Co-Author: David Pruitt

Why should related companies lawyer-up to protect themselves when entering a contract to manage an oil and gas property? The question is not rhetorical. Mesquite Energy, Inc. v. Sanchez Oil & Gas Corporation is a cautionary tale about what can happen when affiliated entities don’t sort out, until it’s too late, who owns intellectual property they create together.

The facts

The Sanchez family operated Sanchez Energy Corporation (“SN”), a public E&P company, and Sanchez Oil & Gas Corporation (“SOG”), the family’s private company. Under a Services Agreement, SOG employees provided management and operational support to SN, executives routinely held the same titles at both companies, and SOG’s personnel directed day-to-day operations that SN funded. In 2014, SN acquired the Catarina Asset for $639 million. Facing declining commodity prices, SN and SOG jointly developed “Zero Dark Forty,” a cost-reduction program that significantly slashed drilling and operational costs at Catarina.

In 2016, three SOG employees left for a competitor, Terra Energy Partners, absconding with thousands of proprietary files, including Zero Dark Forty data. SOG, SN, and a related partnership, SNMP, sued Terra and the disloyal employees. (SNMP is not relevant to the outcome or this discussion.) SN paid the legal fees. The Terra litigation eventually settled in 2024, and the net proceeds went into escrow while SOG and Mesquite (SN’s post-bankruptcy successor) fought over how to split up the proceeds.

The question

Who owned the Zero Dark Forty trade secrets – the company that wrote the checks or the company whose employees built the program?

The law and the ruling

Mesquite argued: Because SN funded Zero Dark Forty, it owned the trade secrets. SOG countered: Its employees developed the program under its operational control and the effect of the Services Agreement was to vest ownership in SOG.

The Texas Business Court determined that neither party was entitled to sole ownership. Funding is probative of contribution but not dispositive of exclusive title, especially where the parties operated as an integrated enterprise. And the Services Agreement itself contained no express language assigning newly developed trade secrets to either party. With executives wearing two hats and employees holding concurrent roles at both companies, the court found the relationship was anything but arm’s-length. The trade secrets were jointly developed, and the settlement proceeds were split 50/50.

The court also invoked unjust enrichment to order SOG to reimburse Mesquite for half of the pre-contingency legal fees SN had paid. SOG passively received a benefit, half a settlement, that would not exist but for SN’s sole funding of the litigation. One cannot sit on the sidelines and then claim a full share of the rewards without contributing to the cost.

Takeaway

It is probably not realistic to expect related parties, especially family-affiliated companies sharing officers, employees and office space, to negotiate as though they were strangers, each suspicious of the other guys. At the time the arrangement was established it didn’t matter, everyone being on the same team. But when the relationship changes, whether through bankruptcy, a sale of one entity or the other, the passage of time or whatever no one was thinking about happens, it matters a great deal.

Draw your own lessons from Mesquite. Maybe its not that affiliated entities should treat every intra-family collaboration as it would if the counterparty were a stranger. Perhaps the question should at least be considered: If we create something valuable together, who owns it if, for example, an unanticipated but not unimaginable event occurs? (After all, how unforseeable is an oil and gas bankruptcy?) An IP ownership provision in the Services Agreement could have resolved this dispute before it started.

Your musical interlude.

Co-Author Gunner West

In Pioneer Nat. Res. USA, Inc. v. Elberta M. Royalty, LLC, a Texas court held that a lease calling for payment of royalty on the “net amount received by Lessee for the sale” of oil and gas required lessee Pioneer to pay its lessor Elberta on a cotenant’s production from first production, though the cotenant did not pay Pioneer for nearly two years. The 120-day deadline in Section 91.402(a) of the Natural Resources Code ran from the first sales from the well, not from the day Pioneer’s check arrived.

The facts

Pioneer’s Upton County lease pays 22.5% of the net amount the lessee receives for the sale; Pioneer paid royalty on its own wells without incident. Henry Resources, a cotenant holding leases from other owners in the same land, drilled the Pearl wells, which began producing in January 2021; Henry did not pay Pioneer its share until November 2022. Elberta, the lessor under Pioneer’s lease, sent a statutory 30-day notice in January 2022; Pioneer did not respond and paid two years of accrued royalty only in January 2023. The trial court dismissed Henry for lack of a payor-payee relationship and held Pioneer liable under the lease and Chapter 91 of the Texas Natural Resources Code.

The lease

Pioneer argued that the royalty is owed on the net amount “received by Lessee,” and it personally received nothing until Henry paid. On that reading, its royalty obligation and the statutory deadline both waited until Pioneer received payment from Henry.

The court rejected Pioneer’s assertions for two reasons.

  • The “net amount received by Lessee for the sale” sets how the payment is computed (proceeds, net of post-production costs) and says nothing about who must make the sale. The same clause deducts post-production costs “incurred by Lessee,” yet Pioneer never personally incurred those costs; Henry did. Pioneer offered no reason “received by Lessee” should be more personal than “incurred by Lessee.”
  • A royalty is an interest beginning with first production, free of the costs of production. Under Pioneer’s reading, Elberta would collect nothing on the Pearl wells until the wells reached payout. That describes a payout interest, not the interest this lease creates in favor of the lessor.

Pioneer then fell back on practicality. Requiring a nonoperating lessee to front royalty it cannot calculate is absurd. Pioneer’s own conduct told the Court otherwise. In January 2021 Pioneer asked Henry’s division order supervisor for production data and decimal interests for the royalties it acknowledged would be owed. According to the record the calculation was not difficult, much less impossible.

The statute governs

Section 91.402(a) is triggered by the sale of production, not the payor’s receipt of proceeds. The statute draws no distinction between sale by a lessee and sales by a cotenant operator. The parties cited no prior case applying the statute to a nonoperating lessee for royalty on a cotenant’s production, and the absence of precedent did not help Pioneer. Its first payment in January 2023 came well past a deadline measured from the first sale in January 2021.

A word about attorney’s fees

Elberta was awarded damages of $17,000+. The jury awarded, and the appellate court upheld, almost $340,000 in attorney’s fees through trial. Wow! It can happen.

Your musical interlude

Co-author David Pruitt

Shorter et al. v. Coffield Family Properties, LTD. is a Texas double-fraction royalty dispute with a variation arising out of language that seems different enough from deeds previously adjudicated to be worth fighting over.

The reservation was,

  • “as a royalty interest an undivided one-half of the usual and customary one-eighth (1/8) royalty on all oil, gas and other minerals”.

… and was clarified in the document to say,

  • “the sole and only right of the grantors herein being to receive one-sixteenth (1/16) of all oil and gas and other minerals produced from said lands as a royalty interest.”

The facts

The conveyance was in a 1944 deed in which the Skeens conveyed 640 acres in Borden County to Wolf. The Coffields, successors to the grantors, sued the Wolfs, successors to the grantee, seeking a judgment declaring that the reserved interest was a floating one-half royalty rather than a fixed 1/16. On cross-motions for summary judgment the trial court agreed with the Coffields.

The question and the answer

The question for the Eastland Court of Appeals: Did the deed reserving a double fraction (“one-half of the usual and customary one-eighth”) followed by a later clause expressing a single fraction (“1/16”) reserve a floating or a fixed royalty interest? The Court concluded that the grantor kept a floating 1/2 of whatever the lease royalty would turn out to be.

The presumption was not rebutted

Under the Van Dyke presumption, when a deed contains a double fraction (x/x of 1/8), a court begins with the presumption that 1/8 reflects the entire mineral estate – meaning the reservation creates a floating royalty interest. The presumption is “readily and genuinely rebuttable” by express language showing a specific intent to reserve a fixed interest; that is, distinct provisions that cannot be harmonized if 1/8 is given its term-of-art usage, or the repeated use of fractions other than 1/8 in ways showing the parties intended that the provisions are only arithmetic.

The holding

According to the Court, “one-half of the usual and customary one-eighth (1/8) royalty” triggered the Van Dyke presumption and reserved a floating one-half royalty interest. The later “sole and only right … to receive one-sixteenth” did not rebut the presumption. The court explained that under prior Texas decisions a single-fraction clause following a double fraction is merely explanatory – illustrating what the floating interest would yield under a standard 1/8 lease, and does not override the primary reservation clause.

The court distinguished Clifton v. Johnson, where the presumption was rebutted because the single fraction appeared first in the granting clause and was then followed by a parenthetical “showing its work.” Here, the structure was inverted: the double fraction came first, and the single fraction appeared only later in a future-lease clause.

No presumed grant

The Court noted the Wolfs’ failure to complain as to the trial court’s implicit findings with regard to presumed grant supported affirmation of the trial court’s judgment. The Court also found that any evidentiary errors regarding a stipulation and a landman’s affidavit were harmless because disposition turned entirely on unambiguous deed language.

Takeaway

The trial court judgment was affirmed. The 1944 deed reserved a floating 1/2 royalty interest. If your old deed says, “one-half of the usual 1/8” and later says “1/16,” you are probably looking at a floating interest unless the text clearly shows the parties were just doing arithmetic … or another appellate court sees it differently.

Dolly, RIP. an early hit … one of her 3000 originals … harmonies with her friends.

Co-author: David Pruitt

Can a consulting agreement convey overriding royalty interests without naming the leases? The Bankruptcy court for the Southern District of Texas tackled that question in In re Barrow Shaver Resources Company, LLC. In summary, the answer is “maybe” … “sometimes” … “it depends on the proof”.

The facts

Independent operator Barrow Shaver hired geologists Kasino and Turner under identical consulting agreements in 2019. In exchange for the geologists identifying and evaluating prospects in the Hidden Rock Field in East Texas, Barrow Shaver agreed to “set aside” for each consultant an override not to exceed 1% of 8/8ths out of the ORRI Barrow Shaver retained in the property, “provided that, the lease burdens and deal terms allow.” Record title was to remain in Barrow Shaver so long as it operated the property.

For several years Barrow Shaver paid production revenues attributable to the overrides. Then came an involuntary Chapter 7 petition against Barrow Shaver in 2024 and the payments stopped. The consultants sued for a judgment declaring their ownership; Barrow Shaver counterclaimed, denying that a valid conveyance occurred.  

Statute of frauds – the property description fails

The Consulting Agreement was legally deficient on its face and could not satisfy the statute of frauds. It referenced only undefined “oil and gas properties” and “Prospects” without identifying any lease from which the overrides derive. Under longstanding Texas property law, the writing itself must furnish the means to identify the property with reasonable certainty. Extrinsic documents such as division orders, division-of-interest listings, and line ledgers cannot supply the essential elements the statute of frauds demands in the operative instrument. Summary judgment on this issue went to Barrow Shaver.

The Court reserved judgment on whether overrides supported by tax records might fall within the partial-performance exception to the statute of frauds and ordered further briefing.

Statute of conveyances – present intent

The consultants prevailed on this issue. The agreements satisfied the statute of conveyances. The phrase “set aside” evidenced a present intent to convey overrides earned both before and after execution of the agreements. The Court found the language was ambiguous enough to admit extrinsic evidence, such as division orders and pay decks reflecting override payments. These documents confirmed that conveyances did occur.

The conditional phrase “provided that … deal terms allow” did not defeat the conveyance: any override generating revenues necessarily had room under the NRI, and Barrow Shaver never executed a financing arrangement that would have extinguished that “room”. The Court declined to read the contract as illusory.

Legal title vs. equitable interest

Because Barrow Shaver retained record title under the agreements while purporting to convey overrides, the Court concluded that Barrow Shaver was left with bare legal title and the consultants with an equitable interest. This included the right to receive royalty payments, to acquire legal title upon sale, and to assign the interest. Under Bankruptcy Code §541(d), that equitable interest was excluded from Barrow Shaver’s estate.

Bankruptcy issues?

There were plenty: §§ 541(a), 544(a), 548(a)(1)(B), 550(a); which we have for the most part ignored. You lawyers and advisors who ply your trade in that environment are encouraged to navigate the decision on your own.

Takeaway

An agreement that “sets aside” an override can manifest the present intent to convey real property, but intent alone is not enough. If the instrument fails to identify the underlying leases, or even point to another writing that does, the statute of frauds will block the conveyance regardless of how many checks the operator cut.

The assignees are not out of the woods yet, but for now they are protected by the statute of conveyances and extrinsic evidence. Their challenge: Under Texas law, a valid conveyance of an interest in land must satisfy both the statute of frauds and the statute of conveyances.

Your musical interludes. Hank doing Hank. Esther Phillips: another way to do Hank.

Co-author: David Pruitt

Gringita, Ltd v. Ineos USA Oil and Gas, LLC et al is in a way a typical Texas royalty dispute in which the lessor’s royalty is “free of post-production costs” (PPCs) according to one provision of the lease, but maybe isn’t so free if one considers another provision.

The facts

Gringita owns 1,015+ acres in Dimmit County and signed a mineral lease providing for a 25% royalty. Original lessee Chesapeake assigned the lease to Ineos. Gringita alleged that Defendants were deducting PPCs from its royalty payments in violation of the lease’s terms.

The royalty clause

Here are the significant subsections:

3.A: Gringita’s “Royalty Share” was measured by “all sums and amounts of money, including but not limited to any reimbursement for [PPCs], bonuses, premiums, and all other benefits in cash, kind or otherwise, derived, received or realized by, or to inure to the benefit of, Lessee, directly or indirectly.”

3.C and 3.E: The definition of “Gross Proceeds” required that if any sales contract provided for deduction for PPCs, “such deduction shall be added to the price received by Lessee … so that Lessor’s Royalty Share shall not be charged directly or indirectly with any such expenses.”

3.I, first sentence: “[t]he royalties provided herein shall be determined and delivered to Lessor free of any development, production, post-production, gathering … transportation, manufacturing, processing, treating … marketing … or like costs, except as specifically provided for in this Lease.”

3.I, second sentence: addressed costs for “construction, operation or depreciation of any plants or other facilities or equipment for processing or treating” minerals,

3.I, third sentence: “Notwithstanding anything to the contrary, any such costs which result in enhancing the value of the marketable oil, gas or other products to receive a better price may be deducted from Lessor’s share of production so long as they are based on Lessee’s actual cost of such enhancements.”

The lease is long and complex. This summary is not the entire clause.

Lessee’s gambit

Defendants argued that “such costs” in the third sentence of 3.I referred to all costs in Section 3.I, effectively converting the royalty into a modified net-proceeds interest subject to dedduction of most PPCs.

The Court decides

Gringita’s reading was the better of the dueling interpretations. “Such costs” in 3.I referred to the immediately preceding sentence, not to the entire litany of costs listed earlier. Under Defendants’ reading one sentence would undo everything the lease otherwise accomplished, rendering the “Royalty – Free of Cost” heading and the surrounding provisions meaningless. A court construes contractual provisions to harmonize them, not render them useless.

Horror of horrors for the lessees. The Court also held that the lease required Defendants to add back any PPC deductions to the royalty base before calculating Gringita’s share (see Devon v. Sheppard and the “proceeds plus” lease model). This wording means that the lessor could be paid more for its share of proceeds than the lessees received for their share.

Takeaway

Gringita’s motion for summary judgment was granted in part, and Defendants’ cross-motion was denied. A royalty clause that is based on the price actually received by the lessee, buttressed by “free of cost” language and add-back provisions, means what it says. One sentence, even beginning with “notwithstanding”, will not be read to swallow the rest of the agreement rendering it meaningless.

Caveat

We said that “in a way” Gringita is a typical PPC dispute. But we’ve warned that highly- negotiated royalty clauses are not “standard”. It is best to consider the principles underlying the result in one decision rather than expecting the language in that decision to match the language in another.

Your musical interlude.

In Ankor Energy, LLC et al v. Merit Management Partners I, L.P. et al a Louisiana federal district court addressed a situation commonly encountered by assignors of oil and gas operating interests: You’ve given up the cheese. How do you get out of the JOA trap?

The facts

The Ankor parties sued the Merit parties to recover unpaid lease operating expenses incurred while Ankor served as operator of two federal offshore oil and gas leases The motions addressed whether a separate claim for day-to-day operating expenses was properly before the Court and whether Merit owed those expenses.

The facts

In 2002 Merit acquired record title and rights in two Joint Operating Agreements in two federal Outer Continental Shelf oil and gas leases (South Pelto 8 and South Pelto 13) located off the coast of Louisiana. Merit assigned those interests to Black Elk effective in 2011.

Ankor acquired interests in the leases and became the operator in 2012. The leases terminated in 2018. During its time as operator Ankor incurred day-to-day lease operating expenses totaling $1,493,418.29. Merit refused to pay. 

Because the South Pelto leases are located on the Outer Continental Shelf off Louisiana’s coast, the Court applied the Outer Continental Shelf Lands Act. Under OCSLA, the law of the adjacent state – Louisiana – applied as surrogate federal law. The Court therefore analyzed the parties’ obligations under Louisiana contract law and the two Joint Operating Agreements. 

Merit’s procedural defense

The Court’s first order of business was to determine whether Ankor properly pleaded a claim for operating costs. The Court had already ruled in Ankor’s favor on its claim for decommissioning expenses. Repeated references in the complaint to expenses to “operate and decommission” the leases, read liberally as required by the Federal Rules of Civil Procedure, encompassed both types of expenses. The prior summary judgment order addressed only decommissioning costs; the operating expenses claim was still alive.

The substantive issue

The question before the Court was Merit’s obligation – or not – to pay the operating expenses. Merit argued that it was released from ongoing obligations under the Operating Agreements by virtue of the 2011 assignment of its working interests to Black Elk.  Merit was not released, said the Court. Under Louisiana law, a mere assignment of an interest is not sufficient to release an assignor from obligations owed to a third party without the obligee’s (Ankor’s) express consent. The unreleased obligor remains solidarily liable with the assignee. The Court found no express release language in the relevant provisions of the Operating Agreements (Articles IV, V and XXVI). The Court found express release language in a different context (relating to well-specific assignments), so the parties knew how to effectuate a release if they had intended to.

Damages: No double recovery

The Court rejected Merit’s contention that because Ankor had recouped the operating expenses from other non-operators, it suffered no actual damages. The Operating Agreements expressly permitted the operator to look to other non-operators to cover a delinquent non-operator’s portion and also required the operator to redistribute any recovered funds to the contributing non-operators. There would be no double recovery. Ankor was abiding by the mechanism established in the Operating Agreements and would be required to distribute Merit’s payment to the non-operators who had previously paid Merit’s share. 

Other defenses

Alleged “industry practice” not to charge non-operators after assignment of their interests did not abrogate Louisiana law. An affirmative defense of waiver (by sending certain invoices for decommissioning but not operating costs) also failed.

The Court granted plaintiffs’ partial summary judgment and denied defendants’ cross-motion. Merit was solidarily liable for $1,493,418.29 in unpaid lease operating expenses. 

 Your musical interlude

Co-author: Gunner West

The words of an instrument conveying real property in Texas mean something, of course. But so does the placement of those words … which leads to the result in SRO Land & Minerals, LP v. BNSF Railway Co. A 1901 deed to The Pecos River Rail Road Company conveyed fee simple title to a 100-foot strip, not a railway easement. Because the railroad was abandoned long ago, an easement would have expired, but the fee did not. Surrounding property owners lost their claim to the minerals under the 100-foot strip.

The deed

The granting clause of the deed conveyed “all and singular the right, title, and interest” of Thomas White in “certain pieces or parcels of land” for operating the railroad on “a way and right of way one hundred (100) feet in width” fifty feet on each side of the main track. A later recital stated that the instrument’s “object and intention” was to convey a strip fifty feet on each side of the centerline “and no more.”

Mineral owners along the corridor sued BNSF, contending that the deed conveyed a right of way. The court of appeals affirmed the trial court’s decree of fee simple title in BNSF “insofar and only insofar as said deed conveyed property within the boundaries of the properties owned by” the plaintiffs.

The deed language supports fee title

Under the Texas Property Code, a conveyance passes fee simple title unless express words limit the estate or a lesser estate arises by construction or operation of law. Texas decisions supply two rules for railroad deeds:

  • a grant of a “right of way” in or over a tract conveys an easement,
  •  a grant of a tract or strip of land conveys a fee simple even if a later clause calls the grant a right of way.

The placement of the right-of-way language favored BNSF. The granting clause conveyed White’s entire interest in “pieces or parcels of land”; the right-of-way language followed as a statement of use. The court found nothing in the granting clause creating an easement or otherwise limiting the estate.

The warranty and recitals confirm fee title

The court rejected the mineral owners’ three remaining arguments.

  • The warranty clause required the grantor to defend “said premises,” and the habendum grants the railroad “the premises above mentioned and described . . . forever.” The mineral owners construed “premises” as an easement. No. The court held that the term applies to either a fee or an easement. Warranting the premises, rather than a right to cross them, supported fee title. `
  • A purpose declaration in a later clause neither conditions title nor reduces a fee to an easement. The “object and intention . . . and no more” recital limited the strip’s physical extent —not the estate conveyed.
  •  “Over” showed an intent not to convey the entire strip. No. The word used elsewhere meant from one side or extremity of the grantor’s land to the other and had the same meaning here.

The line within the granting clause

The Deed’s purpose language follows “pieces or parcels of land” in the same sentence. The court nevertheless treated it as following “the granting clause’s description of the property conveyed,” drawing the line within the sentence rather than at its end.

The words of conveyance and description establish the grant, while “for the purpose of” describes use. For abandoned-corridor title, the critical question is whether right-of-way language appears after the deed has identified the estate. Where the sentence breaks may matter less than where the granting language ends.

Your musical interlude.

Co-author David Pruitt

A question, not hypothetical: Can one provision in a comprehensive water purchase agreement lock a mineral lessee into a single alternative for every purpose under the sun? In Davenport v. EOG Resources, Inc., a court of appeals said “no”, affirming a $14.9 million jury verdict and judgment against Webb County, Texas, landowners who attempted to enforce one sentence of the agreement in isolation without considering the rest of the document. The agreement was sui-generis, but the court’s approach has broader implications.

The Facts

In 1967, the parties’ predecessors signed the Garner Lease, granting the lessee broad surface rights but restricting free use of water from the lessor’s wells. The Davenports acquired tracts burdened by that lease. Mineral lessee EOG and the Davenports signed a water purchase agreement in January 2022. In March 2023, against the Davenports’ wishes, EOG built a new access gate and caliche road. In response the Davenports sued.

Section 9 of the agreement: EOG “shall enter and exit” the ranch “through the Krueger Rd. gate”. If read alone, this appears to be an all-purpose restriction. But read on. The remainder of the clause tied the ingress and egress requirement to obtaining water “from Grantor’s Frac Pond … and/or designated water wells”.

Interpreting the contract

The trial court granted EOG summary judgment on the competing contract interpretations and on the Davenports’ fraud claims. A jury found the Davenports – not EOG – breached the agreement and awarded damages to EOG.

Texas courts take “a holistic approach” when analyzing the intent behind contractual language. Elsewhere in the agreement the parties used broader language, such as “oil and gas operations,” and “all operations”. The parties knew how to draft broadly when they meant to. Courts “do not interpret contracts as if to insert provisions the parties could have included”. Thus, the Krueger Road restriction applied only when EOG travels to or from the frac pond and designated wells – not for every purpose.

No free pass for oral promises

The Davenports claimed EOG orally promised to limit all access to Krueger Road, inducing them to sign. Dean Davenport was an oil-and-gas veteran, represented by counsel, who admittedly demanded that exact restriction during negotiations, but the final, signed agreement said otherwise. A sophisticated party “cannot justifiably rely on oral misrepresentations regarding the contract’s unambiguous terms.”, precluding Davenports’ fraud claims as a matter of law.

The verdict

Of two alleged breach dates, Dean Davenport himself disclaimed the first. On the second, EOG’s contractor drove through Rancho Derecho – not Krueger Road – but Dean Davenport never saw EOG reach the frac pond or designated water wells, and gate logs showed only fuel, light-tower, and trash deliveries by EOG. Without proof that EOG actually traveled to the frac pond or water wells via the wrong gate, the evidence supported the jury’s finding that EOG did not breach the agreement.

Dominant estate wins again

The Davenport’s accommodation-doctrine trespass claim about a new road, mulching, and powerlines fared no better. As the dominant mineral estate owner, EOG had the right to use as much of the surface as reasonably necessary to produce hydrocarbons. The Davenports offered no evidence their existing use was completely precluded or substantially impaired with no reasonable alternative, an essential element of an accommodation-doctrine claim.

Takeaways

  • In a dispute over the meaning of a contract, isolated sentences lose to holistic contract construction, especially when other clauses show the parties knew how to draft in a way that conflicts with the isolated sentence.
  • A sophisticated party with counsel cannot claim reliance on oral promises that contradict a signed contract.
  • Accommodation-doctrine claims require proof of impairment, not mere inconvenience.

Your musical interlude.

“Better the end of a thing than the beginning thereof … .” Ecclesiastes 7:8. The writer was probably prophesying about Texas’ never-ending double-fraction mineral disputes.

Next up: Ovintive USA, Inc. et al v. High Noon Resources, LLC et al in which the Eastland Court of Appeals found that a 1958 mineral deed reserved a fixed NPRI.

In 1958 Chandler and Childress owned half of the minerals under 25,000 acres in Martin County and conveyed a mineral deed to High Crest of 1/4th. Grantors would “receive” 1/4th of the cash bonus for any lease, 1/4th of delay rentals, and 1/4th ” … of the usual 1/8th royalty … (and Grantors shall be entitled to 1/4 of the 1/8 royalty irrespective of the amount of royalty actually provided for in any lease executed by Grantee, its successors or assigns) … .” (emphasis ours)

There were subsequent transactions but the operative language was in that deed. The court first determined ownership of a 1/8th collective interest conveyed in those later transactions.This discussion is not about that aspect of the decision.

Was the Van Dyke presumption rebutted by the text of the deed?  

Yes. The issue was the effect of the parenthetical phrase. The Court examined the entire instrument in order to harmonize and give effect to all provisions so that none would be meaningless. Because the parenthetical phrase was a part of the 1958 deed, the Court considered it in identifying the grantors’ reserved royalty interest. The phrase was significant to the Court in two respects.

First, it was an express acknowledgement that the parties to the deed were not laboring under the belief of a 1/8th standard royalty; they expressly acknowledged that a future lease may provide for a royalty other than 1/8th. The parenthetical phrase negated one of the foundational bases for the Van Dyke presumption—the concept of a “standard and customary” 1/8th royalty in all future leases (citing Hysaw v. Dawkins) and the “related issue”, the estate misconception theory.

Second, by the use of “irrespective of” the parenthetical phrase untethered the royalty interest withheld by the grantors from the amount of royalty in future leases, thereby indicating that the parties intended for the grantors to withhold a fixed royalty interest. Said the court, “Irrespective of” is simply defined as “regardless of”. Applying this definition, the 1958 deed provided that the royalty interest reserved by the grantors for future leases was “regardless of” “the amount of royalty actually provided for in any lease executed by Grantee.”

Did Rule 39 apply?

Texas Rule of Civil Procedure 39 requires a trial court to order joinder of persons who claim an interest in property that is the subject of litigation if certain factors are present. The decision is reviewed for an abuse of discretion, giving the trial court wide latitude to rule as it sees fit. Here, the court of appeals affirmed the trial court’s denial of a defendant’s request that all owners of interests that might be affected by the judgment be joined by the plaintiff. One basis for the ruling is that the non-joined owners did not actually assert a claim to the interests being litigated. Texas cases on this subject go both ways.

Your musical artifact, proving that for most of us “Dance like nobody’s watching” has a limited shelf life, if it even should be attempted in the first place. Destroy all photographs from those frat-house years.

.

It’s often helpful when courts are asked to construe joint operating agreements. Not always, though. Courts sometimes don’t understand or fail to take into account industry custom and practice and the underlying purposes behind the JOA, especially the Model Form. Evans Resources LP v. Petroplex Energy Inc. appears, at first blush, not to be one of those cases on the facts considered by the trial and appellate courts.

The dispute

Evans granted an oil and gas lease to Diamondback for minerals over 651 acres in Midland County. Diamondback as operator and the Anwars (Petroplex) as non-operators entered into what appears to be an AAPL Model Form 610 Joint Operating Agreement to which Diamondback contributed the Evans acreage.

Diamondback released portions of the lease effective as of November 2018. Diamondback drilled horizontal wells that included the Evans expired acreage. Evans sued the Anwars seeking royalties that Diamondback allegedly paid to the Anwars on production from those wells. The claim was the Anwars owed a duty to pay received royalties to Evans because the JOA assigned Diamondback’s royalty obligation to the Anwars. Evans also asserted that it and Diamondback became co-tenants in the released acreage.

How the courts saw the claims.

Not favorably. The Court of Appeals affirmed summary judgment for Anwars on all claims. The basis for the ruling was the words of the JOA (Homework: retrieve a copy and follow along if you wish).

 Evans lacked standing to enforce the JOA’s royalty provisions because:

  • Evans had no privity of estate with the Anwars (Art. III.B disclaims cross-conveyances of contributed interests);
  • Evans was not a third-party beneficiary (Art. VII.A expressly disclaims third-party liability, and Texas law disfavors such claims anyway);
  • Evans had no privity of contract with the Anwars (Under Art. VII.A each party is responsible only for its obligations and no party is obligated to satisfy the default of any other party. Art. III.B requires each party to pay or deliver burdens on its share of production from the Contract Area).

The Court also rejected Evans’s co-tenancy/money-had-and-received claim. There was no co-tenancy relationship between the Anwars and Evans that would create a duty to pay Evans profits from co-tenant operations. Further, the Anwars presented evidence via an affidavit from a Diamondback employee that they received no proceeds attributable to Evans. Rather, they received only revenue based on the leases they contributed to the JOA. Evans’ was not one of those leases.

Lagniappe

Evans knows the courthouse well. While maybe not a “vexatious litigant”, it (or them, or he, or her) is persistent. The Court noted that this is Evans’ third defeat in suits against Diamondback or related parties relating to the same 651 acres. The other opinions are here and here.

Your musical interlude.