                                                                                           ACCEPTED
                                                                                       04-14-00807-CV
                                                                           FOURTH COURT OF APPEALS
                                                                                SAN ANTONIO, TEXAS
                                                                                  6/19/2015 3:55:18 PM
                                                                                        KEITH HOTTLE
                                                                                                CLERK

                             No. 04-14-00807-CV

                                                     FILED IN
                In The Fourth Court Of Appeals4th COURT  OF APPEALS
                                               SAN ANTONIO, TEXAS
                      San Antonio, Texas      06/19/2015 3:55:18 PM
                                                                  KEITH E. HOTTLE
                                                                       Clerk

                     BRAD AERY, LLOYD HOUSE, ET AL.,
                               Appellants
                                       V.
                        C. CLIFTON HOSKINS, ET AL.,
                                 Appellees

          FROM THE 36TH JUDICIAL DISTRICT COURT, MCMULLEN COUNTY, TEXAS
                             CAUSE NO. M-12-0045-CV-A
                    HONORABLE STARR BOLDRICK BAUER, PRESIDING


                      APPELLANTS’ REPLY BRIEF


  NORTON ROSE FULBRIGHT US LLP                   LAW OFFICES OF DAN POZZA

          Rosemarie Kanusky                                Dan Pozza
        State Bar No. 00790999                      State Bar No. 16224800
rosemarie.kanusky@nortonrosefulbright.com           danpozza@yahoo.com
            John W. Weber, Jr.                     239 E. Commerce Street
         State Bar No. 21046500                 San Antonio, Texas 78205-2923
  john.weber@nortonrosefulbright.com               Telephone: 210.226.8888
             Jeffrey A. Webb                           Fax: 210.224.6373
         State Bar No. 24053544
   jeff.webb@nortonrosefulbright.com                 Counsel for the Aerys
         300 Convent, Suite 2100
        San Antonio, Texas 78205
         Telephone: 210.224.5575
            Fax: 210.270.7205

     Counsel for the House Family

                    ORAL ARGUMENT REQUESTED
                                                Table Of Contents

Index Of Authorities .................................................................................................4

Introduction ...............................................................................................................7

Argument...................................................................................................................8

         I.        Hoskins confuses semantics with substance by labeling the
                   Quinns’ pooled royalty interest as “NPIR/NPRI.”...............................8

         II.       Pooling is subject to both property and contract law. ........................10

         III.      Sam’s pooled royalty interest passed to House as a contract
                   right.....................................................................................................10

         IV.       Sam’s pooled royalty interest passed to House pursuant to the
                   greatest estate rule. .............................................................................12

         V.        Sam’s pooled royalty interest passed to House as an
                   appurtenance. ......................................................................................13

                   A.        Hoskins’ cross-conveyance theory is not dispositive. .............13

                   B.        The Quinns’ express intent is dispositive. ...............................14

                   C.        Precedent from this Court and the Supreme Court
                             controls. ....................................................................................16

                   D.        Commentators agree pooled royalty interests are
                             appurtenances. ..........................................................................19

                   E.        Avery and McCall are not binding on this Court. ....................20

         VI.       Recitations in the House and Aery chain of title have no effect. .......22

         VII. Hoskins’ position is not logical. .........................................................22

Conclusion ..............................................................................................................23

Certificate Of Compliance & Service .....................................................................25




                                                              2
Appendix

OWEN ANDERSON, ET AL., KUNTZ, A TREATISE ON THE
  LAW OF OIL & GAS (1989 & Supp. 2014)
  volume 1 § 6.1
  volume 3 § 42.6

LEO J. HOFFMAN, VOLUNTARY POOLING &
  UTILIZATION 169-189 (1954)

Edwin P. Horner, McCall v. McCall Discussion Notes,
  145 OIL & GAS REP. 415-421 (2001)
BRUCE M. KRAMER & PATRICK H. MARTIN, THE LAW OF POOLING &
  UNITIZATION (3d ed. 2014)
  volume 1 § 7.00 at 7-3
  volume 2 § 19.01[1]
  volume 2 § 19.02[2]

BRUCE M. KRAMER & PATRICK H. MARTIN, WILLIAMS & MEYERS OIL
  & GAS LAW (2013)
  volume 3 § 660
  volume 6 § 929.1
ERNEST E. SMITH & JACQUELINE LANG WEAVER,
  TEX. LAW OF OIL & GAS (2d ed. 2014)
  volume 1 § 2.4[A]
  volume 1 § 3.4




                                      3
                                            Index Of Authorities
                                                                                                              Page(s)

Cases
Avery v. Moore,
   144 S.E.2d 434 (W. Va. 1965)............................................................................20
Bibb v. Nolan,
   6 S.W.2d 156 (Tex. Civ. App.—Waco 1928, writ ref’d) ...................................22

Coolbaugh v. Lehigh & Wilkes-Barre Coal Co.,
  67 A. 615 (Pa. 1907) ...........................................................................................11
Cox v. Campbell,
  143 S.W.2d 361 (Tex. 1940) ........................................................................17, 18
Day & Co., Inc. v. Texland Petroleum, Inc.
  786 S.W.2d 667 (Tex. 1990) ..............................................................................21
Eastin v. Dial,
  288 S.W.3d 491 (Tex. App.—San Antonio 2009, pet. denied)..........................12
Forister v. Coleman,
  418 S.W.2d 550 (Tex. Civ. App.—Austin 1967), writ ref’d n.r.e.,
  431 S.W.2d 2 (Tex. 1968)...................................................................................18
Gage v. Owen,
  435 S.W.2d 559 (Tex. Civ. App.—Fort Worth 1968,
  writ ref’d n.r.e.) ...................................................................................................12

Harris v. Currie,
  176 S.W.2d 302 (Tex. 1943) ..............................................................................21

Key Operating & Equip., Inc. v. Hegar,
  435 S.W.3d 794 (Tex. 2014) ..............................................................................19

Killam Ranch Properties, Ltd. v. Webb County,
   376 S.W.3d 146 (Tex. App.—San Antonio 2012, pet. denied)
   (en banc)........................................................................................................17, 21




                                                            4
Landgrebe v. Rock Hill Oil Co.,
  273 S.W.2d 636 (Tex. Civ. App.—San Antonio 1954,
  writ ref’d n.r.e.) ...................................................................................................17

Lott v. Lott,
   370 S.W.2d 463 (Tex. 1963) ..............................................................................12
McCall v. McCall,
  24 S.W.3d 508 (Tex. App.—Houston [1st Dist.] 2000, pet. denied) ...........20, 21

MCEN 1996 P’ship v. Glassell,
  42 S.W.3d 262 (Tex. App.—Corpus Christi 2001, pet. denied) ........................10
Merrill Eng’g Co. v. Capital Nat’l Bank of Jackson,
  5 So. 2d 666 (Miss. 1942) ...............................................................................9, 14

Sharp v. Fowler,
   252 S.W.2d 153 (Tex. 1952) ..............................................................................12
Southland Royalty Co. v. Humble Oil & Ref. Co.,
   249 S.W.2d 914 (Tex. 1952) ........................................................................19, 20
Tanner v. Title Ins. & Trust Co.,
  129 P.2d 383 (Cal. 1942) ..............................................................................14, 15

Teal Trading & Dev., LP v. Champee Springs Ranches
   Prop. Owners Ass’n, 432 S.W.3d 381
   (Tex. App.—San Antonio 2014, pet. denied) .....................................................22
Thomas v. Fin & Feather Club,
  171 S.W. 698 (Tex. 1914)...................................................................................18
Wagner & Brown, Ltd. v. Sheppard,
  282 S.W.3d 419 (Tex. 2008) ..................................................................11, 14, 18
Westland Oil Dev. Corp. v. Gulf Oil Corp.,
  637 S.W.2d 903 (Tex. 1982) ..............................................................................18




                                                            5
Other Authorities
  (alphabetized by first author’s last name and then title)
OWEN ANDERSON, ET AL.,
  3 KUNTZ, A TREATISE ON THE LAW OF OIL & GAS § 42.6 (1989) .....................19

Edwin P. Horner, McCall v. McCall Discussion Notes,
  145 OIL & GAS REP. 415 (2001) ...................................................................20, 21
WILLIAM O. HUIE, Apportionment of Oil & Gas Royalties,
  78 HARV. L. REV. 1113 (1965) ...........................................................................19

BRUCE M. KRAMER & PATRICK H. MARTIN,
  WILLIAMS & MEYERS OIL & GAS LAW (2014)
  volume 3 § 660....................................................................................................19
  volume 6 § 904....................................................................................................13
  volume 6 § 919.2 ................................................................................................15
  volume 6 § 929.1(6) ................................................................................14, 15, 19
  voluem 6 § 930.4 ................................................................................................20
RESTATEMENT (THIRD) OF PROPERTY (SERVITUDES) § 1.5 (2000) ..........................17

NANCY SAINT-PAUL, 4 SUMMERS OIL & GAS § 54.3 (3d ed. 2014).........................13

JOSEPH SHADE & BONNIE BLACKWELL,
   PRIMER ON THE TEXAS LAW OF OIL & GAS 20 (5th ed. 2013) ......................... 9, 10

ERNEST E. SMITH & JACQUELINE LANG WEAVER,
  TEX. LAW OF OIL & GAS (2d ed. 2014)
  volume 1 § 2.4[B][1] ............................................................................................9
  volume 1 § 2.49[A] ...............................................................................................8




                                                          6
                                   Introduction

      The Quinn siblings originally shared an undivided interest in the mineral

estate of the Rose Teal Quinn Ranch. When they later partitioned the mineral

estate, they expressly pooled their royalty interests. Sam Quinn then conveyed his

estate to House, together with all rights and appurtenances. Sam’s pooled royalty

interest in the entire ranch necessarily passed to House. At this point, Sam had

nothing left to give — as such, his subsequent deed to Hoskins conveyed nothing.

      Hoskins argues that, by cross-conveyance, the Quinns did not pool their

royalty interests but instead splintered their interests into distinct parts for each

sibling’s tract that could not be appurtenant to the tract committed to the pool

(despite admitting that each tract is burdened by all of the other siblings’ royalty

interests). Hoskins’ argument ignores not only the Quinns’ express intent to pool,

but also the plain terms of their agreement to cross-convey only as “necessary to

effectuate the pooling.” Hoskins overlooks the fundamental nature of pooling as a

form of joint ownership involving both contract and real property law.

      As Hoskins concedes, Sam’s tract was burdened by the pooled royalty

interest, making that interest an appurtenance as a matter of law. Respected cases

and commentators agree that pooled royalty interests are both rights and

appurtenances. Because Sam’s pooled royalty interest passed to House and not to




                                         7
Hoskins, the trial court’s judgment should be reversed and judgment rendered in

favor of House and Aery.

                                    Argument

      Appellees filed eight briefs, which generally join the arguments of Clifton

Hoskins. For the sake of brevity, the appellees are addressed collectively as

“Hoskins” unless noted otherwise. This term explicitly includes the oil and gas

producers, whose summary judgments are entirely derivative of the motion granted

in favor of Clifton. See Appellants’ Brief at 25; CR5:1631-32.

I.    Hoskins confuses semantics with substance by labeling the Quinns’
      pooled royalty interest as “NPIR/NPRI.”

      Clifton Hoskins insists on using the novel term “non-participating interest in

royalty” (NPIR) to describe the Quinns’ pooled royalty interest in the entire Rose

Teal Quinn Ranch. See, e.g., Clifton’s Brief at vii. Other appellees use the

traditional term “non-participating royalty interest” (NPRI). See, e.g., Jane’s Brief

at 4 n.1. Either term is a red herring. See ERNEST E. SMITH & JACQUELINE LANG

WEAVER, 1 TEX. LAW OF OIL & GAS § 2.49[A] (2d ed. 2014) (defining “royalty” as

a “chameleon-hued” term).

      The dispute here is not whether the Quinns’ pooled royalty interest is non-

participatory in the costs of production. Instead, the dispute is whether the Quinns

created a pooled royalty interest that, by contract and property law, was conveyed

to House.


                                         8
      While Hoskins contends that the sole issue in this appeal is the construction

of the deed from Sam to House, he ultimately recognizes that the scope of Sam’s

ownership interest depends on his prior agreement with his siblings — an

agreement to, in their own words, “pool their interests in the royalties from the

production of oil, gas and any other mineral, produced and saved from any part of

the 2,471.8 acres of land, more or less, known as the Rose Teal Quinn Ranch.”

Clifton’s Brief at viii, 17; CR2:416. Hoskins’ label (either NPIR or NPRI)

completely ignores any concept of pooling. See, e.g., Clifton’s Brief at 3-4.

      Additionally, Hoskins’ label does not affect the law governing the Quinns’

pooled royalty interest, despite Hoskins’ suggestion to the contrary. Compare

Blake’s Brief at 3-4 (arguing that cases involving lease royalty interests cannot be

applied to cases involving NPRIs) with SMITH, 1 TEX. LAW            OF   OIL & GAS

§ 2.4[B][1] (“In analyzing rights of royalty owners, Texas courts have tended to

ignore distinctions between types of royalties”) & Merrill Eng’g Co. v. Capital

Nat’l Bank of Jackson, 5 So. 2d 666, 671 (Miss. 1942) (“We are unable to conceive

of any sound basis for a distinction …”); see also JOSEPH SHADE & BONNIE

BLACKWELL, PRIMER       ON THE   TEXAS LAW      OF   OIL & GAS 20 (5th ed. 2013)

(“[S]imilarities among the different types of royalties far outweigh their

differences”). Hoskins’ label should be set aside as irrelevant.




                                          9
II.    Pooling is subject to both property and contract law.

       Not only does Hoskins attempt to use irrelevant labels to divert the Court’s

attention from the key documents, Hoskins also attempts to draw a sharp

distinction between contract and real property law. See, e.g., Clifton’s Brief at 15,

30. Texas, however, applies both contract and property law in the oil and gas

context.

       For example:

       •     Pooling is a real property interest. MCEN 1996 P’ship v. Glassell, 42
             S.W.3d 262, 263 (Tex. App.—Corpus Christi 2001, pet. denied).

       •     Pooling is contractual. SHADE, PRIMER ON THE TEXAS LAW OF OIL &
             GAS at 143.

       •     Oil and gas law is a blend of contract law and property law. SHADE,
             PRIMER ON THE TEXAS LAW OF OIL & GAS at 4

Under either contract or real property law, House and Aery win.

III.   Sam’s pooled royalty interest passed to House as a contract right.

       Significantly, Hoskins agrees that if pooled royalty interests are contractual,

then they pass whether explicitly described in a deed or not. Clifton’s Brief at 26

(conceding that “contract-theory jurisdictions treat pooled interests as appurtenant”

but arguing that Texas does not recognize pooling as contractual); Aurora’s Brief

at 5 (conceding the Quinns’ pooling agreement is contractual). In an attempt to

avoid this concession, Hoskins claims that House and Aery waived any reliance on

contract. Clifton’s Brief at 26.


                                         10
      House and Aery have consistently applied both contract and property law.

See, e.g., Appellants’ Brief 27 (noting that review should be de novo under

property and contract law); id. at 28 (citing multiple cases for property and contract

principles); id. at 28 (quoting Professor Bruce Kramer, Hoskins’ expert in the trial

court, for the proposition that pooling agreements are contracts that grow out of

property law); id. at 29 (explaining that Sam’s pooled royalty interest passed to

House under “contract and property law”); id. at 35 (highlighting Sam’s transfer of

all rights to House); CR2:394-96 (describing the express contract language in the

Quinns’ pooling agreement).

      Likewise, House and Aery have consistently relied on Wagner & Brown,

Ltd. v. Sheppard, 282 S.W.3d 419, 424 (Tex. 2008) — a case not mentioned or

acknowledged by Hoskins — for the rule that pooling is contractual. Compare

Appellants’ Brief at 28 & CR2:395 with Clifton’s Brief at v.

      In this case, the pooling agreement signed by all of the Quinns was a valid

contract that gave Sam rights in the pooled royalty interest in the entire Rose Teal

Quinn Ranch. CR2:408-19; Wagner, 282 S.W.3d at 424. There can be no doubt

that Sam, in his deed to House, explicitly transferred his contract right to House.

CR2:432 (transferring to House “all and singular the rights … in anywise

belonging”); Coolbaugh v. Lehigh & Wilkes-Barre Coal Co., 67 A. 615, 615 (Pa.




                                         11
1907) (illustrating that a deed’s reference to rights passes pooled contractual

rights). The trial court erred in concluding otherwise.

IV.   Sam’s pooled royalty interest passed to House pursuant to the greatest
      estate rule.

      Falling back on real property law, Hoskins insists that Sam’s pooled royalty

interest must be particularly described in a deed before it can be conveyed.

Clifton’s Brief at 10-11 (citing Gage v. Owen, 435 S.W.2d 559, 562 (Tex. Civ.

App.—Fort Worth 1968, writ ref’d n.r.e.). Neither Gage nor any of the cases it

cites have been used to overrule the long-standing principle that a deed confers

upon the grantee the greatest estate owned by the grantor, whether particularly

described or not. See, e.g., Lott v. Lott, 370 S.W.2d 463, 465 (Tex. 1963); Eastin v.

Dial, 288 S.W.3d 491, 500 (Tex. App.—San Antonio 2009, pet. denied).

      Sam’s deed to House broadly conveys all rights and appurtenances.

CR2:432. Moreover, Sam’s deed to House actually describes the entire Rose Teal

Quinn Ranch. CR2:431 (identifying “623.93 acres … being a part of the Rose Teal

Quinn Ranch consisting of 2471.8 acres, more or less, and being described in a

certain Deed of Trust”). Finally, Sam’s deed to House expressly reserves only one

thing: his mother’s life estate described in the pooling agreement. CR2:431-32;

Sharp v. Fowler, 252 S.W.2d 153, 154 (Tex. 1952) (holding that a warranty deed

passes the entire estate absent a reservation to the contrary). By application of the

greatest estate rule, Sam’s pooled royalty interest passed to House.


                                         12
V.    Sam’s pooled royalty interest passed to House as an appurtenance.

      Hoskins denies that a pooled royalty interest is an “appurtenance,” but

Hoskins is wrong. See Clifton’s Brief at 17. The Quinns’ pooled royalty interest in

the entire Rose Teal Quinn Ranch is directly appurtenant to Sam’s own land.

      A.    Hoskins’ cross-conveyance theory is not dispositive.

      Hoskins argues that the Quinns’ pooling agreement, as a cross-conveyance,

“resolves this case.” Id. at 17 & n.8 (citing NANCY SAINT-PAUL, 4 SUMMERS OIL &

GAS § 54.3 (3d ed. 2014)). Ironically, after criticizing House and Aery for relying

on secondary sources, Hoskins does the same. Compare id. at 28. Hoskins’

reliance on SUMMERS, however, is inconsistent with Texas law.

      According to Hoskins’ reading of SUMMERS, a contract state characterizes

pooling as a contract right, while a cross-conveyance state characterizes pooling as

a property interest that is not appurtenant to any unit committed to the pool.

Clifton’s Brief at 17 (citing SAINT-PAUL, 4 SUMMERS OIL & GAS § 54.3). While

SUMMERS is actually addressing a community lease, a community lease is a type of

voluntary pooling agreement where a single oil and gas lease covers two or more

tracts executed by the separate owners as if they were joint owners. BRUCE M.

KRAMER & PATRICK H. MARTIN, 6 WILLIAMS & MEYERS OIL & GAS LAW § 904

(2014).




                                        13
      Hoskins then characterizes Texas as a cross-conveyance state. Clifton’s

Brief at 17. Whether Texas is a cross-conveyance state is a nonstarter, in part

because Texas does not sharply distinguish contract and property law in the oil and

gas context. As Professor Kramer further explains, the adoption or rejection of the

cross-conveyance theory has no effect on whether the interest in a pooled unit is

appurtenant (passes with the land) or in gross (does not pass with the land).

KRAMER, 6 WILLIAMS & MEYERS § 929.1(6).

      For example, both California and Mississippi are cross-conveyance states,

but Mississippi considers a pooled royalty interest to be appurtenant, while

California does not. Id. § 930.1, § 930.4; Merrill, 5 So. 2d at 672 (holding that “in

the absence of a reservation to the contrary[,] a subsequent grantee of any part of

the pooled area would be entitled to the benefits”); Tanner v. Title Ins. & Trust

Co., 129 P.2d 383, 386 (Cal. 1942) (holding that the pooled royalty interest is “an

incorporeal    hereditament   in   gross”).   Thus,   SUMMERS’ position        is   an

oversimplification, and Hoskins’ reliance on it is misplaced.

      B.      The Quinns’ express intent is dispositive.

      Consistent with Texas principles of contract and deed construction, Kramer

concentrates on the “intent of the parties, not whether pooling or unitization effects

cross-conveyances.” KRAMER, 6 WILLIAMS & MEYERS § 929.1(6); see also

Wagner, 282 S.W.3d at 424 (construing a Texas pooling agreement based on the



                                         14
intent reflected in the agreement). Even Tanner, the leading “in gross” case cited

above from California, is consistent with this basic tenant of document

construction. Tanner, 129 P.2d at 389 (concurring that the intention of the parties

as expressed in their agreement controls).

      Kramer further notes that if the parties did not adequately manifest their

intent, “the courts should usually take the position that the grantor’s interest in unit

production is included in a conveyance of the premises he has committed to the

unit.” KRAMER, 6 WILLIAMS & MEYERS § 929.1(6). “In other words, the interest of

a party in unit production should ordinarily be viewed as appurtenant to his interest

in premises committed to the unit rather than ‘in gross.’ ” Id.

      Here, although it leads to the same result in favor of House and Aery, the

Court need not resort to Kramer’s default position because the Quinns fully

manifested their intent. The Quinn siblings pooled all of their royalty interests.

CR2:416 (expressing the Quinns’ “desire to and do hereby pool their interests in

the royalties from the production of oil, gas and any other mineral, produced and

saved from any part of the 2,471.8 acres of land, more or less, known as the Rose

Teal Quinn Ranch”).

      Furthermore, the Quinns evidenced their intent to cross-convey only to the

extent “necessary to effectuate” their pooling agreement. CR1:231; see also

KRAMER, 6 WILLIAMS & MEYERS § 919.2 (pooling language may negate any


                                          15
undesirable consequences of cross-conveyance by agreement of the parties). If the

Quinns had intended to create the separate and distinct royalty interests in each

sibling’s tract that Hoskins advocates, then they would have used a simple

conveyance to reach that result without implicating pooling at all.

      In their pooling agreement, the Quinns bound their heirs and assigns, further

evidencing their intent to pass their pooled royalty interest with the tracts

committed to the pool. CR2:409. This intent is further underscored by the

recitations regarding the siblings’ prior undivided interests in the mineral estate of

the entire ranch and by the inclusion of their mother as a party to the agreement

and holder of a life estate in the ranch’s mineral estate. CR2:408, 418-49.

      Later, when Sam conveyed his rights and appurtenances to House, he

evidenced his intent to convey his pooled royalty interest in the entire ranch.

CR2:432. Not only did Sam mention all “rights and appurtenances,” but he also

described the entire Rose Teal Quinn Ranch by name and cross-reference to other

filed documents. CR2:431-32. The trial court erred in granting summary judgment

in favor of Hoskins rather than House and Aery.

      C.     Precedent from this Court and the Supreme Court controls.

      Hoskins contends that Sam’s pooled royalty interest cannot be an

appurtenance because is not necessary to the enjoyment of Sam’s tract, but

Hoskins’ contention focuses only on Sam’s surface tract. Clifton’s Brief at 19.



                                         16
That narrow focus is misplaced and is inconsistent with Hoskins’ admission that

Sam’s tract was “burdened” with an obligation to share royalties. Id. at 25 (row

three of Hoskins’ chart).

      “A burden that obligates the owner or occupier of a particular unit or parcel

in that person’s capacity as owner or occupier is an appurtenant burden.” Killam

Ranch Properties, Ltd. v. Webb County, 376 S.W.3d 146, 156 n.4 (Tex. App.—San

Antonio 2012, pet. denied) (en banc) (citing RESTATEMENT (THIRD) OF PROPERTY

(SERVITUDES) § 1.5 (2000), which defines “appurtenances”). An appurtenance

may also be a beneficial right essential to the proper enjoyment of the premises.

Cox v. Campbell, 143 S.W.2d 361, 364 (Tex. 1940).

      Pursuant to the Quinns’ pooling agreement, if oil and gas were ever

produced on Sam’s acres, then he would be required to share royalty with his

siblings. As Hoskins conceded, Sam’s tract was “burdened” by the pooled royalty

interest in the entire ranch. Clifton’s Brief at 25; see also CR3:852 & 861 n.13.

Thus, Sam’s pooled royalty interest is an appurtenance. Killam, 376 S.W.3d at 156

n.4; see also Landgrebe v. Rock Hill Oil Co., 273 S.W.2d 636, 638 & 640 (Tex.

Civ. App.—San Antonio 1954, writ ref’d n.r.e.) (holding that parties to a pooled

lease continued to receive their proportionate share even when their subsequent

partition deeds did not mention the prior pooled royalty interest).




                                         17
      Additionally, under the pooling agreement, if oil and gas were ever produced

on the tracts of Sam’s siblings, they would be required to share royalty with Sam,

conferring on him a beneficial right essential to the proper enjoyment of his own

tract. See Cox, 143 S.W.2d at 364. In this sense, a pooled royalty interest is not

unlike an appurtenant easement, which “inheres in the land, concerns the premises,

and pertains to its enjoyment.” Forister v. Coleman, 418 S.W.2d 550, 559 (Tex.

Civ. App.—Austin 1967), writ ref’d n.r.e., 431 S.W.2d 2 (Tex. 1968).

      The Quinns’ pooled royalty interest in the entire ranch certainly “affected

the nature and value” of their respective tracts. See Westland Oil Dev. Corp. v.

Gulf Oil Corp., 637 S.W.2d 903, 911 (Tex. 1982) (defining an agreement to share

leases in a geographic area as an appurtenance). Hoskins discounts Westland

because “the interest at issue was one created by contract.” Clifton’s Brief at 27.

Westland, however, is controlling here because the Quinns’ pooled royalty interest

is contractual. See Wagner, 282 S.W.3d at 424.

      Furthermore, Hoskins’ attempt to divorce contract law from property law

once again fails. See Westland, 637 S.W.2d at 905 (describing the agreement as a

contract to convey real property interests); see also Thomas v. Fin & Feather Club,

171 S.W. 698, 700 (Tex. 1914) (holding that Bateman’s fishing contract with the

club, recorded in the real property records, was an appurtenance to land Bateman




                                        18
conveyed to Thomas). Because Sam’s royalty interest in the pool was appurtenant

to the tract he committed to the pool, that pooled royalty interest passed to House.

      D.     Commentators agree pooled royalty interests are appurtenances.

      For Professor Kramer, the pooled royalty interest “should ordinarily be

viewed as appurtenant to [the] interest in premises committed to the unit rather

than ‘in gross.’ ” KRAMER, 6 WILLIAMS & MEYERS § 929.1(6); see also

3 WILLIAMS & MEYERS § 660. Under Kramer’s analysis, even if the Quinn siblings

owned fractional royalty interests in each other’s tracts as Hoskins claims (when

they did not), those interests would still be appurtenant to the tract committed to

the unit. Id.; see also William O. Huie, Apportionment of Oil & Gas Royalties, 78

HARV. L. REV. 1113, 1145 n.65 (1965) (characterizing pooled royalty interests as

appurtenances).

      This outcome makes sense given Supreme Court authority holding that

production anywhere on a pooled unit is considered production on every tract in

the unit. See, e.g., Key Operating & Equip., Inc. v. Hegar, 435 S.W.3d 794, 798-99

(Tex. 2014) (citing Southland Royalty Co. v. Humble Oil & Ref. Co., 249 S.W.2d

914, 916 (Tex. 1952)). “Under such reasoning, the right to receive royalty from

production which is realized from wells located on other land covered by the

community lease would necessarily follow the ownership of each tract of land

contributed to the community lease.” OWEN ANDERSON,              ET AL.,   KUNTZ, 3



                                         19
A TREATISE ON THE LAW OF OIL & GAS § 42.6 (1989) (citing Southland, 249

S.W.2d at 916).

      E.       Avery and McCall are not binding on this Court.

      In rejecting pooled royalty interests as appurtenances, Hoskins relies heavily

on McCall and the West Virginia case it cites. Clifton’s Brief at 20-25 (discussing

McCall v. McCall, 24 S.W.3d 508 (Tex. App.—Houston [1st Dist.] 2000, pet.

denied) and Avery v. Moore, 144 S.E.2d 434 (W. Va. 1965)). Neither case is

controlling.

      Avery arises in a contract theory state, which under Hoskins’ analysis, would

not apply in Texas. See KRAMER, 6 WILLIAMS & MEYERS § 930.4. Regardless, as

Hoskins admits, Avery does not explicitly discuss appurtenances (nor does it even

discuss contractual rights); it simply draws a conclusion without relating enough

facts to make a comparison here. See Clifton’s Brief at 21.

      As for McCall, the “facts as stated in the court’s opinion are not entirely

clear.” See Edwin P. Horner, McCall v. McCall Discussion Notes, 145 OIL & GAS

REP. 415, 419 (2001). Nonetheless, there was no pooling of the royalty interest

concurrent with the partition of the remaining mineral estate. For that simple

reason, McCall has no bearing on the Quinns’ pooling agreement.




                                        20
      Moreover, Professor Horner criticized McCall for reaching the wrong result.

First, the opinion defined the term “appurtenance” too narrowly in the royalty

context. Horner, 145 OIL & GAS REP. at 420.

      Second, the opinion disregarded Harris v. Currie, 176 S.W.2d 302 (Tex.

1943), and Day & Co., Inc. v. Texland Petroleum, Inc., 786 S.W.2d 667 (Tex.

1990), which provide that a grantor conveys the greatest estate owned absent a

reservation to the contrary. Horner, 145 OIL & GAS REP. at 418-19. According to

Professor Horner, “where the owner of a tract included in a pooled unit sells his

tract, then his conveyance also includes his interest in the production from the

pooled unit, which production may come from another tract in the unit.” Id. at 418-

19.

      While Hoskins discounts Professor Horner and the other Texas

commentators, their observations offer valuable insight into Texas law. Regardless,

Hoskins himself proves why McCall has no precedential value here. When

discussing McCall, Hoskins concedes that Sam’s tract was “burdened by a royalty

interest in favor of the owners of the other tracts.” See Clifton’s Brief at 25

(emphasis added).

      McCall rejects burdens as appurtenances, which conflicts with this Court’s

recognition of burdens as appurtenances. Killam Ranch, 376 S.W.3d at 156 n.4.




                                        21
Moreover, McCall is narrowly focused on appurtenances and fails to address the

contractual rights reflected in the Quinns’ pooling agreement.

VI.   Recitations in the House and Aery chain of title have no effect.

      In his factual statement, Hoskins mentions the “subject to” language in the

House and Aery chain of title. Clifton’s Brief at 6-8. This language acknowledges

the recording of Sam’s deed to L.R. Hoskins (dated after Sam’s deed to House),

but the reference does not acknowledge the validity of the second deed. See Teal

Trading & Dev., LP v. Champee Springs Ranches Prop. Owners Ass’n, 432

S.W.3d 381, 391 (Tex. App.—San Antonio 2014, pet. denied). In light of this

authority, Hoskins makes no argument based on his factual recitation.

VII. Hoskins’ position is not logical.

      Although Hoskins insists his position is logical, it is not. See Clifton’s Brief

at 15, 17. In Texas, if a landowner enters an ordinary oil and gas lease and

subsequently conveys the land by warranty deed without reserving any mineral

interests, then the grantee takes the land and any royalty due under the lease. Bibb

v. Nolan, 6 S.W.2d 156, 157 (Tex. Civ. App.—Waco 1928, writ ref’d). The same

result must occur if the land is subject to a pooled lease — all the more so in this

case, where the grantors expressly pooled their royalty interests by agreement

before entering any oil and gas leases.




                                          22
                                     Conclusion

         This case illustrates the blending of contract and property law. The Quinns

agreed to partition their jointly owned mineral estate, but for their royalty interests,

which they expressly agreed to pool in perpetuity. Whether Hoskins characterizes

the Quinns’ pooled royalty interest as an NPIR or NPRI or a cross-conveyance is

irrelevant. Nor does it really matter whether the pooled royalty interest can be

spatially divided as Hoskins wrongly asserts.

         The bottom line is that the Quinns’ pooled royalty interest was both a

contractual right and interest in real property. The pooled royalty interest in the

entire Rose Teal Quinn Ranch also necessarily (and admittedly) burdened all of the

tracts committed to the pool and affected their value. As a result, the pooled

royalty interest in the entire Rose Teal Quinn Ranch was appurtenant to Sam’s

tract.

         When Sam transferred and conveyed the “described premises, together with

all and singular the rights and appurtenances thereto in anywise belonging” to

House, Sam’s pooled royalty interest passed to House (and subsequently to Aery).

The trial court erred in concluding otherwise.

         As outlined in more detail in the prayer of their opening brief, Aery and

House ask the Court to reverse the trial court’s summary judgment in favor of

Clifton Hoskins, as well as the other summary judgments and final judgment upon



                                          23
which it is based. Aery and House ask the Court to render judgment on their cross-

motion, and they pray for all other relief to which they may be entitled.

                                 Respectfully submitted,

                                 By: /s/ Rosemarie Kanusky

                                 Norton Rose Fulbright US LLP
                                 Rosemarie Kanusky
                                 State Bar No. 00790999
                                 rosemarie.kanusky@nortonrosefulbright.com
                                 John W. Weber, Jr.
                                 State Bar No. 21046500
                                 john.weber@nortonrosefulbright.com
                                 Jeffrey A. Webb
                                 State Bar No. 24053544
                                 jeff.webb@nortonrosefulbright.com
                                 300 Convent, Suite 2100
                                 San Antonio, Texas 78205
                                 Telephone: 210.224.5575
                                 Fax: 210.270.7205

                                 Counsel for the House Family


                                 Law Offices Of Dan Pozza
                                 Dan Pozza
                                 State Bar No. 16224800
                                 danpozza@yahoo.com
                                 239 E. Commerce Street
                                 San Antonio, Texas 78205-2923
                                 Telephone: 210.226.8888
                                 Fax: 210.224.6373

                                 Counsel for Brad and Randi Aery




                                         24
                      Certificate Of Compliance & Service

      I certify that this brief complies with type-face and type-volume

requirements. The document contains 4,788 words, not including the tables.

      I certify that a copy of this brief was emailed or mailed to the following:

Dan Pozza                                     Marc K. Whyte
danpozza@yahoo.com                            marcwhyte@gmail.com
239 E. Commerce Street                        Whyte, PLLC
San Antonio, Texas 78205-2923                 209 Tuttle
Appellate Counsel for Aery Family             San Antonio, Texas 78209
                                              Counsel for Aery Family

David L. Ylitalo                              Ellen B. Mitchell
dylitalo@coatsrose.com                        emitchell@dykema.com
Coats Rose PC                                 C. David Kinder
1020 Northeast Loop 410, Suite 800            dkinder@dykema.com
San Antonio, Texas 78209                      Dykema Cox Smith Matthews
Counsel for Leonard Hoskins                   112 East Pecan, Suite 1800
                                              San Antonio, Texas 78205
                                              Counsel for Hoskins, Inc., C. Clifton
                                              Hoskins, and Trudy Day

Michael C. Sartori                            Peter E. Hosey
State Bar No. 17655500                        phosey@jw.com
michael@msartori.com                          Julia W. Mann
Law Office of Michael C. Sartori              jmann@jw.com
P.O. Box 1222                                 Jackson Walker L.L.P.
502A Houston Street                           112 E. Pecan Street, #2400
George West, Texas 78022                      San Antonio, Texas 78205
Counsel for Hoskins, Inc., C. Clifton         Counsel for Lee Ann Kulka, Lee Roy
Hoskins, Trudy Day                            Hoskins, III and Andrea Jurica
and Hazel Q. Hoskins




                                         25
Ezra A. Johnson                              David W. Navarro
ejohnson@ufjblaw.com                         dnavarro@hsfblaw.com
Uhl, Fitzsimons, Jewett &                    Brendon C. Holm
 Burton, PLLC                                bholm@hsfblaw.com
4040 Broadway, Suite 430                     Hornberger Sheehan Fuller
San Antonio, Texas 78209                     Beiter Wittenberg &
Counsel for Blake C. Hoskins                 Garza Incorporated
                                             The Quarry Heights Blding
                                             7373 Broadway, Suite 300
                                             San Antonio, Texas 78209
                                             Counsel for Brent C. Hoskins

Benjamin F. Youngblood III                   Jason A. Newman
bfy@prodigy.net                              Jason.newman@bakerbotts.com
Benjamin F. Youngblood III, P.L.L.C.         Baker Botts L.L.P.
8207 Callaghan Road, Suite 100               One Shell Plaza
San Antonio, Texas 78230                     910 Louisiana Street
Counsel for Jane W. Hoskins                  Houston, Texas 77002-4995
                                             Counsel for Texoz E&P I, Inc.

Bruce D. Oakley                              Roberta S. Dohse
bruce.oakley@hoganlovells.com                rdohse@hfdlaw.com
Robert L. Pillow                             Conner R. Jackson
Robert.pillow@hoganlovells.com               cjackson@hfdlaw.com
Hogan Lovells US LLP                         Hoblit Ralls Hernandez & Hudlow,
700 Louisiana St., Suite 4300                LLP
Houston, Texas 77002                         2000 Frost Bank Plaza
Counsel for Armadillo E&P, Inc.,             802 North Carancahua
Sea Eagle Ford, LLC, and                     Corpus Christi, Texas 78401
Sundance Energy, Inc.                        Counsel for Aurora Resources
                                             Corporation



                                       /s/ Rosemarie Kanusky
                                       Rosemarie Kanusky
Dated: June 19, 2015




                                        26
                                             1-6 Kuntz, Law of Oil and Gas § 6.1
Kuntz, Law of Oil and Gas > CHAPTER 6 PARTITION

    § 6.1 Voluntary partition
                                 1

By virtue of the power of a cotenant to convey his undivided interest, particularly his power to convey such interest to another
cotenant and to acquire an interest from his cotenant,2 joint tenants, tenants in common and coparceners may accomplish a
voluntary partition of the common property by cross conveyances, without judicial decree.3 One cotenant cannot accomplish a
unilaterial partition, and the granting of an oil and gas lease upon a specific part of the jointly-owned land by one cotenant
cannot accomplish a partition,4 but a conveyance of a specific part by a cotenant may operate as a voluntary partition if
acquiesced in by the other cotenants.5 If less than all of the cotenants enter into voluntary partition, it is not binding upon
cotenants who do not join,6 and, where it is not ratified or acted upon,7 it is also said not to be binding upon those who do
participate unless it is binding upon all cotenants.8 It would follow that a voluntary partition cannot be accomplished if one or
more of the parties be incompetent.9 A voluntary partition is void if the purpose of such partition is to defraud third persons by
an attempt to defeat their rights under mortgages or leases on the undivided interests involved.10

A parol voluntary partition followed by possession of the allotted portions by the designated cotenants is valid.11 In a
voluntary partition, it is possible for the cotenants to partition the surface only and not the minerals, and if only the surface is
partitioned, an attempt by one of the cotenants to reserve all of the oil and gas rights in a subsequent conveyance would not
serve to divest his cotenants of their rights in the oil and gas.12 In a voluntary partition, the cotenants may partition the surface
and part of the minerals and retain the status of cotenancy with respect to certain incidents of ownership in the minerals. Thus,
each owner may retain an undivided royalty interest in tracts allocated to other cotenants while taking ownership of all other
incidents of mineral ownership, including the power of leasing his own partitioned tract. A subsequent conveyance by the
owner of such a partitioned tract will carry with it all mineral rights in that tract, subject to the outstanding royalty interests, but
it will not convey any of the grantor’s royalty interest in the other tracts.13

Where two cotenants own the surface estate and a third cotenant owns an interest in the minerals, a partition deed by the two
surface owners partitioning the land on the basis of the surface ownership will be construed to partition the

1See generally, American Law of Property (1952), §§ 6.19, 6.20; Powell, The Law of Real Property (1954), P610; Tiffany, The Law of Real
Property (3rd ed. 1939), §§ 468–472.
2   See § 5.5.
3   Griffin v. Reilly (Tex CivApp 1925), 274 SW 242.
But see Zapatero v. Canales, 730 S.W.2d 111, 96 O&GR 178 (Tex. App.—San Antonio 1987, writ ref’d n.r.e.), wherein it was held that a
partition deed is not a conveyance.
4   Medina Oil Development Co. v. Murphy (TexCivApp 1921), 233 SW 333. But see § 6.7.
5   Fugate v. Smith, 290 Ky 115, 160 SW(2d) 328 (1942).
6   Sparks v. Union Manufacturing &c. Co., 121 SC 220, 114 SE 322 (1922).
See Barfield v. Holland, 844 S.W.2d 759, 120 O&GR 556 (Tex. App.—Tyler 1992, writ denied).
7   Sutton v. Porter, 119 Mo 100, 24 SW 760, 41 AmStRep 645 (1893) .
See Barfield v. Holland, 844 S.W.2d 759, 120 O&GR 556 (Tex. App.—Tyler 1992, writ denied).
8   Cochran v. Cochran, 277 Ill 244, 115 NE 142 (1917); Carter Oil Co. v. McQuigg (7th Cir. 1940), 112 F(2d) 275.
See Barfield v. Holland, 844 S.W.2d 759, 120 O&GR 556 (Tex. App.—Tyler 1992, writ denied).
9   Carter Oil Co. v. McQuigg (7th Cir. 1940), 112 F(2d) 275.
10   Id.
11   See Tiffany, The Law of Real Property (3rd ed. 1939), § 469.
12   Griffin v. Reilly (TexCivApp 1925), 275 SW 242.
13   Avery v. Moore, 150 WVa 136, 23 O&GR 1012, 144 SE(2d) 434 (1965).
McCall v. McCall, 24 S.W.3d 508 (Tex. App.—Houston [1st Dist.] 2000) (distinguishing Day & Co. Inc. v. Texland Petroleum, Inc., 786
S.W.2d 667 (Tex. 1990)).
                                                     1-6 Kuntz, Law of Oil and Gas § 6.1


surface only. This result and the underlying reasons are clearly described in the following concise statement by Justice Smith:

        “This case is controlled by our decision in Hutchinson v. Sheppard, supra. There we held that where the parties to a
        partition deed owned two estates in the land, one in common and in the same ratio as the division and the other not
        in common and therefore not in that ratio, the deed should be construed as a conveyance only of the estate held in
        common. And that conclusion was reached even though the deed purported to convey all the grantor’s ‘right, title,
        interest and claim’ in and to the land. The governing rule is obviously both sensible and just, for it prevents either
        party from gaining an advantage at the other’s expense.”14

Whether or not the voluntary partition was intended to partition the mineral as well as the surface interest raises a problem of
construction of the partition deeds. In the case of deeds not involving a partition, it is uniformly held that upon a conveyance of
land, the ownership of or the rights to oil and gas pass to the grantee unless they are expressly reserved or excepted.15 Partition
deeds are not subject to all of the formalities required of other conveyances, but the usual rules of construction apply, and it
may be found that it was intended to partition the minerals as well as the surface, although the minerals are not specially
mentioned.16 Partition deeds which cover both mineral and surface interests by mistake can, because of the mutual mistake, be
reformed to cover only the surface and not the mineral interest.17

If an oil and gas lease is outstanding on the entire tract owned by the cotenants at the time of the voluntary partition of the
surface and mineral estates, it is not necessary that the oil and gas lessee be a party to the partition,18 but such partition can not
impair the rights of the lessee who is entitled to develop the entire tract as a unit and not as separate tracts.19

A voluntary partition may be rescinded for mutual mistake, but it cannot be rescinded for a unilateral mistake unless the other
party knew of the mistake or induced it. Zapatero v. Canales, 730 S.W.2d 111, 96 O&GR 178 (Tex. App.—San Antonio 1987,
writ ref’d n.r.e.).

In Louisiana, natural gas produced from a compulsory unit is subject to partition, and the Conservation Commissioner is
authorized to order a partition. Amoco Production Co. v. Thompson, 516 So. 2d 376, 98 O&GR 273 (La. App. 1987), writ
denied, 520 So. 2d 118 (La. 1988). Because of the authority to partition gas produced from a unit, the commissioner also has
the authority to direct balancing and to order an accounting either in cash or in kind. Amoco Production Co. v. Thompson, 566
So. 2d 138, 112 O&GR 65 (La. App. 1990), writ of cert. denied, 571 So. 2d 627, 628 (La. 1990).

In re Estate of Slaughter, 305 S.W.3d 804 (Tex. App.—Texarkana 2010), provides a good example of a partition in which each owner
retained a royalty interest in the tracts allocated to the other cotenants, but acquired all other incidents of mineral ownership. The court
rejected the claims of two of the original three cotenants that they were entitled to share in all rights in the mineral estate under the third tract,
which had been leased. The court ruled that the provision in their father’s will that left land to his three sons and that stipulated that they
were to “share and share alike production royalty” clearly referred only to royalty and the effect of the sons’ voluntary partition was to give
each son all the other incidents of the mineral estate in the tract that he received.
14   Johnson v. Ford, 16 O&GR 508, 510, 233 Ark 504, 345 SW(2d) 604 (1961).
15Moshiek v. Lininger, 130 Colo 266, 274 P.2d 965, 4 O&GR 121 (1954); Mark v. Bradford, 315 Mich 50, 23 NW(2d) 201 (1946);
Northern Pac. R. v. Advance Realty Co. (ND), 8 O&GR 232, 78 NW(2d) 705 (1956); Cutright v. Richey, 208 Okla 413, 257 SW(2d) 286,
2 O&GR 980 (1953); Schlittler v. Smith, 128 Tex 628, 101 SW(2d) 543 (1937); McCoy v. Lowrie, 44 Wash(2d) 483, 268 P(2d) 1003, 3
O&GR 858 (1954).
16   Bradley v. Teague (ArkApp 1979), 64 O&GR 419, 589 SW(2d) 200; Garza v. De Montalvo, 147 Tex 525, 217 SW(2d) 988 (1949).
17   Farris v. Moore (TexCivApp 1956), 6 O&GR 864, 293 SW(2d) 683.
18   Garza v. De Montalvo, 147 Tex 525, 217 SW(2d) 988 (1949).
19Garza v. De Montalvo, 147 Tex 525, 217 SW(2d) 988 (1949). See Pierce Oil Co. v. Schacht, 75 Okla 101, 181 Pac 731 (1919); Carter Oil
Co. v. McQuigg (7th Cir. 1940), 112 F(2d) 275.
                                                  1-6 Kuntz, Law of Oil and Gas § 6.1


The cases are not uniform as to the rights of the cotenants under an outstanding lease after a partition of the mineral estate.
Under the rule applied in the majority of states with decisions on the point, unless the partition agreement or decree
specifically provides otherwise, each cotenant is entitled to benefits under the lease only insofar as they pertain directly to his
partitioned portion of the tract. He is entitled to all of the royalty payments for production from his portion of the partitioned
tract and is not entitled to a share of royalties for oil or gas produced elsewhere on the larger tract under the lease.20 Under the
rule applied in a minority of the jurisdictions having decisions on the point, royalties and payments under the lease would be
apportioned, that is, royalties payable for oil or gas produced at any point on the larger tract would be divided among the
various owners of the tracts into which it was partitioned. This result has been explained on the basis that oil and gas are
fugitive in nature and that production must be apportioned among the partitioned owners because it is being drained from the
entire tract.21 In Kentucky, if nothing is said about the outstanding lease and royalties payable thereunder, the rule of
apportionment applies on the theory that the royalties and other payments under a lease are not only payment for oil extracted
but also serve as rentals by which the entire tract is held under the terms of the lease.22 Such cotenants may, however, partition
the minerals and rights under the lease so as to prevent such apportionment.23

The effect of a partition of land that is subject to an oil and gas lease may depend upon the provisions of the oil and gas lease.
Thus, in Texas, where the nonapportionment rule is followed and it is held that royalty payable under an outstanding lease will
not be apportioned after a partition of the mineral rights of the lessors, a federal court has concluded that a different result
should be reached if the outstanding lease is a community lease. In reaching the conclusion that royalty payable under the
community lease should continue to be apportioned after a voluntary partition of the mineral rights by the lessors, the court
made a careful analysis of Japhet (applying the nonapportionment doctrine) and Parker (applying apportionment under the
community lease concept), and made the following perceptive comment:

        “As we pointed out previously, Japhet and Parker have been distinguished on two grounds. First, a purchaser of a
        subdivided section of land under a lease is deemed to have purchased with ‘his eyes wide open to the rights of the
        various parties.’ Second, a single lessor is different from joint lessors because he cannot form a community with
        himself. Strict adherence to the second distinction perhaps even compels continuance of the apportionment
        presumption in a partition after unitization. Before the partition the parties have formed the community which was
        lacking in Japhet. The first distinction requires that no presumption be placed either for or against apportionment.
        With their eyes wide open, the parties joined a community and allowed one lessee to treat the lands as a unit. Their
        act of cooperation was based on a profit incentive, and each expected to reap benefits. Can it be said that each
        party to the partition then abandoned his assurance of royalties in favor of a gamble that the lessee would drill on
        his contributed land? At least no presumption to that effect can be defended when the instruments do not so
        provide. There can be a defiance of community by partition where the transaction is capable of being construed as
        an act of liberation; however, either the words or the incidence of the transaction must demonstrate some
        disavowal of former relationships.”24

20   Texas. Garza v. De Montalvo, 147 Tex 525, 217 SW(2d) 988 (1949).
West Virginia.Musgrave v. Musgrave, 86 WVa 119, 103 SE 302, 16 ALR 564 (1920).
See Osborn v. Arkansas Territorial Oil &c. Co., 103 Ark 175, 146 SW 122 (1912); Hurst v. Paken Oil Co., 287 Ky 257, 152 SW(2d) 981
(1941); Northwestern Ohio Nat. Gas Co. v. Ullery, 68 OhioSt 259, 67 NE 494 (1903); Pierce Oil Co. v. Schacht, 75 Okla 101, 181 Pac 731
(1919); Lehew v. Lehew (TexCivApp 1958),314 SW(2d) 146, 9 O&GR 754.
21   Wettengel v. Gormley, 160 Pa 559, 28 Atl 934, 40 AmStRep 733 (1894); 184 Pa 354, 39 Atl 57 (1898).
22   McIntire v. Bond, 227 Ky 607, 13 SW(2d) 772, 64 ALR 630 (1929).
23   Hurst v. Paken Oil Co., 287 Ky 257, 152 SW(2d) 981 (1941).
24   Howell v. Union Producing Co. (5th Cir 1968), 392 F(2d) 95, 28 O&GR 238, 253.
                                                   1-6 Kuntz, Law of Oil and Gas § 6.1


An agreement to partition land which contained no provision regarding mineral rights will not be enforced where the land was
acquired subject to numerous mineral reservations.25
Kuntz, Law of Oil and Gas
Copyright 2014, Matthew Bender & Company, Inc., a member of the LexisNexis Group.


25Roberson v. Hollis (LaApp 1981), 71 O&GR 347, 403 S(2d) 845. For the creation of servitudes in Louisiana by voluntary partition, see §
10.7.
                                           3-42 Kuntz, Law of Oil and Gas § 42.6
Kuntz, Law of Oil and Gas > CHAPTER 42 THE ROYALTY CLAUSE OF OIL AND GAS LEASE—PAYMENT OF
ROYALTY

    § 42.6 Effect of transfer by lessor.

         [a] Conveyance of entire interest by lessor.

In considering what the effect will be upon the payment of royalty under an oil and gas lease if the lessor conveys the entire
interest in the minerals, it is necessary to take into account two different facets of the problem. One such facet involves the
respective rights of the lessor and the grantee as between themselves. The other fact involves the respective rights of the lessor
and grantee as against the lessee. An analysis of both facets of the problem is aided by a consideration of certain fundamentals.

The right to receive royalties under an oil and gas lease is one of the separately alienable incidents of ownership of the
minerals.1 Although such right is capable of being alienated separately, the right to receive royalties will pass with a
conveyance of the minerals, unless such right is expressly reserved or excepted.2 Further, although the right to receive royalty
bears some resemblance to the right to receive rent and there have been instances where the law relating to rent has controlled
the results reached with respect to the right to receive royalty,3 there is an important difference which must be recognized.
Ordinarily, rent is not apportionable as to time and does not accrue from day to day but is payable to the owner of the reversion
on the date that the rent becomes payable. Oil and gas royalties, on the other hand, ordinarily accrue from day to day and are
regarded as being apportionable as to time even though provision may be made in the lease for an accounting period.

In the instance of the royalty which is payable as the result of oil production, the oil and gas lease commonly provides that the
lessee shall deliver, to the lessor or to the lessor’s credit in a pipeline, a portion of the oil produced and saved.4 In the instance
of the royalty which is payable as the result of gas production, the lease commonly provides that the lessee shall pay to the
lessor an amount to be determined either by the value of gas produced or by the proceeds of the sale of such gas.5 In both such
instances, the payment of royalty is not made on the basis of the passage of time. The payment is made to compensate the
lessor for the lessor’s share of a substance that has been removed, and except in the rare instance where a fixed periodic gas
rental might be used,6 the amount of the royalty bears no relation to the passage of time. Provision is occasionally made for the
lessee to make payments or to account periodically, but such a provision does not change the nature of the payment. Such a
provision is obviously designed to solve a mechanical problem incident to payment and is not designed to alter substantive
rights.

Accordingly, although the analysis suggested above has not necessarily been applied in the cases as a basis for decision, it has
been uniformly held or assumed in connection with a related holding that, if after an oil and gas lease has been granted, the
lessor should convey the minerals without exception or reservation or should otherwise make a complete disposition of the
right to receive royalty payments, such lessor is entitled to receive those royalty payments which have accrued to the date of
the conveyance.7 With very rare exception,8 it has likewise been held or assumed that the right to receive royalty passes with a
devise or conveyance or inheritance of the mineral interest

1   See § 15.1.
2   See § 14.1.
3See, e.g., Handlan v. Bennett (4th Cir 1931), 51 F(2d) 21; McIntire v. Bond, 227 Ky 607, 13 SW(2d) 772, 64 ALR 630 (1929). See also §§
44.4(e) and 44.6.
4   See § 39.1.
5   See § 40.4.
6   See § 40.2.
7 Clark v. Richfield Oil Co. of Cal., 127 CalApp 495, 16 P(2d) 162 (1932); McIntire v. Bond, 227 Ky 607, 13 SW(2d) 772, 64 ALR 630
(1929); Duvall v. Stone, 54 NM 27, 213 P(2d) 212 (1949); White v. McVey, 168 Okla 19, 31 P(2d) 850, 94 ALR 656 (1934); Handlan v.
Bennett (4th Cir 1931), 51 F(2d) 21.
8See the second appeal in Wettengel v. Gormley, 184 Pa 354, 39 Atl 57 (1898), in which the court regarded the right to receive royalty
under an oil and gas lease as a personal right of the lessor which did not pass with a devise of the land upon the death of the lessor.
                                                  3-42 Kuntz, Law of Oil and Gas § 42.6


and that royalty which accrues after the date of passage of title properly belongs to the grantee, devisee, or heir of the lessor, as
being incident to the interest which was acquired by virtue of the conveyance, devise, or inheritance.9

The problem of determining which parties are entitled to receive royalty after the lessor has made a conveyance has a different
appearance when considered from the standpoint of the lessee. From the standpoint of the lessee, the problem is one of
determining what is required to discharge a liability. The lessee must pay the royalty to the party entitled to receive it, and a
payment to the wrong party is no defense in an action by the party who is entitled to receive the royalty.10 Consequently, it is
of considerable importance to the lessee to be able to establish the effective date of a change in the parties entitled to receive
royalty.

Although the effective date of the passage of title will control the right to receive royalty as between the lessor and the person
to whom the mineral interest was conveyed, such date may or may not be the controlling date for purposes of determining the
lessee’s liability. Such date may be controlled by statutory provisions for notice. More likely, such date will be controlled by
the presence of a provision in the oil and gas lease which provides that no change of ownership of the lessor’s interest is
binding on the lessee until a prescribed form of notice is given to such lessee.11

According to the operation of the change of ownership clause, the lessee is not required to recognize any change in ownership
of the lessor’s right to receive royalty until after receipt of the notice prescribed by such clause. Accordingly, until there is
compliance with such charge of ownership clause, the lessee may discharge the liability to pay royalty by making payment in
accordance with the status of title prior to any such change.12

           [b] Conveyance of undivided interest by lessor.

Similar to the situation where the lessor conveys the entire interest after having granted an oil and gas lease,13 if the lessor
conveys an undivided interest in the minerals after having granted an oil and gas lease, the resulting problem has two facets.
One facet involves the respective rights of the lessor and the grantee toward one another. The other facet involves the
respective rights of the lessor and the grantee as against the lessee.

With respect to the first facet of the problem, the principles which are applicable to a conveyance by the lessor of the entire
interest may be applied with equal validity to the situation where the lessor conveys an undivided interest after having granted
an oil and gas lease. With respect to the undivided interest conveyed, the grantor is entitled to all royalties attributable to such
interest which have accrued up to the date of passage of title, and the grantee is entitled to all royalties attributable to such
interest which are payable as the result of production on and after such date. The parties are cotenants after title has passed to
an undivided interest in the minerals, and the remedies incident to such cotenancy are available to each cotenant if the other
cotenant has received and retained more than a proper share of the royalty payable under the lease.14 A cotenant is not,
however, limited to such remedies against another cotenant but is entitled to proceed directly against the lessee.

9 See Osborn v. Arkansas Territorial Oil & Gas Co., 103 Ark 175, 146 SW 122 (1912); Agajanian v. Cuccio, 141 CalApp(2d) 828, 6 O&GR
1, 297 P(2d) 755 (1956); Central Pipe Line Co. v. Hutson, 401 Ill 447, 82 NE(2d) 624 (1948); Chandler v. Pittsburgh Plate Glass Co., 20
IndApp 165, 50 NE 400 (1898); McIntire v. Bond, 227 Ky 607, 13 SW(2d) 772, 64 ALR 630 (1929); Succession of Woods (LaApp 1985),
480 S(2d) 444, 87 O&GR 298; Merrill Engineering Co. v. Capital Nat. Bank, 192 Miss 378, 5 S(2d) 666 (1942), Northwestern Ohio Natural
Gas Co. v. Ullery, 68 OhioSt 259, 67 NE 494 (1902); Goetter v. Manahan, 192 Okla 600, 138 P(2d) 113 (1943); Japhet v. McRae
(TexCommApp 1925), 276 SW 669; Campbell v. Lynch, 81 WVa 374, 94 SE 739 (1918).
10   Clark v. Richfield Oil Co. of Cal., 127 CalApp 495, 16 P(2d) 162 (1932).
11   See § 45.3.
12   Id.
13   See § 42.6(a).
14   See § 5.6.
                                                3-42 Kuntz, Law of Oil and Gas § 42.6


To a great extent, the rights of a grantee of a lessor who acquires an undivided interest and thereby becomes a cotenant with
the grantor are similar to the rights of the grantee of the entire interest in the minerals.15 If such grantee complies with the
provisions of the lease with respect to notice of change of ownership, the lessee is required to recognize such change of
ownership and becomes liable to the new owner for performance of the covenants in the lease. The special problem which is
introduced when an undivided interest is conveyed is the problem of whether the lessee is required to pay each cotenant
separately, is entitled to pay them jointly, or is entitled to discharge the liability by paying the entire amount to one of them as
joint obligee.

In a very early case, the right to receive royalty was treated as the right to receive rent, and it was recognized that if a single
lessor should grant an oil and gas lease and subsequently convey an undivided interest, an apportionment is necessary. It was
held, however, that if cotenants grant a single lease they become joint obligees and if one of the cotenants conveys an interest,
there is no apportionment and the lessee may pay the entire royalty to any one of the lessor’s as a joint obligee, either before or
after the conveyance.16 Under the principles applied in such case, if a sole lessor conveyed an undivided interest in the
minerals after having granted an oil and gas lease, each cotenant lessor would be entitled to a share of royalty, and a payment
by the lessee to one of them as a joint obligee or to their joint account as joint obligees would not discharge the lessee’s
obligation. If, however, the oil and gas lease were granted by joint lessors, then they would be joint obligees, and a payment of
royalty to any one of the lessors or to all lessors jointly would satisfy the lessee’s obligation. Further, a conveyance by any one
of such joint obligees would not change the lessee’s right to discharge the liability to the lessors as joint obligees.

Even though the principles just described would otherwise apply, it must be assumed that the modern oil and gas lease, with its
provisions for assignments and notice of change of ownership, and the common practices used in the delivery and sale of
royalty oil17 and royalty gas18 demonstrate an intention that each owner of an undivided interest in the minerals is entitled to
the receipt of such owner’s share of the royalty, even though the lease was originally granted by joint lessors. If, after an oil
and gas lease has been granted, the lessor or one of the lessors should convey an undivided interest in the minerals or otherwise
disposes of the right to receive a part of the royalties payable under such lease, the lessee is required to make future royalty
payments in the correct proportions to the new owners, after having received proper notice of such change in ownership.19

         [c] Conveyance of interest in subdivided part of leased premises by lessor.20

If, after having granted an oil and gas lease, the lessor should convey an interest in a subdivided part of the leased premises, a
question may arise with respect to the rights of such grantee to share in production realized under such lease. Specifically, the
question which may arise is whether the grantee of such subdivided interest should share proportionately in the royalty on all
production under the lease regardless of the locations of the wells or whether such grantee is entitled to participate only in the
royalty on production which is realized from wells drilled on the subdivided part in which an interest is owned. Stated as
general matter, the problem is whether or not royalties are apportioned among the owners of mineral interests in subdivided
parts of the leased premises if the subdivision occurred after the lease was granted. If, for example, the owner of an eighty-acre
tract of land should grant an oil and gas lease and then convey to another the entire interest in a forty-acre portion of the leased
premises, will such grantee be entitled to one-half of the royalty on production from any well on the eighty acres, or will such
grantee

15   See § 42.6(a).
16   Swint v. McCalmont Oil Co., 184 Pa 202, 38 Atl 1021, 63 AmStRep 791 (1898) .
17   See § 39.5.
18   See § 40.6.
19See Carter Oil Co. v. Crude Oil Co. (10th Cir 1954), 201 F(2d) 547; Hafeman v. Gem Oil Co., 163 Neb 438, 80 NW(2d) 139, 7 O&GR 41
(1956).
20 See Hardwick, “Apportionment of Royalty to Separate Tracts: the Entirety Clause and the Community Lease,” 32 TexLRev 660 (1954);
Huie, “Apportionment of Oil and Gas Royalites,” 78 HarvLRev 1113 (1965); Masterson, “Division Order Problems Created by
Apportionment of Royalty,” 10 OklaLRev 289 (1957); Mosburg, “Effect of Lessor’s Assignment of Part of Leased Premises upon Right to
Receive Oil and Gas Royalties,” 11 OklaLRev 149 (1958); Annos, “Respective rights of owners of different parcels into which land subject
to an oil and gas lease has been subdivided,” 5 ALR 1162, 16 ALR 588, 64 ALR 634. See also § 16.4.
                                                  3-42 Kuntz, Law of Oil and Gas § 42.6


be entitled to all of the royalty on production from the acquired forty acres and none of the royalty from production on the
other forty acres?

The question of whether or not royalties payable under an oil and gas lease should be apportioned when there has been a
subdivision of the lessor’s interest in the leased premises after the granting of the lease has been the subject of a considerable
volume of litigation,21 and it has been the subject of a considerable amount of learned discussion.22As matters now stand, the
state in which the question was first decided, Pennsylvania, is the only state in which the most recent decision applies a rule of
apportionment under which royalties would be apportioned among all owners after a subdivision of the lessor’s interest.23 In
all other jurisdictions with decisions on the point, although in some instances there has been an early tendency to follow the
rule of apportionment, the most recent decisions adopt and apply a rule of non-apportionment under which the owner of a
subdivision of the leased premises is entitled to all of the royalty on production from such owned tract and is not entitled to any
of the royalty on production from any other part of the leased premises.24

In Ohio where the lease contained an entirety clause that provided for non-apportionment of royalty, a unit was created
including the leased premises pursuant to a statute enacted and regulations promulgated after the lease was granted. It was held
that the non-apportionment could not be changed retroactively. Burtner-Morgan-Stephens Co. v. Wilson Co., 586 N.E.2d 1062,
118 O&GR 484 (Ohio 1992). The following statement was included in the syllabus by the court:

        “Pursuant to Section 28, Article II of the Ohio Constitution, R.C. 1509.27(D) may not be retroactively applied to
        determine the distribution of royalties that are provided for in an oil and gas lease that was entered into and
        recorded prior to the enactment of the statutory provision.”

It has been observed that the non-apportionment rule is applicable regardless of the manner in which the subdivision of the
leased premises was accomplished;25 and in jurisdictions which follow such rule, the rule of non-apportionment has been
applied indiscriminately in instances where the subdivision was the result of conveyance of a part of the leased premises by
deed,26 where the subdivision was accomplished by will,27 and where the subdivision was the result of a partition,28 unless the
minerals were not divided by the partition.29 The non-apportionment rule will be applied

21See Annos, “Respective rights of owners of different parcels into which land subject to an oil and gas lease has been subdivided,” 64 ALR
634, 16 ALR 588, 5 ALR 1162.
22 See Huie, “Apportionment of Oil and Gas Royalties,” 78 HarvLRev 1113 (1965), for a particularly fine statement and incisive analysis of
the arguments which have been urged or might be urged on the subject.
23   Wettengel v. Gormley, 160 PaSt 559, 28 Atl 934, 40 AmStRep 733 (1894) ; on later appeal, 184 PaSt 354, 39 Atl 57 (1898).
24 Osborn v. Arkansas Territorial Oil & Gas Co., 103 Ark 175, 146 SW 122 (1912); Moshiek v. Lininger, 130 Colo 266, 274 P(2d) 965, 4
O&GR 121 (1954); Central Pipe Line Co. v. Hutson, 401 Ill 447, 82 NE(2d) 624 (1948); Fairbanks v. Warrum, 56 IndApp 337, 104 NE 983
(1914); Carlock v. Krug, 151 Kan 407, 99 P(2d) 858 (1940); Hurst v. Paken Oil Co., 287 Ky 257, 152 SW(2d) 981 (1941), Merrill
Engineering Co. v. Capital Nat. Bank, 192 Miss 378, 5 S(2d) 666 (1942); Hafeman v. Gem Oil Co., 163 Neb 438, 80 NW(2d) 139, 7 O&GR
41 (1956); Raley v. Moore, 60 NM 200, 289 P(2d) 957, 5 O&GR 355 (1955); Northwestern Ohio Natural Gas Co. v. Ullery, 68 OhioSt 259,
67 NE 494 (1902); Kimbley v. Luckey, 72 Okla 217, 179 Pac 928 (1919); Hinds v. McCord (TexCivApp 1931), 45 SW(2d) 442, Musgrave
v. Musgrave, 86 WVa 119, 103 SE 302, 16 ALR 564 (1920).
25   Central Pipe Line Co. v. Hutson, 401 Ill 447, 82 NE(2d) 624 (1948).
26Osborn v. Arkansas Territorial Oil & Gas Co., 103 Ark 175, 146 SW 122 (1912); Moshiek v. Lininger, 130 Colo 266, 274 P(2d) 965, 4
O&GR 121 (1954); Fairbanks v. Warrum, 56 IndApp 337, 104 NE 983 (1914); Carlock v. Krug, 151 Kan 407, 99 P(2d) 858 (1940);
Hammond v. Hammond, 292 Ky 659, 167 SW(2d) 865 (1943); Northwestern Ohio Natural Gas Co. v. Ullery, 68 OhioSt 259, 67 NE 494
(1902); Kimberly v. Luckey, 72 Okla 217, 179 Pac 928 (1919); Hinds v. McCord TexCivApp 1931), 45 SW(2d) 442.
27   Musgrave v. Musgrave, 86 WVa 119, 103 SE 302, 16 ALR 564 (1920).
28Hoffman v. Sohio Pet. Co., 179 Kan 84, 292 P(2d) 1107, 5 O&GR 979 (1956); Coates v. DeGarcia (TexCivApp 1956), 286 SW2d 691, 5
O&GR 1351. See Atwood v. Humble Oil & Ref. Co. (5th Cir 1964), 338 F(2d) 502, 21 O&GR 402, cert. denied, 381 US 926, 22 O&GR 393
(1965).
                                                  3-42 Kuntz, Law of Oil and Gas § 42.6


even though the lessee makes an effort to overcome the effect of such rule by an unsuccessful attempt to drill on the boundary
line.30 Further, such rule will be applied despite the fact that the unproductive subdivision is used to provide sufficient acreage
to permit drilling of a well on the productive subdivision under spacing regulations,31 and despite the fact that the
unproductive subdivision is attributed to the productive subdivision for purposes of determining the volume of production
allowable under proration regulations.32

In a jurisdiction which follows the non-apportionment rule, the royalty may nevertheless be apportioned if the parties express
an intention that it should be apportioned. Such an intention may be found expressed in a provision in the lease or in a
provision of the deed or other instrument by which the subdivision was accomplished. A division order may serve as a
memorandum of a prior oral agreement for apportioning royalty and render such agreement enforceable.33

The provision which is deliberately placed in an oil and gas lease to overcome the non-apportionment rule and to provide for
an apportionment of royalty in the event of a subdivision of the lessor’s interest is the entirety clause. The effect of such clause
is discussed elsewhere herein.34 A provision which is not placed deliberately in the lease to overcome the non-apportionment
rule but which might have such effect is the lesser interest clause. The effect of such clause is also discussed elsewhere
herein.35

In the instance where the intention to apportion royalties is found in the deed or other instrument by which the subdivision is
accomplished, the grantor may convey the mineral interest in a specified tract and also convey a royalty interest in the entire
leased premises. Thus, if an owner of an eighty-acre tract of land grants an oil and gas lease and then subsequently conveys a
one-half interest in a forty-acre tract but also provides that the interest is subject to a described outstanding lease and further
states that the grantee is to be entitled to receive one-half of the royalty payable under such lease, the grantee of such deed will
receive a conveyance of a one-half mineral interest in forty acres subject to a lease covering eighty acres and also a royalty
interest in the entire eighty acres for the duration of such lease. The following quoted provision was construed to have such an
effect:

“It is understood and agreed that this sale is made subject to said lease, but covers and includes one-half of all the oil royalty
and gas rental or royalty due to be paid under the terms of said lease …”36

A similar provision appeared in the deed which was involved in another reported case, but the point was not discussed.37

A mere mention of the outstanding oil and gas lease should not be sufficient to have the effect of a conveyance of a royalty
interest in the entire leased premises. Such a provision is easily accounted for as a protective measure to

29See Stratton v. Kentucky & West Virginia Gas Co., 298 Ky 651, 183 SW(2d) 817 (1944). See also Collins v. Inland Gas Corp. (Ky 1964),
382 SW(2d) 194, 21 O&GR 141, in which the court held that the grantor did not intend to partition the mineral estate where subdivided
portions of the land were conveyed to the grantor’s children and the following provision was made for the mineral estate:
“The first parties reserving the oil and gas and to tend some of the tenable (sic) land on this tract or parcel of land when necessary for his
support… . At the death of the first parties the oil and gas shall fall to the owners of the land.”
30   Galt v. Metscher, 103 Okla 371, 229 Pac 522 (1924).
31   Hitchcock v. Sojourner Drilling Corp. (TexCivApp 1962), 360 SW(2d) 444, 17 O&GR 565.
32Republic Natural Gas Co. v. Baker (10th Cir 1952), 197 F(2d) 647, 1 O&GR 1142; Coates v. DeGarcia (TexCivApp 1956), 5 O&GR
1351, 286 SW(2d) 691.
33 See Briggs v. Gaddis (IllApp 1985), 479 NE(2d) 350, 87 O&GR 10, wherein the owners of interests in subdivided portions of the land
subject to the lease made an oral agreement for apportioning the royalty and then signed a division order specifying that the division would
be effective until secondary recovery methods were put into operation on the premises. The parties stipulated in a pre-trial conference order
that the division order constituted a legal and binding contract.
34   See § 45.4 and 48.2.
35   See § 45.5 and 52.4.
36   Hoffman v. Magnolia Pet. Co. (TexCommApp 1925), 273 SW 828. See also § 16.4.
37   See Republic Natural Gas Co. v. Baker (10th Cir 1952), 197 F(2d) 647, 1 O&GR 1142.
                                                3-42 Kuntz, Law of Oil and Gas § 42.6


avoid liability on a covenant of warranty or to make specific a representation as to title. Thus, the language which is quoted
below and which was contained in a deed was held not to require an apportionment of royalties under the outstanding lease
mentioned.

“It is expressly understood and agreed that there is an oil, gas and mineral lease now in effect covering the above described
tract together with other acreage, and the Grantors hereby convey and assign unto Grantees all their right, title and interest as
Lessors under said lease so far as it applied to the above described tract of land, save and except the one-sixteenth (1/16th)
royalty interest hereinabove provided … to have and to hold the above described premises together with all and singular the
rights and appurtenances thereto in anywise belonging subject, however, to the royalty reservation hereinabove provided.”38

Specifically, the court held that the use of the term “appurtenances” in the habendum clause of the deed did not reveal an
intention to convey a royalty interest in the entire tract covered by the lease. Similarly, it has been observed that such an
intention may or may not be expressed in the following language:

“This sale is made subject to the above mentioned oil and gas lease and to the above mentioned royalty deed but covers and
includes the above described land in fee simple together with all rentals and royalties due under said lease together with all
reversionary rights and other rights of every kind and character owned by grantor.”39

If the oil and gas lease or related agreement make provision for payments other than the conventional delay rental and royalty
payments, problems might be encountered in determining whether such payments should be treated as delay rentals and
apportioned as to acreage or should be treated as royalty and not apportioned. It is to be expected that the degree to which the
payment in question resembles either a delay rental or a royalty payment will govern the decision. Thus, in one instance
payments which, according to an agreement, were made in lieu of further development after an initial producing well had been
drilled were regarded as bearing more resemblance to a delay rental than a royalty and hence were apportioned among the
mineral owners of subdivisions of the land under lease.40 On the other hand, in another instance, payments to be made under a
minimum production covenant were regarded as bearing more resemblance to royalty payments and hence were not subject to
apportionment.41

After a lessor has conveyed interests so that there are separate owners of subdivided portions of the land subject to the lease,
there is nothing to prevent such owners from entering into any arrangement among themselves for pooling their interests or
apportioning the royalty payable under such lease. There is no reason why they cannot make cross-conveyances of royalty
interests with the duration of such interests limited to the duration of the lease. Further, upon termination of the existing lease,
there is no reason why the parties cannot then enter into a community lease and provide for an apportionment of the royalty
payable under such a lease.42 Difficulties might arise, however, when the parties enter into a transaction after they have
acquired their subdivided interest and do not make their intentions clear.

If, after the existing lease terminates, the owners of interests in the subdivided tracts were to join in the granting of a common
oil and gas lease covering all of such tracts, such conduct would be regarded as revealing an intention to enter into a
community lease in many jurisdictions.43 It is doubtful, however, that a ratification or extension of an existing oil and gas lease
by the owners of the subdivided tracts would be similarly regarded. Such conclusion is

38   McElvain v. Texas Co. (TexCivApp 1954), 273 SW(2d) 676, 4 O&GR 293.
39   Frost v. Stanolind Oil & Gas Co. (TexCivApp 1957), 307 SW(2d) 136, 8 O&GR 818.
40   Robinson v. Milam, 125 WVa 218, 24 SE(2d) 236 (1942).
41   Atwood v. Humble Oil & Ref. Co. (5th Cir 1964), 338 F(2d) 502, 21 O&GR 402, cert. denied, 381 US 926, 22 O&GR 393 (1965).
42   See § 42.5(b).
43   Id.
                                                  3-42 Kuntz, Law of Oil and Gas § 42.6


particularly safe if there is another explanation for the ratification44 or if the jurisdiction is one in which the fact of joint
execution of a lease is not regarded as being of controlling significance.45

        [d] Conveyance by lessor of community lease and by lessor after unitization or pooling.46

The situations which are involved where a community lease has been granted and where lessors grant separate leases but enter
into a unitization or pooling agreement are sufficiently similar that they may be discussed together. The principle circumstance
which distinguishes such transactions is the matter of timing. The parties may pool their interests by entering into a community
lease, or they may grant the leases and thereafter accomplish the same objective by subsequent agreement. There has been no
demonstrated tendency on the part of the courts to treat such circumstance of timing as a significant factor. The view has been
expressed that the situation where the lessors join in a community lease is not distinguishable from the situation where the
lessors subsequently enter into a pooling or unitization agreement after granting separate leases.47

If, after having joined in a community lease or in a pooling or unitization agreement, a lessor should convey all or part of the
mineral interest subject to such lease or agreement, a question is likely to arise with respect to the right of the grantee to
participate in the royalty on production which is realized from wells drilled on other land covered by the transaction. The
answer to such question will depend upon the theory entertained with respect to the effect of entering into a community lease
or pooling agreement, and if the theory is entertained that the parties exchange conveyances, the answer will also depend upon
the further theory as to the nature of the interests which are acquired by the cross-conveyances.

In those jurisdictions inclined toward the theory that community leases or pooling or unitization agreements do not result in
cross-conveyances but create contractual rights among the parties, it is helpful in analyzing their rights and duties to identify
the contractual provision involved. The contractual provision under consideration is the royalty clause in the lease granted, as
it may be modified by a pooling or unitization agreement. Regardless of any such modification, such clause remains the source
of the rights and duties. Accordingly, a lessor who conveys an interest in the minerals will, to the extent of the interest granted,
part with the right to participate in royalty from production on the land covered by the agreement. The grantor parts with the
right to participate in royalty produced from the owned land because such right follows the title.

Such grantor also parts with the right to royalty on production from the other land covered by the community lease or
unitization agreement because the right to such royalty stems from the covenant in the lease that runs with the land or mineral
interest conveyed.

It may also be reasoned that the grantor parts with the right to participate in royalty from the other land because such right
arises by virtue of the contribution of land to the community of interest, and a lessor who disposes of an interest in land that
was contributed to such community is no longer making the contribution required for participation. The successor in interest is
the one making the contribution and should receive the compensating benefits.48

44   See Seal v. Banes, 183 Okla 203, 80 P(2d) 657 (1938).
45   See Raley v. Moore, 60 NM 200, 289 P(2d) 957, 5 O&GR 355 (1955).
46See Mosburg, “Effect of Lessor’s Assignment of Part of Leased Premises upon Right to Receive Oil and Gas Royalties,” 11 OklaLRev
149, 154 (1958).
47 “We are unable to conceive of any sound basis for a distinction between a case where the respective owners of several tracts of land join in
a single lease for the purpose of having the whole area developed as a unit for oil and gas, with the right to share in royalties according to the
area of land owned by each, and a case where such owners have executed separate leases to the same lessee and thereafter enter into a
pooling or community agreement for sharing the royalties on such basis from a well that may be produced anywhere on the pooled area.”
Merrill Engineering Co. v. Capital Nat. Bank, 192 Miss 378, 5 S(2d) 666, 671 (1942).
48See Hover v. Cleveland Oil Co., 150 Kan 531, 95 P(2d) 264 (1939); Merrill Engineering Co. v. Capital Nat. Bank, 192 Miss 378, 5 S(2d)
666 (1942); Garvin v. Pettigrew (OklaSupCt 1958), 350 P(2d) 970, 13 O&GR 992; Coolbaugh v. Lehigh v. Wilkes-Barre Coal Co., 218 Pa
320, 67 Atl 615 (1907).
                                                  3-42 Kuntz, Law of Oil and Gas § 42.6


It has been pointed out that the interest acquired by such successor in interest is correspondingly burdened with the right of
other owners whose land is included within the community lease or pooling agreement.49 Under the theory that the community
lease or unitization agreement creates contractual rights, it would be more consistent to reason that the lessee’s liability to pay
royalty on the owned tract is reduced to compensate for the lessee’s increased liability as a result of the agreement to pay
royalty on production from other land.

In those jurisdictions which are inclined toward the theory that a community lease or a pooling or unitization agreement
involves cross-conveyances by the parties, it is necessary to identify the interests which have been cross-conveyed and to
determine whether such interests are in gross or are appurtenant to the interest originally owned.

In California, it has been held that each owner who joins in a community lease acquires a profit in the land of the other owners,
that such profit is in gross and does not pass with a conveyance of the land,50 and that such profit is not covered by an option
to purchase a part of the land included in the community lease unless it is expressly mentioned.51 A conveyance may be
reformed so as to include and cover such profit in gross, if the parties intended to convey such interest but were not aware of
the peculiarity of California law on the subject.52 Further, the outstanding profit in gross may be extinguished by foreclosure
of a pre-existing lien on the land contributed to the community lease and may be restored in the new owner by a subsequent
execution of counterparts of the community lease.53 It has been observed that the creation of a profit in gross, as distinguished
from an interest which is appurtenant to the contributed land, is determined by the agreement of the parties; and it has been
held that the right to share in production on other land is appurtenant to the contributed land and will pass with a conveyance
of such contributed land in the instance of pooling pursuant to statutory conservation provisions.54

In Texas, the theory has been applied that the execution of a community lease results in cross-conveyances of royalty interests
among the lessors.55 A rigid application of the cross-conveyance theory for all purposes would lead to the same problems
encountered in California, unless the royalty interests conveyed by the cross-conveyances were regarded as being appurtenant
to the mineral interest contributed. There are reasons to believe, however, that the cross-conveyance theory will not be applied
rigidly. It has been held that production from one tract covered by a community lease will prevent the termination of a
terminable mineral interest in another tract covered by such community lease. In so holding, the court made the explanation
which is set forth below and which reveals an attitude that each lessor enjoys a share of royalty on production from another
tract because it is agreed that production shall be treated as coming from all parts of the leased premises. Under such
reasoning, the right to receive royalty from production which is realized from wells located on other land covered by the
community lease would necessarily follow the ownership of each tract of land contributed to the community lease.

“As between the lessors themselves, each relinquishes his right to have his own tract separately developed, his right to receive
all of the royalties from production from wells on his own tract, and his right to have wells drilled on his tract off-setting other
wells on the leased premises, and each gains the right to share proportionately in royalties from wells on the other included
tracts. In short, the parties by the execution of a unitized lease agree that production

49   Thomas v. Ley, 177 Okla 150, 57 P(2d) 1186 (1936).
50 “By executing the community lease, the respondents and each of the other lessors assigned or conveyed to his colessors a percentage
interest in all oil produced on his land by the lessee during the continuance of the lease. The consideration for that transfer was the similar
mutual assignments of the other lessors. The royalty interest thus transferred by each landowner to his colessors is an incorporeal
hereditament in gross … and the grantee’s interest in the oil produced upon the property of one of the colessors is entirely separate and
distinct from the royalty interest retained by him in oil which might be produced from his own premises.” Tanner v. Title Ins. & Trust Co.,
20 Cal(2d) 814, 129 P(2d) 383, 386 (1942).
51   Agajanian v. Cuccio (CalApp 1956), 297 P(2d) 755, 6 O&GR 1.
52Sutter Youth Organization, Inc. v. Borsen (CalApp 1963), 29 CalRep 628, 18 O&GR 273. But see Vantress Farms, Inc. v. Sydenstricker
(CalApp 1970), 90 CalRptr 251, 37 O&GR 1, wherein reformation was denied because the party seeking reformation accepted the other
party’s performance with knowledge that the contract as written was being relied upon.
53   See Gillis v. Royalty Service Corp., 91 CalApp(2d) 365, 204 P(2d) 968 (1949).
54   LeBard v. Richfield Oil Corp., 15 CalRep 617, 15 O&GR 1, 364 P(2d) 449 (1961).
55   See, e.g., Brown v. Smith, 141 Tex 425, 174 SW(2d) 43 (1943).
                                                   1-6 Kuntz, Law of Oil and Gas § 6.1

of oil or gas from wells located on any tract included in the lease will be regarded during the life of the lease as production
from each and all other tracts included therein. French v. George, supra.

“The leased premises here could not have been utilized without the joinder of the Powells. By joining in the lease they
necessarily agreed to the legal consequences that production from any of the tracts would be regarded as production from all
other included tracts. More specifically, by joining in the lease the Powells agreed with the other parties thereto, including
Southland, that production from the 50 acre tract would be regarded during the life of the lease as production from the 160 and
the 40 acre tracts.”56

In Texas, it has been held by a federal court that the royalty payable under a community lease should continue to be
apportioned after a voluntary partition of the mineral rights by the lessors, unless some special provision is made for
discontinuing the apportionment of royalty.57 It has also been held that where the granting clause of the mineral deed covers
the entire tract covered by the outstanding pooled leases and the grantor does not own an interest in all parts of the tract, the
mineral deed has the effect of conveying the described mineral interest in the tracts owned, and the “subject to” clause has the
effect of conveying the described fraction of royalty under the existing leases.58
Kuntz, Law of Oil and Gas
Copyright 2014, Matthew Bender & Company, Inc., a member of the LexisNexis Group.


56   Southland Royalty Co. v. Humble Oil & Ref. Co., 151 Tex 324, 249 SW(2d) 914, 1 O&GR 1431, 1435 (1952).
57   Howell v. Union Producing Co. (5th Cir 1968), 392 F(2d) 95, 28 O&GR 238. See also § 26.1.
58   Kelln v. Brownlee (TexCivApp 1974), 517 SW(2d) 568, 50 O&GR 548.
VOLUNTARY POOLING
                and
    UNITIZATION

       OIL and GAS
                 by

     LEO J.     ~OFFMAN
      Membe r of the Texas Bar




               1954
  MATTHEW BENDER ~ COMPANY
           INCORPORATED
           ALBANY, N. Y.
   JOHN R. MARA LAW BOOKS .
          DALLAS, TEXAS
                 SEPARATE POOLING AGREEMENT
                                                              169
 not arriv e at a cont rary effec t by their own priva te con-
 tract . Henc e, it may be antic ipate d that such provisions
 as thos e ment ione d abov e will ultimately be cons trued
 for their effec t upon the doct rine of law which would
 other wise appl y in the abse nce of such provisions.


      Section 3.    Effect of Subsequent Conveyances
     One of the legal problems which is particularly crea ted
  by the doct rine that the act of pooling or unitization
  effec ts a cross -con veya nce of the real prop erty inter ests
  {royalty or working interest} in the various tract s com-
  prising the unit is that of dealing with conv eyan ces of
  the sepa rate tract s mad e after the form ation of the
  unit. This prob lem generally arises where the conv ey-
 ance of the sepa rate tract , or of some inter est in the
 sepa rate tract , is acco mpli shed by a deed or othe r form
 of conv eyan ce which makes no rrent ion of the unit or
 of the statu s of the tract in the unit. It is part of the
 very natu re of the prob lem that it will ordinarily relat e
 to the ownership of the unit royalty interests, since if
 there is a multiple working inter est ownership and a con-
 veya nce is mad e of working inter est in a segr egat ed
tract the parti es to such a trans actio n will generally pro-
vide expr es.sly and in sufficient detai l for the inten ded
effec t of the conv eyan ce with resp ect to the unit. As
time goes on an increasing num ber of roya lty trans ac-
tions are hand led in the same manner. But it is inherent
that roya lty trans fers will not always be tend ed with
care, and it is also inhere~+ that even after a unit is
form ed the parti es are naturally inclined to rega rd their
legal titles as occu pyin g the same statu s as their statu s
170        VOLUNTA RY POOLING AND UNITIZA TION


prior to pooling or unitization, burdene d · only with the
addition al contrac t covenan t. of sharing of product ion.
Thus many subsequ ent conveya nces inevitab ly are pre-
pared on an individual tract basis, without mention of the
prior pooling or unitization of the particul ar tract with
other tracts. In a produci ng unit this type of convey-
ance imposes a substan tial burden upon the purchas er
of the product ion or other party paying the royalties
since he must determi ne, if he can, the legal effect of the
purport ed c.o nveyan ce of an entire tract, or of some speci-
fied interest in the tract, represen ting only a portion of
the unit area.


Illustration of the Problem
   In this instance again the problem is perhaps best illus-
trated by simplified hypothe tical facts. It may be as-
sumed that A , B, C, and D each leases his separate ly-
owned I 0-acre tract to the same lessee, X. Subsequ ently
A, B, C, and. D enter into a pooling agreem ent with X in
which the four tracts are pooled to form the 40-acre
drilling unit required by the spacing rules for the field
for the drilling of one well. X then drills a well on the
tract contrib uted to the unit by A and it is an oil pro-
ducer. Subsequ ently B conveys his I 0-acre tract to E
under the usual form of warr_a nty deed which describ es
only that tract and makes no referenc e to the pooling
agreem ent. This, of course, represen ts the most sim-
plified version of the problem , but it is typical of trans-
actions occurrin g constan tly within the boundar ies of
oil and gas units and involving fieldwide units as well as
single-well drilling units.
               SEPARATE POOLING AGREEMENT                171

Application of the Cross-Conveyance Theory
    The most pressing question in the situation illustrated
above is that of what royalty interest, if any. E has ac-
quired in the productio n from the well on A's tract by
virtue of the simple warranty deed describin g B's tract.
 If the cross-con veyance doctrine of pooling is applied
without modificat ion, as it seemingly should be in juris-
dictions which purport to follow the theory of the Veal
and Belt cases, the act of pooling resulted in the owner-
ship by each A, B. C. and D of ! of the royalty interest
in each of the four tracts. Since B could convey to E
no more than he owned in the tract described in the
deed he. may have conv.eyed to E at most the surface,
the reversion ary interest, and only *of the royalty interest
in that tract. Such an analysis leaves B. even after the
conveyan ce, with ownership of ! of the royalty in eoch
of the tracts contribut ed to the unit by A , C. and D.
This results, then, in the continued ownership by B of ! of
the royalty on the productio n from A's tract, while E.
the grantee, 9oes not participa te in such productio n ot
all. It is probably . although not necessarily, true that
B and E did not at all contempl ate such a result. They
no doubt intended that with the unconditional convey-
ance of B's tract would go all interest in the unit produc-
tion which was initially derived from the ownership of
that tract. But in the light of such doctrine as that of
the Veal and Belt cases are they defeated in their pur-
pose by the failure of the deed expressly to convey, not
only the ·t ract described , but all of B's royalty interest
in the entire unit? Moreover , can the latter conveyan ce
be accompH shed by anything less than an adequate legal
descriptio n, by reference or otherwise, of all of the land
172         VOLUNTARY POOLING A~'l> UNITIZATION


  comprising the unit? Or, on the other hand, . without all
  this, does all" of B's parti.cipation in the unit follow the
 ownership of his tract?                 .
     It is apparent that a strict application of the Veal and
  Belt decisions to the situation illustrated above results in
 the acquisition by the grantee of no participation in the
 royalty on the unit production while the grantor, having
 conveyed his entire ownership in the tract which consti-
 tuted his sole initial contribution to the unit, nevertheless
 retains · as great a royalty participation in the unit pro-
 duction as he had absent the conveyance. The situa-
 tion is, of course, aggravated by the location of the unit
 well on a tract other than that conveyed. Were the
 unit well located on the tract conveyed the grantee, by
 virtue of his having acquired by the deed all of B's ~ of
 the royalty in that tract, would have no immediate ground
for complaint, since at best he is entitled to only ~ of
the royalty production. However, the legal question ex-
 ists to the same degree in either case. It is only by a
 coincidence of circumstances that the grantee sustains
 no actual loss in the latter case on account of the seem-
ingly defective deed so long as the unit production is
from the tract conveyed to him.                             .
    There are infinite variations of the situation illustrated
above. The conveyance to E might have been of a
fractional undivided interest in the tract or in the miner-
als or royalties in the tract. "Such variations serve to
complicate the facts but the basic issue remains the same.
In other circumstances the tract conveyed may represent
only a small part of a fieldwide unit, complicating the
matter still further. But still the fundamental problem
~s the same.
               SEPARATE POOLING AGREEMENT                173
Available Interpretations
    Even in the situation illustrated above there is a pos-
 sible interpret ation beyond those stated-i .e., the in-
                                                   *
 terpretat ion, on the one hand, which gives E of the
 royalty in the tract conveyed with no royalty interest in
the ref!1aining tracts in the unit and the interpret ation,
on the other hand, which gives E all of B's participa tion
in the unit which was initially derived from the tract con-
veyed as an incident of the ownership in such tract.
The third interpret ation is a comprom ise, perhaps one of
merit. This interpret ation would recognize that by vir-
tue of the cross-assignment theory of pooling B owned
     *
only of the royalty in the tract conveyed and that only
such royalty interest in only such tract is conveyed to
E under the deed-bu t subject immediat ely to the pool-
ing agreemen t, so that the ! interest of E in the single
tract is pooled with the retained ~ interest of B in the
remaining tracts. If this interpreta tion were applied and
the pooling had been in proportio n to acreage as illus-
trated, E would become the owner of I I 16 of the roy-
alty on the productio n from the unit well, while B would
retain 3/16 of such royalty. It !s not likely that this third
suggeste d interpret ation is actua.lly within the contem-
plation of the grantor and grantee, but this interpret a-
tion is perhaps as reasonab le as i-he interpret ation which
denies the grantee practicall y all of the royalty owner-
ship in the unit which was initially attributa ble to the
tract presently conveyed .
 174           VOLU NTAR Y POOL ING AND UNIT IZAT ION


 California Decisions
     Wit h this back grou nd it is well to cons ider the deci ded
   case s relating to the effe ct of the conv eyan ce of a
                                                              seg-
   rega ted trac t afte r pooling or unitization has been
                                                                ac-
  complished. The California cour ts· have adop ted
                                                                the
   mos t restr icted view of thos e s.ugg este d abov e.
                                                               The
  leading California decision in this rega rd is that of
                                                                the
  Supr eme Cou rt in Tanner v. Title Insurance & Trust Co., 44
  previously cited here in othe r connections. For this
                                                             pur-
  pose the state men t of the case can be simplified.
                                                              The
  case involved a community lease of several lots whic
                                                                   h
  cont aine d express pooling provisions. One of the
                                                               les-
  sors who had cont ribu ted two trac ts to the lease
                                                            later
  exec uted a deed of trust on his trac ts and still later
                                                               the
  prop erty was sold at a trust ee's sale. The lessee drill
                                                                 ed
 two prod ucin g oil wells on the lease, nei~her of which
                                                             was
 loca ted on the trac ts sold at the trust ee's sale. In
                                                              this
 case the purc hase r of thes e trac ts claimed · the roya
                                                                lty
 inter est of the lessor-mortgagor in the prod uctio n
                                                           from
 othe r part s· of the community lease. The cour t,
                                                           how-
ever, reje cted the claim. The cour t first ruled, as
                                                              has
previously been note d, that when two or more landown
                                                               ers
 join in a community lease of their sepa rate trac ts
                                                           each
of ther:n assigns or conveys to each of the othe rs {dur
                                                              ing
the term of the lease) a royalty inter est in his trac t whic
                                                                 h
is an esta te in real prop erty . ''The roya lty inter est
                                                           thus
tran sferr ed by each landowner to his colessors is an
                                                               in-
corp orea l here ditam ent in gross and the gran tee's inter
                                                                  -
est in the oil prod uced upon the prop erty of one of
                                                             the
colessors is entirely separate and distinct from the
                                                           roy-
  44   20 Cal. 2d 814, 129 P. 2d 383, 387 {1942).
                 SEPARA TE I•OOLIN G   AGREE~!ENT               175
. alty interes t retaine d by him in oil which might be pro-
  duced from his own premises." The court then ruled
  that "the incorp oreal heredi tament owned by the granto r
  in the oil produc ed from the land of the colessors, exist-
  ing in gross, obviously does not follow the convey ance
  of the lessor's land, but can only be conveyed by a speci·
  fie transfe r of that interest." 46 (Emphasis is supplied :n
  the quotati ons.) Since the trust deed did not purpor t
  to convey specifically the granto r's incorp oreal heredi-
  tamen t in gross in the produc ing tracts of the commu-
  nity lease these interes ts did not pass to the purcha ser at
  the trustee 's sale. 46

   4&   I 29 P. 2d 383, 387 ( 1942).
   48   Several more recent California decisions have confirmed
 and applied this rule of the Tanner cas~. See Howard v. General
 Petroleum Corp., 108 Cal. App. 2d 25, 238 P. 2d 145, 148 (1951),
 on second appeal. I I 4 Cal. App. 2d 91, 249 P. 2d 585: Brown v.
Copp, 105 Cal. App. 2d I, 232 P. 2d 868, 871 ( 1951); Friedrich
v. Roland, 95 Cal. App. 2d 543, 213 P. 2d 423, 427 ( 1950):
Gillis v. Royalty Service Corpora tion, 91 Cal. App. 2d 365, 204
 P. 2d 968, 969 ( 1949). It is interesting, however, to compar e the
decision in the much earlier California case of Higgins v. Cali-
fornia Petroleum & Asphalt Co., 109 Cal. 304, 41 P. 1087, 1088
(I 895). There orie of the community lessors had conveye d his
separat e tract to the lessee. Since the only product ion was
from the tract conveye d and the lessor-grantor was not a party
to the suit the point involved in the cases cited above was not
actually in issue. But in noteworthy dictum the court seemed
to constru e the effect of the conveya nce of the separat e tract in
the same manner as if the grantor had been a tenant in common
in both tracts covered by the community lease and had conveye d
all of her interest in the whole to the lessee. The courts in the
later cases obviously did not choose +o follow th is analysis.
 1'76         VOLUNT A.R Y POOLIN G AND UNITIZA TION


Decision of Federal Court - Oklahoma
     Perhap s in accord with the result of the Tanner de-
  cision, but employing an entirely differe nt means of ar-
  riving at such result, is the decision of the Federa l court
  in Oklaho ma in Boren v. Burgess. 47 There an undivided
 mineral interest in a segreg ated tract was convey ed after
 the tract had been included with other land in a community
 lease. Production was secure d by· the lessee only on the
 land in the community lease which was not descri bed in
 the convey ance. The grante e of the mineral interes t in
 the segreg ated tract asserte d his right to partici pate on
 a pro rata acreag e basis in the royalty on the produc -
 tion elsewhere on the community lease. The court re-
 jected this claime d partici pation, reasoning that the ques-
 tion presen ted was whethe r the owner of an interes t in
 a subdivision of a tract of land covere d by a single
 lease has a right to partici pate in the royalty from oil
 produc ed on other subdivisions and holding that under
 Oklahoma law the royalty belongs solely to the owners
of the land on which the well is locate d. It is not
clearly appare nt from the opinion whethe r the court
held that the community lease did not effect a pooling
of the tracts for royalty purposes in the first instanc e or
that the initial pooling was accom plished . but that the
cc;:mveyance of an interes t in a separa te tract subseql:Jent
to the pooling comple tely segreg ated that interes t.
Howev er, the author ities cited by the court have no
relatio n to the first propos ition of no pooling in the first
instance, but suppor t only the propos ition that when
the land covere d by. the ordina ry lease is later subdiv ided

  47    97 F. Supp. 101~ (E. D. Okl. 1951).
                      SEI'A RA'l 'E rOO LIN G AGR EEM ENT
                                                                   177
· in ownership the own er of eac h subdivi
                                                    sion owns only
  the roy alty on pro duc tion from his subdivi
                                                      sion and the re
  is no app orti onm ent of such royalties. 48
                                                         If the cou rt
  inte nde d to rule tha t the re was no pooling
                                                        acc om plis hed
  in the making of the com mun ity lease.
                                                  the n it pro per ly
  held tha t a sub seq uen t gra nte e was not
                                                      ent itle d to an
  app orti onm ent of royalties any mo re tha
                                                  n wer e the orig -
  inal lessors, but in so doi ng the cou rt nec
                                                   essarily ign ore d
 imp orta nt Okl aho ma law to the effe ct
                                                   tha t the re is a
 pre sum ptio n of pooling in the making
                                                  of a com mu nity
 leas e. 49 On the oth er hand, if the cou
                                                    rt inte nde d to
 rule tha t the trac ts wer e poo led as to the
                                                    inte rest s of the
 lessors by the making of the com mun ity
                                                     leas e but tha t
 the sub seq uen t con vey anc e of an inte rest
                                                       in a sep ara te
 trac t effe ctiv ely "un poo led " tha t inte rest
                                                    , the re is sub-
 stan tial dou bt tha t the auth orit ies cite
                                                  d as pre ced ent
for tha t result actu ally lend any sup por
                                                     t at all. The
autn orit ies cite d rela te to the ord inar y
                                                 leas e of a single
are a having          a
                     com mon ownership thro ugh out and the
late r subdivision of the land into sep ara
                                                     te ownerships.
The re the par ties are pre sum ed as a ma tter
                                                       of law, und er
the majority · rule, to inte nd tha t eac h
             \                                     shall own only
the royalties on pro duc tion · from his
                                                own land . It is
an enti rely diff ere nt ma tter to atte mp
                                                 t to app ly this
rule to trac ts which wer e seg reg ate d
                                                 in own ersh ip in
the first inst anc e and the n con soli date d
                                                by an agr eem ent
of pooling. It is as reas ona ble to assu
                                                    me und er the
  48   These auth oriti es supp ort the rule corr
                                                  espo ndin g to the
principle of Ja'p het v. Mc.Rae fn Texas. See
                                              Not e I0, supra, Cha r-
ter 2.
   4 9 See
           Not e 33, supra, Cha pter 2.
                 12
 178        VOLUNT ARY POOLIN G AND UNITIZA TION


latter facts that the granto r and grante e of a separa te
tract, unless they expressly agree to the contra ry, intend
for the grant to be subjec t to the pooling agreem ent
and to contin ued apport ionme nt thereu nder. Here
there is no cause for creatin g and imposing by law an
apport ionme nt of royalties but only cause for continuing
an existing ·appor tionme nt in effect, a result which the
parties might reasonably be expect ed to anticip ate.


Mississippi Decision -   Contra ry Rule
    The leading decision propounding the contra ry rule
 that the convey ance of a tract compri ~ing part of a
 unit, even though made without mention of the unit,
 will pass the granto r's interes t in all royalties derive d
 from his ownership of that tract is by the Suprem e Court
 of Mississippi in Merrill Engineering Co. v. Capita l Nat.
 Bank of Jackso n.60 It is worthy of note that the case
 involved not the ordina ry pooled commu nity lease but
the pooling of a numbe r of separa te tracts and the prior
leases thereo n by a separa te and indepe ndent pooling
agreem ent entere d into by the landowners and the les-
see. This is the more typical situation. After the va r-
ious tracts were thus pooled a produc ing gas well was
drilled on one of them. With respec t to one of the
nonpro ducing tracts there were a numbe r of convey anc-
ing transac tions, including a deed of trust and trustee 's
sale, but suffice it to say here that in none of the con-
veyanc es ·was the unit or the pooling agreem ent men-
tioned and in none was more than the indivi·dual tract of

  &o 192 Miss. 378, 5 SoA 2d 666 (1942).
                     SEPARATE POOLING AGREEMENT
                                                                        179
  land des cri bed . On e of the int
                                              erm edi ate gra nto rs
  con ten ded in the cas e tha t its con
                                            vey anc e of the tra ct
  did not pass titl e to any sha re of
                                             the royalties on the
  pro duc tio n fro m ano the r tr~ct in
                                           the unit. The Missis-
  sip pi cou rt ove rru led this con ten tion
                                                 and held tha t a
  pro por tio nat e sha re in trye royalti
                                           es on the pro duc tio n
 fro m one tra ct in the unit pas sed
                                          with a con vey anc e of
 a non pro duc ing tra ct eve n tho ugh
                                              no mention of the
 unit or the pooling agr eem ent was
                                            ma de in the con vey -
 ance.61 The cou rt ind ica ted tha t
                                           this rule would app ly
 in eve ry cas e in the abs enc e of a
                                          spe cifi c res erv atio n in
 the con vey anc e to the con trar y.
                                             Although the cou rt
 was not pre cis e in sta tin g the legal
                                            eff ect of the pooling
 agr eem ent in the first instance, it
                                          ind ica ted tha t a pro -
 por tio nat e sha re of the royalties
                                            thr oug hou t the unit

    &I   The cou rt stat ed that . " 6 • • we
                                                   are of the opinion tha t
  in the abs enc e of a reservation
                                         to the con trar y a sub seq uen t
 gra nte e of any par t of the poo led
                                              area would be enti tled to
 the ben efit s to flow from the
                                         pooling or community agr ee-
 men t so long as it rem aine d in forc
                                           e ond effe ct aga inst his land;
 and tha t this :.vould be true with
                                         out reg ard to whe ther or not
 such agr eem ent mad e pr-&vision for
                                            the sharing of the rayalties
 by any one oth er than the original
                                              part ies ther eto. " The last
 clause of the abo ve- quo ted opinion
                                             was in response to a con-
tent ion tha t . the pooling agr eem ent
                                            was a personal con trac t for
the sole ben efit of the pro per ty
                                         owners ther ein men tion ed and
that" i·he sharing ben efit s of the poo
                                            ling could not pass to any
sub seq uen t gra nte e. In this con
                                        nection see Hov er v. Cle ve-
land Oil Co. , ISO Kan . 531, 95
                                        P. 2d 264 ( 1939). holding tha t
the par ticu lar pooling agr eem ent
                                        th'9re involved was a personal
con trac t of the lessors and tha t
                                          a con vey anc e of his poo led
trac t by one of the lessors· automat
                                          ically term inat ed the pooling
arra nge men t.
180         VOLUN TARY POOLI NG AND UNITI ZATIO N


 passe s with the title to one of the separ ate tract s within
the unit as a cove nant runniQg with the title to that tract .
This, of course, is direc tly contr ary to the ruling · in the
Tann er decision that the royalty intere st of the grant or
 in other tract s in the unit is an in~erest in gross and will
not pass to the grant ee of one of the tract s unless speci-
fically conv eyed. It must be recog nized , of course, that
the Mississippi court has not held, as has the California
court , that the act of pooling effec ts a cross -conv eyanc e
of the real prope rty intere sts amon g the royal ty owners.
Thus the Mississippi court found it some what easie r to
arrive at the result which it did by treati ng the sharing
arran geme nt impo sed by the pooling agree ment as a
simple coven ant running with the title to the respe ctive
tract s comprising the unit.
    It is notew orthy that the Mississippi court in the Merrill
 Engineering Co. case expressly consi dered the majority
 rule that where the owner of a tract of land lease s it as a
whole and there after subdivides the land into several
tract s by conv eyanc es which do not reser ve the royalty,
each owne r of a subdi vided tract is there after entitl ed
to the royal ty on the produ ction from his tract alo.ne.
But, in contr ast with the Federal decision in the Boren
case, ·the Mississippi court held that that doctr ine has no
appli catio n to the situat ion where the pooling agree ment
of two or more landowners is made in adva nce of the
subdividing conv eyanc e in question and where the shar-
ing of royalties thus impo sed is in effec t a cove nant
running with the land. There is sound basis for such a
distin ction in the two situations and the decision of the
                  SEPA RATE POOL ING AGRE EM.E N'l'
                                                               181
 Mississippi cour t in this rega rd appe ars the mor e reas
                                                            on-
 able and logic al. 52


 Pennsylvania Decision
    The sam e gene ral conclusion reac hed in the Merrill
                                                               En-
  gine ering Co. case was arriv ed at by the Supr eme
                                                           Cou rt
 of Pennsylvania in the much earli er deci sion in Coo
                                                         lbau gh
 v. Lehigh & Wilkes-Barre Coa l Co., 53 previously cited
                                                                in
 anot her conn ectio n. The sepa rate own ers of adjo
                                                            ining
 lots 28 and 29 had ente red into a com mun ity coal
                                                             min-
 ing lease of the two lots in which they had agre
                                                          ed to
 shar e the roya lties . Subs eque ntly lot 28 was sold
                                                              but
 the adm inist rato r of the esta te of the lessor of that
                                                               lot
 cont ende d that the inter est of that lessor in the
                                                           royal-
 ties in lot 29, existing by virtu e of the com mun ity
                                                           lease ,
 did not pass to the purc hase r of lot 28. The cour
                                                         t held,
 how ever , that the pooling did not effe ct a tran sfer
                                                               of
estat~s in real prop erty but that only the
                                                  roya lty coal
prod uctto n had been put in hotc hpot by the lesso
                                                               rs.
Since the inter est of the lessor of lot 28 in the pot
                                                           cam e
solely from his own ersh ip in lot 28, when that was
                                                             sold
the purc hase r took all the lessor had in both lots.
                                                              For
its simplicity and logic the opinion in this deci sion
                                                         meri ts
the <;:lose scru tiny of thos e inter e5te d in the anal
                                                          ogou s
oil a·nd gas lease s.

  82
        See also Thomas v. Ley, 177 Okl. 150, 57 P.
                                                           2d 1186
{1 936); Shell Petro leum Corp . v . Calca sieu Real
                                                     Estat e & Oil
Co., 185 La. 75 I . 170 So. 785 ( 1936}.
    153
        Note 41, SJJpra.         ·
 182        VOLUN TARY POOLI NG AND uNITIZ ATION


Suggested Analysis
    In the light of the many · aspec ts of this probl em it
 would appe ar that the bette r reaso ning lies in favor of
 the gener al rule which cause s all of the unit royal ty par-
 ticipa tion initially deriv ed from a tract in a unit or an
 intere st in such tract to pass to the purch aser of such
 tract or such intere st, wheth er or not speci ficall y men-
 tione d in the conve yance , unless, of cours e, there is a
 contr ary reser vatio n in the conv eyanc e. It requi res a
 much lesser mental burde n to arrive at this conclusion
 wher e the found ation rule of cross -conv eyanc es of real
 prope rty intere sts as effec ted by pooli ng or unitization
 is avoid ed in the first instan ce. If this rule of law be
 avoid ed then the effec t of pooling or unitization is to
leave the estat es in real prope rty as they exist prior to
 pooling or unitization but to impo se upon each such
estat e the propo rtion ate burde n and benef it of the shar-
ing of unit produ ction after produ ction is achie ved.
Thus the pooli ng or unitization agree ment creat es a shar-
ing cove nant which runs with the land and other intere sts
in real prope rty. Any conv eyanc e of any such intere st,
whet her expre ssly state d or not, would then be subje ct
to the terms of the pooling or unitization agree ment
(assuming actua l or const ructiv e notic e to the grant ee
of the existe nce of such agree ment ) and would carry
with it the propo rtion ate benef its and burde ns of the
sharin g arran geme nt speci fied in the agree ment . This
appe ars to be the conclusion reach ed by the Mississippi
court and appe ars to const itute the bette r reaso ning.
As previously state d, howe ver, even in jurisdictions
which gener ally recog nize the rule of cross -conv eyanc es
                   SEPA RAT E POO LING AGR EEM ENT
                                                                  183
   as app lied to pooling or unitization the rule
                                                        can possibly
   be avo ided in part icul ar case s by the reco gnit
                                                          ion of lan-
   gua ge of the agr eem ent indi cati ng the inte
                                                        ntio n of ef-
   fect ing a con trar y result. As previously
                                                       poin ted out,
   such provisions in pooling or unitization agre
                                                          eme nts as
   thos e specifically neg ativ ing all tran sfer s
                                                     of real pro p-
  erty inte rest s und er the agre eme nt or thos
                                                        e prov idin g
  for the allo cati on of unit prod ucti on to the
                                                          resp ecti ve
  trac ts and the pay men t of inte rest s within
                                                         eac h trac t
  just as if the allo cate d prod ucti on had
                                                    actu ally bee n
  pro duc ed ther efro m, clearly indi cate tha
                                                     t und er S.uch
  agre eme nts no cros s-co nve yan ces or tran sfer
                                                        s should be
  reco gniz ed. Any sub seq uen t con vey anc e
                                                    of ·a trac t or
  inte rest within a unit so c~eated should pass
                                                     with it all the
 cov ena nts of the pooling or unitization agr
                                                    eem ent which
 wer e initially attr ibu tabl e to that trac t or
                                                    inte rest . The
 gra ntee should then shar e pro por tion atel y in
                                                       all unit pro -
 duc tion , whe ther from the trac t acq uire d by
                                                       him or oth er
 trac ts in the unit.
     The sam e result can be reac hed eve n whe re
                                                           the doc -
trin e of cros s-co nve yan ces is imp osed ,
                                                    alth oug h th~
 rout e is not yet com plet ely clear. One met
                                                        hod of ar-
riving at such result would be to con side r tha
                                                       t all roya lty
inte rest s crea ted in the unit by virtue of the
                                                          pres ume d
cross-co nve yan ces are inci den t or app urte
                                                     nan t to the
inte rest s from which they were deri ved and
                                                          tha t any
tran sfer of any inte rest in the latt er cate gor
                                                    y pass es with
it all of the incidental or app urte nan t inte
                                                      rest s in the
othe r trac ts in the unit. 54 Thus th.e lessor
                                                       who con tri-
  54 See Walker, Developments · in the Law of
                                              Oil and Gas in
Texas During the War Yea rs-a Resume,
                                           25 Texas Law Re-
184-       VOLUNTARY POOLING AND UN'ITIZATION


butes a I 0-acre tract to a 40-acre drilling unit and sub-
sequently conveys his I0-acre . tract without mention of
the unit would pass title with his conveyance ·t o all of
his present interest in the tract described and    * of the
royalty interest in each of the other tracts as an incident
of or appurtenant to the tract described. Proportion-
ately smaller interests in the royalty in the other unit
tracts would pass with a smaller interest conveyed in
the tract described. The description of the other tracts
in the unit would necessarily be implied from the unit
agreement of which the grantee will almost invariably
have actual or constructive notice. Such reasoning as
this conflicts with the ruling of the California court that
the royalty interest of the lessor in the land of his co-
lessors in the unit is a right or interest in gross and is,
therefore, not transferred unless specifically conveyed.
However, it is believed that such interest in land of the
colessors is better treated as a right or interest appur-
tenant, rather than in gross.
   The principal objective, where overriding considera-
tions of public policy are not involved, is to give effect
to the probable intention of the parties in the transac-
tion. And in this type of situation the actual intention
of the grantor and grantee is normally to convey all of
the grantor's ownership in the unit which he acquired
by virtue of the contribution to the unit of the interest
described in the conveyance. Where the parties have
 not specifically expressed themselves in the instrument

view I, 14 ( 1946); Shank, Pooling Problems, 28 Texas Law Re-
view 662, 678 (1950); Case note, 25 Texas Law Revie~ 274
( 1947).
                     SEPARATE POOLING AGREEMENT
                                                                 185
  the cou rts should pre sum e such
                                          an intention and g1ve
 eff ect to it. Wh ere the gra nto
                                            r and gra nte e hav e
 clearly exp res sed themselves in ~he
                                             instrument, however,
 the cou rts should giv e eff ect to
                                           the ir int ent ion as ex-
 pre sse d, wh eth er it enl arg es or res
                                           tric ts the con vey anc e.
 But in this res pec t it is necessary
                                           to det erm ine wh eth er
 or not the roy alty owners in the uni
                                           t should be per mi tte d,
 as a ma tte r of policy, by the ir ow
                                          n pri vat e con tra cts or
 con vey anc es, to "un poo l" any int
                                         ere st wit hou t the con -
 sen t of the lessee or lessees in the
                                            unit.55

  Co mp ari son to Jap he t v. McRae Sit
                                            uat ion
     It has bee n sta ted tha t the doc trin
                                              e of Jap he t v. Mc-
  R~e66 as app lie d in Texas and
                                         mo st oth er oil and gas
  jurisdictions should have no app lica
                                            tio n to the pro ble m
 dis cus sed her e since the situatio
                                          ns are clearly distin-
 gui sha ble . Th ere is justification for
                                            presuming as a ma t-
 ter of law tha t the gra nto r and
                                         gra nte e do no t int end
 an app ort ion me nt of the royalti
                                         es where the con vey -
 anc e of a seg reg ate d pa rt of a sin
                                           gle lease is ma de and
 tha t the gra nte e del ibe rat ely pur
                                          cha ses the par tic ula r
seg reg ate d tra ct or int ere st for spe
                                           cul ativ e reasons. But
wh ere sev era l sep ara te leases are
                                          con sol ida ted by pool-
ing or sep ara tel y ow ned tra cts are
                                           poo led und er a com -
munity lea se and a sub seq uen t con
                                            vey anc e of a single
tra ct is ma de while an agr eem ent
                                            of app ort ion me nt is
in for ce it is in the ver y nat ure
                                        of the pooling arr ang e-
  ss See Gar za v. DeMontalvo , 147
                                    Tex. 525, 217 S. W. 2d
988, 992 ( 194   9).
  68
       No te I0, supra, Ch apt er 2.
 186         VOLUN TARY l'OOLIN G AND UNITIZ ATION


 ment that the grant or and grant ee would proba bly in-
tend and expec t the appor tionm ent of royalt ies there-
 under to contin ue in force. A:1d the same reason s for
presum ing a delibe rate specu lative desire on the part
of the grant ee are absen t in the case of the usual poole d
unit. It will ordina rily consis t of prove n or semip roven
acrea ge throu ghout and the wildc atting instin ct finds
no basis for existe nce. Moreo ver, in the case of the
drilling or allowable unit neithe r the grant or nor the
grant ee can reason ably antici pate that any furthe r
drilling after the first well will be done. In the case of
the larger units the unit area is ordina rily either fully
devel oped or at least fully prove n prior to the creati on of
the unit so that there is no logical place for the specu lation
which is foster ed by the doctri ne of the Japhe t case.

Comparison to Entirety Clause
  It should also be added thdt the situat ion of the
creati on of the poole d unit ·and the subse quent conve y-
ance of a separ ate tract within the unit is actual ly more
nearly akin to the situati on create d by the "entir ety
clause " which appea rs freque ntly in the lease forms used
in some areas and which was design ed to avoid the
somet imes harsh injustice of the Japhe t doctri ne. 67 The

  67  The typical entiret y clause appear s in the lease as fol-
lows: "If the leased premises shall hereaf ter be owned sever-
ally or in separa te tracts, the premises nevertheless shall be de-
velope d and operat ed as one lease and all royalties accruing
hereun der shall be treated as an entiret y and shall be divided
among and paid to such separa te owners in the propor tion that
the acreag e owned by each such separa te owner bears to the
entire leased acreag e."
                  SEP ARA'l'E l 'OOLIN G .AGREE MENT            187
 entire ty clause in effect provid es that if the owner ship
 of the land cover ed by the lease is segre gated during
 the term of the lease the royalties shall nevert heless be
 appor tipned to all owners in propo rtion to their acrea ge.
 Wher e subse quent to the making of such a lease the
 lessor conve ys a smaller tract cover ed by the lease by
an instru ment which descri bes only the tract conve yed
and does not specif ically provid e for an appor tionm ent
to the tract of a pro rata portio n of all royalt ies pro-
duced from any part of the original lease, it has been
held that the appor tionm ent or entire ty clause of the
lease nevert heless applies and is bindi~g upon both the
grant or and grante e of the tract involved as a coven ant
burde ning the land and the intere sts therei n. 58 The en-
tirety clause has been partic ularly enfor ced where the
conve yance contai ns no provision purpo rting to negat ive
its effect and where no groun d for reform ation of the
instru ment of conve yance exists. The situat ion of the
conve yance of a segre gated tract in a unit after an ex-
press pooling agree ment has been made is analog ous

   68    See Carter Oil Co. v. Crude Oil Co., 20 I F. 2d 547 (I Oth
·cir. 1953): Gypsy Oil Co. v. Schonwald, I07 Okl. 253, 23 1 P.
 864 (1924): Eason v. Rosamond, 173 Okl. I0, 46 P. 2d 471
 ( 1935): Schrader v. Gypsy Oil Co., 38 N. M. 124, 28 P. 2d 885
 ( 1934). But compa re lskian v. Consolidated Gas Utilities Corp..
 207 Okl. 615, 251 P. 2d 1073 (1952): Coyne v. Simrall Cor
 poration, 140 F. 2d 574 (6th Cir. 1944): Shell Petroleum Corpo-
 ration v. Carter ; 187 La. 382, 175 So. I ( 1937): Harley v. Mag-
 nolia Petroleum Co., 378 Ill. 19, 37 N. E. 2d 760 ( 1941). These
 cases are discussed in Hardwicke, Jr., Problems Arising out of
 Royalty Clauses in Oil and Ga,s Leases in Texas, 29 Texas Law
 Review 790, 806 ( 1951 ). See also discussion note, I Oil and Gas
 Reporter 12 I B {19 52).
188        VOLUNTARY FOOLING ·AND UNITIZATION


to that of the conveyance under an entirety clause in
the original single lease. H<;>wever, the case of the con-
veyance after pooling will ordinarily provide even a
stronger case in logic for the continued enforcement of
the apportionment under the pooling agreement since
the pqoling agreement in this situ"ation is obviously in-
tended as a covenant which will run with the land and bind
all future purchasers and is just as .obviously a reasonable
restraint on the future alienation of the lands comprising
the unit.

Procedure for Purchaser
   From what has been said it is apparent that this prob-
lem has not yet been fully developed and decided by
the courts in most of the oil and gas jurisdictions. It is
likewise apparent that the problem will furnish the basis
for future litigation and that the purchasers or other
parties charged with the duty of making payment for unit
production meanwhile can not feel wholly secure in mak-
ing such payments to the grantor or grantee in the type
of situation envisaged here in those jurisdictions in which
the matter has not been fully dealt with in the appellate
courts. It would behoove such parties charged with pay-
ing for unit production to suspend payments attributable
to the interests involved in such situation until the grantor
and grantee have both agreed more fully with respect to
the effect of their transaction, preferably by a further
instrument in recordable form so that the title question
may be permanently cleared for all purposes. If the in-
strument of further agreement is not recorded (as is true
in the case of the usual transfer order) a similar instrument
               SEPARA'l'E POOLIN G AGREEM ENT             189
should be require d of the granto r and grante e each time
the interes t involved change s hands, since the unreco rded
agreem ent will not provid e constru ctive notice to innoce nt
purcha sers for value.


       Sectio n 4.   The Nonco nsentin g Mineral or
                     Royalty Owner
   One of the import ant catego ries of legal proble ms
in the field of voluntary pooling and unitization is the
catego ry which center s on the position of the mineral or
royalty owner who refuses to join in the pooling or uni-
tizatio n agreem ent. The proble m of nonjoinder is a
trouble some one for the nonjoining party himself, since he
may feel sincerely that his individual interes t and rights
will be seriously jeopar dized by his partici pation in the
pooling or unitization arrang ement, yet he must recogn ize
at the same time that in many instances his interes t will
be affecte d by the operat ion of the unit even though he
does not partici pate. In the case of the operat or or
lessee in the unit, on the other hand, the proble m create d
by the refusal of mineral or royalty owners to join can
be even more trouble some. The nonjoinder create s the
necess ity in many instances for a separa te accoun ting for
produc tion--o ne accoun ting to the pooled interes ts and
yet anothe r type of accoun ting to the unpool ed interes ts.
Moreover, the metho d of operat ion of the unit may be
substantially affecte d by the existen ce of unpool ed in-
terests , and may give rise to the necess ity for drilling
interio r offset wells, one of the very things the pooling
or unitization is design ed to eliminate. The proble m of
the operat or where there are unpooled interes ts in the
OIL and GAS
Report er
                              VOLUME 145




Edited by

The Southwestern Legal Foundation




                       2001


        lEXIS Publishing™
        LEXI ~N EXI s-• MARTI NDALE-HU BBELL•
        MATIHEW BENDE~ • MICHIE"• SHEPARD's-




                                           FROM THE LIBRARY OF
                                        FULBRIG~:r0
                                                    JAWORSKI L.l.P.

                                                 JAN 3 1 2001
                                                HOUSTON, TEXAS
                               McCALL    v.   McCALL                               415

tracts. 9 We find the trial court did not err in holding the McCall
deeds were unambiguous as a matter of law.
   W here there is no ambiguity, disagreement over the interpreta-
tion of the reservation wHl not make it ambiguous, Sun Oil Co.
v. Madeley, 626 S.W.2d 726, 727 [73 O&GR 106] (Tex. 1981),
for a patty's construction is immaterial. Id. at 732.
   The court's primary duty when construing an unambiguous
deed is to ascertain the intent of the parties from the "four
corners" of the deed. Luckel, 819 S.W.2d at461. Under the "four
corners rule," the intention of the parties, especially that of the
grantor, will be gathered from the instrument as a whole and not
from isolated parts of the instrument. Plainsman Trading Co. v.
Crews, 898 S.W.2d 786, 789 [129 O&GR 280] (Tex. 1995);
Texas Pac. Coal & Oil Co. v. Masterson, 160 Tex. 548, 334
S.W.2d 436, 439 [12 O&GR 1198] (Tex. 1960).
   Under our interpretation of the 1975 Partition, and applying
the four comers rule to the McCall deeds, we find the trial court
did not err in holding that the royalty interests at issue were not
conveyed in the McCall deeds.
   We affirm the judgment of the trial court.



                              DISCUSSION NOTES
Deeds: Partition-Miner al and Royalty Interests.
             The facts as stated in the court's opinion are not entirely
       clear to the writer. The confusion is about the facts sun·ound-
       ing Lila's claim to a royalty share in the Taub and Dwyer
       production. Shortly after the execution of the partition agree-
       ment, Mrs. McCall, by four separate deeds, conveyed three
   9 We will not address Lila's summary judgment proof affidavit of Mrs.
McCall's attorney, who claims Mrs. McCall intended to convey all her royalty
interests relating to the 3,300 acre tract. Even assuming this affidavit is accurate,
this proof is inadmissible because, where there is no claim of any fraud, accident
or mistake, parol evidence is inadmissible to vary, add to, or contradict the
terms of an unambiguous agreement. Nowlin v. Frost Nat'! Bank, 908 S.W.2d
283, 286 (Tex.App.-Houston [1st Dist.] 1995, no writ) (citing Kuper v.
Schmidt, 161 Tex. 189, 338 S.W.2d 948, 952 (Tex. 1960)).
(Mauhcw Bender & Co.• Inc.)                                [14S O&OR Report No 2 (2-01)]
416                            145   OIL   & GAS   REPORTER


       tracts to her daughters Mildred and Patricia, ber son Verner,
       and her daughter-in-law Lila. The writer believes it is this
       deed to Lila under which she is basing her claim for royalty
       on the Tuub ond Dwyer tracts. h is stated afterward that tJ1e
       three children and Lila conveyed their interests to MCDCO.
       What is not clear from the facts as stated is that if Lila claims
       the interest under a deed executed by Mrs. McCall, why did
       Lila not convey this interest to MCDCO? It is not apparent
       to the writer how Lila could claim an interest in production
       from new wells on the Taub and Dwyer tracts.
             These Discussion Notes are based on the assumption
       U1at Lila never sold her interest acquired from Mrs. McCall.
       The appellees apparently maintained that LiJa never acqui1·ed
       an interest in the Taub and Dwyer tmcts-Lhe ones that did
       not belong to Mrs. McCall. lt is assumed tbat all the tracts
       involved had been a part of the 3,298 acres partitioned.
             There are several ways in which a person may acquire
       a mineral or royalty interest in another's Lrocts other than by
       a straight "buy and sell" transaction. It is stated in the facts
       that the 3,296-acre tract was common ly owned by Taub,
       Dwyer, and Mrs. McCall before its partition into sixteen
       sep<lfate tracts. The land was under three oil and gas leases
       at the time of partition. When a tract is portitioned, the
       minerals and the surface usually remain together. In the
       principal agreement, it was provided that each continued to
       own a stipulated interest as ex.isted in the tracts prior to parti-
       tion and that in future leases, each would continue to own
       a stipulated royalty interest in the tracts of others. ln other
       words, each became a nonparticipating royalty owner of the
       agreed fraction in the other tracts. Their agreement was unlike
       that involved in Garza v. Montalvo, 1 where the siblings
       pm1itioned their jointly owned I ,100 acres, which tract was
       under tense. No mention was made in the partition of the oil
       and gas Iealie or the minerals. The subsequent production was
       held to belong solely to the owner of the tract on which the
       producing well was located.
             No mention was made of any production from Mrs.
       McCall's tract during the period of time involved in the

   12L7 S.W. 2d 988 (Tex. Sup. Ct. 1949).
(Mallhcw Bender & Co., Inc.)                                  (14~   O&CR Report No.2   (~I))
                               McCALL v. McCALL                              417

        principal case. The production at issue was from the eight
        new wells drilled on tbe Taub and Dwyer tracts.
              The question arises as to the creation of Mrs. McCall's
        interest in production from the others' tracts. One possibility
        is that her interest was similar in principle to that set forth
        in Veal v. Thomason, 2 in which owners of separate minerals
        in separate tracts committed them to a unit agreement under
        which each tract would share in the production from the other
        tracts, and Parker v. Parker, 3 where owners of separate tracts
        signed a single lease combining their tracts, with it being held
        that each tract shared in subsequent production from the
        others. Such transactions are frequently refen·ed to as cross-
        conveyances; the interest being conveyed is a royalty, an
        interest in real property.
              The facts in the opinion state that the pat1ition agreement
        provided that each was to continue to own the existing interest
        at the time of partition "in each of the tracts granted to the
        other parties." If this existing interest was a continuation of
        the jointly owned interest in the other tracts and each tract
        partitioned was burdened with the existing lease and royalty
        ownership, then it would appear, as stated above, that each
        would continue to own a nonparticipating royalty interest in
        all of the tracts. Mrs. McCall would then own a royalty inter-
        est in each of the producing tracts on the Taub and Dwyer
        land. But if the ownership in each other's land had been a
        result of a cross-conveyance, then the issue would be con-
        trolled by Veal and related cases.
              In any event, there was no problem as to whether Mrs.
        McCall and her assignees would share in the production on
        the other tracts. T he case turned on whether Mrs. McCall
        assigned an interest in the disputed production to Lila under
        the deed in which she was a grantee or conveyed this royalty
        in the deed executed in the 1997 conveyance to her three
        children, excluding Lila.
              The following analysis of the deed under which Lila
        claimed an interest in production of the eight new wells on
        the Taub and Dwyer tracts is in contrast and conflict with

   2   159 S.W. 2d 472 (Tex. Sup. Ct. 1942).
   3   144 S.W. 2d 303 (Tex. Civ. App.-GaJveston 1940, error rerd).
(MaUhew Bencler & Co.. Inc.)                          (14$ O&OR Rtpon No.2 (2-01))
418                            145 OIL & GAS REPORTER

        the analysis in the opinion. The deed executed by Mrs.
        McCall, in which Lila was a named grantee, provided as
        shown in the opinion that the grantor did "GRANT, BAR-
        GAIN, SELL and CONVEY that certain tract of land
        . . . particularly described in Exhibit A . . . and appurtenances
        thereto . . . unto Grantees . . . ."4 It is not stated whether
        the land described in Exhibit A included the entire 3,298-acrc
        tract formerly commonly owned, or only those tracts set aside
        to Mrs. McCall in the partition deed. In this deed, no mention
        was made of any minerals, exceptions, or reservations. If
        Exhibit A described the 3,298-acre transaction, then the roy-
        alty interest owned by Mrs. McCall in the tracts of the others
        would be included in the description, but if Exhibit A included
        only those tracts partitioned by Mrs. McCall, then the ques-
        tion would involve the conveyance of royalty in tracts not
        desc'r ibed in the deed, but which would be included as an
        appurtenance to Mrs. McCall's royalty in the tracts of the
        others under the cross-conveyance theory.
               In Harris v. Currie, 5 it is stated: "When the owner of
        the entire estate in land conveys it by an ordinary form of
        deed containing no exception or reservation, hls grantee
        acquires the same title whlch the grantor had and such title
        includes all minerals." The case held that delay rentals under
        an oil and gas lease are a part of the mineral eslate, and that
        unaccrued delay rentals, although not mentioned in the deed,
        pass as a patt of the mineral estate to the grantee. This rule
       ·has been cited as authority that a deed conveys the grantor's
        interest in the tract, including the minerals, less those ex-
        cepted or reserved. 6 If Mrs. McCall had expressly stated in
        her conveyance that she conveyed only the trac ts that she
        owned after the partition, she would have also, under 1he rule
        stated in Harris, conveyed her royally interest in the Taub
        and Dwyer tracts. This is the rule that where 1he owner of
        a tract included in a pooled unit sells his tract, then his con-
        veyance also includes his interest in the production from the

   4 Supra at     p. 404.
   5 176 S.W. 2d  302, 304 (Tex. Sup. C1. 1943).
  6 Cockrell v. Texas Gulf Sulphur Co., 299 S.W. 2d 672, 675, 7 O&GR 109,
112 (Tex. Sup. Cl. 1956).
(Mallhew Bender & Co•• lne.)                            114~   O&GR Report No. 2 (2-01)1
                               McCALL v.   McCALL                            419

       pooled unit, which production may come from another tract
       in the unit. The royalty interest that Mrs. McCall owned both
       in her tracts and in the other tracts is a part of her mineral
       estate, and although unmentioned in a conveyance of the
       ordinary deed form, would pass under Harris.
             Day & Co., Inc. v. Texland Petroleum Co., Inc., 7 was
       cited by Lila for the rule from Harris and Cockrell. The court
       distinguished Day by stating that the deed in that case only
       purported to convey ten acres of the ninety-acre tract. The
       principal issue in Day was the court's holding that the
       executive right is neither a power nor akin to a power, but
       is an attribute of the complete mineral estate, i.e., a "stick"
       that can be separately owned and conveyed. As an interest
       in the mineral estate, it passed under the warranty deed
       involved. It is submitted that the royalty interest owed by Mrs.
       McCall in others' tracts, being an interest in realty, passed
       under the rule stated by the Texas Supreme Court in Harris,
       Cockrell, and Day. The application of the rule is a matter of
       law. If a party contends that by the application of the rule,
       it does not reach a result intended by the parties, then there
       is a case for reformation of a mutual mistake. The reasoning
       that the Day case was not applicable because it applied only
       to ten acres and not to the entire ninety-acre tract is difficult
       to follow. Harris and Cockrell were not cited in the opinion.
             In Harris, the court defined "appurtenant" consistently
       with the definition given in Note 8 of the principal case. 8
       The comt stated, "[T]he grant or reservation carries with it,
       as a necessary appurtenance thereto, the right to use . . . the
       surface . ... " 9
             Lila argued that the word "appurtenance" in the war-
       ranty deed caused the royalty interest in the Taub and Dwyer
       tracts to pass under the warranty deed. The court rejected this
       argument, defining "appurtenance" in the footnote as limited
       to that which is necessary to the enjoyment of the principal
       thing granted or indispensable to the proper use of the
       premises demised. There is apparently limited authority as

   7 786 S.W. 2d 667, 105 O&GR 590 (Tex. Sup. Ct. 1990).
   8 Supra at p. 412.
   9 176 S.W.2d at 305.
(Mlllhew Bender & Co., Inc.)                         ( 14S O&CR Repon No. 2 (2-01))
420                             145 OIL & GAS REPORTER


        to tbe meaning of the word "appurtenance," and in construc-
        tion of a mineral or royalty deed, whether it is a separate and
        independent property interest like the executive right or is as
        defined by the court in its Note 8. 10 According to Leo
        Hoffman:
       The same results can be reached even when the doctrine
       of cross-conveyance is imposed, although the result is
       not yet completely clear. One method of arriving at such
       result wou ld be to consider that all royalty interests
       created in the unit by virtue of the presumed cross-
       conveyances arc incident or appurtenant to the interests
       from wltich they were derived and that any transfer of
       any interest in the latter category passes with all of the
       incidental or appurtenant interests in the other tracts in
       the unit. Thus, the lessor who contributed a I0-acre tract
       to a 40~acre driJUng unit and subsequently conveys his
       I 0-acre tract without mention of the unit would pass
       interest in the tract described and 1/4 of the royally
       interest in each of the other tracts as an indicant of or
       appurtenant to the tract described.u
              But whatever definition is given to the word "appurte-
        nance," whether a broad definition or a narrow one, it is
        submillcd that Mrs. McCall's royalty interest in the others'
        tracts was a real property interest, a part of the "mineral
        package" acquired by her either in the partition agreement
        or by cross-conveyance, and when she executed the deed
        without rninernl or royally, the rule io Harris and Cockrell
        applied to pass to the grontees (including Lila) an interest.
        Although Lila hntl never been paid roynlty on production, the
        nonpayment did not preclude the conveyance to her of the
        royalty interest by the deed in question.
              As a side note, not involved in the opinion, is a drafting
        question. ln I he June I, 1997, deed, MCDCO conveyed to
        Lila, Patricia, and Mildred "in equal shares, an undivided 1/3
        interest in all oil, gas and mineral then owned by MCDCO
   10 Supraat p. 412.
   11 Hoffman, Vohmtary Pooling and Unitiwtion, at 83 (Matthew Bender 1954)
(emphasis added).
(Manhew ll<:l!da & Co.. Inc.)                            1145 O&GR Repon No.2 (2-01))
                               McCALL v. McCALL                             421

        anywhere in Texas ...." 12 Did this deed convey an undi-
        vided one-third interest to be divided among the three grant-
        ees (one-third of one-third), or did it convey an undivided
        one-third interest to each of Lhe grantees?
                                                                 E.P.H.
   12   Supra at p. 406.




(Mallhew Bender & Co., Inc.)                        IJ4S O&OR Rtpor1 No. 2 (2-01)1
THELAWOF
POOLING AND
UNITIZATION
THIRD EDITION
VOLUME 1
Bruce M. Kramer
Maddox Prof essor of LAw Emeritus
Lubbock, Texas
Texas Tech University School of LAw

Patrick H. Martin
Campanile Professor of Mineral LAw
Paul M. Hebert LAw Center
Louisiana State University
Baton Rouge, Louisiana


2014
Filed Through:
RELEASE NO. 44, NOVEMBER 201 4




                         • . LexisNexis·
    7-3                                  METHODS OF POOLING                                          § 7.01

                   [1]   Some Examples
                   [2]   Purposes
                   [3]   Validity of the Clause
                   [4]   Entirety Clauses as Real Covenants That Limit the Power of the Lessor to
                         Transfer Interests
                   [5]   The Reversible Entirety Clause-Clear Language Creating Non-Apportioned
                         Royalty Interests.Will Be Implemented
                   [6]   Some General Problem Areas
                         [a]   Present or Future Severances
                         [b]   Defining the Leased Premises
                         [c)   The Anti-Entirety Clause
    § 7.05         Pooling Agreements
                   [1 1 Introduction
                   [2]   Non-Executive Interests
                         [a]   The Texas Rule-Brown v. Smith
                         [b]   The Louisiana Approach
                         [c]   The Alabama Approach
                         [d)   Wyoming
                         [e]   More Problems About Ratification
                   [3]   Pooling and Cotenants
                   [4]   Royalty Pools
                   [5]   Anti-Pooling Agreements
                   [6]   Innovative Alternatives to Pooling
                         [a]   The Allocation Well Methodology
                         [b]   Production Sharing Agreements
       Units may be created by the execution of various insrrumcnts including a community or

-   communitized lease, by the exercise of the powers granted a lessee in a pooling and/or
    unitization clause. by the voluntary execution of a pooling or unitization agreement, by the
    compulsion of a state or local administrative body authorized by law to force-pool or unitize,
    or by the impact of state conservation regulations as interpreted by a court. This chapter
    examines the creation of units by the voluntary actions of the owners of the affected mineral,
    working, or royalty interests. ln addition, the chapter explores how certain common-law
    concepts, such as the apportionment or non-apportionment doctrine relating to royalties, have
    affected the voluntary creation of units. The impact of entirety clauses on the apporrionment of
    royalties issues also is discussed. Finally, the chapter analyzes the negotiation and execution of
    pooling and unitization agreements, including a discussion of the typical provisions that are
    used to pool or unitize separately owned interests in oil and gas.
    § 7.01    A Historical Digression-Apportionment or Non-Apportionment of
                Royalties
      One of the factors that triggered lessee and lessor acquiescence in the inclusion of
                                                                                   (Re i. -14- 11/2014   Pub.4~5)
                                                                                                                      Page 1




                                                    1 of 1 DOCUMENT

                                     The Law of Pooling and Unitization, 3rd Edition

                Copyright 2014, Matthew Bender & Company, Inc., a member of the LexisNexis Group.

                                      CHAPTER 19 The Nature of the Unitized Title

                              2-19 The Law of Pooling and Unitization, 3rd Edition § 19.01

§ 19.01 Contract or Cross-Conveyance Theories



     [1] Introduction

The nature of the unitized title after a pooling or unitization has more than a purely academic interest to the oil and gas
attorney. n1 Problems and solutions to problems flowing from voluntary pooling and unitization agreements may in
large part be caused by the judicial characterization of the nature of the pooled or unitized title. This section focuses on
the two major approaches to resolving the question of the characterization of what is the post-pooled or unitized title.

In reviewing the cases and the doctrines it is crucial to remember the context in which the court is deciding whether to
opt for the contract or cross-conveyance theory. A decision relating to joinder issues, such as what constitutes a
necessary or indispensable party, may have different considerations than a decision relating to whether the Rule Against
Perpetuities has been violated. Likewise, the plaintiff's views as to the continued validity of the pooled or unitized entity
might also impact the court's choice. Finally, in looking at these competing theories or doctrines, most courts are
searching for the intent of the parties as expressed in the instrument that created the pooled or unitized title. Many of the
problems and differences between jurisdictions are caused by the court's varying interpretations of standard provisions
in community leases or pooling or unitization agreements. In most of these cases, there is no express statement of intent
to create contractual rights or property rights. It is that lacunae that these decisions attempt to fill. The emphasis on the
intent of the parties suggests that when the parties expressly state their preference, the courts will follow that language
and not resort to the choice made by that state when the parties have left the issue undecided. Two different theories
have been developed to describe the nature of the unitized title where the parties to a voluntary pooling and unitization
agreement have not specified if they intended to convey property rights in the pooled or unitized area. These two
theories have been labeled the cross-conveyance (cross-assignment) theory and the contract theory. These theories do
not exist in the abstract but in the context of the following issues: who may effect a pooling of interests; who will be
indispensable parties to litigation regarding the pooled unit; and what is the appropriate venue for litigation. Yet as these
problems get resolved by reference to the two theories they mask the underlying issues that are not resolvable by the
choice of a cross-conveyance or contract theory.

The only real issues that could be affected by the adoption of either theory have not been the subject of much litigation.
For example, an important issue relates to whether or not the terms of a pooling or unitization agreement are binding on
assignees. Whether the original agreement was a contract or a cross-conveyance would affect the outcome of that issue.
                                                                                                                           Page 2
                               2-19 The Law of Pooling and Unitization, 3rd Edition § 19.01



The descendability or inheritability of pooled or unitized interests would also be affected by the choice of doctrine.
Other issues such as the affect of recordation of instruments, third party rights and/or liabilities, and the impact of lien
and other security interest statutes would also be impacted by the characterization decision as a contract or a
cross-conveyance of property interests.

Whatever the context of the dispute, the choice between the two doctrines may be outcome determinative. That is, the
choice of which doctrine to apply will necessarily lead to a single result. Therefore, it becomes important to have sound
and easily understood rules that can be applied in an evenhanded manner.

The two theories develop naturally from the purposes and nature of a pooling or unitization agreement that purports to
combine various interests for the purpose of joint operations. In essence, the internal property lines within a pooled unit
and a unitized area have been erased pursuant to the express terms of the agreement. The two theories attempt to explain
whether that combination is property-based or contractually-based. The courts have been trying to deal with oil and gas
production and development that had no counterpart in the traditional estate system developed in medieval England.
Trying to fit the oil and gas property system in general and the nature of the pooled or unitized title into classical
property theory has led to substantial doctrinal uncertainty. That uncertainty is present in many court decisions relating
to the two doctrines. The soundest approach to the underlying issue is to treat pooling and unitization agreements as a
special area of contract law, but clearly note that these contracts grow out of, and affect, property rights. Rather than
trying to fit these issues into the old bottle of estates-in-land and classic property doctrine, it would be better if a new
bottle was created that recognizes the interrelationship between contract and property rights and makes a suitable
accommodation between those rights in order to carry out the intent of the parties without undue interference or
confusion from the courts.

     [2] Effects of the Classification Scheme

Perhaps in no other area than the determination of who are indispensable parties has the choice between the contract and
cross-conveyance theory led to the greatest doctrinal conflict. n2 It is important, however, to place in context many of
the cases that were decided in an era in which there was still a substantial distinction between in rem and in personam
jurisdiction. That distinction affected the ability to join parties if the contract or cross-conveyance theory was adopted.
In today's world of long-arm statutes, where personal jurisdiction is available on a "minimum contacts" theory, one
could get jurisdiction over any party who is part of a pooling or unitization agreement, since it is clear that a party to
those agreements has sufficient minimum contacts with the jurisdiction regardless of the label attached. The question of
proceeding with litigation affecting a pooling or unitization agreement, with or without the joinder of all the parties,
should not turn on the question of whether the agreement was a contract or cross-conveyance of property interests. The
underlying issue should be the impact of the litigation on the rights of the parties, however one classifies those rights.

It is clear, however, that under most definitions of indispensable parties, if the court applies the cross-conveyance theory
the other pooled or unitized owners will be indispensable. However, the converse is not true. A choice of the contract
theory does not necessarily lead to a result that the pooled and unitized owners are not indispensable. Whatever its exact
nature, whether an ordinary contract provision that provides for a changed manner of operation and of calculating
royalties or a real covenant that runs with the land, it still cannot be denied that in a title suit involving the title to a tract
of land committed to the unit that all participants in the unit have an interest in the tract involved. Treating the
agreement as a contract affecting property interests would more accurately describe what the pooling or unitization
agreement concerns. Not allowing the contract/cross-conveyance theory to decide issues of indispensable parties is the
better approach. By requiring a more ad hoc exploration of the nature and the agreement of the lawsuit, in order to
answer the question of whether the non-joined interests are indispensable, will allow the court to consider such
important and diverse issues as where are the producing well or wells located, what is the allocation formula, and what
are the minimum or maximum size requirements, if any, that will be affected by a change in ownership on one of the
tracts.
                                                                                                                     Page 1




                                                   1 of 1 DOCUMENT

                                     The Law of Pooling and Unitization, 3rd Edition

                Copyright 2014, Matthew Bender & Company, Inc., a member of the LexisNexis Group.

                                     CHAPTER 19 The Nature of the Unitized Title

                              2-19 The Law of Pooling and Unitization, 3rd Edition § 19.02

§ 19.02 State Analysis



     [1] Contract Theory States

     [a] Kansas

Two cases clearly suggest in dictum that Kansas has rejected the cross-conveyance theory and has adopted the contract
theory for pooled or unitized titles. The first case, Hover v. Cleveland Oil Co., n101 is typical of court decisions that
struggle with the concept of what a unitized title should be but never directly answer the question. Adjacent lessors had
entered into an agreement whereby they would share certain economic benefits, including oil runs, bonuses, and rentals,
on a surface acreage basis until they mutually agreed otherwise. One of the lessors then conveyed his interests to a third
party through the use of a warranty deed. The issue before the court was whether the sale of one of the interests
terminated the sharing or pooling agreement even when the other parties had not joined in the conveyance. The
application of one theory would produce different consequences than the application of the other theory. Under
cross-conveyance theory, the lessors would each own an undivided interest in the others' interest, and each would
thereby have conveyed to the others a similar interest in the premises originally owned. Undoubtedly the warranty deed
did not mention a reduced share of the described premises, nor did it include the vendor's share of the other premises
that were the subject of the pooling agreement. However, if the lessor had merely given contractual rights to the other
lessors, those could be terminated unilaterally under the provisions of the agreement, and the warranty deed would be
satisfied insofar as it transferred all of the vendor's interest in the described premises. Under a contract theory the deed
would be effective to transfer a non-pooled interest and, in effect, terminate the pooling agreement.

The holding of the court would support the contract theory, although the language of the opinion is somewhat
ambiguous. The court found that the pooling agreement had terminated by the sale by one of the parties to the
agreement. After the sale the seller no longer had anything to contribute to the pooling agreement and the court was
unwilling to substitute the purchaser for the seller as being bound by the terms of the pooling agreement. n102 If there
had been a cross-conveyance of interests, unilateral termination would arguably be impossible unless expressly
provided for in the agreement. The pooling agreement would have cross-conveyed interests that would remain with the
parties until the agreement terminated by its own provisions or until there were later conveyances of the cross-conveyed
interests. Thus, the result and the reasoning are consistent with the contract doctrine; all that was created was a
contractual right to share, which would terminate upon the transfer of the contributed mineral or royalty interest even in
the absence of a formal provision.
                                                                                                                         Page 2
                             2-19 The Law of Pooling and Unitization, 3rd Edition § 19.02




Further support for the contract doctrine in Kansas can be inferred from the holding and analysis in Kenoyer v.
Magnolia Petroleum Co. n103 Kenoyer involved an exercise of a pooling power that was alleged to be in violation of
the common-law Rule Against Perpetuities. n104 In ruling that the rule was not applicable to an exercise of the pooling
power, the court found that the pooling power was not a traditional property-based power but merely a means of
effecting a contractual change in the way that royalties were to be paid and the leasehold estate operated. Again, if the
court were to have adopted a cross-conveyance theory it would have been much more difficult to dismiss the rule
challenge, although states such as Texas that have adopted the cross-conveyance theory also find that the rule is not
violated by the exercise of the pooling power. The Kansas court said:

            we fail to see how the provision in question violates the rule against perpetuities. The lease does not
       create any future estates ... . It granted to lessee the right to operate the lands covered by it separately or
       as a part of a consolidated unit. The royalty provisions fit either operation and provide a formula by
       which the amount of royalties payable to the lessor is capable of accurate and definite ascertainment.
       These rights were vested ... .

            ... .

           In our opinion the rule against perpetuities simply has no application to the provision of the lease
       under consideration. n105

No further light has been shed on the problem in Kansas, but the clear indication from Hover and Kenoyer is that
Kansas treats a voluntary pooling and unitization agreement as merely involving the transfer of contractual rights.

     [b] Oklahoma

Oklahoma appears to have shifted ground in the cross-conveyance/contract controversy. The early case of Lusk v. Green
n106 involved whether the signing of a single lease covering two non-contiguous parcels, each owned separately by a
husband and wife, constituted a community lease and a pooling of royalty interests. The court eventually concluded that
the signing of the single lease with the two parcels described therein did not create a community lease, and, therefore,
there was no effective pooling of the separate interests. In reaching that conclusion the court said:

            under the state of facts disclosed by the record in this case, we are not willing to say that, because
       the lessors executed a lease covering their respective tracts of land, which were not contiguous but
       several miles apart, on the same piece of paper, that they thereby each intended to convey to the other a
       half interest in the royalties. n107

One can infer that if the parties had shown an intent to enter into a community lease or, for that matter, a pooling or
unitization agreement, they would have in effect cross-conveyed to each other a one half interest in their respective
tracts. n108

Although Lusk received some support in dictum in Amis v. Bryan Petroleum Corp., n109 there were some early signs
that there was not widespread support for the cross-conveyance theory. In at least two instances the Oklahoma Supreme
Court found that the Statute of Frauds would not be applicable to agreements to pool or apportion royalties. n110 Since
the Statute of Frauds requires a writing for conveyances, with a few irrelevant exceptions, it would have been
inconsistent to state that a pooling agreement amounted to a cross-conveyance of the royalty interests and to find
simultaneously that the Statute of Frauds is not applicable. n111

The death knell for the cross-conveyance theory in Oklahoma began tolling with Sinclair Crude Oil Co. v. Oklahoma
Tax Commission. n112 Oklahoma was seeking to apply the state's gross production and proration tax to royalty oil that
was payable to several Indian allottees. The allottees had entered into several unitization agreements that provided them
                                                                                                                       Page 3
                             2-19 The Law of Pooling and Unitization, 3rd Edition § 19.02



a proportional share of royalties from production located anywhere on the unit. The basis for the liability was the Tax
Commission's conclusion that the Indian allottees had conveyed their otherwise tax exempt interest to the other parties
who had signed the unit agreement. In exchange they received a cross-conveyance from the other unit members of a
proportional share of their royalty interests in the entire unit. n113 This newly created interest, according to the Tax
Commission, did not fall under any of the tax exemption provisions of the otherwise applicable Cherokee Allotment
Act.

The unitization agreement did not contain any specific provision relating to the issue of whether the parties intended to
apply a cross-conveyancing or contract theory. Without citing Lusk or Amis the Oklahoma Supreme Court determined
that the language of the unitization agreement did not evince an intent to cross-convey the various unitized interests. It
emphasized the lack of specific words of grant that it concluded were vital to treating a document as a conveyance of a
property interest. It did ignore, however, one provision of the unitization agreement that provided that the agreement
would constitute a real covenant running with the land. n114 Under the normal requirements of privity of estate, a real
covenant can only be created when there is a transfer of a property interest or a tenurial relationship between the parties,
such as landlord and tenant. In this case there was neither; the language suggesting that the promises contained in the
agreement were to be construed as real covenants does evince an intent to cross-convey interests that would provide the
privity requirement for real covenants. Nonetheless, the court concluded that the absence of words of grant was critical.
It said:

            ...in order for the communitization agreements to constitute and effect an exchange, conveyance or
       cross transfer between the royalty owners of title and ownership to an undivided fractional share and
       interest in the oil ..., it was essential that the agreements contain adequate operative words such as grant,
       bargain, convey, or others of like import, sufficient to effect a conveyance of title to the minerals
       underlying the land ... . n115

The court emphasized the contractual nature of the agreements when it concluded:

           The communitization agreements here in question constitute a valid form of private contract ... .
       From a consideration of the agreements as a whole we fail to agree with the findings and holdings of the
       Tax Commission wherein it holds that the agreements constitute and effect an exchange of title to the
       mineral or royalty interests ... ." n116

While not citing Lusk, the court was aware of the contrary position on this issue that had been taken in Texas. It clearly
chose to follow the contract doctrine largely on the basis that the weight of "persuasive" authority treated the contract
doctrine as the one that more closely reflected the true intent of parties to pooling and unitization agreements not to
effect a cross-conveyance of their interests. n117

If further evidence was needed that the Oklahoma Supreme Court had adopted the contract theory, it was provided in
Garvin v. Pettigrew. n118 In Garvin, some ten owners of both unleased mineral and royalty interests entered into an
agreement whereby they would share in the royalties that would accrue to each separate tract in proportion to the
acreage that each contributed to the agreement. Specific language contained in the agreement evinced an intent not to
convey or transfer any interest in the lands themselves. n119 The defendant's predecessors had conveyed to that
plaintiff's predecessors all of the acreage committed to the unit. The plaintiff was seeking a declaratory judgment that
the defendant was not entitled to share in the benefits of off-unit production. The jury found for the defendant, but the
trial court ordered a new trial, concluding that the pooling agreement violated the Rule Against Perpetuities and was
therefore void. The Supreme Court affirmed the trial court's granting of the motion for a new trial but differed as to the
reason for overturning the jury verdict. Principally relying on the Hover case, the court found that a pooling agreement,
such as the one used in this case, does not result in a cross-conveyance of any royalty or mineral interests. This was
especially evident from the specific language of the agreement denying a transfer of any mineral or royalty interests.
n120 The court could have decided this case on narrower grounds, such as a specific lack of intent to transfer interests
                                                                                                                       Page 4
                             2-19 The Law of Pooling and Unitization, 3rd Edition § 19.02



or that the rights to share in unit production were attached to the lands that were contractually contributed and once
those lands were no longer owned by a party, the contractual right to shared royalties also expired. n121

The court's language, however, goes beyond the narrow interpretation of the specific terms and broadly rejects the
cross-conveyance doctrine. The court stated:

            The contract here involved constituted a pooling agreement. It was so referred to in the record and in
       the briefs of the parties. It could not have been a conveyance of a mineral interest. Nowhere does it
       appear therein a granting clause of any kind. Nor was it an assignment of royalties in perpetuity. n122

Nonetheless, this broad language must be read in the context of the express disclaimer of interest in the
"lands-of-others" provision of the agreement which was emphasized by the court.

It is interesting to note that this decision followed Sinclair Crude Oil by about six weeks, yet Sinclair 's clear language
rejecting a cross-conveyance theory is not cited. This is particularly n123 troublesome since there was a vigorous
dissenting opinion that clearly preferred an express approval of the cross-conveyance theory for pooling and unitization
agreements. The majority's emphasis on typical language in the pooling agreement and its failure to overrule Lusk and
cite Sinclair, muddied the waters of Oklahoma oil and gas jurisprudence until 1970.

In Tenneco Oil Co. v. District Court n124 the Oklahoma Supreme Court again rejected the cross-conveyance theory for
pooling agreements. The plaintiffs were the lessees of certain lands that were voluntarily unitized; the defendant was
declared the operator of the unit under the unit agreement. The unit was approved by the Corporation Commission. The
plaintiffs were seeking a partition of the interests committed to the voluntary unitization order. They also sought an
injunction prohibiting an expansion of a secondary recovery operation that was being proposed by the unit operator. A
requirement before a party can seek partition is the existence of a cotenancy between the parties. If the
cross-conveyance theory for voluntary unit agreements is followed then, by necessity, a cotenancy is created. However,
if the contract theory is followed, there have been no property interests transferred and therefore no cotenancy. n125

Thus, the issue was squarely before the court. The court rejected the cross-conveyance theory and adopted the contract
theory as it applies to the typical unitization or pooling agreement. No special terms or disclaimers need to be placed in
those agreements for a court to find that only contractual rights are created. In the absence of provisions to the contrary,
it will be presumed that the parties to the pooling and unitization agreement do not intend to cross-convey any property
interests. n126 In answering the question of whether or not a cotenancy had been established the court definitively
stated:

            co-tenancy has never been established or created. The parties have title and ownership to separate
       tracts. No party has been conveyed an interest in the property of the other. The plan of unitization is not a
       cross conveyance of interest, but rather a plan to unitize their several tracts ... . Neither the plan of
       unitization nor the statutes which authorized the Corporation Commission to approve and regulate the
       same intended to convey an interest between the parties. The Plan of Unitization has no operative words
       of conveyance and it is apparent from the instrument itself that none was intended. n127

It is clear that Oklahoma has rejected the cross-conveyance theory for the typical pooling and unitization agreement
because the typical agreements normally disclaim any intent to cross-convey property interests. Where the partners are
silent on the issue, the court would also find no cross-conveyance because there would be no operative words of
conveyance. If parties want to cross-convey property interests they need to amend the standard forms and put in explicit
granting or conveying language evincing such an intent. n128 Thus, Oklahoma has finally planted its feet firmly in the
camp of contract theory states, notwithstanding an initial decision opting for the cross-conveyance theory.

Oklahoma's compulsory pooling system also raises issues over the nature of the unitized title. n129 Non-operating
                                                                                                                   Page 5
                             2-19 The Law of Pooling and Unitization, 3rd Edition § 19.02



working-interest owners sometimes are given an option not to participate in well production expenses and instead
receive a bonus payment and/or some overriding royalties. Is an assignment of the working interest so that the
non-operator is divested of all of his or her interests within the pooled unit? In Ranola Oil Co. v. Corporation
Commission, n130 the court concluded that when the non-operator accepted a bonus payment in lieu of participation,
the entire working interest was deemed transferred to the operator. That precluded the non-operator from participating
as a matter of right in increased-density wells approved later. The pooling order when accepted by the non-operator
terminated the non-operator's working interest in the minerals within the pooled unit.

 Ranola Oil is perhaps inconsistent with an earlier decision of the Oklahoma Court of Appeals, Southern Union
Production Co. v. Eason Oil Co. n131 This decision of the Court of Appeals is not binding as precedent because it was
not ordered released for publication by the Oklahoma Supreme Court. In Southern Union, Eason as a working-interest
owner had opted by default for the bonus payment alternative to participation in production expenses. Eason never
formally assigned its working interest to Southern Union, the operator. A dry hole was drilled and the Corporation
Commission eventually deleted the Eason acreage from the pooled unit. Eason then drilled a producing well on a
re-spaced 80-acre unit, and Southern Union claimed a conversion of its working interest had occurred. That claim was
based on the prior assignment of Eason's working interest that was ordered in the creation of the 640-acre unit. The
Court of Appeals disagreed that Eason had conveyed a fee interest in its working interest. It concluded that no
assignment had taken place or, alternatively, if an assignment had occurred it had been extinguished with the
termination of the 640-acre unit. Ranola Oil clearly would have found that Eason had conveyed its interest when it
chose the bonus alternative. But the termination of the unit was a factor that the Ranola Oil court did not face. The
Corporation Commission never provided whether the assignment was a full fee simple absolute assignment or a
defeasible fee assignment that automatically terminated upon the termination of the unit. The Southern Union court
concluded that it was the equivalent of a defeasible fee assignment, if any assignment of an interest took place at all.

In Unit Petroleum Co. v. Mobil Exploration & Production North America, Inc., n131.1 the court explored in the
context of a gas balancing dispute the relationship between working interest owners who have executed a joint
operating agreement. n131.2 Relying on Harrell v. Samson Resources Co., n131.3 the court described the relationship
between the parties to the JOA as "cotenant-like." This labeling affected the outcome of the suit because the court found
that the JOA did not provide for immediate cash balancing but said that Mobil's sale, if it derogated Unit's rights as a
cotenant and "beneficiary of the trust relationship," might trigger an immediate right to cash balancing. In addition, if
the sale by Mobil caused it to deny further liability for the overproduction then Unit could be entitled to immediate cash
balancing. The use of the term trust relationship is somewhat troubling because the parties to a JOA normally are not
treated as being in such a relationship. In many JOAs the parties can protect themselves against the sale of working
interests by including a preferential right to purchase provision or other type of clause that gives them the right to
approve of a transfer of a working interest. In order to determine whether or not there is a derogation of the trust
relationship or a denial of future liability, an ad hoc determination of the facts of each case must be made by the trial
court.

     [c] Utah

While no state court decision has adopted either theory, an opinion of the Tenth Circuit applying Utah law apparently
assumes that Utah would adopt a contract theory rather than a cross-conveyance theory. In Phillips Petroleum Co. v.
Peterson, n132 the Rule Against Perpetuities was again at the center of the controversy. The lessors claimed that the
leasehold pooling clause was invalid because it violated the rule, and, therefore, the placement of their acreage into
various units was likewise invalid. The Tenth Circuit concluded that the rule was only applicable if the pooling or
unitization agreements constituted a conveyance of interests in realty. n133 The court held that the pooling clause in the
lease and the terms of the unitization agreement did not evince a clear intent to cross-convey the respective royalty
interests. It adopted the view suggested by Leo Hoffman that pooling and unitization agreements generally use
contractual terms rather than language typical of conveyances. There was no special provision in the agreement stating
that no cross-conveyance was intended. Instead the general language regarding allocation of production costs and
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royalty payments was deemed to evince an intent not to cross-convey. n134 The court also followed what it believed to
be the more persuasive case authority that adopts the contract doctrine. n135

     [d] West Virginia

West Virginia is here classified as adopting the contract theory, but the cases upon which this classification are based
are unclear and perhaps contradictory. The first case that suggested that the court was opting for the contract doctrine
was Lynch v. Davis. n136 Lynch involved a community lease whereby several separate owners of mineral estates joined
in one lease of their respective tracts. n137 The ultimate issue related to whether or not there should be an
apportionment of royalties based on a surface acreage allocation formula. The court rejected an argument that finding
for apportioned royalties is the equivalent of finding that the parties cross-conveyed their interests; it ruled that the
community lease was not a conveyance of an interest in the minerals. If it was a conveyance, the court would have to
find that the non-apportionment rule would apply. n138 While not a model of clarity, the opinion suggests that a
community lease does not entail a conveyance of interests in real property unless it undertakes to do so through specific
language of grant. n139

While Lynch standing alone would cause us to place West Virginia in the ambiguous category, the case of Boggess v.
Milam n140 would support a conclusion that West Virginia has embraced the contract doctrine. Boggess involved the
right to share in royalties where there had been a pooling of less than all of the interests in the pooled tracts. Boggess
owned an undivided interest in a tract of land. He was given an opportunity to join in a pooling or unitization
agreement, but he refused. The agreement was executed by the other owners, including those who owned fractional
shares in the same tract as Boggess. The unit well was drilled off of the Boggess acreage. He nonetheless claimed a
share of the royalty from the unit well's production. Under either a contract or cross-conveyance theory Boggess had to
lose because he had refused to execute the agreement. His argument was based on a cross-conveyance theory, asserting
that he was a cotenant of the royalty interests of those owners who had joined the agreement. While that argument
would be persuasive had he executed the agreement, his failure to join gave him no rights whatsoever in the off-tract
pooled production. While not critical to its holding, the court discussed the contract and cross-conveyance theories and
concluded that a unitization agreement merely involves the merging of contractual rights. n141 By stating that the
unitization agreement did not effectuate a merger of title the court was in essence rejecting a cross-conveyance theory,
which if adopted would cause a merger of title between the parties to the agreement. While not a solid member of the
contract theory group, the combination of Boggess and Lynch clearly indicate a judicial predilection for treating pooling
and unitization agreements as merely entailing contractual relationships.

     [2] Cross-Conveyance Theory States

     [a] California

Although California is now considered a state firmly committed to the cross-conveyance theory, some of its early
opinions suggested that the contract theory was the preferable approach. In Bayside Land Co. v. Dabney, n142 the
lessor entered into a lease with the defendant that contained a form of pooling clause that gave the lessee the power to
enter into subsequent leases with other parties. The lessee could then jointly develop the separate leasehold estates as
long as there was a sharing of the royalties. The court concluded that the lessee had properly signed leases with other
parties, which provided for a sharing of royalties. In describing the relationship between the plaintiff and the other
lessors the court clearly distinguished this case from an earlier case n143 on the basis that in this case there was no
tenancy in common formed by the lessee's exercise of the pooling clause, even when there was a pooling of the
royalties. n144 If there was no tenancy in common there could be no conveyance of royalty interests. The court
emphasized the fact that only contractual rights were involved so that no cotenancy situation would exist. n145

The adoption of the cross-conveyance theory occurred in 1946 with Tanner v. Title Insurance & Trust Co. n146 A
community lease was the subject of the litigation in Tanner. In resolving the dispute between transferees of the original
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lessors and the lessee regarding the right to pooled or apportioned royalties, the court made the following statement
about the nature of the pooled title that ensued from the signing of the community lease:

           By executing the community lease, the respondents and each of the other lessors assigned or
       conveyed to his colessors a percentage interest in all oil produced on his land by the lessee during the
       continuance of the lease. The consideration for that transfer was the similar mutual assignments of the
       other lessors. n147

The interest that was transferred to each of the colessors was distinct from the royalty interest that may have been
retained by the lessor in production on his own premises. This view was followed in other cases that reiterated the
conclusion that community leases or other forms of pooling or unitization agreements constitute a cross-conveyance of
royalty interests. n148

The Tanner rule was followed in another community lease case, Southern California Title Clearing Co. v. Laws. n149
In this case, the legal issue was whether all of the community lessors were indispensable parties to a lawsuit seeking
partition of the lessors' interest. n150 The original community lease combined thirteen different tracts with thirteen
different owners. The partition suit was solely directed at the divided ownership of one of the lots. The owners of the
twelve remaining tracts were not joined. The court used the Tanner rationale to find that the act of executing a
community lease cross-conveyed royalty interests between the lessors. As such, a partition action seeking to terminate
the lease as to one of the tracts would also affect the other lessors who were owners of a fractional share of the royalty
interest in the tract where the partition was being sought. Under the California test for indispensable parties, they were
indispensable because their ownership rights were being affected. n151

Doubts about the commitment of the California courts to the cross-conveyance theory was raised by the case of LeBard
v. Richfield Oil Corp., n152 although the facts of the case are unique. LeBard involved the very limited statutory
compulsory pooling laws that exist in California. n153 Under the statute at issue, when one acre or smaller parcels are
located adjacent to existing leased parcels and certain other requirements are met these smaller parcels are deemed
included within the lease, and the owner of the minerals is entitled to a proportionate share of the royalty payments.
After the plaintiff's interest had been committed to the pooled unit, she sold her entire estate to the defendants or their
predecessors in interest. She then claimed that the pooled royalties she was entitled to by virtue of the statutory
forced-pooling were interests in gross and were not therefore transferred with the mineral estate conveyance. The court
rejected that reading of the rights created by the statutory pooling procedure. Then the plaintiff argued that the statute in
effect made her the equivalent of a community lessor, which, under the Tanner rule, would constitute a
cross-conveyance of the royalty interests in the pooled unit. n154 While agreeing that the Tanner court adopted a
cross-conveyance doctrine, this court attempted to limit the application of the doctrine by stating that it did "not fit the
pattern established by Section 3608 for compensating owners who have been deprived of the right to recover oil and gas
from their lands." n155 The court was correct in not making equivalent a voluntary community lease or pooling
agreement and a compulsory pooling statute. In dealing with voluntary agreements, the courts are interpreting the
language of the agreements to ascertain the intent of the parties. Where the choice of contract or cross-conveyance
theories is expressly stated the court will enforce the language as written. n156 The Tanner rule merely states that where
the community lease or pooling or unitization agreement does not contain express language indicating a choice of
theories, the courts will find that a cross-conveyance of property interests has occurred. The Laws decision recognized
that the parties are free to make that choice but if they do not the Tanner rule will apply when the court said: "Whether
in any given agreement for unit development the Tanner rules will be applicable between the parties will depend on the
terms of the agreement." n157

But in this case we are not dealing with voluntary agreements and the intent of the parties but with a question of
statutory interpretation. Here the court looked at the provisions of the compulsory pooling statute and determined that
the legislature had not intended to effect a cross-conveyance of property interests whenever the compulsory pooling
process was used. This would be consistent with the general rule that actions of state conservation agencies, while
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affecting property interests, cannot convey or affect the title to property interests held by those who have been brought
into the regulatory process.

     [b] Illinois

Illinois has shown some support for the cross-conveyance theory in a case involving the joinder of indispensable parties.
In Ragsdale v. Superior Oil Co., n158 the plaintiffs claimed that the operator of a pooled unit that had included the
plaintiffs' lands had committed tortious acts including trespass, wrongful entry, and conversion. The unit contained 37
working-interest owners and 140 royalty-interest owners. None but the unit operator was named in the suit. The
intermediate appellate court had found that those parties were not indispensable without opting for the contract theory.
n159 The Illinois Supreme Court reversed and found that the action should be dismissed for failure to join indispensable
parties. The rationale for that result is not as clear as it could have been had the court simply adopted the
cross-conveyance theory as the one applicable in Illinois. After describing the usual effects of unitization, the court
simply concluded that a judgment for the plaintiff in this case would by definition adversely impact all of the other
owners. The court concluded:

            The oil produced is pooled, regardless of the separate tracts upon which the wells are located and
       from which the oil is produced. They all share in the oil produced, saved and sold in the proportion
       which each owner's tract bears to the entire unitized tract. For all practical purposes the same situation
       exists as though there was a single owner-lessor and a single lessee ... . Assuming that the well, or even
       one of several, is on the tract in question and title failed. The production would belong to the successful
       litigant rather than to the record owners. The unitized tract would be broken and every party owning an
       interest in it would be adversely affected. n160

While consistent with the cross-conveyance theory, the Illinois court properly refused to allow the choice of theory to
affect the determination of who are indispensable parties. Under either theory it could be argued that the non-joined
parties' interests would be substantially affected by the removal of the Ragsdale tract from the unit. If the lessee would
lose this case and be forced off of the tract, other interests might be terminated or otherwise affected. The analysis
correctly focused on the legal and practical impacts of the litigation and not on the choice of theory.

     [c] Mississippi

Mississippi, as a general matter, follows fairly closely the oil and gas jurisprudence of the Texas courts. It would thus
not be surprising if Mississippi followed the lead of Texas and adopted the cross-conveyance theory. The limited case
law does suggest that result, although there is no clear indication in any Mississippi case that it has opted for the
cross-conveyance doctrine. n161 In Merrill Engineering Co. v. Capital National Bank, n162 the main issue was
whether a royalty interest was realty or personalty such that when the owner of a royalty transferred his realty his
royalty interest was also conveyed. The answer was clearly yes, but the answer was made more difficult because the
lessor's interest had been pooled with adjacent tract owners pursuant to a pooling agreement. While only tangentially
involving a cross-conveyance or contract issue, the court's repeated emphasis that both the pre-pooling and post-pooling
royalty interests were realty lends support to the idea that those interests were conveyed to the parties who executed the
pooling agreement.

A federal case applying Mississippi law, Hudson v. Newell, n163 found that Mississippi would follow the
cross-conveyance theory. Again, the issue related to indispensable parties to litigation involving interests which had
been committed to a unitization agreement. The plaintiffs sought to quiet title in themselves because certain transfers
had been executed by a life tenant without the joinder of the remaindermen. After one of those transfers, a lease of the
minerals had taken place and a unitization agreement was executed pursuant to the lease. The court saw the issue quite
plainly. If the unitization agreement constituted a cross-conveyance of royalty interests, no litigation could occur unless
all royalty owners within the unit were joined, since their interests would be affected. Noting the close ties between
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Texas and Mississippi oil and gas law the Fifth Circuit resolved the issue as follows:

            The district judge held that in Mississippi the oil in place is, as in Texas, conveyed by oil leases,
       royalty sales, and other formal recorded contracts, and that a unitization contract vests joint ownership
       jointly in all the unitized reserves in place and in the royalty oil produced from the well, citing Veal v.
       Thomason, 138 Tex. 341, 159 S.W.2d 472 . While no Mississippi authorities on point are cited, we
       believe this to be correct, so that all these owners must be parties, or the unitized lands must be excluded
       from any decree. n164

The finding that a cross-conveyance occurs requires the conclusion that the other royalty owners are indispensable
parties to a lawsuit relating to the title of one of the royalty owners. As was discussed earlier in § 19.01[2][a][ii], on
rehearing, the Fifth Circuit eventually held that the non-joined royalty owners were not indispensable after the plaintiffs
filed affidavits disclaiming any intent to interfere with the unitization agreements executed by the defendants to the
litigation. n165

     [d] Texas

Texas has been the state where the choice of the cross conveyance theory has had the most influence. While not the first
case to adopt the cross conveyance theory, Veal v. Thomason n166 is perhaps the most oft-cited and important decision,
which has clearly placed Texas among those states that follow the cross-conveyancing theory. Veal involved a
community lease where the plaintiff was challenging the title of one of the community lessors. The plaintiff only served
the community lessors whose title he was directly attacking, failing to serve the community lessee and the remaining
community lessors. The defendants argued that the suit had to be dismissed for failing to join indispensable parties. In
finding that the non-joined parties were indispensable the court made the following statement:

            To our minds, when we look to the substance and intent of this lease contract as a whole, the
       above-recited provisions can have no effect other than to constitute all the lessors of land in the unitized
       block joint owners, or joint tenants, of all royalties reserved in each of the several leases in such block,
       the ownership being in proportion which the acreage of the unitized block. n167

Regardless of the choice of theories, the non-joined parties were indispensable because the plaintiffs were seeking to
terminate the relationship between their alleged mineral interest and the community lease.

Shortly after Veal the court was faced with the same indispensable party issue where the plaintiffs were not seeking to
terminate the relationship with the community leasehold interests but were merely seeking to substitute themselves for
the defendants as the proper royalty owners. In Belt v. Texas Co., n168 the same community lease that was litigated in
Veal was before the court. The court refused to distinguish Veal on the different relief sought, instead opting to apply
the cross-conveyance theory to all interests created by a community lease. Once the court applied the theory it was
inescapable that the non-joined community lessors would be indispensable. n169

The Veal holding was followed in Brown v. Smith. n170 While Brown directly involved the right of the owner of the
executive power to lease non-participating royalty interests, the court in discussing the rights of the non-executive
owner clearly embraced the cross-conveyance theory as the one that best describes the nature of the unitized title. n171
In finding that the executive did not possess the power to pool the interests reserved to the non-executive through a
community lease, the court described the consequences of executing a community lease as follows:

            An oil and gas lease jointly executed by the owners of two or more tracts of land owned in severalty,
       with provision for pooling or sharing, on the basis of acreage, the royalties from oil or gas produced
       anywhere on the leased land, has the effect of vesting all of the lessors, at least during the life of the
       lease, "with joint ownership of the royalty earned from all the land in such block." Veal v. Thomason,
       138 Tex. 341, 349, 159 S.W.2d 472, 476 . The lease so executed is a conveyance by each lessor to each of
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       the other lessors of an undivided interest in the royalties. n172

Since the non-executive had not joined in the community lease, she did not convey her interest to the community. The
executive did not possess the power to convey that interest without her further consent. She could not be divested of her
full interest, nor could she receive the interests from the other royalty owners unless she joined in the lease. n173

The first Texas case extending the cross-conveyance doctrine to a pooling agreement was Miles v. Amerada Petroleum
Corp. n174 The court followed the Veal holding that an exercise of the power by a lessee was a conveyance or
exchange of a part of the lessor's royalty interest for a part of the interests of other royalty owners who were included in
the pooled unit. n175 Later Texas cases have applied the cross-conveyance theory in other contexts. n175.1 For
example, in Renwar Oil Corp. v. Lancaster, n176 the plaintiffs sought to interpret a survey so that it would include their
lands within a lease that had a producing well located thereon. The procedural issue raised related to the proper venue
for the action. The suit was filed in Dallas County although the land itself was located in Nueces County. The defendant
objected to the trial court's jurisdiction through a properly filed plea of privilege asserting that the lawsuit was one that
related to the recovery of land, which under the then existing venue statute had to be filed in the district court for the
county where the land is located. The action, while sounding in contract, was affected by Veal because the interest being
litigated had been pooled. Since the plaintiffs sought to have the pooling terminated as to their claimed interest because
they never agreed to the pooling, the court concluded that Veal was applicable. The survey interpretation sought by the
plaintiff would change the nature of the ownership of the other royalty owners who had received a cross-conveyance of
the contested interest; under the Veal rationale they granted to others a proportionate share of their reserved royalty
interest. The court concluded:

            In addition plaintiffs seek an adjudication that certain unitization agreements are void and ineffective
       as to them. Since these agreements are essentially a conveyance of an interest in realty, Veal v.
       Thomason ... , this constitutes an effort to remove cloud from title, even though alleged as an effort to
       construe a contract. n177

The Court of Civil Appeals decision in Minchen v. Fields, n178 which confirmed the holding in Brown v. Smith n179
that the executive cannot pool, or authorize the lessee to pool, non-executive interests used the cross-conveyance theory
to support that result. The court stated:

            The reason of the rule is that where mere executive rights are conferred or reserved, there is no
       intention evidenced to vest authority to convey a royalty interest reserved or the royalty interest
       attributable to the minerals leased and to hold that such holder can unitize or pool the interest would
       allow him to convey such royalty interest because a unitization of the royalty and minerals under
       different tracts effects a cross-conveyance to the owners of minerals under the various tracts of royalty or
       minerals so that they all own undivided interests under the unitized tract in the proportion their
       contribution bears to the unitized tract. n180

The adoption of either the cross-conveyance or contract doctrine is irrelevant in resolving the pooling power question.
The major issue in determining if the non-executive's interest can be pooled should be one of intent, or more precisely,
presumed intent of the parties since they have not expressed their intent through the relevant documents. That issue
should not be affected by the categorization of a pooling or unitization agreement as a contract or cross-conveyance.
The lessee can or cannot pool based on the intent of the parties as expressed in the instruments creating the
non-executive interests. The fact that the pooling would, if effective, transfer property interests or merely create
contractual rights should not affect the determination of the intent of the parties creating the non-executive interests.

The consequences of choosing between the cross-conveyance and contract theories also affect ancillary matters such as
joinder problems, the Rule Against Perpetuities, and the Statute of Frauds. n181 The option does not, and should not,
effect the basic impact of the pooling or unitization decision, which is to provide a sharing of risks, benefits and costs
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among the various owners within the pooled unit or unitized area.

The cross-conveyance theory was also reaffirmed in dictum in Texaco, Inc. v. Letterman, n182 a case involving the
exercise of a leasehold pooling clause. The major issue was whether a pooling clause could be exercised a second time,
after the original pooled unit had been abandoned. The court concluded that the lessee could pool the lessor's royalty
interest so long as the lease was still alive. In dictum, however, the court suggested that if the court had held that the
lessee could not have exercised his pooling power after the initial pooled unit had been abandoned the attack on the later
exercises of the pooling clause would have had to have been dismissed for failure to join necessary and indispensable
parties, the other pooled royalty owners in those units. n183

In Wagner & Brown, Ltd. v. Sheppard, n183.1 the court effectively reaffirmed the continued adherence to the
cross-conveyance theory as it relates to a voluntary pooling created under a leasehold pooling clause, despite the
pooling clause stating "Pooling hereunder shall not constitute a cross-conveyance of interests." The Texas Supreme
Court ruled that the effectiveness of the pooling by the lessee continued even after the termination of the lease. Thus the
possibility of reverter had been committed to the unit by the lessee. The lessee, the court found, was empowered to
commit the lessor's interests for a period longer than it committed its own interest.

The merging of the cross-conveyance doctrine with other rules or canons affecting interpretation of mineral deeds has
caused some problems. In Kelln v. Brownlee, n184 the Kellns owned the equivalent of 151 undivided acres in Section
59. They leased the entire 640 acres even though they only owned that lesser amount. The lease contained a pooling
clause that was exercised to pool all of the interests in Section 59. The Kellns then transferred certain undivided
interests in Section 59 subject to the lease, and the grantees sought an apportioned share of the royalties based on the
cross-conveyance theory. The court found that the royalty interests that the Kellns received by virtue of the pooling
agreement were transferred to the grantees under the doctrine of after-acquired title in order to make the grantees whole.
The grantees were entitled to the benefit of the pooling agreement because their interest was transferred subject to the
lease.

There are only a few cases that depart from the cross-conveyance theory. In Sohio Petroleum Co. v. Jurek n185 the
plaintiffs claimed that a constructive or resulting trust should be placed on an undivided mineral interest that had been
leased and then placed into a voluntary pooled unit. The mineral interest had been purchased with funds that were to be
shared between the plaintiff's children and their mother. The defendants asserted that the cross-conveyance was
applicable, and since none of the other royalty owners within the pooled unit were joined the suit had to be dismissed
for failing to join necessary parties. Rather than blindly applying the cross-conveyance theory, the court could have seen
whether the non-joined parties' interests would be affected by the litigation. It is not likely that they would be affected
since the plaintiffs were seeking merely to have their ownership interest recognized. There was no suggestion that they
sought to terminate either the lease or the pooling agreement. n186

There is no way to reconcile Jurek with Veal. Other Texas cases have followed Jurek and not found non-joined pooled
or unitized owners indispensable parties in actions where the relief sought is not the termination of the interest's
participation in the pooled or unitized development. n187 Thus some courts have recognized the fact that not all
litigation involving owners of pooled or unitized interests affects the other owners. n187.1

Not all forms of joint or cooperative development necessarily invoke the Veal rule. In Atlantic Richfield Co. v. Exxon
Corp., n188 the Court of Civil Appeals found that there was no cross-conveyance of natural gas pursuant to the terms
of a joint operating agreement. Several oil companies, including the plaintiff and the defendant, entered into a series of
joint operating agreements to expand an existing gasoline plant and construct additional gas gathering facilities. The
parties agreed to allocate ownership of the plant and the extracted products in proportion to the ownership interest in the
gas reserves in the field. The plaintiff's reserves were produced faster than the defendant's, but it was only allocated its
proportionate share of the reserves originally held. At that time, the defendant sought to exercise a termination clause in
the contracts and execute a new contract that had terms very unfavorable to the plaintiff. One of the theories proffered
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by the plaintiff to avoid the express terms of the termination clause was that the original contracts had in effect
constituted a cross-conveyance of the gas in place, analogous to a pooling or unitization agreement. Once conveyed, the
plaintiff's interest in the remaining reserves could not be diminished without its express consent. While admitting that
gas reserves are realty under Texas law and therefore capable of being conveyed, the Court of Civil Appeals agreed
with the trial judge that the contracts in question did not evince an intent to cross-convey those reserves. In looking at
the instrument as a whole, the court could not find express words of grant, nor could it find an adequate description of
the subject matter of the deed. No mention is made of the Veal doctrine that essentially presumes an intent to convey
from the language of a community lease or a pooling or unitization agreement, which usually does not contain express
orders of grant either. Nonetheless, the result in Atlantic Richfield shows that the cross-conveyance theory will not be
blindly followed when there is clearly no intent to convey a mineral or royalty interest. While community leases,
pooling clauses, and pooling and unitization agreements create a presumed intent to cross-convey, joint operating
agreements between lessees do not. The Texas Supreme Court did not disturb the finding of the Court of Civil Appeals
that no cross-conveyance took place. It reversed the lower court's application of an implied covenant to the agreement
since it determined that express covenants governed the parties' relationship, preempting the use of implied covenants.

While joint operating agreements may not necessarily invoke the cross-conveyance doctrine, that is not to say that such
agreements do not create a cotenancy relationship between the working interest owners. A number of Texas cases
reinforce the view that the working interest owners are co-tenants. n188.1

A second case that distinguished Veal raises some interesting questions. In Puckett v. First City National Bank of
Midland, n189 the lessor's royalty interest was pooled by the lessee into two separate gas production units. Gas from
both units was subject to split stream sales, some being sold at higher intrastate prices, and some at lower interstate
prices. The weighted average sale price of plaintiff's lease was lower than the other lessee's overall weighted average
sale price. Nonetheless, the plaintiff was receiving a royalty in excess of the sales price attributed to his acreage.
Language in the lease and the division order as well as language in the operating agreement evinced an intent to pay the
plaintiff based upon on the price received for the gas produced that was allocated to his tract. One of the arguments
raised by the plaintiff was that the pooling agreement cross-conveyed the respective royalty interests under Veal so that
the plaintiff was entitled to the overall weighted average of all sales from both units. The court dismissed this argument
by stating that Veal dealt with indispensable parties and not the calculation of royalties from split stream gas sales out of
a pooled unit. The better explanation offered by the court was that the parties' express language regarding the allocation
of royalty evinced an intent not to effect a cross-conveyance as to payments of unitized royalty. n190

In Parker v. HNG Oil Co., n190.1 the cross conveyance theory was apparently ignored in a situation in which it
otherwise might have applied. A lease had been executed in 1973 covering approximately 93 acres. Almost 24 acres
were committed to an oil unit where there was an existing producing well. The original lessee assigned the lease,
retaining an overriding royalty. In 1982 the lessors sought a release of the lease as to all non-pooled acreage. HNG
mistakenly issued a release covering the entire 93 acres while other working interest owners only released the acreage
outside of the pooled unit. The lessors brought this action to have HNG's affidavit claiming an interest in the 24 acres
inside the pooled unit removed from the county records as a cloud on its title. HNG counterclaimed seeking reformation
of the release. Neither litigant would be interested in having the lawsuit dismissed for lack of joinder of indispensable
parties. The lessors wanted to have the affidavit removed from the title records, and the lessee wanted to quiet title and
reform the written release instrument. While the status quo may have favored the lessee's position, undoubtedly it
wanted the title issue resolved rather than wait for a new lawsuit to be filed.

Since this litigation involves title to a pooled interest, Veal would seemingly be applicable and if followed, would
require that all of the other working interest owners in the pooled unit be joined as indispensable parties. Apparently,
neither of these two parties raised the issue given the nature of the dispute, so the court did not deal with the Veal
requirement of joining all of the other pooled unit owners. On the merits, the case was resolved in favor of HNG since it
met the two pronged test for reformation of a written instrument, to wit, the true agreement of the parties is shown and
the provision was erroneously entered by mutual mistake.
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The unexplored issue of indispensable parties and the Veal cross conveyance rule raise some interesting questions. It is
clear that the owners of the pooled unit production, and more specifically, the assignee of HNG's leasehold interest,
have an interest in the outcome of the litigation. The overriding royalty amounted to 30% of all oil and gas produced
after lessor royalties were paid. Why the original lessors wanted to terminate the interest was unclear. Their landowner
royalty was unaffected by the override. But the assignee who was obligated to pay the override was clearly an
interested, and probably an indispensable, party since it was out of their share that the override was being taken. The
other working interest owners in the pooled unit would have been greatly affected by the litigation if they were sharing
the cost of the override. They were still interested since if the lease was terminated, in theory an unleased mineral owner
would now be part of the mix of owners. Since the well was off of the leasehold acreage, it can be presumed that the
lessors would ratify the pooling, otherwise they would lose the right to share in the production from the pooled unit
well.

     [3] Undecided States

     [a] Louisiana

The early Louisiana decisions would support the cross-conveyance theory, but more recent decisions suggest Louisiana
would be more properly considered a contract theory state. In Martel v. A. Veeder Co., n191 the court in dictum stated
that if the instruments had been effective to pool the royalty interests, then an exchange of those mineral rights would
have occurred. Since the court had found that the instruments did not constitute a community lease, the discussion on a
possible cross-conveyance was dictum. n192

A clearer statement opting for the cross-conveyance doctrine was made in Coyle v. North American Oil Consolidated.
n193 The issue was clearer because the necessary and indispensable party doctrine was involved in the decision. The
plaintiff used an abandonment theory in seeking to cancel a lease as to certain formations. The trial court found no
abandonment was proven, partially on the basis that the evidence was not clear that there was more than one producing
sand. However, the court said that even if the trial court had determined that there had been an abandonment of one of
the horizons, it would have been powerless to order the lease canceled because that acreage had been pooled, and the
other royalty owners were not served as defendants in the lawsuit. n194 The case was remanded for reconsideration of
the abandonment evidence for one of the formations, with the requirement that all parties to the pooling agreement be
joined so that the plaintiff's attempt to terminate the pooling agreement for his claimed interest could be adjudicated. On
a motion for rehearing both the plaintiffs and defendants argued that it was not necessary to serve all of the other
royalty-and working-interest owners. The court refused to repudiate the language of its original opinion regarding the
necessity to join those parties, but it otherwise found that the parties to the lease never intended to treat the separate
horizons as segregated portions of the lease, which could be individually abandoned. The choice of the
cross-conveyance theory was not clearly decided because of the presence of an alternative rationale for the decision.

The clearest statement by a Louisiana court that it has opted for the cross-conveyance doctrine came in Vizier v.
Howard. n195 The plaintiffs owned several non-contiguous tracts that they alleged had been included in a community
lease that entailed approximately thirty additional tracts of land. The plaintiffs were seeking an accounting for unpaid
royalties and an order terminating the lease. The trial judge issued a preliminary order requiring the plaintiff to join the
owners from the thirty additional tracts or face dismissal of the lawsuit. The plaintiffs responded by attempting to
convert their lawsuit into a class action representing all of the royalty owners in the communitized leasehold area. That
was held by the trial court to be insufficient, and the judge dismissed the petition. The Court of Appeals accepted
without question the propriety of the preliminary order demanding that all communitized lessors be joined. Its opinion
was solely concerned with the legitimacy of the class action sought by the plaintiffs. Obviously, the Court of Appeals
agreed that the communitized lessors are either necessary or indispensable, which lends support to the adoption of the
cross-conveyance theory for community leases. The opinion, however, cites no cases to support the view that Louisiana
has opted for that theory.
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Two later cases, however, suggest that Louisiana is either opting for a contract theory or is making the determination of
whether the non-joined parties are indispensable on the merits of each case, without regard for either of the contract or
cross-conveyance theories. In Melancon v. Texas Co., n196 the lessor sought cancellation of a lease when the lessee,
who was apparently trying to coerce the lessor to approve a pooling or unitization agreement, withheld royalty
payments that were properly due and owing. The lease contained a pooling clause with limited pooling to 40 acres. The
clause was exercised, a pooled unit was created, and a producing well was placed on the unit. However, the lessee
wanted the lessor to agree to a revision of the unit that would be larger than that authorized by the pooling clause. Other
royalty interest owners were joined as parties defendant. The court recognizes that those other owners were necessary
parties and, if not joined, the suit could not continue. n197 The court did not state if it was adopting either a contract or
cross-conveyance theory, but regardless of the choice of theories the other royalty owners would be affected by the
outcome of the litigation, because the plaintiff was seeking to terminate both the lease and the pooling.

In Mallett v. Union Oil & Gas Corp. of Louisiana, n198 the plaintiff was seeking to terminate the lease in question
because of a lack of production at the end of the primary term. The lease contained a pooling clause, and near the end of
the primary term the lessee pooled part of the plaintiff's acreage with adjacent acreage that already had a producing well
located thereon. The court determined that the pooling clause only contemplated pooling with undeveloped lands, and
therefore the pooling that was accomplished was beyond the lessee's authority. n199 If the cross-conveyance theory was
applied, then the other royalty owners in the pooled unit would be indispensable parties. There was no indication in the
opinion that the other owners were joined. The lessee apparently chose not to argue the cross-conveyance theory as a
means of having the plaintiff's complaint dismissed.

     [b] Montana

Montana, like Louisiana, has reached some inconclusive results in several cases regarding the application of the
cross-conveyance or contract theories. In Toomey v. State Board of Land Commissioners, n200 the plaintiff taxpayer
sought to enjoin the state from entering into a unitization agreement that would pool state lands with private lands. The
plaintiff urged, among other arguments, that the unitization would effectively cross-convey a fractional royalty interest
from the state to the other private unitization owners, which would violate a restriction against the barter of public
lands. The court rejected the argument but stated that the reason for the rejection was the fact that ownership of the gas
was an incorporeal interest subject to the rule of capture. Since the state did not own the gas in place, there was no
barter. While that argument may not be persuasive, one possible explanation of the holding is that the court did not
believe the state was conveying its royalty interest by virtue of executing a unitization agreement. n201

In Nadeau v. Texas Co., n202 a similar inference could be reached from a small part of a decision that relied on other
grounds to reach its result. The plaintiff and defendant were rival claimants to oil and gas leases on the same land. The
defendant had apparently signed a pooling agreement, and the other parties to the agreement had not been joined. The
court dismissed the argument that the non-joined parties were indispensable by simply concluding that the controversy
did not affect their rights but merely involved the validity of the lease. That conclusion is clearly erroneous since if the
defendant lost, the other parties who agreed to pool their interests and apportion their royalties would have their
interests substantially changed by the removal of the leased lands from the pooled unit. Again, no direct mention was
made to the contract or cross-conveyance theories, and the point was the last of many that the court rejected in finding
for the plaintiff. n203

Finally, in a Ninth Circuit decision ostensibly applying Montana law, the court developed at least four different answers
to the question of why unitized royalty owners were not necessary or indispensable parties to a lawsuit when a lessor
sought to invalidate a lease that had previously been committed to the unit. The case of Stumpf v. Fidelity Gas Co. n204
is a practitioner's nightmare and a law professor's dream. The facts were relatively simple. The plaintiff claimed that the
lease he originally executed to the defendant had terminated for lack of production at the end of the primary term. Due
to alleged fraud by the lessee, the plaintiff did not complain about the termination of the lease until well after the
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primary term had expired. In the meantime the defendant lessee had, pursuant to a leasehold pooling clause, entered into
a pooling agreement with another lessee who became the operator of the unit.

The defendant alleged that the suit must be dismissed because the plaintiff had not joined any of the pooled royalty
owners who, he claimed, were indispensable parties. The court rejected that argument but the precise reason for the
rejection is difficult to discern. The court seemingly rejects the Veal cross-conveyance doctrine, which it discusses at
great length. However, the rejection of Veal may in part be based on the fact that Veal involved a community lease, and
this case involved a pooling clause and pooling agreement. A second explanation is that the court is applying the
Nadeau rationale that litigation between a lessor and lessee has no effect whatsoever on the other pooled royalty
owners. As discussed earlier, the argument also lacks much merit. n205 On rehearing, the court realized that the
termination of the lease would affect the non-joined owners, because the modified opinion concluded that the
unitization agreement could not be revoked by the plaintiff because the disputed interest was validly committed to the
unit when the agreement was executed. n206 Under Erie, the court was required to apply the law of Montana. Nadeau
and Toomey are both decisions of the Montana Supreme Court that must be applied by the federal court. They suggest
that pooling and unitization agreements are not cross-conveyances. Thus the court's analysis of Veal should have
focused on whether the Montana Supreme Court would follow Veal, rather than the results suggested by Nadeau and
Toomey.

The third explanation given by the court arises from the notice and demand clause contained in the lease. In the per
curiam opinion on rehearing the court for the first time suggested that the lessee's power to pool could not be terminated
unless the lessor complied with the notice and demand provisions of the lease. But that misstates the law as it relates to
the termination of leases at the end of the primary term for lack of production. Montana, like most states, treats the
habendum clause of a lease as a common-law fee simple determinable estate. Thus, it automatically terminates at the
end of the primary term unless there was production, or the terms of a savings provision (such as a continuous
operations clause) were met. n207 Normally, a lessor does not have to send notice, and demand a cure to the problem of
lack of production when the primary term has expired. n208 Thus, one should question the reasons presented by the
court in its opinion on rehearing.

A fourth explanation for finding the non-joined parties not indispensable was a specific provision of the unitization
agreement that stated: "That nothing herein contained shall be construed as affecting or passing title to any lands, leases,
or permits, but the Operator shall acquire operating rights only." n209

Finally, the holding is also based on Hudson v. Newell, n210 where when the plaintiffs disclaimed any right to change
the nature of the unit agreement if they prevailed, the remaining royalty-and working-interest owners were held not to
be indispensable parties. n211

Thus, the state of the law in Montana is unclear at best. Since all three decisions applying Montana law refused to find
that pooled or unitized royalty owners were indispensable parties to litigation not directly involving the pooling or
unitization agreement it might be inferred that Montana has in effect adopted a contract theory for unitized titles.

     [c] Pennsylvania

A very early case involving a coal lease suggests that Pennsylvania might follow a contract theory approach to the issue
of the nature of the unitized title. In Coolbaugh v. Lehigh & Wilkes-Barre Coal Co., n212 a coal lease covered two
adjacent lots, numbers 28 and 29. An apportionment of royalties clause was contained in the joint lease. Eventually Lot
28 was sold, and the issue before the court was whether the grantor retained any share of the apportioned royalties from
Lot 29 production. The court answered the question in the negative and suggested that the joint lease did not affect the
"estates" of the individuals who contributed to the lease. The court suggested that the "titles remained distinct as they
were before ... ." n213 Though it is weak authority, it again suggests that the court would not treat the signing of a
community lease as a transfer of estates between the joint signers.
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FOOTNOTES:
(n1)Footnote 101. Hover v. Cleveland Oil Co., 150 Kan. 531, 95 P.2d 264 (1939) .

    (n2)Footnote 102. The exact language used by the court is as follows:

           The very essence of the agreement was that the contracting parties were owners of adjacent
       properties suitable to be explored and exploited for oil and gas, and that any resulting royalties should be
       divided proportionately to their respective acreage. When the Hovers parted with their property what did
       they have to contribute to the common pool of possible royalties? Nothing. The agreement had quite
       properly provided the oil royalties should be shared until it was changed by the parties. But that result
       would follow when they sold their property if the agreement had not mentioned it.


  95 P.2d at 266 .

    (n3)Footnote 103. Kenoyer v. Magnolia Petroleum Co., 173 Kan. 183, 245 P.2d 176, 1 O.&G.R. 1126 (1952) .

    (n4)Footnote 104. For a discussion of the rule problem as it applies to pooling clauses, see § 8.07 above.

    (n5)Footnote 105. 245 P.2d at 179, 10 O.&G.R. at 1131 . There are some ambiguities in the language just quoted.
Are the pooling provisions contained in the transfer of a property interest (the lease) totally contractual in nature, or are
they possibly in the nature of real covenants? The court does not delve into that murky area. In addition, the court's
conclusion could simply be based on a traditional property-based theory that a pooling power is not the creation of a
contingent future interest, and, therefore, the rule is simply not applicable.

  In Rosenbaum v. Texas Energies, Inc., 241 Kan. 295, 736 P.2d 888, 96 O.&G.R. 259 (1987) the Kansas Supreme
Court eschewed placing a label on the rights created by a unitization or pooling agreement, merely concluding that
"Creation of a valid unit would create vested rights ... " 736 P.2d at 893 . Here the plaintiffs were seeking to stop their
lessee from de-unitizing a unit because the lessee did not have the power to unitize the other joined interests. The court
concluded that the other royalty owner's interests were not subject to a valid unitization clause and therefore there was
never a valid unit created. Because no unit had been created no vested rights came into existence, and plaintiffs had no
authority to challenge the de-unitization.

  The court in Coulter v. Anadarko Petroleum Corp., 1999 U.S. Dist. LEXIS 19817 (D. Kan. Oct. 8, 1999) (unpublished
opinion) did not analyze Kenoyer or Hover when it decided not to aggregate the claims of royalty owners to pooling
agreements in order to meet the federal jurisdictional requirement of having a minimum of $75,000 in damages. The
court seemingly ignored the ramifications of the execution of the pooling agreement setting forth both a royalty fraction
and a royalty calculation methodology that was binding on all signatory parties.

    (n6)Footnote 106. Lusk v. Green, 1926 OK 169, 114 Okla. 113, 245 P. 636 (1926) .

    (n7)Footnote 107. 245 P. at 637 .

    (n8)Footnote 108. L. Hoffman, Voluntary Pooling and Unitization 158-159 (1954) reads the Lusk case as
supporting the cross-conveyance theory.

    (n9)Footnote 109. Amis v. Bryan Petroleum Corp., 1939 OK 192, 185 Okla. 206, 90 P.2d 936 (1939) . Amis
involved the general validity of a municipal compulsory pooling statute. The Oklahoma City ordinance authorized its
Board of Adjustment to force-pool mineral and/or royalty interests before it would authorize the issuance of a drilling
permit. While having no trouble upholding the constitutionality of the ordinance, the court added the following
language regarding the effect of the ordinance on the title of the parties who were force-pooled:
                                                                                                                   Page 17
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           Here the city created the relationship as it now exists between the parties ... . The relationship in the
       nature of a tenancy in common resulted merely as an incident to the application of the city's police
       powers. The tenancy owes its existence to those powers and is entirely subject thereto. The parties cannot
       successfully assert their common law rights as tenants in common, for such a tenancy did not exist.


  90 P.2d at 939 .

  Since tenancies in common require that a property interest be conveyed by one party to that party and another or to
two other persons, the clear implication of the language cited above is that a pooling of mineral and/or royalty interests
involves just such a conveyance.

    (n10)Footnote 110. Griswold v. Public Service Co., 1951 OK 342, 205 Okla. 412, 238 P.2d 322, 1 O.&G.R. 108
(1951) , Brazell v. Brown, 1934 OK 520, 169 Okla. 623, 38 P.2d 17 (1934) .

    (n11)Footnote 111. See § 19.01[2][b][ii] supra for a discussion of other cases dealing with Statute of Frauds
problems.

   (n12)Footnote 112. Sinclair Crude Oil Co. v. Oklahoma Tax Commission, 1958 OK 110, 326 P.2d 1051, 9
O.&G.R. 613 (Okla. 1958) .

   (n13)Footnote 113. All parties conceded that without the unitization agreement the Indian allottees' royalty
payments would be exempt from state taxation under the federal Cherokee Allotment Act. 326 P.2d at 1051 .

    (n14)Footnote 114. 326 P.2d at 1055 .

     (n15)Footnote 115. 326 P.2d at 1056 . While there were some words of grant in the unitization agreement, they
related solely to the granting of easements of rights of way over the surface estate in order to carry out the joint
operations of the unit. That grant was considered separate and distinct from the overall purpose of the unitization
agreement.

    (n16)Footnote 116. 326 P.2d at 1055 .

     (n17)Footnote 117. 326 P.2d at 1056-1057 . The court was aware that both Texas and California had adopted a
cross-conveyance theory for similar language in pooling or unitization agreements. It nonetheless rejected that approach
for the contract theory largely on the basis of the arguments presented by Leo Hoffman in his early work. L. Hoffman,
Voluntary Pooling and Unitization (1954). Hoffman argued that the adoption of the cross-conveyance theory was
dictum in the two major Texas cases embracing the concept. In addition, he supported the emphasis of the Oklahoma
Supreme Court in its conclusion that parties who enter into pooling or unitization agreements do not intend to effect a
cross-conveyance of their mineral or royalty interests. Hoffman, op cit. at 160. Finally, the court felt that the weight of
persuasive authority favored adoption of the contract doctrine, although in its string citation of cases to support that
conclusion the court includes some questionable authority. See, e.g., Arkansas Louisiana Gas Co. v. Southwest Natural
Production Co., 60 So. 2d 9, 221 La. 608, 1 O.&G.R. 1186 (1952) ; Shell Petroleum Corp. v. Calcasieu Real Estate &
Oil Co., 185 La. 751, 170 So. 785 (1936) ; and Coolbaugh v. Lehigh & Wilkes-Barre Coal Co., 218 Pa. 320, 67 A. 615
(1907) . The authors have classified both Louisiana and Pennsylvania as states that have taken ambiguous positions on
the adoption of the contract or cross-conveyance theories. See § 19.02[3][a] and [c] infra. The court also cites Kenoyer
v. Magnolia Petroleum Co., 173 Kan. 183, 245 P.2d 176, 1 O.&G.R. 1126 (1953) , which is explained in § 19.02[1][a]
supra is very weak support for the adoption of the contract doctrine.

    (n18)Footnote 118. Garvin v. Pettigrew, 1958 OK 158, 350 P.2d 970, 13 O.&G.R. 992 (Okla. 1958) , cert. denied,
364 U.S. 823, 81 S. Ct. 58, 5 L. Ed. 2d 52 (1960) .
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    (n19)Footnote 119. 350 P.2d at 972 . The agreement stated:

              It is agreed by and between all of the parties hereto that this contract shall in no wise interfere with
         or divest any party thereto of the right to separately lease his or her part of the lands hereinbefore
         described, for oil and gas purposes, and that the several interests set apart to each of the parties hereto, ...
         shall not attach to the royalties from oil and gas until oil and gas ... has been produced from the above
         described lands belonging to each of the other parties hereto.


   Id.

    (n20)Footnote 120. See n.119 supra. For a discussion of Hover, see § 19.02[1][a] supra.

     (n21)Footnote 121. Professors Williams and Meyers argue that Garvin can be read as interpreting pooling
agreements to create appurtenant rights to the parties that attach to the lands that are contributed. Since the rights are
appurtenant, only those who own the lands or interests contributed to the unit can claim an apportioned share of unit
production. This would contrast with a finding that the rights created are in gross or personal to the contributing party,
which would remain in the grantor unless expressly mentioned in a grant of the underlying interest, notwithstanding his
transfer of the contributed mineral or royalty interest. 6 Williams & Meyers, Oil & Gas Law 572.1 (1988).

     (n22)Footnote 122. 350 P.2d at 974 . Lewis Mosburg, Jr., who wrote the Discussion Notes in this case, also opined
that it was the death of the cross-conveyance theory in Oklahoma. But he was concerned by the lack of a strong
statement by the majority that it was rejecting the cross-conveyance theory in general, as opposed to not applying it in
this case because of the language of the agreement. Discussion Notes, 13 O.&G.R. 1008-12 .

     (n23)Footnote 123. Again the Discussion Notes by Mr. Mosburg raise that issue and for him raised the unsettling
possibility that the issue had not really been decided. After all, it would have been easy for the court to have cited
Sinclair rather than the specific agreement language in finding that there were only contractual rights transferred by
virtue of the pooling agreement. Discussion Notes 13 O.&G.R. 1010-11 .

    (n24)Footnote 124. Tenneco Oil Co. v. District Court, 1970 OK 21, 465 P.2d 468, 36 O.&G.R. 441 (Okla. 1970) .

     (n25)Footnote 125. The court reiterated its support for the view that a compulsory pooling or unitization order does
not create a cotenancy. Wakefield v. State, 1957 OK 10, 306 P.2d 305, 7 O.&G.R. 291 (Okla. 1957) ; Amis v. Bryan
Petroleum Corp., 1939 OK 192, 185 Okla. 206, 90 P.2d 936 (1939) . The language of the compulsory pooling statute in
Oklahoma also supports the contract theory since it provides that there is no vesting or transfer of title by virtue of the
compulsory pooling order. Okla. Stat. Ann. tit. 52, § 287.9.

  The Tenneco Oil and Wakefield analysis that a compulsory pooling order does not create a cotenancy relationship
between the parties was followed in Schulte v. Apache Corp., 1991 OK 61, 814 P.2d 469, 113 O.&G.R. 336 (Okla.
1991) , on later appeal, 949 P.2d 291 (Okla. 1995) .

    (n26)Footnote 126. The court only cited Sinclair Crude Oil and L. Hoffman, Voluntary Pooling and Unitization
(1954) in support of its holding. Neither Lusk nor Garvin was mentioned. 465 P.2d at 468 .

    (n27)Footnote 127. 465 P.2d at 470 .

    (n28)Footnote 128. The unit operator had also claimed that the partition action was a collateral attack on the
Corporation Commission order approving the unit. It was an attempt to dissolve the unit without going through the
Corporation Commission. Professor Kuntz in the Discussion Notes following this case in the Oil and Gas Reporter
suggests that since the agreement, in order to be approved, required a provision for unit dissolution, the commission
would still have authority to dissolve the unit upon the petition of an interested party. Discussion Notes, 36 O.&G.R.
                                                                                                                    Page 19
                             2-19 The Law of Pooling and Unitization, 3rd Edition § 19.02



445-447 .

    (n29)Footnote 129. See § 12.03[1][a] supra, which discusses the Oklahoma compulsory pooling system.

    (n30)Footnote 130. Ranola Oil Co. v. Corporation Commission, 1988 OK 28, 752 P.2d 1116, 98 O.&G.R. 336 .

   (n31)Footnote 131. Southern Union Production Co. v. Eason Oil Co., 1975 OK CIV APP 48, 540 P.2d 603, 53
O.&G.R. 62 .

   (n32)Footnote 131.1. Unit Petroleum Co. v. Mobil Exploration & Production North America, Inc., 2003 OK CIV
APP 95, 78 P.3d 1238, 157 O.&G.R. 908 , cert. denied.

    (n33)Footnote 131.2. The gas balancing aspects of this case are analyzed at § 19.05[1] below .

    (n34)Footnote 131.3. Harrell v. Samson Resources Co., 1998 OK 69, 980 P.2d 99, 142 O.&G.R. 62 .

    (n35)Footnote 132. Phillips Petroleum Co. v. Peterson, 218 F.2d 926, 4 O.&G.R. 746, 4 O.&G.R. 756 (10th Cir.
1954) , cert. denied, 349 U.S. 947, 75 S. Ct. 871, 99 L. Ed. 1273, 4 O.&G.R. 1178 (1955) .

    (n36)Footnote 133. 218 F.2d at 930 .

    (n37)Footnote 134. The 10th Circuit stated:

            Section 12 [the pooling clause] does not violate the rule against perpetuities, unless the unitization or
       pooling agreement accomplishes transfers of interests in real property, or, otherwise stated, effects
       cross-transfers of property interests among the parties to the agreement ... . Thus, it appears that the
       effect of unitization was to be only with respect to allocation of production and the computation of
       royalties and was not to effect cross-transfers of royalty interests ... .

            Moreover, an intent that there shall be no cross-transfers of royalty interests may be derived from a
       provision that proportions of the unit production shall be allocated to the respective tracts and that the
       portion so allocated to each tract shall be treated as if it had actually been produced from said tract.


  218 F.2d at 930-931 .

     (n38)Footnote 135. 218 F.2d at 931 . See, e.g., Kenoyer v. Magnolia Petroleum Co., 173 Kan. 183, 245 P.2d 176,
1 O.&G.R. 1126 (1952) ; Coolbaugh v. Lehigh & Wilkes-Barre Coal Co., 218 Pa. 320, 67 A. 615 (1907) ; Lynch v.
Davis, 79 W. Va. 437, 92 S.E. 427 (1917) . The court did note that there was contrary authority principally in Texas and
California and suggested that the Texas rule is different because Texas has adopted ownership-in-place theory for oil
and gas. Such a rationale would not explain why California adopted the cross-conveyance theory, for it is a
non-ownership jurisdiction. The court ultimately selected the contract theory, not because of the way the state classifies
the ownership of oil and gas but because it is "supported by well-reasoned and more persuasive authority." Id.

   The nature of unitized titles was explored in depth by the Utah Supreme Court in Dye v. Miller & Viele, 587 P.2d 139,
63 O.&G.R. 136 (Utah 1978) . The plaintiff and defendants disputed the title to certain lands. The plaintiff claimed
through a chain of title tracing back to a 1927 tax deed. The defendants' claim was based on a 1928 sheriff's deed and by
title through adverse possession. Their allegations relating to adverse possession were supported by the defendants'
execution of a voluntary pooling agreement more than four years prior to the onset of this litigation. There had been
production from a well on the unit but off of the disputed acreage. The evidence showed that the defendants were never
in actual possession of the disputed acreage. The defendants' argument was that the pooling agreement and the
off-acreage unit activities constituted constructive possession of the disputed lands. If the court had followed a
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cross-conveyance theory, one might be able to argue constructive possession since the defendants would have in effect
conveyed a fractional share of the royalty interest in the lands described in the 1928 royalty deed. The court, however,
rejected that claim, not on the basis of the contract doctrine, but on the general proposition that actual possession cannot
be claimed by remote control, citing Phillips Petroleum Co. v. Peterson, 218 F.2d 926, 4 O.&G.R. 746, 4 O.&G.R. 756
(10th Cir. 1954) , cert. denied, 349 U.S. 947, 75 S. Ct. 871, 99 L. Ed. 1273, 4 O.&G.R. 1178 (1959) . One could argue
that if the defendants had in effect conveyed their royalty interest they would meet the requirement of constructive
possession. The more difficult problem of attributing the actual possession of the premises to the off-premises activity
of the pooled unit operator would still face the claimant.

    (n39)Footnote 136. Lynch v. Davis, 79 W.Va. 437, 92 S.E. 427 (1917) .

    (n40)Footnote 137. For a complete discussion of community leases, see § 7.03[1] supra.

    (n41)Footnote 138. 92 S.E. at 430 . The language of the court is somewhat confusing and contradictory. It stated:

              It is contended by appellee [drillsite owner] that to place this construction [non-apportionment] upon
         the contract involved in this case would, in effect, convey a part of the real estate of Lola M. Davis to her
         sisters, when there is in the lease no words which would effect such a conveyance. This argument is not
         well founded. The interpretation we give the contract, instead of having the effect declared, has the effect
         of preventing one of the parties from securing a part of the estate of the others without procuring a
         conveyance ... .


  Id. The authors would not read the above paragraph as indicating a clear rejection of the cross-conveyance theory for
community leases. For a contrary view, see L. Hoffman, Voluntary Pooling and Unitization 165-166 (1954).

    (n42)Footnote 139. There is some contrary language in a case decided one year later, Pittsburgh & West Virginia
Gas Co. v. Ankrom, 83 W.Va. 81, 97 S.E. 593, 596 (1918) , which suggests that the community lessors may be tenants in
common, a status that is only available if the community lease is treated as involving a conveyance of the respective
royalty interests.

    (n43)Footnote 140. Boggess v. Milam, 127 W.Va. 654, 34 S.E.2d 267 (1945) .

    (n44)Footnote 141. 34 S.E.2d at 270 . The court said:

              In our opinion, the so-called unitization agreement does not effect a merger of title ... . It
         consolidates only the contractual interests under the leases to the United Fuel Gas Company. Boggess,
         having refused to become a party to the lease ..., acquired no contractual right subject to merger, and by
         remaining aloof, both from the lease and the unitization agreement, neither instrument affected his
         interest, either favorably or unfavorably.


   Id.

    (n45)Footnote 142. Bayside Land Co. v. Dabney, 90 Cal. App. 122, 265 P. 564 (1928) .

    (n46)Footnote 143. Jameson v. Chanslor-Canfield Midway Oil Co., 176 Cal. 1, 167 P. 369 (1917) .

      (n47)Footnote 144. The court said: "Another feature of the Jameson Case ( 176 Cal. 1 (1917)) will serve to
distinguish it from the case presented here. In that case the lessors were all tenants in common of the entire tract leased
... . The relation of tenants in common between the corporation [plaintiff] and the subsequent lessors did not exist ... ."
265 P. at 566 .
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     (n48)Footnote 145. In addition to Bayside Land, several later California decisions relating to the tax consequences
of a pooling or unitization agreement also reached results that were more consistent with a contract theory than a
cross-conveyance theory. But these cases were decided long after the strong commitment was made by the California
Supreme Court to the cross-conveyance theory. Compare Belridge Oil Co. v. Commissioner, 27 T.C. 1044, 7 O.&G.R.
673 (1957) , aff'd sub nom. Commissioner v. Belridge Oil Co., 267 F.2d 291, 7 O.&G.R. 673, 10 O.&G.R. 662 (9th Cir.
1959) and Whitwell v. Commissioner, 257 F.2d 548, 9 O.&G.R. 445 (9th Cir. 1958) , with Tanner v. Olds, 29 Cal. 2d
110, 173 P.2d 6 (1946) and Tanner v. Title Insurance & Trust Co., 20 Cal. 2d 814, 129 P.2d 383 (1942) .

    (n49)Footnote 146. Tanner v. Title Insurance & Trust Co., 20 Cal. 2d 814, 129 P.2d 383 (1946) .

    (n50)Footnote 147. 129 P.2d at 386 . The court went on to add that the interest assigned was an in gross
incorporeal hereditament in keeping with California's view that ownership of oil and gas is also an incorporeal
hereditament.

    (n51)Footnote 148. For other cases following the Tanner conclusion, see Tanner v. Olds, 29 Cal. 2d 110, 173 P.2d
6 (1946) ; Howard v. General Petroleum Corp., 108 Cal. App. 2d 25, 238 P.2d 145, 1 O.&G.R. 10 (1951) , on second
appeal, 114 Cal. App. 2d 91, 249 P.2d 585, 1 O.&G.R. 1579 (1952) , and Friedrich v. Roland, 95 Cal. App. 2d 543, 213
P.2d 423 (1950) .

   (n52)Footnote 149. Southern California Title Clearing Co. v. Laws, 2 Cal. App. 3d 586, 83 Cal. Rptr. 8, 34
O.&G.R. 507 (1969) .

     (n53)Footnote 150. For a discussion of how the cross-conveyance and contract doctrines effect the joinder of
parties, including the principle of necessary and indispensable parties, see § 19.01[2][a][i] supra.

      (n54)Footnote 151. 83 Cal. Rptr. at 10 . The court also relies on a hard rock mineral partition case that raised
similar issues. In Hardie v. Chew Fish Yuen, 258 Cal. App. 2d 301, 65 Cal. Rptr. 594, 28 O.&G.R. 1 (1968) , a hard
rock mineral lease covered two separate parcels. The original lease had been executed by the mineral estate owners of
one parcel, but on the second parcel only half of the mineral estate was clearly leased. The other half of the second
parcel was only leased by the life tenant. The remaindermen did not execute the lease. The plaintiff eventually acquired
all of the interest in the second parcel and brought this quiet title action claiming that the lease of the half interest was
void because the remaindermen were not joined, and it would thus constitute an act of waste. None of the owners of the
first parcel was joined in the lawsuit. Without citing Tanner the court concluded that the owners of the interests in the
first parcel were indispensable parties because the community lease effected a cross-conveyance of royalties between
both parcels that would be detrimentally affected by the plaintiff's quiet title action. The omitted parties would have had
a right to share in the royalties from leasehold production on the second parcel, and therefore no action seeking to
terminate the second parcel lease could be brought unless all of the parties to the original community lease were joined.

    (n55)Footnote 152. LeBard v. Richfield Oil Corp., 56 Cal. 2d 532, 15 Cal. Rptr. 617, 364 P.2d 449, 15 O.&G.R. 1
(1961) .

    (n56)Footnote 153. Cal. Pub. Res. Code § 3608. See § 30.05A infra.

     (n57)Footnote 154. Had the plaintiff prevailed on this issue, she would have been out of court in any event since
under the rule of indispensable parties she would probably have had to join all of the other royalty owners in litigating
the ownership rights that she claimed she owned. See Southern California Title Clearing Co. v. Laws, 2 Cal. App. 3d
586, 83 Cal. Rptr. 8, 34 O.&G.R. 507 (1969) .

    (n58)Footnote 155. 15 Cal. Rptr. at 617 .

    (n59)Footnote 156. See § 19.01[3] supra.
                                                                                                                  Page 22
                             2-19 The Law of Pooling and Unitization, 3rd Edition § 19.02



    (n60)Footnote 157. 15 Cal. Rptr. at 620 .

      (n61)Footnote 158. Ragsdale v. Superior Oil Co., 40 Ill. 2d 68, 237 N.E.2d 492, 28 O.&G.R. 589 (1968) , rev'g, 85
Ill. App. 2d 467, 229 N.E.2d 299, 27 O.&G.R. 3 (1967) .

     (n62)Footnote 159. The intermediate court relied on Stumpf v. Fidelity Gas Co., 294 F.2d 886, 16 O.&G.R. 139
(9th Cir. 1961) , in which the court had also found that the remaining pooled working-and royalty-interest owners were
not indispensable parties. For a full discussion of Stumpf, see § 19.01[2][a][i] supra.

     (n63)Footnote 160. 237 N.E.2d at 494 . Note that the Illinois approach treats a pooling or unitization agreement as
identical with the community lease. That is in sharp contrast with LeBard v. Richfield Oil Corp., 56 Cal. 2d 532, 15 Cal.
Rptr. 617, 364 P.2d 449, 15 O.&G.R. 1 (1961) , which suggested that community leases and pooled units were different
for purposes of applying the contract or cross-conveyance theories. See § 19.02[2][a] supra.

    (n64)Footnote 161. Two authorities well acquainted with Mississippi oil and gas law have also suggested that the
cross-conveyance theory will probably be followed should the issue be raised. Custy & Knowlton, "Compulsory
Field-Wide Unitization Comes to Mississippi," 36 Miss. L.J. 123, 135 (1965).

    (n65)Footnote 162. Merrill Engineering Co. v. Capital National Bank, 192 Miss. 378, 5 So. 2d 666 (1942) .

     (n66)Footnote 163. Hudson v. Newell, 172 F.2d 848 (5th Cir.) , on reh'g 174 F.2d 546 (5th Cir. 1949) . The
Hudson case is also discussed in § 19.01[2][a][ii] supra, in which the authors discuss the issue of indispensable parties,
ratification of pooling unitization agreements, and the contract and cross-conveyance theories.

    (n67)Footnote 164. 172 F.2d at 852-853 . The court's use of the ownership-in-place theory is not critical to the
court's conclusion that a cross-conveyance has occurred. California, as previously noted in the Tanner case, §
19.02[2][a] supra had also adopted the cross-conveyance doctrine even though it is a non-ownership theory state.

    (n68)Footnote 165. 174 F.2d at 546 . See § 19.01[2][a][i] supra for a more detailed analysis of the indispensable
party issue.

     (n69)Footnote 166. Veal v. Thomason, 138 Tex. 341, 159 S.W.2d 472 (1942) . From its citation in other cases, it is
clear that Veal has had a tremendous influence both in and out of Texas. For a complete discussion of Veal, see §
19.01[2][a][i] supra.

    (n70)Footnote 167. 159 S.W.2d at 476 .

    (n71)Footnote 168. Belt v. Texas Co., 175 S.W.2d 622 (Tex. Civ. App. 1943) , writ ref'd.

     (n72)Footnote 169. See § 19.01[2][a][i]-[ii] supra for a complete discussion of the indispensable party issue in the
context of community leases and pooling and unitization agreements. As suggested therein, the real issue should not be
the choice of theory but whether the non-joined parties are affected by the outcome. In Belt, the non-joined parties
would not be affected and therefore they would not be indispensable.

    (n73)Footnote 170. Brown v. Smith, 141 Tex. 425, 174 S.W.2d 43 (1943) .

  The Brown commitment to the cross-conveyancing doctrine has been reaffirmed in Browning Oil Co. v. Luecke, 38
S.W.3d 625, 634, 149 O.&G.R. 127 (Tex. App.--Austin 2000), rev. denied, , discussed in greater detail at § 8.05 above ;
MCZ, Inc. v. Triolo, 708 S.W.2d 49, 52-53, 91 O.&G.R. 389 (Tex. App.--Houston [1st Dist.] 1986, writ ref'd n.r.e.) .

    (n74)Footnote 171. For a discussion of the problems relating to the issue of pooling non-executive interests, see §
7.05 supra.
                                                                                                                         Page 23
                             2-19 The Law of Pooling and Unitization, 3rd Edition § 19.02



     (n75)Footnote 172. 174 S.W.2d at 46 . It is interesting to note that the Brown decision cited Lusk v. Green, 1926
OK 169, 114 Okla. 113, 245 P. 636 , the early Oklahoma decision to support its conclusion that a cross-conveyance
occurs merely upon the execution of a community lease. As seen earlier in § 19.02[1][b] supra , Oklahoma has ignored
the Lusk holding and adopted the contract theory as being applicable to the community lease or pooling and unitization
agreement in the absence of language in the agreement to the contrary.

    (n76)Footnote 173. The court reaffirmed its commitment to the cross-conveyance theory when it said:

            Had Mrs. Lee [the non-executive] ... joined in the execution of the oil and gas lease, she would have
       become a party to the pooling agreement contained in the lease and thereby, in effect, she would have
       conveyed to the owner of the 42.75 acres a part of her interest in the royalty in the 20 acres and would
       have become the owner of an undivided interest in the royalty in the 42.75 acres. Since Mrs. Lee did not
       join in the lease, the execution and delivery of it by [the executives] ... would neither divest her of any
       part of her royalty interest in the 20-acre tract nor vest in her any interest in the royalty in the 42.75-acre
       tract.


  174 S.W.2d at 46 .

     (n77)Footnote 174. Miles v. Amerada Petroleum Corp., 241 S.W.2d 822 (Tex. Civ. App.--El Paso 1950, writ ref'd
n.r.e.) .

     (n78)Footnote 175. See also Rogers Nat'l Bank v. Pewitt, 231 S.W.2d 487 (Tex. Civ. App.--Texarkana 1950, writ
ref'd) .

     (n79)Footnote 175.1. In MCEN 1996 Pshp. v. Glassell, 42 S.W.3d 262, 148 O.&G.R. 84 (Tex. App.--Corpus
Christi 2001, rev. denied) , the court relied on Montgomery v. Rittersbacher, 11 Tex. Sup. Ct. J. 186, 424 S.W.2d 210, 27
O.&G.R. 774 (Tex. 1968) to conclude that the parties to a pooling agreement had cross-conveyed their respective
interests. The court later concluded that the terms of the agreement had waived the pooled parties' power to partition the
concurrently owned interest. See § 19.01[2][a][iii] above.

    (n80)Footnote 176. Renwar Oil Corp. v. Lancaster, 154 Tex. 311, 276 S.W.2d 774, 4 O.&G.R. 697 (1955) .

  See also Wagner & Brown, Ltd. v. Sheppard, 198 S.W.3d 369 (Tex. App.--Texarkana 2006) ; Kuklies v. Reinert, 256
S.W.2d 435, 2 O.&G.R. 794 (Tex. Civ. App.--Waco 1953, writ ref'd n.r.e.) .

    (n81)Footnote 177. 276 S.W.2d at 776 .

     (n82)Footnote 178. Minchen v. Fields, 330 S.W.2d 683, 12 O.&G.R. 111 (Tex. Civ. App. 1959) , aff'd in part, rev'd
in part, 162 Tex. 73, 4 Tex. Sup. Ct. J. 198, 345 S.W.2d 282, 14 O.&G.R. 266 (1961) .

    (n83)Footnote 179. Brown v. Smith, 141 Tex. 425, 174 S.W.2d 43 .

    (n84)Footnote 180. 330 S.W.2d at 687 .

    (n85)Footnote 181. See § 19.01[2] supra.

     (n86)Footnote 182. Texaco, Inc. v. Lettermann, 343 S.W.2d 726, 14 O.&G.R. 427 (Tex. Civ. App. 1961) , writ ref'd
n.r.e.

    (n87)Footnote 183. The court said:

            However, our view is that if the 1957 and 1959 Units [the second units] were to be declared null and
                                                                                                                    Page 24
                             2-19 The Law of Pooling and Unitization, 3rd Edition § 19.02



       void as to the appellees' interest as they do seek in count Nos. 1 and 3, this would have the effect of
       necessarily freeing appellees' land from these unitized units. In spite of appellees' argument to the
       contrary, we can not comprehend how, in such a situation, the other royalty owners' interest could not be
       affected. It seems clear that the rule laid down as to necessary parties in Veal ... would control in the case
       before us. Therefore if the 1957 and 1959 Units were to be declared null and void as to appellees'
       interest, which we do not so hold, the royalty owners under the other leases in the two unitized units
       would have such a royalty interest in the appellees' lease to make them necessary and indispensable
       parties.


   343 S.W.2d at 733-734 . For other Texas cases applying the cross-conveyance theory, see Leach v. Brown, 251
S.W.2d 553, 1 O.&G.R. 1806 (Tex. Civ. App.--San Antonio 1950, writ ref'd) , A federal case that followed Veal was
Whelan v. Placid Oil Co., 198 F.2d 39, 1 O.&G.R. 1453 (5th Cir. 1952) . In Matthews v. Landowners Oil Association,
204 S.W.2d 647 (Tex. Civ. App.--Amarillo 1947, writ ref'd n.r.e.) , the cross-conveyance doctrine was applied to a
landowners' royalty pool agreement. See § 7.05[4] supra for a discussion of landowners' royalty pools. In Phillips
Petroleum Co. v. Ham, 228 F.2d 217, 5 O.&G.R. 268 (5th Cir. 1955) , the Fifth Circuit in applying the law of Texas
found that the various interests in a communitization agreement are "homologated" into one lease, lending further
support to the cross-conveyance theory.

   (n88)Footnote 183.1. Wagner & Brown, Ltd. v. Sheppard, 282 S.W.3d 419 (Tex. 2008) , rev'g 198 S.W.3d 369 (Tx.
App.--Texarkana 2006) .

     (n89)Footnote 184. Kelln v. Brownlee, 517 S.W.2d 568, 50 O.&G.R. 548 (Tex. Civ. App.--Amarillo 1974, writ
ref'd n.r.e) ,

    (n90)Footnote 185. Sohio Petroleum Co. v. Jurek, 248 S.W.2d 294, 1 O.&G.R. 977 (Tex. Civ. App.--Ft. Worth
1952, no writ) .

     (n91)Footnote 186. The court's analysis, however, did not either distinguish Veal nor independently determine that
the non-joined parties' interest were not indispensable. The court merely concluded:

            We are of the opinion that the point is not well taken. Unitization is a conservation measure to
       permit economical and orderly development. The cases cited by appellants in support of their theory
       [cross conveyance] are: [ Veal, Belt & French v. George, 159 S.W.2d 566 (Tex. Civ. App. 1942) , writ
       ref'd. ] ... .

            We are of the opinion that these cases are not in point and that the other land owners in this unit
       have acquired no such interest in Lot 3-B as to constitute them joint owners of the mineral interests
       thereunder. 248 S.W.2d at 298 .


    (n92)Footnote 187. See also Standard Oil Co. of Texas v. Marshall, 265 F.2d 46, 11 O.&G.R. 379 (5th Cir. 1959) ;
Petroleum Producers Co. v. Reed, 135 Tex. 386, 144 S.W.2d 540 (Tex. Comm. App.) opinion adopted by the Texas
Supreme Court (1940); Gehrke v. State, 315 S.W.2d 684, 9 O.&G.R. 264 (Tex. Civ. App. San Antonio 1958; no writ) ;
Fussell v. Rinque, 269 S.W.2d 442 (Tex. Civ. App. 1954, writ ref'd n.r.e.) .

     (n93)Footnote 187.1. The Jurek rationale was used by the 5th Circuit in Howell v. Union Producing Co., 392 F.2d
95, 28 O.&G.R. 238 (5th Cir. 1968) , to suggest that the cross-conveyance theory had to be tempered with doses of
contractual analysis when it came to the effects or consequences of pooling. Although not vital to the decision, the court
did suggest that the contract theory has some support in Texas, citing the Jurek decision. 392 F.2d at 103 [n.13 ].

    (n94)Footnote 188. Atlantic Richfield Co. v. Exxon Corp., 663 S.W.2d 858, 83 O.&G.R. 598 (Tex. Civ.
                                                                                                                          Page 25
                             2-19 The Law of Pooling and Unitization, 3rd Edition § 19.02



App.--Houston [1st] Dist. 3 1983) , rev'd on other grounds, 28 Tex. Sup. Ct. J. 68, 678 S.W.2d 944, 83 O.&G.R. 623
(Tex. 1984) .

    (n95)Footnote 188.1. See Rankin v. Naftalis, 21 Tex. Sup. Ct. J. 9, 557 S.W.2d 940, 946, 59 O.&G.R. 82 (Tex.
1977) ; Cass v. Stephens, 156 S.W.3d 38, 61, 160 O.&G.R. 27 (Tex. App.--El Paso 2004) ; Donnan v. Atlantic Richfield,
732 S.W.2d 715, 717, 104 O.&G.R. 128 (Tex. App.--Corpus Christi 1987, writ denied) ; Hamilton v. Texas Oil & Gas
Corp., 648 S.W.2d 316, 321, 76 O.&G.R. 300 (Tex. App.--El Paso 1982, writ ref'd n.r.e.) .

     (n96)Footnote 189. Puckett v. First City Nat'l Bank, 702 S.W.2d 232, 90 O.&G.R. 144 (Tex. App. Eastland 1985,
writ ref'd n.r.e.) .

    (n97)Footnote 190. The court's statement was:

            the Pucketts argue that the pooling of their acreage resulted in a cross conveyance between all
       royalty owners under Veal v. Thomason, ... and, therefore, each royalty owner should be paid royalties
       based on the weighted average method. We disagree. The court in Veal was concerned with necessary
       parties. The court did not address the question of how to calculate royalties in a split stream sale of
       production from a pooled unit. Moreover, the Pucketts' lease specifically states that the entire acreage
       pooled in a unit shall be treated for all purposes, "except the payment of royalties on production from the
       pooled unit," as if it was included in the lease. The language of the lease shows an express intent not to
       effect a cross conveyance as to payments of royalty.


  702 S.W.2d at 237

    (n98)Footnote 190.1. Parker v. HNG Oil Co., 732 S.W.2d 754, 97 O.&G.R. 429 (Tex. App. 1987) .

    (n99)Footnote 191. Martel v. A. Veeder Co., 6 So. 2d 335, 199 La. 423 (1942) .

    (n100)Footnote 192. See L. Hoffman, Voluntary Pooling and Unitization 159 (1954).

    (n101)Footnote 193. Coyle v. North American Oil Consol., 9 So. 2d 473, 201 LA. 99 (1942) .

    (n102)Footnote 194. The court stated:

            we could not render judgment canceling the leases, for the reason that all of the parties who are at
       present interested in them are not before the court. It is alleged ... [that plaintiff's land] has been unitized
       with the 40 acres west of and adjacent to it by a pooling agreement entered into by the owners of mineral
       interests and royalties in these two 40's.


  9 So. 2d at 477 .

    (n103)Footnote 195. Vizier v. Howard, 165 So. 2d 655 (La. App. 1964) .

    (n104)Footnote 196. Melancon v. Texas Co., 89 So. 2d 135, 230 La. 593, 6 O.&G.R. 623 (1956) .

    (n105)Footnote 197. 89 So. 2d at 146-147 .

    (n106)Footnote 198. Mallett v. Union Oil & Gas Corp. of Louisiana, 94 So. 2d 16, 232 La. 157, 7 O.&G.R. 434
(1957) .

    (n107)Footnote 199. See Chapter 8 supra for a complete discussion of leasehold pooling clauses.
                                                                                                                      Page 26
                             2-19 The Law of Pooling and Unitization, 3rd Edition § 19.02



    (n108)Footnote 200. Toomey v. State Bd. of Land Comm'rs, 106 Mont. 547, 81 P.2d 407 (1938) .

    (n109)Footnote 201. 81 P.2d at 415 . L. Hoffman, Voluntary Pooling and Unitization 159 [n.32] (1954).

    (n110)Footnote 202. Nadeau v. Texas Co., 104 Mont. 558, 69 P.2d 586 (1937) .

    (n111)Footnote 203. The court said:

             it is contended that the action should have been abated until all of the persons who had signed the
       unit and pooling agreement ... were brought in as necessary parties ... . The controversy here was whether
       the lease of the defendant company was valid as against the plaintiff. No attempt was made to quiet the
       title of the plaintiff as against the whole world, or any person other than defendant ... . Hence, whatever
       rights may have been created by these negotiations and transactions ... could in no wise affect the rights
       of the plaintiff and, therefore, they are not necessary parties ... .


   69 P.2d at 592-593 . The court's language would suggest that the removal of acreage from a pooling or unitization
agreement has no impact on the remaining parties. That would not be the case regardless of whether the agreements
were treated as creating contractual rights or conveying property rights. The entire pooling or unitization agreement
might be rendered economically useless, and, should there be existing production, it is clear that the apportionment
fractions would be different if the leasehold acreage was involved. If the producing well was located on the withdrawn
acreage, the impact on the remaining owners would be devastating.

    (n112)Footnote 204. Stumpf v. Fidelity Gas Co., 294 F.2d 886, 16 O.&G.R. 139 (9th Cir. 1961) .

    (n113)Footnote 205. See n.203 supra and Nadeau v. Texas Co., 104 Mont. 558, 69 P.2d 586 (1937) .

    (n114)Footnote 206. 294 F.2d at 897-898 .

   (n115)Footnote 207. See generally 3 P. Martin & B. Kramer, Williams & Meyers, Oil and Gas Law § 604.1
(Matthew Bender).

     (n116)Footnote 208. 4 P. Martin & B. Kramer, Williams & Meyers, Oil and Gas Law § 682.2, at 354.2-355
(Matthew Bender). There is a later Montana case that does apply the notice and demand clause to the payment of delay
rentals, but it may have been an "or" lease rather than an automatically terminating "unless" lease. Bingham v.
Stevenson, 148 Mont. 209, 420 P.2d 839, 26 O.&G.R. 175 (1966) .

    (n117)Footnote 209. 294 F.2d at 895 . See § 19.01[3] supra. That section of the agreement also provided:

            That nothing herein contained, implied, or contemplated in relation hereto shall create or be deemed
       to create a partnership between the parties hereto, but they shall each hold their respective right, titles,
       and interests in their respective tracts according to existing leases, permits, operating agreements, and
       gas purchase or sales contracts and any extensions, renewals, substitutions, or modifications thereof,
       unchanged, except as to the right of the Operator to operate Unit No. 7.


  Id. at 894-895 .

    (n118)Footnote 210. Hudson v. Newell, 172 F.2d 848 (5th Cir.) , on reh'g, 174 F.2d 546 (5th Cir. 1949) . See §
19.01[2][a][ii] supra.

    (n119)Footnote 211. For a discussion of Hudson, see § 19.01[2][a][ii] supra.
                                                                                                   Page 27
                       2-19 The Law of Pooling and Unitization, 3rd Edition § 19.02



(n120)Footnote 212. Coolbaugh v. Lehigh & Wilkes-Barre Coal Co., 218 Pa. 320, 67 A. 615 (1907) .

(n121)Footnote 213. 67 A. at 615 .
                              3-6 Williams & Meyers, Oil and Gas Law § 660
Williams & Meyers, Oil and Gas Law > CHAPTER 6 The Oil and Gas Lease—Express Provisions >
Topic 6. The Royalty Clause and Related Provisions

§ 660 Classification of Royalty Interest as “In Gross” or as “Appurtenant”
Reference has been made elsewhere to a number of classifications applicable to royalty and other
nonoperating interests in production. Thus for certain purposes it has been necessary to classify such
interests as realty or as personalty,1 as corporeal or incorporeal,2 or as principal or in-come.3
Classification of shut-in royalty has been required for the purpose of ascertaining the person or persons
entitled to the receipt thereof under some circumstances.4

Yet another classification problem has given rise to some difficulty, viz., whether a royalty interest
created by a lease is in gross or is appurtenant to the lessor’s mineral interest. Specifically, where a
lessor conveys his interest in the premises (or in the minerals therein) without specific mention of the
royalty interest arising under a previously executed lease, does such royalty interest pass with the
conveyed interest?
Quite infrequently this matter may be resolved by an express lease provision to the effect that the
benefits of the lessor under the lease shall be appurtenant to the land of the lessor.5 In other instances
an express “subject-to” clause in the conveyance itself may make it clear that the conveyance is
intended to cover and include the grantor’s benefits under the lease. We have discussed elsewhere
certain of the construction problems arising from the employment of this clause.6
Current authority supports the position that a lessor’s lease benefits, including his royalty interest, are
appurtenant to his mineral interest and pass with a conveyance of such mineral interest even though
1
    See §§ 212–214, supra.
2
    See §§ 208–211, supra.
3
    See §§ 512.2, 514.1, supra.

This problem of classification has arisen in a number of states by reason of constitutional or statutory provisions allocating various types
of receipts from state-owned lands. See, e.g., State ex rel. Fatzer v. Board of Regents, 176 Kan. 179, 269 P.2d 425, 3 O.&G.R. 1280
(1954). The question here was whether bonus, rentals and royalties were “moneys derived from the sale of lands,” as that term was used
in a statute allocating such moneys to a particular purpose. It was held that royalties were such moneys, but that bonus and rentals were
not.
4
    Morriss v. First Nat’l Bank, 249 S.W.2d 269, 1 O.&G.R. 1371 (Tex. Civ. App. 1952, error ref’d n.r.e.) (controversy over whether
persons entitled to delay rentals or persons entitled to royalty were entitled to receipt of shut-in royalty; held, owners of royalty were
entitled to receive such payment).
5
    E.g., the following provision of a California lease form:

       “The benefits of each Lessor under this lease, including rent and royalty accruing hereunder from the entire demised
       premises are appurtenant to the land of such Lessor included in this lease, and any transferee or subsequent owner of the
       title to the land of any Lessor shall, as between the parties to this lease, their successors or assigns, be entitled to receive
       such appurtenant benefits under this lease except to the extent that such benefits be expressly reserved or shall have been
       theretofore transferred in whole or in part.”



6
    See §§ 340–340.4, supra.

                                                             SUSAN BOVA
                                                                                                                                 Page 2 of 4
                                          3-6 Williams & Meyers, Oil and Gas Law § 660

neither the lease nor the deed contains such clauses.7 Earlier authority in Texas to the contrary8 has
been overruled.9 By appropriate language in a deed or other conveyance, of course, a royalty interest
may be severed from the mineral estate.10

                                                [Effect of pooling or unitization]
A somewhat more difficult problem concerns the effect of pooling or unitization. Where a lessor is
bound by pooling or unitization, he gives up a portion of his royalty interest in his own premises
(Blackacre) and receives a portion of the royalty in the other premises (e.g., Whitacre) included in the
unit. Or stated somewhat differently, he becomes entitled to an apportioned share of the royalty on
7
     See, e.g., the following:

Hardcastle v. McCluskey, 139 Kan. 757, 33 P.2d 127 (1934) (holding that mortgagor’s royalty interest arising under a lease passes with
a mortgage of the leased premises even though the mortgage contains no reference to the lease or royalty);

Williams’ Adm’r v. Union Bank & Trust Co., 283 Ky. 644, 143 S.W.2d 297, 131 A. L. R. 1364 (1940) (same);

Merrill Engineering Co. v. Capital National Bank, 192 Miss. 378, 5 So. 2d 666 (1942) (same);
White v. McVey, 1934 OK 234, 168 Okla. 19, 31 P.2d 850, 94 A. L. R. 656 (1934).

See also Duquesne Natural Gas Co. v. Fefolt, 203 Pa. Super. 102, 198 A. 2d 608, 20 O.&G.R. 595 (1964) (treating the lessor’s reserved
royalty interest as appurtenant to his mineral or surface estate).
Oil payments and overriding royalties should also be viewed as appurtenant rather than in gross. See Minchen v. Fields, 162 Tex. 73,
345 S.W.2d 282, 14 O.&G.R. 266 (1961) (oil payment).
8
    Caruthers v. Leonard, 254 S.W. 779 (Tex. Com. App. 1923) (holding that a mineral grantee acquired his grantor-lessor’s possibility
of reverter but no interest in delay rentals).
9
     Harris v. Currie, 142 Tex. 93, 176 S.W.2d 302 (1943).
10
     See § 301 et seq., supra.

A related problem was treated in Avery v. Moore, 150 W. Va. 136, 144 S. E. 2d 434, 23 O.&G.R. 1012 (1965). In the partition of a larger
tract, plaintiff’s predecessor in interest (the owner of a 1/5 undivided interest) received the 50-acre parcel involved in this action. The
partition deed reserved coal and mining rights and provided that on the expiration of the existing oil and gas lease, the owner of each
partitioned parcel would have leasing rights but the owners of the other partitioned parcels would share in the royalty on the basis of
their interests prior to the partition. Plaintiff conveyed the 50-acre parcel to defendant by a deed reciting that it was subject to a provision
in the partition deed with reference to leasing and development. In this declaratory judgment action, it was held that the deed from
plaintiff to defendant conveyed plaintiff’s entire interest in the oil and gas within and under the 50-acre parcel, subject to the rights of
other claimants under the partition deed to share in the royalty, but that the deed did not convey to defendant any royalty interest in the
other four partitioned parcels. In other words, the court held that plaintiff’s interest in the royalty in the other four partitioned parcels
was not appurtenant to his interest in the parcel he received by the voluntary partition.
In McCall v. McCall, 24 S.W.3d 508, 145 O.&G.R. 401 (Tex. App.—Houston [1st Dist.] 2000, writ denied), the court was faced with
a similar problem as in Avery. After a partition deed, Ms. McCall was given a royalty interest in the mineral estates that had been given
to third parties. She later conveyed to some of her children and a family-owned corporation the mineral estates she received from the
partition along with the “appurtenances.” One of the children asserted that the deeds conveyed the royalty interests burdening the third
parties’ mineral estates. The court disagreed, noting that these royalty interests were not “appurtenant” to the conveyed mineral estates.
To be appurtenant, a thing must be incidental to or indispensable to the conveyed interest. The court thus distinguished Day & Co. v.
Texland Petroleum, Inc., 786 S.W.2d 667, 105 O.&G.R. 590 (Tex. 1990), that had found an executive power appurtenant to a conveyed
mineral estate. Because the royalty interests were not appurtenant, they did not pass in the general warranty deeds and were retained by
Ms. McCall.

The rationale of McCall was not followed in Anadarko Petroleum Corp. v. BNW Property Co., 393 S.W.3d 846 (Tex. App.—El Paso
2012, rev. denied), and Chesapeake Exploration, LLC v. BNW Property Co., 393 S.W.3d 852 (Tex. App.—El Paso 2012, rev. denied),
where the court concluded that a “naked” executive right appurtenant to a third party-owned non-executive mineral interest was conveyed
when a fractional mineral interest containing all of the attributes of a mineral interest were conveyed.

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                                         3-6 Williams & Meyers, Oil and Gas Law § 660

production from the unit whether such production is from a well or wells located on the premises he
leased or on some other portion of the unit. The question may arise in this instance whether his royalty
interest in such other premises included within the unit (e.g., Whiteacre) is appurtenant to his interest
in Blackacre so that it will pass by a conveyance of his interest in Blackacre. California authority is
to the effect that the royalty interest in Whiteacre under these circumstances is in gross and will not
pass by a conveyance of Blackacre unless specially mentioned therein.11 The preferable view is to the
contrary, viz., that the royalty interest in production from Whiteacre is appurtenant to the lessor’s
interest in Blackacre and passes with a conveyance of Blackacre unless specially reserved from such
conveyance.12 There is uncertainty in some states as to the applica-ble law on this matter. It is
advisable, therefore, to include in any conveyance affecting premises included in a pooling, unitization
or joint operating agreement express provision concerning the grantor’s interest in production from
other premises included in such agreement. The following clause has been suggested for this purpose:

     “It is agreed and made a part of this grant that if the interest hereby conveyed, in whole or in part,
     is now or hereafter, either or both, included in a valid pooling agreement or agreements, either or
     both, which includes all or any part of the above described land covered by this deed, then grantee,
     his heirs and assigns, shall be entitled to all payments and other rights accruing by reason of any
     such agreement or agreements as to the interest hereby conveyed; that is, this grant includes the
     right to participate in and under any such agreement insofar as it covers or may include the interest

11
    See Tanner v. Title Insurance & Trust Co., 20 Cal. 2d 814, 129 P.2d 383 (1942). A community lease was executed by several
landowners. The court declared that:

      “The royalty interest thus transferred by each landowner to his colessors is an incorporeal hereditament in gross … and the
      grantee’s interest in the oil produced upon the property of one of the colessors is entirely separate and distinct from the
      royalty interest retained by him in oil which might be produced from his own premises. … Although the cases clearly
      establish that the percentage of the royalty reserved by a lessor in oil produced from his own land passes to a grantee of
      the fee as an incident of the conveyance …, except as such rights are reserved by the deed, the incorporeal hereditament
      owned by the grantor in the oil produced from the land of the colessors, existing in gross, obviously does not follow the
      conveyance of the lessor’s land, but can only be conveyed by a specific transfer of that interest.” 129 P.2d at 386–387.
Another California case has held that a contract to sell land does not include the vendor’s royalty interest under a community oil and
gas lease covering such land. Agajanian v. Cuccio, 141 Cal. App. 2d 828, 297 P.2d 755, 6 O.&G.R. 1 (1956).

In Sutter Youth Organization, Inc. v. Borsen, 214 Cal. App. 2d 676, 29 Cal Rptr. 628, 18 O.&G.R. 273 (1963), a deed was reformed to
include the rights of the grantor in a community oil and gas lease that covered the land in question.

See also Howard v. General Petroleum Corp., 108 Cal. App. 2d 25, 238 P.2d 145, 1 O.&G.R. 10 (1951), (Blackacre and Whiteacre were
included in community lease; subsequent conveyance of Blackacre did not include the owner’s interest in royalty on production from
Whiteacre), on later appeal,, 114 Cal. App. 2d 91, 249 P.2d 585, 1 O.&G.R. 1579 (1952) (holding that the lease had been terminated
and therewith any right to royalty).

But cf. LeBard v. Richfield Oil Corp., 56 Cal. 2d 532, 15 Cal. Rptr. 617, 364 P.2d 449, 15 O.&G.R. 1 (1961) (California statute
prohibiting drilling by owner of small tract entitled the owner of such tract to share in proceeds of oil and gas production from adjoining
lands; held that such interest was appurtenant and passed with a conveyance of the land without express mention therein).
12
    See, e.g., Merrill Engineering Co. v. Capital National Bank, 192 Miss. 378, 5 So. 2d 666 (1942) (holding that unitization agreement
gave each lessor a royalty interest in other premises included in the unit and that such royalty interest was appurtenant to the lessor’s
mineral interest and passed with a conveyance thereof).

Huie, “Apportionment of Oil and Gas Royalties,” 78 Harv. L. Rev. 1113, 1137 n.65 (1965), also urged that the preferable view is that
the royalty interest in unit production is appurtenant.

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                                     3-6 Williams & Meyers, Oil and Gas Law § 660

     hereby conveyed to exactly the same extent as grantor would have such right as to such interest in
     the absence of this grant.”13

The pooling clause of the lease may itself include a provision to the effect that the payments made shall
ordinarily be appurtenant to the premises.14
Williams & Meyers, Oil and Gas Law
Copyright 2014, Matthew Bender & Company, Inc., a member of the LexisNexis Group.




13
     Discussion Notes, 1 O.&G.R. 17 (1952).
14
     See § 669.21, infra.

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                                6-9 Williams & Meyers, Oil and Gas Law § 929
Williams & Meyers, Oil and Gas Law > CHAPTER 9 Pooling and Unitization > Topic 5. Voluntary
Pooling and Unitization

§ 929 Pooling or Unitization Agreement as Cross-Conveyance or Contract: Introduction

Stated in simplest terms, a pooling or unitization agreement authorizes the exploration and/or
development of separate parcels of land as if there were a single owner thereof and provides for the
allocation of the expenses and proceeds of such operations among the owners of interests in the several
parcels. Thus, if the agreement affects Blackacre and Whiteacre, the owners of each tract will share in
production on a basis specified in the agreement, whether such production is from Blackacre or
Whiteacre.

A number of cases and writers1 have raised the question whether a pooling or unitization agreement
is a cross-conveyance of interests in land or is a mere contract; that is, does the agreement have the
effect of conveying to the owner of Blackacre some interest in Whiteacre and of conveying to the
owner of Whiteacre some interest in Blackacre, or does the agreement have the effect merely of giving
each owner a contract right to share in the production from premises other than those he has
contributed to the agreement. Upon the answer to this question, a number of important consequences
are said to depend. In the subsections which follow we indicate the consequences said to flow from
the answer given this question and the effect of lease provisions expressly negating any intent to effect
a cross-conveyance. Thereafter, we examine the case authority on the matter in a number of states.

     § 929.1 Pooling or unitization agreement as cross-conveyance or contract: Consequences
A number of important legal consequences have been said to turn upon the answer to the question
whether a pooling or unitization agreement effects a cross-conveyance of interests in the affected
premises among the parties to the agreement or merely creates contract rights in such parties. The more
important of these consequences sometimes viewed as turning upon this question relate to the
following matters:

                                              [Indispensable parties to suit]

(1) Indispensable parties to title or other suits involving premises included in a pooling or unitization
agreement.

The problem of indispensable parties to litigation affecting land included in a pooling and unitization
agreement has been discussed herein.1 For many years in Texas, the case of Veal v. Thomason,2
established the proposition that a pooling or unitization agreement effects a cross-conveyance and that,
1
    See, e.g., the following:

Hoffman, Voluntary Pooling and Unitization 144–189 (1954) (strongly opposing the cross-conveyance theory);

French and Elliott, “Legal Effect of Voluntary Pooling and Unitization: Theories and Party Practice,” 35 Tex. L. Rev. 401 (1957);

Masterson, “The Nature of Unitized Title,” 10 Sw. L.J. 146 (1956).
1
    See §§ 928–928.5, supra.
2
    Veal v. Thomason, 138 Tex. 341, 159 S.W.2d 472 (1942).

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therefore, all persons having an interest in the pooled or unitized premises are necessary parties to an
action involving one such parcel included in the agreement. As was noted earlier, the Veal rule can have
a debilitating effect on the substantive rights of the parties. A change in the Texas Rules of Civil
Procedure, however, has cast a doubt on the continuing validity of that part of the Veal rule that finds
such parties indispensable. While not challenging the cross-conveyance doctrine, a recent Texas court
of appeals decision refused to apply the necessary and indispensable party part of the Veal rule to a suit
brought by a royalty owner seeking to invalidate a pooling of its interest without requiring the joinder
of all other pooled royalty owners.2.1

                                                  [Consent to agreement]

(2) Necessity of consent to a pooling or unitization agreement.

The theory that a pooling or unitization agreement effects a cross-conveyance of interests among the
parties thereto was viewed in Brown v. Smith3 as requiring the joinder of royalty owners in a pooling
or unitization agreement if such agreement was to be fully effective. The plaintiffs in this action sought
to recover the bonus agreed to be paid for the execution of a unitized lease but plaintiffs had failed to
obtain the joinder of the owner of a royalty interest in a 20-acre portion of the 62.75-acre tract covered
by the lease. In holding that plaintiffs were not entitled to recover since the tendered lease did not
measure up to the unitized lease contracted to be given, the court noted that without joinder of the
royalty owner, the lease would not divest the owner of her interest in the 20-acre tract nor vest in her
any interest in the royalty in the 42.75 acres; as a result, the lessee’s freedom of operation on the
62.75-acre tract would be materially affected. We discuss elsewhere herein (§§ 925–925.6 supra) the
state of authority regarding parties whose consent to a voluntary pooling or unitization agreement is
necessary. It suffices here to observe that the cross-conveyance theory is said to make necessary the
consent of all persons having operating or nonoperating interests in premises affected by a pooling or
unitization agreement.4

                                               [Conveyancing requirements]

(3) Application of the statute of frauds or conveyancing statutes to voluntary pooling or unitization
agreement.

Obviously if the cross-conveyance theory is followed, then a voluntary pooling or unitization
agreement involves the conveyance of interests in land and the requirements of the statute of frauds




2.1
       Sabre Oil & Gas Corp. v. Gibson, 72 S.W.3d 812, 815 (Tex. App.—Eastland 2002).
The Sabre Oil rationale was extended to cover Federal Rule of Civil Procedure 19 joinder issues in HS Resources, Inc. v. Wingate, 327
F.3d 432 (5th Cir. 2003).
3
      Brown v. Smith, 141 Tex. 425, 174 S.W.2d 43 (1943).
4
      See Minchen v. Fields, 162 Tex. 73, 345 S.W.2d 282, 14 O.&G.R. 266 (1961).

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and of conveyancing statutes must be satisfied.5 In states rejecting the cross-conveyance theory, it may
be held that pooling and unitization agreements are not within the statute of frauds.6

                                                  [Rule against Perpetuities]

(4) Application of the Rule against Perpetuities to the pooling clause of a lease.

In Phillips Petroleum Co. v. Peterson,7 the court apparently accepted the view that a pooling clause of
a lease might be invalid under the Rule against Perpetuities if the cross-conveyance view were adopted
but that such clause was valid under the contract view of the effect of a pooling or unitization
agreement. This matter will be discussed in a later section.8

                                                        [Venue questions]

(5) Application of venue statutes to actions involving the construction or validity of a pooling or
unitization agreement.

Adoption of the cross-conveyance or of the contract theory as to the effect of a pooling or unitization
agreement may affect the application of a venue statute to various controversies. Thus, in Texas, a
venue statute provided that “suits for the recovery of lands or damages thereto, or to remove
encumbrances upon the title to land, or to quiet the title to land, or to prevent or stay waste on lands,
must be brought in the county in which the land, or a part thereof, may lie.”9 In Renwar Oil Corp. v.
Lancaster10 it was held that this statute was applicable to a declaratory judgment action in which an
adjudication was sought concerning the effectiveness of a unitization agreement. The court noted that:

5
   See, e.g., Kuklies v. Reinert, 256 S.W.2d 435, 2 O.&G.R. 794 (Tex. Civ. App.—Waco 1953, error ref’d n.r.e.) (dealing with the
question of the sufficiency of the description of the affected premises in the unit agreement);

Paddon Hughes Dev. Co. v. Pancontinental Oil Ltd., [1992] 5 W.W.R. 106 at 123 (Alta. Q.B. 1992) (the court implicitly adopted the
contract, rather than the cross-conveyance, theory of pooling by ruling that the pooling agreement there in question “was not a deed for
which physical delivery of the document is required”).
6
     See, e.g., the following:
Griswold v. Public Service Co., 1951 OK 342, 205 Okla. 412, 238 P.2d 322, 1 O.&G.R. 108 (holding a lessor bound by an oral pooling
agreement; the opinion contains no mention of a statute of frauds problem);

Brazell v. Brown, 1934 OK 520, 169 Okla. 623, 38 P.2d 17 (oral agreement by lessors of separate tracts to share in royalties paid by
lessee).
7
   Phillips Petroleum Co. v. Peterson, 218 F.2d 926, 4 O.&G.R. 746 (10th Cir. 1954), cert. denied, 349 U.S. 947, 75 S. Ct. 871, 99 L.
Ed. 1273, 4 O.&G.R. 1178 (1955).
8
     See § 936, infra.
9
     Vernon’s Annotated Texas Civil Statutes, Article 1995, subdivision 14.
10
     Renwar Oil Corp. v. Lancaster, 154 Tex. 311, 276 S.W.2d 774, 4 O.&G.R. 697 (1955).
Renwar was distinguished in In re Riata Energy, Inc., 2001 Tex. App. LEXIS 7806 (Tex. App.—Houston [1st Dist.] Nov. 21, 2001)
(unpublished opinion), where the operator under a joint operating agreement unsuccessfully argued that Tex. Civ. Prac. & Rem. Code
§ 15.011 (venue provision for actions affecting real property) required a suit challenging various operator actions and seeking removal
of the operator to be brought in the county where the well was located. The court interpreted the non-operator’s pleadings as seeking
monetary damages for breach of the JOA, fraud remedies, and conversion of the production based on a wrongful allocation under the
JOA.

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                                        6-9 Williams & Meyers, Oil and Gas Law § 929

     “[P]laintiffs seek an adjudication that certain unitization agreements are void and ineffective as to
     them. Since these agreements are essentially a conveyance of an interest in realty, Veal v.
     Thomason, 138 Tex. 341, 159 S.W.2d 472, this constitutes an effort to remove cloud from title, even
     though alleged as an effort to construe a contract.”11

                                        [Conveyance not mentioning agreement]

(6) Effect of conveyance by lessor which does not mention the pooling or unitization agreement.
A possible impact of the cross-conveyance theory upon the construction of certain instruments has
been suggested by one able writer, Leo J. Hoffman. He raises the possibility that should the owner of
a separate tract included in a unit conveyance convey such tract without mention of his rights in the
unit agreement, such conveyance would not affect his interest in such other premises.12 In other words,
if Blackacre is included in a pooling or unitization agreement affecting Blackacre and Whiteacre, a
subsequent conveyance of Blackacre which made no reference to the agreement would not convey the
grantor’s interest in royalty on pooled production from Whiteacre.
Although mention of this suggestion must be made for purpose of completeness of discussion of
possible impact of the cross-conveyance theory in various contexts, we must also emphasize our
disagreement with the suggestion itself. In our view the question is one of intent of the parties, not
whether pooling or unitization effects cross-conveyances. The court should give effect to a properly
manifested intent of the parties as to whether the grantor’s interest in unit production from Whiteacre
is conveyed with Blackacre. But where the parties have failed adequately to manifest their intent in this
regard, the question becomes one of judicially ascertained intent and, in our opinion, the courts should
usually take the position that the grantor’s interest in unit production is included in a conveyance of
the premises he has committed to the unit. In other words, the interest of a party in unit production
should ordinarily be viewed as appurtenant to his interest in premises committed to the unit rather than
“in gross.”13 Decisions on this matter do not appear to have been affected by the adoption or rejection
of the cross-conveyance theory; thus, both in California and in Mississippi the cross-conveyance
theory appears to have been adopted, but the two states differ in answering the question whether a
party’s interest in unit production is appurtenant or in gross.14

                                   [Operation of recordation statutes and bona fide

                                                       purchaser doctrine]

(7) Effect of pooling or unitization agreement upon prior unrecorded interests in affected lands.

If a pooling or unitization agreement is viewed as a conveyance it may be contended that execution
of such an agreement brings into play doctrines relating to the operation of recordation statutes and the
11
     Renwar Oil Corp. v. Lancaster, 4 O.&G.R. at 700.
12
     Hoffman, Voluntary Pooling and Unitization 169–172 (1954).
13
     See § 660 at notes 11–14, supra.
14
    Application of the cross-conveyance theory in California and in Mississippi is discussed in §§ 930.1, 930.4, infra. The cases dealing
with the effect of a conveyance which fails to mention the pooling or unitization agreement are discussed in § 660 at note 11 and 12,
supra.

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bona fide purchaser doctrine. Thus, if subsequent to the creation of unrecorded legal or equitable
interests in Blackacre, the record title owner commits Blackacre to a pooling or unitization agreement,
will such unrecorded legal or equitable interests be defeated insofar as inconsistent with the interests
of other parties claiming under the agreement? In Sohio Petroleum Co. v. Jurek,15 it was urged that by
virtue of the pooling of Blackacre, the lessors of other pooled tracts became the owners of undivided
interests in Blackacre, thereby cutting off the equitable interests of the plaintiffs therein under the bona
fide purchaser doctrine. The court in this case refused to apply the cross-conveyance theory. This
holding is contrary to the weight of Texas authority,16 but in the instant case it enabled the court to
avoid addressing itself to this issue. As indicated by a student note, the logic of the cross-conveyance
theory requires application of the bona fide purchaser doctrine and the recording statutes to pooling
agreement.17

                                                        [Tax consequences]

(8) Tax treatment of participant in pooling or unitization agreement.
The characterization of a unit agreement is also of significance for federal tax purposes. One theory
is that the unitization agreement effects a series of nontaxable exchanges and another is that no
exchange of depletable properties takes place upon unitization but that the parties merely agree
contractually to devote their depletable properties to common use and to share in the common product.
The problem is discussed in the papers noted below.18 It suffices here to observe that the conclusion
whether a particular state has adopted the cross-conveyance or the contract theory as to the effect of
a pooling or unitization agreement should not be determinative of federal tax consequences.19

In Wyoming State Tax Commission v. BHP Petroleum Company,19.1 the court held that delinquent ad
valorem property taxes on mineral production could not be assessed and collected from the unit
operator of a federal exploratory unit, as opposed to the working interest owners. The court
distinguished an earlier case, BHP Petroleum Company v. Wyoming Tax Commission,19.2 which had
held that the unit operator could be assessed the delinquent severance tax on all production attributed
to working interest owners. It concluded that the ad valorem tax was levied on the owner of the mineral
15
       Sohio Petroleum Co. v. Jurek, 248 S.W.2d 294, 1 O.&G.R. 977 (Tex. Civ. App.—Ft. Worth 1952, writ ref’d n.r.e.).
16
       See § 930.8, infra.
17
       German, “Oil and Gas—Formation of Pooling Unit Does Not Defeat Outstanding Equitable Interests,” 31 Tex. L. Rev. 340 (1953).
18
       See the following papers discussing the tax consequences of treating unitization as an exchange or a contract:

Benjamin, “A Different View of the Nature of Unitization,” 9 Oil & Gas Tax Q. 212 (1960);
Chodorow, “Federal Tax Consequences of an Oil and Gas Unitization,” 37 Tex. L. Rev. 877 (1959);
Benjamin, “Recent Developments in Field of Taxation Affecting Oil and Gas Transactions,” 9 Sw. Legal Fdn. Oil & Gas Inst. 549 at 573
et seq. (1958).
19
       This is the conclusion of the court in Killam v. Comm’r, 39 T.C. 680, 18 O.&G.R. 406 (1963).
19.1
        Wyoming State Tax Commission v. BHP Petroleum Co., 856 P.2d 428, 125 O.&.G.R. 207 (Wyo. 1993) .

In Amoco Production Co. v. Board of County Commissioners of County of Sweetwater, 2002 WY 154, 55 P.3d 1246, 154 O.&G.R. 559,
the court held that the non-operator waived its rights to contest the assessment of its share of unitized real property when it failed to
appeal the notice of assessment sent to the unit operator for which the non-operator had actual or constructive notice.
19.2
        BHP Petroleum Co. v. Wyoming Tax Commission, 784 P.2d 621, 105 O.&.G.R. 661 (Wyo. 1989) .

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products produced, while the severance tax was levied on the person (i.e., the unit operator) extracting
the mineral products. The unit agreements were held to create an agency relationship rather than to
transfer an ownership interest. Thus, the unit operator was not an owner but, rather, was the extractor
of the share of production attributable to the working interest owners.

Unit operators also are responsible for dealing with the problems associated with multiple taxing
jurisdictions.19.3

Another tax problem relating to exemption from taxation of certain Indian lands in Oklahoma is
discussed hereinafter.20

                                  [Application of “two-grant” theory to conveyance]

(9) Application of the two-grant theory to a conveyance “subject-to” an existing lease.

In §§ 340–340.5, the effect of a “subject to” clause in a mineral conveyance is discussed at length. As
is there noted, some courts have viewed the clause in a mineral deed reciting that the conveyance is
“subject to” an existing lease but covers and includes a specified interest in lease benefits has the effect
of conveying an interest in existing lease benefits which may be different from the benefits which pass
under the habendum clause of the mineral deed.

A Texas case, Kelln v. Brownlee,21 applied the two-grants theory to a conveyance of minerals “subject
to” an existing lease which had been pooled with other leases in Section 59 to form a pooled unit for
the entire section. The grantor owned undivided interests in portions of the section but not in other
portions. The court applied the cross-conveyance theory and concluded that the grantee was entitled
to an apportioned share of royalty on unit production from any portion of Section 59, but on
termination of the pooling pursuant to the pooling clauses of the grantors’ lease, the grantee’s rights
would be measured by the habendum clause of the mineral deed as applied to the interests in the
section owned by the grantors.

         § 929.2 Pooling or unitization agreement as cross-conveyance or contract: Effect of express
           provision negating intent to make cross-conveyance

By reason of fear of certain consequences thought to follow from treatment of a pooling or unitization
agreement as a cross-conveyance rather than as a mere contract, many such agreements contain express
19.3
      In Shell Western E & P, Inc. v. Dolores County Board of Commissioners, 948 P.2d 1002 (Colo. 1997), the unit operator mistakenly
failed to attribute a portion of unit production to lands located within a certain county. Therefore, it did not make the required production
reports or the proper payments. The unit operator was found liable for the unpaid taxes and could not use the statute of limitations as
a defense, because it had an affirmative duty to report the production to the county tax officers. See also Amoco Production Co. v.
Wyoming State Board of Equalization, 7 P.3d 900 (Wyo. 2000) (challenge to the unit operator’s allocation of unit production between
two counties). On remand, the Board reaffirmed its earlier decision that Amoco, the unit operator, had misallocated production so that
it would be paying a lower tax rate in one of the two counties straddled by the unitized oil and gas reservoir. The Wyoming Supreme
Court affirmed the Board decision in BP America Production Co. v. Department of Revenue, 2006 WY 27, 130 P.3d 438.
20
   See the discussion in § 930.6, infra, of Sinclair Crude Oil Co. v. Oklahoma Tax Commission, 1958 OK 110, 326 P.2d 1051, 9
O.&G.R. 613.
21
       Kelln v. Brownlee, 517 S.W.2d 568, 50 O.&G.R. 548 (Tex. Civ. App. 1974, error ref’d n.r.e.).

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                                       6-9 Williams & Meyers, Oil and Gas Law § 929

clauses designed to negate or prevent cross-conveyances. Examples of such provisions are collected
elsewhere herein.1

The effect of such a provision in the agreement remains uncertain. There is some authority for the
contention that it will be given effect by the courts. In Phillips Petroleum Co. v. Peterson,2 for example,
in holding that the Rule against Perpetuities was inapplicable to a pooling clause in an oil and gas
lease, the court emphasized certain language in the pooling clause said to indicate that “the effect of
unitization was to be only with respect to allocation of production and the computation of royalties and
was not to effect cross-transfers of royalty interests.”3 It further noted that the unitization agreement
itself clearly provided that “[n]othing herein … shall be construed to transfer title to any land or to any
lease or operating agreement.”4 And a distinguished writer on the law of unitization has essayed the
following conclusions:

     “There can hardly be any objection in the law to such an express agreement that the pooling or
     unitization shall not constitute an exchange or transfer of real property interests. Presumably such
     a provision is valid and, therefore, effective for the purpose of nullifying any cross-conveyancing
     which could otherwise result.”5

The authors hereof are not so sanguine on the matter. Although parties to an agreement may “make
their own law” in many respects by contract, they may not do so for all purposes. If, for example,
application of the Rule against Perpetuities to a lease pooling clause or to a pooling or unitization
agreement or if the question of indispensable parties in a title or other suit involving unitized premises
turn upon whether the agreement effects a cross-conveyance or is a “mere” contract, it seems difficult
to believe that a characterization given by the parties to their agreement will be effective to determine
such important legal consequences.
Williams & Meyers, Oil and Gas Law
Copyright 2014, Matthew Bender & Company, Inc., a member of the LexisNexis Group.




1
    See § 921.6, supra.
2
   Phillips Petroleum Co. v. Peterson, 218 F.2d 926, 4 O.&G.R. 746 (10th Cir. 1954), cert. denied, 349 U.S. 947, 75 S. Ct. 871, 99 L.
Ed. 1273, 4 O.&G.R. 1178 (1955).
3
   4 O.&G.R. at 750. See also the discussion in § 928.2, supra, of Stumpf v. Fidelity Gas Co., 294 F.2d 886, 16 O.&G.R. 139 (9th Cir.
1961).
4
    Ibid.
5
    Hoffman, Voluntary Pooling and Unitization 168 (1954).
See also, to the same effect, Doggett, “Practical Legal Problems Encountered in the Formation, Operation and Dissolution of Fieldwide
Oil and Gas Units,” 16 Okla. L. Rev. 1 at 10 (1963).

                                                         SUSAN BOVA
TEXAS LAW OF OIL
AND GAS
SECOND EDITION
VOLUME 1
Ernest E. Smith
Rex G. Baker Centennial Chllir in Natural Resources lAw
University of Texas School of Law

Jacqueline Lang Weaver
A.A. White Professor of Law
University of Houston Law Center


2014
Filed Through:
RELEASE NO. 16, JUNE 2014




                     •       LexisNexis·
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                                                                                               (Rei 1 ~ 14 Pub.8~72)
2-61                         Types of Interests in Oil and Gas                               2.4[AJ

2.4     ROYALTY AND SIMILAR INTERESTS

   A.      In General
   The word "royalty" is a chameleon-hued term. It changes meaning with
the context in which it is used. As commonly understood, a royalty is a real
property interest with two distinguishing characteristics. It is nonpossess01y
and it is free of production and operating expenses. The owner of such an
interest has no right to explore, drill, or produce oil and gas; similarly, he
normally has no right to execute oil and gas leases. T he principal benefit
conferr-ed by royalty ownership is the right to a fraction of oil, gas, or
mineral production free of drilling, mining, and operating expenses. 287·1
   This common understanding of the term "royalty" is correct in a general
sense, but it is both underinclusive and overinclusive. It is underinclusive
because it does not fully encompass all contexts in which the word is used.
Hybrid interests can be created. The separation of all possessory rights from
a mineral fee interest will not automatically transform it into a royalty, 288
and, conversely, rights normally attached to a mineral fee interest, even
including the right to patticipate in leases,289 can be attached to a royalty.
More commonly the royalty owner is given specified rights to use the
surface and subsurface or rights to share in lease benefits in addition to
production. 290 Although instruments creating such interests almost invari-
ably create problems of interpretation and lead to litigation over whether the
interest is a royalty or a fractional interest in the mineral fee, 291 they are
encountered with surprising frequency.
   Additional ly, the word "royalty" is used in oil and gas leases and

   287 1
      ·   There is an exception for some overriding royalties carved from leases subject to a
joint operating agreement. See. e.g., Boldrick v. BTA Oil Producers, 222 S.W.3d 672 (Tex.
App.-Eastland 2007) and refer to Section 17.3(E) of this treatise.
   288  See, e.g., Buffalo Ranch Co. v. Thomason, 727 S. W.2d 331 (Tex.. App.-Houston
[1st Dist.] 1987, writ refd n.r.e.).
   289
       Elick v. Champlin Petroleum Co.,-697 S.W.2d I (Tex. App.-Houston [14th Dist.]
1985, writ refd n.r.e.).
   290 See. e.g., Brady v. Security Home lnv. Co .. 640 S.W.2d 731 (Tex. App.-Houston

(14th Dist.] 1982, n.w.h.); Nee! v. Alpar Resources. Inc., 797 S.W.2d 361 (Tex.
App.-Amarillo 1990, n.w.h.).
    291 See, e.g.. Altman v. Blake, 712 S.W.2d 117 (Tex. 1986); Diamond Shamrock Corp.

v. Cone, 673 S.W.2d 310 (Tex. App.- Amarillo 1984, writ refd n.r.e.). Problems of
interpreting such instruments are discussed at Section 3.5(8) of this treatise. See also Bruce
M. Kramer, Conveying Minerallllterests- Mastering the Problem Areas, 26 TULSA L.J. 175
( 1990).

                                                                        (l!<llll/\-1 U2008   l'ub.R257~)
2.4[B]                            Texas Law of Oil and Gas                                    2-62

occasionally in other instruments to describe payments that are not based on
production. The most co11Ullon example is shut-in royalties, which are
payments made to maintain a lease where all wells have been shut in for Jack
of a market. Minimum royalties and some forms of compensatory and in lieu
royalties may also not be tied entirely to production. 292 Royalty owners have
argued that settlements between gas producers and purchasers over the
purchasers' failure to take or pay for contracted amounts of production
should also be subject to royalty payments.293 The term has also been used
to refer to a lessor 's share of oil or gas after they have been produced or to
the money payable to the lessor from the sale of such production. 294
  The common understanding of royalty is overinclusive in that it encom-
passes interests not usually referred to as royalties. For example, the owner
of a production payment has a nonpossessory interest which entitles her to
an expense-free share of production, but she is not usually considered to own
a "royalty."
   This section will attempt to describe the vruiety of interests that, either
through common usage or by their nature, may fairly be considered forms of
royalty or closely related thereto. Its major focus will be on the traditional
royalty interests: the lessor's royalty, the royalty created by grant or
reservation in a deed, and the overriding royalty carved from a working
interest. Except when otherwise indicated, the term "royalty" will be used in
accordance with its commonly understood meaning.

  B.       Types, Duration, and Size of Royalties
   A royalty is usuaJly categorized in accordance with the transaction in
which it was created. These are principally the execution of an oil and gas
lease, the transfer of an interest in land by deed, and the assignment of all or
part of a lessee's working interest. Regardless of how created, all such
royalties are interest in real property and are governed by the doctrines
applicable to real property. 294.1


   292
       Refer to Sections 4.5(C) and (F) of this treatise, dealing with shut-in royalty and
minimum royalty provisions.
   293   This issue is discussed in Section 4.6(E)(4) of this treatise.
   294
         See Jones v. O'Brien, 251 S.W. 208 (Tex. Comm'n App. 1923).
   294 1
      ·   See, e.g., Sheffield v. Hogg, 77 S.W.2d 1021 , 124 Tex. 290 (1934), mot. overruled.
80 S.W.2d 741. 124 Tex. 290 (1935} (landowner's royally reserved in executing oil and gas
lease): Kelly Oil Co.. Inc. v. Svetlik. 975 S. W.2d 762 (Tex. App.-Corpus Christi I 998)
(overriding royally assigned from lessee's working interest): Quigley v. Bennett. 227 S.W. 3d

                                                                          11M JOA-11/2008   Puh.82~~~
2-63                        Types of lnterests in Oil and Gas              § 2.4[B][l]

   The names used for royalties created in these transactions are not, strictly
speaking, legal terms. They have evolved from common industry usage.
Although widely used, the terminology has not been consistent over time or
from location to location. Hence a draftsman who uses a term such as
"overriding royalty" should be careful to define it rather than rely on
common understanding within the industry.
   In analyzing rights of royalty owners, Texas courts have tended to ignore
distinctions between types of royalties. Alameda Corp. v. Transamerican
Natural Gas Corp. 295 and Condra v. Quinoco Petroleum, Inc. 2 9 6 are good
examples. The courts in both cases apparently assumed that the doctrines
articulated were applicable to all types of royalty; for much of the judicial
language refers to lease royalty, even though the royalty claims were not
based on the royalty clause of an oil and gas lease. Alameda Corp. involved
a nonparticipating royalty and Condra involved an overriding royalty.
Because of this judicial approach, most of the discussion of the calculation
and payment of lease royalties in Section 4.6 of this treatise is also
applicable to nonparticipating and overriding royalties. It should be noted,
however, that some issues, such as the lessee's ability to pool a royalty
without first obtaining the express consent of the royalty owner, require a
consideration of the distinctions between the types of royalty and the context
in which the royalty was created.296· 1 A lessee's right to pool royalties is
treated in Section 4.8.
        1.   Tbe Landowner's Royalty
   The most common transaction in which a royalty is created is probably the
execution of an oil and gas lease. The landowner who executes an oil and gas
lease invariably retains a right to a specified fraction of gross production.
This royalty, which is frequently called a "landowner's royalty," terminates
when the lease terminates. This limitation on its duration has practical
consequences primarily in situations where the original lessor has trans-
ferred all or part of his landowner's royalty to another person, for the
transferee's interest will not outlast the lease.
  The landowner's royalty varied considerably in size during the first two

51 (Tex. 2007) (agreement to compensate geologist by conveying overriding royalty subject
to the statute of frauds.) Refer to Section 2.4(E).
  295
         950 S.W.2d 93 (Tex. App.-Houston [14th Dist.] 1997. writ refd).
  296    954 S.W.2d 68 (Tex. App. -San Antonio 1997, writ rerd.]
  296 · 1
        See, e.g., Union Pac. Resources Co. v. Hutchison, 990 S.W.2d 368 (Tex. App.-
Auslin 1999).

                                                                     md 14-<112012 l'ub.N2S72>
§ 2.4[B][2]                      Texas Law of Oil and Gas                                   2-64

decades of this century297 and then became standardized at 1/8 during the
1920s and early 1930s. Landowners' royalties that are larger than 1/8
became increasingly common in oil and gas leases executed after the
mid-1970s. It is unusual to find a lease executed within the last 20 years that
provides for a royalty of less than 1/6, and many now provide for a royalty
of 115 or even 1/4. On state-owned lands the royalty is commonly set at 1/4.
   The landowner's royalty is dealt with in detail in Chapter 4 of this treatise.
        2.   The Nonparticipating Royalty
   Royalties are also frequently created in deeds of real estate, by either grant
or reservation. A royalty created in such a transaction is sometimes referred
to as a "nonparticipating royalty." 2 9 8 Its duration may be perpetual or, as
discussed in Section 2.5 of this chapter, it may be limited to a defined period.
A royalty owner's right to share in production accrues monthly as oil and gas
are produced, and the statute of limitations begins to run when the owner
receives information that puts him on notice that there is production from or
attributable to the land subject to his royalty. 299
   The size of this type of royalty may be stated in two different ways. The
deed may either specify a stipulated fraction of gross production, such as
1/16,300 or it may specify a fraction of the royalty reserved in an oil and gas
lease. 301 The owner of a royalty stated as a set fraction of gross production
will be entitled to that fraction, regardless of the terms of any existing or
future oil and gas lease.302 If, however, the interest creates a right to a
fraction of royalty, the owner's share of production will vary with the size of
the royalty reserved in an oil and gas lease. Thus, the owner of a right to
"one-fourth of royalty" will receive 1/32 of the gross production from a lease
providing for a l/8 royalty, but he will receive l/24 of the gross production
from a lease providing for a 1/6 royalty.
   An unfortunately common formulation combines these two basic methods

  297
       Compare Southern Oil Co. v. Colquitt, 69 S.W. 169 (Tex. Civ. App. 1902) (1110
royalty) with Consumers' Gas Trust Co. v. Littler. 162 Ind. 320, 70 N.E. 363 (1904) (1/6
royalty).
  298
       This term as applied in this context is obviously undcrinclusive. for all royalties are
nonparticipating in the sense that they bear no share of the capital or operating costs.
  299
         Harrison v. Bass Enters. Prod. Co., 888 S. W.2d 532 (Tex. App.-El Paso 1994).
  300
        E.g., the instrument in Watkins v. Slaughter, 144 Tex. 179. 189 S.W.2d 699 (1945).
  301
        See, e.g., the deed in Schlitller v. Smith, 128 Tex. 628. 101 S.W.2d 543 (1937).
  302   See, e.g., Winslow v. Acker, 781 S.W.2d 322 (Tex. App.-San Antonio 1989, n. w.h.);
Tiller v. Tiller, 685 S.W.2d 456 (Tex. App.-Austin 1985. n.w.h.).

                                                                         !Rd 14·612012   ru~ .82~721
2-65                        Types of Interests in Oil and Gas                § 2.4[B][3]

of stating the size of the nonparticipating royalty. An example is the
reservation of "an undivided one-half interest in and to all of the royalty that
may be payable under any and all oil and gas leases, by which royalty is
meant one-eighth of production.'' Language such as this, which clearly states
that the parties were thinking in terms of a 118 landowner's royalty, has the
effect of limiting the royalty to the specified fraction of 1/8. Thus the grantor
is entitled to only 1116 of the gross production, even though an oil and gas
lease provides for a royalty larger than the standard 118.303 Variations on this
language often lead to litigation over the intent of the parties to the deed.sou
  Regardless of size or the manner of describing the fractional interest, the
owner of a nonparticipating royalty is limited to receiving a share of gross
production. Other lease benefits, such as bonus and delay rentals, are not
shared with the owner of a nonparticipating royalty unless the instrument
creating the royalty expressly provides for participation in these benefits.304
       3.   The Overriding Royalty
   The term "overriding royalty" has at least two, somewhat different
meanings. In earlier years it was occasionally used in referring to any portion
of a landowner's royalty which exceeds 1/8. For example, the lease litigated
in Martin v. Glass 305 provided for a 1/8 royalty and an additional "overriding
royalty in the aggregate amount of 1132nd of 7/8ths of all oil, gas and other
minerals saved, produced or sold from the premises." This use of "overrid-
ing royalty'' is quite uncommon today, however, and the term is typically
used in referring to a gross production interest created in a transaction
between an oil and gas lessee and a person other than the landowner. Thus
an oil and gas lessee may assign all or part of its leasehold interest and
reserve an overriding royalty in any production obtained from the assigned
acreage. In some instances, a condition may be attached to the overriding
royalty, such as a provision that if it is not paid within a specified period after
production commences, the assignor has the right to terminate the assign-
ment.305·1
  Alternatively, an overriding royalty may be carved out of the leasehold

  303
        See, e.g., Ray v. Truitt, 751 S.W.2d 205 (Tex. App.-El Paso 1988, n.w.h.).
  303 1
     · See Section 3.7[A] of this Chapter.
  304 Schlittler v. Smith, 128 Tex. 628, 101   S.W.2d 543 (1937).
  305
        571 F. Supp. 1406 (N.D. Tex. 1983).
  sou Circle Ridge Prod. v. Kittrell Family Minerals, LLC, 2013 Tex. App. LEXIS 8790
(Tex. App.-Texarkana July 17, 2013).


                                                                      (Rei. 16-612014 Pllb.82S72)
§ 2.4[B][3]                        Texas Law of Oil and Gas

estate and assigned to a third party. sou Assignments of overriding royalties
are commonly used to obtain financing and as a method of compensating
landmen, geologists, and other persons for services or information provided
to the oil and gas company.305.3
   Because an overriding royalty is created from the lessee's interest, it will
not outlast the lease.308 unless there is an express savings clause, such as a
provision that the overriding royalty will apply to all amendments, exten-
sions, renewals, or new leases taken out within a specified period after
termination of the current lease. Although there may be some occasional
exceptions where deliberate fraud is involved, in the absence of an express
savings clause all interests which are dependent upon the lease will normally
terminate when the lease terminates. For example, in one situation, tbe lessee
allowed a lease subject to overriding royalties to terminate by not spending
a rather minimal amount of money to repair the well's broken rod and then
obtained a new lease which would not be subject to the overriding royalties.
The court conceded that there was some support for the proposition that a
lessee that deliberately engages in conduct in order to wash out an overriding
royalty is subject to liability, but went on to point out that Texas courts have
generally been reluctant to impose any type of duty-either an implied
contractual covenant or a fiduciary obligation-on a lessee in favor of the
holder of an overriding royalty. 306..1
   Whether reserved or assigned, the fraction of gross production included in
the overriding royalty should be clearly specified. Because overriding
royalties are created from the lessee's working interest, which is always less

  305 2
     ·     For special issues connected with overriding royalties carved from a working
interest that is subject to a joint operating agreement, refer to Section 17.3(E) of this treatise.
    305 3
        • See, e.g., Mobil Exploration and Producing, U.S., Inc. v. Dover Energy Exploration,
L.L.C., 56 S.W.3d 772 (Tex. App.-Houston [14th Dist.) 2001), where a drilling company
received access to a second company's proprietary information concerning offshore drilling
prospects in exchange for an agreement to grant an overriding royalty to the second company
if it acquired a lease on any of the second company's prospects: and Quigley v. Bennett, 227
S.W. 3d 51 (Tex. 2007), involving a geologist whose compensation was typically based on
an overriding royalty of the leases be agreed to evaluate.
    305
         See, ·e.g., Sunac Petroleum Corp. v. Parkes, 416 S.W.2d 798 (Tex. 1967); The
Exploration Co. v. Vega Oil & Gas Co., 843 S.W.2d 123 (Tex. App.-Houston [14th Dist.J
1992, writ denied); Sasser v. Dantex Oil & Gas, lnc.• 906 S.W.2d 599 (Tex. App.-San
Antonio 1995, writ denied); SM Energy Co. v. Sutton, 376 S.W.3d 787 (Tex. App.-San
Antonio 2012). Problems involving duration of overriding royalties are discussed in Section
16.5(A)(3) of this treatise.
    306 1
        · Stroud Prod., L.L.C. v. Hosford, 405 S.W.3d 794 (Tex. App.-Houston [lst Dist.]
2013).
                                                                             (Rei 16-612014 Pllb.82S72)
2-66.1                      Types of Interests in Oil and Gas                § 2.4[C]

than 100 percent of production, the language creating the overriding royalty
must be carefully drafted to indicate the size of the fraction. There may be,
for example, confusion whether a 1/16 overriding royalty entitles its owner
to 1/16 of total production or only 1116 of the production to which the lessee
was entitled, e.g., 1/16 of 7/8.
  C.     Benefits Included in a Right to a Fraction "of Royalty"
   Unless the word "royalty" is defined, a grant or reservation of a fraction
"of royalty" may lead to disputes over the royalty owner's right to share in
a variety of lease benefits. The Texas courts have generally construed the
word "royalty" when used in this context to mean payments from production
which will continue throughout the life of an oil and gas lease. Hence, the
owner of "one-fourth of royalty" will receive her stated fraction from all
royalty reserved in an oil and gas lease, even though the payments from
gross production exceed one-eighth, which was the standard royalty
throughout much of the twentieth century, and are labeled "excess royalty"
or "bonus."307 This definition excludes from royalty a lease benefit payable
from production which will terminate when a specified sum has been
received. Such payments, commonly designated "oil payments" or "produc-
tion payments," are sometimes used to provide additional or deferred bonus
money, and the owner of a fraction "of royalty" is not entitled to share
them.308
   The Texas courts have frequently dealt with other lease benefits on an ad
hoc basis, without express reference to a general definition. Thus a
"compensatory" royalty that a lessee paid from production of a well draining
the leased tract in settlement of its obligation to drill an offset well was
deemed a royalty within the meaning of a prior deed which had conveyed a
right to one-fourth "of the oil royalty, gas royalty and royalty in casinghead
gas, gasoline, and royalty in other minerals in and under, and that may be
produced and mined" from the premises.309 The same treatment has been
accorded "minimum royalty," which is a sum payable under a lease clause

  307
      Griffith v. Taylor, 156 Tex. 1, 291 S.W.2d 673 (1956); Lane v. BJkins, 441 S.W.2d
871 (Tex. Civ. App.-Eastland 1969, writ refd n.r.e.).
  308 See, e.g., State Nat'l Bank v. Morgan, 135 Tex. 509, 143 S.W.2d 757 (Tex. Comm'n

App. 1940, opinion adopted).
  309
        Andretta v. West, 415 S.W.2d 638 (Tex. 1967).




                                                                    (R<!I. 1~14 Pub.82S72)
§ 2.4[C]                       Texas Law of Oil and Gas                                2-66.2

stipulating that royalties from production must at least equal the lease delay
rental.slo
   It is arguable that both types of payments fall within the concept of
"royalty" as a payment from production continuing over the life of the lease.
The royalty paid in lieu of drilling an offset well was pegged to production
from a draining well and would presumably continue until either the well
ceased producing or the recipients' lease terminated. Minimum royalty falls
even more clearly within the definition. Although such payments are pegged
to the delay rental, they are clearly required only if the lease is maintained
by production. The fact that they are not based on the sale price of
production does not distinguish them from other common lease royalties,
such as those paid on production which
                                                          (Text continued on page 2-67)

  310
        Morriss v. F'I!St Nat'! Bank, 249 S.W.2d 269 (Tex. Civ. App.-San Antonio 1952,
writ refd n.r.e.).




                                                                    (Rei. 1(>.612014   Pub.82S72)
Types of Interests in Oil and Gas                                          2.4(0)

is used off the premises or those based on the market value of natural
gas.
     The right of an owner of a fraction "of royalty" to share shut-in
payments is more problematic. Although one appellate court has
indicated that the royalty owners would share in such payments,311 the
language was dictum, because that issue was not before the court.
Shut-in payments do not fall within the concept of payments based on
production because they are expressly paid in lieu of production.
Moreover, treating shut-in payments as royalty is arguably inconsistent
with the long line of cases holding that shut-in payments do not maintain
a term royalty interest beyond its initial specified term. 312

          D. Interests Similar to Royalties
     There are several types of interests in gross production that, although
not generally called royalties, are similar to them.
     A "production payment" is a right to a specified fraction of
production until a specified sum has been received. Occasionally the
parties creating it may provide for its termination upon some other
event. 3l3 Because a production payment is almost always carved out of
the lessee's interest in an oil and gas lease, the terminating event must
be something other than lease termination, or the interest in production
will be classified as a royalty. 314 Like a royalty, it does not bear any of
the costs of drilling. completing, or operating the well. A production
payment may be limited to certain categories of production, such as oil,
gas well gas, or casinghead gas, and may be payable in kind rather than
in cash. Such an interest may be given to a lessor as a means of providing
him with an additional bonus,315 to a lender as a means of repaying or
providing security for a loan, or to a person, such as a geologist, who has
performed services for the lessee and receives the production payment
as compensation. It may also be consideration for the assignment of an
oil and gas lease.316




     311. Id.
     312. Archer County v. Webb, 161 Tex. 210, 338 S.W.2d 435 (1960). Refer
also to the discussion in Section 2.5 of this chapter.
     313 See, e.g., First City Nat'l Bank v. Concord Oil Co., 808 S.W.2d 133 (Tex.
App.-El Paso 1991) (production payment terminates when 10% of the oil
beneath the tract remains unproduced).
     314. Griffith v. Taylor, 156 Tex. 1, 291 S.W.2d 673 (1956).
     315. See State Nat'l Bank v. Morgan, 135 Tex. 509, 143 S.W.2d 757 (Tex.
Cornm'n App. 1940, opinion adopted).
     316. See, e.g., First City Nat'l Bank v. Concord Oil Co., 808 S.W.2d 133 (Tex.
App.-El Paso 1991).

TEX. OIL AND GAS 2d od.Issue 0 (1998)                                        2-67
2.4(0)                                              Texas Law of Oil and Gas

     A "net profits" interest is a right to a specified share of profits. It has
some similarity to a royalty in that its owner is not personally liable for
drilling or operating expenses. Unlike the royalty, however, it entitles
its owner only to a share of profits after expenses have been paid. The
method of computing net profits, lhe manner and time of payment, and
lhe costs to be taken into account are determined by the instrument
creating the interest. Because the term "net profits" has no fixed legal
definition, it is essential that the parties creating such an interest set out
in detail the method for determining net profits. For example, they
should specify whether the owner is entitled to payment only after
drilling and completion costs have been recouped, or whether his
interest is subject only to operating expenses. In lieu of a definition, the
parties may well have their rights determined by the same doctrines
which are applicable to a cotenant who does not participate in leasing
or developing. Such a co-owner has a form of net profits interest as a
matter of law, although he is more commonly spoken of as having a
carried interest.
     The term "carried interest" is used in a variety of contexts. Such an
interest may arise by operation of law, as in the case of cotenants, or it
may arise through contractual agreement. The term is, therefore, only
generally descriptive of any interest which entitles its owner to a
specified fraction of production, while not subjecting him to personal
liability for certain expenses. The carrying party is responsible for lhose
expenses but is entitled to recoup them from the carried party's share of
production. Unlike lhe net profits interest, which normally continues
for the duration of the underlying oil and gas lease, the carried interest
terminates when the agreed-upon costs have been recouped by the
carrying party. At that point the carried interest is transformed into a
fractiona l share of the working interest, and its owner is liable for costs
and entitled to a share of production like other working interest owners.
Thus the point to which the interest is "carried" is crucial to a
determination of the parties' rights and liabilities. This point will vary
from agreement to agreement, but frequently the owner is carried either
"to the casing point," in which case he is not personally liable for the
drilling and testing costs but is subject to his proportionate share of
completion and operating costs, or "to the tanks or pipeline," in which
case he is freed from liability for virtually all expenses, including
operating expenses. Joint operating agreements commonly include a
provision whereby a party who does not wish to commit funds for
additional wells may be carried to well completion but is not entitled to
any share of production until the carrying parties have recovered some
multiple of the carried party's share of cost from his share of production.
This type of interest is sometimes referred to as a "Manahan" type of



2-68                                           TEX. OIL AND CAS 2d ed. Issue 0 (1998)
Types of Interests in Oil and Gas                                           2.4(E)

interest. 317 Like other common forms of carried interests, it received its
name from a case litigating tax implications.318

        E. Nature and Incidents of Royalty Ownership
    All varieties of royalties,319 overriding royalties, 320 and production
payments321 are nonpossessory interests in land, whether payable in
money or payable in kind.322 The same analysis is usually made of
carried interests323 and net profits interests.324 They are thus subject to
ad valorem taxes as interests in land,325 and an instrument creating or
transferring them must meet the requirements of the statute of frauds. 326
Because such interests are nonpossessory, their owners normally are not
entitled to compel a suit for partition327 or to invoke possessory
remedies, such as a trespass to try title.3 28 Moreover, because the owner


     317. See Railroad Comm'n v. Olin Corp., 690 S.W.2d 628 (Tex.
App.-Austin 1985, writ refd n.r.e.).
     318. See Manahan Oil Co. v. Commissioner, 8 T.C. 1159 (1947). See also
Commissioner v. Abercrombie, 164 F.2d 338 (5th Cir. 1947), overruled as to tax
consequences; United States v. Cocke, 399 F.2d 433 (5th Cir. 1968), cert. denied,
344 U.S. 922 (1969); Herndon Drilling Co. v. Commissioner, 6 T.C. 628 (1946).
     319. Sheffield v. Hogs, 124 Tex. 290, 77 S.W.2d 1021 (1934), rehearing
denied, 124 Tex. 290, 80 S.W.2d 741 (1935).
     320. Frost v. Standard Oil Co., 107 S.W.2d 1037 (Tex. Civ. App.-Galveston
1937, no writ); T-Vestco Litt-Vada v. Lu-Cal One Oil Co., 651 S.W.2d 284, 291
(Tex. App.-Austin 1983, writ refd n.r.e.).
     321. Sheppard v. Stanolind Oil & Gas Co., 125 S.W.2d 643 (Tex. Civ.
App.-Austin 1939, writ refd); Tenannt v. Dunn, 130 Tex. 285, 110 S.W.2d 53
(1937); Roberts v. Lone Star Producing Co., 369 S.W.2d 373, 376 (Tex. Civ.
App.-Eastland 1963, no writ).
     322. Sheffield v. Hogg, 124 Tex. 290, 77 S.W.2d 1021 (1934), rehearing
denied. 124 Tex. 290, 80 S.W.2d 741 (1935).
     323. See Paine v. Moore, 464 S.W.2d 477 (Tex. Civ. App.-Tyler 1971, no
writ).
     324. LaRue v. Wiggins, 277 S.W.2d 808 (Tex. Civ. App.-Waco 1955, writ
ref'd n.r.e.).
     325. Sheffield v. Hogg, 124 Tex. 290, 77 S.W.2d 1021 (1934), rehearing
denied, 124 Tex. 290, 80 S.W.2d 741 (1935).
     326. LaRue v. Wiggins, 277 S.W.2d 808 {Tex. Civ. App.-Waco 1955, writ
ref'd n.r.e.). In refusing a writ of error in Hydrocarbons,lnc. v. Pecos Dev. Corp.,
797 S.W.2d 265 {Tex. App.-Corpus Christi 1990, writ denied), lhe Texas
Supreme Court issued a memorandum opinion stating that "a majority of the
court disapproves that portion of the court of appeals opinion holding that the
conveyance of an overriding royalty in future production from unleased land is
not subject to the statute of frauds." 803 S.W.2d 266,267 (Tex. 1991).
     327. Chaffin v. HaJJ, 210 S.W.2d 191 (Tex. Civ. App.-Eastland 1948, writ
ref'd n.r.e.).
     328. T-Vestco Litt-Vada v. Lu-Cal One Oil Co., 651 S.W.2d 284 (Tex.
App.-Austin 1983, writ refd n.r.e.).

TEX. OLL AND GAS 2d ed. Issue 2[2000)                                         2-69
2.4(E)                                          Texas Law of Oil and Gas

of a nonpossessory interest has no power or right to affect the way in
which a well is drilled, operated, or maintained, he is not liable in tort
for personal injuries resulting from negligence or from the condition of
the premises. 329 Conversely, such interests should not be subject to loss
to an adverse possessor of the surface estate.
     Traditionally, all forms of royalties and production payments have
been free of all costs of drilling, completing, and operating the well;
however, unless the instrument creating it specifies to the contrary, the
royalty must bear its proportionate share of costs incurred subsequent
to production.330 Occasionally, the instrument creating the royalty will
specify what these expenses are; more commonly, the instrument is
silent on the subject. Most of these disputes have arisen in the context
of the landowner's royalty created by an oil and gas lease and are treated
in Chapter 4 of this treatise.


2.5.     TERM lNTERESTS

     Royalty interests and interests in the mineral estate presumptively
last in perpetuity.331 Such interests may, however, be for a more limited
duration. Term interests, whether created by grant or reservation, are
quite common in Texas. The most typical term interest is for a specified
period of time, such as five years, and so long thereafter as oil, gas, or
other minerals are produced from the described lands. The interest
created by such language normally terminates at the end of the specified
period if there is no production at that time. If there is production, the
interest will extend beyond the specified period and terminate only
when production terminates.

         A. What Constitutes Production
     Probably the most frequently litigated issue that arises under an
instrument creating a term interest is the meaning of "production." In
the absence of language to the contrary in the instrument creating the
term interest, the payment of shut-in royalty under an oil and gas lease
does not constitute "production" that will extend the term interest past
its specified period. In Archer County v. Webb, 332 the Texas Supreme



    329. Davis v. Esperado Mining Co., 750 S.W.2d 887 (Tex. App.-Houston
[14th Dist.] 1988, no writ).
    330. Refer to Section 4.6(C) of this treatise.
    331. Dubois v. Jacobs, 533 S.W.2d 149 (Tex. Civ. App.-Austin 1976), on
remand and appeal, 551 S.W.2d 147 (Tex. Civ. App.-Austin 1977, no writ).
    332. 161 Tex. 210, 338 S.W.2d 435 (1960).

2-70                                        TEX. Oil. AND GAS 2d ed. Issue 2 (2000)
TEXAS LAW OF OIL
AND GAS
SECOND EDITION
VOLUMEl
Ernest E. Smith
Rex G. Baker Centennial Choir in Natural Resources Law
University of Texas School of Law

Jacqueline Lang Weaver
A.A. White Professor ofLaw
University of Houston Law Center


2014
Filed Through:
RELEASE NO. 16, JUNE 2014




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                                                                                                 (Jlcl 16-6/2014 Pub.82572)
§ 3.4                           Texas Law of Oil and Gas                                  3-22

Abilene, N.A. v. Westwood Energy, Inc.,M a nonoperator bad signed an
unrecorded operating agreement giving the operator a lien on the nonopera-
tor's working interest to secure the payment of all sums due the operator.
The nonoperator subsequently borrowed money from MBank Abilene and
gave the bank a deed of trust as security. When the nonoperator defaulted on
his obligation to pay his share of the operating expenses, the operator sued
to foreclose its lien on the nonoperator's working interest. MBank, which
was made a party to the suit, alleged priority of its deed of trust over the
unrecorded operator's lien. The court rejected MBank's argument on the
ground that the bank was deemed to have taken its lien with notice of the
preexisting operator's lien. Under the rule of the Westland case, MBank was
on notice of every recital and reference in its chain of title, and recorded
assignments of the nonoperator's working interest had contained references
to the operating agreement.
3.4 STANDARD RULES OF CONSTRUCTION AND
          CONSTRUCTIONAL PREFERENCES
   Grants and reservations of mineral interests are frequently unclear. The
language used to describe the interest may be equally consistent with a
royalty and a mineral fee. The instrument may be silent on what substances
are included in the term "minerals." The size of the interest created may be
the subject of dispute. In resolving such issues, the parties' intent is
determined, if possible, by considering the instrument as a whole. ''The
primary duty of the courts in interpreting a deed is to ascertain the intent of
the parties. But it is the intent of the parties as expressed within the four
comers of the instrument which controls."87 Unless there is an irreconcilable
conflict, all provisions of an instrument will be given effect. Thus, apparently
contradictory and inconsistent language will be given a construction which
hannonizes all provisions in the instrument.61

  66  723 S.W.2d 246 (Tex. App. -Eastland 1986, no writ).
  67  Altman v. Blake, 712 S.W.2d 117, 118 (Tex. 1986). See also, e.g., Garrett v. Oils Co.,
299 S.W.2d 904, 906 (Tex. 1957); Lucke! v. While, 819 S.W.2d 459, 461 (Tex. 1991); IVA
Operating Co. v. Kaiser-Francis Oil Co., 11 S.W.3d 504, 506 (Tex. App.-Eastland 2000).
  • Benge v. Schatbauec, 152 Tex. 447, 259 S.W.2d 166 (1953); DuBois v. Jacobs, 533
S.W.2d 149 (Tex. Civ. App.-Austin 1976), appeal after remand, 551 S.W.2d 147 (Tex. Civ.
App.-Austin 1977, no writ); Selman v. Bristow, 402 S.W.2d 520 (Tex. Civ. App. -Tyler
1966, writ refd n.r.e.); Neel v. Alpar Resources, Inc., 797 S.W.2d 361 (Tex. App.-AmariUo
1990, n.w.IL); Lucke! v. While, 819 S.W.2d 459 (Tex. 1991); Jupiter Oil Co. v. Snow, 819
S.W.2d 466 (Tex. 1991 ); Hunsaker v. Brown Distrib. Co., 373 S.W.3d 153 (Tex. App.-San
Antonio 2012); Dodd v. Wiatrek, 2012 Tex. App. LEXJS 8976 (Tex. App.-San Antonio
Oct 31 , 2012).

                                                                        (Ret 16-()12()14 Pub.82S72)
3-22.1                             Titles and Conveyances                               § 3.4

   In many instances this process is aided by the use of standard rules of
construction and constructional preferences.69 There is, for example, a
general preference for construing a deed in favor of the grantee and for
interpreting it as transferring the largest estate that is consistent with the
language of the instrument.70 Thus a reservation will not be implied, and
must be stated in clear language.70•1 All the incidents and attributes of the
mineral estate are deemed transferred to a grantee unless they are expressly
reserved. In Lesley v. ~terans Land Bd.,7 o.z the court rejected an argument
that a subdivision developer bad impliedly retained the exclusive executive
right by making the deeds to the lots in the subdivision subject to a recorded
covenant prohibiting oil and gas development and bad thus stripped the
grantees of the right to execute oil and gas leases. Interests such as royalty
and executive right that are appurtenant to the granted estate will pass to the
grantee even though they are not specifically mentioned in the deed. 70.3 The
general rule against implying grounds for forfeiture71 is a logical extension
of this doctrine.
   Of course the doctrine that all incidents of a mineral estate are transferred

  89
        Bruce M. Kramer, The Sisyphean Task of Interpreting Mineral Deeds and Leases: An
Encyclopedia of Canons of Construction, 24 TEx. TEcH L. REv. I (1993), is the definitive
discussion of the rules and canons of construction used and applied by Texas courts. The
same rules of construction used in construing conveyances of min.eral interests are also often
used in construing provisions of wills devis.ing mineral interests. See, e.g., the discussion in
Grisham v. Lawrence, 298 S.W.3d 826 (fex. App.-Tyler 2009).
   70 See, e.g .• Day &Co., Inc. v. TexlandPetroleum, Inc., 786 S.W.2d 667 (felt. 1990); Lott

v. Lott, 370 S.W.2d 463 (fex. 1963); Telr.as Pac. Coal & Oil Co. v. Masterson, 160 Tex. 548,
334 S.W.2d 436 (1960); Monroe v. Scott, 707 S.W.2d 132 (fex. App.-Corpus Christi 1986,
writ refd n.r.e.); Temple-Inland Forest Prods. Corp. v. United States, 988 F.2d 1418 (5th Cir.
1993); GXG, Inc. v. Te.xacal Oil & Gas, 977 S.W.2d 403, 418-19 (fex. App.-Corpus
Christi, 1998, pet. denied); Eastin v. Dial, 288 S. W.3d 491 (fex. App.-San Antonio 2009);
MPH Prod. Co. v. Smith, 2012 Tex. App. LEXIS 3989 (fex. App.-Texarlcana May 18,
2012).
   70· 1 Sharp v. Fowler, 252 S.W.2d 153 (fex. 1952); Melton v. Davis, 443 S.W.2d 605,608

(fex. Civ. App.-Tyler 1969, writ refd n.r.e.); Eastin v. Dial, 288 S.W.3d 491 (fex.
App.-San Antonio 2009). See Section 3.9(C), infra.
   70· 2 352 S.W.3d 479 (fe.x. 2011).
   70 3
      · E.g., Day & Co., Inc. v. Telr.land Petroleum, Inc., 786 S.W.2d 667 (fex. 1990); Alfrey
v. Ellington, 285 S.W.2d 383 (fe.x. Civ. App.-Eastland 1955, writ ref'd n.r.e.). There is an
exception for a tax foreclosure deed, which will transfer only the interest in land subject to
the tax lien, even though the deed contains no exceptions or exclusions from the grant. Pounds
v. Jurgens, 296 S.W.3d 100 (fex. App.-Houston [14th Dist.] 2009).
   71 cambridge Oil Co. v. Huggins, 765 S.W.2d 540 (fex. App.-Corpus Christi 1989, writ

denied).

                                                                           (Rei. ·~·4 Pub.82S12)
I 3.4                           Texas Law of Oil and Gas                                  3-22.2

to a grantee will not be applied to transfers of an estate or interest entirely
different from that described in the instrument. For example, an instrument
assigning a grantor's lien on the surface estate will not operate to transfer the
grantor's interest in a severed mineral estate in the same land, even though
the granting clause states that it conveys "all liens and titles held by me in
and to said land. " 72 Similarly, interests such as nonparticipating royalties
that are appurtenant to other lands are not impliedly included in a
conveyance, even though such lands were once part of a larger, single tract
and the grantor received the interests when the larger tract was parti·
tioned. 72.1 The oil and gas lease is an important exception to the rule
favoring the grantee in deed construction, for it is usually construed against
the lessee and in favor of the lessor-grantor. 73 A related doctrine which
usually (although not always) results in a deed interpretation favorable to the
grantee is the rule that the granting clause prevails in the event of an
irreconcilable conflict with other deed clauses. The importance of this
doctrine as applied to mineral deeds has diminished, however, as a result of
the Texas Supreme Court's decision in Luckel v. White. 74 The Luckel opinion
overruled an earlier case, Alford v. Krum, 75 which involved a deed that
granted "one-half of the one-eighth interest" in the mineral estate, covered
and included "l/16th of all royalties due" under an existing lease, and
provided that under future oil and gas leases "the lease interests and all
future rentals . . . shall be owned jointly by [the grantor and grantee] each
owning a one-half interest." The Alford court held that the granting clause
should prevail because it was in irreconcilable conflict with the future-leases
clause. Prior to Lucke/, appellate decisions 7 ' interpreted Alford as mandating

  72
     Smitb v. Williams, 786 S.W.2d 665 (fex. 1990); Humphreys-Mexia Co. v. Gammon,
113 Tex. 247, 254 S.W. 296 (1923).
  72 •1   McCall v. McCall, 24 S.W.3d 508 (fex. App.-Houston [1st Dist.] 2000).
  73 See McMahon       v. Christmann, 157 Tex. 403, 303 S.W.2d 341 (1957). This rule applies
only if the lease is ambiguous. TSB Exco, Inc. v. E.N. Smith, m Energy Corp., 818 S.W.2d
417 (Tex. App.-Texarkana 1991, no writ).
  74   819 S.W.2d 459 (fex. 1991).
  75   671 S.W.2d 870 (fex. 1984).
  78  E.g., Snow v. Jupiter Oil Co., 802 S.W.2d 354 (fex. App.-Eastland 1990), rev'd. 819
S.W.2d 466 (fex. 1991). Hawkins v. Texas Oil & Gas Corp., 724 S.W.2d 878 (fex.
App.-Waco 1987, writ refd n.r.e.); Stag Sales Co. v. Flores, 697 S.W.2d 493 (Tex.
App.-San Antonio 1985, writ rerd n.r.e.). For critiques of the repugnant-to-the-grant
doctrine. see Snow v. Jupiter Oil Co., 802 S.W.2d 354 and Tevis Herd. Deed Constmction
and the "Repugnant to the Grant" Doctrine, 21 TEx. TEcH L. REv. 635 (1990).


                                                                        (Rei   1~612014   Pub.82S72}
3-22.3                                 Titles and Conveyances                                  §   3.4

use of the repugnant-to-the-grant doctrine when interpreting a deed granting
fractional interests.
  In addition to the foregoing, there are, of course, many other rules of
construction that may be used in interpreting instruments creating royalty
and mineral interests. Thus handwritten or typewritten language which has
been added to a form deed will usually prevail over inconsistent printed
language in the body of the instrument." The presumption against intestacy
may lead a court to interpret a will as devising a mineral fee rather than
merely a royalty. 78 If there are multiple grantees, there is a presumption that
they have received equal undivided shares of the interest conveyed unless
the deed provides otherwise.79 The doctrine of estoppel by deed precludes
the parties to a deed from disavowing any of its provisions. Although the
doctrine has occasionally been invoked to prevent a grantee from disavow-
ing recitals or reservations in a deed be bas accepted, 79.1 it is used far more
commonly when a grantor attempts to assert a reservation in derogation of
the grant.. The cases that have arisen in this context are dealt with in a
separate section of the treatise.792
  Rules of grammar may also be used to aid in deed construction.79.3
Whether a deed is ambiguous is a question of law, determined by an
examination of the entire document. 7u If it is impossible to resolve an
ambiguity through the use of rules of grammar or construction, extrinsic

  77
     McMahon v. Christmann, 157 Tex. 403, 303 S.W.2d 341 (1957); Gibson v. Watson,
315 S.W.2d 48 (Tex. Civ. App.-Texarkana 1958, writ rerd n.r.e.); Minchen v. Hirsch, 295
S.W.2d 529 (Tex. Civ. App.-Beaumont 1956, writ rerd n.r.e.); TSB Exco, Inc. v. E.N.
Smith, ffi Energy Corp., 818 S.W.2d 417 (Tex. App.-Texarkana 1991, no writ).
  78
           Drach v. Ely, 237 Kan. 654, 703 P.2d 746 (1985).
  7" John Hancock Mut. Life           Ins. Co. v. Bennett, 133 Tex. 450, 128 S.W.2d 791 (1939).
  JU           Sauceda v. Kerlin, 164 S.W.3d 892 (Tex. App.-Corpus Christi 2005); Freeman v.
Stephens Production Co., 171 S.W.3d 651 (Tex. App.---Corpus Christi 2005).
  7 2
   •·          s~e Section 3.7(C).
  7
      •·See, ~.g., Stewman Ranch, Inc. v. Double M. Ranch, Ltd., 192 S.W.3d 808 (Tex.
           3

App.-EasUand 2006), considering the rule of grammar that a restricting clause that is not set
off by commas modifies the word or phrase immediately preceding it, but rejecting its
application on the ground that it would render the restricting clause superfluous.
  7 •.4        Morrison v. Robinson, 2006 Tex. App. LIDOS 7905 (Tex. App.- Waco Aug. 30,
2006).




                                                                            (Rei. l(~llflOL4   Pub.82.572)
§ 3.S[A)                         Texas Law of Oil and Gas                             3-22.4

evidence may be admitted to determine the parties' intent.IO
3.5      DISTINGUISHING A MINERAL INTEREST FROM A
           ROYALTY INTEREST
   A.      Traditional Language
   The language used in a grant or reservation determines whether a mineral
fee or a royalty bas been created The traditional language used to create a
mineral fee is a reference to the oil, gas, and other minerals in, on, and under
the described land.11 Specific rights of ingress and egress and surface and
subsurface easements are also commonly included.82 Although most of these
rights would be implied in favor of the mineral fee owner in any event,
setting them out specifically may accomplish three things. First, it makes
much clearer the intent to create a mineral fee with its concomitant rights to
explore, drill, and produce. Second, it reduces the possibility of disputes
with the surface owner over the rights held by the mineral fee owner. The
surface owner is more likely to be convinced by written language than by an
argument based on implied rights. Third, it gives the draftsman an
opportunity to list specific rights which might not be implied in the mineral
owner's favor or which are broader than implied rights.
   A royalty is typically created simply by using the word ''royalty." Thus a
landowner may grant "a 1116tb royalty" or a right to "1114tb of royalty," and
in either event it is clear that the grantee will receive a fraction of gross
production.u The same result can be accomplished by using the form of
language in Barker v. Levy, 14 where a deed granting a "one/one hundred and
sixtieth (l/160tb) part of all oil, petroleum, sulphur and all other minerals
that may be produced and saved" was held to have unambiguously
transferred a royalty rather than an undivided interest in the mineral fee.
   B.     Deeds with Confticting or Atypical Language
   Unfortunately, mineral and royalty deeds and wills devising such interests

  80    Brown v. Havard, 593 S.W.2d 939 (Tex. 1980).
  81  See, e.g., Altman v. Blake, 712 S.W.2d 117 (Tex. 1986); Richardson v. Hart, 143 Tex.
392, 185 S.W.2d 563 (1945).
  82  E.g., Richardson v. Hart, 143 Tex. 392, 185 S.W.2d 563 (1945); Prairie Producing Co.
v. Schlachter, 786 S.W.2d 409 (Tex. App.-Texarkana 1990, writ denied).
  83  Caraway v. Owens, 254 S.W.2d 425 (Tex. Civ. App.-Texarkana 1953, writ refd);
Neel v. Alpar Resources, Inc., 797 S.W.2d 361 (Tex. App.-Amarillo 1990, n.w.h.)
(reservation clause).
  14    507 S.W.2d 613 (fex. Civ. App.-Houston [14tb Dist.] 1974, writ refd n.r.e.).


                                                                      (Rei. 16-6"20 14 Pub.82S72)
