BPX Operating Co. v. Strickhausen

• Decision Date: 11 June 2021
• Docket Number: No. 19-0567,19-0567
• Citation: 629 S.W.3d 189
• Parties: BPX OPERATING COMPANY, BPX Properties (NA) LP, Segundo Navarro Drilling, Ltd., First Rock I, LLC, EF Non-OP, LLC, and South Texas Shale, LLC, Petitioners, v. Margaret Ann STRICKHAUSEN, Respondent
• Court: Texas Supreme Court

629 S.W.3d 189

BPX OPERATING COMPANY, BPX Properties (NA) LP, Segundo Navarro Drilling, Ltd., First Rock I, LLC, EF Non-OP, LLC, and South Texas Shale, LLC, Petitioners,

v.Margaret Ann STRICKHAUSEN, Respondent

No. 19-0567

Supreme Court of Texas.

OPINION DELIVERED: June 11, 2021

Rehearing Denied October 15, 2021

Argued October 28, 2020

Jennifer Ruth Josephson, Christopher Michael Hogan, Jeremy Leon Doyle, for Petitioners CEU Hawkville, LLC n/k/a South Texas Shale, LLC, Petrohawk Properties, LP n/k/a BHP Billiton Petroleum Properties (N.A.), LP.

William J. Boyce, for Amicus Curiae Texas Oil & Gas Association.

John Sullivan, Jesse R. Pierce, Houston, for Petitioner First Rock I, LLC.

Christopher Michael Hogan, Conrad Hester, Jeremy Leon Doyle, Mitchell E. Ayer, Houston, for Petitioner EF Non-OP, LLC.

Jennifer Ruth Josephson, Jeremy Leon Doyle, Samantha Thompson, Christopher Michael Hogan, for Petitioner Segundo Navarro Drilling, Ltd.

Jeremy Leon Doyle, Christopher Michael Hogan, Mitchell E. Ayer, Houston, Jennifer Ruth Josephson, Gordon M. Carver III, Dick Watt, for Petitioner Petrohawk Operating Company n/k/a BHP Billiton Petroleum (TxLa) Operating Company.

Jesse Byron Burton III, Joseph B.C. Fitzsimons, San Antonio, Jaime Santiago Rangel, for Amicus Curiae Texas Land & Mineral Owners Association

Keith W. Franklin, Baldemar Garcia Jr., Laredo, Frank Armstrong, Corpus Christ, Ricardo E. Morales, Laredo, for Respondent.

Justice Blacklock delivered the opinion of the Court, in which Justice Guzman, Justice Lehrmann, Justice Devine, and Justice Busby joined.

The petitioners in this case (collectively "BPX") are lessees of Margaret Strickhausen's mineral interest. Strickhausen's lease requires BPX to obtain her "express written consent" before pooling her tract with others. If Strickhausen withholds her express written consent, then "pooling for oil or gas is expressly denied and shall not be allowed under any circumstances." Strickhausen never gave her express written consent, which means BPX may not pool "under any circumstances." BPX contends Strickhausen nevertheless impliedly ratified an unauthorized pooling agreement by depositing royalty checks calculated on a pooled basis.

As explained below, whether Strickhausen impliedly ratified the pooling depends on whether she exhibited an objective intent to do so. As always, determining objective intent requires an examination of all the relevant circumstances. While the circumstances here include Strickhausen's acceptance of royalties calculated on a pooled basis, they also include many other objective manifestations of her rejection of the pooling and her intention to assert her contractual anti-pooling rights. We agree with the court of appeals that BPX was not entitled to summary judgment on the issue of ratification because the evidence does not "conclusively establish as a matter of law [Strickhausen's objective] ‘intention of giving validity to the earlier act’ of pooling." 607 S.W.3d 350, 357 (Tex. App.—San Antonio 2019) (quoting Bank of Am., N.A. v. Prize Energy Res., L.P. , 510 S.W.3d 497, 506 (Tex. App.—San Antonio 2014), pet. denied). The judgment of the court of appeals is affirmed, and the case is remanded to the trial court for further proceedings consistent with this opinion.

I.

Strickhausen owns fifty percent of the mineral interest in a tract of land in La Salle County. Delphine Crouch and others (collectively "Crouch") own the other fifty percent. In 2009, Strickhausen and Crouch leased their mineral rights to Escondido Resources II, LLC. After several assignments, BPX acquired the leases.

"The primary legal consequence of pooling is that ‘production and operations anywhere on the pooled unit are treated as if they have taken place on each tract within the unit.’ " Key Operating & Equip., Inc. v. Hegar , 435 S.W.3d 794, 798 (Tex. 2014) (quoting Se. Pipe Line Co. v. Tichacek , 997 S.W.2d 166, 170 (Tex. 1999) ). "Mineral lessees of multiple tracts may pool some or all of the tracts by combining them into a single unit, provided pooling is authorized by the leases. " Id. (emphasis added).

Although Crouch's lease permits pooling, Strickhausen's lease prohibits pooling without Strickhausen's "express written consent." Her lease states:

9. POOLING: Notwithstanding any provision or reference contained in this Lease agreement to the contrary, pooling for oil or gas is expressly denied and shall not be allowed under any circumstances without the express written consent of the Lessor named herein. Further, Lessee is denied the right to seek, or consent to, or participate in the forced pooling of any part of the Leased Premises under the Texas Mineral Interest Pooling Act and any and all amendments thereto or any other pooling or unitization statutes of the State of Texas without Lessor's written consent.

Despite this prohibition,¹ BPX pooled several tracts—including the Strickhausen and Crouch property—to create a 320-acre pooled unit named "White Kitchen Unit No. 4" ("WK4 unit"). Like the Crouch lease, the other leases permit pooling. In April 2012, BPX drilled a well on Strickhausen's tract named "WK Unit 4 No. 1H Well" ("WK4-1H well"), which ran horizontally under the other pooled tracts. The well began producing in August 2012.

On September 20, 2012, BPX sent Strickhausen a letter asking her to sign a ratification of the WK4 unit and a pooling consent agreement. BPX attached to the letter a proposed ratification agreement stating that "the lands covered by the Lease are included in the White Kitchen No. 4 Gas Unit as described in the Designation of Pooled Unit dated January 1, 2012." Strickhausen contacted her attorney, Frank Armstrong.

Armstrong received BPX's letter on October 8, 2012. On October 9, he emailed BPX to say he would need more information before he could advise Strickhausen on the request to execute the pooling consent agreement. In the subsequent email exchange, Armstrong asked when the well was completed, whether and how long it had been producing, and how Strickhausen's royalties would be calculated if she "elects not to sign the Ratification and consent to pooling." On October 11, BPX advised Armstrong that the WK4-1H well began flowing on August 16, 2012. On October 12, Armstrong informed BPX that "Strickhausen is not refusing to ratify the unit" but that she would like "to understand how a ratification would impact her royalty interest under her Lease." He then asked how Strickhausen would be paid if she "d[id] not ratify the Unit" and "if she d[id] ratify" the unit. BPX responded that if Strickhausen refused to ratify the pooling, her royalty would be calculated "based on the length of productive wellbore on the subject tract over the total length of productive wellbore." BPX asked Armstrong to "[l]et [us] know what Mrs. Strickhausen decides to do."

Also on October 12, Armstrong sent a letter to BPX formally responding to its September 20 letter. Armstrong's letter pointed out that Strickhausen's lease prohibits pooling without her express written consent. He further observed: "it appears that the referenced Lease has been pooled, notwithstanding the fact that the express terms of the Lease prohibit pooling." The letter asked BPX to explain "[w]hat authority exists for the pooling" and to provide further information on its drilling operations and on how royalties would be calculated if Strickhausen chose not to consent to pooling. The parties continued to communicate over the next several weeks. Armstrong's affidavit states that "[t]hroughout these negotiations until the filing of this suit," he "made it clear" to BPX that Strickhausen "would not ratify the pooling of the White Kitchen No. 4 Gas Unit until a favorable settlement could be reached."

On December 10, 2012, BPX sent Armstrong a letter acknowledging that the lease prohibits pooling without Strickhausen's written consent, admitting that BPX had not obtained her consent, and attempting to answer Armstrong's questions from two months prior. BPX explained that if Strickhausen consented to pooling, it would pay on a "tract participation" basis, with royalties calculated based on the size of her tract relative to the acreage of the entire WK4 unit. If Strickhausen refused pooling, she would be paid royalties based on the length of the "perforated lateral" located on her tract relative to the length of the entire perforated lateral on the WK4 unit. BPX claimed Strickhausen would receive a 25.03% royalty if she agreed to the pooling but only a 23.70% royalty if she did not. BPX concluded the letter by stating that "the royalties will require being placed in suspense" if Strickhausen did not "cooperat[e] by executing the enclosed Ratification of Designation of Pooled Unit." Neither Armstrong nor Strickhausen immediately responded to the letter.

On February 18, 2013, BPX filed a certificate of pooling authority for the WK4 unit with the Railroad Commission. On February 20, BPX sent Strickhausen a $249,901.73 check for royalties for production from August to December 2012. The check stub bore the notation "WK UNIT 4 1H."

On March 8, Armstrong sent BPX a letter rejecting what he described as BPX's March 1, 2013 "offer to settle the issue of the wrongful pooling of the Strickhausen Lease."² Armstrong made a counter-offer. He stated that Strickhausen would ratify the wrongful pooling if, among other things, BPX paid her a $300,000 bonus and agreed that she could deposit the $249,901.73 check as "payment of Ms. Strickhausen's royalties from the WK Unit 1H Unit from the date of first sales through December 2012." The counter-offer expired on March 18, 2013. Although BPX did not accept the counter-offer, Strickhausen deposited the check on March 11, 2013. BPX continued to send Strickhausen monthly royalty checks bearing the notation "WK UNIT 4 1H," which she continued to deposit. By July 2014, Strickhausen had deposited $591,497.05 in royalty payments.

On August 1, 2014, Strickhausen sued BPX for breach of...