The takeaway from DDR Weinert, Limited et al v. Ovintiv USA Inc. is that equitable recoupment rescued a royalty payor from its mistaken payment of royalties. But first,
The events.
The Richters were mineral lessors in land in Karnes County. In 2016 lessee Ovintiv mistakenly adjusted gas flow on the property resulting in overpayment to some royalty owners and underpayment to others. Ovintiv did not catch the error until 2018. Meanwhile, in 2017 in their estate planning the Richters conveyed their minerals to plaintiffs Weinert and Williams. Ovintiv prepared division orders and plaintiffs became the successor lessors under the oil and gas lease on the property. Before catching the error Ovintive mistakenly overpaid the Richters $608,000 in royalties. Upon discovering the overpayment Ovintiv notified Weinert and Williams that it would make a prior period adjustment and then deducted Richters’ overpayments from Weinert’s and Williams’ royalty payments.
Plaintiffs sued for breach of contract, violations of the Texas Natural Resources Code and conversion. Ovintiv claimed that it was entitled to recover its overpayment to the Richters from Weinert and Williams. The federal court granted summary judgment for Ovintiv. The Fifth Circuit affirmed.
Equitable recoupment saves the day
The court identified two general requirements for equitable recoupment: (1) some type of overpayment must have been made, and (2) both the creditor’s claim and the amount owed to the debtor must arise from a single transaction. The plaintiffs conceded that recoupment is a valid, commonly accepted remedy in the oil and gas industry. The question was whether each month’s royalty obligation was part of the same transaction. The court deternined that each payment obligation under the same oil and gas lease was part of a single transaction for the purpose of recoupment.
The court discussed Gavenda v. Strata Energy, which concerned the applicability of the default rule that division and transfer orders bind underpaid royalty owners until revoked. Under that rule, division and transfer orders would have been binding during the entire period of underpayment, estopping the underpaid royalty owner’s claim against the operator. In Gavenda the operator kept some of the underpaid royalties and thus profited at the underpaid royalty owner’s expense. Gavenda did not help the plaintiffs in this case.
Equitable recoupment barred the plaintiff’s claim here. But for the doctrine, Ovintiv would have to pay the amount of overpayment twice, once to the overpaid Richters and again to the underpaid plaintiffs. Here Ovintiv did not profit by underpaying the plaintiffs.
A wrinkle that informed the result?
The court noted that it “cannot ignore” that the overpaid Richters control the underpaid plaintiffs. Both the plaintiffs and the Richters would be unjustly enriched if plaintiffs prevailed. What would be “equitable” about such an outcome? Plaintiffs still have a remedy. They have the right to pursue reimbursement from the Richters, the only parties that were unjustly enriched.
RIP Sylvester Stone
RIP Brian Wilson
Two brilliant and troubled individuals.
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