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Leavitt v. Ballard Exploration Company, Inc.

Court of Appeals of Texas, First District

December 7, 2017


         On Appeal from Probate Court No. 2 Harris County, Texas Trial Court Case No. 167164

          Panel consists of Chief Justice Radack and Justices Keyes and Massengale.



         Appellant Michael Leavitt, successor testamentary trustee of the Bert Earl Gassaway Testamentary Trust and successor independent administrator with will annexed of the Estate of Marie Anderson Gassaway, deceased ("the Trust"), appeals the trial court's summary judgment in favor of appellee Ballard Exploration Company, Inc. ("Ballard"). Leavitt sought to collect statutory prejudgment interest and attorney's fees against Ballard based on a claim that Ballard wrongfully withheld royalties. Ballard asserted that although a well operator like Ballard must pay statutory prejudgment interest when it fails to make timely payment of royalties, the Texas Natural Resources Code contains a "safe harbor" provision providing that "[p]ayments may be withheld without interest" when "a dispute concerning title that would affect distribution of payments" exists. See Tex. Nat. Res. Code Ann. § 91.402(b)(1) (West 2011). The trial court granted Ballard's motion for summary judgment and dismissed the Trust's claims for prejudgment interest and attorney's fees with prejudice.

         On appeal, the Trust argues that: (1) the trial court erred in ruling that Ballard was entitled to the protection provided by the "safe harbor" provision; (2)Ballard did not meet its summary judgment burden for dismissal of the Trust's claim to recover its attorney's fees incurred in a dispute with a third party based on theories of conversion, unjust enrichment, and equitable subrogation; and (3)Ballard did not present, argue, or prove its alleged affirmative defenses in its motion for summary judgment.

         Because we conclude that a legitimate title dispute as contemplated by Natural Resources Code section 91.402(b)(1) existed here, thus authorizing Ballard to withhold payment of royalties to the Trust until that dispute was resolved, we conclude that the trial court did not err in denying all of the Trust's claims. We affirm.


         This appeal involves twelve years of litigation that arose from a dispute regarding royalties from a gas unit in Liberty County, Texas. The Trust traces its royalty interest back to a 1966 deed conveying a 100-acre tract of land in Liberty County from Marie Anderson Gassaway and her brother, Allie Anderson, to A. Chester Holbrook ("the 1966 Deed"). The 1966 Deed reserved a one-sixteenth nonparticipating royalty interest[1] ("NPRI") to Gassaway and Anderson. Allie Anderson's half of this interest was eventually inherited by Charles and David Stroud, while Marie Gassaway passed her half through her will to the Bert Earl Gassaway Testamentary Trust, which was created for the benefit of Bert Gassaway, Marie's son. The successor beneficiary of the Trust is Sadie Boatner (a/k/a Celia Boatner). Holbrook's interest as the executive owner of the mineral interest passed to his successors Bruce Holbrook, Virgil Holbrook, Juanita Rizzo, Ellen Holbrook, and Evelyn Waldrop (collectively, "the Holbrooks").

         In 1997, the Holbrooks entered into various oil and gas leases with Anshutz Gulf Coast Corp. covering over 250 acres, including the tract of land conveyed in the 1966 Deed.

         In 1999, Ballard acquired the leases from Anshutz. These leases identified the Holbrooks as the lessors and Ballard as the lessee/operator. Ballard hired Shorthorn Resources to examine the relevant titles in order to facilitate royalty payments. According to the affidavit of Ballard's representative, Bob Frederick, this title search did not uncover the Trust's NPRI.

         Ballard drilled a producing well known as the Holbrook No. 1 Well ("the Well") that was completed in October 1999. The Well was not located on the tract burdened with the Trust's NPRI. On November 19, 1999, Ballard designated the Holbrook No. 1 Unit ("the Unit") comprised of 234.6 acres, including 38 acres from the tract of land conveyed in the 1966 Deed and burdened with the Trust's NPRI. The Unit designation was recorded in the Liberty County property records. After production from the Well began in December 1999, Ballard paid royalties to the Holbrooks for their entire interest in the pooled Unit, including all of the royalties payable under the pooling agreement for the 38-acre tract burdened with the Trust's NPRI.

         Bert Earl Gassaway died on June 26, 2002. In late 2003, Boatner-the successor beneficiary of the Trust-informed the trustee[2] of Bert's death and of the royalty interest owned by the Trust in Liberty County. The trustee discovered at that time that a portion of the land on which it held the NPRI had been pooled in 1999, that "substantial production" from the Unit had occurred between November 1999 and June 26, 2002, when Bert died, and that production continued after Bert's death. Boatner, who believed that the NPRI automatically vested in her upon Bert's death, made a written claim to Ballard seeking royalty payments based on her interest in the NPRI, which she represented as beginning at the time of Bert's death on June 26, 2002. She was given the opportunity to ratify the lease and pooled Unit and did so on December 1, 2003.

         Upon receiving Boatner's claim, Ballard placed the NPRI interest that was the subject of Boatner's claim in suspense and requested that Shorthorn reexamine its earlier title report. Shorthorn indicated that it did not report the Trust's NPRI because it believed that the 1966 Deed conveyed an overriding royalty interest rather than a NPRI based on the language in the Deed.[3]

         On March 3, 2004, the Trust made a formal written claim to royalties based on its NPRI to both Ballard and the Holbrooks. The trustee recounted conversations with attorneys for the Strouds and for the Holbrooks that led to discovery of the Well. The trustee asserted the Trust's interest in royalties from the Well's production beginning in October 1999 and continuing at least through the date of Bert Gassaway's death. The trustee's letter stated that correspondence with the Holbrooks' attorney, Edward Pickett, "makes it apparent to me that Ballard has discovered that an error was made concerning erroneous royalty payments made to the Holbrook family and is attempting to rectify the situation."

         The Holbrooks, however, maintained that neither the Trust nor Boatner was entitled to any of the royalties from the Well in the pooled Unit. On June 3, 2004, the Holbrooks filed suit in Liberty County asserting that Boatner, Leavitt, and the Strouds had created a cloud on their title to the royalties at issue ("the Liberty County suit"). The Holbrooks essentially argued that because the Well was not located on the tract of land burdened with the NPRI, no royalties were due until the applicable lease and pooling agreement were ratified, and that royalty payments would begin as of the date of ratification. Ballard was not a party to the Liberty County suit.

         On September 3, 2004, the trustee filed an original petition for declaratory judgment in the trial court (the Harris County probate court) against the Holbrooks and Ballard, arguing that it had "the immediate right to certain oil and gas royalties that had accrued from pooled production of an [NPRI] owned by the Estate and Trust from the inception of production on or about November, 1999 through the death of Bert Earl Gassaway on June 26, 2002." The Trust alleged that Ballard had suspended payment of the royalties and was holding the monies because the Holbrooks "totally denied" the Trust's interest in the royalties. The Trust also argued that it was entitled to attorney's fees and costs. The Trust further alleged that the trustee "was never contacted by Ballard or the Holbrooks regarding this interest, that it had never been given the opportunity to ratify the pooling, related lease, or related division order, and had never received any of the royalties." However, this suit was abated pending resolution of the Liberty County suit.

         On December 6, 2005, the Holbrooks and the Strouds announced that they had reached a settlement in the Liberty County suit. The Liberty County court subsequently granted summary judgment in favor of the Holbrooks, clearing the cloud on their title and determining that neither Boatner nor the Trust was entitled to any of the claimed royalties (i.e., those predating Boatner's ratification of the lease). The Trust appealed, and, on July 10, 2014, the Ninth Court of Appeals vacated the judgment in the Liberty County suit as it related to the Trust on the ground that the Liberty County court had never had subject matter jurisdiction over the claim, and it held that the Harris County Probate Court-the trial court in this appeal-had exclusive jurisdiction over the trustee and actions concerning the Trust. See Leavitt v. Holbrook, No. 09-12-00303-CV, 2014 WL 3384672, at *3-4 (Tex. App.-Beaumont July 10, 2014, no pet.) (mem. op.).

         Boatner was not a party to that appeal. The trustee subsequently asserted that when Boatner decided not to appeal, she effectively waived any interest she had in the royalties, and, on June 21, 2012, the Trust sent a letter to Ballard asserting the Trust's interest in the entire claim for royalties, including any claim of Boatner's.

         On December 19, 2014, Leavitt and the Holbrooks reached a settlement, including an Agreed Partial Final Judgment in which the Holbrooks waived all claims to the disputed royalties and a Settlement Agreement requiring payment to the Holbrooks to offset some of their costs. The Trust waived any claim for legal fees against the Holbrooks, and the Holbrooks were dismissed from the underlying suit, while the Trust's claims against Ballard remained pending.

         Upon learning of the settlement, Ballard prepared a ratification of the leases covering the portion of land in which the Trust held the NPRI that was pooled into the Unit and a division order. On December 31, 2014, the trustee signed the ratification and division order on behalf of the Trust, and Ballard paid the Trust $63, 709.66, representing "all suspended funds attributable to the [Trust's] interest."

         On August 14, 2015, the Trust supplemented its petition to allege new facts and arguments in light of the Ninth Court of Appeals' opinion in Leavitt and the Trust's settlement with the Holbrooks. The Trust alleged that it was entitled to recover from Ballard "all prejudgment interest on the Trust's oil and gas royalties from December, 1999 through December 31, 2014" and "reasonable attorney's fees and costs pursuant to the protections provided to royalty owners by §§ 91.402, 91.403, 91.404, 91.406 and other provisions of the Texas Natural Resources Code." The Trust also asserted that it was entitled to recover from Ballard all attorney's fees incurred in both the Harris County and Liberty County suits because "Ballard's refusal to pay the Trust any of its legally entitled royalties until December 31, 2014 was without any legal justification since the Trust made demand on Ballard more than eleven years prior." The Trust asserted causes of action for unjust enrichment and conversion, sought the imposition of a constructive trust, and asserted equitable subrogation rights.

         On October 30, 2015, the Trust moved for partial summary judgment, arguing that it was entitled as a matter of law to prejudgment interest and attorney's fees under the Natural Resources Code due to Ballard's failure to pay the Trust royalties-royalties the Trust claims it held by "clear, indisputable legal title"-in a timely and accurate manner. This motion was denied by the trial court.

         On March 15, 2016, the Trust filed another motion for summary judgment on its request for attorney's fees based on claims of conversion, unjust enrichment, and equitable subrogation against Ballard. Ballard responded, refuting these claims, and, on March 21, 2016, Ballard filed its own traditional and no evidence motion for summary judgment on all of the Trust's claims against it.[4] As evidence, Ballard submitted the affidavit of Bob Frederick setting out the facts discussed above and Ballard's actions in withholding the disputed royalties. It also included copies of the written demands and other letters sent by the trustee, pleadings from this suit and the Liberty County suit, the judgment from the Liberty County suit, and the opinion of the Beaumont Court of Appeals in Leavitt.

         The trial court granted Ballard's motion for summary judgment and denied the Trust's motions for summary judgment. It determined that the Trust should take nothing ...

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