639 S.W.3d 682
Tex.2022Background:
- 1986 deed reserved an undivided 1/8 nonparticipating, in‑kind royalty to be delivered “free of cost in the pipe line, if any, otherwise free of cost at the mouth of the well or mine.”
- Produced gas is collected in an onsite gathering system (compression/processing) and then delivered to third‑party transportation pipelines; operators and third parties charge for gathering, processing, and transportation.
- Under prior operator Quicksilver, Engler was paid based on downstream sales proceeds (no postproduction deductions); BlueStone (successor operator) began deducting postproduction costs, valuing the royalty at the gathering‑pipeline entry point.
- Engler sued for conversion and money had and received; cross‑motions for summary judgment were filed. Trial court initially held royalty free of postproduction costs, later ruled delivery occurred at transportation pipeline (so some downstream costs deductible) and awarded damages; court of appeals reversed, holding delivery in the gathering pipeline.
- Texas Supreme Court affirmed the court of appeals: a gathering pipeline qualifies as a “pipe line” under the deed, delivery can occur on the wellsite, and BlueStone properly deducted postproduction costs incurred after delivery into the gathering system.
- The Court excluded Engler’s expert evidence on deed meaning (contract was unambiguous) and clarified Burlington Resources does not create a per se rule equating “into the pipeline” with an at‑well valuation in all contexts.
Issues:
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether a gathering pipeline is a “pipeline” under the deed | Engler: “pipe line” means downstream transportation pipeline (not gathering lines) | BlueStone: gathering lines are pipelines in ordinary, industry, and regulatory usage | Held: Gathering pipelines qualify as “pipe line”; delivery may be made into onsite gathering system |
| Proper delivery/valuation point under clause “in the pipe line, if any, otherwise at the mouth of the well” | Engler: “otherwise” shows pipeline means offsite transporter; valuation at transportation pipeline so royalty free of most postproduction costs | BlueStone: clause permits delivery into any pipeline that exists, including onsite gathering; valuation at gathering entry so postproduction costs after that point deductible | Held: Clause does not limit to offsite pipelines; default at mouth of well applies only if no pipeline exists; BlueStone’s point (gathering) controls |
| Whether Burlington Resources established a categorical rule that “into the pipeline” equals an at‑well valuation | Engler: Burlington creates a rule that “into the pipeline” is equivalent to at‑well delivery | BlueStone: Burlington does not create a universal rule; context governs | Held: Burlington does not create a blanket rule; contract language controls case‑by‑case |
| Admissibility/effect of Engler’s expert testimony on industry meaning of “pipe line” | Engler: expert shows historical industry meaning supports transportation‑pipeline reading | BlueStone: expert testimony was conclusory, opined on law, and assumed facts not in record; contract unambiguous so extrinsic evidence inadmissible | Held: Contract unambiguous; expert evidence inadmissible to vary plain terms; no fact issue created |
Key Cases Cited
- Burlington Res. Oil & Gas Co. v. Tex. Crude Energy, LLC, 573 S.W.3d 198 (Tex. 2019) (contract‑language analysis of an "into the pipeline" clause; emphasized construing instruments as a whole)
- Chesapeake Exploration, L.L.C. v. Hyder, 483 S.W.3d 870 (Tex. 2016) (discussed gross‑production and royalty concepts; in‑kind royalty principles)
- Heritage Res., Inc. v. NationsBank, 939 S.W.2d 118 (Tex. 1996) (rule that royalties generally bear postproduction costs absent contrary agreement)
- Barrow‑Shaver Res. Co. v. Carrizo Oil & Gas, Inc., 590 S.W.3d 471 (Tex. 2019) (limits on using extrinsic evidence to vary unambiguous contract terms)
- KCM Fin. LLC v. Bradshaw, 457 S.W.3d 70 (Tex. 2015) (definition and nature of nonparticipating royalties)
- Blasi v. Bruin E&P Partners, LLC, 959 N.W.2d 872 (N.D. 2021) (North Dakota case interpreting similar "in the pipeline" royalty language and rejecting narrow technical definitions of "pipeline")