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Amoco Prod. Co. v. Underwood - 558 S.W.2d 509 (Tex. Civ. App. 1977)

Rule:

The lessee must exercise "good faith" toward the lessor and royalty owners in making a pooling designation. As a general rule, the question of good faith is a fact question to be determined by the fact finder.

Facts:

Victory Petroleum Corporation (Victory) drilled a producing gas well and then filed a gas unit declaration that included over 2,250 acres of land. Amoco Production Company (Amoco), mineral interest holders of lands in the unit, brought suit to cancel the unit, alleging that Victory acted in bad faith in forming the unit because the unit was "gerrymandered." Amoco alleged that the formation of the gas unit served to tie up the leases included in the unit, preventing their owners from securing other leases. The trial court found that Victory acted in bad faith, canceled the gas unit and gas purchase contract that encumbered the properties, declared the leases on the properties other than where the well was drilled were canceled for lack of production, and ordered all royalties be paid to appellee landowner of the tract where the well was drilled. Victory appealed.

Issue:

Did Victory Petroleum Corporation show the required good faith in creating the “gerrymandered” gas unit?

Answer:

No.

Conclusion:

The court affirmed the judgment that cancelled the gas unit and gas purchase contract, terminating the leases, and ordering all royalties be paid to Amoco where the well was sited. The court held that Victory and others had not shown the required good faith in creating a "gerrymandered" gas unit that was intended to keep those properties' leases in effect and preventing their owners from leasing to other producers.

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