Yturria v. Kerr-McGee Oil & Gas Onshore, LLC

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
September 8, 2008
No. 07-40636 Charles R. Fulbruge III
Clerk
FRANK D. YTURRIA, Trustee of the Frank D. Yturria Mineral Trust, et al.
Plaintiffs-Appellees
v.
KERR-MCGEE OIL & GAS ONSHORE, LLC, KERR-MCGEE OIL & GAS
ONSHORE, LP, doing business as KMOG ONSHORE LP
Defendants-Appellants
Appeal from the United States District Court
for the Southern District of Texas
USDC No. M-05-181
Before PRADO, ELROD, and HAYNES, Circuit Judges.
PER CURIAM:*
This appeal involves the proper interpretation of uniquely worded natural
gas liquid royalty provisions in four oil and gas leases entered into as part of a
settlement agreement following litigation over the meaning of prior lease
language. The provisions require lessees Kerr-McGee Oil & Gas Onshore, LP
and Kerr McGee Oil & Gas Onshore, LLC (collectively Kerr-McGee) to pay
Lessors, as a royalty, a certain percentage of “all plant products, or revenue
*
Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH CIR.
R. 47.5.4.
No. 07-40636
derived therefrom, attributable to gas produced by [Kerr-McGee] from the leased
premises.” Lessors sued Kerr-McGee, alleging that Kerr-McGee improperly paid
royalties due under these provisions based on the revenue that it received for
natural gas liquids from its third-party processor–a sum that includes
deductions for the processor’s transportation and fractionation costs. According
to Lessors, the leases require Kerr-McGee to calculate royalties based on the
total revenue generated by the natural gas liquids, exclusive of these third-party
costs. The district court agreed, granting summary judgment that the leases
unambiguously require Lessors’ method of calculating royalties. We agree that
Lessors’ interpretation is the correct one and thus affirm the district court’s
judgment.
I. BACKGROUND
This appeal arises from a dispute over how Kerr-McGee pays royalties for
natural gas liquids, also referred to as plant products, under Lessors’ oil and gas
leases in Starr and Hidalgo Counties, Texas. The Lessors are royalty interest
owners of four oil and gas leases of which Kerr-McGee and its predecessors in
interest are the lessees. The four leases consist of the I.Y. Garcia Lease, the J.A.
Garcia Lease (collectively, the Garcia leases), the Yturria 600-Acre Lease, and
the Yturria 350-Acre Lease (collectively, the Yturria leases). Although the leases
contain slight variations (noted herein when relevant), they are similar in most
pertinent respects.
Since 1983, Kerr-McGee has drilled and put into production a number of
gas wells on the leased premises. In order to sell to consumers the natural gas
liquids produced by these wells, the gas must be processed and fractionated in
a gas plant. To accomplish this, Kerr-McGee uses pipelines to transport the
natural gas liquids to processing plants. The plants are owned by third-party
processors that contracted with Kerr-McGee to transport, process, and
fractionate the gas generated from the leased premises.
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No. 07-40636
In 1993, Lessors sued Kerr-McGee in two actions separate from this case.
The Lessors claimed that Kerr-McGee impermissibly deducted transportation
and treating charges from natural gas liquid revenue prior to calculating the
Lessors’ royalties. Kerr-McGee took the position that these deductions were
proper and not barred by the leases. The 1993 lawsuits ended in settlement.
At the time of the 1993 suit, the leases required Kerr-McGee to pay
Lessors a royalty on 100% of the “revenue . . . received by Lessee [Kerr-McGee]”
for the natural gas liquids. As part of the settlement, however, the parties
amended the leases’ natural gas liquid royalty provisions. The amended royalty
clauses are the central provisions at issue in this appeal. Those provisions now
require Kerr-McGee to pay Lessors “a royalty of one-fourth (1/4th) of seventy-five
percent (75%) of all plant products, or revenue derived therefrom, attributable
to gas produced by [Kerr-McGee] from the leased premises.” The Garcia leases
include additional language after “revenue derived therefrom” as follows:
“(whether or not Lessee’s processing agreement entitles it to a greater or lesser
percentage).” Except as amended, the leases remained in full force and effect as
written.
The settlement did not result in amendment to the leases’ separate “no
deduct” provisions. The “no deduct” provisions vary slightly in the Garcia and
Yturria leases. In the Garcia leases, the provision states:
Lessor’s royalty shall never bear, either directly or indirectly, any
part of the costs or expenses of production, gathering, dehydration,
compression, transportation (except transportation by truck),
manufacture, processing, treatment or marketing of the oil or gas
from the leased premises, nor any part of the costs of construction,
operation or depreciation of any plant or other facilities or
equipment for the processing or treating of said oil or gas produced
from the herein leased premises . . . .
In the Yturria leases, the provision states:
Lessor’s royalties hereunder shall never be subject to any
amortization or interest or investment charge or deduction for
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No. 07-40636
transporting the same to a pipeline, or for gathering, transporting,
producing, treating, separating, storing, compressing, dehydrating
or marketing the same . . . .
In 1997, Kerr-McGee entered into a new agreement for the processing,
transporting, and fractionating of natural gas liquids with a third-party
processor, Enterprise. Under the Enterprise agreement, natural gas liquids are
transferred from the leased premises to Enterprise’s plants in Delmita and
Gilmore, Texas where Enterprise processes the gas. Once processed, title to the
gas passes to Enterprise. Enterprise then transports the gas to its plant in
Corpus Christi where the gas is fractionated into natural gas liquid components
such as propane, ethane, butane, and pentane. Enterprise then sells the gas.
Under the Enterprise agreement, Kerr-McGee receives 80% of Enterprise’s “Net
Proceeds,” which consist of the total value of the fractionated natural gas liquids
(based on price averages) minus product marketing, transporting, and
fractionating costs. Because Enterprise does not know its actual transportation
and fractionation costs when Kerr-McGee is compensated, the Enterprise
agreement uses transportation and fractionation costs mutually agreed upon to
calculate the price owed to Kerr-McGee. Thus, the price is calculated on index
prices for the various plant products, not prices specific to the Corpus Christi
plant.
In 2003, Lessors audited Kerr-McGee’s method of paying natural gas
liquid royalties under the leases. The audit revealed that Kerr-McGee was
deducting Enterprise’s transportation and fractionation costs prior to calculating
Lessors’ royalties. In other words, Kerr-McGee was calculating Lessors’
royalties based on the revenue that Kerr-McGee received from Enterprise (which
includes deductions for Enterprise’s transportation and fractionation costs)
rather than on the total revenue generated by the natural gas liquids, exclusive
of costs.
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No. 07-40636
In May 2005, Lessors filed a complaint against Kerr-McGee, alleging that
this conduct violated the leases. In its answer, Kerr-McGee admitted that it
takes into account transportation and fractionation costs prior to calculating
Lessors’ royalties, but asserted that the leases require this method of calculation.
Kerr-McGee also raised affirmative defenses of waiver, estoppel, and ratification
based on the parties’ 1993 dispute and subsequent settlement.
Lessors moved for partial summary judgment arguing that the
unambiguous language of the leases precluded Kerr-McGee from taking into
account transportation and fractionation costs prior to calculating Lessors’
royalties. Kerr-McGee filed a combined reply and cross-motion for summary
judgment arguing that the unambiguous language of the leases demonstrated
that it had properly calculated and paid royalties, and that Kerr-McGee’s
affirmative defenses of waiver, estoppel, and ratification established, as a matter
of law, that Lessors could not sue to recover alleged underpayments of natural
gas liquid royalties. Lessors filed a cross-motion for summary judgment on Kerr-
McGee’s affirmative defenses, asserting that they were entitled, as a matter of
law, to sue for alleged royalty underpayments.
The district court granted Lessors’ motion for partial summary judgment
on the contract interpretation issue, denied Kerr-McGee’s cross-motion for
summary judgment, and granted Lessors’ cross-motion for summary judgment
on Kerr-McGee’s affirmative defenses.
The parties thereafter stipulated and agreed to damages and expert
witness fees. After a bench trial on the remaining issue of attorneys’ fees, the
district court entered a final judgment, incorporating the parties’ stipulations
and awarding damages, costs, and fees to Lessors. This appeal followed.
II. DISCUSSION
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No. 07-40636
Kerr-McGee challenges the district court’s judgment on two grounds.
First, it contends that the district court erred in granting summary judgment
that the unambiguous language of the leases requires Kerr-McGee to calculate
Lessors’ royalty based on the total revenue derived from the natural gas liquids,
exclusive of transportation and fractionation costs. Second, Kerr-McGee argues
that the district court improperly granted summary judgment for Lessors on
Kerr-McGee’s affirmative defenses of waiver, estoppel, and ratification.
In assessing Kerr-McGee’s challenges, we review the district court’s
summary judgment de novo, viewing the evidence in the light most favorable to
Kerr-McGee, the party opposing the judgment. Crawford v. Formosa Plastics
Corp., 234 F.3d 899, 902 (5th Cir. 2000). Summary judgment is appropriate if
there is no genuine issue of material fact and Lessors are entitled to judgment
as a matter of law. Id.
A. Natural Gas Liquid Royalties
We turn first to the parties’ dispute over the proper method of calculating
Lessors’ royalty under the leases’ natural gas liquid royalty provisions. In
relevant part, the provisions read:
If gas . . . produced from the leased premises is processed in a
hydrocarbon recovery plant for the recovery of liquid and/or
liquefied hydrocarbons therefrom, and if [Kerr-McGee] . . . receives
plant products, or revenue attributable thereto, then Lessor[s] shall
receive as a royalty one-fourth (1/4th) of seventy-five percent (75%)
of all plant products, or revenue derived therefrom, attributable to
gas produced by [Kerr-McGee] from the leased premises.
The parties agree that the phrase “revenue derived therefrom” governs the
proper payment of royalties under these provisions. They further agree that the
term “revenue,” as used in the royalty provisions, refers to the total income
produced by a given source, exclusive of costs. The parties disagree, however,
on what source of revenue Kerr-McGee must use to calculate Lessors’ royalties.
According to Kerr-McGee, the relevant source of revenue is the payment that
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No. 07-40636
Kerr-McGee receives from Enterprise when title to the natural gas liquids
passes to Enterprise under the Enterprise agreement, i.e., the value of the
fractionated natural gas liquid components at the point of sale minus
Enterprise’s transportation and fractionation costs. In contrast, Lessors contend
that the relevant source of revenue is the gross revenue, i.e., the index price per
gallon of all plant products, before the deduction of any transportation and
fractionation costs.
At the outset, it is important to note that we are construing unique
language in four particular oil and gas leases. The vast majority of oil and gas
leases use judicially defined terms such as “market value at the well” or “amount
realized” to measure the lessor’s royalty. See generally Heritage Res., Inc. v.
Nationsbank, 939 S.W.2d 118, 124-31 (Tex. 1996) (Owen, J., concurring)
(discussing the meaning of “market value at the well”); Tana Oil & Gas Corp. v.
Cernosek, 188 S.W.3d 354, 360 (Tex. App.—Austin 2006, pet. denied) (discussing
the meaning of “amount realized”). Here, in contrast, the parties have opted to
use the previously unconstrued phrase “revenue derived therefrom” in the
context of a settlement of a previously litigated dispute over this very issue.
Thus, cases construing leases that use judicially defined terms provide little
guidance concerning how the uniquely worded leases here should be construed.
As Texas courts have recognized, the specific language of the lease provisions at
issue determine how the parties must calculate royalties. See Heritage, 939
S.W.2d at 124 (Owen, J., concurring).
(1) Governing rules of construction
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No. 07-40636
Under Texas law,1 an oil and gas lease is a contract and its terms are
interpreted as such. See Anadarko Petroleum Corp. v. Thompson, 94 S.W.3d
550, 554 (Tex. 2002). In construing an unambiguous lease, our primary duty is
to ascertain the parties’ intent as expressed by the words of their agreement. Id.
In so doing, we consider the wording of the lease in light of the circumstances
surrounding its adoption and apply the rules of construction to determine its
meaning. Sun Oil Co. v. Madeley, 626 S.W.2d 726, 731 (Tex. 1981). We must
give contractual terms their plain and ordinary meaning unless the instrument
shows the parties’ intent to use the terms in a different sense. Heritage, 939
S.W.2d at 121. We “examine and consider the entire writing in an effort to
harmonize and give effect to all the provisions of the contract so that none will
be rendered meaningless.” Coker v. Coker, 650 S.W.2d 391, 393 (Tex. 1983). If,
after applying the pertinent rules of construction, the lease remains subject to
two or more equally reasonable interpretations, Texas cases counsel that we
adopt the interpretation more favorable to the lessor. Zeppa v. Houston Oil Co.,
113 S.W.2d 612, 615 (Tex. App.—Texarkana 1938, writ. ref’d) (“[I]t appears to
be the settled rule in this state that of two or more equally reasonable
constructions of which the language of an oil and gas lease is susceptible the one
more favorable to the lessor will be allowed to prevail.”); see also Champlin
Petroleum Co. v. Ingram, 560 F.2d 994, 998 (10th Cir. 1977) (applying Texas
law); Freeman v. Samedan Oil Corp., 78 S.W.3d 1, 7 (Tex. App.—Tyler 2001, pet.
granted, judgm’t vacated w.r.m.); Sirtex Oil Indus., Inc. v. Erigan, 403 S.W.2d
784, 788 (Tex. 1966) (“[A] lease will be most strongly construed against the
lessor.”).
1
As all the leases were negotiated and executed in Texas, Texas law governs their
interpretation. See H E Butt Grocery Co. v. Nat'l Union Fire Ins. Co., 150 F.3d 526, 529 (5th
Cir. 1998) (Texas law controls the interpretation of contracts negotiated, drafted, and executed
in Texas).
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No. 07-40636
(2) The “No Deduct” Provisions
In concluding that Lessors’ royalty under the natural gas liquid royalty
provisions cannot include deductions for Enterprise’s transportation and
fractionation costs, the district court relied heavily on the leases’ separate “no
deduct” provisions. The Lessors do the same in this appeal. Those provisions
provide, respectively, that Lessors’ royalty shall not bear deductions for
“transportation,” “processing,” and “treatment” costs (Garcia leases), and for
“transporting,” “producing,” “treating,” and “separating” costs (Yturria leases).
The language of these clauses is no doubt broad enough to include Enterprise’s
transportation and fractionation costs. But the breadth of the “no deduct”
provisions is only half the issue. First, we must specifically identify that from
which deductions may not be made pursuant to the “no deduct” provisions.
Here, the “no deduct” provisions in both the Garcia and Yturria leases apply only
to “Lessor’s royalty.”2
The Texas Supreme Court explained the significance of this limitation in
Heritage, 939 S.W.2d at 118. Like this case, Heritage involved the question of
how to properly calculate the royalties owed a group of lessors under oil and gas
leases. Id. at 121. The relevant royalty provisions required the lessee to pay the
lessors a certain percentage of the “market value at the well for all gas . . .
produced from the leased premises.” Id. at 120-21. The leases also contained a
“no deduct” provision similar to those at issue here. The provision provided that
“there shall be no deductions from the value of the Lessor’s royalty by reason of
any required processing, cost of dehydration, compression, transportation, or
other matter to market such gas.” Id.
The lessee in Heritage deducted the post-production cost to transport gas
from the wellhead to the point of sale from the sales price before calculating the
2
The Yturria leases use the plural “Lessor’s royalties.”
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No. 07-40636
lessors’ royalties. Id. at 120. As in this case, the lessors sued for breach of
contract, arguing that the deductions violated the leases’ “no deduct” provision.
In assessing this claim, the Texas Supreme Court did not directly address the
apparent conflict between the definition of “market value at the well”3 (which
required that post-production costs be deducted from lessors’ royalty) and the “no
deduct” provision (which appeared to prohibit deducting such costs). Rather, the
court looked first to the applicability of the “no deduct” provision, which
prevented deductions only from the “value of the Lessor’s royalty.” Id. at 122.
According to the court, the “value of the Lessor’s royalty” was the market value
of the gas at the well–a measure which requires a deduction for post-production
costs. Id. The court thus concluded that the leases’ “no deduct” provision was
“surplusage as a matter of law.” Id. at 123.
Accordingly, under Heritage, to determine whether a lessee has made
improper “deductions” from a lessor’s royalty, one must start with the royalties
that the lease entitles the lessor to. Justice Owen’s Heritage concurrence
succinctly makes this point:
It is clear certain “deductions” are prohibited. The question that
must be answered is from what are deductions prohibited. The
clause says “from the value of the Lessor’s royalty.” The value of the
Lessor’s royalty is “market value at the well” for gas sold off the
leased premises.
Id. at 130 (Owen, J., concurring).
Likewise, we must determine the value of Lessors’ royalty before accessing
the impact of the leases’ separate “no deduct” provisions. To do so, we turn to
the leases’ natural gas liquid royalty provisions.
(3) The Natural Gas Liquid Royalty Provisions
3
Under Texas law, “market value at the well” is generally determined by comparable
sales. Heritage, 939 S.W.2d at 122. In cases such as Heritage, however, where evidence of
comparable sales is unavailable, market value is determined by subtracting reasonable post-
production marketing costs from the market value at the point of sale. Id.
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No. 07-40636
Those provisions require Kerr-McGee to pay Lessors “a royalty of one-
fourth (1/4th) of seventy-five percent (75%) of all plant products, or revenue
derived therefrom, attributable to gas produced by [Kerr-McGee] from the leased
premises.” The parties initially focus on the word “derive,” citing a host of
dictionary definitions in support of their proposed constructions. These
dictionary definitions are not dispositive of the issue and, regardless, the word
“derive” can be interpreted to support both parties’ constructions.
a. Kerr-McGee’s Proposed Interpretation
In support of its proposed method of calculating royalties, Kerr-McGee
notes that its obligation to pay royalties arises only after it receives revenue
attributable to extracted natural gas liquids. Because Kerr-McGee receives such
revenue only from Enterprise via the terms of the Enterprise agreement, Kerr-
McGee argues that the revenue it receives from Enterprise is inextricably
intertwined with the royalties it must pay Lessors. Thus, under Kerr-McGee’s
reading, “if gas . . . produced from the leased premises is processed in a
hydrocarbon recovery plant for the recovery of liquid and/or liquefied
hydrocarbons therefrom, and if [Kerr-McGee] . . . receives plant products, or
revenue attributable thereto,” (emphasis added), then it must pay one-fourth of
seventy-five percent of that revenue to Lessors as a royalty.
Kerr-McGee’s construction of the royalty provisions is consistent with the
general definition of “royalty” under Texas law, which includes deductions for
post-production costs such as treatment and transportation costs. See id. at 122.
Moreover, as Kerr-McGee implicitly argues, it is certainly more reasonable to
assume that a party would agree to pay royalties based on the revenue it
receives for gas, rather than on the gross revenue received for that gas by a third
party at the point of sale. As Kerr-McGee notes, title to the natural gas liquids
passes to Enterprise before the gas is even fractionated. Thus, under Lessors’
proposed construction, they receive the full benefit of Enterprise’s transporting,
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No. 07-40636
fractionating, and marketing efforts, yet bear none of the costs–costs which Kerr-
McGee, the party paying the royalty, does bear. Of course, this construction fails
to acknowledge the lawsuit and settlement context in which the language in
question arose.
Kerr-McGee also argues that its construction is supported by Lessors’
option to take their royalty “in kind.” Kerr-McGee argues that the in-kind option
demonstrates the absurdity of Lessors’ proposed construction because, if Lessors’
royalties are based on Enterprise’s gross revenue, then Lessors should be able
to go to Enterprise’s Corpus Christi plant and demand that they be given their
share of natural gas liquid components there. Kerr-McGee, however, fails to
take into account the fact that the value of a royalty taken in-kind does not have
to equal the value of a monetary royalty. See Mesa Operating Ltd. P'ship v. U.S.
Dep't of Interior, 931 F.2d 318, 325 (5th Cir. 1991) (rejecting argument that
royalty taken in kind must always be equal to royalty taken in value). Moreover,
this entire argument is based on the flawed notion that, under Lessors’ proposed
interpretation, they would receive Enterprise’s actual gross revenue for the
natural gas liquids. But as mentioned, that is not the case. Under the
Enterprise agreement, Kerr-McGee is compensated for extracted natural gas
liquids based on index prices for the various plant products minus agreed-to
transportation and fractionation costs. All that Lessors assert is that Kerr-
McGee must calculate their royalty based on this total index price, exclusive of
deductions for transportation and fractionation costs. This calculation is not
dependent on the actual price that Enterprise receives for the plant products in
Corpus Christi.
Finally, the leases contain a number of other gas royalty provisions. Most
of these provisions are based on “gross proceeds,” which the leases define as “the
price received by [Kerr-McGee].” Additionally, several of these provisions
require that certain post-production expenses incurred prior to the tailgate of the
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No. 07-40636
processing plant, if deducted, must be added back to determine “gross proceeds”
prior to calculating Lessors’ royalties. But none of these “add-back” clauses
require that Kerr-McGee add back Enterprise’s downstream transportation and
fractionation expenses prior to calculating Lessors’ royalties, and indeed, some
of them specifically exclude such add-backs. Although Kerr-McGee relies on
these provisions in support of its proposed interpretation, we find them equally
supportive of both parties’ interpretations. On one hand, the provisions show
that the parties generally intended to base Lessors’ royalties on Kerr-McGee’s
revenue and also intended to deduct Enterprise’s costs from those royalties. But
on the other hand, the provisions show that the parties knew how to specifically
provide for both of these things in a particular gas royalty provision, but chose
not to do so in the leases’ natural gas liquid royalty provisions.
b. Lessors’ Proposed Interpretation
While Lessors concede that royalties under Texas law usually include post-
production expenses, they note that parties are free to alter this general rule by
agreement, and argue that is precisely what the parties did here. Lessors note
that the leases’ natural gas liquid royalty provisions do not say that Kerr-McGee
must pay royalties based on the “total revenue derived” by Kerr-McGee; rather,
the provisions say that Kerr-McGee must pay royalties based on “all plant
products, or revenue derived therefrom, attributable to gas produced by [Kerr-
McGee] from the leased premises.” (emphasis added). Indeed, the parties chose
this language to replace the phrase “revenue . . . received by Lessee [Kerr-
McGee]” when they amended the royalty provision in settling Lessors’ 1993
lawsuit. The amended language was a specific effort by Lessors to prevent Kerr-
McGee from reducing Lessors’ royalty through alleged “gamesmanship.” In the
1993 lawsuit, Lessors alleged that Kerr-McGee abused the “revenue . . . received
by Lessee [Kerr-McGee]” language by allowing its affiliate processor to retain
more of the natural gas liquids, which reduced the revenue that Kerr-McGee
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No. 07-40636
received and hence reduced the royalty Kerr-McGee ultimately owed Lessors.
Thus, the language allowed Kerr-McGee, through its affiliate processor, to
receive the full benefit of the natural gas liquids while at the same time
decreasing the amount it owed Lessors as a royalty. The amendments were
designed to address this problem.
Lessors argue that in order to adopt Kerr-McGee’s proposed interpretation,
we would have to ignore this amended language and simply read the provisions
as if they still referred specifically to Kerr-McGee’s revenue. Based on the
amended language, Lessors argue that Kerr-McGee must pay royalties on “all”
plant products or revenue derived from “all” plant products, attributable to the
natural gas liquids. Lessors note that “revenue,” when not expressly qualified
by “net,” means “[a]ll the income produced by a particular source.” AMERICAN
HERITAGE DICTIONARY OF THE ENGLISH LANGUAGE 1492 (4th ed. 2000). Thus,
they argue that the revenue from “all” plant products is the amount realized
from 100% of the plant products before deductions for post-production expenses.
c. Court’s Interpretation
Based on the forgoing discussion, we conclude that only Lessors’
interpretation gives effect to the specific manner in which the parties amended
the royalty provisions following settlement of their 1993 dispute. The settlement
context of the amendment is properly considered “surrounding circumstances”
evidence under Madeley, 626 S.W.2d at 731. Thus, while we understand Kerr-
McGee’s concerns with the unusual breadth of Lessors’ proposed interpretation,
that fact is not sufficient to render Lessors’ proposed interpretation
unreasonable in light of the strong circumstantial evidence that “revenue
derived therefrom” must mean something other than revenue obtained by Kerr-
McGee.
We conclude that Lessors’ interpretation is the correct one. That
conclusion is particularly buttressed in the Garcia leases by the additional
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No. 07-40636
language “(whether or not Lessee’s processing agreement entitles it to a greater
or lesser percentage),” which makes no sense if Kerr-McGee’s revenue is the sole
measure of Lessors’ royalty, as Kerr-McGee argues.
Even if we were to conclude that both sides proffer reasonable
interpretations of the leases, however, we would still affirm the district court’s
judgment. Kerr-McGee incorrectly asserts that any ambiguity in the leases
makes the question of how to calculate royalties an issue of fact for the jury. For
most contracts, that would be the case, see Geoscan, Inc. of Tex. v. Geotrace
Techs., Inc., 226 F.3d 387, 390 (5th Cir. 2000), but here the two Yturria leases
expressly provide that “[i]n the case of ambiguity, [the] Lease always shall be
construed in favor of Lessor[s] and against [Kerr-McGee].” This contractual
clause simply supplements Texas cases to the effect that if two equally
reasonable interpretations of an oil and gas lease arise, the one more favorable
to the lessors must be adopted. Zeppa, 113 S.W.2d at 615; see also Champlin,
560 F.2d at 998 (applying Texas law); Freeman, 78 S.W.3d at 7; Erigan, 403
S.W.2d at 788 (“[A] lease will be most strongly construed against the lessor.”).
This common law rule of construction also applies to the Garcia leases, which
contain no express rule of construction.
In order to find for Kerr-McGee, as it impliedly conceded at oral argument,
we would have to find that Kerr-McGee’s construction is the only reasonable one.
On this record, we cannot do that. Accordingly, we hold that the leases’ natural
gas liquid royalty provisions require Kerr-McGee to calculate Lessors’ royalty
based upon the Kerr-McGee/Enterprise index price per gallon for all plant
products before deductions are made for transportation and fractionation fees,
as the district court concluded.
B. Kerr-McGee’s Affirmative Defenses
Kerr-McGee also challenges the district court’s ruling granting Lessors’
motion for partial summary judgment on Kerr-McGee’s affirmative defenses of
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No. 07-40636
quasi-estoppel, waiver, and ratification. Initially, Kerr-McGee argues that the
district court failed to apply the proper summary judgment standard. A party
moving for summary judgment on an opponent’s affirmative defense can obtain
judgment as a matter of law by disproving an essential element of that defense.
Fontenot v. Upjohn Co., 780 F.2d 1190, 1194 (5th Cir. 1986). Here, while the
district court may not have restated the proper standard as to each of Kerr-
McGee’s affirmative defenses, its analysis makes eminently clear that the proper
standard was applied,4 and accordingly the district court did not err.
We address, in turn, Kerr-McGee’s remaining challenges to the judgment
against its affirmative defenses.
(1) Quasi-Estoppel
The defense of quasi-estoppel precludes a party from asserting, to
another’s disadvantage, a right inconsistent with a position previously taken.
Lopez v. Munoz, Hockema & Reed, L.L.P., 22 S.W.3d 857, 864 (Tex. 2000). The
defense applies when “it would be unconscionable to allow a person to maintain
a position inconsistent with one to which he acquiesced, or from which he
accepted a benefit.” Id. Quasi-estoppel does not require a showing of
misrepresentation or detrimental reliance. Atkinson Gas Co. v. Albrecht, 878
S.W.2d 236, 240 (Tex. App.—Corpus Christi 1994, writ denied).
Kerr-McGee asserts that the district court erred in concluding that
Lessors’ did not receive a benefit for the purposes of quasi-estoppel because, as
part of the parties’ prior settlement, “they received an additional royalty of 100%
4
With respect to quasi-estoppel, the district court ruled that Kerr-McGee could not
prove that Lessors had benefitted from accepting underpayments of royalties. With respect
to waiver, the district court ruled that Kerr-McGee could not prove that Lessors had
intentionally relinquished their right to have royalties calculated based on the total revenue
derived from all natural gas liquids because the release language of the parties’ prior
settlement applied only to claims arising “prior” to the settlement date. Finally, relying on this
circuit’s precedent, the district court ruled that Kerr-McGee could not prove that Lessors
ratified Kerr-McGee’s method of calculating royalties merely by accepting less monies than
they were owed.
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of Enterprise’s Net Proceeds.” Kerr-McGee asserts that by accepting this
additional royalty, which included a deduction for Enterprise’s transportation
and fractionation costs, Lessors should now be estopped from challenging Kerr-
McGee’s method of calculating royalties. But even assuming that Lessors knew
how Kerr-McGee calculated the settlement royalty–a fact they adamantly
deny–it is unclear how accepting this additional royalty constitutes a position
inconsistent with their current claims. As part of the settlement, the parties
fundamentally altered the leases’ natural gas liquid royalty provisions, providing
that royalties would be calculated based on the “revenue derived” from natural
gas liquids rather than on the monies that Kerr-McGee received for natural gas
liquids from a processor. Thus, even if Lessors’ position in the prior settlement
constituted an implicit admission that transportation and fractionation expenses
were properly deductible under the old natural gas royalty provisions, there is
nothing unconscionable about allowing Lessors to assert a new position, namely
that transportation and fractionation expenses cannot be deducted under the
new natural gas liquid royalty provisions. Indeed, the parties’ settlement
specifically contemplates that Lessors would retain the right to bring any new
claims based on the underpayment of royalties under the new provisions.
Accordingly, the district court properly granted summary judgment for Lessors
on Kerr-McGee’s quasi-estoppel defense.
(2) Waiver and Ratification
Under Texas law, the elements of wavier include: (1) an existing right,
benefit, or advantage; (2) knowledge, actual or constructive, of its existence, and;
(3) actual intent to relinquish the right, which we can infer from conduct. ASI
Techs., Inc. v. Johnson Equip. Co., 75 S.W.3d 545, 548 (Tex. App.—San Antonio
2002, pet. denied). Ratification requires: “(1) approval by act, word, or conduct;
(2) with full knowledge of the facts of the earlier act; and (3) with the intention
of giving validity to the earlier act.” Motel Enters., Inc. v. Nobani, 784 S.W.2d
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545, 547 (Tex. App.—Houston [1st. Dist.] 1990, no writ.) (unpublished). An
implied ratification of conduct will only be found where there is full knowledge
of the facts surrounding that conduct. Crooks v. M1 Real Estate Partners, Ltd.,
238 S.W.3d 474, 488 (Tex. App.—Dallas 2007, pet. denied).
As to both defenses, Kerr-McGee argues that a fact issue exists concerning
whether Lessors had notice of Kerr-McGee’s practice of deducting Enterprise’s
transporting and fractionating expenses from Lessors’ royalties prior to the audit
that led to this lawsuit. According to Kerr-McGee, Lessors’ decision to accept
alleged underpayments of royalties, knowing Enterprise’s transporting and
fractionating costs were being deducted, constituted both an implied ratification
of Kerr-McGee’s calculation practice and an intentional relinquishment of the
right to assert a different method of calculating royalties.
As part of their cross-motion for summary judgment on these defenses,
Lessors’ attorneys submitted affidavits stating that they only became aware of
Kerr-McGee’s method of calculating royalties through the audit that led to this
lawsuit. To counter this evidence, Kerr-McGee relies on letters and
spreadsheets provided to Lessors in connection with the settlement of the
Lessors’ 1993 claims. Kerr-McGee asserts that these documents provided
Lessors with notice of Kerr-McGee’s method of calculating royalties under the
amended royalty provision. As additional evidence of Lessors’ knowledge, Kerr-
McGee also points to Lessors’ 1993 pleadings, in which Lessors made similar
allegations that Kerr-McGee impermissibly deducted third-party transporting
and treating charges from natural gas liquids. Initially, as with Kerr-McGee’s
quasi-estoppel defense, we fail to see how knowledge of Kerr-McGee’s method of
calculating royalties under the parties’ prior agreement provided Lessors with
notice of the same under the parties’ amended agreement.
Even assuming that notice under the old agreement could somehow
constitute notice under the amended agreement, we fail to see how the content
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No. 07-40636
of Kerr-McGee’s letters and spreadsheets put Lessors’ on notice. While the
spreadsheets contain a column showing “Value actually received from Valero”
(presumably Kerr-McGee’s third-party processor at the time), nothing in the
spreadsheets indicate that Kerr-McGee calculated royalties based on that figure,
or that they deducted transportation and fractionation expenses from Lessors’
royalty. In fact, Kerr-McGee’s handwritten notes on the document refer to
“Royalty paid on actual natural gas liquid proceeds,” which is consistent with
Lessors’ understanding of how the leases require Kerr-McGee to calculate
royalties. Further, while the letter states that Kerr-McGee made clear to
Lessors’ attorneys that it would not agree to a settlement that made Kerr-McGee
liable for royalties on revenue that Kerr-McGee did not receive, as discussed
above, one reasonable construction of the parties’ settlement amendment
indicates that Kerr-McGee did eventually agree to such an arrangement.
Accordingly, the district court properly granted summary judgment for Lessors’
on Kerr-McGee’s affirmative defenses of waiver and ratification.
The district court’s judgment is AFFIRMED.
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