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Who Has The Right to Execute an Oil and Gas Lease?

The Texas 14th Court of Appeals recently decided the case an interesting case,  Clay Exploration, Inc. v. Santa Rosa Operating, LLC, concerning who has the right to execute oil and gas leases for unknown owners. In 1889 Frederick Kastan and Gustav Heye purchased 102 acres in Grimes County, Texas. Subsequently, Kastan left Texas and moved to Germany. In 1999, after conducting an unsuccessful effort to locate Kastan or his heirs, Marathon Oil petitioned a local court for a receiver to sign oil and gas leases for the 102 acres purchased by Kastan and Heye. Marathon’s petition requested that the receiver “take charge of and execute an oil, gas, and mineral lease, or leases” on behalf of unknown owners of the mineral rights, which included Kastan and his unknown heirs. This is pretty standard practice in Texas when an oil company can’t locate all the owners. The trial court appointed a receiver, Charles Ketchum, and ordered Ketchum to execute mineral leases with Marathon. The Marathon leases required Marathon to drill and produce within three to five years or the lease would expire.

Apparently the Marathon leases expired, and in 2011 two new oil companies, Clay Exploration, Inc. and Santa Rosa Operating, LLC decided they wanted to lease the 102 acres.  Santa Rosa petitioned a local court to appoint another receiver to lease the Kastan mineral rights. While the Santa Rosa petition was pending, Clay Exploration contacted the original receiver, Ketchum, who signed a lease with Clay in January 2012.

In April 2012 Santa Rosa intervened in the original Marathon receivership action, alleging that Ketchum had only been authorized to sign a lease with Marathon and no one else. Meanwhile, Santa Rosa located the unknown Kastan heirs and obtained leases directly from them. Santa Rosa filed a motion to set aside and invalidate the Clay leases on the grounds that Clay was aware that the Kastan heirs were no longer unknown and that Ketchum was authorized to sign a lease only with Marathon.” Santa Rosa also alleged that Marathon never drilled or operated on the tracts, although there was apparently no evidence on this. In response, Clay filed a motion to confirm the lease they signed with Ketchum.

The trial court granted Santa Rosa’s motion to set aside the Clay lease with Ketchum and denied Clay’s motion to confirm that lease and Clay appealed. Clay argued that the trial court incorrectly based its ruling on a section of the Texas Civil Practice and Remedies Code that states a receivership does not stay in effect beyond the expiration of the initial lease, and that instead the original receivership was still in effect.

The statute governing receivership, Texas Civil Practice and Remedies Code §64.091, requires that a receiver appointed by the court shall:

1. Execute and deliver to a lessee or successive lessees mineral leases on the outstanding undivided mineral interest;
2. Execute and deliver to a lessee or successive lessees an assignment of the outstanding undivided leasehold interest; and
3. Enter into a unitization agreement authorized by the Railroad Commission of Texas.

The statute also provides that a receivership continues until the unknown owners or heirs appear in court in person to claim their interest.

The Court of Appeals agreed that Santa Rosa failed to show the Ketchum receivership had terminated; however, the Court disagreed with Clay’s assertion that Ketchum could sign leases with oil companies other than Marathon. The Court noted that the Kastan’s heirs were approached outside the court by Santa Rosa for leases and these heirs never appeared in court. Because the Santa Rosa lease directly with Kastan’s heirs occurred outside the court system and the court had no knowledge that the heirs had been found, the receivership created by the local court would continue until the natural expiration of the receivership or until the heirs presented themselves to the court. The Court held that judicial orders must be “constructed as a whole” and leases created under receivership are to be created “as ordered by the court.” The original receivership order expressly provided authority to sign a lease only with Marathon Oil and Ketchum lacked authority to sign a lease with anyone else.