Energy Law

Texas Court Upholds Lease Cancellation for Failure to Pay Shut-In Payments To Proper Party

By Robert Theriot

By Kevin Connolly:

In Nitschke v. Circle Ridge Production, Inc., No. 12-09-00150CV, _____ S.W.3d ____ (Tex. App.—Tyler 5/5/2010), the Tyler Court of Appeals upheld a trial court's findings of fact and conclusions of law with respect to the termination of an oil and gas lease for failure to pay shut-in royalty payments to the proper party.   The case involved a dispute between the original lessee and a top lessee.  Ultimately the original lessee lost its lease because it made shut in payments to its lessee, rather than the current royalty owner, to whom those payments were owed.

In 1976, Karin H. Van Hovenberg ('Van Hovenberg') conveyed by royalty deed to O.B. Mobley ('Mobley') 'her entire 8/8 Royalty Interest' in a 105.8 acre tract of land in Smith County, Texas. In 2001, Dan Nitschke ('Nitschke'), as lessee, obtained an oil and gas lease (the 'Smith Lease') covering the same land from Janet Townsend ('Townsend'), the attorney in fact for Van Hovenberg. The Smith Lease had a primary term of ninety days and could thereafter be held by 'operations' as defined in the lease or by paying a shut-in royalty. Nitschke had no actual knowledge of the royalty deed from Van Hovenberg to Mobley, and consequently paid shut-in royalties to Van Hovenberg. In 2002, based on Nitschke's alleged failure to pay shut-in royalties to the proper party, Townsend, acting as Van Hovenberg's attorney in fact, leased the 105.8 acre tract to Circle Ridge Production, Inc. ('Circle Ridge'). A dispute arose between Nitschke and Circle Ridge as to which of their respective leases was valid and enforceable. Nitschke sued Circle Ridge seeking a declaratory judgment in his favor and removal of the cloud on his title allegedly created by Circle Ridge's lease. Over three years later, Circle Ridge filed a no evidence motion for summary judgment that was never ruled on by the trial court. Instead, the parties proceeded to a bench trial on the merits. After closing arguments, the trial court issued findings of fact and conclusions of law. The trial court concluded that Nitschke's lease lapsed because he paid shut-in royalties to the wrong person, and consequently, Nitschke had no interest in the property.

Nitschke appealed arguing that it was reversible error for the trial court to grant Circle Ridge's no evidence motion for summary judgment. In short, Nitschke argued that the Smith Lease required him to make shut-in royalty payments to Van Hovenberg. In the alternative, Nitschke argued that the lease required him to make the royalty payments to the royalty owner, a person other than Van Hovenberg, but his failure to do so was the fault of Van Hovenberg. However, the trial court did not grant Circle Ridge's no evidence motion for summary judgment. Rather, the court held a bench trial during which both parties presented testimony from live witnesses, and at the conclusion the trial court issued findings of fact and conclusions of law. In his brief, Nitschke did not challenge any of the trial courts findings or conclusions. Instead, he recited the no evidence motion for summary judgment standard of review. Thus, Nitschke failed to present a justiciable issue to the appellate court for its review. Accordingly, Nitschke's sole issue was overruled.

Full post as published by The Energy Law Blog on May 10, 2010 (boomark / email).