## Facts

- In 1967, the Gavenda family conveyed Burleson County land while reserving, for 15 years, an undivided one-half non-participating royalty in oil and gas production, excluding lease bonuses and rentals.
- The land later changed hands, and in 1976 the then-owner executed an oil and gas lease reserving a standard 1/8 lessor’s royalty.
- Strata Energy, Inc. and Northstar Resources, Inc. acquired working interests under the lease; Strata served as operator and disbursing agent under a joint operating agreement.
- Strata hired an attorney for a title examination and received an erroneous opinion that the Gavendas owned only a collective 1/16 royalty rather than the reserved one-half royalty.
- Strata prepared division orders and later transfer orders reflecting a 1/16 collective royalty; the Gavendas signed the orders and were paid accordingly.
- The payment scheme underpaid the Gavendas by 7/16 of gross production, and Strata and Northstar retained at least part of the underpayment.
- On September 29, 1982, after discovering the error, the Gavendas revoked the division and transfer orders in writing.
- On October 1, 1982, the 15-year reserved royalty expired by its terms.
- The Gavendas sued to recover more than $2.4 million in underpaid royalties, plus interest and attorney’s fees.
- The trial court granted summary judgment for the operators, limiting recovery based on the view that division/transfer orders are binding until revoked; the court of appeals largely affirmed with a limited remand; the Supreme Court of Texas granted review.

## Issues

1. Whether division and transfer orders are binding until revoked when the operator prepared erroneous orders, underpaid the royalty owner, and retained part of the proceeds.
2. Whether an operator can avoid liability for underpayment by attributing the title error to an independently retained attorney.
3. Whether expiration of the reserved royalty interest bars recovery of underpayments that accrued before expiration.

## Decision

- The Supreme Court of Texas reversed the court of appeals in part and remanded.
- It held the signed division and transfer orders did not bar the Gavendas’ recovery to the extent the orders would permit Strata and Northstar to keep proceeds owed to the Gavendas.
- The “binding until revoked” rule did not protect an operator that was unjustly enriched by its own erroneous payment scheme.
- Strata could not avoid responsibility by characterizing the title attorney as an independent contractor for purposes of liability to the underpaid royalty owners.
- Expiration of the 15-year reserved royalty did not extinguish claims for royalties that accrued and were misallocated during the reservation term.
- The case was remanded for determination of underpaid amounts and related relief, including prejudgment interest and attorney’s fees.

## Legal Principles

- Division and transfer orders generally function to direct payment and protect purchasers and disbursing agents against double liability when proceeds are paid in good faith to the wrong party.
- The “binding until revoked” effect of a division order does not operate to shield an operator who prepared the erroneous order and retained proceeds that should have been paid to the rightful interest owner.
- Equity bars an operator from keeping benefits arising from its own payment error when doing so results in unjust enrichment at the expense of the interest owner.
- An operator responsible for disbursing proceeds may be held accountable for underpayments caused by reliance on a negligent title opinion obtained for the operator’s benefit.
- Termination of a royalty interest does not defeat a claim to recover sums that accrued and were wrongfully withheld before termination.

## Conclusion

The court refused to treat division and transfer orders as a bar to recovery where the operator’s mistaken allocations resulted in the operator retaining proceeds owed to the royalty owners, and it remanded for calculation of the underpaid royalties and related monetary relief.


Gavenda v. Strata Energy, Inc., 705 S.W.2d 690 (Tex. 1986)