431 Coates Energy Trust v. Frost National Bank

Richard F. Brown

 
The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.
 
Coates Energy Trust v. Frost Nat. Bank, No. 04-11-00838-CV, 2012 WL 5984693 (Tex. App.—San Antonio Nov. 28, 2012, pet. denied) held that the inconsistent provisions of a three- part form deed were effective to convey a mineral interest rather than a royalty interest. The parties aligned as successors in interest to Grantor and Grantee under a common commercial preprinted deed form in use in 1932. The three-part form was entitled “Royalty Contract,” and the three-parts provided the following:
 

The “granting clause” conveyed to Coates:

“[1] . . . an undivided one-half interest in and to all of the oil, gas, and other minerals in and under the following described tract of land, situated in Duval County, Texas, to wit: [Surveys 36, 39, and 40] together with the rights of ingress and egress at all times for purposes of taking said minerals.”

The subject-to, or existing lease clause provides:

“[2] It is distinctly understood and herein stipulated that if [sic] said land is under an Oil and Gas Lease by grantor providing for a royalty of 1/8th of the oil and certain royalties for gas and other minerals, and that Grantee shall receive one- half of the royalties and rentals provided for in said lease; but he shall have no part of the annual rentals paid to keep said lease in force until drilling is begun.”

The future lease clause provides:

“[3] It is further agreed that Grantee shall have no interest in any bonus money received by the Grantor in any future lease or leases given on said land, and that it shall not be necessary for the Grantee to join in any such lease or leases so made; That Grantee shall receive under such lease or leases 1/16th part of oil, gas and other minerals taken and saved under any such lease or leases, and he shall receive the same out of the royalty provided for in such lease or leases, but Grantee shall have no part in the annual rentals paid to keep such lease or leases in force until drilling is begun.”

The issue was whether the deed conveyed a 1/2 nonparticipating mineral interest or a fixed 1/16 royalty interest.
 
The court began its analysis by setting out the five attributes of a severed mineral estate which include: (1) the right to develop, (2) the right to lease (executive right), (3) the right to receive bonus payments, (4) the right to receive delay rentals, and (5) the right to receive royalty payments. The court explained that “a mineral interest shorn of the executive right and the right to receive delay rentals remains an interest in the mineral fee.” Here, Grantor reserved the right to lease, to receive bonus payments, and to receive delay rentals. Following multiple precedents, the court reasoned that Grantor’s reservation of the various attributes of the mineral estate would have been redundant, if Grantor intended to convey a royalty interest, because a royalty interest would not have included such rights. The 1932 deed between Grantor and Grantee contained specific mineral ownership hallmarks, in particular: a granting clause containing the traditional “in, on, and under” language used to create a mineral fee, followed by express reservation of certain mineral attributes. Therefore, the court held that the deed conveyed an undivided mineral ownership interest, not a fixed royalty interest.
 
The court next addressed the conflicting fractions in the granting and future lease clauses by examining the four corners of the deed to ascertain the intent of the parties. The granting clause (paragraph [1]) provided for “an undivided one-half interest in and to all of the oil, gas, and other minerals,” while the future lease clause (paragraph [3]) stated, in pertinent part: “Grantee shall receive under such lease or leases 1/16th part of oil, gas and other minerals . . . .” The court explained that the provision in the future lease clause did not limit Grantee’s right to 1/16 of whatever amount of royalty is paid under a future lease. Rather, the 1/16 fraction is simply a recognition of what the royalty would be under a future lease clause providing for the “usual” 1/8th royalty (that is, Grantee’s 1/2 interest multiplied by a 1/8 royalty). The 1932 deed involved a single conveyance with fixed rights because the deed did not contain any language suggesting two different estates were conveyed. After harmonizing the provisions of the deed, the court held Grantee was entitled to an undivided 1/2 nonparticipating mineral interest “in whatever amount of royalty is paid under the future lease clause.”
 
There was also an adverse possession issue in the case, but the court refused to find that Grantor had established title to a greater interest by adverse possession. Among other reasons given, the court held that a leased mineral owner retains only a royalty interest and the possibility of reverter, which are non-possessory interests. The leased owner could not assert the required right to possession to perfect title by limitations. This suggests there may be some interesting future cases on stacking or not stacking periods of adverse possession because the adverse possession was or was not continuous.
 
The significance of this case is that it continues the trend of interpreting deeds by harmonizing all provisions and reinforces the “four corners” rule as the rationale for similar cases. In particular, finding two distinct grants is increasingly unlikely. There is probably more clarity required on the rights of leased cotenants in the context of adverse possession.