Puckett v. First City National Bank of Midland

The Pucketts (defendants) issued an oil and gas lease on their land to a lessee. First City National Bank of Midland (Bank) (defendant) acquired the lessee’s interest. The lease provided that if the leasehold was pooled, the entire pooled unit would be treated as if it were a part of the lease, “except the payment of royalties on production from the pooled unit.” The lease further stated that if the leasehold was pooled, the Pucketts would receive a portion of the total royalty from the pooled unit equal to the portion of their acreage as compared to the total pooled acreage. The Bank pooled the leasehold with land leased by Gulf Oil Corporation (Gulf) (plaintiff). The Bank sold its portion of gas from the unit to Northern Natural Gas Company (Northern) and LoVaca Gathering Company (LoVaca) (defendant). Gulf sold its portion of gas to LoVaca. The pooling agreement stated that production “from any portion of the . . . unit shall be allocated between the tracts comprising such unit on the acreage basis” described in the agreement. The Pucketts ratified and adopted the agreement. The Bank calculated its royalty payments to the Pucketts based on the Bank’s gas-sales prices. Gulf brought suit against LoVaca and the Bank, alleging that LoVaca had paid the Bank for gas that was actually Gulf’s gas. The Bank instituted a third-party action against the Pucketts, seeking reimbursement of any royalties that the Bank had erroneously paid to the Pucketts. The Pucketts countersued, seeking royalty payments based on a weighted average of the total proceeds from the sale of gas on the entire unit. LoVaca settled prior to trial. The trial court found that the Bank had properly paid the Pucketts royalties based on production on the Bank’s portion of the unit. The trial court ordered the Pucketts to pay the Bank excess royalties, and awarded contribution to the Bank from Gulf. The Pucketts and Gulf appealed.