Face Challenges Confidently

446 Key Prod. Co., Inc. v. Quality Operating, Inc.

Tuesday, September 1st, 2015


Richard F. Brown

The following is not a legal opinion.  You should consult your attorney if the case may be of significance to you.
Key Prod. Co., Inc. v. Quality Operating, Inc., No. 10-10-00379-CV, 2013 WL 1286672 (Tex. App.—Waco Mar. 28, 2013, no pet.) (mem. op.), held that a depth limitation in a recorded designation of unit was effectively incorporated into a subsequent assignment of leases to limit the interest assigned to only the depths included on the designation of unit.  The specific Designation of Unit that created the Pearline Perkins, et al., Smackover Gas Unit (“Smackover Unit”) was not only limited by geographic area, but also recited that it pertained only to the “Smackover Geological Formation.”  The “Smackover Geological Formation” was then defined as depth limited to the interval between 10,980 feet and 11,680 feet subsurface.  There was a subsequent assignment of leases in which Grantor conveyed to Grantee all of Grantor’s interest as follows:
All leases or wellbores or contract rights INSOFAR AND ONLY INSOFAR AS set out in Exhibit A being attached to this Assignment and Bill of Sale and made a part hereof for all purposes, INSOFAR AND ONLY INSOFAR AS these leases or wellbores or contract rights are contained in the units described and set out in the particular Exhibit A . . . .
Exhibit A to the assignment identified the Smackover Unit.  The parties aligned as successors to Grantor and Grantee.
Grantee contended that the language “contained in the unit” was merely a geographic limitation and not a depth limitation.  Grantee reasoned that the assignment was not depth limited because the assignment itself did not include express language defining the depths transferred as limited to the Smackover Unit, and because there were other express depth exceptions in the assignment which were superfluous if this assignment only conveyed the Smackover Formation.  The court held that the assignment conveyed only the interest in the Smackover Formation, the definition of the Smackover Formation is contained in a recorded instrument referenced in the assignment, and the Smackover Formation is defined in the recorded Designation of Unit as depth limited.
The significance of the case is the holding that the depth limitation expressed in a previously recorded designation of unit may effectively operate as an exception to the grant in a subsequent lease assignment.