Recently, a Petition for Review was filed in the Texas Supreme Court centering on an assignment terminating due to non-payment of overriding royalty interests. Specifically, the Court of Appeals for the Sixth Appellate District of Texas, Texarkana, looked at the issue of ‘strict compliance’ with respect to sending notices of default, and whether this technicality was complied with, or even if it needed to be.

Here’s what happened. Kittrell Family Minerals owned a mineral lease, and in 2009, assigned it to Circle Ridge Production, Inc. Kittrell reserved an overriding royalty in the Assignment. Included in that reservation was a termination provision that read “If royalty is not paid by such due date, Assignor may give Assignee written notice of nonpayment of the overriding royalty (via certified mail to addressed Assignee at the address shown herein), and if Assignor’s overriding royalty is not paid on or before expiration of sixty (60) days from Assignee’s receipt of such notice, Assignor may terminate this agreement and evict Assignee forthwith.”

Of course, Circle did not pay the ORI by the date required. Kittrell sent the notice, demanding payment within 60 days. However, Kittrell used the wrong zip code. Despite the address mistake, Circle received the notice. Circle did not reply. After the time period for the demand expired, Kittrell sent a second notice, demanding payment in 5 days. Circle responded, and also, a few days later, sent a division order. Kittrell sent a letter back to Circle that provided that Circle was “advised that the Assignment is terminated and Circle Ridge has been evicted effective immediately.” Circle continued production and, a month later, sent Kittrell a check. Kittrell returned the check and reiterated that “Kittrell had ‘terminated the Assignment’ and ‘locked the gates to the lease’ and that continued production would be considered trespassing.”

Circle claims that the notice it received was not in strict compliance with the forfeiture clause, and, they argued, “Texas cases have consistently required strict compliance for the termination or forfeiture of an interest in a mineral estate.” Circle claimed Kittrell was not in strict compliance because of the incorrect zip code, and therefore, failed. Keep in mind Circle did receive the notice, but stated that despite receipt, “[i]f the lease contains a provision giving the lessee a right of notice of any breach or default before declaring any forfeiture, it must be ‘literally complied with.” Circle argued that because the wrong zip code was on the envelope, the notice failed.

The Court, however, did not have any sympathy for Circle. The Court noted that Circle had actually received the notice. “‘By focusing on the receipt of actual notice as the event that establishes the sixty-day deadline,” the Court held, “the forfeiture clause decreases the importance of the earlier requirement that the notice be sent to addressed Assignee at the address shown herein.” “The forfeiture clause required actual notice at the address specified in the lease, and the record conclusively establishes Circle Ridge received actual notice at the exact address, including zip code, specified in the Assignment.”

The argument is one I enjoyed, because it was dependent on such a hyper-technical reading of the clause. If the Court had decided to side with Circle, I can’t imagine the internal staffing problems this ruling would create! Circle, of course, asked the Supreme Court to review the decision. I expect the Court will not grant the review, but will hide and watch all the same. However, the lesson to be learned here is two-fold – (1) a wrong zip code ultimately led to the Court of Appeals, and possible the Supreme Court of Texas, so dot those i’s and cross those t’s, and (2) hyper-technical arguments are unlikely to work if there was no harm to the party claiming such a technicality was not followed… so just leave those be.