Co-author Gunner West

Last year we reported on Steelhead Midstream Partners, LLC v. CL III Funding Holding Company, LLC, where the Texas Supreme Court held that a pipeline owner’s breach-of-contract claim was not an impermissible collateral attack on a foreclosure judgment. The case went back to the Fort Worth Court of Appeals for a decision on the merits. That decision is now in.

On remand in CL III Funding Holding Company, LLC v. Steelhead Midstream Partners, LLC, the Court of Appeals reversed the trial court’s $2 million judgment and rendered a take-nothing judgment against Steelhead.

The facts

CL III owned an interest in a pipeline and related oil and gas interests and entered into a joint operating agreement with Steelhead to govern operations and accounting for revenues and expenses.

Steelhead alleged CL III violated the JOA by failing to pay a pre-existing lien debt and by suing for foreclosure on the lien, which CL III had acquired by assignment.

The Court here framed the case narrowly: Did the JOA either:

  • require CL III to proactively calculate and pay its share of the lien without receiving a bill from Steelhead, or
  • prohibit CL III from acquiring, holding, or foreclosing on a preexisting third-party lien?

The Court answered “no” to both questions. Under the JOA’s plain language there was no such requirement or prohibition.

No invoice = no breach

The JOA incorporated a COPAS Accounting Procedures, the industry-standard framework for addressing joint account expenses. Under those procedures, the operator invoices owners monthly and owners must pay within 30 days of receipt.

Steelhead never billed CL III for the pre-existing lien. The Court held that without an invoice, CL III’s payment obligation was never “triggered.” The Texas Supreme Court has held that under similar COPAS procedures a non-operator’s payment obligation is not triggered until the operator sends a joint interest billing.

The Court rejected Steelhead’s argument that no invoice was required because revenues from operations consistently covered expenses. Steelhead used self-defeating logic: If the lien was a “contingent liability” that couldn’t be invoiced until the foreclosure judgment, then it wasn’t a JOA expense during CL III’s ownership. And if Steelhead could have invoiced it anyway, then Steelhead can’t blame CL III for Steelhead’s decision not to do so.

Acquiring or foreclosing on liens not prohibited

Steelhead also argued that CL III breached the JOA by acquiring and foreclosing on a lien that wasn’t a “Permitted Lien.” The court rejected this on several grounds.

  • “Permitted Liens” was a defined term under the JOA that imposes a duty on the operator to keep the property free from non-permitted liens. Nothing in the JOA prohibited owners from acquiring liens. The court noted, “A defined term is not a contractual prohibition.”
  • The JOA provision for “several, not joint” liability addressed debts arising “hereunder”, that is, the JOA. The lien was a preexisting encumbrance based on obligations to the construction company—not a JOA expense.
  • The JOA’s good-faith provision didn’t create a standalone duty. The court observed that a contractual good-faith provision is merely a “lens” through which other contract requirements must be viewed; it doesn’t create independent obligations.

The court emphasized that the JOA contemplated foreclosures between owners in certain contexts. Had the parties intended to prohibit all foreclosure actions against one another, they could have said so. They did not, and courts “will not squint to discover requirements [or prohibitions] that the parties themselves chose not to write into the memorialization of their bargain.”

Your musical interludes: Old and no so old

 The Collins mineral lease covers 1131.5 acres in Bienville Parish spread across 10 semi-contiguous tracts.   

The lease

Provision 6 of the form lease provides: In the event of cessation of production for any cause following expiration of the primary term, the lessee would be entitled to continue the lease in force by restoring production or conducting operations on the land or on lands pooled therewith within 90 days. (This is a severely simplified summary. You might want to read it yourself)

Exhibit A contains a Pugh Clause (again, simplified): Two years following the expiration of the primary term or any extension or renewal, in the event a portion or portions of the land is pooled with other land so as to form any pooled unit or units (emphasis mine), operations on such unit or units will not maintain this lease in force as to the land not included in such unit or units.

In the event of any inconsistencies the terms of Exhibit A supersede the form lease.

Provision 7 of the lease authorizes the lessee to voluntarily pool acreage. Neither Paragraph 7 nor Exhibit A mention compulsory units or the Commissioner of Conservation.

Five compulsory Haynesville Shale production units collectively encompassing all of the lease acreage were established by the Commissioner of Conservation. XTO operates the wells in these units. Two wells were drilled on portions of the lease included in a unit encompassing Section 18 of the land. Following expiration of the primary term, those wells did not produce during two periods of time exceeding 90 days each.

Triple C’s claims

In Triple C Minerals LLC v. XTO Energy, Inc., Triple C sued for termination of those portions of the lease in the unit for Section 18 arguing that the Pugh clause applies to compulsory pooled units and divides the lease on a unit-by-unit basis. Thus, maintenance of one unitized portion of the lease did not automatically maintain the other portions. The absence of production on Section 18 for two 90-day periods resulted in termination of the lease as to that acreage.

XTO’s response

Because the Pugh clause does not specifically state that it applies to compulsory pooled units, it should be interpreted against such application. The clause was not triggered because it applies only to voluntary pooled units created under the lease’s pooling clause and not to compulsory units created by the Office of Conservation. Even if the Pugh clause was triggered, it did not divide the lease on a pooled-unit-by-pooled-unit basis. Thus, production from wells on other sections maintained the entire lease. 

The Court’s analysis

Summary judgment granted in favor of XTO. The Pugh clause was not triggered by compulsory unitization. Under Louisiana law an oil and gas lease is an indivisible obligation unless the parties unambiguously agree otherwise. Creation of compulsory units by the Office of Conservation does not divide a mineral lease. To apply to compulsory units, a Pugh clause must be drafted to clearly apply to compulsory units.

No ambiguity                                     

The Court declined to consider extrinsic evidence. That process would apply to ambiguous contracts but those principles fail when long-standing jurisprudence sets a more specific interpretive role. Ambiguity as to the Pugh clause’s applicability to compulsory units should be resolved against the party seeking to sever the lease. The language of the Pugh clause clearly provides that it applies to voluntary units. The lease was not ambiguous

Your musical interlude. (All you need to know is that he loved Alida since he was 14 but mama does not approve. If she won’t let him have her he will put her in a wagon and take her home.) Not a contemporary love story!

In Ageron Energy LLC v. ETC Texas Pipeline, LTD Justice Busby authored a concurring opinion in the denial of a petition for review to the Supreme Court in which he criticized the majority opinion of the Court of Appeals saying it undermines important protections afforded mineral rights owners. To understand this case, see the COA’s opinion in a prior case, Regency Field Services v. Swift Energy and the COA majority opinion in this case. Also, Lightining Oil v. Anadarko E&P, was heavily cited by Justice Busby.

Res judicata

The COA majority held that a lessee’s suit can be barred by res judicata even if a claim for interference with subsurface development in a prior suit was not ripe and could not have been brought earlier. According to the COA majority, a surface injury claim that accrued before Ageron leased the minerals resulted in accrual of any and all other claims arising from the same allegedly unlawful conduct, including Ageron’s. To require parties to assert unripe claims would be pointless; the unripe claims will be swiftly dismissed. Regency did not alter Supreme Court cases holding that res judicata bars only claims that could have been asserted in the initial action.

The COA made two errors, says the Justice:

  • First, they ruled that the fact that a claim may be unripe will not stop it from accruing at the same time as a ripe claim based on an earlier injury caused by the same wrongful conduct.
  • Second, the COA misunderstood when a complete and present cause of action accrues for injury to mineral development rights.

The COA failed to appreciate that when different property interests are involved, the injuries are often distinct. The holding was contrary to the very definition of res judicata, an essential requirement of which is that the claims in the current suit could have been litigated in the prior suit. Ageron’s claims here could not have been litigated in the prior suit. Mere migration of contaminants into subsurface space is not, by itself, an injury to the mineral estate.

The single action rule

The COA was mistaken in applying the single action rule, which is a species of res judicata that prohibits splitting a single cause of action and subsequently asserting claims that could have been litigated in the first instant. It does not require asserting claims that were not yet actionable.

The question the COA should have decided is when Ageron’s claims for interference with mineral development rights accrued. Could the plaintiffs in Regency have asserted such claims in their prior suit, or at some other time before Ageron acquired its lease?

Texas law distinguishes between interfering with the place where minerals are found, which belongs to the surface owner, and interference with the minerals themselves, which belongs to the mineral rights owner or lessee. Interference with the subsurface is actionable only if it infringes the lessee’s ability (Busby’s emphasis) to exercise its rights.  

No harm, no foul
Because there was some evidence that trespassing gas infringed on mineral development before Ageron acquired its interest, the question of whether the evidence was conclusive was not important to the jurisprudence of the State. It was not clear that the COA’s legal errors led to an improper judgment, so he joined denying the petition for review

Your musical interludes (go to 30A Songwirters Festival)

Adam Hambrick (wrote it and sung it)

Tony Lane (Tony wrote it)

Jeremy Stover (Jeremy wrote it)

North Dakota surface owners defeated the carbon-storage lobby’s effort to steal their interstices.*  In Northwest Landowners Association, et al, v. State of North Dakota et al, a district court declared a portion of the CO2 underground storage statute (NDCC 38-22) unconstitutional because it provides for a government-authorized physical invasion of property, which constitutes a taking, and does not provide for just compensation required by the North Dakota Constitution.

The statute

The statute requires that before issuing a permit for underground carbon storage the North Dakota Industrial Commission must find that all nonconsenting pore space owners will be equitably compensated. If the operator fails to obtain consent of all pore space owners the Commission may require that nonconsenting owners be included in a storage facility and subject to CO2 storage. Once the project is completed, title to the facility and the stored CO2 would transfer to the State without payment of compensation.

The Supreme Court decisions

So-called NWLAI involved saltwater injection under portions of the statute. There the Supreme Court concluded that surface owners have a constitutionally protected property interest in pore space, and thus subject to a “takings” analysis under the North Dakota Constitution.  Permanent physical invasion is a per se taking.

This case is on remand from the North Dakota Supreme Court in “NWLAII” (Space does not allow a discussion). Some of plaintiffs’ claims were rejected. Remand addressed the issues on which they prevailed.

The pore space invasion would be extensive. Under the statute operators could inject millions of metric tons of CO2 into the pore space, store it for an undetermined amount of time, and eventually title to the pore space and carbon in the facility would be transferred to the State.

Is there “just” compensation

The court rejected the defendants’ argument that this case is different than NWLAI because there, the surface owners demanded compensation for physical occupation of pore space while this portion of the statute does not. Invasion of the pore space is a taking and requires just compensation. And there is a timing requirement.  Private property cannot be taken or damaged without “ … just compensation having been first made……. “.

Correlative rights doctrine does not apply

In rejecting the State’s argument that CO₂ storage is similar to oil and gas unitization, where owners can be forced into pooled units, the Court observed that unitization involves extracting a shared resource, not forcing storage of a foreign substance. NWLAI established that pore space is a vested property right, not a resource to be extracted. Applying correlative rights here would justify forced storage of any unwanted substance such as garbage or nuclear waste.

In unitization an owner would always be entitled to his just and equitable share of production to prevent waste and ensure maximum recovery of the landowner’s resource. This statute is not about maximizing extraction of a resource but instead the aim is to maximize storage of a resource – carbon – that may or may not be present on the owner’s property. Producing units share natural resources within the unit but in this case space amalgamation would bring carbon to property from wherever it was previously located, forcing nonconsenting owners to store carbon not native to their land. Then once the project is finished, the carbon and pore space goes to the State, depriving the landowner of that property right indefinitely.

No valid use of police power

The State’s argument that the law was a valid exercise of police power was rejected. The police power cannot authorize physical occupation of private property without compensation.

Result

Summary judgment for landowners; attorneys’ fees to be determined.

Bob Weir RIP and post-Dead Bob.

*In the spirit of General Jack D. Ripper?

Co-author Kamal Omar

test

In Endeavor Natural Gas III, LLC v. Comanche Maverick Ranch Investments, L.P., a Texas court held that operator Endeavor could not conduct seismic operations on lessee/surface owner Commanche’s ranch because the parties’ surface-use agreement allowed such operations ” … only after first entering into a mutually agreed-upon seismic surface use permit with [Comanche]”. The trial court, affirmed by the appellate court, construed the provision as an enforceable condition precedent.

The documents

Alongside an 18-page oil and gas lease from Commanche to Endeavor the parties signed a 29-page surface use agreement governing operations on Comanche’s wildlife-focused South Texas ranch. Endeavor could conduct geophysical/seismic operations “only after” the parties entered into a “mutually agreed-upon” seismic surface use permit.

The impasse

Endeavor proposed to negotiate a seismic operations permit; Comanche responded that it had “no obligation” to agree to one and deemed the provision regarding a permit to be unenforceable. Endeavor then announced it would proceed anyway. As is frequently the case, litigation ensued.

On motions for smmary judgment, the trial court declared:

  • Endeavor could not conduct seismic operations without a Comanche-granted permit;
  • no permit existed;
  • Comanche was not required to issue a permit; and
  • Endeavor had no right to conduct seismic operations on Comanche’s surface estate.

Endeavor appealed, to no avail.

Was the seismic clause a condition precedent?

Endeavor argued the clause was merely an unenforceable “agreement to agree”; alternatively, compliance should be excused because Comanche refused to negotiate. The court deemed the clause unambiguous, applying standard contract-construction principles.

“Only after” signals a condition precedent

The clause was a condition precedent. Endeavor’s right to conduct seismic operations (and Comanche’s obligation to allow it) accrues “only after” the parties “mutually agreed” to a seismic permit. Drawing on authorities construing “only after,” the court reaffirmed the phrasing manifests conditional intent.

What does “mutually agree” mean?

The court adopted the ordinary meaning of the phrase: each party holds its own right to assent—or withhold assent. “Mutual” agreement requires both parties’ consent. The phrase requires unanimity.

No “rewrite” to cure bargaining leverage

Endeavor lamented that Comanche would never have an incentive to allow seismic operations and would always withhold consent if it wanted to. The court refused to “rewrite an agreement that Endeavor wishes it hadn’t made.”

No excuse for non-occurrence

Endeavor’s backup theory: Comanche’s refusal to negotiate excused the condition. That failed because excusing the condition would nullify the parties’ choice to require “mutual” agreement in the first place. With no seismic permit, Comanche had no obligation to allow seismic operations.  

Words matter

If rights are established “only after” a “mutual” agreement, there is a condition precedent that either side can withhold. Courts are not likely to impose a duty to negotiate nullifying that unambiguous language. The court also reconciled other provisions of the agreement where Comanche’s consent could be withheld “in its sole discretion” by noting those were simple yes/no guardrails, whereas a seismic permit requires agreement on numerous operational and financial details. That makes bilateral assent a sensible prerequisite.

What the agreement could have said

Rather than relying on “mutual agreement” language alone, Endeavor would have benefited had it specified objective standards (scope, timing, restrictions) or default terms, or required that consent “not be unreasonably withheld.” The court’s contrast between “sole discretion” yes/no clauses and the multi-variable seismic operations permit shows how structure and wording drive outcomes.

Your musical interlude.

Other than almost burning down the pavilion as a preview of the warmth of collectivism, and constructing a new highway through the diminishing Brazilian rain forest so as to hurry the attendees on to the heavy hors d’ouevre table and the open bar, nothing much, which means a lot. Minor dignitaries, self-congratulatory platitudes, and plenty of private jets were on hand. On the other side of the coin, as an indicator the direction climate hysteria is trending the four countries contributing over half the world’s CO2 emissions (China (33%), the USA (12%), India (8%), and Russia (5%) did not show up. (Al Gore and Gavin Newsom were on their own.)

As with earlier editions, this “Congress of the Parties” was dominated by the usual unfortunate assortment of sophists, idealogues, socialists, free-riders, and rent-seekers. This report pretty much sums it up.

The session opened with an Orwellian demand that all nations join together to ban discussions that would run contrary to the climate orthodoxy, a convenient way to shut down all dissent.

The confab resulted with nothing of real value. European media will tell you of the accomplishments, as vague and thus as meaningless as they were. The final report failed to even mention transition from fossil fuels. Here is a less sympathetic view.

On other fronts

Not everything happened at COP30. There has been no shortage of half-truths, untruths and mis-directions on the topic. Here are but a few reported examples:

From Roger Pielke on five climate science scandals.

Blaming California wildfires on climate change and not government policies.

The good news is some falsehoods are being retracted by publications seeking to recover their legitimacy such as Nature magazine, says Doug Sheridan.

… but not soon enough.

Speaking of not soon enough, if you are wondering if Barri Weiss’s appointment as president of CBS is good news, read about the network’s misreporting on the cause of monsoons in Southeast Asia.

Will climate hysteria die?

Theodore White thinks so. But it will probably stay alive as long as there are politicians who are the only ones who can “save” you from real or imagined peril, rent-seekers who want your money, and media platforms in need of a scary headline. But the movement is losing its “steam”, so to speak. If only the radical and unworkable aspects of the movement could be taken out behind the barn and put out of their misery like Christi Noem’s equally feckless dog, the world would be a safer and wealthier place.

This doesn’t mean giving up on the energy “transition”; it does mean that the energy debate should be addressed by reliance on real science, protections against destruction of western economies (not to mention trees and wildlife), and remembering how many hundreds of millions of people in the world remain in dire poverty because they lack access to reliable and affordable energy.

Your musical interlude.

Co-author Taylor Hall

In Alcott v. 1893 Oil and Gas, Ltd., a Texas court of appeals applied the scourge of inaccurate, incomplete or careless (sometimes all three!) deed drafting – the statute of frauds – to reject a claim to ownership of minerals.

The facts

In 1917, the owner of 2,092-acres in Live Oak County conveyed the surface of the tract and 3/4ths of the minerals to a developer, who then sold portions to different buyers. Ultimately, one Robert Alcott acquired “Acre 8 in Tract 69” along with an “undivided interest in an undivided one half of any oil, gas or other minerals that may be found to be in, under or upon any part of” the 2092 acres. The seller did not have title to minerals under the entire 2092 arces. Mr. Alcott’s heirs filed a trespass to try title suit (and the claims that usualy accompany a TTT action) to recover “all of the interests conveyed by the Alcott Deed”.

The problem? The seller did not own the entire 2092 acres. The Alcott Deed contained no language limiting the conveyance to minerals under land actually owned by the seller. Nonetheless, the Alcott asserted that the deed vested them with mineral interests across portions of the larger tract.

Statute of frauds

To comply with the statute of frauds an instrument conveying real proprty must provide sufficient information to reasonably identify the property in question, either directly or by reference to some other existing writing by which the property to be conveyed may be identified with ‘reasonable certainty. Also, the property description must furnish enough information to locate the property’s general area as in identifying it by tract survey and county, and to determine the size, shape, and boundaries of the property.

The court found the Alcott Deed’s property description was deficient. It lacked any qualifying language limiting the grant to minerals under land owned by the seller, and nothing within the four corners of the instrument supplied data sufficient to locate the property’s size, shape, and boundaries. The Alcott heirs relied on plats prepared in 1913 and 1920 to bolster their claim, but those documents did not provide enough information to identify the general area where the claimed mineral interests would lie.

Concluding that the Alcott Deed violated the statute of frauds, the Court declined the Alcott heirs’ claim. There were alternative claims and defenses and that the Court did not need to reach once it ruled on the statute of frauds.

As a practical matter, it probably didn’t help the plaintiffs that the deed in question was more than a century ago and defendants provided evidence that they had been leasing, drilling wells and mining on the land since the 1940’s.

Your musical interludes: New talent, famous talent, and forgotten talent.

Co-author Taylor Hall

In MIECO LLC v. Pioneer Natural Resources USA Inc., the U. S. District Court for the Northern District of Texas, on remand from the Fifth Circuit (see our report on that opinion) addressed two questions:

  • Did Winter Storm Uri prevent Pioneer’s delivery of natural gas under the parties’ NAESB Base Contract (Yes, it did), and
  • Did Pioneer use reasonable efforts to avoid the storm’s adverse effects. (Yes, it did).

As with most other Uri cases we recall, the Court concluded that Uri prevented Pioneer’s performance. The storm caused widespread freeze‑offs, outages, and processing failures across the Permian Basin, reducing Pioneer’s production to nearly zero and curtailing deliveries from February 14 through 19, 2021.

Pioneer invoked the contract’s force majeure clause, which covered “weather related events affecting an entire geographic region,” including the freezing or failure of wells or lines, and required reasonable efforts to avoid adverse impacts.

The Court’s conclusion that Pioneer used reasonable efforts pointed to Pioneer’s preparation for Uri: the company undertook winterization measures, adjusted allocations, insulated wells and equipment, and prepared field resources in advance of the storm.

MIECO argued that Pioneer should have purchased third‑party gas to meet its delivery obligations. The court rejected that argument, citing industry practice: after declaring force majeure, a supplier that loses its supply is not expected to procure spot gas. Requiring such purchases would divert producers from restoring production, inflate spot prices during an emergency, and undermine the objective of mitigating the event’s effects by increasing supply in the affected region.

The court also rejected MIECO’s interpretation because it was unreasonable. To agree with MEICO would mean a storm like Uri or other catastrophic event could never prevent performance so long as gas exists somewhere or the seller has the funds to buy it. If Pioneer were required to avoid the adverse impact of Uri by performing its obligations, as MIECO argued, then no performance was being excused.

Because Uri prevented performance and Pioneer used reasonable efforts to mitigate its effects, the Court found Pioneer did not breach the parties’ contract.

Joe Ely, RIP

In EOG. v  CNH Enterprise Holdings, Ltd. the Court denied a Texas Citizens Participation Act motion to dismiss a plaintiff’s claim.

CNH sued EOG for termination of the Hundley lease covering 3,500 acres in McMullen County. The claim that drew EOG’s TCPA ire was CNH’s cause of action (in the alternative and among several others, including terminaton of the lease) for breach of the implied covenant to protect the lease from drainage. CNH alleged that EOG permitted and drilled a well on adjoining acreage in violation of field rules and Rule 37 without notice or consent from CNH or its predecessor lessor, fracked the well causing fractures and injecting proppant into the Hundley lease resulting in damage by draining hydrocarbons from the lease, and then failed to drill an offset well.

EOG’s motion to dismiss alleged that the claim that should be dismissed was based on EOG’s communications with the Railroad Commission in its application for a drilling permit.

The lofty purposes of the TCPA are “to encourage and safeguard the constitutional rights of persons to petition, speak freely, associate freely, and otherwise participate in government to the maximum extent permitted by law and, at the same time, protect the right of person to file meritorious lawsuits for demonstrable injury.”  

 To prevail on such a motion the movant must first demonstrate that the TCPA applies. This is the only step in the analysis that the Court needed to address (there are two others). The statute requires a connection between the legal action andexercise of the protected right, and the claim must be “based on or in response to exercise of a protected right”.

CNH’s petition referred to EOG’s communications with governmental bodies (The right to petition includes such communications). Was the failure-to-protect claim based on or in response to EOG’s communicztions to the Commission? The Court went to case law and the dictionary in search of the meaning of “based on” or “in response to”, and other words and phrases such as “the gravamen of”, “factually predicated on”, and “main ingredient” (the fundamental part of something, in case you were wondering). That is what the courts do when having to evaluate the meaning of words not defined in the statute (or contract in some cases) under consideration.

The Court’s conclusion

Not surprisingly, the Court deemed the gravamen of CNH’s failure-to-protect claim to be that EOG breached its obligation to protect the Hundley lease by failing to drill an offset well to prevent drainage. There was no connection between the legal action and exercise of a protected right, and the claim was not based on or in response to exercise of a protected right.

The lesson?

Whether or not EOG’s goal was to subject CNH to costly and time-consuming satellite litigation, that seems to be the effect of its motion. (This is to NOT to say that was the goal). Regardless, now the parties will be able to address the underlying claims and defenses. 

Raul Malo (think the Mavericks) RIP. And, this being Advent, let’s not forget Joseph.  

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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