years before Gavenda , when the SCOT held that an erroneous division order was binding in favor of the payors, even though there was no detrimental reliance on the payors’ part, so long as “they had not profited from their error in preparing the division order.” 12 Per the SCOT, the Gavenda holding provides “stability in the oil and gas industry.” 13 To put it plainly, as long as payors do not benefit from their own mistake, it is a losing battle for payees if they sue to recover from them. Accordingly, when a payor prepares an “erroneous division order and retains the benefits, Texas courts have held that the division orders were not binding.” 14 Therefore, the payor is liable for the entirety of the payee’s royalties it erroneously retained, but not liable for any royalties it erroneously paid out to other payees. 15 Strongly Construing the Texas Code in Favor of Payors While division orders establish the mechanism of settlements and payments, they can be terminated upon thirty days of written notice and no longer bind their signatories. 16 Until then, Section 91.402 of the Texas Natural Resources Code explicitly requires a payor to distribute production proceeds to each payee within certain deadlines after the oil and gas is sold. 17 Nevertheless, there seems to be a discrepancy between the statute’s explicit language and the meaning the courts have given it. In a nutshell, the Code states that on or before 120 calendar days following the end of the month of the first sale of production, payment is due to each payee, and all subsequent payments must be made in a timely manner based upon the frequency specified in the written agreement; however, if there is no specified frequency, subsequent payments “must be paid no later than 60 days after
the end of the calendar month in which subsequent oil production is sold or 90 days after the end of the calendar month in which subsequent gas production is sold.” 18 In a 2018 case, the SCOT “allowed payees to maintain a cause of action for breach of contract where their lease specified a time limit for payment of royalties,” after holding that Section 91.402 did not distinctly preclude common law claims. 19 Nonetheless, with the aim of ruling that payees cannot bring a common law breach of contract action for overdue royalty payments, the SCOT held that it first needed “clear language from the Legislature indicating an intent to abrogate a common law cause of action,” as Section 91.402 clearly left out that language. 20 In 2021, the Legislature responded and unanimously passed Senate Bill 1259, which provided the explicit legislative intent the SCOT found previously deficient. 21 In view of the 2018 case where the SCOT recognized that Section 91.402 was “designed to protect the interest of royalty owners,” it is no surprise that the industry supported SB 1259, while royalty owners opposed it. 22 On May 24, 2021, the Bill became effective, enforcing from that day forward that “a payee does not have a common law cause of action against a payor for withholding payments under the Natural Resources Code unless the contract requiring payments specifies that payments to the payee may 12). Id. (discussing Exxon Corp. v. Middleton, 613 S.W.2d 240 (Tex. 1981)). 13). Id. 14). Gavenda, 705 S.W.2d 690; Perdido Properties LLC on Behalf of Bremer v. Devon Energy Prod. Co., L.P., 669 S.W.3d 535, 549 (Tex. App. 2023) (emphasis added). 15). Id. 16). § 91.402(g) (Vernon). 17). Id. at (a). 18). Id. (emphasis added). 19). John H. H. Bennett, Oil, Gas, and Mineral Bills Enacted by the 87th Texas Legislature, 18 Tex. J. Oil Gas & Energy L 61, 71 (2023). 20.) Bennett, supra note 18; ConocoPhillips Co. v. Koopmann, 547 S.W.3d 858, 879 (Tex. 2018). 21). Bennett, supra note 18. 22). Koopmann, 547 S.W.3d at 878; Bennett, supra note 18.
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G rowth T hrough E ducat i on - A pr i l / M ay / J une 2024
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