If a lessor cashes a royalty check, then they’ve agreed to whatever the operator did to generate those royalties, right?

Texas operators have long functioned under that comforting belief.  Whether they pooled without explicit lease authority, amended a unit without consent or undertook other not-quite-lessor-authorized actions, it’s long been assumed that as long as the royalty owner cashed the check generated from such questionable actions, the operator is in the clear.  The royalty owner must have ratified the operator’s conduct by implication.  Unfortunately, those implied ratification waters aren’t so clear anymore.

By its June 11, ,2021 opinion, the Texas Supreme Court officially muddied things up.  In BPX Operating Co. v. Strickhausen, the Court held that even though a royalty owner cashed more than $700,000 of royalty checks over 17 months, she did not ratify pooling by implication.  64 Tex. Sup. Ct. J. 1284, 2021 Tex. LEXIS 468.  The Court focused on the lease language, which stated that,

“…pooling for oil or gas is expressly denied and shall not be allowed under any circumstances without the express written consent of the Lessor…Further, Lessee is denied the right to seek, or consent to, or participate in the forced pooling or any 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.”

The Court explained that the no pooling without consent provision provided extra protection and a lessor with that language “should have less reason to worry about mistakenly giving her implied, unwritten consent than does a party not protected by such clause.”

With the lease’s extra protective language and the lessor questioning and attempting to negotiate a settlement to ratify the unit, the Court concluded the lessor did not impliedly ratify the unit—even though the lessor continued to cash royalty checks designated from the unit for more than a year while her proposed settlement and questions went unanswered.

With this new opinion, the Texas Supreme Court upheld the underlying appellate court’s reversal of the trial court’s summary judgment in favor of the operator and implied ratification based on the familiar precedent of Hooks v. Samson Lone Star, Ltd. Partnership, 457 S.W.2d 52 (Tex. 2015) (holding that “any act inconsistent with an intent to avoid a contract has the effect of ratifying the contract.”) and Montgomery v. Rittersbacher, 424 S.W.2d 210 (Tex. 1968) (finding that a royalty owner impliedly ratifies an unauthorized pooling agreement “by accepting royalties from the pool.”).  The Strickhausen operator has already petitioned the Court for a rehearing due to all the confusion this new anti-implied ratification law would cause. You can be sure this isn’t the final word on the matter.