Focus Report, Volume 87, Number 5, January 10, 2022 Page: PAGE18
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Establishing a cause of action for bad
faith washouts of oil and gas leases
HB 4218 by Craddick (Hughes)Digest
HB 4218 would have authorized a person to bring
a cause of action for a bad faith washout of the person's
overriding royalty interest in an oil and gas lease. A person
would have been entitled to a remedy if able to prove by a
preponderance of the evidence that:
the person owned or had a legal right to the
overriding royalty interest;
the defendant had control over the oil and gas
lease burdened by that interest;
the defendant caused a washout of the person's
interest; and
the defendant acted in bad faith by knowingly or
intentionally causing the washout.
An owner of a royalty interest who prevailed in an
action could have recovered actual damages, enforcement
of a constructive trust on the oil and gas lease or mineral
estate acquired to accomplish the washout of the
overriding royalty interest, and court costs and attorney's
fees.
Governor's reason for veto
"Texas prizes the freedom of parties to enter into
private contracts and to have their bargains enforced.
House Bill 4218 would contravene these principles,
representing a remarkable intrusion by the State into
the contractual relationship between overriding royalty
interest-holders and oil-and-gas lessees. The Legislature
sought to address a 'wash out' of an interest holder, where
a lessee allows the lease to terminate - which extinguishes
the royalty interest under some contracts - and then
acquires a new lease on the same property. But those
are contractual rights the parties bargained for, and the
interest-holder could have given something up in exchange
for protection from a wash-out. The answer is not to
trample every such contract in Texas and provide an extra-
contractual cause of action against the lessee, paired withan award of fees for the lawyers who will surely seek out
these claims. Instead of enriching lawyers through costly
litigation on the back end, as House Bill 4218 would do,
Texas law should encourage the parties to negotiate wash
out protections in advance."
Response
Rep. Tom Craddick, the bill's author, said: "HB 4218
was overwhelmingly supported in both chambers and was
a reasonable, negotiated, thoughtful response to decades of
court decisions, many of which requested this to be settled
in the Texas statutes.
"HB 4218 received full support when voted out of the
House Committee on Judiciary and Civil Jurisprudence.
It was then voted on by the full House of Representatives
with 148 members supporting the measure. In the
Senate, the bill received full support in the Committee
on Natural Resources and Economic Development
and was approved with 31 votes in favor on the local
calendar. This legislation was heard in both chambers
and no one testified, or even registered, in opposition to
the legislation. I worked with stakeholders during the
legislative process and all of their concerns were readily
addressed. Not once during the lengthy legislative process
or during the veto period did anyone from the governor's
office reach out with concerns.
"The governor's veto statement indicated that this
legislation would be an intrusion on contractual rights
of the parties and an impetus for additional litigation.
Neither of these contentions is supported by members of
the oil and gas industry, including mineral interest holders
and operators. In fact, the Texas courts have been asking
the Legislature to clarify the definition of a bad faith
washout for many years to prevent contractual disputes.
"The two controlling decisions repeatedly cited
on bad faith washouts are Sunac Petroleum Corp. v.
Parkes, 416 S. W2d 798 (Tex. 1967) and Ridge Oil Co.S
Page 18
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Texas. Legislature. House of Representatives. Research Organization. Focus Report, Volume 87, Number 5, January 10, 2022, periodical, January 10, 2022; Austin, Texas. (https://texashistory.unt.edu/ark:/67531/metapth1543870/m1/18/?q=%22~1%22~1: accessed July 16, 2024), University of North Texas Libraries, The Portal to Texas History, https://texashistory.unt.edu.; crediting UNT Libraries Government Documents Department.