Scenes from the trial lawyer’s conference room:

Client: “Lookee here! This paragraph says we win!”

Lawyer: Yes, but what about all the other paragraphs?”

“Those don’t matter.”

Why is that?”

“Because they don’t help us. Did you graduate from law school?”

But the court will harmonize all the provisions in the document.”

“If I want harmony I’ll go with the Everlys. If you’re afraid of a fight, I’ll find me a lawyer with a backbone. I’m thinking the tough, smart lawyer. That one that’s always on TV.”

and:

Client: “@*^& the words. I’ll tell ’em what the deal really was.”

(Repeat client disappointment)

In XTO Energy v. EOG Resources, a title dispute over the mineral estate in 1,653 acres in Atascosa and McMullen counties, Texas, the loser tried both, to no avail.

The deed of trust, the debt, the foreclosure

Wofford conveyed the property to Hetherington and retained a vendor’s lien. Hetherington also executed promissory notes and a deed of trust.

A “Disposition Clause” allowed Hetherington to dispose of 7/8ths of the mineral rights as he saw fit “… but the usual 1/8th royalty will be retained against the land for protection of the holder of the notes …”

Hetherington conveyed the 7/8ths to XTO’s predecessor Magnolia, then defaulted on the notes. Wofford foreclosed and bought back the property. None of the documents at issue excluded the minerals.  Wofford’s successor McNeel leased to EOG, who drilled two producing wells. This trespass to try title suit ensued.

The issue

Did the Disposition Clause authorize Hetherington to convey title to the 7/8ths mineral interest free of the vendor’s lien and deed of trust, leaving only the 1/8th as Wofford’s security? No.

Harmony

XTO argued that according to the contract language, Wofford’s purchase at the foreclosure sale was limited only to the surface estate. The 1/8th royalty was extinguished by the foreclosure.

McNeel argued that the function of the Disposition Clause was to add the 1/8th royalty as a third layer of security for Wofford in the event of a mineral interest transfer. The clause limited Heatherton’s ability to convey the 7/8ths. When Heatherton defaulted on the notes and the trustee foreclosed Magnolia’s equitable interest in the 7/8ths was extinguished.

The rules

The court’s job was to harmonize all provisions in the related documents. A conveyance of land includes the minerals unless they are excluded.  Using the Disposition Clause to carve out the mineral interest from the liens and substituting the 1/8th interest as security would give that clause controlling effect over the other provisions and negate the effect of the liens against the entire mineral and surface estates.

The deed of trust was additional security retained by Wofford to protect against the mineral interest transfer rather than a replacement of the liens on the mineral estate. This harmonizes all provisions of the Wofford deed and the deed of trust.

Hear my story!

XTO asked the court to look outside the four corners of the instruments and consider that Wofford was aware of Hetherington’s plan to sell the 7/8ths mineral interest and knew that Magnolia contributed the cash that Hetherington used for the down payment. This knowledge showed her intent that the Disposition Clause would carve out the 7/8ths mineral interest from the liens so that Hetherington could convey clear title to Magnolia.

Also to no avail. Extrinsic evidence of surrounding circumstances may not be used to create doubt where the language of the document is not ambiguous. The Disposition Clause was not ambiguous.

Wofford’s vendor’s lien was further secured by the deed of trust. The conveyance became absolute only on full payment of the notes.

The result

Hetherington had only an equitable right to acquire title by paying the debt. Until the notes were paid in full, a sale by Hetherington was only a transfer of equitable interests susceptible to rescission. With the foreclosure, Wofford re-acquired all of the minerals and thus title was vested in the McNeels.

Today’s musical interlude: its about harmonizing.

And of course, Barbara Bush, RIP.

Co-author Chance Decker

What could go wrong when the well recovers two times its costs in nine months? Plenty, as we see in Dimock v. Sutherland Energy.

In a Seismic Exploration and Farmout Agreement, Dimock farmed out a 15-section area in Hardeman County, Texas, to Sutherland to drill the Hamrick #3.  Project payout was that point when revenues equaled two times Sutherland’s capital costs. The parties disagreed over whether payout occurred. The question was whether a $1 million seismic shoot after the well was drilled was a capital cost.

First, why do I care?

  • “Boilerplate” in contracts is there for a reason.
  • Should important terms be defined? This case suggests yes.
  • Grammar matters. An errant comma cost one of the parties money and time.
  • Defending a fiduciary duty claim will not be an enjoyable experience due to the high standard of behavior required of fiduciaries in Texas. Avoid fiduciary duties if you can. Seek them from the other guy if you can.

Continue Reading Farmout Agreement Worked Over by the Court

Co-author Chance Decker

Recall the Battle of the Bastards: The heroic Lady Sansa and the duplicitous Lord Baelish gallop over the hill to save the foolish Jon Snow from the heinous Ramsey Bolton. In similar fashion, but without the malnourished canines, the Texas Supreme Court in Conoco Phillips Company v. Koopmann saved the Koopmanns and you, the document drafters and title examiners, from brutal application of the Rule Against Perpetuities. Continue Reading NPRI Reservation Survives Rule Against Perpetuities

Co-author Chance Decker

The ruling from the Supreme Court of Texas in JP Morgan Chase Bank, N.A., et al v. Orca Assets, G.P., L.L.C. was foreseeable. Experienced energy professionals who pass on the opportunity to examine title for themselves are not sympathetic plaintiffs in a suit claiming reliance on oral statements of the lessor.

How did this happen?  Continue Reading Fraud Claim Rejected for Unreasonable Reliance

There are specific requirements for proving that an oil and gas lease has survived past its primary term. Fail to hit them all when the lease is challenged at the courthouse, and disappointment will be order of the day.

The heart of the dispute in J&L Oil Company v. KM Oil Company was whether plaintiff J&L satisfied the requirements of a Pugh clause in a 1951 lease. J&L sued KM for impinging upon J&L’s lease on 55 acres in Caddo Parish, Louisiana. Summary judgment in favor of KM, the alleged impinger, was affirmed. Continue Reading Lack of Proof Dooms Pugh Clause Defense

Let’s get right to the takeaway: Despite the humble hourly rate operators are typically willing to fork over for title examination, the job isn’t easy and you’d better put your trust in a practitioner with expertise, patience, and an eye for detail.

It took a court of appeal two tries to get this one right, after being enlightened by an aggrieved party. These errors are typically discovered in the real life of a producer when an aggrieved royalty owner says you’ve overpaid somebody else. Let’s hope the well is still producing when they bring the matter to your attention. Continue Reading Mineral Title Examination – It’s Not Easy  

Are you “woke”* vis-vis-vis global warming and the coming-any-day-now destruction of the coral reefs, the arctic ice pack, polar bears, coastlines, the flora, the fauna, you, me, and the entire natural world as we know it? Me neither. That’s because I elect to look past the first dozen or so results from a Google search of “global warming”, “climate change”, and related topics. Continue Reading There is Another Way to Report on Global Warming

Co-author Chance Decker  

Proving once again that gratitude is the rarest of human emotions, a contract between a landman and his client was deemed unenforceable, leaving the landman with nothing, even though he actually secured oil and gas leases for the client (at least he said that he did). In Moore v. Bearkat Energy Partners, LLC, independent landman Moore signed a contract with the purported agent of Lane.  Lane would pay Moore “$600 per mineral acre for each and every lease [Lane] enter[ed] with [Moore’s] assistance.”  Moore said he helped Lane secure numerous leases, but Lane refused to pay. Continue Reading Landman Defeated by the Statute of Frauds

Co-author Paul Yale

Issues surrounding the legality of allocation wells in Texas have been percolating for some time, and lately we’ve heard of potential litigation. So, what’s the fuss about? The results in Klotzman (a Texas Railroad Commission dispute) and Spartan et al v. EOG (a district court case) didn’t resolve the legal questions. Both settled before a ruling. Browning Oil Company v. Luecke provided theoretical underpinnings but didn’t go far enough.

Why does the controversy exist? Continue Reading Is the Allocation Well Debate About to Boil Over?