Presenting a live 90-minute webinar with interactive Q&A Mineral Royalty Mispayments: A Discussion of Common Mispayment Scenarios and Applicable Law THURS DAY, NOVEMBER 21, 2013 1pm East ern | 12pm Cent ral | 11am Mount ain | 10am Pacific Today’s faculty features: Douglas Hafer, Part ner, Curnutt & Hafer, Arlingt on, Tex. Daniel B. Mat his, S enior At t orney, Devon Energy, Oklahoma Cit y The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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Mineral Royalty Mispayments: A Discussion of Common Mispayment Scenarios and Applicable Law Douglas Hafer Curnutt & Hafer, LLP Daniel B. Mathis Sr. Attorney, Devon Energy Corp. Strafford Webinar November 21, 2013
Disclaimers The materials in this presentation are for informational purposes only and are not, nor are they intended to be, legal advice. Legal advice involves a licensed attorney applying the law to the specific facts of your situation. Accordingly, the authors make no warranty herein, and disclaim all implied warranties. To obtain legal advice regarding your specific situation, please contact the attorney listed herein or an attorney in your local jurisdiction. Any opinions expressed in this presentation are those of the authors only and do not represent the opinions, views, or positions of Devon Energy Corporation or any of its affiliates. Strafford Webinar – November 21, 2013 5
Outline • Common Royalty Mispayment Scenarios – Causes – Underpayments – Overpayments • Resolving Underpayments – Who has to pay? • Resolving Overpayments – Can overpayments be recovered? – Judicial and self-help recoupment – The operator’s claims and defenses • Examples from cases (discussed throughout) Strafford Webinar – November 21, 2013 6
Why? • Underpayments – Lessee has a contractual obligation to pay royalties – Interest may accrue – Leases may expire (although uncommon in certain states) • Overpayments – Operator may lose revenue • Know how to respond when mispayments occur • Avoid and catch some of the common mistakes • Insight into how these cases are legally analyzed Strafford Webinar – November 21, 2013 7
What Causes Mispayments? • Human error – Simple clerical mistakes – Transposed numbers – Typographical errors • Miscalculations – Complicated decimal interests are common – Example: 5/6 x 4/7 x 1/8 x 37.55/683.02 = .0033272406 • System/computer glitches • Uncommon contractual provisions • Mistaken identity (paid the wrong person) • Mistakes of judgment Strafford Webinar – November 21, 2013 8
What Type of Mispayments? Two basic types: 1) Underpayment • Royalty payee is due royalties on past production • Usually caught by payee • Generally may be cured 2) Overpayment • Royalty payee was paid more than its share • May go undetected for many years • More challenging (practically and legally) Strafford Webinar – November 21, 2013 9
Royalty Mispayments Example #1: The David Family Case • Facts (underpayment and overpayment) – David Lease pooled with John Lease – Davids continued receiving royalties on lease-basis rather than unit-basis for over four years – Operator discovers that Davids were overpaid $164,000+ – Johns have been underpaid (no royalties or division orders) • Once the mispayment is discovered: – Operator pays the Johns their royalties – Operator notifies Davids of overpayment – Operator informs Davids that it will reduce future royalties to recoup the overpaid amounts • What happens next? Strafford Webinar – November 21, 2013 10
Royalty Mispayments Example #1: The David Family Case • The operator gets sued. – Breach of Contract; Breach of Duty to Pool in Good Faith; Breach of Duty to Conduct Operations as a Reasonably Prudent Operator; Subterranean Trespass; TRO and Injunction [The Corporation and its Affiliate Operator] Strafford Webinar – November 21, 2013 11
Royalty Mispayments Example #1: The David Family Case • Underpayment to Johns – resolved by paying • Overpayment to David Family – Operator counterclaims for recoupment – Davids’ response • “Voluntary Payment Rule” defense • Claims limited by statute of limitations • Conclusion? – Parties settled shortly after mediation – Davids agreed to operator recouping by withholding 50% of royalties on additional wells drilled up to $121,000 Strafford Webinar – November 21, 2013 12
Mispayment Overview: Three-Part Analysis Part A: Identify Mispayment Type(s) and Resolve Underpayments Part B: Analyze Overpayment Facts/Evaluate Recoverability Part C: Assess Recoupment Options Strafford Webinar – November 21, 2013 13
Mispayment Analysis Part A: Underpayments Strafford Webinar – November 21, 2013 14
Part A – Underpayments (cont’d): Signed Division Orders If there is a signed division order, and the underpaid payee’s money is with another overpaid payee, then the underpaid payee must recoup from the overpaid payee. – Gavenda v. Strata Energy, Inc. , 705 S.W.2d 690 (Tex. 1986). Strafford Webinar – November 21, 2013 15
Part A – Underpayments (cont’d): Signed Division Orders Division Order Pay me 2 bags. Signed, Payee #1 (5 bags to distribute) Strafford Webinar – November 21, 2013 16
Part A – Underpayments (cont’d): Signed Division Orders • Payee #1 may pursue a claim against Payee #2 to recover its underpayment. Payee #2 has been overpaid. • No underpayment claim against Payor. • Payor did not retain any excess. Strafford Webinar – November 21, 2013 17
Part A – Underpayments (cont’d): Example #2: Gavenda Case • Facts – Gavendas owned an undivided 1/2 NPRI (15-year reservation) – Strata’s title examination found that Gavendas owned 1/16 NPRI – Division and transfer orders completed and executed at 1/16 • Royalties disbursed and accepted by the Gavendas at 1/16 – Two days before their 15-year interest terminated, the Gavendas revoked the division and transfer orders – Gavendas sue to recoup $2.4 million in underpaid royalties • Strata’s Position: The division and transfer orders are binding until revoked. • Gavendas’ Position: No, not when the payor is enriched. Strafford Webinar – November 21, 2013 18
Part A – Underpayments (cont’d): Example #2: Gavenda Case • Holding? – The general rule is that division orders and transfer orders bind the underpaid royalty owners until revoked. – Exception: When the operator retains the benefits. • Reasoning: – Payor is entitled to receive a signed division order as a condition of payment. – Division order binds underpaid royalty owner until revoked. – Operator’s rely on the signed division orders, so payees are estopped from pursuing claims against payor due to payor’s detrimental reliance. Strafford Webinar – November 21, 2013 19
Part A – Underpayments (cont’d): Signed Division Orders Division Order Pay me 2 bags. Signed, Payee #1 Later, Payee #1 realizes it is entitled to 3 bags. • If Payor retains the excess, the signed division order does not bar Payee’s underpayment claim against the Payor. • Payee #1 has no claim against Payee #2. Strafford Webinar – November 21, 2013 20
Part A – Underpayments (cont’d): Underpaid Payee’s Options • Two general causes of action if underpaid: 1. Breach of Contract claim against Lessee – Obligation to pay royalties under the lease – Lease may include a termination provision 2. Nonpayment under T EX . N AT . R ES . C ODE § 91.404 – May sue “Payor” (lessee, operator, first purchaser) – Payor = first purchaser unless first purchaser and one with right to produce have agreed that operator is to distribute and has the proceeds Strafford Webinar – November 21, 2013 21
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