470 Graham v. Prochaska
Tuesday, December 8th, 2015
The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.
Graham v. Prochaska applied the “estate-misconception theory” to assume the parties to an old deed did themselves assume the lease royalty would always be 1/8, and therefore the 1950 deed reserved a floating 1/2 of royalty interest, rather than a fixed 1/2 of 1/8 royalty. The parties aligned as successors to Grantor and Grantee under a 1950 warranty deed, which included the following relevant provisions:
[“Save And Except Clause”] however, there is reserved unto [Grantor] . . . one-half (1/2) of the one-eighth (1/8) royalty to be provided in any and all leases for oil, gas and other minerals now upon or hereafter given on said land, or any part thereof, same being equal to one-sixteenth (1/16th) of all oil, gas and other minerals of any nature, free and clear of all costs of production, except taxes;
[“Provided Clause”] this reservation is burdened with paying the two outstanding mineral royalty reservations, each of One–Fourth (1/4) of one-eighth (1/8) royalty, [description of deeds creating reservations]; And this reservation shall only be effective to the extent that one or both of said outstanding reservations become terminated.
[“Intent Clause”] It being the intent of the parties hereto that [“Grantor”], as of the effective date hereof, shall be vested with and entitled to one-half (1/2) of the usual one-eighth (1/8) royalty in and to all oil, gas and other minerals in on and/or under the property herein conveyed, and the reservation herein above recited in favor of the grantor herein, shall relate to and cover only the one-half (1/2) of one-eighth (1/8) royalty interest previously reserved [by outstanding reservations] if, as and when said interest [outstanding in others] terminate.
It was undisputed that another provision clearly limited the reservation to a nonparticipating royalty interest. At the time of the conveyance, the property was subject to a mineral lease with a 1/8 royalty. A new mineral lease provided for a 1/5 royalty. Grantor contended that Grantor was entitled to a “floating” one-half of royalty interest (1/2 of 1/5 = 1/10). Grantee contended that Grantor should receive a “fixed” 1/16 royalty interest, and therefore Grantee should receive eleven-eightieths of production (1/5 – 1/16 = 11/80). The parties agreed that the deed was unambiguous.
The court explained that a “‘fixed’ or ‘fractional’ royalty interest entitles the owner to an absolute fraction of production—it is not affected by the amount of the landowner’s royalty.” “In contrast, a ‘fraction-of’ or ‘floating’ royalty interest entitles its owner to a share of the landowner’s royalty obtained under a lease.” The court further explained that in the 1920s and 1930s, the landowner’s royalty became standardized at 1/8 of production so that courts eventually took judicial notice of that fact, although beginning in the mid-1970s, a larger royalty became common. There has been confusion in the interpretation of deeds from the earlier time period in situations where the landowner’s royalty subsequently changes. The “estate-misconception theory” is that parties from that earlier period mistakenly assumed and conceptualized the landowner’s royalty as fixed at 1/8 of production.
The court applied the estate-misconception theory to harmonize all the parts of the deed that appeared contradictory or inconsistent in order to give effect to all of its provisions. The court began with the first phrase of the Save and Except Clause— “one-half (1/2) of the one-eighth (1/8) royalty to be provided in any and all leases for oil, gas and other minerals now upon or hereafter given on said land”—and found that indicia of both fixed and floating royalty were present. The court found that the description of the reservation as “one-eighth royalty,” indicated a fixed royalty; however, the reservation of “one-half of the royalty to be provided in any and all leases” indicated a floating royalty. The second phrase of the Save and Except Clause described the reserved interest as “being equal to one-sixteenth (1/16th) of all oil, gas and other minerals of any nature, free and clear of all costs of production, except taxes,” which standing on its own, would indicate a fixed royalty interest. In harmonizing the Save and Except Clause as a whole, the court held that the clause exemplified the estate-misconception theory, and consequently, described a floating royalty interest. The court emphasized that it found language in this specific deed to objectively determine that the parties assumed the lease royalty would always be 1/8.
The court observed that language in both the Intent Clause (“the one-half (1/2) of one-eighth (1/8) royalty interest previously reserved”) and the Provided Clause (“outstanding mineral royalty reservations” as “each of One-fourth of one-eighth (1/8) royalty”) standing alone wound indicate a fixed royalty reservation. However, the court examined the outstanding interests and concluded that they were each naked mineral interests (striped of all rights except the right to royalty), and thus floating royalties, i.e., together, 1/2 of the lease royalty. The court held that there was no conflict in concluding that Grantor reserved the possibilities of reverter in those outstanding floating royalty reservations. Upon the termination of those prior interests, Grantor’s future interests became present possessory interests. Therefore, there was “only one reasonable construction of the deed’s language”—the reservation was of a floating 1/2 of royalty interest.
There was a dissenting opinion which stated that the court is not permitted to look outside the four corners of an unambiguous deed (to examine the deeds creating the prior outstanding interests) to interpret the parties’ intent, and the dissent would hold that the reservation was a fixed 1/16 royalty.
It appears that there will be no end to the difficulty in interpreting these old deeds and little hope of certainty for the title examiner. This case elevates the problem to an “estate-misconception theory” and suggests that courts will more aggressively assume that misconception in interpreting these old deeds.
