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Seeing Double: Operator Must Pay Royalties To Multiple Units, Says Texas Supreme Court

Late last week, the Texas Supreme Court told a cautionary tale for operators with its unanimous opinion in Samson Exploration LLC v. T.S. Reed Properties Inc., which addressed the circumstance in which a well is situated within not just one pooled unit, but instead within two overlapping units.

The operator, Samson Exploration, took it upon itself to pay royalties from the well to interest owners from one of the units, to the exclusion of the other. Unsurprisingly, the royalty owners from the second unit who had gone unpaid promptly balked, arguing that—although Samson may have struck a poor bargain by including a single well in multiple units—a deal is a deal, and so a sophisticated actor like Samson must sleep in the bed that it made.

The Texas Supreme Court, affirming a decision from the Ninth Court of Appeals in Beaumont, sided with the royalty owners.

Samson hung its hat on the principle of property law that title cannot be duplicatively conveyed. Taking this tenet, together with the rule that a pooled unit is invalid unless title is cross-conveyed, Samson reasoned that the second unit never even came into existence—thereby relieving it of any obligation to pay royalties.

Justice Guzman, writing for the undivided Court, did not mince words when, in response, she bluntly announced that “Samson’s argument in this case is a theoretical construct that holds no water.”

Elaborating, Justice Guzman emphasized that the strictures of property law do not alone control the issue. “Under the law in Texas, pooling implicates both contract and property law—authority to pool emanates from contract but pooling agreements give rise to interests in realty.” Owing to this duality, the Supreme Court “discern[ed] no impediment to enforcing Samson’s obligations in this case under a contract theory even if the pooling designation failed to effect a conveyance of title.”

While the Court had already made itself abundantly clear, it drove its point even further home when it proceeded to invoke the words of a 1968 decision from the Fifth Circuit, Howell v. Union Producing Co., 392 F.2d 95 (5th Cir. 1968):

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 short, the Court concluded, “[t]hough Samson bemoans the economic consequences of its actions, this is a circumstance of Samson’s own making.”