      TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN


                                      NO. 03-04-00600-CV



                           Anadarko E&P Company, LP, Appellant

                                                 v.

             Clear Lake Pines, Inc., V. A. Hrbacek and Jean Hrbacek, Appellees




   FROM THE DISTRICT COURT OF FAYETTE COUNTY, 155TH JUDICIAL DISTRICT
        NO. 2001V197, HONORABLE HENRY J. STRAUSS, JUDGE PRESIDING



                            MEMORANDUM OPINION


               Anadarko E&P Company LP appeals from a summary judgment granted in favor of

Clear Lake Pines, Inc., V. A. Hrbacek and Jean Hrbacek,1 and asks this Court to reverse that grant

and render a take-nothing judgment. The issue on appeal is whether Anadarko is obligated to pay

the statutory interest on late-paid royalties either under section 91.403 of the Texas Natural

Resources Code or by agreement. See Tex. Nat. Res. Code Ann. § 91.403 (West 2001). For the

reasons set forth below, we hold that Anadarko is not obligated to pay the interest on the late-paid

royalties. We reverse the order of the district court and render a take-nothing judgment in favor of

Anadarko.



       1
         Because the interests of the appellees are the same, we will refer to them as “Clear Lake”
for convenience.
                      FACTUAL AND PROCEDURAL BACKGROUND

               Clear Lake is the owner and lessor of various oil and gas wells, and Anadarko is the

leaseholder of those wells. The previous leaseholder was Edco Energy, and the purchaser of

condensate was Mesa Pipeline Company. Clear Lake was the owner of the royalty interest in the

mineral production from the wells. Mesa failed to pay royalties for the production from a particular

well from December 1993 to April 1995. Eventually, Mesa paid the late royalties to Clear Lake at

the end of September 1997, long after Anadarko had acquired the leasehold from Edco on March 10,

1995. Clear Lake believed it was owed statutory interest for the late royalties under the Texas

Natural Resources Code, and filed suit against Anadarko for those interest payments, alleging that

Anadarko was liable for statutory breach by failing to pay interest on the late royalties. Id. Clear

Lake did not file suit against Mesa or Edco.

               Anadarko filed summary judgment motions, which were denied. Clear Lake filed its

own summary judgment motion, which was granted, and Clear Lake was awarded the statutory

interest on the well for which royalties were late, and attorney’s fees. Anadarko appeals and asks

that we reverse the trial court and render judgment in its favor.


                                   STANDARD OF REVIEW

               When both parties move for traditional summary judgment, each side bears the

burden it would normally have as movant under the usual standards of summary judgment, as well

as the usual burden of response as nonmovant. City of Houston v. McDonald, 946 S.W.2d 419, 420

(Tex. App.—Houston 1997, writ denied). A grant of summary judgment is proper if the movant has



                                                  2
established that there is no genuine issue of material fact and the movant is entitled to judgment as

a matter of law. Fort Worth Osteopathic Hosp., Inc. v. Reese, 148 S.W.3d 94, 99 (Tex. 2004).

When both parties move for summary judgment, as in this case, and the trial court grants one motion

but denies the other, the reviewing court should review the summary judgment evidence presented

by both sides and determine all questions presented. Commissioners Court v. Agan, 940 S.W.2d 77,

81 (Tex. 1997). The reviewing court should render such judgment as the trial court should have

rendered. Id. In reviewing the appeal, this Court will indulge all reasonable inferences and resolve

all doubts in favor of the losing party. University of Tex. Health Sci. Ctr. v. Big Train Carpet, Inc.,

739 S.W.2d 792, 792 (Tex. 1987).


                                            DISCUSSION

                The general question before us is whether Anadarko is liable for the statutory interest

for the late royalties Mesa paid under section 91.403 of the natural resources code, or whether it is

liable for that interest pursuant to a contractual provision. See Tex. Nat. Res. Code Ann. § 91.403(a)

(West 2001). Specifically, Clear Lake argues that Anadarko is the statutory “payor” as defined in

section 91.401 and that Anadarko assumed the obligations of the “payor” through its lease with Clear

Lake and through the “Permitted Encumbrances” section of its Asset Purchase Agreement with

Edco. See id. § 91.401(a) (West 2001). Anadarko responds that it does not fit the definition of

“payor” in section 91.401 and that none of its agreements provided for its assumption of the

obligation to pay royalties or interest on minerals extracted prior to the transfer of the leasehold. See

id.



                                                   3
                In 1995, Edco and Anadarko entered into an Asset Purchase Agreement transferring

the interest in the leasehold from Edco to Anadarko. The Agreement states that Anadarko acquired

the lease free from defect, except for designated “permitted encumbrances.” By agreement, these

encumbrances include “[l]essors’ royalties, overriding royalties, revisionary interests, and similar

burdens . . . in any of the Properties as such interests are set forth on Exhibit ‘B.’” They further

include “all other contracts, agreements, instruments and obligations affecting the oil and gas

leasehold estate.” Exhibit “B” of the agreement describes a number of mineral wells. There was

also a lease between Anadarko and Clear Lake providing that Anadarko would pay royalties on the

oil and gas of the described properties after the closing date. We conclude that because the natural

resources code did not obligate Anadarko to pay statutory interest, and because Anadarko did not

agree to assume any such obligation from whomever was obligated under the statute, Anadarko is

not liable for any of the statutory interest on the late-paid royalties.


The Natural Resources Code on Payment for Proceeds of Sale

                Section 91.402 of the natural resources code provides the time frame in which the

“payor” must pay proceeds from the sale of oil or gas production to the “payee.” Tex. Nat. Res.

Code Ann. § 91.402(a) (West 2001). It specifies the deadlines for payment of proceeds. Id. Section

91.403 requires the “payor” to pay interest to a payee if the payments for oil and gas produced are

not made within specific time limits. Id. § 91.403(a). Section 91.404 provides the “payee” with a

cause of action for nonpayment of the mineral proceeds or interest on those proceeds covered under

the previous sections. Id. § 91.404(c) (West 2001). Section 91.401 defines “payor”:



                                                    4
       The payor is the first purchaser of such production of oil or gas from an oil or gas
       well, unless the owner of the right to produce under an oil or gas lease or pooling
       order and the first purchaser have entered into arrangements providing that the
       proceeds derived from the sale of oil or gas are to be paid by the first purchaser to the
       owner of the right to produce who is thereby deemed to be the payor having the
       responsibility of paying those proceeds received from the first purchaser to the payee.

Id. § 91.401(a).


                We must first determine, then, whether Anadarko was a “payor” under the code. The

Agreement and the lease reflect that Anadarko was the “owner of the right to produce.” There is

nothing in the record to show that Anadarko was the “first purchaser” of the production of oil or gas.

Anadarko describes Mesa as the “first purchaser.” Clear Lake does not argue that Mesa was not the

“first purchaser,” and its pleadings describe Mesa as the “purchaser of condensate” of the well for

which royalty payments were late. Thus, absent an “arrangement” between Mesa and Anadarko

providing that Mesa pay Anadarko the proceeds, or absent a prior arrangement between Mesa and

Edco providing that Mesa pay Edco the proceeds, Mesa was the “payor.” There is no evidence in

the record showing the existence of such an arrangement, and what evidence there is appears to

contradict any claim that there was such an arrangement. As the first purchaser, Mesa was

responsible for paying royalties to the payee unless the first purchaser and the owner of the right to

produce had entered into some other “arrangement.” Id. Clear Lake’s pleadings, affidavits,

responses to summary judgment motions, check stubs, and brief all describe Mesa as having been

the party paying the royalties. Clear Lake’s own evidence negates the proposition that there was an

arrangement between Mesa and Edco or Mesa and Anadarko making Edco or Anadarko responsible

for payments.

                                                  5
               As the “first purchaser,” therefore, Mesa was the “payor,” and so was statutorily

obligated to pay royalties by the expiration time set out in section 91.402 and, in the event of a late

payment, the statutory interest required by section 91.403. See id. §§ 91.402(a), .403(a).


Permitted Encumbrances of the Asset Purchase Agreement

               Under Texas law, an encumbrance is an interest in realty that diminishes its value and

is a burden on its transfer. City of Dayton v. Allred, 68 S.W.2d 172, 178 (Tex. 1934); Nationwide

of Bryan, Inc. v. Dyer, 969 S.W.2d 518, 521 (Tex. App.—Austin 1998, no pet.). Examples of

encumbrances include liens, claims, easements, and servitudes. Allred, 68 S.W.2d at 178. In certain

jurisdictions, there can be “encumbrances” on personal property as well. See, e.g., Hartford Fire Ins.

Co. v. Jones, 250 P. 248, 251 (Ariz. 1926); Black’s Law Dictionary 908 (4th ed. 1968). In Texas,

we find no case law extending the concept beyond its traditional scope, and Clear Lake cites none.

               Under Texas law, unaccrued royalties on oil and gas are interests in realty. Clyde v.

Hamilton, 414 S.W.2d 434, 438 (Tex. 1967). Accrued royalties, however, are interests in personal

property. Yzaguirre v. KCS Res., Inc., 53 S.W.3d 368, 371 (Tex. 2001) (quoting Texas Oil & Gas

Corp. v. Moore, 630 S.W.2d 450, 452-53 (Tex. App.—Corpus Christi 1982, writ dism’d w.o.j.)).

Oil and gas severed (extracted) from the land become personal property. Phillips Petroleum Co. v.

Mecom, 375 S.W.2d 335, 339 (Tex. Civ. App.—Austin 1964, no writ); Lone Star Gas Co. v.

Murchison, 353 S.W.2d 870, 879 (Tex. Civ. App.—Dallas 1962, writ ref’d n.r.e.). Royalties accrue,

and therefore become interests in personal property, at the time the minerals are severed from the

land. Phillips Petroleum Co. v. Adams, 513 F.2d 355, 363 (5th Cir. 1975); Moore, 630 S.W.2d at



                                                  6
452; Sabine Prod. Co. v. Frost Nat. Bank, 596 S.W.2d 271, 276 (Tex. App.—Corpus Christi 1980,

writ dism’d). It follows then that royalties become interests in personalty at the time the minerals

for which they are owed become personalty. See Phillips, 513 F.2d at 363; Sabine, 596 S.W.2d at

276.

                The question, then, is whether Anadarko assumed any obligation to pay the statutory

interest through the Asset Purchase Agreement with Edco. The initial answer is that it did not:

Anadarko could not assume such an obligation from Edco unless Edco had that obligation, that is,

unless Edco was the “payor.” There was no evidence in the record showing that Edco was the

“payor” because there was no evidence of a section 91.401 “arrangement” between Edco and Mesa,

but there was sufficient evidence in the record to show that Mesa was the “payor.” As the

Agreement was between Anadarko and Edco, not Anadarko and Mesa, and as Edco had no

obligation to pay the statutory interest that Anadarko could assume, Anadarko assumed no such

obligation. However, if we accept for the sake of argument that there was an “arrangement” between

Edco and Mesa making Edco the “payor,” nothing in the Agreement required Anadarko to assume

the statutory interest obligation.


1. “Lessors’ royalties”

                Clear Lake claims that Anadarko assumed the royalty payments and therefore the

interest payments as a “permitted encumbrance” under the Agreement. The Agreement lists

“[l]essors’ royalties . . . in any of the Properties as such interests are set forth on Exhibit ‘B’” as a

permitted encumbrance. First, encumbrances are interests in realty in Texas. Allred, 68 S.W.2d at



                                                   7
178.    Because the late-paid royalties were interests in personalty prior to the leasehold

transfer—since the minerals for which they were owed were severed prior to the leasehold transfer

of March 10, 1995—they are not an “encumbrance” in Texas, and thus Anadarko did not assume the

obligation to pay them. Second, because the property interests in Exhibit “B” of the Agreement are

all wells, not the severed minerals for which the late royalties were paid, Anadarko did not assume

those royalty obligations, whatever the scope of “encumbrance.” Anadarko only assumed the

obligations to pay unaccrued royalties, that is, royalties that accrued after the closing date of the

agreement. Thus, Anadarko could not have assumed the obligation to pay the statutory interest on

the late royalties.


2. “Obligations affecting the oil and gas leasehold estate”

                The Agreement also includes as permitted encumbrances “all other contracts,

agreements, instruments and obligations affecting the oil and gas leasehold estate.” Again, the

royalties accrued prior to the leasehold transfer were not encumbrances on the leasehold and

therefore did not “affect” it. Even so, since only royalties on the wells encumbered the leasehold,

the royalties on the severed minerals could not “affect” the leasehold. See Phillips, 513 F.2d at 363.

Thus, Anadarko did not assume the obligation to pay the statutory interest on such royalties.


Anadarko’s Lease

                In its summary judgment motion, Clear Lake argues that Anadarko assumed the

statutory interest obligation through its lease with Anadarko, which provides that Anadarko is to pay

royalties on the oil and gas. There is nothing in the lease providing that Anadarko assumes the

                                                  8
obligation to pay the interest on late-paid royalties by the “payor.” Thus, the question is whether an

agreement between the leaseholder of mineral wells and the owner stipulating that the leaseholder

pay royalties is sufficient to make the leaseholder liable under section 91.403 for statutory interest

on late royalty payments.

               The statute obligates the statutorily-defined “payor” to pay royalties within a certain

time and, in the event of late payment, to pay interest on those royalties. Id. §§ 91.401(a), .402(a),

.403(a). It does not provide that anyone who agrees to pay royalties who is not otherwise the

statutory “payor” thereby incurs liability for the statutory interest upon late payment. Liability for

interest does not arise when a party liable for mineral royalties fails to make payments, but only

when the statutory “payor” fails to make payment. See id. It does not follow from the fact that

Anadarko entered into an agreement with the well owner to assume liability for failed or late royalty

payments that it became liable for the statutory interest. The language of the statute does not place

the obligation to pay the interest on Anadarko by virtue of its assumption of the obligation to pay

royalties alone unless, as discussed, it is the “first purchaser,” or made an “arrangement” with the

first purchaser. The only arrangement the lease represents is one with the lessor, Clear Lake, not the

first purchaser, Mesa. Anadarko could have agreed to assume the obligation of paying the statutory

interest as well, but it did not do so in the lease with Clear Lake.

               Even under a reading of the statute that finds assuming the obligation to pay royalties

sufficient for someone to be designated the statutory “payor” and therefore obligated to pay the

statutory interest, Anadarko still did not assume the obligation to pay the royalties owed on severed

minerals, but only on the oil and gas of the properties described in the lease. Under the lease,

                                                  9
Anadarko assumed only the obligation to pay royalties due on production occurring after the closing

date. Thus, under an alternative reading of the statute, Anadarko could be the “payor” only of

unaccrued royalties, not the accrued royalties for which statutory interest is sought in this suit.


                                          CONCLUSION

               Because Anadarko was not obligated by the Texas Natural Resources Code to pay the

statutory interest on Mesa’s late-paid royalties, and because it did not assume such obligation under

either its lease agreement or the Asset Purchase Agreement, we reverse the district court’s order

granting summary judgment in favor of Clear Lake and denying Anadarko’s summary judgment

motion. We sustain Anadarko’s issues, grant its summary judgment motion, and render a take-

nothing judgment.




                                               Jan P. Patterson, Justice

Before Chief Justice Law, Justices Patterson and Puryear

Reversed and Rendered

Filed: July 7, 2005




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