Face Challenges Confidently

681 Wenske v. Ealy, 521 S.W.3d 791 (Tex. 2017)

Tuesday, August 7th, 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.

Wenske v. Ealy, 521 S.W.3d 791 (Tex. 2017) held that an outstanding non-participating royalty interest (“NPRI”) burdened grantor and grantee proportionately, because nothing within the four corners of the deed indicated the parties intended that the NPRI would burden only grantee. Perhaps more importantly, the case strongly restates the Court’s preference for finding intent without resorting to rules of construction. There was an outstanding 1/4th NPRI burden on the property. In the granting clause of the warranty deed, Grantor conveyed all of the property to Grantee “subject to the Reservations from Conveyance and the Exceptions to Conveyance and Warranty.” The “Reservations from Conveyance” clause reserved 3/8ths of the minerals to Grantor. The “Exceptions to Conveyance and Warranty” clause expressly identified the outstanding NPRI. Grantor contended that Grantor’s interest was not burdened by the NPRI. Grantee contended that the NPRI burdened Grantor and Grantee proportionately. The issue was whether the “Exceptions to Conveyance and Warranty” clause was merely a limitation on the warranty.

Grantor relied upon Bass v. Harper, 441 S.W.2d 825 (Tex. 1969). In Bass, there was an outstanding 6/14ths interest, and grantor conveyed 1/2 of the minerals (7/14ths), subject to the outstanding 6/14ths, which the Court held resulted in 1/14th to grantee. This case, like Bass, centered upon the effect to be given to a subject-to clause. While the Court in Wenske did not overrule Bass, it held that Bass is limited to the specific language in the deed at issue in Bass. “The instrument in question does not relate the outstanding mineral royalty interests to the warranty. It could have done so, but it is tied specifically to the grant.”

The resolution of this case turned largely upon the meaning of the subject-to clause. The principal function of a subject-to clause in a deed is to protect a grantor against a claim for breach of warranty when some mineral interest is already outstanding. Use of a subject-to clause to perform some other function is likely to introduce an element of ambiguity. The Court cited to an 1880’s case from Pennsylvania as authority for its reasoning on intent. “We think ‘[t]he best construction is that which is made by viewing the subject of the contract as the mass of mankind would view it; for . . . it may be safely assumed that such was the aspect in which the parties themselves viewed it.’” Perhaps the Court could have cited Ockham’s razor (when presented with competing hypothetical answers to a problem, one should select the one that makes the fewest assumptions). Apparently we need not examine the entire “mass of mankind,” because the Court also said “[t]he principles of oil-and-gas law inform our interpretation. Generally, ‘the conveyance of an interest in the minerals in place carries with it by operation of law the right to a corresponding interest in the royalty.’” “Giving the deed’s words their plain meaning, reading it in its entirety, and harmonizing all of its parts, we cannot construe it to say the parties intended the [Grantee’s] interest to be the sole interest subject to the NPRI.”

The Court obviously intends this opinion to be important in articulating how intent is to be determined. The Court acknowledges the trend of its decisions to reject rigid, mechanical rules of deed construction, and to rely upon four-corners deed construction to ascertain the intent of the parties. The Court repeatedly states that it rejects rules of construction, “magic words,” and giving primacy to particular clauses. The Court also expressly stated that its decision in this case should not be construed as establishing a new default rule that conveyances subject to an outstanding NPRI will result in the NPRI being borne proportionately. The Court recites that its decision “does not vitiate the established background principles of oil-and-gas law nor does it open for debate the meaning of clearly defined terms in every deed dispute.” The Court suggests that “[g]oing forward, drafters of deeds should endeavor to plainly express the contracting parties’ intent within the four corners of the instrument they execute.”

The Court said “[t]he deed here is not a model of clarity. But read in its entirety, we see only one reasonable interpretation of its words.” Nevertheless, this 5-4 decision prompted a strong dissent. The dissent contends “the interest granted to [Grantee] is the only interest that is ‘subject to’ the exception for [the NPRI] interest. The interest conveyed was the only interest made “subject to” anything, and it was made subject to the NPRI, not 5/8ths of the NPRI. The Court should not use its “own intuition of what the parties probably meant – which of course will usually correspond to our own views of what the parties should have meant. . . .”

The dissent also pushes back on abandoning all rules of interpretation. “[W]hen this Court adopts a rule of interpretation, parties who draft agreements will reasonably rely on that rule when deciding how to express their intent. Our decisions can imbue words with ‘magic,’ and drafters rely on that talismanic power to create certainty in their instruments.”

The dissent then cites and discusses in detail Duhig and its progeny as authority for construing the deed for Grantor. The dissent found Bass to be helpful, if not controlling.

The significance of this case is the holding that, although the intent of the parties, rather than mechanical rules or “magic words,” governs an unambiguous conveyance, a subject-to clause is generally intended to limit the warranty and will not be construed to do more, unless clearly expressed in the deed. However, the Court should not use its “own intuition of what the parties probably meant – which of course will usually correspond to our own views of what the parties should have meant. . . .”