704 Haywood WI Units, Ltd. v. B&S Dunagan Investments, Ltd., No. 13-15-00454-CV, 2017 WL 6379737 (Tex. App.—Corpus Christi Dec. 14, 2017, pet. filed)

Wednesday, September 5th, 2018

Richard F. Brown

The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.

Haywood WI Units, Ltd. v. B&S Dunagan Investments, Ltd., No. 13-15-00454-CV, 2017 WL 6379737 (Tex. App.—Corpus Christi Dec. 14, 2017, pet. filed) (mem. op.) held that grantor reserved a present right to future production from the mineral estate in a deed conveying grantor’s entire interest in the mineral estate. The litigants aligned as the successors to Grantor and Grantee under a “1972 Deed.” It was undisputed that Grantor owned 1/2 of the minerals in 1972 and that Grantor conveyed Grantor’s entire interest in the mineral estate to Grantee. (However, the opinion also recites that Grantor claimed it retained a mineral estate.) The 1972 Deed also included the following clause:

For any of those properties described in Exhibit “A” in which the Grantors collectively own, prior to this conveyance, one-half or more (but less than 100%) of all of the oil, gas and other minerals in, on and under any of the properties described in Exhibit “A” provided, that the Grantors join with Grantee, his successors or assigns, in any future oil, gas, and/or mineral leases covering any of said properties (which right to join in such leases is hereby reserved to Grantors), then the oil, gas and mineral lease bonuses, rental, royalties or other sums to be received under or for the lease will be allocated so that the Grantors (collectively) and the Grantee shall share equally in the mineral lease bonuses, rental, royalties or other sums received.

For years, Grantor executed oil and gas leases and received 1/4 of the royalty. In 2011, all of the successors to the 1972 Deed agreed to the terms of a correction deed, except one, and that one, as “Plaintiff Grantee,” sued all of the other successors to the 1972 deed and their “Lessee.” Plaintiff Grantee then owned 1/8 of the minerals. Plaintiff contended Grantor retained no mineral rights, no executive rights, and that Grantor was entitled to no royalties on Plaintiff Grantee’s 1/8, if Plaintiff Grantee had not signed a lease, which it had not.

From the opinion, it is unclear whether Plaintiff Grantee had not signed a lease at all, or contended it had not signed a lease as to the 1/8 interest of Grantor over which Plaintiff Grantee claimed the executive right. Plaintiff Grantee was being paid “for a 1/16 interest” and claimed “[Lessee] owed it royalty payments for the 1/16 interest that it had paid to the [Grantor].” If Plaintiff Grantee had not signed a lease, then Plaintiff Grantee would not receive a royalty, but the opinion recites Plaintiff Grantee did receive a royalty payment. There are facts missing from this memorandum opinion, and it appears that the parties and/or the court(s) used the terms “mineral estate” and “royalty” imprecisely, which makes the opinion very difficult to understand.

On motion for summary judgment, the trial court determined that Grantor “reserved one-quarter [1/2 of Grantor’s 1/2] of all bonuses, delay rentals, and royalties in the Disputed Acreage in and under the 1972 Deed,” and “retained the executive right to lease the Disputed Acreage in and under the 1972 Deed.” “Disputed Acreage” is not defined in the opinion or explained in the opinion, but apparently it does not mean acreage, but means the 1/4 interest retained by Grantor.

On appeal, the case turned on how to interpret the language from the 1972 Deed quoted above as to the interest retained by Grantor. Grantor contended that this language should not be read in isolation, because when the 1972 Deed is read as a whole, it is clear that the parties to the 1972 Deed intended that Grantor reserved a royalty interest of 1/2 of the interest conveyed to Grantee. Although the court agreed with Plaintiff Grantee that the contested clause in the 1972 Deed does not specifically include any of the widely used reservation language included in other instruments found in the case law and that the 1972 Deed itself contains typical reservation language in other parts of the 1972 Deed, the court ruled the clause in the 1972 Deed clearly states that the Grantor and Grantee “shall share equally in the mineral lease bonuses, rentals, royalties or other sums received.” To conclude that the 1972 Deed conveyed a present interest in future royalties, the court relied on the decision of the Austin Court of Appeals in Luecke v. Wallace. In Luecke, a deed reserved for the grantor an undivided 1/2 non-participating interest in the royalties reserved by the grantee “at any time in the future and which may be payable to Grantee, his heirs and assigns under any future lease of the property.” The Austin Court rejected the claim that the interest was not vested until a lease was executed, pointing out that by definition a royalty interest is a share of future product or profit from an oil and gas lease. The court in this case did not discuss bonus or rentals.

Although the trial court determined that Grantor retained executive rights, and the judgment was affirmed on appeal, the appellate court recited the following:

“We need not determine this issue because even assuming without deciding that [Grantor] lacked executive rights, the [Grantor] has a 1/4 interest in the royalties, bonuses, and delay rentals and [Plaintiff Grantee] had a 1/16 interest in the same. The summary judgment evidence establishes that [Lessee] properly paid [Plaintiff Grantee] his 1/16 share. Thus, even assuming that the trial court’s judgment is incorrect [and?] that the [Grantor] lacked executive rights, we are unable to conclude that [Plaintiff Grantee] prevails because [Plaintiff Grantee] suffered no harm.”

The court then refers generally to the obligation of a producing cotenant to account to the non producing cotenant. This suggests, although the opinion is silent, that Plaintiff Grantee was unleased, claimed a 1/8 share of production net of allowable costs, and claimed that Grantor was entitled to nothing on that 1/8 of production because there was no lease from Plaintiff Grantee. However, compare this to the earlier recital in the opinion that the Plaintiff Grantee claimed Lessee “owed it royalty payments for the 1/16 interest that it had paid to the [Grantor].” (Emphasis added). The trial court judgment also held that, if the executive right was not retained by Grantor, the statute of limitations and estoppel prevented Plaintiff Grantee from claiming the executive right. The opinion of the court of appeals is silent on that point.

This is a deed construction case that has some significance as to the present vesting of rights to future royalties. Because it is a sketchy memorandum opinion, it is not clear exactly what the opinion says on executive rights. It expressly does not determine the issue, but then it effectively does.