imageUsing a fraction of a fraction instead of a percentage can cost an oil and gas fortune.

The lesson came in Hyshaw v. Dawkins, No. 14-0984 (Tex. Jan. 29, 2016), a fight over a 69 year-old will. It shows what a mess can result from the fondness of oil and gas people for a particular kind of fraction — the sort with an eight in the denominator.

Fractions as shorthand

Oil and gas people like to speak in eighths.

They say “8/8ths” when they mean “all”, for instance.

And for many decades, until at least the 1970s, the “usual” or “customary” royalty for the land/mineral owner meant one of those eighths.* (The exploration and production company leased the property from the land/mineral owner and paid all drilling and operating costs in return for the other 7/8ths).

Indeed, the notion of dividing oil and gas interests into eighths embedded itself so deeply into the consciousness of the oil and gas milieu that “many landowners erroneously believed the landowner’s royalty could be no greater than 1/8″. Hyshaw v. Dawkins, slip op. at 1 (emphasis added).

And they also thought, incorrectly, that a lease ceded to the lessee forever all but 1/8 of the minerals when in fact they retained the right to reversion of the minerals if the lease terminated (i.e., they had a possibility of reverter).

Thus, although a royalty equals a “percentage share” of production from a well or proceeds — 12.5 percent, say — leases, wills, deeds, and other conveyances have typically expressed the percentage as a fractional shorthand — 1/8.

The case

Hyshaw v. Dawkins arose from the 1947 will and death of Ethel Hyshaw.

When she shuffled off the mortal coil in 1949, Ms. Hyshaw owned the surface of, and minerals under, 1415 acres in Karnes County, southeast of San Antonio. She bequeathed the property to her son and two daughters in three separate, and unequal, parcels. But she granted “each of my children . . . an undivided one-third (1/3) of an undivided one-eighth (1/8) of all oil, gas or other minerals in or under or that may be produced from any of said lands”. Id. at 4.

A later passage stated that, in the event she sold a royalty interest during her lifetime, the son and daughters “shall each receive one-third of the remainder of the unsold royalty.” Id. (emphasis added). Note the non-specific, un-fractional “remainder of the unsold royalty” language.

The matriarch thus treated her offspring unequally vis-a-vis how much of the 1415 acres each one received but the same with respect to the royalty payable to them upon lease of the lands.

Or did she?

Successors to the interests of Ms. Hyshaw’s children got in a fight over what “one-third (1/3) of an undivided one-eighth (1/8)” meant. One group urged that it simply equaled .04167 or 4.167 percent (.3333 x .125). The other faction claimed that “undivided one-eighth (1/8)” referred to whatever royalty the lessee agreed to — which has in more recent years often exceeded 1/8 (12.5 percent) by a factor of two (25 percent).

The fight thus concerned whether the successors to fee ownership of the unequal parcels could retain all the benefit of higher royalty rates in more recent leases or whether they instead had to share it with the others.

Ruling

The Supreme Court ruled 9-0 in favor of sharing. As Justice Eva Guzman explained:

The third royalty clause demonstrates that Ethel intended the royalty devise to be equal and that re-equalization would be required if an inter vivos event diminished the available royalty. If Ethel had truly intended the fee-owning child to benefit exclusively from any excess royalty, as Inez’s successors argue, equalization following a royalty-diminishing transaction would produce a paradoxical result. The only plausible construction supported by a holistic reading of the will is that Ethel used “one-eighth royalty” as shorthand for the entire royalty interest a lessor could retain under a mineral lease, anticipated the siblings would share that royalty equally, and intended proportional equalization of any royalty remaining following an inter vivos transaction. We therefore hold that Ethel’s will devised to each child 1/3 of any and all royalty interest on all the devised land tracts.

Id. at 22-23 (footnotes omitted).

Impact

The outcome of Hyshaw v. Dawkins means uncertainty around conveyances of royalty interests that express the grant in fraction-of-1/8 terms.

In disputes over interpretation of both wills and inter vivos transfers, courts in Texas will treat a conveyance of a 1/8 royalty interest as suggesting, but not proving, an intent to part with a “floating” interest, which will vary depending on the royalty rate that the land/mineral owner negotiates with the lessee/exploration and production company. Other language in the will or deed must ordinarily buttress the inference of a wish to create a royalty interest that varies rather than one that always equals the product of multiplying the fractions.

Will the incidence of these sorts of disputes fade with time, as limitations defenses and equitable doctrines bar complaints about royalty payments? That topic will simply have to wait.

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* “For many years,” one authority notes, “almost all oil and gas leases reserved a 1/8th royalty.”An example of the “printed form” or “Producers 88” appears as Figure 1 in this article.

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Clients and colleagues call Barry Barnett an “incredibly gifted lawyer” (Chambers and Partners) who is “magic in the courtroom” (Who’s Who Legal), “the top antitrust lawyer in Texas” (Chambers and Partners), and “a person of unquestioned integrity” (David J. Beck, founder of Beck…

Clients and colleagues call Barry Barnett an “incredibly gifted lawyer” (Chambers and Partners) who is “magic in the courtroom” (Who’s Who Legal), “the top antitrust lawyer in Texas” (Chambers and Partners), and “a person of unquestioned integrity” (David J. Beck, founder of Beck Redden).

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PERSONAL
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Yale won, 14-0.