This summer, the Texas Supreme Court heard another appeal involving Samson Exploration, LLC (formerly Samson Lone Star, L.P.) and mispayment of royalties. While the issues in this case involved double pooling, ratification, and procedural issues, which will be discussed in later articles, the issue focused on discuss today is disgorgement of royalty payments. Specifically, are over-paid royalty owners required to pay to under-paid royalty owners the amounts that were overpaid, or is it the operator’s responsibility to come out of pocket to make the under-paid royalty owner whole? Well, the answer depends on the circumstances, of course. However, Samson learned a lesson in this instance, and all operators should beware.
In short (with most facts omitted), when creating two separate pooled units, a mistake in the description of one of the units was made, and the boundaries and depths of the two units overlapped. A well was drilled that was on lands that were included in the two units, and also produced from the overlapping depth. Samson refused to pay a lessor that was in the first pooled unit, and by virtue of the overlap also had lands in the second unit, claiming the second unit was invalid. The Supreme Court disagreed, and Samson argued that any the over-paid owners were responsible for paying the under-paid owners, as Samson’s overpayments to them were made in good faith.
“Samson’s reimbursement theory rests on the premise that enforcing its obligation to pay ‘has the practical effect of enlarging the [DuJay1/Amended] unit.’” Thus, royalties would need to be recalculated and redistributed. Samson “characterize[ed] prior royalty payments to the DuJay1/Amended Unit stakeholders as ‘good faith overpayments,’” which should be required to be disgorged by the over-paid royalty owners. However, the court of appeals disagreed, providing that “money voluntarily paid on a claim of right, with full knowledge of all the facts, in the absence of fraud, deception, duress, or compulsion, cannot be recovered back merely because the party at the time of payment was ignorant of or mistook the law as to his liability.” The conclusion that the Texas Supreme Court agreed with was that “the summary judgment evidence conclusively shows that Samson’s payments [to the DuJay1/Amended Unit stakeholders] were voluntary and that Samson made the payments . . . with full knowledge of the fact that it had created units that shared significant areas of their pools, including the zone being produced by one of its wells.”
“The court [of appeals] also observed that Samson never exercised its authority to amend the designation of the declaration, even though the designation that it filed expressly provided that Samson reserved the right to do so ‘in order to correct any error herein[.]’ […] Further, ‘Samson did not allege that any of the [DuJay1/Amended Unit] claimants were guilty of any acts of fraud, that it paid the royalties under duress, or that it was compelled to pay royalties over its objection to doing so.’” Because the Texas Supreme Court found that Samson made no attempt to correct the error in the pooling designations despite being on notice that the units were at issue, and with actual notice of the overlapping depths, they held that “Samson must bear its contractual obligation to pay royalties out of its working interest rather than seeking reimbursement from stakeholders in the DuJay1/Amended Unit.” The Court stated that “[t]hough Samson bemoans the economic consequences of its actions, this is a circumstance of Samson’s own making,” and concluded with a final thought from a previous court decision:
[The lessee,] unfortunately, has agreed to pay royalties two ways. Our conscience, though aroused, is relieved by the recognition that [the lessee] was the scrivener, and lucidity was in its hands and with its pen. While it may be unusual to have double royalty agreements, contract conformity to the usual is not a judicial responsibility. To argue that we must enforce only reasonable contracts or contracts which reasonable men enter into, mistakes our function. We can and do enforce unreasonable contracts if they be clear. Unreasonable men make reasonable contracts and reasonable men may make unreasonable contracts.
In other words, the Court won’t save you if the contract is clear, albeit unreasonable, unusual or just plain stupid.