Oliver Lane Chambers, Donna Kay Chambers-Jones, Rhonda Thompson, Clinton L. Chambers and Wife, Brandi N. Chambers v. San Augustine County Appraisal District

Opinion

ACCEPTED 12-15-00201-CV TWELFTH COURT OF APPEALS TYLER, TEXAS 10/15/2015 3:13:06 PM Pam Estes CLERK

NO. 12-15-00201-CV ____________________________________ FILED IN IN THE TWELFTH COURT OF APPEALS12th COURT OF APPEALS TYLER, TEXAS TYLER, TEXAS 10/15/2015 3:13:06 PM ____________________________________ PAM ESTES Clerk Oliver Lane Chambers, Donna Kay Chambers-Jones, Rhonda Thompson, Clinton L. Chambers and wife, Brandi N. Chambers, Appellants, v. San Augustine County Appraisal District, Appellee. ____________________________________ On Appeal from the 273rd Judicial District Court San Augustine County, Texas Trial Court No. CV-13-9481

APPELLEE’S BRIEF

GUIDRY, BATES & HOYT ATTORNEYS, LLP Jeff Bates State Bar No. 01905200 bates@gbhattorneys.com 118 E. Hospital Street, Suite 100 Nacogdoches, Texas 75961 (936) 560-6954 telephone (936) 560-5996 facsimile

ORAL ARGUMENT REQUESTED TABLE OF CONTENTS

TABLE OF CONTENTS………………………………………………….…….…ii

INDEX OF AUTHORITIES…………………………………………….………...iii

STATEMENT ON ORAL ARGUMENT ...…………………………….………...iv

STATEMENT OF THE CASE…………………………………………………….v

STATEMENT OF FACTS…………………………………………….…………...1

SUMMARY OF THE ARGUMENT…………………………………….……..….2

ARGUMENT AND AUTHORITIES……………………………………………...3

I. THE TRIAL COURT DID NOT ERR IN GRANTING THE APPRAISAL DISTRICT’S TRADITIONAL MOTION FOR SUMMARY JUDGMENT…………………………………3

LEASE PROVISIONS……………………………………………………....3

UNIT DECLARATIONS……………………………………………….…...3

METHOD OF TAXATION………………………………………………....5

APPELLANTS’ LEASE INTERPRETATION………………………..……6

LIMITED ISSUES……………………………………………...………..….8

CONCLUSION AND PRAYER…………………………………………….…..…9

CERTIFICATE OF COMPLIANCE………………………………….……….….10

CERTIFICATE OF SERVICE………………………………………….………...10

APPENDIX……………………………………………………………………….11

Texas Attorney General Opinion DM-490 (1998)…………………………12

ii INDEX OF AUTHORITIES

Cases: Hooks v. Samson Lone Star, 58 Tex. Sup. Ct. J. 252 (Tex. 2015)…………………5

Key Operating & Equip., Inc. v. Hegar, 435 S.W.3d 794 (Tex.2014)………….….6

London v. Merriman, 756 S.W.2d 736 (1988)………………………………….….5

Minchen v. Fields, 162 Tex. 73 (1961)………………………………………….…5

Montgomery v. Rittersbacher, 424 S.W.2d 210 (Tex. 1968)………………………6

Pipe Line Co. v. Tichacek, 997 S.W.2d 166 (Tex.1999)…………………………...6

Veal v. Thomason, 159 S.W.2d 472 (Tex. 1942……………………………………7

Wagner & Brown, Ltd. v. Sheppard, 282 S.W.3d 419 (Tex.2008)………………...7

Other Authorities:

Texas Attorney General Opinion DM-490 (1998)…………………………………5

Basics of Oil and Gas Leases – The Producers 88 Lease Form and its Mutant Progeny, Terry I. Cross, State Bar of Texas, Oil Gas and Energy Resources 101, October 17, 2012, Houston…………………..8

iii STATEMENT REGARDING ORAL ARGUMENT

Appellee respectfully requests oral argument.

iv STATEMENT OF THE CASE

Appellants complain that they do not owe property taxes in San Augustine

County because the surface portion of the real estate for which the minerals are

being taxed is within the boundary of Shelby County. It is undisputed that the

surface estate of Appellants’ real estate lies exclusively within Shelby County.

However, the mineral interest which is being taxed has been unitized, and a portion

of the Unit lies within San Augustine County. Because Appellants’ lands have

been unitized and pooled with other lands, the minerals are appropriately taxed in

both San Augustine and Shelby counties in proportion to the percentage of the unit

lying within each county.

v STATEMENT OF FACTS

Appellant’s Statement of Facts is correct.

This appeal arises from a summary judgment from the District Court relating

to a protest of property taxes in the following amounts:

Donna Kay Chambers $14.49 [CR 14] Oliver Lane Chambers $14.49 [CR 16] Rhonda Thompson $14.49 [CR 18] Clinton and Brandi Chambers $13.99 [CR 20]

1 SUMMARY OF THE ARGUMENT

Appellants’ leases provide that the lessee has the right to pool lessor’s lands

with other lands. Appellants’ leases were, in fact, pooled with other lands and a

designation of unit was appropriately filed. Because the unit contains pooled lands

within both Shelby and San Augustine counties, it is appropriate for both counties

to tax a portion of the mineral interests within the unit in the percentage of total

surface area contained within each county.

2 ARGUMENT AND AUTHORITIES

I. The Trial Court Did Not Err in Granting the Appraisal District’s Traditional Motion for Summary Judgment.

LEASE PROVISIONS

Appellants’ mineral leases [CR 82, 85, and 88] provided their lessee the

right at its option to pool or unitize land covered by the lease with other land. The

leases provide:

“Lessee is hereby granted the right, at its option to pool or unitize any land covered by this lease with any other land covered by this lease, and/or with any other land, lease, or leases, as to any or all minerals or horizons…”. [ CR 82, 85, and 88]

The lease further provides that:

“Any operations conducted on any part of such unitized land shall be considered, for all purposes, except the payment of royalty, operations conducted upon said land under this lease. There shall be allocated to the land covered by this lease within each unit, after deducting any used in lease or unit operations, which the number of surface acres in such land (or in each such separate tract) covered by this lease within the unit bears to the total number of surface acres in the unit, and the production so allocated shall be considered for all purposes, including payment or delivery of royalty, overriding royalty and any other payments out of production, to be the entire production of unitized minerals from the land to which allocated in the same manner as though produced therefrom under the terms of this lease.” [CR 82, 85, and 88]

UNIT DECLARATIONS

It is undisputed that the Chambers’ interests subject to this appeal are

included in the Tigers DU No. 1H Unit (“Tigers Unit”) and the Wolfpack (SL) DU

3 No. 1H Unit (“Wolfpack Unit”). The Unit Designations are included in the

Summary Judgment evidence. [CR 97, 104, and 114]. (The “Wolfpack Unit also

had an amended Designation of Unit which is included in the evidence). From the

face of the documents, the unit designations were in place prior to and on January

1st of the tax year subject to this protest. The designations also demonstrate the

San Augustine/Shelby county boundary consistent with the description set forth in

Appellants’ Statement of Facts. [CR 109, 118]

The Lessees of Appellants Mineral Interests, and all other lessees in the

Unit, XH, LLC, XTO Energy Inc., HHE Energy Company, and Southwestern

Energy Production Company certified pursuant to Railroad Commission

requirements that they held the leases in the unit and that each of said leases:

“provide that the lessee shall have the right and power to designate, pool or combine, as to the gas rights therein and thereunder, the acreage coverage thereby, or portions thereof, with other land, lease, or leases in the immediate vicinity thereof, in order to form a gas unit…”. [CR 97, 114]

By filing the Unit Designation, lessees invoked those rights. Utilizing their

rights under the leases, the Lessees did pool said gas rights and created the unit.

As provided in the Unit Designation, “production from the unit shall be allocated

proportionately among all of the tracts within the unit and in proportion which the

number of surface acres in each such tracts bears to the total number of surface

acres in the unit.” [CR 97, 115]

4 Both of the designations demonstrate that the leases included therein:

“provide that the lessee shall have the right and power to designate, pool or combine, as to the gas rights therein and thereunder, the acreage covered thereby, or portions thereof, with other land, lease, or leases in the immediate vicinity thereof, in order to form a gas unit or units of the size and type hereinafter described provided that lessee shall execute an instrument in writing identifying and describing such acreage”. [CR 97, 114]. The lessee found it “necessary and advisable” to “pool and combine said leases and the lands covered thereby”.

The designation further provides that:

“lessee, acting under and by future of the power and authority conferred and granted by the provisions of said leases…does hereby designate, pool, and combine said leases…and the lands covered thereby…for the purpose of developing and operating the lands and leases for the production, storage, processing, and marketing of gas…”. The designation further provides that “production from the unit shall be allocated proportionately among all of the tracts within the unit in the proportion which the number of surface acres in each of such tracts bears to the total number of surface acres in the unit”.

METHOD OF TAXATION

The method of taxation used herein has been consistently applied by

appraisal districts around the state and was approved in Texas Attorney General

Opinion DM-490 and included in the Appendix attached hereto. [CR 121].

The effect of unitization of minerals was also discussed in London v.

Merriman, 756 S.W.2d 736 (1988) and Minchen v. Fields, 162 Tex. 73 (1961).

The Texas Supreme Court recently discussed the concept of pooling in

Hooks v. Samson Lone Star, 58 Tex. Sup. Ct. J. 252 (Tex. 2015). They stated: 5 “To resolve this dispute, we apply the “ ‘primary legal consequence’ of pooling to this case---that production anywhere on a pooled unit is treated as production on every tract in the unit.” See Key Operating & Equip., Inc. v. Hegar, 435 S.W.3d 794, 798-99 (Tex.2014) (quoting See Pipe Line Co. v. Tichacek, 997 S.W.2d 166, 170 (Tex.1999)). The reason a lessor receives royalties under a pooling agreement, even if no production occurs directly on that lessor’s tract, is because production elsewhere on the pooled unit is attributed to the lessor’s tract. And the reason the lessor receives royalties on production attributed to the lessor’s tract is because of the underlying lease. It follows that a lessor’s royalty on production from the unit as a whole reflects the lessor’s royalty on production from its individual tracts in proportion to the size of the tracts relative to the overall unit. This accords with the nature of pooling, which “effects a cross-conveyance among the owners of minerals under the various tracts of royalty or minerals in a “pool so that they all own undivided interests under the unitized tract in the proportion their contribution bears to the unitized tract.” Montgomery v. Rittersbacker, 424 S.W.2d 210, 213 (Tex.1968). In other words, the royalty owed on production from the whole unit is necessarily tied to the royalty owed on production from the lessor’s individual tracts. To increase one is to increase the other.”

Having pooled and unitized their mineral interests with other mineral

interests lying within the boundaries of San Augustine Texas, Appellants have the

obligation to pay taxes on said mineral interests within the Unit to the extent they

lie within the boundaries of San Augustine Texas.

APPELLANTS’ LEASE INTERPRETATION

While Appellee believes that a cross conveyance was created by unitization,

Appellants’ reliance upon the words “cross conveyance” is not dispositive. The

fact that the tracts have been pooled and unitized and are treated as a single unit for

all purposes except payment of royalties is sufficient to permit proportional

6 taxation of the unit by the counties. The term cross conveyance (as opposed to

unitize or pool) becomes relevant only when issues arise relating to potential

termination of the unit or expiration of a lease as occurred in Wagner & Brown,

Ltd. v. Sheppard, 282 S.W.3d 419 (Tex.2008).

The language that Appellant describes as “anti-cross conveyance” language

reads:

“The production so allocated shall be considered for all purposes, including the payment or delivery of royalty, to be the entire production of pooled minerals from the portion of said land covered hereby and included in said unit in the same manner as though produced from said land under the terms of this lease. Notwithstanding such allocation, the formation of any unit hereunder which includes land not covered by this lease shall not have the effect of exchanging or transferring any interest under this lease (including, without limitation, any shut in royalty which may become payable under this lease) between parties owning interests in land covered by this lease and parties owning interests in land not covered by this lease.” (emphasis added) [CR 131, 135, 139].

Appellee does not concede that the language negates a cross

conveyance. The words “cross conveyance” do not even exist in the

language relied upon by Appellant. Nonetheless, in a discussion of a lease

provision from another lease form which actually reads: “Pooling hereunder

shall not constitute a cross-conveyance of interest”, one author wrote the

following:

The last sentence, negating a cross-conveyance, is meant to fortify the authority to modify units. Generally, in Texas, pooling does accomplish a cross-conveyance, Veal v. Thomason, 159 S.W.2d 472 7 (Tex. 1942), and if a cross-conveyance is accomplished, then the modification of the unit, i.e., “unconveying,” is harder to reconcile. Disclaiming that pooling is a cross-conveyance is an attempt to keep the relationship resulting from the pooling as merely contractual in nature. Basics of Oil and Gas Leases – The Producers 88 Lease Form and its Mutant Progeny, Terry I. Cross, State Bar of Texas, Oil Gas and Energy Resources 101, October 17, 2012, Houston.

Another interpretation of the language relied upon by Appellants to simply

provide that each lessor shall retain their contractual interest “under their lease”,

and each shall be paid for their proportionate share of the production according to

their lease despite unitization.” In other words, each lessor within the unit shall be

paid according to the terms of their specific lease, and that their rights under their

lease shall not be cross conveyed to another lessor in the unit who may have

received a better or worse lease. Whatever rights each lessor may have regarding

the right to receive shut-in royalties, for example, are not transferred to other

members of the unit.

LIMITED ISSUES

Appellants do not contend that their total tax is in excess of 100% valuation.

Appellants do not contest the methods of appraisal. Appellants have not contested

the validity of the unit for any purpose other than assessment of tax. Appellants’

sole argument is that their mineral estate should be taxed in Shelby County because

their surface estate is within Shelby County and despite the unitization and pooling

with lands that cross the county line. There is no question of fact or law and

8 Appellee is entitled to summary judgment on the pleadings. Appellee incorporates

Plaintiff’s Original Petition by reference herein. [CR 5].

CONCLUSION AND PRAYER

The contractual language in the lease allows the lessee to pool or unitize the

lease with other lands. The lessee in this case did pool and unitize. A portion of

the unit which was created lies within the boundary of the entities for which the

San Augustine Appraisal District has taxing authority, and did so on January 1st of

the year of the protest.

Appellee prays that the Summary Judgment be affirmed and for such other

and further relief to which it may be entitled.

Respectfully submitted,

GUIDRY, BATES & HOYT ATTORNEYS, LLP 118 E. Hospital Street, Suite 100 Nacogdoches, Texas 75961 (936) 560-6954 telephone (936) 560-5996 facsimile bates@gbhattorneys.com

/s/ Jeff Bates____________ Jeff Bates State Bar No. 01905200

9 CERTIFICATE OF COMPLIANCE

I certify that this brief complies with the limitation of Tex.R.App.P. 9.4(i)(2)(B) because this brief contains 1,943 words, excluding the parts exempted by Tex.R.App.P. 9.4(i).

/s/ Jeff Bates__________________ Jeff Bates

CERTIFICATE OF SERVICE

I hereby certify that the foregoing brief has been provided to counsel listed below via electronic service on this 15th day of October, 2015.

April Gregston Prince Mettauer Law Firm 403 Nacogdoches Street, Suite 1 PO Box 2016 Center, Texas 75935 april@mettauerlaw.com

/s/ Jeff Bates____________ Jeff Bates

10 APPENDIX