Do Actions Speak Louder Than Words: Ratification by Acceptance of Royalties?
In BPX Operating Co. v. Strickhausen, 2021 Tex. LEXIS 468, the Texas Supreme Court determined that there was insufficient evidence to support a finding that a lessor had impliedly ratified an unauthorized pooling agreement by depositing royalty checks that had been calculated on a pooled basis. To make this determination, the Court considered the totality of the lessor’s actions and whether, considered objectively, they provided clear evidence of implied ratification as a matter of law.
Margaret Strickhausen (“Strickhausen”) owned a fifty percent mineral interest in a tract of land in La Salle, County. The other fifty percent of the mineral interest was owned by Delphine Crouch and others (collectively “Crouch”). Both Strickhausen and Crouch leased their mineral rights to Escondido Resources II, LLC, and after subsequent assignments, BPX acquired the leases.
While the Crouch lease permitted pooling, Strickhausen’s lease prohibited pooling unless obtaining Strickhausen’s “express written consent.” The Strickhausen lease provided the following:
- POOLING: Notwithstanding any provision or reference contained in this Lease agreement to the contrary, pooling for oil or gas is expressly denied and shall not be allowed under any circumstances without the express written consent of the Lessor named herein. Further, Lessee is denied the right to seek, or consent to, or participate in the forced pooling of any part of the Leased Premises under the Texas Mineral Interest Pooling Act and any and all amendments thereto or any other pooling or unitization statutes of the State of Texas without Lessor’s written consent.
(emphasis added). Despite Strickhausen’s express prohibition on pooling, BPX pooled multiple tracts, including the Strickhausen and Crouch property, to form a pooled unit BPX named “White Kitchen Unit No. 4” (“WK4 Unit”).
In April 2012, BPX drilled the “WK Unit 4 No. 1H Well” (“WK4-1H Well”) on the Strickhausen tract that also ran horizontally under other pooled tracts. The WK4-1H Well began producing in August 2012. However, it was not until September 2012 that BPX sent Strickhausen a letter requesting that she sign a pooling consent agreement and a ratification of the WK4 Unit. BPX also included an attachment of the proposed ratification agreement that stated, “the lands covered by the Lease are included in the White Kitchen No. 4 Gas Unit as described in the Designation of Pooled Unit dated January 1, 2012.”
Strickhausen notified her attorney Frank Armstrong (“Armstrong”) about the letter from BPX. Armstrong then contacted BPX to request information, which prompted a series of email exchanges between Armstrong and BPX over a two-month period. The emails consisted of Armstrong requesting information about the pooling consent agreement and how royalties would be calculated if Strickhausen ratified the pooling agreement in comparison to if she did not. During this correspondence period, Armstrong called attention to Strickhausen’s lease that prohibited pooling without her express written consent. Armstrong also acknowledged that despite the prohibition, BPX had pooled the leased lands and requested authority for the unauthorized pooling. BPX responded by acknowledging the prohibition on pooling but concluded by stating that “the royalties will require being placed in suspense” if Strickhausen did not “cooperat[e] by executing the enclosed Ratification of Designation of Pooled Unit.”
Despite BPX not receiving the executed Ratification, BPX sent Strickhausen a $249,901.73 check for royalties for production from August to December 2012 with the notation “WK UNIT 4 1H.” During this same time period, Armstrong rejected BPX’s “offer to settle the wrongful pooling of the Strickhausen Lease,” and made a counter-offer. The counter-offer was never accepted, and Strickhausen deposited the initial check on March 11, 2013, and continued to deposit the monthly royalty checks until filing suit over a year later.
In 2014, Strickhausen filed suit against BPX for breach of contract, in addition to other claims. Both parties filed motions for summary judgment. Strickhausen argued that BPX owned her royalties on all production from the WK4-1H Well, despite the well extending horizontally under other pooled tracts. Strickhausen reasoned that her lease required BPX to pay royalties on all production from any well on her tract. BPX argued that Strickhausen impliedly ratified the pooling because she accepted royalty payments calculated on a pooled basis. The trial court granted BPX’s motion and the court of appeals reversed. The court of appeals reasoned that because of Strickhausen’s challenges to the pooled unit, the evidence cannot conclusively establish as a matter of law Strickhausen’s implied ratification. BPX petitioned for review.
The Court began its analysis with stating the well-established principle that contract formation is a question of the parties’ intent to be bound. Similarly, one party ratifying changes to a contract is also a matter of intent. The Court noted that when the facts are not disputed, a court may decide a question of ratification as a matter of law.
The Court noted that implied ratification is complex and that a party’s subjective state of mind is immaterial. Instead, courts look to the objective intent, such as words or actions. In addition, the Court noted that many Texas courts have held that implied ratification should be found only if the party’s actions clearly evidence an intent to ratify, in an effort to not interfere with a party’s rights to contract and reject unfavorable terms. The Court agreed and reasoned that BPX was required to show that Strickhausen’s behavior clearly evidenced an intent to ratify the unauthorized pooling.
When determining whether Strickhausen’s actions clearly evidence an intent to ratify BPX’s unauthorized pooling, the Court first looked to the lease itself. The Court reasoned that Strickhausen specifically bargained for the prohibition on pooling without her express consent, which was unlike her neighboring lessors. The Court also looked to the history of the dispute, acknowledging that when Strickhausen learned of the unauthorized pooling, she notified her attorney, asserted her anti-pooling rights, and requested an explanation. In addition, not only did BPX acknowledged the unauthorized pooling, but they had also threatened to put Strickhausen’s royalties “in suspense” until she ratified. However, rather than putting the royalties in suspense, BPX began sending unsolicited royalty checks based on the unauthorized pooling. The Court also considered Strickhausen’s rejection of BPX’s offer to settle the wrongful pooling, the continued assertion of her anti-pooling rights, and the proposing of a counteroffer to settle the dispute. When considering all of these facts together, the Court determined that the facts did not amount to clear evidence of an attempt to ratify that would sufficiently support a judgment of ratification as a matter of law.
The Court did recognize that depending on the circumstances, there are times that acceptance of the benefits of pooling can amount to ratification. The Court cited Yelderman v. McCarthy, 474 S.W.2d 781 (Tex. Civ. App. 1971), which held that a lessor who was not entitled to royalties in the absence of pooling had ratified unitization by accepting royalty checks based on production from the pool. However, when the facts relating to objective intent point in different directions, the Court reasoned that there is no Texas authority that requires evidence of implied intent to trump express intent, with express intent being all of Strickhausen’s other actions.
The Court also recognized that, in some cases, depositing pooled royalty checks despite objections to the pooling can amount to ratification as a matter of law. Again, the Court cited Yelderman, which provided that “[a] creditor who accepts and cashes a check tendered as full payment of a disputed claim cannot vary the legal effect of such acceptance as an accord and satisfaction by protesting that he is accepting the check as part payment only.” However, the Court distinguished the situation in Strickhausen by explaining that pooling was not the only reason that Strickhausen was owed money. Rather, the Court found that she could have reasonably seen the checks as payment towards what she believed she was owed absent pooling.
In support of its argument, BPX cited Hooks v. Samson Lone Star, Limited Partnership, 457 S.W.3d 52 (Tex. 2015), to advance a categorical rule that when a lessor accepts payments of royalties calculated on a pooled basis, it always amounts to ratification of pooling as a matter of law. The Court disagreed, noting that in Hooks nor its predecessors, did the Court hold that ratification occurs as a matter of law whenever a party commits an act inconsistent with intent to avoid a contract in the case. The Court reasoned that the holding in Hooks rested on the confluence of facts that pointed toward ratification, not any single act. The Court reasoned that if that were the standard, ratification would be a trap for the unwary who had committed an act that could be portrayed as inconsistent with rejecting the former agreement. Further, the Court noted that intent would no longer be the controlling question if such a standard were adopted. Therefore, the Court found that BPX did not establish ratification as a matter of law.
Ultimately, the Texas Supreme Court determined that implied ratification as a matter of law should only be found when the party’s actions clearly evidence an objective intent to ratify. This case emphasizes how important the agreed terms are in a lease. Despite actions to the contrary, the agreed terms in a lease may be controlling without express written consent to the contrary.
At the time of the Court’s review, Strickhausen received over $700,000.00 in monthly royalty checks.
 The Court cited Chrisman v. Electrastart of Hous., Inc., No. 14-02-00516-CV, 2003 Tex. App. LEXIS 10725, 2003 WL 22996909, at *5 (Tex. App.—Houston [14th Dist.] Dec. 23, 2003, no pet.) for support.
 The Court also specified that none of their prior decisions support a bright line rule that acceptance of royalties calculated on a pooled basis always constitutes ratification of pooling regardless of contrary evidence of intent.
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