Fifth Circuit Applies Equitable Recoupment to Bar Successor Royalty Owner's Claims for Overpayments Made to Predecessor
The Fifth Circuit affirmed summary judgment for Ovintiv USA in a dispute over more than $608,000 in royalty withholdings, holding that DDR Weinert and DDR Williams—entities owned and controlled by the Richters—acquired their Karnes County mineral interests subject to all valid leases and other indebtedness, including Ovintiv's right to recoup prior overpayments made to the Richters before the transfer. The court rejected the plaintiffs' breach of contract, Texas Natural Resources Code, and conversion claims arising from Ovintiv's Prior Period Adjustment to correct a gas flow error that resulted in overpayments to the Richters between September 2016 and January 2018.
Background and Transaction Structure
In December 2017, Duane and Colleen Richter executed special warranty deeds and mineral deeds conveying their mineral interests in four tracts in Karnes County, Texas, to DDR Weinert, Ltd., and DDR Williams, Ltd.—entities the Richters owned and controlled—as part of estate planning. Ovintiv USA, Incorporated served as lessee and operator of the Subject Property. Following the conveyances, the plaintiff entities became successor lessors entitled to royalty payments previously paid to the Richters, and Ovintiv prepared new division orders executed in April and May 2018 and signed by the Richters on behalf of the plaintiffs.
The Overpayment and Recoupment Dispute
Between September 2016 and January 2018, Ovintiv mistakenly adjusted gas flow on several properties, resulting in underpayments to some royalty owners and overpayments to others. The Richters were among those overpaid during this period, which predated the transfer to the plaintiff entities. Ovintiv did not discover the error until January 2018. On June 26, 2018, Ovintiv informed the plaintiffs that it planned to conduct a "Prior Period Adjustment" that year and would recoup any overpayments to the Richters from future royalty payments to the plaintiffs. According to the plaintiffs, Ovintiv withheld more than $608,000 in royalties from them.
Procedural History and District Court Decision
The plaintiffs brought suit on April 27, 2022, in Texas state court, alleging breach of contract, violations of the Texas Natural Resources Code (TEX. NAT. RES. CODE § 91.401, et seq.), and conversion. Ovintiv removed the lawsuit to the Western District of Texas on the basis of diversity jurisdiction. The parties filed cross-motions for summary judgment. The district court granted summary judgment for Ovintiv because the plaintiffs had acquired their interest subject to all valid leases and other indebtedness.
Fifth Circuit Affirmance
The Fifth Circuit affirmed the district court's grant of summary judgment for Ovintiv. Reviewing the summary judgment order de novo and applying the same standard as the district court, the appellate panel upheld the determination that the plaintiffs acquired their mineral interests subject to all valid leases and other indebtedness, which included Ovintiv's right to recoup the overpayments previously made to the Richters.