shysterAccording to Mr. Bumble, the law is an ass. I disagree (Know a lawyer who’s an ass? That’s another conversation). In Davis v. Mueller the law was not an ass, per se, but as applied by the Texas Supreme Court it showed little mercy.

A refresher on conveyances

  • According to the Statute of Frauds, a writing conveying real property must furnish within itself, or by reference to some other existing writing, the means or data by which the land to be conveyed may be identified with reasonable certainty.
  • A Mother Hubbard clause is a catchall in a deed to capture small, overlooked, or incorrectly described interests.
  • A Mother Hubbard clause is not effective to convey a significant property interest not adequately described in the deed.
  • In Texas a general conveyance of all of a grantor’s property in a geographic area is given effect.

Continue Reading Texas Mineral Deeds Survive the Statute of Frauds

Yellow KEEP OUT Barrier TapeCo-author Chance Decker

We know that in Texas the mineral owner has the right to explore for and produce the minerals. What does that leave for the surface owner? In Lightning Oil Company v. Anadarko E&P Onshore, LLC the Texas Supreme Court tells us he owns the right to possess the specific place or space where the minerals are located. Absent pooling or some other contractual arrangement, with that comes the right to grant (for a price) or deny an off-lease operator the right to drill through the mineral estate to reach minerals under an adjacent tract. Continue Reading Texas Subsurface Trespass Law Clarified

railroadCo-author Chance Decker

BNSF v. Chevron Midcontinent LP et al. asked whether a 1903 deed granted BNSF’s predecessor a strip of land in fee simple absolute or only an easement. The result: BNSF holds only an easement. There’s more to the case than an analysis of particular language in one sui generis contract. What else did we learn?

The big picture

  • Is your assignment to determine the intent of the parties in a document? Consider it as a whole; don’t cherry pick phrases and read them in isolation. I doesn’t matter whether you are issuing checks based on ownership or convincing the court of your righteousness.
  • Beware of ancient title documents, in particular a “Right of Way Deed”. Railroads in the early part of the last century had a propensity to present documents that looked like easements but were really deeds in fee simple. Here, 115 years later, if that was the intent it didn’t work.
  • “Beware” translates to “read the document carefully and thoroughly”. Don’t skim the granting clause and call it a day.
  • In a face-off between the granting and habendum clauses, the granting clause prevails. But, as you will see, it’s not that simple.

Dueling deed language

The consideration: “… benefits which will accrue… by reason of the construction of a line of railroad over the land…”

The granting language: “… a right of way, that certain strip of land hereinafter described, …”. The deed then described a line traced by surveyors.

The habendum clause: “To have and to hold the said premises, together with all appurtenances thereto belonging, in fee simple, unto the said … its successors and assigns forever.”

BNSF’s losing arguments (contending the deed conveyed fee simple absolute)

  • “Right-of-way” is not a legal term of art with a set definitive meaning, but rather may be used in two senses: a right of passage, and also a strip of land which railroad take up one upon which to construct a roadbed. The court agreed, but that didn’t carry the day.
  • “For a right-of-way” is a precatory nonrestrictive clause that states a purpose but does not limit the nature of the estate being conveyed. (Don’t even try to say you already know what “precatory” is.)
  • The habendum clause refers to “fee simple”. That alone should  answer the question. But the granting clause controls, and the court wasn’t ready to recognize a Texas doctrine of “an easement in fee simple” as do some other states.

The court – it’s an easement

The granting clause straddled the line between two different types of deeds, making it ambiguous. The court then had to examine the entire deed and harmonize its conflicting provisions. The court followed the basic rule: Assume the parties intended every clause to have effect so that no clause is rendered meaningless. But the focus remained on the granting clause, which controls the disposition.

Chevron offered the only reasonable reading of the deed. The deed as a whole evinces a clear intent to convey only a surface easement. The court noted these factors:

  • The opening recitals show that the grantor would receive benefits if a railroad passed over the land.
  • “Right-of-way” appears in the granting clause directly in front of “that strip of land”. The placement of the statement of purpose means something.
  • The line shaped by the surveyors went “over to and across” various sections.
  • There was a separate grant of the right to use wood, stone and other resources. If the deed conveyed the land in fee simple the right to take and use the natural resources would have passed automatically.
  • The granting clause defines which bundle of rights was transferred; the habendum clause tells the recipients how long and under what conditions they can have and hold those rights.
  • The habendum clause allows the grantee to have and hold the “premises”, which suggests only an easement.

What is the effect of the reference to “fee simple” in the habendum clause? Fee simple is a “durational or conditional qualifier, rather than the expression of an estate’s size”. The operative question of what BNSF actually owns is answered by the granting clause and the “gloss put on that clause by the rest of the deed.”

What is it about trains and prison in country songs?  Know what I mean?

perpuitiesWe have a new format. And we’re still gluten free!

Co-author Alexandria Twiss

In BP America v. Laddex, Ltd.  the Texas Supreme Court affirmed that in a lease termination case the trial court cannot limit the jury’s consideration of production in paying quantities to an arbitrary time period. The court also applied the Rule Against Perpetuities.

Production in paying quantities

See this entry for our discussion of the court of appeals’ ruling.

In March 2007 the lessors under the BP lease entered into a top-lease with Laddex covering the same property as the BP lease. Laddex sued, alleging that the BP lease had terminated for failure to produce in paying quantities in 2005 and 2006. A jury found that the BP lease had terminated for failing to produce in paying quantities. BP appealed.

The trial court incorrectly charged the jury on production in paying quantities by limiting the inquiry to a specific 15-month period in which production slowed. The controlling issue was whether the well failed to produce over a reasonable period of time determined by the jury, not a specific period chosen by the court.

The Rule Against Perpetuities

Despite the boredom that may result, you need to know about the Rule. BP argued that the top-lease on which Laddex’s standing depended was void as a perpetuity.

The Rule: “No interest is valid unless it must vest, if at all, within twenty-one years after the death of some life or lives in being at the time of the conveyance.”

The BP bottom-lease was a conveyance of the mineral estate (less portions expressly reserved, such as royalty) as a determinable fee. A it possibility of reverter is the interest left in a grantor after the grant of a fee simple determinable. The possibility of reverter is presently vested at the time the lease is executed.

A top-lease conveyance on expiration of a bottom-lease, without more, generally violates the Rule. However, the court looked to Laddex’s lease. Its primary term commenced on the date that either (1) releases of the BP lease executed by all owners of record are filed in the real property records, or (2) a final judgment terminating the BP lease.

The Laddex lease further stated that is “is intended to and does include and vest in Lessee any and all remainder and reversionary interest and after-acquired title of Lessor in the Leased Premises upon expiration of any prior oil, gas or mineral lease . . . .” The Court concluded that a plausible interpretation of this language was that the Laddex lease is a present “partial alienation” of the lessors’ possibility of reverter under the BP lease, to the extent that what Laddex has acquired “is capable of ripening into a fee simple determinable interest upon expiration of the [BP] lease.” BP’s interpretation was also plausible, but where an instrument is equally open to two constructions, the one will be accepted which renders it valid rather than void.

I denied my heritage by failing to feature a Mardi Gras song on Mardi Gras day. I’ll make up for it with one you’ve heard and one, maybe not.

maneiri-1A phrase currently in common usage begins with “‘cluster” and ends with a vulgarity that has been around for centuries. Saheid v. Kennedy presents facts that pretty much exemplify the meaning of the phrase:

  • While living in England, start out to buy a hotel in New Orleans,
  • have no experience in Louisiana mineral transactions,
  • when the hotel falls through, buy 1096 acres with 500 wells in northernmost Caddo Parish,
  • do zero title due-diligence,
  • memorialize the $4 million transaction with a one-page handwritten document,
  • close the deal three weeks later with an Act of Credit Sale,
  • pay royalties for four years and then dispute the obligation,
  • when disagreement ensues sign another “contract” that doesn’t really help,
  • sum it all up by testifying as to your “confusion” about the transaction.

The one-pager for the 1096 acres provided: “Seller [Gish] to give a best effort to deliver to Buyer [Saheid] the remaining 12 ½% Gish family oil and gas lease holding.” Saheid’s purchase price would be reduced by $400,000 if Gish couldn’t deliver the minerals within five years. Saheid paid royalty to the Gish relatives for almost four years. Saheid and Gish later entered into a “contract” in which they agreed that the Saheid payment would be reduced and Gish would continue to withhold the 12.5% royalty.

What legal points are at play?

Not much about titles, a lot about parol evidence, which is admissible when:

  • the terms of a contract are susceptible to more than one meaning,
  • there is ambiguity as to its provisions, or
  • the intent of the parties cannot be ascertained from the language used.

Four witnesses sorted out the mess. And as one might expect, the testimony was confusing and contradictory. Saheid had never purchased mineral interests before and said he was unaware of the 12.5% being claimed by the family. His title-examiner expert testified that the public records showed there was no written contract for the 12.5% mineral interest. But he agreed that it was Gish’s right to sell 87.5% and keep the rest if the agreement so specified.

The court concluded that Gish did not intend to sell and Saheid did not intend to buy the entire mineral interest. Gish was selling 100% of the tract and 87.5% of the minerals, which is a reasonable concession for accepting a partial payment and owner financing. The court referred to Saheid’s “imperfect understanding” of the transaction.

Takeaways

  • Due diligence = good business, sloppiness and haste = bad business.
  • Lame, one-page agreements are seldom sufficient for anything, much less a $4 million land and mineral trade.
  • Paying royalties for four years and then saying you thought you owned the minerals = not persuasive.
  • Entering into a contract before you understand it = bad business.

If Saheid had stopped in Opelousas instead of turning north to Shreveport, maybe he could have avoided this mess.

Good - Better - Best. On the black bacground
Good – Better – Best. On the black bacground

Co-author Katie English

McCabe Trust v. Ranger Energy LLC, is the consequence of failing to comply with the Texas Property Code when correcting real property conveyances.

The simplified facts

  • In 2008, Mark III executes a mortgage granting a bank a security interest in property described in an attached exhibit which included certain oil and gas leases.
  • In 2011, Mark III assigns overrides in the leases covered by the mortgage, plus two additional leases, the McShane Fee and Brice, to the McCabe Trust and the Rochford Trust.
  • In January 2013, a revised mortgage is recorded, replacing the original exhibit with one including the McShane Fee and Brice leases. It is not executed by the bank or Mark III.
  • The bank transfers the mortgage to Ranger Energy.
  • Ranger forecloses.

Ranger asserted that the Trusts’ overrides in the McShane Fee and Brice leases were extinguished by the foreclosure sale. The trial court granted judgment for Ranger.  The appellate court reversed and remanded.

Why the reversal? Blame the Texas Property Code

A correction instrument that complies with the Property Code is effective as of the date of the original conveyance. The statutory requirements for correction instruments differ based on whether the correction is a material change or nonmaterial correction.

A nonmaterial change

Section 5.028 allows a person with personal knowledge to execute a correction instrument making a nonmaterial change of an inadvertent error, including the addition of an inadverantly omitted legal description.

A material correction

Section 5.029 allows the original parties to the transaction or their successors to execute a correction instrument making a material correction, including “the addition of land to a conveyance that correctly conveys other land.”

The decision

The 2013 revisions added two additional leases to a mortgage which correctly conveyed interests in other leases.  The addition was a material correction. The corrective instruments were not retrospectively valid because they were not signed by the parties who originally executed the instruments. Thus, they were not notice to subsequent buyers of the facts stated therein. Foreclosure of the revised mortgage did not extinguish the Trusts’ overrides in the two leases.

The dissent

The dissent agreed with Ranger that adding the two leases was a nonmaterial change but argued that the Trusts were not bona fide purchasers.  The dissent would say the Trusts’ interests were extinguished.

Takeaways

There are several:

  • Statutory requirements for correcting a real property conveyance differ depending on the circumstances.
  • These provisions date from 2011. If you haven’t dusted off the Code since the Longhorns were successful on the gridiron, be warned.
  • The general rule is that first in time is first in right. There will be times when you will need the correction to relate back.
  • If there is a question whether a change is material or nonmaterial, have all original parties to the original transaction (or their successors) execute the correction.

Recall my desire to criminalize lame cover songs. Immunity should be granted for good ones. For example, we have the very outstanding Curtis Mayfield original, and the almost-as-good Huey Lewis cover.

speed limitToday’s “pay attention” edition begins with a quiz. What is the most important thing to read carefully:

a. Speed limit sign in small-town (insert name of Southern state).

b. Itinerary for that dream vacation, the one with multiple layovers of varying durations in airports and time zones far from your own.

c. Title documents to which you affix your John Hancock.

d. Prep instructions before the colonoscopy.

Scott v. Peters, et al. reminds us of the directive imposed by Oklahoma’s constructive notice doctrine:  Read and understand documents that you sign affecting your land. (Helpful hint: It’s no different in other states).

The events

  • 1997 – Warranty Deed filed with the county clerk, Scott conveys 120 acres to Peters; later says he only conveyed the surface.
  • 2000 – Warranty Deed filed, Scott conveys another 40 acres to Peters; retains no minerals
  • 2001 – Warranty Deed filed, Scott grants the same 120 acres to Russell; no reference to mineral reservation.
  • 2001 – Russell conveys the 120 acres to Wichert; no reference to mineral reservation.
  • 2002 – Peters discovers the Wichert deed; obtains a quitclaim from Wichert; leases the minerals under the entire 160 acres.
  • 2014 – Scott sues Peters to quiet title in the minerals under both tracts.

 The issue 

When did Oklahoma’s five-year statute of limitations for reformation of a deed begin to run? Resolved: When the document was filed of record, even if Scott didn’t understand what it said.

Scott argues: Limitations for reformation of the 1997 deed didn’t begin to accrue when the deed was filed. It did contain a mineral reservation, but the reservation was insufficient. A layman such as himself couldn’t be held to know the legal effect of such an insufficiency until the legal effect was questioned. He relied upon Oklahoma’s equitable 15-year limitation statute.

Peters responds: Constructive notice was imposed upon Scott by the filing of the deed in 1997; thus the suit was untimely.

Scott acknowledged that he was precluded from challenging the 2000 deed, but argued that the statute was tolled until he learned of an issue regarding the insufficiency of the reservation in the 1997 deed.

The court opines – Scott should have read his deed

Scott’s suit was untimely. He had an opportunity and obligation to read the 1997 deed and at least inquire as to what he was signing. He was required to be diligent in investigating the transaction. This, he did not do.

Even if the mineral reservation in the 1997 deed had been unartfully drafted and was insufficient, Scott attempted to convey the exact same property in 2001 with no reservation whatsoever. Thus, at least as of 2001 Scott was on notice as to what the deed expressed. Had he timely sought to reform the deed, his suit might have succeeded.

The statute began to accrue a least with Scott’s 2001 deed to Russell with no reservation. At that time Scott was on notice that he had no minerals.

Quiz answer

Its a trick question. All answers are correct sooner or later. In Mr. Scott’s case, it’s obvious.

A musical interlude for Mr. Scott.

It’s a multiple choice question:

a.  The royalty interest reserved by the lessor.

b. The drillbit, courtesy of fearless, risk-taking entrepreneurs, the backbone of the great American free enterprise system and the sworn enemies of collectivism.

c.  A cache of DNC emails, discovered by Vladimir Putin himself.

d.  The working interest.

e. It doesn’t matter. Trump won. Get over it.

Can’t stand the suspense? It’s “d”. If the override doesn’t spring from the working interest, you don’t have it.

How did this happen?

EnCana Oil & Gas (USA) et al v. Brammer Engineering et al involved a Power of Attorney under which Brammer would manage minerals for the mineral owners. Terms in the POA regarding Brammer’s compensation:

  • “. . . mineral leases executed in the future by Agent . . . will provide for the reservation of an additional free overriding royalty interest on behalf of the lessors.”
  • Brammer’s compensation would be “on . . . leases under the terms of which not less than 1/16th override royalty is reserved, [Brammer] shall be entitled to 1/32nd free overriding royalty”.

WW&M represented other mineral owners. With Brammer’s permission WW&M negotiated a lease with EnCana with a 1/4th royalty. The lease did not include overriding royalty language Brammer believed it was entitled to, so Brammer executed the lease and an assignment of a 1/32nd override in favor of itself out of the lessor’s royalty.

Then, the litigation 

The mineral owners’ point: Brammer didn’t carve the override out of the working interest and thus was not entitled to it.

Brammer’s response: The additional override was a contractual obligation payable to Brammer from the total royalty reserved in the lease.

The court decides

If Brammer obtained any lessor’s royalty greater than 1/8th, was it entitled to an override, or was Brammer required to expressly reserve an additional free override for itself?

Brammer had to expressly reserve an additional royalty interest for the mineral owners in order to trigger its right to the override. To the court, Brammer redefined “royalty” to mean the standard royalty, whatever that standard might be at any given time. This would require the court to look beyond the words of the unambiguous contract. Further, to the court, “additional” means an override in addition to the lessor’s royalty.

Stated another way: Brammer argued it was entitled to a 1/32nd override anytime that it acquired, in favor of the mineral lessors, at least 1/16th more than the “typical” 1/8th. This, it did not do. Brammer did nothing to obtain the 1/4th royalty in WW&M’s bid package. Judgment for the mineral owners.

What is an overriding royalty anyway?

The Mineral Code does not expressly define an override. Citing plenty of authority, the court concluded that the term describes a royalty carved out of the working interest, different from and in addition to the lessor’s royalty.  This is acknowledged in Brammer’s assignment language:  “It is hereby reserved in favor of Brammer . . . from the Lessors’ royalty . . . a free overriding royalty 1/32nd of  . . .  .”

Have a happy holiday.

perpetuityToday we venture into Oklahoma, to be instructed on the Supreme  Court’s treatment of the Rule Against Perpetuities. First, the Rule: No property interest is good unless it must vest, if all, not later than 21 years after some life in being at the creation of the interest.

In American Natural Resources LLC v. Eagle Rock Energy Partners LP, et alEagle Rock’s predecessor (Encore) and ANR entered into a participation agreement with an AMI. Eagle Rock drilled and completed 17 wells without allowing ANR to participate. In response to ANR’s tortious interference and breach of contract suit, Eagle Rock said that the Rule Against Perpetuities prevented enforcement of this option: “In all subsequent wells within the AMI, ANR shall have the right to participate in the prospect area with a . . . 25% working interest . . .”

ANR responded: The Rule doesn’t apply to operating agreements and doesn’t apply to the option because oil and gas production is always of limited duration.

The court’s analysis

The court observed that the Rule applies to property rights but not to contracts, which are personal, and found cases involving JOAs and leases that fell on both sides. The question was, Does this option provision create a property right subject to the Rule?  The court’s answer was yes.

Options in mineral leases do not violate the Rule because leases and JOAs have a built duration not necessarily tied to the cessation of production. But this AMI was a stand-alone document, and the option applies to participation in wells drilled in the future, as well as existing leases. ANR could participate in future wells even if production ceased and then restarted.  The option allowed ANR to participate in future wells if production ceased and then restarted under new leases and new JOAs. as well as existing leases. As such it is subject to the Rule.

An LLC is not a “life in being”

ANR argued that a single member limited liability company with a 30 year duration should be disregarded as an entity.  The court responded: A corporation might be a person, but it is not a “life in being”.  The only measurable “life in being” in the case of a corporation is a term not exceeding 21 years.  A provision with an immeasurable life in being that vests or distributes after 21 years violates the Rule and is void. ANR asked the court to rely on the disregarded entity doctrine used for federal tax purposes. The court said they were not dealing with federal taxes, but with contractual rights.  Thus, an Oklahoma LLC is a legal entity separate from its owners.

Speaking of Oklahoma, Leon Russell RIP.

Lagniappe

For extra credit, learn more about the Dakota Access Pipeline.

burning moneyMEMORANDUM

From: Legal Department

To: Accounts Payable

Re: What we learned from Shell Western E&P, Inc. v. Pel-State Bulk Plant, LLC

________________________________________________________________________

Just received notice of a Texas subcontractor’s mineral lien? DO NOT continue to pay the contractor. He hasn’t paid the subcontractor. Think you owe nothing on the well on which the lien will be filed? Think what you owe the contractor is not related to the lien? Both good questions, but it might not matter.

If your contractor is insolvent you’ll pay twice, and your standing with the boss will take a major hit.

________________________________________________________________________

Under Chapter 56 of the Texas Property Code a property owner receiving a mineral subcontractor’s lien notice may withhold payment to the contractor in the amount claimed until the debt on which the claim is based is resolved.

Pel-State was a subcontractor for frac jobs in 11 Shell wells.  Pel-State sent Shell a notice that the contractor was not paying for the sub’s work and then perfected a mineral lien.

The dispute was whether the lien amount was $3.19 million or $713,000. The mineral property owner is not liable to the subcontractor for more than the amount the owner owes the original contractor when the notice of lien is received.

A lesson on the Master Service Agreement 

The source of Shell’s misery was its Master Service Agreement with the contractor. When Shell received Pel-State’s lien notice Shell owed the contractor $11 million and thereafter continued to make payments to the contractor.  Bad call.

Shell owed nothing to the contractor on what it considered to be the contract under which Pel-State claimed a lien. Shell owed only $713,000 for the wells on which Pel-State performed work.

Under the MSA no specific work or a price was agreed upon. Those were determined by separate work orders for each job.  The court concluded that the multiple work orders under the MSA comprised a single contract. Where several instruments executed contemporaneously or at different times pertain to the same transaction they will be read together although they did not expressly refer to each other.

What about the Property Code?

Under Section 56.006 the operator cannot be liable to a subcontractor for an amount greater than the amount agreed to be paid under the contract for furnishing material or labor.  Because the MSA was one contract, the court rejected Shell’s argument that a lien should only apply on the work orders for the wells upon which Pel-State provided work.

Pel-State was entitled to collect from Shell for all work performed under the Shell/contractor MSA, under which Shell owed $11 million. The court affirmed Pel-State’s $3.19 million recovery.

Section 56.043 – a safe harbor

This provision, if used properly, protects the operator from liability.  But he has to stop paying the contractor once he receives a notice. Under this opinion, any limitation on the amount of the subcontractor’s lien must be determined by the state of the account between the property owner and the operator, not by amounts that might be owed on a particular work order or field ticket.

Musical interlude – more Bob

Can’t get enough of Bob Dylan songs of loss, sadness and unrequited love, especially when he’s not singing?

Tomorrow is a Long Time

Boots of Spanish Leather

Farewell