Karli v. Wilson instructs mineral/royalty traders and their scriveners on a surefire way to create title chaos out of what could have been an uncomplicated land transaction. In 1950 the Wilson siblings and spouses executed a warranty deed to the Veterans Land Board for 196.7 acres in Brazos County, Texas. The Karlis now own the VLB’s interest. Each grantor reserved an interest, expressed in three ways (ergo, the chaos):
- an undivided 1/32nd right title and interest in and to all oil, gas and minerals in and under said lands or that may be produced or saved from said lands … ; (emphasis mine, deemed by the Court to be “odd”)
- However [grantors] shall not be entitled to receive any rental or bonus money paid for leases;
- It being the intention to reserve 1/4th “non-participating interest in the customary one-eighth royalty …”.
Understating the chaos, the Court deemed the clauses to be in conflict.
What do the Wilsons own?
The Court rendered judgment that the Wilson heirs and assigns each own a “¼ non-participating mineral interest, stripped of all attributes aside from the right to receive royalty payments in the amount of ¼ of the lease royalty under the current and any future leases.”
How did the court get there?
The Court first discussed general contract principles (among others):
- The court must determine what the deed language could reasonably have meant to an informed but disinterested speaker at the time the instrument was executed;
- The court must determine what the plain language in the four corners of the instrument says (You don’t need a lawyer for this one, but if it’s your money riding on the instrument, you will have great difficulty being “disinterested”);
- What mineral rights an instrument creates or reserves is governed by real property and oil and gas law rather than general contract law;
- The court must harmonize all provisions of the instrument;
- The court may invoke the estate misconception theory (to answer what fractional interest the parties own; we skip that analysis here; FYI it was floating).
- The “bundle of rights” in a mineral estate include five: development, executive, bonus, royalty, rentals;
- Where deeds grant or reserve minerals expressly including “royalty” and excluding one or more of the other rights, the Supreme Court’ has treated the resulting interest as a “stripped” mineral estate, carrying all the other unmentioned rights.
Examining the instrument
The first portion of the reservation, in isolation, was sufficient to reserve a full mineral estate. But the “or” language reflects an alternative description of an interest in production. On balance the interest was a mineral interest.
The second portion excluded the right to receive rental and bonus money. Was this an intentional “redundancy”? Considering the state of the law and drafting practices in 1950 the Court could not conclude that that mere exclusion of rights apart from royalty established a stripped mineral interest.
The third portion, referring to a 1/4 “non-participating interest” in the customary 1/8 royalty, “almost” coincides with an NPRI.
Harmonizing the clashing provisions, the Court concluded that the reservations “more closely resembles” language the Supreme Court construed as a stripped mineral interest. Case law at the time suggests that “non-participating interest” was “most likely” to exclude executive and development rights.
The practical effect of the decision
Charles Barkley would refer to it as a “jump ball”. Regardless, the Court had to side who gets the possession. The Wilson heirs and assigns own, in effect, floating royalty interests tied to current and future leases. They cannot participate in leasing or development decisions. The Court expressed the interests as ¼ of royalty, not 1/32 of minerals.
A shout out to those who will follow us, Well, perhaps some of us. Now a Christmassy musical interlude