In Leavitt39 v. Ballard Exploration Company, Inc., the Texas First Court of Appeals upheld a trial court decision construing the Safe Harbor Provision of the Texas Natural Resources Code by determining that Ballard Exploration Company, Inc. (“Ballard”) acted within the statute and was not liable for prejudgment interest or attorney’s fees.40
This case involves more than a decade of litigation surrounding royalties from a gas unit in Liberty County, Texas.41 In that dispute, Leavitt’s predecessors claimed a non-participating royalty interest (“NPRI”) ostensibly created by reservation in 1966.42 In 1997, the mineral interest owners leased numerous lands, including those burdened by Leavitt’s NPRI, to Anshutz Gulf Coast Corp., said leases being later acquired by Ballard.
As due course of business, Ballard ordered title opinions on the leases it acquired from Anshutz. Said title examination did not uncover Leavitt’s NPRI, or report it to Ballard, as the examiners interpreted Leavitt’s interest as an expired overriding royalty interest (“ORRI”), rather than an NPRI.43
By 1999, Ballard had unitized the land carrying Leavitt’s NPRI and drilled a producing gas well offsite.44 In 2002, Leavitt discovered the fact that it was not receiving royalty payments on its NPRI despite the occurrence of substantial production within the pooled unit and in 2004 submitted a claim to Ballard for the unpaid NPRI royalties.
Upon receipt of Leavitt’s claim and despite the protests of the mineral interest owners (who claimed that Leavitt’s interest had expired or that royalty payments were inappropriate because the Leavitt’s had never ratified the pooling agreement), Ballard placed all royalties associated with the NPRI in suspense and ordered new title examination for Leavitt’s interest.45 Based on this dispute, the mineral owners filed suit against Leavitt in Liberty County to quiet title over the disputed interest, Ballard was not a party to this lawsuit.46
Later in 2004, Leavitt filed suit against Ballard and the mineral owners in the Harris County Probate Court, which based on non-relevant factors had subject matter jurisdiction over the disputed royalty payments.47 In that suit, Leavitt alleged an immediate right to the suspended NPRI as well as prejudgment interest and attorney’s fees. The Harris County Probate suit was abated pending the conclusion of the Liberty County action. The Liberty County suit ended in settlement (recognizing Leavitt’s NPRI in a portion of the pooled lands), and the Harris County Suit was resumed and renewed in 2015.48 As part of the renewed suit, Leavitt alleged entitlement to prejudgment interest on the NPRI royalties validated in the Liberty County settlement and attorney’s fees in both the Harris County and Liberty County suits. The trial court denied Leavitt’s Motions for Summary Judgment, alleging prejudgment interest, attorney’s fees, conversion, unjust enrichment, and equitable subrogation. Thereafter, the trial court granted Ballard’s No Evidence Motion for Summary Judgment and determined that Leavitt take nothing in its claims against Ballard.49 This appeal followed:
On appeal, Leavitt argued that the trial court erred in rendering summary judgment in favor of Ballard on all counts. The appellate court rejected all points of error and affirmed the trial court’s take nothing judgment.
Specifically, Leavitt argued that Ballard owes prejudgment interest and attorneys fees pursuant to §91.403 of the Natural Resources Code. Under this section, when royalties are not paid within the period proscribed by §91.402 (120 or 60 days as the case may be), oil and gas operators are liable for interest on the delayed payment. In defense, Ballard directed the court to §91.402(b)(1), under which “payments may be withheld without interest beyond the time limits … when there is … a dispute concerning title that would affect distribution of payments.”50 Leavitt argued that the Liberty County suit was not a title dispute as there was no argument over the ownership of the royalty interest; instead, they argued that the dispute lay in the nature and amount of the royalty and payments, if any, based on the royalty owner’s non-ratification of the pooled unit.51 The court rejected this argument, noting that “the dispute over who owned the right to royalties … is a classic situation under which [Ballard] was entitled to withhold” payments.52
The court draws similarities in Leavitt’s case to Headington Oil, a case over the correct amount of royalty interest owned and accordingly affecting the amount of royalty payments owed.53 In Headington Oil, the 14th Court of Appeals concluded that “because the disagreement affected [the operator’s] ability to distribute royalty payments,” a title dispute existed for the purposes of §91.402(b).54 Here, the Liberty County suit affected Ballard’s ability to pay royalties, and suspension without interest was appropriate.
In applying these statutes and considering several cases, the court determined that the Liberty County suit described above, wherein title examination was required to construe the nature of a disputed royalty, constituted a “dispute concerning title that would affect distribution of payments,” affirmed the trial court judgment that the safe-harbor provisions of §91.402(b) was properly applied, and determined that Ballard owed neither prejudgment interest or attorney’s fees to Leavitt.55
Second, Leavitt asserted that Ballard failed to comply with notice prerequisites to the safe-harbor provision located in §91.404 of the Texas Natural Resources Code. The court quickly disposes of this argument by demonstrating that §91.404, when read in its entirety, is a prerequisite to a claimant such as Leavitt filing suit, not a prerequisite for an operator to suspend payments.56
Finally, the court overruled Leavitt’s final points of error based on theories of Conversion, Unjust Enrichment, and Equitable Subrogation. On these points, Ballard argued that because suspending payments related to the disputed royalties was authorized by statute and that upon resolution of Liberty County suit Ballard properly distributed all suspended funds according to the settlement agreement, they could not have profited in any way from the suspended payments. The court summarily agreed with Ballard’s points and dismissed Leavitt’s points of error.57
After dismissing all points of error raised by Leavitt, the court affirmed summary judgment in favor of Ballard, confirming that Ballard properly suspended funds related to a disputed royalty interest and, as such, was protected against prejudgment interest and attorney’s fees by the safeharbor provision of the Texas Natural Resources Code. This case is significant to operators who become aware of ambiguous title situations or disputes among royalty owners. When in doubt about an outgoing payment, an operator should immediately suspend the relevant money pending the interest owners settling their dispute in a signed agreement presented to the operator or receipt of a judgment resolving the same.
38 Michael I. Leavitt, Successor Testamentary Trustee of the Bert Earl Gassaway Testamentary Trust and Successor Independent Administrator with Will Annexed of the Estate of Marie Anderson Gassaway, Deceased v. Ballard Exploration Company, Inc., No. 01-16-00536-CV, 2017 WL 6043695 (Tex. App.-Houston [1st Dist.] Dec. 7, 2017, no pet. h.).
39 For the sake of this brief, numerous parties in Leavitt’s chain of title are simply referred to as Leavitt, herein.
40 Tex. Nat Res. Code Ann. §91.402(b)(1) (West 2011).
41 Leavitt v. Ballard Exploration, 2017 WL 6043695, at *3.
42 Id. at *4.
43 Id. at *6.
44 Id. at *5.
45 Id. at *7.
46 Id. at *7.
47 Leavitt v. Ballard Exploration, 2017 WL 6043695, at *7.
48 Id. at *9.
49 Id. at *11.
50 Tex. Nat Res. Code Ann. §91.402(b)(1) (West 2011).
51 See Montgomery v. Rittersbacher, 424 SW2d 210, 212 (Tex. 1968).
52 Leavitt v. Ballard Exploration, 2017 WL 6043695, at *19.
53 Headington Oil Co., L.P. v. White, 287 S.W.3d 204 (Tex. App.—Houston [14th Dist.] 2009, no pet.).
54 Leavitt v. Ballard Exploration, 2017 WL 6043695, at *23, (citing Headington).
55 Id. at *24.
56 Id. at *24.
57 Id. at *27.