Escondido Resources II, LLC v. Justapor Ranch, L.C.

ACCEPTED
04-14-00905-CV
FOURTH COURT OF APPEALS
SAN ANTONIO, TEXAS
5/15/2015 11:46:24 AM
KEITH HOTTLE
CLERK
No. 04-14-00905-CV
FILED IN
4th COURT OF APPEALS
In the Fourth District Court of Appeals SAN ANTONIO, TEXAS
San Antonio, Texas 05/15/2015 11:46:24 AM
KEITH E. HOTTLE
Clerk
Escondido Resources II, LLC,
Appellant,
v.
Justapor Ranch Company, L.C.,
Appellee.
On Appeal from the 49th Judicial District Court
Webb County, Texas,
Cause No. 2013-CV7-001396-D1
BRIEF OF APPELLANT
James P. Keenan Robert Dubose Wallace B. Jefferson
State Bar No. 11167850 State Bar No. 00787396 State Bar No. 00000019
keenan@buckkeenan.com rdubose@adjtlaw.com wjefferson@adjtlaw.com
J. Robin Lindley ALEXANDER DUBOSE Rachel A. Ekery
State Bar No. 12366100 JEFFERSON & TOWNSEND LLP State Bar No. 00787424
lindley@buckkeenan.com 1844 Harvard Street rekery@adjtlaw.com
BUCK KEENAN, LLP Houston, Texas 77008 ALEXANDER DUBOSE
700 Louisiana, Suite 5100 Telephone: (713) 523-2358 JEFFERSON &TOWNSEND LLP
Houston, Texas 77002 Facsimile: (713) 523-4553 515 Congress Avenue
Telephone: (713) 225-4500 Suite 2350
Facsimile: (713) 225-3719 Additional counsel listed on Austin, Texas 78701
next page Telephone: (512) 482-9300
Facsimile: (512) 482-9303
ATTORNEYS FOR APPELLANT
Oral Argument Requested
IDENTITY OF PARTIES AND COUNSEL
Appellant: Escondido Resources II, LLC
Appellate Counsel: Wallace B. Jefferson
Rachel A. Ekery
ALEXANDER DUBOSE JEFFERSON
&TOWNSEND LLP
515 Congress Avenue, Suite 2350
Austin, Texas 78701
Robert Dubose
ALEXANDER DUBOSE JEFFERSON
& TOWNSEND LLP
1844 Harvard Street
Houston, Texas 77008
Kirsten Castañeda
ALEXANDER DUBOSE JEFFERSON
&TOWNSEND LLP
4925 Greenville Avenue, Suite 510
Dallas, Texas 75206
Telephone: (214) 369-2358
Facsimile: (214) 369-2359
Trial and Appellate Counsel: James P. Keenan
J. Robin Lindley
BUCK KEENAN, LLP
700 Louisiana, Suite 5100
Houston, Texas 77002
Appellee: Justapor Ranch Company, L.C.
Appellate Counsel: Timothy Patton,
TIMOTHY PATTON, P.C.
14546 Brook Hollow #279
San Antonio, Texas 78232
Trial and Appellate Counsel: Patton G. Lochridge
MCGINNIS LOCHRIDGE & KILGORE LLP
2
600 Congress Avenue, Suite 2100
Austin, Texas 78701
Jose M. Rubio, Jr.
JOE RUBIO LAW FIRM
1000 Washington Street, Suite 4
Laredo, Texas 78040
3
TABLE OF CONTENTS
Identity of Parties and Counsel .................................................................................2
Index of Authorities ..................................................................................................7
Statement of the Case..............................................................................................13
Issues Presented ......................................................................................................14
Statement of the Facts .............................................................................................15
Summary of Argument ...........................................................................................30
Argument.................................................................................................................32
I. The trial court erred by granting summary judgment that the lease
terminated because Escondido did not correctly reconcile royalty
underpayment. ..............................................................................................33
A. Texas law disfavors lease termination and prohibits termination
absent clear, unequivocal, and unambiguous lease language. ...........33
B. Paragraph XIV does not provide that the lease terminates for a
failure to reconcile underpaid royalties. .............................................37
1. The lease treats underpayment and nonpayment
differently, with different words in different provisions. ........38
2. Paragraph XIV terminates for nonpayment of royalties,
not underpayment.....................................................................44
3. Paragraph XIV does not address remedies for failure to
reconcile underpayment. ..........................................................46
4. In any event, Paragraph XIV cannot support termination
so long as Escondido’s interpretation is reasonable. ...............49
C. Independently, termination is improper because Justapor did
not establish Escondido was required to reconcile any
underpayment. ....................................................................................49
4
1. Justapor did not establish any underpayment for
production months February 2012 – January 2013 based
on unambiguous lease terms. ...................................................50
a. The special pricing provision replaced all pricing
measures, or alternatively was ambiguous. ...................51
b. The royalty price measure on which Justapor relies
is ambiguous or meaningless. ........................................54
2. Fact issues exist regarding production months November
2011 – January 2012. ...............................................................55
D. Independently, lease termination is improper because it is
inequitable on these facts. ..................................................................57
1. It would be inequitable to enforce a termination in light
of Justapor’s conduct. ..............................................................58
2. Forfeiture is inequitable because it would be
disproportionate with the alleged breach. ................................61
3. Forfeiture would be inequitable because Jones did not
raise it for 18 months after the alleged termination. ................62
E. Remedy: the summary judgment should be reversed in its
entirety and partial summary judgment rendered that there was
no termination.....................................................................................62
II. Regardless of whether the lease terminated, Justapor did not
conclusively establish Escondido was a bad-faith trespasser.......................63
A. Escondido was not a bad-faith trespasser per se because it
lawfully entered into possession of the land. .....................................64
B. Justapor also did not conclusively establish that Escondido
lacked a good-faith belief in the superiority of its title. .....................67
C. Because Escondido was not a bad-faith trespasser, the judgment
should be reversed and the case remanded for further
proceedings. ........................................................................................69
5
III. The trial court erred by granting summary judgment declaring the
parties’ rights and requiring conveyance of Escondido’s leasehold
interests regarding the “vacancy tract.” ........................................................71
A. Justapor did not conclusively establish its declaratory judgment
claim. ..................................................................................................72
1. Justapor did not conclusively establish that the interests
to be conveyed include leasehold interests. .............................73
2. Unless “mineral interests” and “additional interests”
mean the same thing, the letter agreement is ambiguous. .......75
3. Justapor did not establish that it had chosen an entity to
which any interests should be conveyed. .................................76
4. Justapor did not identify any leasehold interest that
should have been, but was not, conveyed. ...............................77
B. Justapor was not entitled to specific performance. ............................77
Conclusion and Prayer ............................................................................................80
Certificate of Compliance .......................................................................................82
Certificate of Service ..............................................................................................82
Appendix .................................................................................................................83
6
INDEX OF AUTHORITIES
Page(s)
Cases
Am. Apparel Prods., Inc. v. Brabs, Inc.,
880 S.W.2d 267 (Tex. App.—Houston [14th Dist.] 1994, no writ) ................... 78
Am. Mfrs. Mut. Ins. Co. v. Schaefer,
124 S.W.3d 154 (Tex. 2003) ..............................................................................46
Anglo-Dutch Petroleum Int'l, Inc. v. Greenberg Peden, P.C.,
352 S.W.3d 445 (Tex. 2011) ..............................................................................59
Aquaplex, Inc. v. Rancho La Valencia, Inc.,
297 S.W.3d 768 (Tex. 2009) ..............................................................................34
Barnes v. Winona Oil Co.,
200 P. 985 (Okla. 1921) ................................................................................65, 66
Barrand, Inc. v. Whataburger, Inc.,
214 S.W.3d 122 (Tex. App.—Corpus Christi 2006, pet. denied) ......................73
Benavides v. Hunt,
79 Tex. 383, 15 S.W. 396 (1891) .......................................................................36
Bonham State Bank v. Beadle,
907 S.W.2d 465 (Tex. 1995) ..............................................................................73
Brannon v. Gulf States Energy Co.,
562 S.W.2d 219 (Tex. 1977) ........................................................................69, 71
City of Houston v. Clear Creek Basin Auth.,
589 S.W.2d 671 (Tex. 1979) ..............................................................................79
Covington v. Travelers Indem. Co.,
122 S.W.3d 330 (Tex. App.—Fort Worth 2003, no pet.).............................68, 69
Dallas Power & Light Co. v. Cleghorn,
623 S.W.2d 310 (Tex. 1981) ..............................................................................46
7
DeBord v. Muller,
446 S.W.2d 299 (Tex. 1969) ..............................................................................78
Decker v. Kirlicks,
110 Tex. 90, 216 S.W. 385 (1919) .........................................................36, 37, 49
DeWitt Cnty. Elec. Co-op., Inc. v. Parks,
1 S.W.3d 96 (Tex. 1999).....................................................................................74
Elliott v. Davis,
553 S.W.2d 223 (Tex. Civ. App.—Amarillo 1977, writ ref’d n.r.e.) ................. 68
Enter. Leasing Co. v. Barrios,
156 S.W.3d 547 (Tex. 2004) (per curiam) .........................................................53
In re Ford Motor Co.,
211 S.W.3d 295, 299 (Tex. 2006) (per curiam; orig. proceeding) ....................47
Fortis Benefits v. Cantu,
234 S.W.3d 642 (Tex. 2007) ..............................................................................47
Frost Nat’l Bank v. L & F Distribs., Ltd.,
165 S.W.3d 310 (Tex. 2005) (per curiam) .........................................................75
G.H. Bass & Co. v. Dalsan Properties-Abilene,
885 S.W.2d 572 (Tex. App.—Dallas 1994, no writ) ..........................................56
Guleke v. Humble Oil & Ref. Co.,
126 S.W.2d 38 (Tex. Civ. App.—Amarillo 1939, no writ)................................33
Gulf Prod. Co. v. Cruse,
271 S.W. 886 (Tex. Comm’n App. 1925) ..........................................................37
Gulf Prod. Co. v. Spear,
125 Tex. 530, 84 S.W.2d 452 (1935) ...........................................................64, 69
Henshaw v. Tex. Natural Res. Found.,
147 Tex. 436, 216 S.W.2d 566 (1949) ...............................................................35
Hilco Elec. Co-op., Inc. v. Midlothian Butane Gas Co.,
111 S.W.3d 75 (Tex. 2003)...........................................................................74, 75
8
Houston Exploration Co. v. Wellington Underwriting Ags., Ltd.,
352 S.W.3d 462 (Tex. 2011) ..............................................................................54
Houston Prod. Co. v. Mecom Oil Co.,
62 S.W.2d 75 (Tex. Comm’n App. 1933) ..............................................65, 66, 67
Humble Oil & Ref. Co. v. Harrison,
146 Tex. 216, 205 S.W.2d 355 (Tex. 1947) .......................................................57
Italian Cowboy Partners, Ltd. v. Prudential Ins. Co. of Am.,
341 S.W.3d 323 (Tex. 2011) ............................................................38, 40, 41, 53
Johnson & Higgins of Tex., Inc. v. Kenneco Energy, Inc.,
962 S.W.2d 507 (Tex. 1998) ..............................................................................57
Key Operating & Equip., Inc. v. Hegar,
435 S.W.3d 794 (Tex. 2014) ..............................................................................66
King v. Dall. Fire Ins. Co.,
85 S.W.3d 185 (Tex. 2002).................................................................................45
Kirby Lake Dev., Ltd. v. Clear Lake City Water Auth.,
320 S.W.3d 829 (Tex. 2010) ..............................................................................35
Knight v. Chicago Corp.,
188 S.W.2d 564 (Tex. 1945) ..................................................................36, 49, 50
Levetz v. Sutton,
404 S.W.3d 798 (Tex. App.—Dallas 2013, pet. denied)..............................78, 79
Lowder v. Schluter,
78 Tex. 103, 108, 14 S.W. 205, 206, rev’d on reh’g on other
grounds, 78 Tex. 109, 14 S.W. 207 (1890) ........................................................67
Lowder v. Schluter,
78 Tex. 103, 14 S.W. 205, rev’d on reh’g on other grounds, 78
Tex. 109, 14 S.W. 207 (1890) ......................................................................67, 69
Luccia v. Ross,
274 S.W.3d 140 (Tex. App.—Houston [1st Dist.] 2008, pet.
denied).................................................................................................................79
9
Maxvill-Glasco Drilling, Co., Inc. v. Royal Oil & Gas Corp.,
800 S.W.2d 384 (Tex. App.—Corpus Christi 1990, writ denied) ......................70
Mayfield v. de Benavides,
693 S.W.2d 500 (Tex. App.—San Antonio 1985, writ ref’d n.r.e.) .......64, 65, 67
McConnell v. Southside Indep. Sch. Dist.,
858 S.W.2d 337 (Tex. 1993) ..............................................................................78
Moore v. Jet Stream Investments, Ltd.,
261 S.W.3d 412 (Tex. App.—Texarkana 2008, pet. denied) .............................70
Neece v. A.A.A. Realty Co.,
159 Tex. 403, 322 S.W.2d 597 (1959) ...............................................................53
Outdoor Sys., Inc. v. BBE, L.L.C.,
105 S.W.3d 66 (Tex. App.—Eastland 2003, pet. denied) ......................34, 35, 46
Pac. Mut. Life Ins. Co. v. Westglen Park Inc.,
160 Tex. 1, 325 S.W.2d 113 (1959) ...................................................................58
Paciwest, Inc. v. Warner Alan Props., LLC,
266 S.W.3d 559 (Tex. App.—Fort Worth 2008, pet. denied) ............................79
Paragon Gen. Contractors, Inc. v. Larco Constr., Inc.,
227 S.W.3d 876 (Tex. App.—Dallas 2007, no pet.) ..........................................77
Reilly v. Rangers Mgmt., Inc.,
727 S.W.2d 527 (Tex. 1987) ..................................................................47, 50, 76
REO Indus., Inc. v. Natural Gas Pipeline Co. of Am.,
932 F.2d 447 (5th Cir.1991) ...............................................................................35
Rogers v. Ricane Enters., Inc.,
772 S.W.2d 76 (Tex. 1989)...........................................................................42, 46
Ryan v. Kent,
36 S.W.2d 1007 (Tex. Comm’n App. 1931, judgm’t adopted) ..........................35
Stafford v. S. Vanity Magazine, Inc.,
231 S.W.3d 530 (Tex. App.—Dallas 2007, pet. denied)....................................78
10
T-Anchor Corp. v. Travarillo Assocs.,
529 S.W.2d 622 (Tex. Civ. App.—Amarillo 1975, no writ)..................37, 57, 62
Truly v. Austin,
744 S.W.2d 934 (Tex. 1988) ..............................................................................58
Universe Life Ins. Co. v. Giles,
950 S.W.2d 48 (Tex. 1997).................................................................................68
Vela v. Pennzoil Prod. Co.,
723 S.W.2d 199 (Tex. App.—San Antonio 1986, writ ref’d n.r.e.) ................... 68
Vinson Minerals, Ltd. v. XTO Energy, Inc.,
335 S.W.3d 344 (Tex. App.—Fort Worth 2010, pet. denied) ......................34, 35
W.T. Waggoner Estate v. Sigler Oil Co.,
118 Tex. 509, 19 S.W.2d 27 (1929) .............................................................36, 47
Wagner & Brown, Ltd. v. Sheppard,
282 S.W.3d 419 (Tex. 2008) ..............................................................................70
Walker v. Fed. Kemper Life Assurance Co.,
828 S.W.2d 442 (Tex. App.—San Antonio 1992, writ denied) .........................33
Williams Consol. I, Ltd./BSI Holdings, Inc. v. TIG Ins. Co.,
230 S.W.3d 895 (Tex. App.—Houston [14th Dist.] 2007, no pet.) ................... 32
Worldwide Asset Purchasing, L.L.C. v. Rent-A-Center E., Inc.,
290 S.W.3d 554 (Tex. App.—Dallas 2009, no pet.) ..........................................74
XTO Energy, Inc. v. Pennebaker,
07-10-00396-CV, 2011 WL 6846196 (Tex. App.—Amarillo Dec.
29, 2011, no pet.) (mem. op.) .............................................................................34
Statutes
Tex. Prop. Code §§ 22.021-0.24 ..............................................................................71
Tex. Prop. Code § 22.021(a) ....................................................................................71
Other Authorities
41 Tex. Jur. 3d Forfeitures and Penalties § 6 (1998) ...............................................35
11
Patrick H. Martin & Bruce M. Kramer, 3 Williams & Meyers, Oil and
Gas Law § 656.2 (2008) .....................................................................................34
12
STATEMENT OF THE CASE
Nature of the Case Oil-and-gas lease dispute
Trial Court 49th District Court, Webb County, Hon. Joe
Lopez
Trial Court Disposition Summary judgment in favor of plaintiff, Justapor,
Ranch Company, L.C. In its judgment the trial
court:
• Declared that the mineral lease terminated
on March 2, 2012 and that ownership of
minerals reverted to Justapor;
• Awarded more than $12 million from
Escondido to Justapor in trespass damages
consisting of all production proceeds for all
oil-and-gas sales from March 2, 2012 to
August 2014. The judgment did not credit
Escondido for either the costs of production
or for improvements;
• Awarded Justapor all production proceeds
after August 2014 until the date Escondido
relinquishes possession, again with no
deductions for costs or improvements;
• Declared Escondido a bad-faith trespasser
at all times; and
• Ruled that Escondido takes nothing on its
counter claims, which means it receives
nothing for its $33 million in
improvements.
CR3:1859-62. The court severed Justapor’s
claims for exemplary or punitive damages (based
on the claim of bad-faith trespass) and its claims
for attorney’s fees, expert witness fees, and
accounting costs. CR3:1897-98. Those claims are
now stayed.
13
ISSUES PRESENTED
1. Lease termination. Did the trial court err in granting Justapor’s
motion for summary judgment and in denying Escondido’s cross motion for partial
summary judgment? Specifically, did it err in ruling that the Justapor lease
terminated based on an underpayment of royalties, and in granting the relief that
flowed from that ruling, when:
• paragraph XIV of the lease did not provide that an underpayment of
royalties or failure to reconcile an underpayment terminated the lease;
• Justapor’s claim of termination turns on words in the lease that do not
support termination or, alternatively, are ambiguous; and
• equity does not favor termination and forfeiture here?
2. Bad-faith trespass. Did the trial court err in declaring Escondido a
bad-faith trespasser as a matter of law when (1) Escondido lawfully exercised its
right to possession when it entered the property, and (2) Escondido presented
evidence that it did not believe the lease terminated, which negates bad faith?
3. Vacancy tract. Did the trial court err in rendering summary judgment
on Justapor’s declaratory judgment claim? Further, did the trial court err in
awarding specific performance regarding conveyance of interests in the “vacancy
tract?”
14
STATEMENT OF THE FACTS
Overview
This appeal concerns an oil-and-gas lease between Justapor Ranch
Company, L.C. (the lessor) and Escondido Resources II, L.L.C. (the lessee).
Escondido spent more than $33 million to drill seven gas wells and to make other
capital improvements to the property. CR3:1149 (¶5). Escondido paid Justapor
more than $5.7 million in royalties for the first five years of production. CR3:1148.
But Justapor stands to profit much more on its legal claims that the lease
terminated in 2012 and that Escondido has been a bad-faith trespasser. The reason?
As Justapor reads the lease, royalties were underpaid by about $81,000. CR3:1148;
CR1:331-332. And as Justapor reads the lease, any amount of underpayment not
reconciled by March 1 of any year terminates the lease. The trial court agreed,
granting summary judgment that:
• the lease terminated on March 2, 2012;
• Escondido owes more than $12 million in gross production proceeds from
March 2, 2012 through August 2014 with no deduction for Escondido’s
costs of production;
• Escondido owes all gross production proceeds from August 2014 through
the date Escondido relinquishes possession, again with no deductions;
• Escondido recovers none of its $33 million in improvements; and
• Escondido faces punitive damages in a severed proceeding because the trial
court ruled it was a bad-faith trespasser as a matter of law.
CR3:1859-61; 1796-99.
15
The parties
Justapor owns an 803-acre ranch in Webb County. CR3:1325 (¶1). The sole
owner of Justapor is Jimmy Jones. CR3:1022. Jones is a trial lawyer whose
practice includes “land, oil and gas.” CR3:1023.
In May 2008 Jones contacted Escondido, an oil-and-gas production and
development company, to ask whether it was interested in leasing mineral interests
on the ranch. CR3:1325 (¶2).
Lease negotiation and terms
In early June 2008, when Jones was discussing with Escondido a possible
lease of minerals from Justapor, Jones also offered to represent Escondido as its
attorney in negotiating other oil and gas leases. CR3:1328 (¶¶12-13); CR3:1325-26
(¶¶3-5). Beginning in mid-June, Jones represented Escondido in negotiating two
other leases. CR3:1328 (¶13). As compensation, Escondido agreed to Jones’
request to give him an overriding royalty interest on one lease. CR3:1328 (¶14).
During this same time, Jones also negotiated his own lease, for Justapor,
with Escondido’s Vice President, David Wrather. CR3:1325 (¶1-2). Escondido was
not represented by separate counsel in negotiating the Justapor lease, and Jones
never suggested that his client retain separate counsel. Id. (¶2). Jones drafted both
the lease and an amendment that the parties signed on the same day, June 24, 2008.
CR3:1325-26. This dispute turns on three sections of the lease and the amendment.
16
1 – Gas-royalty provision and its amendment—Paragraph III(b)
Jones drafted a gas-royalty provision that appeared verbatim in the ultimate
lease. CR3:982 (¶III(b)); CR3:1231-32 (¶III(b); CR3:1325 (¶3). This paragraph,
III(b), provided that Escondido shall calculate and pay a 25% royalty on gas from
the lease based on the highest of four price measures:
... Lessee shall calculate and pay royalties to Lessor on One-Fourth
(1/4th) of all gas produced from this lease and its constituents and
products sold or used therefrom, which royalties shall be calculated
and paid to Lessor based upon the highest of (i) the CURRENT
MARKET VALUE of such gas production from this lease which is
sold by, through or under Lessee or used by, through or under Lessee,
(ii) the CURRENT HOUSTON SHIP CHANNEL PRICE for such gas
production, as hereinafter defined, or (iii) the CURRENT
PROCEEDS REALIZED BY LESSEE for such gas production,
without deduction of any costs or expense except as hereinafter
stipulated or, (iv) the highest sales price of any gas were gas produced
from the property could be present when sold to a third party.
CR3:982 (¶III(b)). The first three pricing measures—CURRENT MARKET
VALUE, CURRENT HOUSTON SHIP CHANNEL PRICE, and CURRENT
PROCEEDS REALIZED BY LESSEE—are further defined in part III(b). Id. But
the fourth pricing measure—part III(b)(iv)—is not defined in the lease and is not a
customary royalty provision. Id.; CR3:1137 (¶2).
Wrather told Jones that Escondido did not want to base royalty payments on
the highest of these four price measures, but instead wanted to base the royalty on
the sale price Escondido had negotiated with a purchaser, Enterprise. CR1325 (¶4).
When the parties signed the lease in June 2008, the Enterprise pipeline was the
17
only market readily available to purchase and transport gas from the Justapor
Ranch. CR3:1326 (¶5). Wrather sent Jones Enterprise’s purchase terms. Id.;
CR3:1274.
Jones responded that Justapor would agree to a royalty based on the
Enterprise price, but only for as long as Escondido held the lease and did not
assign it to another party. CR3:1325 (¶4). To accomplish this, Jones proposed a
non-assignable amendment that (1) would incorporate the pricing terms of
Escondido’s agreement with Enterprise, but (2) would apply only to Escondido,
not any assignee. Id. The parties ultimately agreed to an amendment “to provide a
special royalty pricing provision, based on the Enterprise price.” CR3:1326 (¶4).
Jones drafted this amendment. Id. CR3:1325 (¶4).
This special pricing provision was reflected in the following sentence of the
lease amendment:
Provided however, Lessee shall have the right to enter into gas sales’
contracts that will determine the price upon which gas royalty is
calculated if such contracts provide no less than a price
redetermination every six months and provide the following minimum
terms....
CR3:1015 (minimum terms omitted); CR3:1326 (¶5). But the amendment, as
drafted by Jones, placed this provision in a paragraph labeled as an amendment to
Paragraph III “(b) ii.” CR3:1014-15. It appeared at the end of a long paragraph that
18
defined “HOUSTON SHIP CHANNEL PRICE” using the same language as the
original lease. CR3:1015.
Escondido understood that the amendment’s special pricing provision was a
substitute for all four pricing provisions in Paragraph III(b) of the lease. CR1326
(¶5). But Justapor later took the position that the purpose of the amendment was
“to amend specifically the Houston Ship Channel price to reflect what they were
getting from Enterprise.” CR3:1036.
2 – Accounting and adjustment provision—Paragraph III(g)
Oil-and-gas producers frequently receive adjusted information from
purchasers that changes the volume and price on which a royalty payment was
based, often months after the royalty was paid. CR3:1149 (¶6). And producers
often make mistakes in royalty calculations or disagree lessors about prices,
volumes, or methodology used to calculate royalty. CR3:1138 (¶7). Accordingly,
paragraph III(g) of the lease is a lengthy clause that addresses a number of subjects
relating to discrepancies in royalty payments, such as accounting for royalties,
notice and disputes over royalty deductions, adjustments for overpayment of
royalty, and adjustments for underpayment. CR3:987-98 (III(g)). Several aspects
of this clause are relevant.
19
Accounting—Escondido was required to provide Justapor with a detailed
accounting of specific aspects of the royalty calculation on a monthly basis.
CR3:987 (III(g)).
Overpayment—Paragraph III(g) also addressed how the parties would
reconcile overpayment of royalty:
If it is agreed by Lessor or the royalty owner in question that a royalty
owner was overpaid, then the overpaid royalty owner has the option of
repaying such overpayment or allowing Lessee to recoup such
overpayment out of future royalty payments on a schedule and in
monthly amounts agreed to by such overpaid royalty owner and
Lessee. Any overpaid royalty owner shall not be charged interest on
overpaid sums.
CR3:987-88 (III(g)).
Underpayment—Paragraph III(g) also addressed how the parties would
reconcile underpayment of royalty:
In the event the prices and/or volumes used by Lessee in calculating
and payment of production royalties paid to Lessor was less than
those required to be paid, Lessee shall issue its check to make up the
difference on or before March 1st of each year.
Id. Justapor has conceded that no language in paragraph III(g) says the failure to
reconcile underpayment by March 1 terminates the lease. CR3:1043:18-22.
Escondido reviewed prices and volumes on a monthly basis. CR3:1117:24-
1118:14. Over the life of the lease, Escondido made 15 reconciliation payments to
Justapor, which totaled more than $441,000. CR3:1149 (¶8).
20
3 – Nonpayment provision—Paragraph XIV
Paragraph XIV of the lease addressed the nonpayment of royalties.
CR3:996-97. The following is the relevant part of this paragraph, with the key
disputed language in bold:
Royalties payable to Lessor in the manner hereinabove provided
for are due and payable to Lessor within a period of sixty (60)
days following each month’s production of oil or gas produced
and sold from the premises. Thereafter, such payments shall be
delinquent and will bear interest at the rate of Ten (10%) percent per
annum, compounded monthly, until paid. In the event that such
royalties are not paid and become delinquent, and there is no title
dispute or title defect, this lease shall terminate ipso facto on the
date that such royalties were due and not paid. In the event such
royalties are not paid and become delinquent, Lessor without other
notice than this paragraph, shall be authorized to file suit in the
District Court of Webb County, Texas, for recovery of such
delinquent royalties....
CR3:996-97 (¶XIV) (bold added, underlining in original).
Justapor has conceded that Escondido never failed to pay monthly royalties
within 60 days following monthly production, as Article XIV requires.
CR3:1041:17-1042:3. Instead, it claims that some royalties were paid in the wrong
amount. Id.
While Jones and Wrather were negotiating the Justapor lease, Jones told
Wrather that he had drafted a “tough agreement” in case Escondido ever assigned
its rights under the Lease Agreement to another party. CR3:1329 (¶17). But Jones
told Wrather that he would work out with Escondido any issues that might arise
21
between them. Id. Based on that conversation and the fact that Jones was
Escondido’s attorney in other matters, Wrather believed the parties would
amicably resolve any differences. CR3:1329. Jones never mentioned that he
believed the termination provision meant that the lease could terminate for
underpayment of royalties, no matter how small. CR3:1329 (¶17).
Escondido drilled wells, made site improvements, and paid royalties
After the lease was signed, Escondido made more than $33.1 million in
improvements to the Justapor Ranch. CR3:1149 (¶5); CR3:1112:24-1113:11.
These included roads and ponds as well as seven wells. CR3:1113:10-16. Of this
amount, about $10 million was spent on drilling costs and other improvements
after March 2, 2012, the date on which Justapor claims the lease terminated.
CR3:1220-21.
To transport gas from Justapor Ranch to Enterprise, Escondido built a meter
site and a pipeline across the ranch to connect with the Enterprise pipeline system.
CR3:1326 (¶6). To facilitate this, Escondido and Justapor signed a Surface Site
Agreement, which Escondido then assigned to Enterprise. Id.; CR3:1282-88.
Escondido first paid royalties in June 2009. CR3:1148 (¶3). In 2011
Enterprise reduced the amount of gas it purchased from Escondido because of
capacity constraints on its pipeline system. CR3:1326 (¶7). To make up for the
22
reduction in sales to Enterprise, Escondido sold gas from the Justapor Ranch to
Kinder Morgan. Id.
From its first production in June 2009 until April 2014, Escondido paid
Justapor more than $5.7 million in royalties. CR3:1148 (¶3). Justapor has not
disputed the amount of royalties that were paid for production occurring before
October 2011. See CR3:330-31.
Jones first claims that the lease terminated
Before the current dispute arose, Justapor claimed that the lease terminated
on another ground.
In June 2011, Jones told Escondido that the lease had terminated “ipso
facto” when Escondido purportedly underpaid a compensatory royalty under article
V of the lease. CR3:1070:5-1071:11; CR3:1072:11-1074:17. But Jones later
admitted that the lease did not terminate as the result of an underpayment.
CR3:1073:3-1074:13. The parties ultimately resolved their disagreement over the
compensatory royalty by letter agreement dated August 9, 2011. CR1:445-48;
CR3:1308-11.
As part of this letter agreement, Escondido agreed to convey, to an entity of
Justapor’s choice, certain interests in a 42-acre tract known as the “vacancy tract.”
CR3:977. Two different versions, both initialed and signed on the same date, use
different words to memorialize the parties’ agreement. One version requires
23
Escondido to convey mineral interests it already has acquired in the Justapor
Ranch “as well as all other mineral mineral [sic] interests [Escondido] acquire[s]
in this land after [Justapor’s] approval & consent.” CR3:1310 (emphasis added).
The other version requires Escondido to convey mineral interests it already has
acquired in the Justapor Ranch “as well as all other additional interests we acquire
in this land after your approval and consent.” CR1:447 (emphasis added).
Escondido gave Jones executed deeds conveying all mineral interests owned or
subsequently acquired by Escondido in the Vacancy Tract. CR3:1327-28 (¶11).
Justapor later asserted that Escondido must convey not only mineral interests
acquired in Justapor Ranch, but also all leasehold interests. CR1:255.
Jones’ actions prevent Escondido’s sales to Enterprise
In October 2011 Enterprise announced it would resume purchasing gas from
the Justapor Ranch because its capacity constraints had lifted. CR3:1326 (¶8). But
in the same month, Jones sent Enterprise a letter announcing that the Enterprise
sales meter Surface Site Agreement between Justapor and Enterprise terminated
because Enterprise missed one $4,500 yearly lease payment in May. CR3:1299,
1326 (¶8), 1092:5-11, CR3:1282. Jones also told Enterprise that it could not use
the meter and that he was going to seize its equipment. CR3:1092:7-19. The
Surface Site Agreement did not provide for automatic termination upon default,
but instead provided that Justapor must give notice and an opportunity to correct
24
the late payment before the lease terminated. RR3:1284 (¶15). Justapor gave no
notice and no opportunity to cure, and refused to accept Enterprise’s late rental
check. RR3:1054:17-1059:13. As a result of Jones’ claim of termination,
Enterprise could not purchase gas from the Justapor Ranch. CR3:1326-27 (¶8).
Unable to sell to Enterprise, Escondido could only sell to Kinder Morgan at
a lower daily spot price or shut in the wells until it found a purchaser for a higher
price. CR1:341:5-13; CR3:1327 (¶9). It began negotiating sales to other higher-
priced markets in order to sell several months later. Id. In the meantime, rather than
sell to Kinder Morgan at the lower daily spot price, Escondido proposed to shut-in
the wells until it could finalize these higher-price deals or secure a new surface-site
agreement between Jones and Enterprise. CR3:1326-27 (¶¶8-9). Escondido also
told Jones that the price to be realized from the sale of gas at the daily spot price
would be lower. Id. (¶9). But Jones insisted that Escondido sell gas at the lower
daily spot price and not shut-in the wells for any time. Id.
Escondido made sales at the lower daily spot price for three months
beginning in October 2011, which resulted in royalties to Justapor that were $3,851
less than the Enterprise special pricing provision set out in the amendment.
CR1:340:13-23; CR3:1148 (¶4). It has not made up this $3,851 underpayment
because Justapor caused it to receive a lower price and because Jones verbally
25
agreed to the royalty he was going to get based on the lower daily spot price.
CR1:340:20-341:20; CR3:1089:13-20.
Dispute over royalties for production months after January 2012
In May 2013, Justapor hired Charlie Graham to audit Escondido’s records
regarding the calculation of royalties. CR3:1025:24-1026:18. Graham determined
that Escondido’s calculations of royalties on a price-received basis were correct.
CR3:1337:8-19; 1338:8-24. Graham did not audit the royalty calculations on other
bases, such as market value or the Houston Ship Channel price. CR3:1336:6-17.
Graham believed that Escondido was trying to properly calculate the quantity and
price of gas sales. CR3:1339:18-20.
Justapor sued Escondido in August 2013, claiming the lease had terminated
due to an underpayment of royalties. CR1:22, and 25. Before suing, Justapor gave
Escondido no notice that it believed Escondido had underpaid gas royalties.
CR3:1044:20-1045:9. And it gave Escondido no opportunity to cure. Id.
Justapor initially claimed that the lease terminated “as early as April 2012”
because royalty payments for production beginning in February, 2012, were based
on a weighted average price in breach of pricing provision III(b)(iv). RR3:1304,
1305. Justapor claimed that the lease terminated because of the underpayment
alone. RR3:1304. Justapor later amended its claim to assert, for the first time, that
an underpayment triggered termination if it was not corrected by March 1 of the
26
following year. CR1:150. Later, Justapor’s expert identified two periods in which
he claims Escondido underpaid the royalty:
• October 2011 – January 2012 production: alleged underpayment of
$3,851;
• February 2012 – January 2013 production: alleged underpayment of
$77,107.
CR1:320, 331-32; CR3:1148 (¶4).
The parties’ experts disagree over whether royalties were underpaid at all
between February 2012 and January 2013. If the special pricing provision in the
amendment replaced the lease’s royalty price entirely, as Escondido contends, then
Escondido correctly calculated the royalty based on current proceeds. CR1150
(¶11). Justapor presented no summary-judgment evidence of any underpayment
based on that measure. But if the special pricing provision in the lease amendment
replaced only the Houston Ship Channel Price, as Justapor contends, then the
amount of these underpayments was disputed by two experts. According to
Justapor’s expert, the amount of underpayment would be $77,107. CR1:331;
CR3:1148 (¶4). But according to Escondido’s expert, even assuming Justapor’s
interpretation of the contract, the correct amount of underpayment would be
$22,107. Id. (¶¶11, 13).
27
Summary judgment proceedings and final judgment
Justapor and Escondido filed cross motions for summary judgment on the
issue of whether the lease had terminated. The trial court denied Escondido’s
motion, granted Justapor’s motion, and signed a final judgment in Justapor’s favor.
CR3:1796-99; 1857-62. The court ruled that the lease terminated on March 2, 2012
and that all of Escondido’s interests under the lease reverted to Justapor at that
time. CR3:1859.
The court declared Escondido a bad-faith trespasser and that it has never
been a good-faith trespasser. CR3:1859. As a result of that ruling, the court
awarded not only an accounting of all underpaid royalties, but also awarded
Justapor all of Escondido’s post-March 2, 2012 production proceeds, with no
deduction for expenses. CR3:1861. The amount awarded through August 31, 2014
was more than $12 million, with an unspecified award of all additional production
proceeds from that date through the date Escondido relinquishes possession. Id.
The court dismissed Escondido’s counterclaims, including its claims for
reimbursement based on Escondido’s improvements to the property. CR3:1860;
CR1:142-43. The court severed Justapor’s claims to recover punitive damages and
attorney’s fees based on this judgment. CR3:1897-1900.
Justapor also moved for summary judgment on its claim for declaratory
judgment, asking the court to interpret the letter agreement as requiring Escondido
28
to convey both “mineral and leasehold” interests acquired by Escondido in
Justapor Ranch. CR1:155 (¶34), 254-55. The trial court granted summary judgment
declaring that the letter agreement requires conveyance of both mineral and
leasehold interests acquired by Escondido in the Justapor Ranch. CR3:1797. In
addition, the trial court awarded specific performance requiring Escondido to
convey these interests to Justapor on or before the date the judgment becomes final
and non-appealable. CR3:1858-59.
29
SUMMARY OF ARGUMENT
Termination and forfeiture. Texas law requires a heightened level of
clarity in lease language before an automatic-termination clause can legally kill a
lease. The point is to disfavor forfeiture of a lessee’s rights unless the lessor makes
explicit that draconian intent. Under Texas law, an enforceable termination clause
must be clear, unequivocal, and unambiguous.
The termination clause in this lease fails that test. Paragraph XIV does not
provide that a payment pennies less than owed divests the lessee of its rights,
converts its capital investments, and threatens punitive damages. Rather, it
terminates only for nonpayment of monthly royalties. It specifically addresses
instances in which the lessor goes to the mail, only to find no monthly check. It
says that the lease will terminate if “such royalties are not paid.…”
Paragraph III(g) is the remedy for payments made that are less than owed—
payments that are “less than those required to be paid.” Nothing in that paragraph
even hints at the capital punishment Justapor seeks. The nonpayment paragraph
provides for termination; the underpayment paragraph does not.
The trial court’s ruling that the lease terminated based on underpayment of
royalties violates basic rules governing lease termination and forfeiture provisions.
It blurs the line in the oil-and-gas industry that distinguishes royalty nonpayment
from underpayment. Because the trial court’s core legal ruling is wrong, Justapor’s
30
judgment must be reversed. And Escondido is entitled to summary judgment that
the lease survives.
Bad faith. Even if the lease had terminated as a matter of law, the trial court
wrongly concluded that Escondido was a bad-faith trespasser as a matter of law.
Escondido entered into possession of the land under the Justapor lease before any
adverse claim and long before Jones embarked on his windfall-litigation strategy.
Escondido did not believe the lease terminated—for good reason that should
survive even an affirmance of the trial court’s core holding. Bad faith is inherently
a fact question for a jury. The evidence here could not conclusively establish that
Escondido was a bad-faith trespasser.
Vacancy tract conveyance. The trial court also erred by granting summary
judgment on Justapor’s declaratory judgment claim regarding the vacancy tract,
because the parties’ letter agreement unambiguously requires Escondido to convey
only mineral interests, not leasehold interests.
Appellate courts exist for cases like this.
31
ARGUMENT
Standard of Review
“When both parties move for summary judgment, each party must carry its
own burden, and neither can prevail because of the failure of the other to discharge
its burden.” Williams Consol. I, Ltd./BSI Holdings, Inc. v. TIG Ins. Co., 230
S.W.3d 895, 900 (Tex. App.—Houston [14th Dist.] 2007, no pet.). “Because each
party was a movant, the burden for each was the same: to establish entitlement to a
summary judgment by conclusively proving all elements of the claim or defense as
a matter of law.” Id. Thus, the questions presented by the standard of review are:
• Issue 1: Termination: Did the lease terminate as a matter of law? Or did the
evidence conclusively establish that it did not terminate?
• Issue 2: Bad faith: Did the summary-judgment evidence conclusively
establish Escondido was a bad-faith trespasser?
• Issue 3: Vacancy tract: Did Justapor conclusively establish its
interpretation of the letter agreement or its (unpleaded) right to specific
performance?
32
I. The trial court erred by granting summary judgment that the lease
terminated because Escondido did not correctly reconcile royalty
underpayment.
This is not an ordinary contract construction case. Under Texas law, lease
language must meet a heightened level of clarity and plain language in order to
provide for automatic termination. If the conditions for termination are not clear,
unequivocal, and unambiguous, the lease will not terminate. Nor will termination
be enforced if forfeiture would be inequitable.
The trial court erred in granting summary judgment that the lease
terminated, and it erred in denying Escondido’s cross-motion for partial summary
judgment that it did not terminate, for three independent reasons:
(1) the lease did not clearly, unequivocally, and unambiguously provide for
termination based on failure to reconcile underpayment of royalty;
(2) Justapor did not conclusively establish that Escondido failed to correctly
reconcile any underpayment of royalty; and
(3) termination and forfeiture are impermissible under Texas law because
they would be inequitable on these facts.
A. Texas law disfavors lease termination and prohibits termination
absent clear, unequivocal, and unambiguous lease language.
The automatic termination of a lease or other contract is a forfeiture. Walker
v. Fed. Kemper Life Assurance Co., 828 S.W.2d 442, 446 (Tex. App.—San
Antonio 1992, writ denied); Guleke v. Humble Oil & Ref. Co., 126 S.W.2d 38, 40
33
(Tex. Civ. App.—Amarillo 1939, no writ). The forfeiture sought by Justapor is
disproportionately large. Under Justapor’s reading of the contract, Escondido’s
failure to correct any underpayments, no matter how small, causes Escondido to
forfeit its rights and lose its investment of more than $33 million in this lease,
subjects it to trespass damages in excess of $12 million, and exposes it to punitive
damages.
Texas law disfavors lease forfeiture. XTO Energy, Inc. v. Pennebaker, 07-
10-00396-CV, 2011 WL 6846196, at *3 (Tex. App.—Amarillo Dec. 29, 2011, no
pet.) (mem. op.). “Forfeitures are not favored in Texas, and contracts are construed
to avoid them.” Aquaplex, Inc. v. Rancho La Valencia, Inc., 297 S.W.3d 768, 774
(Tex. 2009). In general, “[f]orfeiture is a harsh and punitive remedy, and it is not
favored in law or equity.” Outdoor Sys., Inc. v. BBE, L.L.C., 105 S.W.3d 66, 70
(Tex. App.—Eastland 2003, pet. denied). And specifically with regard to the claim
here, Texas law applies a rule of strict construction to “forfeiture provisions based
on failure to make proper and timely payment of royalty.” Vinson Minerals, Ltd. v.
XTO Energy, Inc., 335 S.W.3d 344, 354 (Tex. App.—Fort Worth 2010, pet.
denied) (quoting Patrick H. Martin & Bruce M. Kramer, 3 Williams & Meyers, Oil
and Gas Law § 656.2 (2008)).
34
So unlike an ordinary contract dispute, special rules of construction—
applying a heightened standard—apply to lease forfeitures. These principles
include the following:
1. All doubts resolved against forfeiture. “Texas courts will not construe a
contract to result in a forfeiture unless it cannot be construed in any other way.”
Kirby Lake Dev., Ltd. v. Clear Lake City Water Auth., 320 S.W.3d 829, 841-42
(Tex. 2010) (quoting REO Indus., Inc. v. Natural Gas Pipeline Co. of Am., 932
F.2d 447, 454 (5th Cir.1991). Thus, “If the terms of a contract are fairly susceptible
of an interpretation which will prevent a forfeiture, they will be so construed.”
Henshaw v. Tex. Natural Res. Found., 147 Tex. 436, 444, 216 S.W.2d 566, 570
(1949). This rule has been applied specifically to oil-and-gas leases. If a “lease
contract is susceptible of two reasonable interpretations, it should be construed as
to prevent a forfeiture.” Vinson Minerals, 335 S.W.3d at 354 (citing Ryan v. Kent,
36 S.W.2d 1007, 1011 (Tex. Comm’n App. 1931, judgm’t adopted)).
2. Clear and unequivocal language required. The right to forfeiture may
be found only in language that is plain, clear, and unequivocal. Outdoor Sys., 105
S.W.3d at 71. The cause of forfeiture must be “plainly and clearly stated,” and “the
time definitely fixed.” Id. (quoting 41 Tex. Jur. 3d Forfeitures and Penalties § 6
(1998)). As the Supreme Court of Texas has recognized:
The authority to forfeit a vested right or estate should not rest in
provisions whose meaning is uncertain and obscure. It should be
35
found only in language which is plain and clear—whose unequivocal
character may render its exercise fair and rightful.
W.T. Waggoner Estate v. Sigler Oil Co., 118 Tex. 509, 522, 19 S.W.2d 27, 31
(1929) (quoting Decker v. Kirlicks, 110 Tex. 90, 94, 216 S.W. 385, 386 (1919)).
When the contractual termination provision is not clear, forfeiture is
forbidden. See, e.g., Benavides v. Hunt, 79 Tex. 383, 392, 15 S.W. 396, 399 (1891)
(holding that termination could not be based on a condition requiring lessee “to use
all economy in the conduct and management of said mining enterprise” because
that language is “too uncertain to recognize as a condition on which a forfeiture
might rest.”).
3. Forfeiture cannot result from an ambiguous provision. It follows from
the two previous rules that, “[i]f the provision is ambiguous, that alone condemns it
as a forfeiture provision.” Decker v. Kirlicks, 110 Tex. 90, 94, 216 S.W. 385, 386
(Tex. 1919). Forfeiture cannot be based on the breach of an ambiguous provision.
“[I]f there is any uncertainty in the language [of a mineral lease] so as to make it
ambiguous or of doubtful meaning,” a request for forfeiture should be denied.
Knight v. Chicago Corp., 188 S.W.2d 564, 566 (Tex. 1945) (emphasis added).
Given the gravity of terminating a contract, this rule makes sense:
A forfeiture should rest upon surer ground. Where a contract is so
vague in its terms that a court cannot determine its meaning, it would
be unjust to enforce a forfeiture under it against one whose only fault
has been to possibly mistake its meaning. Forfeitures are harsh and
punitive in their operation. They are not favored by the law, and ought
36
not to be. The authority to forfeit a vested right or estate should not
rest in provisions whose meaning is uncertain and obscure.
Decker, 110 Tex. at 94, 216 S.W. at 386.
4. Consider general customs and practices. In construing forfeiture
provisions in lease contracts, courts will take into consideration general customs
and practices, as well as the law affecting the matters contracted about, and will
presume that the parties contracted with such customs, practices, and laws in mind,
unless the contrary clearly appears from the terms of the contract. Gulf Prod. Co. v.
Cruse, 271 S.W. 886, 886-87 (Tex. Comm’n App. 1925).
5. No forfeiture if inequitable. Ordinarily, Texas courts resolve issues of
construction without reference to equity. But forfeiture lies at the intersection of
law and equity, and courts consider the equities of an asserted forfeiture.
“Although parties may contract to provide for forfeiture upon default, where
equities are shown which justify a continuation of the contract rather than
forfeiture of it, the forfeiture will be prevented.” T-Anchor Corp. v. Travarillo
Assocs., 529 S.W.2d 622, 627 (Tex. Civ. App.—Amarillo 1975, no writ) (citing
authorities and holding that equities prevented forfeiture).
B. Paragraph XIV does not provide that the lease terminates for a
failure to reconcile underpaid royalties.
Paragraph XIV of the lease does not clearly, unequivocally, and
unambiguously provide for termination based on either an underpayment of
37
royalties or a failure to reconcile underpayment. Instead, it addresses only
nonpayment of monthly royalties. In this particular lease, nonpayment and
underpayment are treated separately and differently—(1) addressed in separate
provisions, (2) referred to with different terminology, (3) and dealt with under
different procedures, timelines, and consequences. The plain language of
paragraph XIV addresses only nonpayment of royalties. No part of paragraph XIV
refers in any way to underpayment, the underpayment provision, or a failure to
reconcile underpayment.
1. The lease treats underpayment and nonpayment differently,
with different words in different provisions.
To construe a contract, Texas courts “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.” Italian Cowboy Partners, Ltd.
v. Prudential Ins. Co. of Am., 341 S.W.3d 323, 333 (Tex. 2011). The beginning of
this analysis is “the contract’s express language.” Id.
This lease contains two separate provisions with different procedures for (1)
adjustments of past royalty payments including overpayment and underpayment,
and (2) nonpayment. The key language of these provisions is as follows:
38
III(g)—royalty adjustments, overpayment, XIV—nonpayment
and underpayment CR3:996-97 (¶XIV) (bold emphasis
CR3:987-88 (¶III(g)) (emphasis added) added).
“In accounting to Lessor for royalties payable“Royalties payable to Lessor in the
hereunder, Lessee shall be required, on a manner hereinabove provided for
monthly basis, if requested by Lessor, to are due and payable to Lessor
account to Lessor for each well on leased within a period of sixty (60) days
premises based upon the volume of following each month’s production
production…the BTU…content of such of oil or gas produced and sold from
production, the royalty interest in such the premises. Thereafter, such
production and the amount owed and paid to payments shall be delinquent and will
such royalty interest owner.…” bear interest at the rate of Ten (10%)
percent per annum, compounded
“If it is agreed by Lessor or the royalty monthly, until paid. In the event that
owner in question that a royalty owner was such royalties are not paid and
overpaid, then the overpaid royalty owner has become delinquent, and there is no
the option of repaying such overpayment or title dispute or title defect, this lease
allowing Lessee to recoup such overpayment shall terminate ipso facto on the
out of future royalty payments on a schedule date that such royalties were due
and in monthly amounts agreed to by such and not paid. In the event such
overpaid royalty owner and Lessee.” royalties are not paid and become
delinquent, Lessor without other
“In the event the prices and/or volumes notice than this paragraph, shall be
used by Lessee in calculating and payment authorized to file suit in the District
of production royalties paid to Lessor was Court of Webb County, Texas, for
less than those required to be paid, Lessee recovery of such delinquent
shall issue its check to make up the royalties.…”
st
difference on or before March 1 of each
year.”
Several differences between paragraphs III(g) and XIV demonstrate that
these paragraphs address distinct subjects and have different effects.
a. The provisions use different words. The discussion of underpayment in
III(g) refers to an amount of payment: “payment of production royalties paid to
Lessor” that are “less than those required to be paid.” And other parts of paragraph
39
III(g) refer to adjustments to past royalty amounts for deductions, overpayment,
and underpayment. In contrast paragraph XIV expressly refers to a failure to pay
monthly royalties on time: “such royalties are not paid and become delinquent.”
CR3:996 (¶XIV).
The use of different phrasing is consistent with industry custom and usage.
The oil-and-gas industry does not equate an underpayment of royalty with a
nonpayment. CR3:1137 (¶3). Nor does the industry consider neglecting to
reconcile a prior underpayment as failing to make a payment at all. Id.
b. The provisions address different concepts. Just as the oil-and-gas
industry differentiates royalty nonpayment from royalty underpayment, CR1:1137
(¶3), so does this lease.
Paragraph III(g)—including parts not quoted above—addresses topics all
relating to adjustments to royalties. These topics include accounting, deductions,
withholding of taxes, reconciliation of overpayment, and reconciliation of
underpayment (“on or before March 1st of each year”). These detailed adjustment
provisions exist because gas purchasers frequently send the producer adjusted data
about volume or price many months after the royalty is paid, thus requiring a
royalty adjustment. CR3:1149 (¶6).
In contrast, paragraph XIV applies only to the deadline for monthly royalty
payments (“sixty (60) days following each month’s production”), and the
40
consequences of nonpayment. The first sentence provides when monthly royalties
are due—providing a different due date than reconciliation payments (60 days vs.
March 1st). CR3:996-97 (¶XIV). The second sentence addresses late-payment
interest for monthly royalties that are not paid—not reconciliation payments for
underpaid royalties. The third sentence addresses termination when “such
royalties” are not paid within 60 days. Id. And the final sentence authorizes a
particular venue for suit to recover “such royalties [that] are not paid.” Id.
Each sentence in paragraph XIV addresses only monthly royalty
nonpayment—the failure to meet the 60-day deadline. But here, monthly royalty
nonpayment is not at issue. Justapor admitted that Escondido always paid monthly
royalties within 60 days. CR3:1041:17-1042:3. Rather, because Justapor seeks to
recover for alleged underpayment of royalties, paragraph III(g) applies. It
addresses royalty adjustments and reconciliation of underpayment.
c. The provisions have different, inconsistent procedures for
underpayment and nonpayment. These two provisions provide separate paths for
(1) underpayment and adjustments, versus (2) nonpayment.
If Escondido underpays by using the incorrect price or volume, the
consequence is not termination but instead the covenant that Escondido will make
a reconciliation payment by March 1 of the following year. CR3:987-88 (¶III(g)).
Paragraph III(g) does not specify a remedy, termination or otherwise, for a breach
41
of that covenant, leaving available an ordinary action for breach of contract and
damages. See Rogers v. Ricane Enters., Inc., 772 S.W.2d 76, 79 (Tex. 1989).
Unlike paragraph III(g), paragraph XIV does not provide a grace period until
the following March 1. Instead, it provides that the failure to meet the 60-day
deadline for monthly payment of royalties allows a series of immediate remedies:
(1) termination “on the date that such royalties were due and not paid,” (2)
immediate accrual of 10% interest, and (3) the immediate right to sue “without
other notice than this paragraph.” CR3:996-97 (¶XIV).
It would be inconsistent with the lease’s plain language to treat a breach of
paragraph III(g) as a trigger for termination under paragraph XIV. Paragraph III(g)
provides a grace period to make up underpayment and provides no express
remedies for a failure to make up underpayment above and beyond contract law. In
contrast, Paragraph XIV provides immediate and severe consequences, which
makes sense for nonpayment but not for a royalty payment that often later requires
adjustment. The two provisions in completely different parts of this contract do not
address the same subject.
d. Unlike the long process for adjusting underpayment, the remedy
of “ipso facto” termination is immediate and based on an instance that shows
an obvious breach. Under paragraph XIV “ipso facto” termination occurs
immediately. CR3:996-97 (¶XIV). Unless the event triggering termination would
42
be immediate and obvious, parties would have no marker to know that their legal
relationship has automatically changed.
Nonpayment of royalties within 60 days is exactly the sort of event that
would be instantaneously obvious to the parties so that they know termination has
occurred.
In contrast, an underpayment or failure to reconcile an underpayment is not
an immediately apparent breach and therefore cannot result in an instant lease
termination. If paragraph XIV applied to underpayment or the failure to make a
reconciliation payment by March 1, the lease could easily terminate without either
party knowing. But oil-and-gas producers frequently receive information from
purchasers many months later that affect the volume or price on which the payment
was made. CR3:1149 (¶6). Under Justapor’s interpretation, if such information
were received about a December royalty payment in the following April, for
instance, the lease would have terminated on March 2 without either party’s
knowledge. That interpretation is not what the contract says and is not reasonable.
An ipso facto termination provision provides a bright line that allows both
parties to know the lease has immediately terminated and to adjust their conduct
accordingly. Here, Justapor first claimed termination 20 months after the initial
underpayment and 18 months after the March 1 deadline for reconciliation
payments. CR1:22; CR3:1044:20-1045:9. Such a strained interpretation would
43
permit no-fault terminations that a producer who has invested more than $33
million in the lease has no ability to correct. It makes no sense to apply the ipso
facto termination language to underpayment or the failure to timely reconcile
underpayment.
2. Paragraph XIV terminates for nonpayment of royalties, not
underpayment.
Justapor initially asserted that the lease terminated ipso facto under
paragraph XIV when Escondido first made an underpayment. CR3:1304, 1307. But
Justapor later adjusted its interpretation, conceding that the lease does not
terminate immediately upon any underpayment. CR3:1027:18-1028:12;
CR3:1073:3-1074:13. Instead, Justapor now says that Escondido’s failure to
reconcile underpaid royalties by March 1 of the following year results in
termination. CR1:248-49; CR3:1027:18-1028:12; CR3:1073:3-1074:13.
The plain language of paragraph XIV has nothing to do with underpayment
at all—whether an underpayment by itself or a failure to reconcile an
underpayment. Instead, Paragraph XIV provides for termination when “such
royalties”—the monthly royalties due in 60 days discussed throughout the
paragraph—“are not paid and become delinquent.” CR3:996-97 (¶XIV) (emphasis
added).
Nothing in this paragraph refers back to the underpayment of royalties,
which is addressed separately in paragraph III(g). Under the express terms of
44
III(g), underpayment must be rectified by the March 1 deadline rather than a 60-
day deadline. CR3:988 (¶III(g)). The lease does not even use the same language in
paragraph XIV (“delinquent payments”) that it uses to describe underpayment in
paragraph III(g) (“royalties paid ... less than those required to be paid”). Compare
CR3:988 (¶III(g)) with CR3:996-97 (¶XIV). Instead, the only thing that triggers
termination is nonpayment—which occurs immediately when the monthly
royalties due in 60 days “are not paid and become delinquent.” CR3:996-97
(¶XIV).
If the lease were to terminate upon the date of any underpayment, the March
1 reconciliation deadline would be meaningless. A violation of paragraph XIV
results in immediate termination, immediate accrual of interest, and immediate
authorization to sue. CR3:996-97 (¶XIV). If those consequences also apply at the
moment Escondido makes any underpayment, then it would be meaningless to
provide a reconciliation procedure and a March 1 deadline for reconciliation
payments. A court should “give effect to all contract provisions, and render none
meaningless.” King v. Dall. Fire Ins. Co., 85 S.W.3d 185, 193 (Tex. 2002).
The parties did not draft the lease to terminate immediately upon
underpayment. Paragraph XIV does not provide for termination based on royalties
“not paid in whole or in part.” It does not provide for termination based on
royalties “paid less than those required to be paid.” And it does not provide for
45
termination based on nonpayment “of any amounts due to the Lessor hereunder.”
Cf. Outdoor Sys., 105 S.W.3d at 69. The parties did not use the sort of language
necessary to specify clearly and plainly that the lease terminates in the event of an
underpayment.
3. Paragraph XIV does not address remedies for failure to
reconcile underpayment.
Justapor’s new interpretation, advanced in its summary-judgment motion,
was that paragraph XIV is triggered by Escondido’s failure to make March 1
reconciliation payments. That interpretation is unreasonable for a number of
reasons.
First, it has no support in the plain language. No part of paragraph XIV
refers to reconciliation payments of underpaid royalties or their March 1 deadline.
Instead, the sentence about ipso facto termination uses the phrase “such royalties”
to refer to the monthly royalties due within 60 days under the prior sentences of the
paragraph. CR3:996-97 (¶XIV).
Second, Justapor’s interpretation also requires adding or implying language
to the lease. Courts “may neither rewrite the parties’ contract nor add to its
language.” Am. Mfrs. Mut. Ins. Co. v. Schaefer, 124 S.W.3d 154, 162 (Tex. 2003).
Specifically, when construing a lease, a court should not imply “terms in
opposition to the express language that the parties themselves have written into the
contracts.” Rogers, 772 S.W.2d at 79 (quoting Dallas Power & Light Co. v.
46
Cleghorn, 623 S.W.2d 310, 311 (Tex. 1981)). And because termination requires
plain and unequivocal language, courts cannot imply grounds for termination that
are not expressly stated in the termination provision. W.T. Waggoner Estate, 118
Tex. at 522, 19 S.W.2d at 31.
Yet Justapor’s interpretation would require that words be added. It would
require changing:
In the event that such royalties are not paid and become delinquent, ...
this lease shall terminate ipso facto on the date that such royalties
were due and not paid.
to add or imply the following highlighted language to the lease:
In the event that such royalties are not paid and become delinquent, or
in the event that underpayment of royalties are not reconciled by
March 1 of the following year under paragraph III(g) of this lease, ...
this lease shall terminate ipso facto on the date that such royalties
were due and not paid.
The parties could have written the highlighted language. But it does not appear in
this lease. Nor should the Court add it or imply it, especially when lease
termination under Texas law requires clear and unequivocal language.
Third, Justapor’s interpretation is unreasonable and oppressive. A court
should avoid an interpretation of a contract that renders it “unreasonable,
inequitable, or oppressive.” Reilly v. Rangers Mgmt., Inc., 727 S.W.2d 527, 530
(Tex. 1987) (cited in Fortis Benefits v. Cantu, 234 S.W.3d 642, 650 n.54 (Tex.
2007) and In re Ford Motor Co., 211 S.W.3d 295, 299 (Tex. 2006)) (per curiam;
47
orig. proceeding). The parties to oil-and-gas leases frequently disagree about the
prices and volumes used in royalty calculations. CR3:1138 (¶7). New information
may be received months later that requires an adjustment of the royalty. CR3:1138
(¶6). If the failure to reconcile underpayment by March 1 results in immediate
termination, the lessee would risk losing its lease based on a disagreement about
the methodology, pricing, or volumes to be used in royalty calculations, or if it
made a mistake. CR3:1138 (¶7). Such an interpretation would allow lessors
effectively to blackmail a lessee by disputing every reconciliation. Id. And it would
allow, as in this case, a lessor to conduct audits months or years after the claimed
termination event, looking for any type of uncorrected underpayment in order to
hijack a valuable mineral lease and improvements to property and recover over a
year of past proceeds. Id.
Paragraph XIV does not clearly and unequivocally provide for termination
based on a failure to make reconciliation payments by March 1. By its plain
language, paragraph XIV does not provide for termination of the lease based on
underpayment at all. Instead, paragraph XIV provides for termination only for a
nonpayment of monthly royalties within 60 days after the production month.
Accordingly, this Court should reverse the summary judgment in its entirety and
render partial summary judgment that the lease did not terminate.
48
4. In any event, Paragraph XIV cannot support termination so
long as Escondido’s interpretation is reasonable.
Even if Justapor’s competing interpretation were somehow defensible, the
fact that Escondido’s interpretation is reasonable would, at a minimum, mean that
Jimmy Jones drafted a lease agreement that is fundamentally ambiguous. Because
an ambiguous termination or forfeiture provision cannot support that draconian
remedy, the trial court erred in concluding that Escondido’s lease expired. See
Knight, 188 S.W.2d at 566. “If the provision is ambiguous, that alone condemns it
as a forfeiture provision.” Decker, 110 Tex. at 94, 216 S.W. at 386. Upon
concluding two reasonable interpretations exist, the result is not a fact issue on the
provision’s proper meaning, but instead a ruling as a matter of law against
termination. See Knight, 188 S.W.2d at 566; Decker, 110 Tex. at 94, 216 S.W. at
386. This court should therefore render judgment that the lease did not terminate.
C. Independently, termination is improper because Justapor did not
establish Escondido was required to reconcile any underpayment.
An independent reason to reverse the trial court’s holding of termination is
that Justapor failed to establish conclusively that Escondido breached the contract
by failing to reconcile alleged underpayments. Although the Court could decide the
issue of termination without deciding whether Escondido breached the contract, it
is necessary for the Court to address this part I.C in order to rule on the summary
judgment determination of breach of contract as a matter of law, the award of
49
$3,619 in contract damages, and the severed claim for attorney’s fees and other
fees. See CR3:1861, 1897-98.
Justapor’s claim of breach is based on two different periods and amounts of
alleged underpayment: (1) $77,107 for production months February 2012 through
January 2013; and (2) $3,851 for production months October 2011 through January
2012. Because the theory and defenses for these two periods are different, we
address them separately.
1. Justapor did not establish any underpayment for
production months February 2012 – January 2013 based on
unambiguous lease terms.
There are two respects in which Justapor’s argument for termination is not
unambiguously supported by the royalty-price provisions: (1) the effect of the
special royalty pricing provision in the first lease amendment, and (2) the effect of
the royalty pricing prong on which Justapor relies. Summary judgment on the issue
of breach was improper because the lease unambiguously supports Escondido’s
reading of the amendment. Alternately, the lease is ambiguous, precluding
summary judgment. Reilly v. Rangers Mgmt., Inc., 727 S.W.2d 527, 529 (Tex.
1987). Further, if there is any ambiguity, uncertainty, or doubt in the lease
language triggering termination, forfeiture is prohibited as a matter of law. Knight,
188 S.W.2d at 566. Thus, Justapor’s motion should have been denied and partial
50
summary judgment of no termination should have been granted in Escondido’s
favor.
a. The special pricing provision replaced all pricing
measures, or alternatively was ambiguous.
The parties’ dispute over the royalty price concerns the effect of the lease
amendment on the pricing provision in paragraph III(b), which provided that the
25% royalty “shall be calculated and paid to [Justapor] based upon the highest of”
four different gas prices: (i) “CURRENT MARKET VALUE,” (ii) the
“CURRENT HOUSTON SHIP CHANNEL PRICE,” (iii) “CURRENT
PROCEEDS REALIZED BY LESSEE” [Escondido], and (iv) “the highest sales
price of any gas were gas produced from the property could be present when sold
to a third party.” CR3:982 (¶III(b)). The first three of these prices were defined in
detail; the last was not defined at all. CR3:982-83 (¶III(b)(i)–(iii)).
In the lease amendment, the special pricing provision stated:
Provided however, Lessee shall have the right to enter into gas sales’
contracts that will determine the price upon which gas royalty is
calculated if such contracts provide no less than a price
redetermination every six months and provide the following minimum
terms....
CR3:1015 (minimum terms omitted); CR3:1326 (¶5). The amendment, as drafted,
placed this provision in a paragraph labeled as an amendment to Paragraph III “(b)
ii.” It appeared at the end of a long paragraph in which the first parts of the
paragraph define “HOUSTON SHIP CHANNEL PRICE.” CR3:1015.
51
The parties offer two competing interpretations:
1 – Escondido’s interpretation: The special pricing provision, on its face,
modifies “the price upon which gas royalty is calculated.” It replaces all four
alternate price measures as the single price on which gas royalty is
calculated.
2 – Justapor’s interpretation: The special pricing provision only modifies
the Houston Ship Channel Price—which means that any of the other three
alternate prices govern if it is higher. See CR3:1669.
There are several reasons why Escondido’s interpretation is the only reasonable
one, or alternatively, the amendment is at least ambiguous.
First, the special pricing provision does not modify only the Houston Ship
Channel Price as Justapor claims. CR3:1015. The sentence does not mention the
Houston Ship Channel Price. Instead, the sentence states in global terms that its
measure “will determine the price upon which gas royalty is calculated.” Id.
Justapor’s reading of this sentence contradicts its plain language. Justapor attempts
to transform “price upon which gas royalty is calculated” into the Houston Ship
Channel Price. But the gas royalty is not calculated on the Houston Ship Channel
Price under the original lease when the Houston Ship Channel Price is not the
highest of the four measures. The plain language of the special price provision
modifies the whole royalty price, not just the Houston Ship Channel Price.
52
Second, Justapor’s best argument is based, not on the language of this
sentence, but on its label and location—at the end of a long paragraph that begins
with the title “(b) ii” and that, apart from this sentence, consists of a definition of
the Houston Ship Channel Price. But the location and label of the paragraph do not
determine its meaning when the plain language requires a different construction.
Although “in certain cases courts may consider the title of a contract provision or
section to interpret a contract, ‘the greater weight is given to the operative
contractual clauses of the agreement.’” Enter. Leasing Co. v. Barrios, 156 S.W.3d
547, 549 (Tex. 2004) (per curiam) (quoting Neece v. A.A.A. Realty Co., 159 Tex.
403, 322 S.W.2d 597, 600 (1959)).
Third, it would make no sense for the special pricing provision to modify
just the Houston Ship Channel Price. If the special pricing provision were to
modify only the Ship Channel price, then it would be redundant with part (iii) of
the 4-prong royalty in the original lease, which also is based on a “current
proceeds” measure. Under Justapor’s reading, the amendment would make parts
(ii) and (iii) redundant, therefore rendering one of them meaningless surplusage. A
court should avoid an interpretation that renders a term meaningless. Italian
Cowboy, 341 S.W.3d at 333. Instead, the special pricing provision is a measure of
royalty price based on the current proceeds that Escondido receives from contracts
that meet minimum pricing requirements. That has nothing to do with the Ship
53
Channel Price, but is a replacement for all of the royalty measures and therefore
“will determine the price upon which gas royalty is calculated.” CR3:1015.
Fourth, the surrounding circumstances, including the parties’ prior
negotiations, demonstrate that Justapor’s interpretation is unreasonable. See
Houston Exploration Co. v. Wellington Underwriting Ags., Ltd., 352 S.W.3d 462,
469 (Tex. 2011) (noting that courts may consider “surrounding circumstances that
inform, rather than vary from or contradict, the contract text”). Wrather told Jones
that Escondido did not want to use the royalty calculation in the original lease, but
instead wanted to base pricing on Escondido’s agreement with Enterprise.
CR3:1325 (¶4); CR3:1274. And Jones agreed to such a non-assignable
amendment. CR3:1325-26 (¶4). These negotiations, consistent with Escondido’s
interpretation, render Justapor’s interpretation unreasonable.
b. The royalty price measure on which Justapor relies is
ambiguous or meaningless.
Justapor’s motion for summary judgment argued that Escondido underpaid
royalties by around $77,100 for one year of production starting in February 2012
because it did not use the fourth pricing measure in the original lease:
(iv) the highest sales price of any gas were gas produced from the
property could be present when sold to a third party.
CR3:982 (¶III(b)); see also CR1:233-235 (motion for summary judgment);
CR1:330-332 (expert calculations of underpayment). Justapor argued that this
54
measure resulted in the highest gas price and should have been applied after
February 2012. CR1:233-35; CR1:330-332.
This provision is ambiguous at best, and meaningless at worst. Even if it is
assumed that “were” is a typo and should mean “where,” this provision still makes
no sense. For instance, would “where gas is sold” refer to the highest sales from a
particular well, from anywhere on the property, or to market price in the area?
Does “when sold” refer to the highest sales price at the exact time of the sale, the
day of the sale, the month of the sale? And does “when sold to a third party” refer
to the highest sales price for that particular purchaser or to any purchaser?
There was ample summary-judgment testimony that this language is
meaningless in the industry. According to Energy Law Professor Lowe, “[a]
typical lessee in the oil-and-gas industry would not know how to apply this
provision to the calculation of royalty payments” and it “could be interpreted in
alternative ways....” CR3:1137 (¶2). It is not a “customary or usual royalty
provision” and is “unclear and ambiguous.” Id. According to CPA Abington, this
provision is “unclear” and is not defined. CR3:1150 (¶10). This provision was
inherently ambiguous.
2. Fact issues exist regarding production months November
2011 – January 2012.
The issue for the alleged $3,851 underpayment for production months
November 2011 through January 2012 is different. There is no dispute that
55
Escondido paid Justapor royalties that were $3,851 less than the Enterprise special
pricing provision set out in the amendment. CR1:340:13-23; CR3:1148 (¶4). But it
did not make up that amount because (1) Justapor caused it to receive a lower price
during this period by terminating the Enterprise ground lease and insisting that
Escondido continue to sell at the daily spot price, and (2) Jones verbally agreed to
the royalty he was going to get based on the lower daily spot price. CR1:340:20-
341:20; CR3:1089:13-20; see also supra p. 24-25. Further, Jones did not complain
about this alleged nonpayment for over 18 months as he continued to accept
royalties from Escondido. CR3:1044:20-1045:9. During this time Escondido
continued to invest an additional $10 million into its $33 million investment,
including drilling costs and other improvements CR3:1220-21.
This evidence at least created a fact issue on Escondido’s defenses of waiver
and estoppel. CR2:928. Jones’ verbal agreement to the reduced royalty, plus his
continued acceptance of royalties for 18 months without complaint, raises a fact
issue on waiver. See G.H. Bass & Co. v. Dalsan Properties-Abilene, 885 S.W.2d
572, 578 (Tex. App.—Dallas 1994, no writ) (holding evidence that landlord
accepted less than full payment raised a fact issue of waiver precluding summary
judgment).
Similarly, the evidence supports an inference that Jones concealed his
complaint and his belief that the lease terminated as Escondido poured an
56
additional $10 million into drilling costs and improvements. This meets the
elements of equitable estoppel: (1) a false representation or concealment of
material facts; (2) made with knowledge, actual or constructive, of those facts; (3)
with the intention that it should be acted on; (4) to a party without knowledge or
means of obtaining knowledge of the facts; (5) who detrimentally relies on the
representations. Johnson & Higgins of Tex., Inc. v. Kenneco Energy, Inc., 962
S.W.2d 507, 515-16 (Tex. 1998).
Accordingly, the summary judgment and the awards based on termination
and breach of contract should be reversed, summary judgment rendered that there
was no termination, and the breach-of-contract issue remanded for further
proceedings.
D. Independently, lease termination is improper because it is
inequitable on these facts.
Because this case involves forfeiture, equity is an independent ground to
reverse the termination finding. Equitable defenses are available to a claim of lease
termination. See Humble Oil & Ref. Co. v. Harrison, 146 Tex. 216, 226, 205
S.W.2d 355, 361 (Tex. 1947). Even if the lease clearly, plainly, and
unambiguously provided for termination in these circumstances, the equities
“justify a continuation of the contract rather than forfeiture of it....” T-Anchor, 529
S.W.2d at 627. “[E]quity will consider the conduct of the adversary, the
requirements of public policy, and the relation of the misconduct to the subject
57
matter of the suit and to [the party asserting clean hands].” Pac. Mut. Life Ins. Co.
v. Westglen Park Inc., 160 Tex. 1, 6, 325 S.W.2d 113, 117 (1959).
1. It would be inequitable to enforce a termination in light of
Justapor’s conduct.
Justapor’s claim of forfeiture disregards its apparent scheme to lay a trap.
Jones, while representing Escondido in other matters, drafted a lease that, under his
interpretation, enhanced the likelihood both of Escondido’s forfeiture and
Justapor’s windfall. The evidence supports an inference that Justapor told
Escondido that the “tough” aspects of the lease would not apply to it and that any
problems would be resolved by negotiation. Then, after reaping the benefit of
Escondido’s $33 million in improvements, Justapor made every effort to find a
technical reason to terminate the lease and caused Escondido to lose its highest-
paying gas purchaser. This evidence of Justapor’s unclean hands should have
precluded summary judgment for Justapor. See Truly v. Austin, 744 S.W.2d 934,
938 (Tex. 1988) (preventing a party who caused the failure of a project to impose
liability on others for its failure).
The negotiation and drafting of the lease. Before entering this lease, Jones
gained Escondido’s trust by making reassurances about any future problems with
this lease and even becoming Escondido’s fiduciary in negotiating other leases.
Jones drafted the Justapor lease and the amendment. CR3:1325-26. He was
also acting as Escondido’s attorney. Although Jones did not represent Escondido in
58
negotiating this lease, he was Escondido’s attorney in other matters during some of
the negotiations and at the time this lease was signed. CR3:1328 (¶¶12-13);
CR3:1325-26 (¶¶3-5); CR3:1328 (¶13). The situation is similar to a lawyer who
already represents a client when he negotiates an attorney-client agreement with
that client. Because a lawyer's fiduciary duty to a client covers contract
negotiations between them, such contracts are closely scrutinized. Anglo-Dutch
Petroleum Int'l, Inc. v. Greenberg Peden, P.C., 352 S.W.3d 445, 450 (Tex. 2011).
And although Escondido was a sophisticated party, it was not represented by
independent counsel, nor did Jones suggest that it retain counsel. CR3:1325 (¶2).
Jones assured Escondido that it would not be subject to the original lease’s
pricing terms and that any disagreements would be negotiated. He told Escondido
Justapor would agree to payment of royalty based on the Enterprise pricing terms,
but only so long as the lease was held by Escondido. CR1325 (¶4). And he agreed
to draft the “special royalty pricing provision, based upon the Enterprise price.”
CR1325-26(¶4). He told Escondido that he had drafted a “tough agreement” in
case Escondido ever assigned its rights under the Lease Agreement to another
party, but that he would work out with Escondido any issues that might arise.
CR3:1329 (¶17). He never told Escondido that he interpreted the termination
provision to mean that the lease could terminate based on an underpayment of
59
royalties, a circumstance the lease covered under a separate provision. CR3:1329
(¶17).
Despite these representations and Jones’ fiduciary relationship with
Escondido, he now seeks to do the opposite—argue that the royalties were not
governed by the Enterprise price agreement and assert that the lease terminated
ipso facto, without notice, and without any attempt to work out any issues that
might arise.
Justapor’s creation of the circumstances resulting in underpayment.
Jones, acting on behalf of Justapor, created the situation that gave rise to the first
underpayment. No gas royalty payments were disputed until Jones terminated the
Enterprise Surface Site Agreement unilaterally. Justapor improperly terminated
that agreement because Enterprise was late on one $4,500 lease payment.
CR3:1326 (¶8); CR 3:1092:5-11; CR3:1282. Justapor refused to give Enterprise
the notice of default and opportunity to cure required by the lease, and it even
refused to accept Enterprise’s subsequent rental check. CR3:1054:17-1059:13. It
told Enterprise that Enterprise could not use the meter and that Justapor was going
to take their equipment. CR3:1092:7-19. And Justapor insisted Escondido sell gas
at a lower daily spot price to Kinder Morgan rather than shutting in the wells until
Escondido could negotiate a better price. CR3:1326-27 (¶8). This prevented
60
Enterprise from purchasing gas produced on the Justapor Ranch and forced
Escondido to sell gas for a lower price. CR3:1326-27 (¶8); CR1:341:5-13.
Justapor’s agreement to the underpayment. There was evidence that
Jones verbally agreed to the royalty price based on the lower daily spot price.
CR1:340:20-341:20; CR3:1089:13-20. Although this verbal modification of the
lease may not be enforceable, it is evidence that Justapor led Escondido to believe
the lower royalty payment was not a problem. This is especially true in light of
Jones earlier promise to Wrather that, notwithstanding the lease’s “tough” terms
designed for assignees, Justapor would work out any problems that arose with
Escondido. It would be inequitable to terminate the lease based on an
underpayment to which Justapor consented.
The evidence supports an inference that Justapor terminated the Enterprise
Surface Site Agreement to cause Escondido to lose that purchaser, provoking an
act of default resulting in forfeiture. Equity should not reward that scheme.
2. Forfeiture is inequitable because it would be
disproportionate with the alleged breach.
The trial court terminated Escondido’s lease in which it had invested more
than $33 million, and awarded well more than $12 million in damages, as legal
remedies to Escondido’s royalty underpayment of somewhere between $3,800 and
$81,000, or somewhere between .00067 and .014 of the $5.7 million in royalties
previously paid to Justapor.
61
Even if the lease clearly and unambiguously provided for termination, the
inequity of such disproportionate result does not justify a forfeiture. See T-Anchor
Corp., 529 S.W.2d at 627.
3. Forfeiture would be inequitable because Jones did not raise
it for 18 months after the alleged termination.
Justapor first notified Escondido that it believed there had been any
underpayment of gas royalties when it sued Escondido in August 2013. CR1:22;
CR3:1044:20-1045:9. This was 20 months after the underpayment of October 2011
royalties and 17 months after the March 2, 2012 date Justapor alleges, and the trial
court held, that the lease terminated. CR3:1859. During this time Escondido
continued to invest an additional $10 million into its $33 million investment,
including drilling costs and other improvements CR3:1220-21. Yet under the trial
court’s judgment, Escondido loses all of its investment, must return all revenues
from that 18-month period, and cannot deduct its expenses during that period. See
CR3:1859-61. That result is neither fair nor equitable.
E. Remedy: the summary judgment should be reversed in its entirety
and partial summary judgment rendered that there was no
termination.
Both Justapor’s grounds for summary judgment and all affirmative relief
granted to it in the judgment were premised on the termination of the lease. See
CR1:260-61; CR3:1858-1861. Accordingly, the summary judgment granting
Justapor’s affirmative claims should be reversed in its entirety.
62
Additionally, because the lease did not terminate as a matter of law,
judgment should be rendered in Escondido’s favor denying the following causes of
action asserted by Justapor, all of which are premised on lease termination:
trespass (including claims of bad-faith trespass and punitive damages), trespass to
try title, and its request for an accounting and declaratory relief. CR1:153-155;
CR2:812. Justapor’s claim of breach of contract should be remanded for further
proceedings consistent with this Court’s judgment.
II. Regardless of whether the lease terminated, Justapor did not
conclusively establish Escondido was a bad-faith trespasser.
In its final judgment and summary-judgment orders, the trial court found
“that from March 2, 2012 through the date hereof [Escondido] has remained, and
remains, in unlawful possession of minerals covered by the Justapor Lease as a
bad-faith trespasser, and is not, and never has been, a good faith trespasser.…”
CR3:1760, 1797, 1859. Based on this ruling, the trial court declared that Justapor is
entitled to damages in the amount of all proceeds from the sale of oil and gas
produced from the Justapor Lease from March 2, 2012 until the date of final, non-
appealable judgment in this matter, less royalties already paid by Escondido, but
without any deduction for production costs or other expenses incurred by
Escondido with regard to the Lease. CR3:1860; see also CR1:254.
Justapor’s claim that Escondido is a trespasser rests on the finding that the
Lease terminated. CR1:250-54. As shown in part I above, the trial court erred in
63
that ruling. Accordingly, as a matter of law, Escondido remained the lessee and
was not a trespasser at all, much less a trespasser in bad faith. If the Court reverses
the trial court’s ruling that the lease terminated, it should reverse the summary
judgment on the bad-faith trespass claim without the need to examine this separate
issue.
But even if the lease had terminated as a matter of law, Justapor did not
conclusively establish bad-faith trespass, and the trial court’s summary judgment
should be reversed.
A. Escondido was not a bad-faith trespasser per se because it lawfully
entered into possession of the land.
The question of whether Escondido was a bad-faith trespasser turns on
whether, as a matter of law, Escondido transformed from a lessee in lawful
possession of land under a lease into a bad-faith trespasser at the moment Justapor
contends the Lease terminated (i.e., on March 2, 2012). In general, the question of
a defendant’s good faith in entering upon land and developing oil-and-gas
production is one of fact. Gulf Prod. Co. v. Spear, 125 Tex. 530, 539, 84 S.W.2d
452, 457 (1935). To be in good faith, a party must have both an honest and
reasonable belief in the superiority of one’s title. Id.; Mayfield, 693 S.W.2d at 504.
The law will conclusively presume that a person is a bad-faith trespasser
only when he enters into possession of land and makes improvements thereon with
full knowledge of the pendency of an action to enforce an adverse claim to the
64
premises. Houston Prod. Co. v. Mecom Oil Co., 62 S.W.2d 75, 76 (Tex. Comm’n
App. 1933); Mayfield v. de Benavides, 693 S.W.2d 500, 504 (Tex. App.—San
Antonio 1985, writ ref’d n.r.e.). The conclusive-presumption standard does not
focus on when the person enters on to the land, but rather when he enters into
possession of the land. Thus, Texas law distinguishes between: (1) a person who
enters into peaceable possession of land under a valid lease before any adverse
claim is filed; and (2) a person whose first entry on the land does not occur until
after a lawsuit has been filed to enforce an adverse claim. Mecom, 62 S.W.2d at 76.
When a lessee in good faith enters into peaceable possession of land under a
valid oil-and-gas lease, and under a claim of right produces oil and gas from it, and
the lease later is declared invalid or otherwise terminated in a suit to enforce an
adverse claim, the lessee is not a bad-faith trespasser per se. Id.; Barnes v. Winona
Oil Co., 200 P. 985, 986 (Okla. 1921) (quoted and discussed in Mecom). The
conclusive presumption will not arise if the lessee has taken possession of land
under a lease in good faith, but later learns that the lease does not afford him the
right to develop the minerals. Mecom, 62 S.W.2d at 76; Barnes, 200 P. at 986.
Only when a person first enters into possession of land with full knowledge of the
pendency of a lawsuit to enforce an adverse claim—i.e., there is no prior
possession by the lessee—does Texas law classify the person as a bad-faith
65
trespasser per se, such that he cannot recover the cost of his improvements.
Mecom, 62 S.W.2d at 76-77.
This rule reflects Texas policy to encourage the recovery of minerals and to
discourage waste in the production of oil and gas. Key Operating & Equip., Inc. v.
Hegar, 435 S.W.3d 794, 798 (Tex. 2014). When a lessee acquires peaceable
possession of the land prior to a lawsuit on an adverse claim, allowing continued
production pending resolution of a later claim furthers the recovery of minerals and
lowers the risk of waste. Subjecting oil and gas lessees to the risk that, upon the
filing of an adverse claim (no matter how arguable or spurious), the lessee must
cease operations until the claim is resolved would discourage lessees from agreeing
to develop oil and gas production. Moreover, punishing a lessee who has obtained
possession in an orderly manner without creating a breach of the peace, and who is
operating under a lease that has not yet been declared invalid or void, would give
the landowner an unjust windfall. See Barnes, 200 P. at 986.
A lessee who enters into possession of land under a lease before the filing of
a lawsuit, i.e., without any knowledge of a pending action to enforce an adverse
claim, does not fall under the conclusive presumption standard and cannot be a
bad-faith trespasser per se. See Mecom, 62 S.W.2d at 76-77. Continuing to possess
the land after receiving notice of an adverse claim does not prohibit a finding of
good faith, although it is a circumstance a jury may consider in answering the fact
66
question. Mayfield, 693 S.W.2d at 505. This rule recognizes that, even though a
defendant may know there is title in another superior to the defendant’s title, he
might believe, and have good grounds to believe, in his own claim to the property.
Lowder v. Schluter, 78 Tex. 103, 108, 14 S.W. 205, 206, rev’d on reh’g on other
grounds,1 78 Tex. 109, 14 S.W. 207 (1890). Belief in one’s own superior right is
determined from all the facts in evidence, the titles, and other circumstances, as
viewed by persons of ordinary intelligence and prudence. Lowder, 78 Tex. at 108,
14 S.W. at 206.
It is undisputed that Escondido entered lawful possession of the land before
March 2, 2012. CR3:981, 1326 (¶5). 2 Justapor has neither alleged nor proven that
the lease terminated before that date. Accordingly, Escondido cannot be a bad-faith
trespasser per se. See Mecom, 62 S.W.2d at 76-77.
B. Justapor also did not conclusively establish that Escondido lacked
a good-faith belief in the superiority of its title.
Aside from the per se bad faith established when a lawsuit is filed before a
party first gains possession of land, good faith may become a question of law if
1
On rehearing, the Court determined there was no evidence defendants had adverse possession
that would entitle them to recover the value of any improvements, rendering harmless the jury
charge error on which the Court initially reversed and remanded. 78 Tex. at 109, 14 S.W. at 207.
2
Justapor’s lawsuit was not filed until August 20, 2013. CR1:22. Escondido was not served with
the lawsuit until September 23. CR1:9. Even if the conclusive presumption could apply,
Escondido could not have acted “with full knowledge of the pendency of an action to enforce an
adverse claim to the premises” until September 23, 2013, a date over 18 months after the date on
which the trial court concluded Escondido became a bad-faith trespasser. See CR3:1760, 1797,
1859.
67
there is no conflict in the evidence. Covington v. Travelers Indem. Co., 122 S.W.3d
330, 334-35 (Tex. App.—Fort Worth 2003, no pet.). On the other hand, if there is
evidence on both sides, bad faith presents a fact question precluding summary
judgment. See Covington, 122 S.W.3d at 335; Vela v. Pennzoil Prod. Co., 723
S.W.2d 199, 205 (Tex. App.—San Antonio 1986, writ ref’d n.r.e.); Elliott v. Davis,
553 S.W.2d 223, 226-27 (Tex. Civ. App.—Amarillo 1977, writ ref’d n.r.e.).
Rendering summary judgment where such a fact question exists not only
contravenes Texas law, but also deprives the defendant of its “exceptionally broad
jury trial right” under the Texas Constitution. Universe Life Ins. Co. v. Giles, 950
S.W.2d 48, 56 (Tex. 1997).
In this case, the weight of the summary-judgment evidence indicates that
Escondido had a good-faith belief in the superiority of its title. Justapor contends
the Lease terminated because of alleged royalty underpayment. CR1:246-49.
Escondido, on the other hand, contends the termination provision is triggered only
by nonpayment of monthly royalties; for this and other reasons, any alleged
underpayment did not terminate the Lease. CR3:959-66. Escondido’s
interpretation, supported by expert testimony about industry and custom, provided
good grounds to believe the Lease continued in effect, even if Escondido’s belief
ultimately turns out to be mistaken. CR3:1137-138 (¶¶2-9); CR3:1149-51 (¶¶6-11).
Additionally, there was evidence that Escondido believed its interpretation of the
68
pricing and termination provisions was correct. CR3:1325-26 (¶¶4-5), 1329-30
(¶17); see Brannon v. Gulf States Energy Co., 562 S.W.2d 219, 224 (Tex. 1977)
(holding one may be completely mistaken about superior title and still trespass in
good faith); Lowder, 78 Tex. at 108, 14 S.W. at 206 (allowing that good grounds to
believe in one’s own claim even when one knows there is superior title in another).
There was no evidence that Escondido ever believed that the lease terminated and
that it was a trespasser.
At most Escondido may have established its good faith as a matter of law; at
least, the issue presents a question of fact that a jury must decide. See Spear, 125
Tex. at 539, 84 S.W.2d at 457; Covington, 122 S.W.3d at 335. As a result, the trial
court’s summary-judgment ruling that Justapor was a bad-faith trespasser
(including both liability findings and all damages awards) should be reversed and
the claim remanded for further proceedings consistent with this Court’s opinion.
C. Because Escondido was not a bad-faith trespasser, the judgment
should be reversed and the case remanded for further
proceedings.
Several aspects of the judgment were premised on the ruling that Escondido
is a bad-faith trespasser. If this Court holds the lease terminated, but reverses the
ruling that Escondido is a bad-faith trespasser, then other aspects of the judgment
also must be reversed.
69
Trespass damages. Escondido’s measure and evidence of damages to
support the judgment award of $12,038,042 in trespass damages require that
Escondido be a bad-faith trespasser. See CR3:1676, 1860, 1861. But if the bad-
faith ruling is reversed, Escondido’s measure is incorrect because it fails to deduct
drilling and operating costs. See Moore v. Jet Stream Investments, Ltd., 261
S.W.3d 412, 428 (Tex. App.—Texarkana 2008, pet. denied). In cases involving
good-faith oil-and-gas trespass, courts measure damages by “net profits.” Maxvill-
Glasco Drilling, Co., Inc. v. Royal Oil & Gas Corp., 800 S.W.2d 384, 386 (Tex.
App.—Corpus Christi 1990, writ denied). A party “who drills a well in good faith
is entitled to reimbursement.” Wagner & Brown, Ltd. v. Sheppard, 282 S.W.3d
419, 426 (Tex. 2008). The award of trespass damages must be reversed and the
issue remanded.
Accounting. The judgment orders an accounting and payment of all
proceeds of production from March 2, 2012 through August 31, 2014 and from
September 1, 2014 until Escondido relinquishes possession. CR3:1859. This relief
should be reversed to allow deductions for drilling and operating costs. See Moore,
261 S.W.3d at 428.
Prejudgment interest. The judgment’s award of prejudgment interest is
based on the improper damage awards and thus should be reversed. See CR3:1861.
70
Relief under Texas Property Code. The judgment denied Escondido’s
counterclaim under Texas Property Code Sections 22.021-0.24, including its claim
to recover the value of improvements. CR2:930; CR3:1860. Section 22.021
provides that a trespasser who possessed property in good faith and made valuable
improvements to it is either:
(1) entitled to recover the amount by which the estimated value of the
defendant's improvements exceeds the estimated value of the
defendant's use and occupation of and waste or other injury to the
property; or
(2) liable for the amount by which the value of the use and occupation
of and waste and other injury to the property exceeds the value of the
improvements and for costs.
Tex. Prop. Code Ann. § 22.021(a); see also Brannon, 562 S.W.2d at 224 (holding
driller under invalid lease entitled to reimbursement of reasonable drilling
expenditures if it drilled “in good faith belief in the superiority of its lease”).
If the bad-faith ruling is reversed, the case should be remanded for trial of
this claim because there was evidence that Escondido made $33.1 million in
improvements to the land, including approximately $10 million after March 2,
2012. CR3:1149 (¶5); CR3:1220-21.
III. The trial court erred by granting summary judgment declaring the
parties’ rights and requiring conveyance of Escondido’s leasehold
interests regarding the “vacancy tract.”
Justapor also sought summary judgment on declaratory judgment concerning
42 acres known as the “vacancy tract.” The dispute concerns the meaning and
71
effect of the August 9, 2011 letter agreement regarding the “vacancy tract” and
whether Justapor is entitled to a conveyance of the vacancy tract. CR1:255. The
trial court’s summary judgment ruling did not specifically address the vacancy
tract. But its Final Judgment provided broadly that Justapor is entitled to a
conveyance from Escondido “of mineral interests acquired under the Justapor
Ranch,...” and “all other additional interests and improvements acquired in or
under the Justapor Ranch, such as mineral interests, leasehold interests, or any
other interests acquired by lease, deed or otherwise.” CR3:1858 (emphasis added).
The trial court also ordered specific performance: that Escondido “shall effectuate
such conveyance on or before the date this judgment becomes a final, non-
appealable judgment….” CR3:1858-59.
Escondido seeks to reverse this broad relief in the judgment, in part, because
of the improper ruling on lease termination. But because the vacancy tract was a
separate summary-judgment ground, and appears to fall within the broad relief
granted, this separate issue addresses why Justapor is not entitled to a conveyance
of interests specifically in the vacancy tract.
A. Justapor did not conclusively establish its declaratory judgment
claim.
Justapor did not conclusively establish (1) that its interpretation of the letter
agreement was correct, or (2) the existence of a justiciable controversy.
Declarations interpreting a contract are appropriately rendered by summary
72
judgment only if the contract provision at issue is unambiguous. See Barrand, Inc.
v. Whataburger, Inc., 214 S.W.3d 122, 129 (Tex. App.—Corpus Christi 2006, pet.
denied). Declaratory judgment is proper only if a real and substantial controversy
involving a genuine conflict of tangible interests exists, not merely a theoretical
dispute. See Bonham State Bank v. Beadle, 907 S.W.2d 465, 467 (Tex. 1995).
1. Justapor did not conclusively establish that the interests to
be conveyed include leasehold interests.
Based on the letter agreement as a whole, the only reasonable interpretation
is that Escondido agreed to convey only “mineral interests”—not leasehold
interests. The summary judgment record contains two versions of the letter
agreement. CR1:445-48; CR3:1308-11. Both are initialed. Both are signed. Both
have the same date.
The letter agreement attached to Escondido’s summary judgment response
provides:
Additionally, we have agreed to convey to an entity of your choice,
mineral interests we have acquired under the referenced 803 acres, as
well as all other mineral mineral [sic.] interests we acquire in this
land after your approval & consent.
CR3:1310 (emphasis added). A different version of the letter agreement attached to
Justapor’s summary judgment motion provides:
Additionally, we have agreed to convey to an entity of your choice,
mineral interests we have acquired under the referenced 803 acres as
well as all other additional interests we acquire in this land after your
approval and consent.
73
CR1:447 (emphasis added).
Based on these two versions and the letter agreement as a whole, “mineral
interests” and “additional interests” should mean the same thing. Interpreting the
two versions to have the same meaning is consistent with the fact that both
agreements are initialed and dated the same day. These writings must be
considered together. See DeWitt Cnty. Elec. Co-op., Inc. v. Parks, 1 S.W.3d 96,
102 (Tex. 1999).
The letter agreement attached to Justapor’s summary judgment motion
provides that Escondido will convey “mineral interests we have acquired under the
referenced 803 acres, as well as all other additional interests we acquire in this
land after your approval and consent.” CR1:447 (emphasis added). The general
term “additional interests we acquire” refers back to the specific term “mineral
interests.” See Hilco Elec. Co-op., Inc. v. Midlothian Butane Gas Co., 111 S.W.3d
75, 81 (Tex. 2003). In other words, Escondido agreed as to not only mineral
interests acquired at the time the agreement was signed, but also any mineral
interests acquired with Justapor’s approval and consent after signing. See
CR1:447. In contract interpretation, specific and exact terms are given greater
weight than general language. Worldwide Asset Purchasing, L.L.C. v. Rent-A-
Center E., Inc., 290 S.W.3d 554, 560-61 (Tex. App.—Dallas 2009, no pet.). When
words of a general nature are used in connection with the designation of particular
74
objects or classes of persons or things, the meaning of the general words will be
restricted to the particular designation. Hilco Elec., 111 S.W.3d at 81.
In order to hold that “additional” means something other than “mineral”
interests, the Court would have to strike out the term “mineral” from that version
of the letter agreement and add the term “additional.” In contrast, interpreting
“additional” to mean “mineral” interests harmonizes the two versions and prevents
a conflict that would render the term “mineral interests” in that version of the letter
agreement meaningless. See Frost Nat’l Bank v. L & F Distribs., Ltd., 165 S.W.3d
310, 312 (Tex. 2005) (per curiam).
Justapor acknowledged mineral interests do not include leasehold interests.
CR3:1679 (¶38). Justapor’s position that “additional” means a different type of
interest, as opposed to additional interests of the same type acquired at a later date,
would require the Court to violate fundamental rules of contract interpretation and
common sense. The letter agreement unambiguously requires conveyance only of
“mineral interests,” which do not include leasehold interests. Accordingly, the trial
court erred in granting summary judgment that the letter agreement requires
conveyance of interests other than mineral interests.
2. Unless “mineral interests” and “additional interests” mean
the same thing, the letter agreement is ambiguous.
If the Court disagrees, however, the face of the summary judgment record at
least shows the letter agreement is ambiguous. If “mineral interests” and
75
“additional interests” are given different meanings, it is unclear whether the parties
intended to require Escondido to convey “mineral interests” or “additional
interests” and what “additional interests” might include. Compare CR1:447 with
CR3:1310. This ambiguity would create fact questions about the letter agreement’s
meaning and effect, precluding summary judgment on Justapor’s vacancy tract
claim. See Reilly, 727 S.W.2d at 529.
3. Justapor did not establish that it had chosen an entity to
which any interests should be conveyed.
The letter agreement provided that Escondido was obligated to convey either
“mineral interests” or “additional interests” “to an entity of [Justapor’s] choice….”
CR1:447; CR3:1310. Justapor provided no summary judgment evidence that it
identified its chosen entity to Escondido, and neither the summary judgment
motion nor the judgment identifies the entity to whom Escondido is required to
convey unidentified “leasehold interests, or any other interests acquired by lease,
deed, or otherwise ….” CR1:254-55; CR3:1760.
Unless and until Justapor chose an entity to whom any later interests could
be conveyed, there is no basis to conclude that Escondido “failed” to convey any
such interest or that it must convey any interest now.
76
4. Justapor did not identify any leasehold interest that should
have been, but was not, conveyed.
Justapor also did not identify any leasehold or other interest that Escondido
acquired in the vacancy tract after Justapor’s approval and consent. The most the
summary judgment record shows is that Escondido has leased some interests from
owners of the vacancy tract, but there is no evidence as to when these interests
were acquired or whether they were acquired “after [Justapor’s] approval and
consent.” CR1:355 (Deupree deposition). Affidavit testimony by Justapor’s Jones
that “Escondido has failed to convey all of its leasehold interest in the Vacancy
Tract” is conclusory and constitutes no evidence. Compare CR1:315-16 (¶8) with
Paragon Gen. Contractors, Inc. v. Larco Constr., Inc., 227 S.W.3d 876, 883-84
(Tex. App.—Dallas 2007, no pet.). This testimony does not identify any lease,
establish it concerns the vacancy tract, or establish it was acquired after Justapor’s
approval and consent.
Justapor’s claim for declaratory relief sought an advisory ruling regarding a
phantom interest to be conveyed to a never-chosen entity. It is no support for any
portion of the trial court’s judgment.
B. Justapor was not entitled to specific performance.
Neither Justapor’s pleading nor its summary judgment motion requested
specific performance, but instead only a declaration that Justapor “is entitled to a
conveyance of all of Escondido’s interest in the Vacancy Tract....” CR1:153 (¶¶22-
77
24); CR1:255. A summary judgment cannot be sustained on a ground not set forth
in the motion. McConnell v. Southside Indep. Sch. Dist., 858 S.W.2d 337, 339, 341
(Tex. 1993). Nor is summary judgment proper on an unpleaded claim. See DeBord
v. Muller, 446 S.W.2d 299, 301 (Tex. 1969) (holding summary judgment
unavailable to defendant on unpleaded affirmative defense).
The trial court granted specific performance when it added to the judgment:
“and [Escondido] shall effectuate such conveyance on or before the date this
judgment becomes a final, non-appealable judgment ….” CR3:1858-59. This grant
of relief is beyond the summary judgment motion. Compare CR1:255 with
CR3:1858-59.
Even if Justapor had pleaded or sought summary judgment for specific
performance, Justapor did not show it was entitled to such relief. Claims for
declaratory relief and specific performance are not interchangeable. A
determination that an agreement is enforceable—i.e., a declaration of the parties’
rights under an agreement—does not equate to a determination that a party is
entitled to specific performance. Levetz v. Sutton, 404 S.W.3d 798, 805 (Tex.
App.—Dallas 2013, pet. denied). A party seeking specific performance must
establish that it has performed, or tendered performance of, its obligations under
the contract. Stafford v. S. Vanity Magazine, Inc., 231 S.W.3d 530, 535 (Tex.
App.—Dallas 2007, pet. denied); Am. Apparel Prods., Inc. v. Brabs, Inc., 880
78
S.W.2d 267, 269 (Tex. App.—Houston [14th Dist.] 1994, no writ). By failing to
provide any evidence (much less, conclusively establish) that it had chosen an
entity to whom any interests should be conveyed, Justapor was not entitled to
summary judgment affording specific performance.
In addition, a party seeking specific performance must establish that the
other party has breached the contract. Luccia v. Ross, 274 S.W.3d 140, 146 (Tex.
App.—Houston [1st Dist.] 2008, pet. denied). If the letter agreement does not
provide unambiguously that Escondido is required to convey only mineral
interests, not leasehold interests, specific performance is improper. A contract is
subject to specific performance if its essential terms are expressed with such
certainty and clarity that it may be understood without recourse to parol evidence.
Paciwest, Inc. v. Warner Alan Props., LLC, 266 S.W.3d 559, 571 (Tex. App.—
Fort Worth 2008, pet. denied). The heightened degree of certainty required for
specific performance is a product not only of its equitable nature, but also of its
ultimate goal: to require exact performance of a contract in the specific form in
which it was made. Levetz, 404 S.W.3d at 805.
Justapor did not conclusively establish its right to specific performance,
requiring reversal of this portion of the trial court’s judgment. See City of Houston
v. Clear Creek Basin Auth., 589 S.W.2d 671, 678 (Tex. 1979).
79
CONCLUSION AND PRAYER
Escondido prays that the Court:
• reverse the trial court’s summary judgment in Justapor’s favor in its entirety;
• either:
o render partial summary judgment in Escondido’s favor that the lease
did not terminate and therefore dismiss Justapor’s causes of action for
trespass, trespass to try title, its request for an accounting and
declaratory relief; or
o alternatively, reverse the trial court’s summary judgment that
Escondido was a bad-faith trespasser and all relief based on that
finding, including the accounting ordered by the trial court, all awards
of past and future proceeds from the sale of oil and gas, prejudgment
interest, costs, and post-judgment interest; and
• and remand this case for further proceedings on the remaining claims
consistent with this Court’s opinion.
80
Respectfully submitted,
/s/Robert Dubose
James P. Keenan Robert Dubose
State Bar No. 11167850 State Bar No. 00787396
keenan@buckkeenan.com rdubose@adjtlaw.com
J. Robin Lindley ALEXANDER DUBOSE JEFFERSON
State Bar No. 12366100 & TOWNSEND LLP
lindley@buckkeenan.com 1844 Harvard Street
BUCK KEENAN, LLP Houston, Texas 77008
700 Louisiana, Suite 5100 Telephone: (713) 523-2358
Houston, Texas 77002 Facsimile: (713) 523-4553
Telephone: (713) 225-4500
Facsimile: (713) 225-3719 Wallace B. Jefferson
State Bar No. 00000019
wjefferson@adjtlaw.com
Rachel Ekery
State Bar No. 00787424
rekery@adjtlaw.com
ALEXANDER DUBOSE JEFFERSON
&TOWNSEND LLP
515 Congress Avenue, Suite 2350
Austin, Texas 78701
Telephone: (512) 482-9300
Facsimile: (512) 482-9303
Kirsten Castañeda
ALEXANDER DUBOSE JEFFERSON
&TOWNSEND LLP
4925 Greenville Avenue, Suite 510
Dallas, Texas 75206
Telephone: (214) 369-2358
Facsimile: (214) 369-2359
ATTORNEYS FOR APPELLANT
81
CERTIFICATE OF COMPLIANCE
Based on a word count run in Microsoft Word 2013, this brief contains
14,763 words, excluding the portions of the brief exempt from the word count
under Texas Rule of Appellate Procedure 9.4(i)(1).
/s/Robert Dubose
Robert Dubose
CERTIFICATE OF SERVICE
On May 15, 2015, I electronically filed this Brief of Appellant with the
Clerk of Court using the eFile.TXCourts.gov electronic filing system which will
send notification of such filing to the following:
Timothy Patton, Jose M. Rubio, Jr.
TIMOTHY PATTON, P.C. JOE RUBIO LAW FIRM
14546 Brook Hollow #279 1000 Washington Street, Suite 4
San Antonio, Texas 78232 Laredo, Texas 78040
tpatton@tp-pc.com joerubio@joerubiolawfirm.com
Patton G. Lochridge
MCGINNIS LOCHRIDGE & KILGORE LLP
600 Congress Avenue, Suite 2100
Austin, Texas 78701
plochridge@mcginnis1aw.com
/s/Robert Dubose
Robert Dubose
82
APPENDIX
Tab Item
1. Final Judgment (CR3:1857-1891)
2. Order Granting Plaintiff’s Motion for Summary Judgment
(CR3:1796-99)
3. Oil and Gas Lease (CR3:981-1013)
4. Amendment to Oil and Gas Lease (CR3:1014-1020)
5. Affidavit of David Wrather (CR3:1325-1330)
6. Affidavit of John Lowe (CR3:1136-1147)
7. Affidavit of William Abington without exhibits (CR3:1148-1151)
8. August 9, 2011 Letter Agreement (version 1) (CR3:1308-1311)
9. August 9, 2011 Letter Agreement (version 2) (CR1:445-448)
10. Aquaplex, Inc. v. Rancho La Valencia, Inc., 297 S.W.3d 768 (Tex.
2009)
11. Decker v. Kirlicks, 110 Tex. 90, 216 S.W. 385 (1919)
12. Outdoor Sys., Inc. v. BBE, L.L.C.,105 S.W.3d 66 (Tex. App.—
Eastland 2003, pet. denied)
13. T-Anchor Corp. v. Travarillo Assocs., 529 S.W.2d 622 (Tex. Civ.
App.—Amarillo 1975, no writ)
14. Vinson Minerals, Ltd. v. XTO Energy, Inc., 335 S.W.3d 344 (Tex.
App.—Fort Worth 2010, pet. denied)
15. Tex. Prop. Code § 22.021(a)
83
"
Filed
11120120144:30:30 PM
Esther Degollado
District Clerk
Webb District
2013-cv7 -001396-D 1
CAUSE NO. 2013-CV7-001396-DI
JUSTAPOR RANCH COMPANY, L.C. § IN THE DISTRICT COURT OF
§
Plaintiff, §
§
"s. §
§
ESCONDIDO RESOURCES II, LLC, §
§
Defendants §
§
§
§
,,'
FINAL JUDGMENT
On this the 21" day of November 2014, came on to be heard Plaintiff Justapor Ranch
Company, L.C.'s ("Justapor" or "Plaintiff') Motion for Entry of Final Judgment and, upon
considering the orders entered by this Court on the Parties' Motions for Summary Judgment, and
Motion for Partial Summary Judgment, objections to summary judgment evidence, and Motion
for Severance and as well as the Motion for Entry of Final Judgment and the materials submitted
therewith, and, upon hearing the arguments of counsel, the Comt finds that Plaintiffs Motion for
Entry of Final Judgment should be granted in all respects.
The Court finds that on September 11, 2014, this Court heard Justapor Ranch Company,
L.c. 's and Escondido Resources, II, LLC's ("Defendant" or "Escondido"), cross motions for
summary judgment. After hearing and considering such motions and the evidence and arguments
submitted therewith, on October 8, 2014, this Court granted Justapor's Motion for Summary
Judgment on Defenses Attacking Lawyer James K. Jones, Jr., and denied Escondido's Motion
for Partial Summary Judgment. On October 14, 2014, this Court granted Justapor's Motion for
Summary Judgment. This Court also entered its Order Sustaining Objections to Escondido's
1
1857
Resources, II, LLC's Motion for Partial Summary Judgment Evidence and its Order on
Juslapor's Response to Escondido Resources, II, LLC's Objections to Summary Judgment
Evidence. The Court's orders on those Summary Judgment Motions are attached hereto as
Exhibits A, B, and C respectively and are incorporated herein by reference for all purposes. The
Court's Orders sustaining/denying objections to summary judgment evidence are attached hereto
as Exhibits D and E respectively and are incorporated herein by reference for all purposes. This
Court's orders on these summary judgment motions disposed of all claims and counterclaims
made the subject of this lawsuit except for Justapor's causes of action for exemplary or punitive
damages, attorneys fees, and expert witness and accounting fees and Escondido's defenses
thereto not decided by this Court's orders on the motions for summary judgment attached hereto
as Exhibits A-C.
On November 20, 2014, the Pat1ies filed an Agreed Motion for Severance of Claims to
sever these remaining claims and remaining defenses so that the summary judgment orders
entered by this Court may become final. This Court on November 21, 2014, granted the Joint
Motion for Severance of Claims.
It is therefore,
ORDERED, ADJUDGED, DECLARED, AND DECREED that the Motion for Entry of
Final Judgment be and hereby is GRANTED in all respects; and it is further
ORDERED, ADJUDGED, DECLARED, AND DECREED that the oil and gas lease
between Plaintiff Justapor Ranch Company, L.C. and Defendant Escondido Resources II, LLC
(the "Justapor Lease") is terminated, and was terminated as of March 2,2012; and it is further
2
1858
ORDERED, ADJUDGED, DECLARED, AND DECREED that the ownership of the
minerals covered by the Justapor Lease has reverted to Plaintiff as of March 2, 2012; and it is
further
ORDERED, ADJUDGED, DECLARED, AND DECREED that Plaintiff is the sole and
rightful owner of all interests conveyed by the Justapor Lease and is the owner in fee of the
mineral estate; and it is further
ORDERED, ADJUDGED, DECLARED, AND DECREED that Defendant is not entitled
to remain in possession of the minerals or other property covered by the Justapor Lease and shall
surrender possession thereof to Plaintiff; and it is further
ORDERED, ADJUDGED, DECLARED AND DECREED that from March 2, 2012,
through the date hereof Defendant has remained, and remains, in unlawful possession of
minerals covered by the Justapor Lease as a bad faith trespasser, and is not, and has nevcr bccn, a
good faith trespasser; and it is further
ORDERED, ADJUDGED, DECLARED AND DECREED that Plaintiff is entitled to an
accounting for and payment of up to March 1, 2012, all underpaid royalties, and to an accounting
for and payment of all the proceeds of all production from the ]ustapor Lease (I) from March 2,
2012, through August 31,2014, and, (2) from September 1,2014, through the date Defendant
relinquishes possession less royalties already paid to Justapor and Mary Hansen under the
Justapor Lease; and Defendant is hereby ordered to provide the accountings and payments to
Plaintiff as stated in (I) above on or before the 31 SI day after this Judgment is signed and as
stated in (2) above on or before March 1, 2015 and continuing on be first day of each successive
3
1859
month for proceeds of production through the date Defendant relinquishes possession; and it is
further
ORDERED, ADJUDGED, DECLARED, AND DECREED that Plaintiff is entitled to a
conveyance from Defendant of mineral interests acquired under the Justapor Ranch, including
without limitation the 803 acre tract described in the Justapor Lease, as well as ail other
additional interests and improvements acquired in or under the Justapor Ranch, such as mineral
interests, leasehold interests, or any other interests acquired by lease, deed, or otherwise; and
Defendant shall fully effectuate such conveyance on or before the date this judgment becomes a
final, non-appealable judgment; and it is further
ORDERED, ADJUDGED, DECLARED, AND DECREED that Defendant take nothing
on each of Defendant's counterclaims in this malter; and it is further
ORDERED, ADJUDGED, DECLARED, AND DECREED that Plaintiff is entitled to
damages in the amount of all proceeds from the sale of oil and gas produced from the Justapor
Lease from the date of termination until the date of final non-appealable judgment in this matter
less royalties already paid to Justapor and Hansen under the Justapor Lease and thereafter until
Defendant relinquiShes possession to Plaintiff; and it is further
ORDERED, ADJUDGED, DECLARED, AND DECREED that Plaintiff is entitled to
and shall recover from Defendant the following damages:
a. Actual damages for Defendani's trespass, for the proceeds from sale of oil and gas
produced by Defendant from Plaintiff's land described in the Justapor Lease (less
royalty already paid to Justapor and Hansen under the Justapor Lease) from the
4
1860
date oftennination (March 2, 2012) through August 31, 2014, in the amount of
$12,038,042;
b. Actual damages for Defendant's trespass, for the proceeds from sale of oil and gas
produced by Defendant from Plaintiff's land described in the Justapor Lease (less
royalty already paid to Justapor and Mary Hansen under the Justapor Lease) from
September 1, 2014, through the date Defendant relinquishes possession to
Plaintiff;
c. Actual damages for Defendant's breach of contract in the amount of$3,619.00;
d. Prejudgment interest through November 20,2014 on the amounts set forth in (a)
and (c) above in the amount of$603,233.00;
e. Prejudgment interest on the actual damages incurred after September 1, 2014 until
November 20, 2014 at the rate of 5% per allilUm non-compounded;
f. Court costs through trial and appeal; and
g. Postjudgment interest on all of the above, from the date of this Final Judgmem
until all amount, are paid in full at the rate of 5% per annmn compounded
annUally.
This Final Judgment disposes of all parties and all claims and is appealable.
5
1861
IT IS SO ORDERED.
/(1
SIGNED this ~ day of November, 2014.
I
1/1 IV
The Honorable JUdgrftltJ
U
6
1862
CAUSE NO. 2013-CV7-001396-Dl
JUSTAPOR RANCH COMPANY, L.C. §
§
Plaintiff, §
§
"s. §
§
ESCONDIDO RESOURCES II, LLC, §
§
Defendants §
§
§
§ 49th JUDICIAL DISTRICT
ORDER GRANTING PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT
On this the ~ day of September, this Court considered Plaintiff Justapor Ranch
Company, L.C.'s ("Plaintiff') Motion for Summary Judgment and Plaintiff Justapor Ranch
Company, L.C.'s Supplement to its Motion for Summary Judgment Evidence (collectively, the
"Motion"). The panies appeared before the Coun for the hearing on the Motion. After
considering the pleadings, the Motion, Defendant Escondido Resources II, LLC ("Defendant")
Response, Plaintiffs Reply, evidence on file in connection with all motions for summary
judgment, and arguments of counsel, the Coun GR.<\NTS the Motion in full. It is, therefore,
ORDERED, ADJUDGED AND DECREED that the Motion be and hereby IS
GR.<\NTED in all respects, it is further
ORDERED, ADJUDGED AND DECREED that the oil and gas lease between the panies
(the "Justapor Lease") is terminated, and was terminated as of March 2, 2012; and it is further
ORDERED, ADJUDGED AND DECREED that the ownership of the minerals covered
by the Justapor Lease has reverted to Plaintiff as on.'larch 2, 2012; and it is funher
1
1796
.'
ORDERED, ADJUDGED AND DECREED that Plaintiff is the sole and rightful owner
of all interests conveyed by the Justapor Lease and is the owner in fee of the mineral estate; and
it is further
ORDERED, ADJUDGED AND DECREED that Defendant is not entitled to remain in
possession of the minerals or other property covered by the Justapor Lease and shall surrender
possession thereof to Plaintiff; and it is further
ORDERED, ADJUDGED AND DECREED that from March 2, 2012 through the date
hereof Defendant Escondido Resources II, LLC CDefendant") has remained, and remains, in
unlawful possession of minerals covered by the Justapor Lease as a bad faith trespasser, and is
not, and has never been, a good faith trespasser; and it is further
ORDERED, ADJUDGED AND DECREED that Plaintiff is entitled to an accounting for
and payment of up to March I, 2012, all underpaid royalties, and to an accounting for and
payment of all the proceeds of all production from the Justapor Lease from March 2, 2012
through the date of final non'appealable judgment in this matter less royalties already paid under
the Justapor Lease; and Defendant is hereby ordered to provide such accounting and payment to
Plaintiff; and it is further
ORDERED, ADJUDGED AND DECREED that Plainti
from Defendant of mineral interests acquired under th ustapor Ranch, including without
limitation the 803 acre tract described in the J por Lease, as well as all other additional
interests and improvements acquired in or nder the Justapor Ranch, such as mineral interests,
leasehold interests, or any other int sts acquired by lease, deed, or otherwise; and Defendant
2
1797
shall effectuate such conveyance on or before the date this judgment becomes a final, non-
appealable judgment; and it is further
ORDERED, ADJUDGED AND DECREED that Defendant take nothing on each of
Defendant's counterclaims in this matter; and it is further
ORDERED, ADJUDGED AND DECREED that Plaintiff is entitled to damages in the
amount of all proceeds from the sale of oil and gas produced from the Justapor Lease from the
date of termination until the date of final non-appealable judgment in this matter less royalties
already paid under the Justapor Lease and thereafter until Defendant relinquishes possession to
Plaintiff; and it is further
ORDERED, ADJUDGED AND DECREED that Plaintiff is entitled to and shall recover
-------
f, mD,f,,,,.m ili, follow'" d'm.,'" /
"r a. Actual damages for Defendant's trespass, for the proceeds,from sale of oil and gas
\Y produced by Defendant from Plaintiffs land described1n the Justapor Lease (less
\``
~
/
royalty already paid under the Justapor Leas/from the date of termination
(March 2, 2012) through February 28, 2014/lie amount of$10,413,114.00;
»-~. S b. Actual damages for Defendant's trespass, for the proceeds from sale of oil and gas
produced by Defendant from Plaintiffs Ik described in the Justapor Lease (less
~ ," roy.hy ,'~.dy p.1d "doc ,., J''''7!l~;o) from M~h I, 2014, 939 S.W.2d 118 (TEX 1996) or In similar judicial
decisions respecting post production expenses.
(II) The term "HOUSTON SHIP CHANNEL PRICE" shall be construed to mean the
price or value which Is equal to the highest reported on-shore spot purchase price beIng
paId during the month of production by purchasers of gas produced In the Texas Gulf
Area, to be determined on a monthly basis by reference to the Index spot gas price
(large packages only) for gas delivered to pipelines at Houston Ship Channel/Beaumont,
Texas, as recorded In Inside F.E.R.C. vs. Gas Market Report published by McGraW-Hili,
minus five (.05) cents per MMBtu, (an agreed upon reasonable transportation charge
for this lease productIon) adjusted for MMBtu content, and without any other deduction
by lessee save unrelmbursed severance taxes actually paid by the Lessee In behalf of
Lessor to the taxing authority. In the event the above-desIgnated gas price index
publication ce\lses to exist, (or ceases to report such "Houston Ship Channel PrIce"
hereInabove referred to), the Lessor and Lessee shall agree on another publication
generally acceptable as providing comparable accurate current data as to current on-
.shore spot prices for gas delivered Into pipelines by purchasers In saId area, which
substituted publicatIon shall be used In lieu of the above-described publication as part
. of the foregoIng standard, upon whIch Lessor's royalty shall be calculated and paId. In
the event no prIce Index publlcatlon can be agreed upon as reliable, then a reliable
governmental or other non-partisan publication evaluating the same Information shall
be used, with current payments to be made on the most current Information available
and then adjusted, as necessary, within thirty (30) days following the availability of the
governmental data or other non-partIsan publication, or If no such publication Is
available for purposes, hereof, this standard, as an element for calculation of Lessors
royaltIes, shall cease to exist.
(111) The term "CURRENT PROCEEDS REAUZED BY LESSEE" shall be construed to
mean the price or value which Is equal to all proceeds actually received by Lessee from
Its purchaser (whether affiliated or unaffiliated) for the sale of the gas produced from
this lease.
(c) Lessee specifically agrees to Install, maintain and operate a properly
calibrated gas metering device at each gas wellhead for the purpose of accurate
measurement of all gas production produced from each gas well on this lease, which
gas measurement shall be made pursuant to the measurement law referred to under
Article III, paragraph (b) of this lease. Such gas meter shall be avajlable for Inspection
as to its calibration, orifice size and measurements at any time or times by Lessor (or
Lessor's representative) and no "by-pass" valves or connections shall be authorized to
983
be made which do not provide for proper and accurate metering of gas production from
any such gas well. Each such gas metering device and orifice plates shall be Installed
and maintained In accordance with the provisions of the current American Gas
Association Report No. 3 (A.G.A. Report #3), as now existing. Further, to assure
compliance with American Gas Association Report No. 3 (A.G.A. Report #3), as now
published, such meters shall be Inspected and re-callbrated monthly by Lessee after
notice to Lessor with sufficient time for Lessor to arrange to be present, either
personally or through Lessor's representative. Lessee shall also Install, operate and
maintain a separate gas meter on this lease at each point of exit of a pipeline
transporting gas production off of this lease and shall report such gas production
volumes taken from this lease, on a monthly basis, to lessor. All gas volume
measurements at the point of exit (whether one or more) shall be compared to the
aggregate of all the Individual wellhead gas volume measurements, and for the purpose
of royalty payment calculations, Lessee shall use whichever volume Is greater. lessee
shall report such gas production volumes taken from this lease, and the discrepancies If
any on a monthly baSiS, to lessor. Lessee shall be required to perform an accurate gas
analysis on all gas production, on a well-by-well baSiS, periodically, but at least monthly
from date of first production of each gas well drilled and completed hereunder, which
analYSis shall extend to the BTU content of such gas production and other commercial
constituents thereof. A copy of such gas analysis shall be furnished to Lessor as
obtained by Lessee if requested by Lessor. In the event that any distillate or other liquid
hydrocarbons are contained In the gas stream of any gas well on this lease, In
commercial quantities, then lessee Is required to extract such liquid hydrocarbons on
this lease and to store and to sell and market the same separately from the gas
production, paying Lessor's royalties thereon. In the event that the gas production
contains distillate, condensate, or other liquid hydrocarbons, or water, such gas
production shall first be separated at the wellhead prior to measurement of such gas
productfon as provided above. All liquid hydrocarbons removed from the gas stream
through such separator shall be stored In steel distillate or condensate tanks at each
well site and such liquid hydrocarbons shall be purchased by Lessee at the current
pricing provisions specified under subparagraph a) of this Article III, Lessee being
required to pay and account to Lessor for Lessor's royalties on all of such separated and
stored liquid hydrocarbons on a monthly basis. In the event that the gas .production
from this lease needs to be compressed, the compression thereof shall occur through
fac1l1tles located on this lease In a manner designed to maximize production. In the
event that Lessee drills and completes several wells on this lease, Lessee may provide
for one or more central facilities for heating, dehydration, separation and compression
of such gas production with storage tanks for distillate or condensate being also located
at such central facility, which central facility or central facilities, must In be located upon
this lease In a location to be deSignated by Lessor. Lessee shall be prohibited from
commingling of third party gas production through such proceSSing or central facilities.
Further, any gas produc.tlon which has a fractional 011 and gas royalty Interest p~yable
to Lessor different from other 011 and gas production royalties payable to Lessor
hereunder, shall require Lessee to separately process and meter such 011 and gas
984
production upon thIs lease In whIch Lessor has a different net royalty Interest therein
and account to Lessor, accordingly.
In addition, Lessor shall be authorized to Install and maintain Its own check
meter on any 011 or gas well upon such leased premIses, or on the sales meter of
production from this lease, In order to verify the amount of productIon from any well or
wells on this lease; provided that IF Lessor elects to Install theIr own check meter or
meters, such shall be Installed under the supelVlslon of an engineer and after thirty (30)
days' written notice to Lessee. In this connection, Lessee shall have the right to make
such Installation Itself of Lessor's check meter or meters, In order that such Installation
does not Interfere with Lessee's operations, provided such Installation Is performed by
Lessee pursuant to Lessor's speclflcatlons within a reasonable time, not exceeding thirty
(30) days following written request of Lessor. calibration of such meter (whether one or
more), Its maintenance, Its charts, and computation of production, shall be perFormed
by Lessor at Lessor's sole cost and expense. In this connection, If requested by Lessee,
Lessor shall calibrate any such meter In the presence of Lessee. All gas production from
this lease must be measured on thIs lease In the manner stated above prior to point of
exit of such gas production from this lease. calculation of volume of gas production,
adjusted for btu content at stated herein, for royalty payment purposes hereunder shall
be computed from such exit meter, (whether one or more) or the aggregate of all
IndIvidual wellhead gas measurement meters at each gas wellhead on this lease,
whichever volume amount Is the greater.
(d) Lessee agrees that all other gas and Its constituents and products whIch do
not extend to condensate covered by the preceding subparagraph c) of thIs Article fit
:may be further processed by Lessee at a gas processing plant located off of this lease
'and In such event, Lessee shall calculate and pay to Lessor, Its herein reselVed
royalties, based upon the higher of the market value thereof or the price paId by such
plant operator to Lessee herein for constItuents and products extracted from the gas
stream and the .resIdue gas remaining after such extractton. Lessee Is prohibited from
marketing gas production and Its products through a processing plant, as referred to
hereIn, unless the combined royalties paid to Lessor for such plant products and residue
gas, exceed the value of the royalties payable by Lessee to Lessor on the unprocessed
gas stream from this lease as provided for under subparagraph (b) of Article III of thIs
lease.
(e) Lessor and Lessee herein agree that Lessor reselVes and shall have the
continuing option to take all or any part of'liNenty-five (25%) percent of all of the gas
produced from this lease In kind (such 25% of all gas production from this lease,
sometimes referred to hereIn as "Royalty Gas'1, and Lessor shall be entitled, upon not
less than sIxty (60) days prIor written notice mailed to the Operator of the lease, to
require that Lessee commence, as of the effectIve date and hour of Lessor's election,
delivering to the connecting gas gatherIng and transmission systems for the account of
the owners of the Royalty Gas or their designated marketer or purchaser or otherwise,
985
all of such designated volume of the subsequently accruing Royalty Gas, on a dally
basis, for such duration or period as Lessor designates in Its written notice to Lessee
(hereinafter called "In kind ga5'1, which delivery Into such gas gathering and
transmission systems shall be made ratably and transported and delivered by the
Lessee and Its transporters In accordance with the Instructions of Lessor, or Lessor's
designated marketer or purchaser. Because all deliveries of Lessor's Royalty Gas are to
be made ratably, on a dally basis, with the volumes of gas actually being marketed and
delivered by Lessee to Lessor's purchaser, no gas Imbalances shall be permitted to
accrue as a result of Lessor's election to take Its Royalty Gas In kind. Any Royalty Gas
not actually taken In kind by Lessor shall be marketed and sold by Lessee, and Lessee
shall account to Lessor for all Royalty Gas not actually taken In kind In accordance with
Article III (b) of this lease. Lessee further commits and obligates Itself to reasonably
cooperate with Lessor and Lessor's designated representative In arranging for any such
deliveries in kind, Including Lessee's obligation to exercise Its good faith best efforts to
assist Lessor In the obtaining of the consent and commitment of the Initial and each
subsequent transmission company with whom Lesse.e Is doing business, or hereafter
does bUSiness, to transport Lessor's In kind gas to the pOint where all Royalty Gas
deSignated by Lessor as In kind gas can be Interconnected and delivered over to other
gas transmission systems selected by Lessor (or Lessor's designated marketer or
,purchaser) from time to time, at a cost of transportation not greater than that then
·belng charged by each such transporter to their respective most favored shippers
·;(whether such shipper Is a buyer or seller of gas and regardless of whether such
:shlpper Is affiliated with the transporter) for comparable transportation consistent with
. applicable statutory and regulatory standards governing such transportation.
The right of Lessor to elect, from time to time, to take all or some designated
portion of the Royalty Gas as In kind gas shall In no manner relieve the Lessee of Its
duty to market all gas (with the exception of any gas which Lessor expressly designates
as In kind gas) under the Reasonably Prudent Operator Standard, which lessee agrees
to require It, among other things, to market all gas production from this lease as would
a Reasonably Prudent Operator under the same or similar circumstances with Interests
of Itself and Its royalty owners In mind (except designated In kind gas) and to account
to the royalty owners herein, for their royalties on the basis as provided for under
Article III(b) of this lease.
(f) Lessor's reserved royalty shall never be reduced by partial production from
any well on this lease or by production by one Working Interest Owner but not another
(whether one or more), nOI' shall such royalty obligation be divided among one or more
Working Interest Owners, as it Is agreed that the royalties reserved by Lessor shall be
applied wholly to any production produced from the well bore of any well or wells on
this lease and shall remain the responsibility of all Working Interest Owners (whether
one or more, jointly and severally).
986
(g) In accounting to Lessor for royalties payable hereunder, Lessee shall be
required, on a monthly basis, If requested by Lessor, to account to Lessor for .each well
on leased premises based upon the volume of production, (measured as provided for
under subparagraph (b), hereof), with a statement reflecting the gross production of
each well, the gross price per unit of production (gas being expressed in thousand cubic
feet and 011 being expressed In barrels of 42 gals.), the BTU (British Thermal Unit)
content, of such production, the royalty Interest In such production and the amount
owed and paid to such royalty Interest owner. Except as provided for herein, Lessee
shall not be authorized to make deductions from Lessor's royalties without first notifYing
Lessor with a full explanation therefore, giving Lessor at least fifteen (15) days to
respond thereto. Lessor, at all reasonable times, shall have the right of Inspection of
Lessees' records relating to computation and payment of the royalties reserved
hereunder. In the event Lessor or royalty owner, upon written notice to Lessee,
disputes the legitimacy of any deduction or adjustment to Lessor's royalty payments,
Lessee shall not be entitled to make such deductions or adjustments against Lessor's
royalty (and Lessor's full-royalty payments shall not be Interrupted) until such dispute Is
resolved. If It Is agreed by Lessor or the royalty owner In question that a royalty owner
was overpaid, then the overpaid royalty owner has the option of repaying such
overpayment or allowing Lessee to recoup such overpayment out of future royalty
payments on a schedule and In monthly amounts agreed to by such overpaid royalty
, ,owner and Lessee. Any overpaid royalty owner shall not be charged Interest on the
.,overpald sums •. Further, Lessor shall be entitled, upon request In writing, to be
:fumlshed with copies of all gas purchase or gas sales agreements made for the sale of
011 or gas or any of its constituents from this leased premiSes, together with any and all
:subsequent amendments thereto; provided, however, that Lessor shall keep such
".agreements confidential except to the extent of their use by Lessor In connectlon with
''Lessee's obligations hereunder. In the event Lessee withholds any windfall profits tax
(or any other similar tax type of tax by any governmental authority) from any royalty
payment payable hereunder, from and after a period of six (6) months following Initial
production and upon request In writing, Lessor shall be entitled to be furnished with full
facts and Information respecting the ca!culatlon and deduction of such windfall profit
tax or other tax upon production, together with evidence of payment of such tax by
Lessee. Lessee shall be authorized to withhold from such royalty payment only that
windfall profit tax proportionately related to such royalty Interest, which Is legally'owed
to governmental authority and actually paid by Lessee In behalf of such royalty Interest
owner. Severance taxes directly and Indirectly paid by Lessee to the State of Texas,
which are not reimbursed to Lessee by the Purchaser of 011 or gas production from this
lease, shall be deducted by Lessee In proportion to Lessor's royalty Interest, on a
month-by-month basis, from Lessee's payment of such royalties to Lessor. It Is agreed
that any severance tax on production from this lease, which is paid by the Purchaser of
011 or gas production and/or reimbursed by the Purchaser to Lessee, shall not be
charged or deducted from Lessor's royalties. Lessee shall annually, on or before January
31st of each year, review the prices and production volumes used by Lessee In
calculation of Lessor's royalties against the price and production volume required to be
987
paid to Lessor under the terms of this lease. In the event the prices and/or volumes
used by Lessee In calculating and payment of production royalties paid to Lessor was
less than those required to be paid, Lessee shall Issue its check to make up the
difference on or before March 1st of each year. If requested by Lessor, Lessee shall
submit a report to Lessor on January 31 st of each year stating that It has complied with
all terms of this lease, Including but not limited to, Lessee's obligations concerning
operations; measurement aM determination of quality of all product, sale or disposition
of all product; calculation and payment of royalties and any deductions therefrom. On
Lessor's written request, Lessee shall furnish Lessor with all InformatIon that was used
or should have been used under this lease In calculating the royalties to be paid Lessor
under this lease.
(h) Subject to the limitation hereinafter provided, where gas from a well or wells
located on said land, capable of producing gas In .paying quantities, with or without
condensate, Is not sold, but Is shut'ln, and this lease Is not being otherwise maintained,
then Lessee may pay Shut·ln Gas Royalty payments to Lessor, commencing on or
before the dates hereinafter specified and annually thereafter on or before the
:annlversary date of such payment, an amount equal to the sum of ONE HUNDRED AND
{lJO/100THS ($lQO:OO) DOLLARS per acre covered hereby, and while such payment Is
, madt1, It will be conSidered that gas Is being produced In paying quantities within' the
,> mea'rilng of Article II hereof for such entire annual period (whether or not there occurs
,"perlodJc production during such annual period); provided, however, that no gas well
',: :may, be held under the provisions hereof proViding for payment of Shut·ln Gas Royalty
'"payments In lieu of actual production, for more than two (2) consecutive years after
,,.t~e ,~xplratlon of ,the primary term. Such Shut-in Gas Royalty will operate to extend
,:'"suchilease for six (6) month period or periods, only. Such Shut-In Gas Royalty payments
to be timely, shall be made as follows: on or before thirty (30) days after the date the
well Is shut-In or, If the well Is shut·ln during the primary term, on or before thirty (30)
..days after the date on which said well Is shut·ln or thirty (30) days after the date this
lease ceases to be otherwise maintained, whichever Is later. The term "shut·ln" as used
herein shall mean the later of the date that a well Is completed or the date that a
commercial well ceases actual production. The term "completed or completion" as used
herein shall mean the date thirty (30) days after the date that the well Is drilled to Its
permitted depth as reflected on forms flied with the Texas Railroad Commission.
Nothing herein shall relieve Lessee of Its duty to market such gas production pursuant
to the Reasonably Prudent Operator Standard, as that standard Is deflned by Texas
case law, now or hereafter.
In the event that Lessee exerclses Its rights under the foregoing provisions of
this subparagraph (h), Lessee shall, conduct appropriate and adequate tests of each
shut-In gas well designated by Lessor to determine whether such deSignated gas well Is
actually capable of producing gas In paying quantities. Such tests shall be conducted at
times selected by Lessee, but not more than thirty (30) days after which Lessee has
shut In the well or wells. Lessee shall give Lessor reasonable notice prior to conducting
such well tests and Lessor or Lessor's representative shall have the right to be present
988
at all testing and shall be entitled to receive full Information, Including all data and
Interpretation, In connectIon wIth such testing. In the event any such test reveals that
the well or wells tested (on a well by well basis) are non-commercial as provided In
Article XIII hereof, It shall be considered that such well or wells have ceased to produce
gas in paying quantities on the date of the test of each such well.
Lessor shall have the same privileges as above outlined to test any 011 well on
said fands and obtain and deliver operating expense and revenue data on each such
well and If such test and examination reveals that such oil well or wells are not
producing In paying quantities, then such well or wells shall be considered as having
ceased to produce 011 In paying quantities on the date of such test, and such well shall'
not qualify as a productive well, the acreage allocated thereto shall not be held thereby.
No shut-In royalty shall be due during the primary term of this lease.
(I) Subject to the other provIsions contained herein, after the primary terms of
this lease, Lessee shall pay to Lessor an Annual Minimum Income which shall never
be 'Iess than the amount of SIXlY AND NO/100THS ($60.00) DOLLARS per acre, for the
acreage held by this lease. The Annual Minimum Income to Lessor herein shall be paid
: within thirty (30) days following the third anniversary of the execution of this lease and .
' .. -each ;following annual perIod thereafter. Lessee shall calculate the royaltIes paid to
:·Lessor durIng such annual period and If less than such minimum payment amount, then
.-Lessee shall pay-or tender such difference to Lessor withIn such thirty (30) day perIod.
. . : . (j) In the event that Lessee Is entitled to receive from a pipeline purchaser of
:·gas production from this lease under a "take or pay" or similar provision In Lessee's Gas
Purchase Contract, a sum of money for gas production not taken hereunder, Lessee
shall be requIred to pay to Lessor, hereIn, one-fourth (1!4th) of all of such sums of
money paid to Lessee under the "pay" provisIons thereof, without reductIon,
whatsoever, which monies shall be paid by Lessee to Lessor hereIn within sIxty (60)
days from receipt thereof by Lessee. Lessee shall not be entitled to any credit upon Its
royalty obligations hereunder to Lessor or for any other reason.
IV.
This Is a paid up lease and no delay rental payments are due hereunder to
maintain this lease in effect. Except as otherwise provided herein, Lessee, during the
prImary term of this lease, may, at anytime, execute and deliver to Lessor a release
covering this entire lease, only, and thereby be relieved of all future obligations
regarding thIs lease, save those obligations which survive the termination of this lease
as stated herein. Lessee, after expiration of the prImary term, may, at any time,
execute and deliver to Lessor or releases covering any portion of the above-described
premises and thereby surrender this lease as to slich portion and be relieved of all
989
future obligations as to the acreage surrendered except as to the drainage provisions
of Article V.
V.
If, prior to discovery of oil or gas on said land, Lessee should drlll and abandon a
dry hole or holes thereon, or If, after discovery of all or gas, the production thereof
should cease from any cause, this lease shall not terminate If Lessee commences
drilling, additional drilling or reworking operations within ninety (90) days thereafter.
Such drilling or reworking operations shall be prosecuted with no cessation of more
than sixty (60) consecutive days between the completion of a well as a producer or dry
hole and the commencement of drilling or reworking operations on an additional well.
Such drilling or reworking operations shall be prosecuted with no cessation of more
than thirty (30) consecutive days. Subject to the provisions of Article XlV, If at the
expiration of the primary term, all 01' gas Is not being produced on said land, but Lessee
Is then engaged 10-bona fide drilling or reworking operations thereon, this lease shall
remain In force and effect so long as such bona fide operation or operations on said
well or any additional well or wells are prosecuted, with no cessation of more than
ninety (90) consecutive days, between the completion of a well as a producer or a dry
hole ·and the commencement of drilling or reworking operations on a subsequent well,
~and JI~ they result In the production of 011 or gas In paying quantities, so long thereafter
.. as .01[ or gas In paying quantities Is produced from said land. The term "drilling
':opera,tlons" as referred to In this agreement, shall mean actual drilling operations with a
drillil'\g rig on location on Leased Premises, together with all attendant eqUipment
needed to drill a well to the permitted depth, with the drill bIt actually making hole. The
term "~\rewol'klng operations", as referred to In this agreement, shall be construed to
mean the actual reworking or deepening of a well that on Leased Premises, with the
eqUipment necessary on location to condl,lct such reworking of such well and actually In
the operation of reworking of such well or wells and the prosecution of such operations
without cessation for longer than thirty (30) days. Only a well that has been previously
completed as a producer may be reworked. The provisions of this paragraph shall
control over the doctrine of temporary .cessatlon of production, which doctrine shall
never be construed to be applicable to this lease.
Lessee agrees that In the event an' off-premises well Is draining the leased
premises, Lessee will drill, complete and produce such offset well or wells on this leased
premises as a Reasonably Prudent Operator would under the same or similar
circumstances Lessee shall commence operations to drill such offset well not later than
ninety (90) days from the date of the first production of the draining well. Any off lease
well drilled within or whose well bore, where prodUCing, passes within 1,000 ft of the
leased property, shall be presumed to be draining the leased premises.
In lieu of drilling an offset well on the leased premises, Lessee may elect to pay
a . compensatory royalty equal to 25% of the gross production and quality of gas
990
procluced from the draining well so long as the draining well Is In production. If the
BTU content of the gas produced from the draining well Is not known, the highest BTU
content from production on any well on this lease shall be used In the calculation of
compensatory royalty due Lessor. Lessee 'shall either drill or pay a compensatory
royalty within 60 days of first production of any draining well. Lessee Is prohibited from
releasing any acreage subject to the offset well obligation, In lieu of drilling or paying
compensatory royalty. Lessee must protect the premises from drainage on a well-by-
well basis. Lessee shall not defend a claim for damages resulting from drainage by
contending that production between the leased premises and the draining land will
"balance out" In light of future production or development of the lease.
If, this lease Is kept In effect by the payment of Shut-In Gas Royalty, and gas Is
sold and delivered from an off-premise well located within one thousand (1,0001 feet,
of the leased premises, the right to continue to maintain the lease by paying the Shut-In
Gas Royalty shall cease. The lease shaH only remain In effect upon the drilling and
completing of an offset well or payment of a compensatory royalty as stated.above.
TermInation of this lease does not relieve the Lessee of paying a compensatory royalty
during the life of the production of the draining well or wells. The compensatory royalty
Is to be paid monthly.
VI .
. Lessee shall perform all terms of this lease, and any amendments thereto, In
utmost good faith, and the failure to comply with this provision shall operate as a
.' .' .. limitation on this lease to the same extent as though no such term was performed or
com~iled with.
VII.
Lessee shall have a continuIng duty and obligation to plug any well drilled or
used on this lease within 90 days of (a) the abandonment of such well as a dry hole by
Lessee of any such well or wells, or (b) the cessation of production as defined
hereunder In Article XIV, all pursuant to plugging requirements of the Texas Rallroad
Commission or Similar jurisdictional authorlly. Following such plugging on a well by. well
baSiS, Lessee shall be obligated to remove from each well site, all well equipment and
pipes and to restore the area thereof, as provided for under Article XVH, subparagraph
(g) of this lease.
VIII.
(a.) lessee Is prohibited from assigning or transferring any Interest herein leased
to lessee hereunder, In whole or In part without the prior written consent of Lessor,
which shaH not be unreasonably withheld. In the event of an assignment or partial
assignment of this lease with consent of Lessor first obtained In writing, It Is agreed that
991
the foregoing prohibition of assignment without Lessor's consent shall extend to ali
permitted Assignees, of any part 01' parcel of this lease and any such Assignment will
cause the Assignee thereof to becOme jointly and severally obligated With Lessee to
perform all express and Implied obligations owed by Lessee herein to Lessor'(and the
other royalty owners claiming under Lessor) as to all covenants, terms and prOVisions of
this iease, express or Implied, which shall be considered as covenants running with the
title of this lease and binding upon any permitted assignee or sub-lessee of Lessee and
shall extend to their respective permitted and consented to heirs, successors and
assigns. Any attempted assignment or partlai assignment of this iease without the
written consent of Lessor shall be null and void, In no event may any assignment of this
lease ever operate to reduce or extinguish the obligation of Lessee, which accrued prior
to such assignment 01' partial assignment. Lessee agrees that it's permitted aSSignments
of this lease, or any part thereof, shall not be binding or effective until It furnishes
Lessor with copies of such aSSignments. It Is agreed that the term "ASSignment" shall
extend to any transfer of lease rights, conditional or unconditional, whether labeled as a
farm-out, aSSignment, transfer, or some other label Involving a transfer or permit of any
or all of Lessee's rights hereunder to a third person.
(b) Lessor may fully aSSign or transfer any of Its rights hereunder, but in such
" " event, It is agreed that any such change, transrer or division of Lessor's rights
, .'
:\
. hereunder shall not operate to enlarge the obligations or diminish the rights of Lessee.
. No.s~le or assignment by Lessor shall be binding unless Lessee has been advised In
.wrltlng of such conveyance, In the event of the death of any person entitled to rentals,
.; royalties or other payments hereunder, Lessee may make such payments to the credit
": of the deceased or the estate of the deceased, until such time as Lessee Is furnished
With :':proper evidence of the appOintment and qualification of an executor or
administrator of the estate, or if there be none, then until Lessee Is furnished with
eVidence as to. the heirs or devisees of the deceased and that all debts of the estate
have been paid, at which time all such payments shall be made to the appropriate legal
representative, heir or devisee of such deceased owner,
IX,
Lessee agrees to use only so much of the surface of said lands as Is necessary to
exercise Its rights hereunder. Lessor does not warrant title to the Oil and Gas Leasehold
Estate covered hereby. Lessee represents that It reviewed and approved title of Lessor
and represents to Lessor that the lands covered hereby were free of third party claims.
Lessee, In connection with Its operations upon the lands covered hereby, shall have all
those rights herein expressly provided for, with all other rights, which could be applied
to operations upon lands covered hereby, being expressly reserved by Lessor. Rights to
surface use and penetration of formations beneath the surface of lands herein
described, by Lessee are subject to all terms and provisions o~ this lease and are non-
exclusive, with exception of those areas or locations upon which are situated Lessee's
operating drilling, production, treatment, storage, separators or other related
992
equipment to such operations whIch shall be exclusively used by Lessee durIng the term
of such operations, subject to reasonable access rights thereto by Lessor for the
exercise of Lessor's rights hereunder.
x.
In the event Lessor consIders that operations are not at any tIme being
conducted In compliance with this lease, Lessor shall notify Lessee In writing of the
facts relied upon as constituting a breach thereof, and Lessee, If In default, shall have
thirty (30) days after receIpt of such notIce In which to comply with the obligatIons
Imposed by virtue of thIs Instrument. Failure to correct such breach within the time shall
cause the lease to forfeIt and revert to Lessor.
Xr.
· .' b) On or before 90 days from the date of execution of this lease, Lessee shall
drlll or cause to be drilled a water well to a minimum depth of 1800' not
to exceed a depth of 2,200' sufficient to secure production of water from
the Trinity (or Carrizo) sands. Lessee shall install all equipment, tanks,
pumps, and delivery lines as necessary to secure and deliver water as
stated herein. Lessee shall have the non-exclusive license to use such
water as It deems necessary for the drilling, completion, and reworking
operation of any well on or off the leasehold that It drills, completes, or
reworks as operator. Lessee shall bear all expense of upkeep,
maintenance, repair, equipment replacement, and cost for such well.
Lessor shall at all times have full use and enjoyment of water from the
well, and may at Its own expense install pipe, tanks, or other delivery on
the land. llt1e and ownership of all equipment and property shall pass to
Lessor upon the eXpiration of the lease. For all water to be used drilling
operations off-lease, Lessor shall Install pipe and delivery apparatus
sufficient to deliver water to tank trucks, at a locatIon selected by Lessor,
ImmedIately outside the boundary fence of the of the surface of the
property covered by thIs lease. Lessee's license to use water from the
well Is exclusive to Lessee and Is non-assIgnable. Lessee shall not use any
water from the well for any purpose other than Its own drilling,
completion, and reworking operatlonsi and
993
c) On or before one year from the date of execution of this lease, Lessee
shall dr1l1 or cause to be d"llIed a second 011 or gas well to the depth of
9,000' or to the base of the Olmos formation If shallower, below the
surface sufficient to test and produce commercial quantities of
hydrocarbons from the Olmos formations
If Lessee can demonstrate that Is unable to secure a drilling rig during the time
periods required herein, such time periods may be extended for no more than sixty
days. If Lessee falls to comply with any of the forgoing provisions, It shall pay lessor
liquidated damages in the amount of $150,000 per provision not complied with ,no later
30 days from the date of such failure to comply with the terms Of this article.
XII.
By the acceptance of this lease, lessee agrees to all of Its terms, provisions and
conditions, which shall also Inure to the benefit of and be binding upon Lessee's
successors and permitted assigns. All payments of monies hereunder by Lessee to
Lessor are payable to lessor In Webb County, Texas, at the address herein stipulated or
such':other address as Lessor notifies Lessee, In writing.
XIII.
. ' In the event this lease Is continued In force and effect by production of 011 or gas
.. , " !n paying quantities or by drilling operations (as defined under Article V of this lease),
, which· result In production of all or gas In paying quantities which perpetuate this lease
within the meaning of Article II hereof, on or after the expiration of the primary term of
this lease, then, In such event, It Is agreed that such production shall only perpetuate
this lease as to that well unit acreage which Is equal to that amount of acreage per well
which such well will reasonably drain, subject to the provisions dealing with reduced
production and marginal wells, hereafter defined. In no event may any well ever
perpetuate lease acreage In excess of forty (40) acres, and as to all other acreage
covered hereby, Lessee covenants and agrees, subjectto the provisions for Continuous
Drilling Operations as hereinafter provided, to execute and deliver to Lessor a
recordable written release as to any and all Of such other acreage not so allocated to a
producing or shut-In well or wells. The acreage allocation per well shall be made within
sixty (60) days following completion of the last well completed on this lease or the
cessation of drilling operations under the continuous development provisions of this
lease, whichever time period occurs later. In the event Lessee falls to make such unit
allocations following (60) days' wrllten notl~e from Lessor, Lessor reserves the right to
make such unit allocations based upon the acreage area which any such completed well
will reasonably drain (not to exceed however the above unit sizes), by the filing of unit
deSignations of record In the Office of the County Clerk of Webb County, Texas, and the
994
acreage covered hereby which Is not allocated to any such well or wells shall no longer
be held by this lease.
In the event that this lease has been perpetuated by production of all or gas In
paying quantities as above provided for on or after expiration of the primary term,
hereof, then the release of such unallocated acreage to well unit or units may be
postponed only In the event that within a period of ninety (90) days after the expiration
of the primary term hereof or the completion of the last well drilled on this lease
fol/owlng expiration of the primary term (whichever occurs last) Lessee commences
drilling operations (with adequate drilling rig and equipment to drill and complete the
contemplated well) of an additional well or wells on such unallocated acreage and, In
such event the entire lease shall remain In force so long as such drilling operations on
said additional well or wells are prosecuted with reasonable diligence, -and If after the
completion or abandonment of any such well, Lessee commences the drilling of an
additional well or wells within ninety (90) days from the completion or abandonment of
the preceding well, and If Lessee continuously conducts drilling operations In good faith
and with reasonable diligence on said lease, without any cessation for longer than
thirty (30) days, this lease shall remain In full force and effect duling such drilling
operations and until the end of ninety (90) days after the completion or the
,abandonment of the final wel/; at which time, this lease as to all rights granted
" .. hereunder shall automatically terminate as to all acreage covered hereby, LESS AND
EXCEPT all acreage allocated to a producing all or gas well or wells on a well unit by
well i,\.Jnlt basis as hereinabove provided for. Lessee shall be obligated to release-all
"
acreage and depths not so allocated to a producing 011 or gas well or wells as herein
"provIded. The term "completion" as used herein, regarding any well drilled on this
, \ lease; shall have the following meanings: (a) as to a dry hole, shall mean the date of
cessation of drilling by the drilling rig on location; (b) as to a producer of oil, shall mean
fifteen (is) days following date of cessation of drilling by the drilling rig; (c) as to a
producer of gas which does not Involve the fraclng of said well, shall mean thirty (30)
days following the date of cessation of drilling by the drilling rig; and (d) as td a
producer of gas which extends to fraclng of the well, shall mean sixty (60) days
following cessation of drilling by the drilling rig.
It Is further agreed that at the expiration of the primary term, or at the end of
such extended period of drilling operations, as hereinabove provided for under this
paragraph, whichever occurs later (conditioned upon this lease or any part thereof
being perpetuated by production at such time), production from any of said well or
wells shall only perpetuate this lease as to depths above the base of the de~pest all or
gas strata from which production actually occurs In each such well bore hole, and this
lease as to all rights granted hereunder on a well unit by well unit basis below the base
of each such 011 or gas strata shall terminate. The provisions of the foregoing shall be
applicable on a well unlt-by-well unit basis, and the acreage and strata herein alloca,ted
to each well on a well unit basis shall be held hereunder only for and so long as such
well to which such acreage relates produces oil or gas therefrom In paying quantities, or
995
this lease ,as to any such unit or units, Is othelWlse maintained In force and effect under
other provisions hereof. Horizontal wells shall hold wells In the form of a unit agreed '
II'
upon by Lessor or Its representative. •
Lessee agrees to execute proper releases at the appropriate times to
acknowledge termination of this lease as to such undeveloped acreage or strata or
cessation of production of any well unit or units, from time to time, during the term of
this lease,pursuant to provisions of the foregoing paragraphs. .
"
The acreage retained under this lease as to each producing well, (except the well
bore gas and/or 011 well) as hereinabove provided, shall be selected by Lessee In a
contiguous blocked form surrounding each such well, except in the case of horizontal
wells, which shall be selected as provided for above.
At such time as a partial termination or terminations of this lease occurs under
the provisions of the foregoing paragraphs (requiring releases by Lessee), each such
retained tract and/or retained well bore as to which this lease has not terminated shall
be co.nsldered as a separately leased tract and/or well bore In the same manner as
though Lessor had executed separate and distinct leases covering each such tract
and/or well bore as to the 011 and gas strata held thereby. Notwithstanding a partlal
'termlnation of this lease under the above provisions, It Is agreed that Lessee shall have
:and r.etaln such easements of Ingress and egress over those lands covered hereby as
, . shall ;be necessary to enable Lessee to develop and operate the portion or portions of
this lease that continue in force and effect by the production of 011 or gas therefrom,
.'and I~ Is further agreed that It shall not be necessary for Lessee to remove or relocate
,any plpellnes, tank batteries or other surface equipment or Installatlon from any portion
of this lease which have terminated, for so long as same continue to be used for
development and operation of such portion of this lease as Is continued In force and
effect.
It Is agreed that the foregoing provisions shall not be construed to reduce
Lessee's duty to reasonably develop all of this lease In the same or similar manner as
would a Reasonably Prudent Operator under the same or similar facts and
circumstances, with Interests of itself and lis lessor in mind.
XIV.
Royalties payable to Lessor In the manner hereinabove provided for are due and
payable to Lessor within a period of sixty (60) days following each month's production
of 011 or gas produced and sold from the premises. Thereafter, such payments shall be
delinquent and will bear Interest at the rate of Ten (10%) percent per annum,
compounded monthly, until paid. In the event that such royalties ar~ not paid and
become delinquent, and there Is no title dispute or title defect, this lease shall
terminate Ipso facto on the date that such royalties were due and not paid. In the event
996
such royalties are not paid and become delinquent, Lessor wlthqut other notice than
this paragraph, shall be authorized to flIe suit In the District Court of Webb COunty,
Texas, for recovery of such delinquent royalties, together with such Interest thereon
and expenses of collection thereof, Including court costs, expert and accounting costs,
and reasonable attorneys fees. Notwithstanding the foregoing provisions, It Is
understood that a greater length of time might be required following first production to
obtain title examination and proper division orders, and It Is therefore agreed that such
time period of sixty (60) days shall be extended for an additional reasonable period of
time for such purposes, not to exceed, however, an additional sixty (60) days, or until
such time as division orders by Lessor, guaranteeing their respective Interest In such
production, are furnished to Lessee, whichever occurs first. If required by Lessor,
Lessee agrees that the form of drvlslon order selected by Lessor, which only certifies
royalty ownership of Lessor, shall constitute the agreed upon form of division order
between the parties notwithstanding any statutory provision to the contrary. With
respect to all third party royalties payable hereunder, Lessee assumes all obligations for
the proper payment of all third party royalties.
XV.
" lt Is agreed that Lessor may hereafter execute leases for the exploration,
,development and production of any minerals not covered by this lease Including but ,not
IImlte,9 to 011 and gas formations (not then covered by this lease), uranium and other
'fjsslonable materials, to third persons and to grant rights to such third persons to use
the surface for such purposes and to penetrate the strata and horizons covered hereby,
1 provided that any such subsequent lease expressly provides that same Is subject to this
011 and gas lease, but any such minerai lessee shall be authorized to penetrate the 011
and gas formations covered hereby provided that such penetration does not unduly
Interfere with existing operations of Lessee hereunder.
XVI.
Lessor shall be entitled, upon request In writing to Lessee, to be furnished with
copies of any and all tests, together with all of the Interpretations of the tests, made of
any gas production from the premiSes, setting forth the quality of such gas, Its BTU
content and any constituents of gas, such as, but not limited to, distillate, ethane,
propane, butane, etc. Further, Lessee agrees to furnish to Lessor upon their written
request, true copies of any soniC, electrical, porosity or other type of log or survey of
any such well together with the analysiS and Interpretation of Information and data from
any core tests or wire line tests conducted on said well or wells. Further, Lessor (or
Lessor's representatives) shall have access (at their own risk) to the drilling floor of any
well on this lease and to be furnished with all drilling and testing Information, which
Lessor agrees to keep confidential during drilling, testing and completion of said well.
Lessor shall be entitled to full facts and Information with respect to any geophysical
operations conducted by Lessee upon this lease, or In conjunction with this lease. In
997
this connection, Lessor shall be entitled to be furnished by Lessee, at any time during
the term of thIs lease or wIthIn four (4) years following the expiration of this lease,
whichever Is longer, with the followIng:
1. The final base map showIng locations of all 3-D senderos (all geophone
stations and vIbrator points) along which data was recorded.
2. Paper seismic sections of data recorded along all 3-D senderos on lands
hereInabove described and to Indude one-half (1/2) mile outside the boundaries
thereof, of such additional distance as to jOint operations Involving adjoInIng leases so
as to extend the length and width of such adjoining leases.
3. Both final stack and migrated seIsmic sections will be In Lessee's standard
format which will be a scale of five (5') Inches per second and a trace spacing of twelve
(12) traces per Inch. The title block will provIde conventional field and processing
parameters. All such data and Information shall be kept confidential by the undersigned
Lessor and used by them only for their own knowledge and development of theIr own
lands located in Webb County, Texas. The undersIgned Lessors agree to Instruct any
representative employed by them to view and take notes on such seismic data to keep
such.lnformatlon confidential outside of the use of saId Lessors.
" ,
" ',: 4. Lessee agrees l'O notify the undersigned Lessor, with notIce of completion of
"
any geophysical work performed on this lease or any adjoining leases In conjunction
with this lease and shall provide all of such data, maps and Information referred to
lIbove.; as well 8S all Interpretation and analysis of such data or Information, If any, at
'any time during such perIod above stipulated as requested by Lessor. In addition,
Lessor reserves the right to have Its own geophysIcIst or other representative view such
3-D seismic or other geophysical data obtained from geophysical operations conducted
upon thIs lease or In conjunction wIth this lease by Lessee (any other entity authorized
by Lessee). Lessee agrees to maIntaIn control and authority over all of such geophysical
data secured from eXploratory operations on thIs lease or In conjunction with this lease
for viewing by an authorized representatIve of Lessor. Lessor or Lessor's geophysicist or
other representative may view the data, maps, or InformatIon mentioned In this lease,
together with all Interpretation and analysis of such data or Information, durIng normal
business hours and upon 10 business days written notice from Lessor to Lessee. Lessee
shall make all of such data and Information available for viewing and copying by Lessor
or Lessor's representatives under the aforementioned confidential agreements. Such
presentation and showrng of data shall extend to Lessor's programs and workstations In
order to facilitate the Interpretation of such data for the benefit of Lessor.
XVII.
Lessee agrees to notify Lessor and Lessor's representative prior to entry upon
Leased Premises by Lessee to go upon Leased Premises, to conduct drilling, re-worklng
998
or exploratory operations upon lands covered by this lease and the approximate
location of such operations. Lessee agrees to coordinate with Lessor's representative
prior to beginning operations, In order to agree In writing on Size, location and payment
for surface damages, on drill Sites, roads, pipelines, flow lines or any other construction
that may be needed.
It Is further agreed:
(a) Lessee Is authorized the non-exclusive use of existing roads upon leased
premises and be required to use perimeter roads where practical, provided that Lessee
first reconstructs such roads as all weather roads capable of bearing heavy "oilfield"
type of equipment and keeps such road or roads so used, maintained and In good
repair. Lessee agrees to apply and maintain according to the manufacturer's
specifications, "Dustchchek" or any similar product approved by the Surface owner to all
roads, drill Sites, or other sites used in Lessee's operations. In the event such existing
roads do not extend to areas on the lease upon which Lessee desires to conduct Its
operations, then lessee shall be authorized to construct new lease roads (whether one
or more than one) which are requlr!ld for providing access to Lessee to the area of this
lease upon which Lessee has elected to conduct drilling operations hereunder. In such
evenli such new lease roads must not exceed forty (401 feet In wIdth, shall be
,constructed as an aI/ weather road (whether one or more and by the route designated
, by Surface Owner) capable of bearing heavy "oilfield" type of equipment and shall be
kept l,n good repair and maintenance throughout the term of this lease.
"
, ,("After a road Is no longer needed In Its operations, Lessee shall, at the option of
'the surface owner, remove the caliche and/or other road materIal from the surface and
shall restore the lands utilized for such roads to their original condition. For the
propose of this lease, to restore the surface to Its' "original condition" shall mean to
remove any foreign materials, do any remediation required and to replace any topsoil
which was removed from such site during or preceding Its construction. Lessee shall
then disc such restored site with a heavy brush type disc and then seed with grasses
selected by Surface Owner at a rate of not less than eight (8) pounds per acre. At the
option of the 'lessor, Lessee shall perform such dlsclng and seeding work at a time
designated by Lessor or pay the Lessor so that the Lessor may perform such work at
their convenience.
Lessee will Install new drainage culverts Inroads used or constructed by It of
sufficient size to keep water from washing out the road and/or backing up normal water
flow. Lessee wlll water lease roads at times of heavy traffiC to prevent dust, and dust
accumulation on vegetation, caused by such traffic. Lessee will keep the sides of the
roads cleared to their original width of construction by mechanical mowing. Lessee
agrees to post proper and adequate speed limit slgnage limiting traffic to twenty (20)
mph.
999
(b) With respect to divIsion or InterIor fences, (as distinguished from boundary
fences, which may not be cut by Lessee), between the pastures comprIsIng leased
premIses, Lessor believes that adequate fence crossIngs are already' available for
existIng roads or senderos and that no new opening need to be made. However, If after
agreement with Lessor, It becomes necessary to cut an existing divIsIon or InterIor
fence In cpnnectlon with a new lease road to be constructed by Lessee along a route
required by Lessee to conduct Its operations hereunder (as authorized under the
preceding subparagraph (a) of this paragraph), or to widen an existing fence crossing,
then In either of such events, only, may Lessee cut such existing or Interior fences
crossed by such proposed lease road as required for access way of Lessee, provIded
that prior to any such cuttIng, Lessee must first place two (2) "corner type" posts with
"H" braces on eIther sIde of such proposed cut with the fence wIres securely fastened
thereto so as to prevent any sagging of fence wires when the cut Is made between such
"H" braced posts. Lessee shall use four (4") Inch oilfield type eight (8') foot long steel
pipes set firmly at least three (3') feet Into the soli, embedded In concrete with three
(3'') Inch steel pipe braces between such double steel pIpes on either side of such
proposed cut. Lessee shall then Install a double eight (8') feet one (1'') Inch steel pIpe
gate .Into such opening, whIch shall be hung from the opposite corner posts In such a
manner that the bottom of such gate shall be no higher than sIx (6'') Inches above the
,5011 and shall be at least five (5') feet In height, and approXImately eIght (8') feet In
width ,so as to form a closure of such constructed opening. Such gate shall be kept
locked by Lessee, wIth chaIn and lock with separate slots for a separate locks for Lessor
, ' and f9r surface owner so as to allow passage through such gate opening. All gates to
",' . be constructed by Lessee on the leased premIses shall be Single as opposed to double
,, gates.
(c) Lessee shall at all tImes except when passIng through, keep the entty gate
locked. Lessee, prIor to Initiation of drlllh1g operations shall, at Its own expense,
provIde a bonded gate guard, designated by surface owner, at the entry gate, who shall
maintain such entry gate locked at all times except when being traversed by authorized
personnel of Lessee.
Lessee shall exerCIse Its best efforts to keep the Lessor reasonably Informed of
the names of the representatives and contractors which Lessee Is utilizing In the
conduct of its operatIons on the lands covered hereby, and the business purpose for
beIng on the premIses. Lessee agrees to desIgnate In writing the name of the person or
persons to be present from tIme to time on said premises as current operations are
beIng conducted, with whom surface owner may dIscuss such matters and wIth whom
the Lessor may resolve any claIm for use, abuse, Injury and/or damage to livestock,
wild life, surface area or Improvements on saId premises, occasioned by or arIsing from
Lessee's operations or other activity on ,the leased premises. Lessee Is responsible for
the actions of all Individuals who enter upon the leased premises to perform any activity
under this lease.
1000
(d) Under no circumstances shall any officer, agent, representative or employee
of lessee or any contractor or subcontractor or sublessee carry firearms on lands
covered by this lease, nor shall any such person collect artifacts, Including but not
limited to arrow heads, collect shed horns, collect fire wood, nor do any hunting,
fishing or bring any dogs on any land covered hereby. The presence of drugs and
alcohol on the leased premises are strictly prohibited. Any person violating the forgoing
prohibitions, or, using illegal drugs, alcohol, or on the premises without a'uthorlty or
business, shall be ejected and barred from the premises permanently.
(e) In the event exploratory operations are conducted under this lease, Lessee
agrees that all shot holes will be located a sufficient distance so as not to cause any
damage to such Improvements. lessee agrees to promptly fill In all shot holes and
restore the sUrface of the land to substantially the same condition as It was In before
the commencement of lessee's operations. In conducting seismic operations on leased
premises, Lessee agrees to use a high degree of care In keeping bulldozer operations
from making any unnecessary cuts Into the turf of the grass or otherwise unnecessarily
disturbing the surface of the land covered by this lease. Lessee shall terrace all
senderos on slopes of hills to minimize erOSion to lands of surface owner.
" (f) Prior to commencing drilling or re-worklng operations, Lessee shall promptly
fencEl, all pits to be used therefore, Including all salt water reservoirs with bull panel
fencing hung on such posts as to provide a strong enough enclosure so as to prevent
entry lnto such area by wlldllfe and livestock. Regarding any drilling fluids which are
harmful to livestock, wildlife or the propagation and growth of grass for livestock on
said lands, or to' the environment such as oil-based mud or harmful chemicals, Lessee
agrees to store the same In protected non-seeping reservoirs and following, drilling
operations, to remove the same from such reservoirs on such drilling location and to
dispose of the same off of this leased premises, at such time as such drilling fluids and
pits are no longer needed to conduct drilling or reworking operations on any well
location.
(g) Upon completion of drilling operations upon each well, which may be drilled
upon this lease, Lessee shall, with respect to the drilling location, perform the following
work:
1) If such drilling operations result In the completion of an 011 and Gas
well, then follOWing such completion and Installation of all production
equipment upon the drill site location, Lessee, with respect to the
remainder of the drill site location and the "earthen pits" constructed
thereon, Lessee agrees to restore each drill site area occupied by such
Pits, by the removal therefrom and froni this lease, of all drilling flUids,
which may contain hazardous or harmful chemicals, all oil base mud and
all other harmful chemicals as contained In such pits (which, as above
1001
provided for, were required to have been stored In protected non"seeping
reservoirs) and to then allow such pit to be dried and following the drying
of such pit, to then fill the same from the surrounding earthen "berms" In
such a manner so that when filled, the upper fill shall consist of the
original top soli excavated In construction of such pit. All pits which
contain harmless drilling fluids shall be allowed to dry prior to restoration
of such pit as above provided for, which shall then be filled In the same
manner as above provided for so that the top soli originally excavated will
be replaced over such pit or pits and restored to Its' "original condition".
2) If such drllling operatlons result in a dry hole, Lessee shall remove
all well equipment, pipes and other materials related to drilling and
completion of such well as a dry hole and then proceed to remove
hazardous materials, fill pits and to restore the entire drill site location as
hereinabove required under subparagraph (g)(1) of this Artlc/e, which
restoration shall extend to the entire drill Site location.
(3) Upon completion of any well on this lease as a producer of 011 or gas,
Lessee agrees to fence the area upon which any production or storage or
treating eqUipment Is situated with a good and substantial fence capable
of turning wild livestock, except as to the well Itself which may be left
unfenced at Lessee's election. Such fenced area shall be kept In good
condition throughout the term of this lease In which such well Is not
abandoned and plugged. Lessee shall be required to maintain and paint
when necessary all drill site equipment, fences, gates and roadways on a
continuous basis.
(4) Upon cessation of production and abandonment of the producing well
on each drill Site, Lessee shall be required to plug the well as required by
Article VII of this lease and to clean up and remove all well production
eqUipment, pIpe, underground pipes and other equipment Installed by
Lessee on such drill site location related to the drilling, completion and
production from such well, with removal of the caliche or other location
materials underlying such well equipment and perimeter as stated above
and restore to I~ "original condition".
All remedial, clean-up and restoration work shall be performed no later than four
(4) months after completion or, abandonment of any well drilled on said lands or at an
earlier date If weather conditions permit.
(h) Lessee will not Inject any salt water or other deleterious substance Into the
subsurface of Leased PremIses. Nor shall Lessee ever have the right to store or dIspose
of salt water on Leased Premises or adjoining lands or adjoining water tables to this
lease. All saltwater must be removed from Leased Premises.
1002
(I) Lessee agrees that in the conduct of any of Its operations, or those of Its
agents, employees or Independent contractors, It will not allow any cans, papers, trash,
old equipment, parts or any debris to be left on Leased Premises, but will continuously
keep such premises clean and In an orderly state.
(j) Lessee shall reqUire all pipe brought upon leased premises for any pipeline
purpose be comprised of entirely new pipe, fittings and appurtenances, all of more than
sufficient grade and quality to be utilized for such pipeline purposes Lessee Is prohibited
from bringing upon any of the leased premiSes, any used pipe or any new pipe with
scales such as defined In the Texas Regulations for Control of Radiation (TRCR) Part 46
(Licensing of Naturally occurring Radioactive Material (NORM), (adopted and published
June 1, 1993 In 18 Tex. Reg. 3516) effective July 1, 1993. Lessee must Inspect all of
drilling pipe brought upon the leased premises and assure Lessor, In writing, that such
pipe does not violate the foregoing Texas Regulations for Control of Radiation, All
oilfield pipe following completion of any well of this lease, shall be removed from lands
covered by this lease, unless such pipe Is to be used at another location In which event
shall be moved to such new location and stored on racks•• During the time that such
drilling pipe Is on location, such pipes shall be stored on racks In such a manner that
they r.;1II not make contact with the surface of such location.
Prior to the commencement of any operations on the leased premises,
and at all times thereafter during the existence of this lease, lessee
shall furnish valid Insurance certificates evidencing coverage, Including
the following:
I. WORKER'S COMPENSATION INSURANCE: covering all employees
engaged In operations on the lands subject to this agreement In
compliance with the laws of the state of Texas and EMPLOYER'S
lIABllfIY INSURANCE of not less than $1,000,000 for Injuries or
death of anyone employee and $10,000,000 for Injuries to or
death of more than one employee resulting from anyone aCCident;
II. GENERAL PUBLIC LIABILfIY AND PROPERlY DAMAGE: In
connection with all operations conducted hereunder, with bodily
Injury and death limit of not less than $1,500,000 for Injuries to or
death of more than one person resulting from anyone accident,
and not less than $10,000,000 for Injuries to or death of more than
one person resulting from anyone accident; and properly damage
limited of not less than $1,000,000 per accident, and $5,000,000
aggregate. Such property damage Insurance shall not exclude
liability for loss of or damage to properly on or above the surface
of the earth arising from a blowout or cratering of a 'gas or all well,
1003
and shall not exclude damage to the earth arising from spills of oil,
chemicals or other deleterious substances or materials;
III. AUTOMOBILE PUBLIC LIABILITY AND PROPERTY DAMAGE: In
connection with all operations conducted hereunder Including
coverage on owned and non'owned automotive equipment with
bodily Injury or death limit of not less than $1,000,000 for Injuries
to or death of anyone person resulting from, anyone aCCident,
and not less than $10,000,000 for Injuries to or death of more than
one person resulting from anyone accident, and property damage
limit of not less than $10,000,000; and
iv. Excess umbrellas coverage In the amount of at least $5,000,000 .
Prior to beginning any operations on the premises covered hereby,
Lessee shall furnish Lessor current certificates of Insurance Issued
by Its Insurers In form satisfactory to Lessor under all such poliCies
as evidence that all of such Insurance is carried and providing that
not less then ten (10 ) days prior written notice of material change
In, cancellation of, or refusal to renew, such Insurance, or any part
thereof, will be given to Lessor. All such certificates and written
notices shall be addressed to Lessor at Its address appearing on
page One of this Lease. Such Insurance certlflcates shall be
original Issued by Lessee's Insurance carrier or agent and shall not
be a previously Issued certificate. In the event the Insurance
poliCies maintained by Lessee under Subparagraph II. and Ill. above
provide for combined single limit coverage, the minimum coverage
shall be $1,000,000.
v. Maintenance by Lessee of said Insuran,ce Is In no manner to be
considered a limitation on the Indemnity obligations Imposed on
Lessee herein.
vi. Lessee shall assure that all sub-contractors, Lessee's Invitees and
licenses shall either have Insurance coverage comparable to the
requirements set out above or be covered by Lessee's policies.
vII. No requirement Imposed by Lessor on Lessee In this lease shall be
considered maintenance or reservation of a control or
participation by Lessor In Lessee's operations.
vlll. Lessee agrees to comply with all rules and regulations of the
Environmental Protection Laws of the United States of America and
of the State of Texas, whether or not such laws, rules 01'
regulations apply to Lessee or Lessee's operations, hereunder.
1004
le. LESSEE SHALL AND BY EXECUTION HEREOF, DOES HEREBY,
INDEMNIFY AND HOLD LESSOR HARMLESS FROM ANY CLAIM OR LIABlUTY,
DAMAMGE, DAMAGES, OR CLAIM FOR DAMAGES OR INJURY, BY REASON 01"
ANY OCCURRENCE OR HAPPENING INCIDENT TO THE CONDUCT OF ANY
OPERATION BY LESSEE, ITS AGENTS, SERVANTS, OR CONTRACTORS,
INVITEES AND LICENSEES ON THE LANDS COVERED BY THIS OIL AND GAS
LEASE, INCLUDING BUT NOT LIMITED TO ANY DAMAMGE OR INJURY WHICH
RESULT IN THE VIOLATION 01" ANY ENVIRONMENTAL PROTECTION LAWS
OR OTHER SlMILAR LAWS RELATED TO CLAIMS, LIABILITIES OR PENALTIES
OF THE FEDERAL OR STATE GOVERNMENTS DUE TO INJURY, DAMAGE OR
CONTAMINATION TO THE VIRONMENT OF THE SURFACE OR SUB-SURFACE
OF LANDS COVERED BY THIS LEASE OR ADJOINING THIS LEASE AND LESSEE
AGREES TO PERFORM ALL REMEDIAL WORK REQUIRED BY ANY SUCH
GOVERNMENTAL ENTITY RELATED THERETO, OR AS OTHERWISE PROVIDED
IN THIS LEASE, WHICH EVER OBLIGATION IS GREATER, AND INCLUDING
BUT NOT LIMITED TO ANY AND ALL INJURY OR DAMAGE TO PERSON OR
PROPERTY FROM ANY CAUSE.
" (I) Lessee shall pay the Lessor for all damage to the land, brUSh, grasses and
crops':on said land, cattle and livestock resulting from any operation or exercise of rights
here~rder, as well as for all damages to fences, water wells and reservoirs and all other
Improvements of the Lessor, now or hereafter situated on the surface of this leasehold,
which, are damaged, Injured or destroyed by operations of Lessee or any employee,
" representative, agent or guest of Lessee.
(m) Lessee shall bury all pipelines below ordinary plow depth; provided that
temporary lines used for drilling or re-worklng operations shall not be required to be
burled If same are removed upon completion of such operations.
(n) Lessee shall use no water from the surface of or below Lessor's lands except
as stated herein. Lessee shall bury any pipelines that cross ranch roads In such a way
to not Impede traffic thereon and not leave such pipeline exposed to damage by heavy
vehicles.
(0) Lessee shall erect, at a distance not to exceed twenty-five (25) feet from
each well on the premIses covered by this lease, a legible sign on which shall be stated
the name of the operator, the lease deSignation, the name of the well, and the Railroad
Commission lease number. Where two or more wells on the same lease whether by
Individual flow line connections direct to the tank or tanks or by use of a multiple
header system, each line between each well and such tank or header shall be legibly
identified at all times, either by a flrmly attached tag or plat or an Identification properly
painted on such line at a distance not to exceed three (3) feet from such tank or header
1005
connection. Said signs, tags, plates or other Identification markers shall be maintained
In a legible condition throughout the term of this lease.
(p) Lessor shall not be required to sell Lessee caliche. Lessee shall use the type
and quality of caliche required by Lessor. No caliche shall be mined from the surface
unless agreement Is reached on source and payment therefore. All caliche used for
operations shall be returned to the original source after a site or a road Is no longer In
use.
(q) At the option of the Lessor, all permanent well and facility locations will be
fenced with King Ranch Wire, or heavy bull wire panels. When fencing a well and
related facilities, an area 150' x 150' will be enclosed to accommodate the entry of
reworking and other equipment to such drill site. Temporary enclosures must· be
erected In a manner acceptable to the surface owner In order to assure their ability to
turn livestock, wildlife and Withstand weather and other forms of stress.
XVIII.
Notwithstanding any provision contained herein or Implied by law, to the
contrary, Lessee agrees that prior to Initiating or commencing any seismiC, drilling or
rewotklng operatlpns, to perform the following:
. A. Seismic Operations:
(1) Secure from Lessor written pernilsslon to conduct seismiC
operations on the land subject to this lease after payment of
surface damages.
(2) Provide Lessor with all copies of seismiC permits,
B, Drilling Operations:
(1) Furnish Lessor a copy of all permits from any regulatory authority for
such drilling operations, accompanied by a plat reflecting the actual location of
such drill site and the name of the Permittee, Lessee agrees that such Permittee
shall not be changed or altered without prior notification to Lessor In writing with
full facts and Information of any sucli alteration.
(2) Furnish Lessor with the name and address of the drilling company who
shall perform such operations and the name, address and telephone number of
the person In charge of such drilling operation.
1006
(3) Inform Lessor, in writing, of the date of entry on Leased Premises to
commence any operation on Leased Premises after staking a location thereon.
B. Reworking Operations:
(1) Furnish Lessor with copies of any re-worklng permits from any
regulatory authority, together with facts and Information regarding the type and
extent of such reworking operation contemplated, the type of equipment to be'
,used and the name and address of the operator of such eqUipment.
(2) Notify Lessor of the entlY date for such operations.
XIX.
Lessor and Lessee agree to the following miscellaneous provisions:
(a) Lessee shall take the highest degree of care and all proper safeguards to
protect said premises and to prevent theft of oil, gas and other hydrocarbons produced
from:.sald lease. this includes, but Is not limited to, the installation of all necessalY
eqUipment, seals, locks or other appropriate protective devises on or at all access points
at the lease's production, gathering and storage systems where theft of hydrocarbons
can occur. Lessee shall be liable for the loss of any hydrocarbons resulting from thell:
and shall pay the Lessor 'royalties thereon as provided In Article V above, on all oil, gas
or other hydrocarbons lost by reason of theft.
. (b) No well may be drilled or any equipment be placed within Five HUNDRED
feet (500? of any structure, water well, stock pens, or stock tank now existing or
hereafter located on the property without Lessor's written permission.
(c) It Is expressly agreed that no express statement of a covenant contained
herein shall constitute a waiver or abandonment of any covenant Implied In equity or at
law, and Lessor shall have the benefit of all such implied covenants. In the event of a
conflict between an express covenant set out herein and a covenant Implied at law or In
eqUity, the express covenant set out herein shall govern the rights of the parties to the
extent of the express covenant, Insofar as there is a conflict between It and the Implied
covenant, but without such a conflict, both express covenants and Implied covenants
shall govern the rights and relationship of the parties.
(d) This 011 and Gas Lease shall be executed and acknowledged by Lessor and
Lessee, In duplicate originals and when Lessor Is In receipt and possession of a fully
executed and acknowledged duplicate original of this 011 and Gas Lease, Lessor shall
execute a memorandum for recordation purposes of this 011 and Gas Lease on a form
approved by Lessor, delivering same to Lessee for recordation In the Office of the
1007
County Clerk of Webb County, Texas. It Is agreed that neither party herein shall record
their duplicate original of this 011 and Gas Lease unless such recordation becomes
necessary to enforce their rights hereunder. Each duplicate original shall be fully
effective and binding upon the parties, whether or not both duplicate originals are
presented for any such enforcement. The provisions of this 011 and Gas Lease are
binding upon the parties hereto and their respective successors and assigns. The
pronouns of gender shall Incfude the other genders, and either the singular or the plural
shall Include the other. Lessee, by Its acceptance of this lease, agrees and obligates
Itself to all terms and provisions of this lease. Lessee agrees that upon Its receipt of the
notice of this 011 and Gas Lease for recordation purposes from Lessor, that It shall file
same of record and will deliver to Lessor, a copy of such recorded notice showing the
filing and recording Information thereof.
(e) The terms and conditions contained herein shall constitute covenants running
with the land and shall be binding upon, and for the benefit of, Lessor and Lessee and
their respective heirs, legal representatives, successors and assigns.
(f) No change or modification of this 011 and Gas Lease shall be valid or binding
unless the same Is made or specified In writing and signed by the parties, and no
course of dealing between the parties shall be construed to alter the terms hereof•
. (g) If any cfause or provision of this lease Is Illegal, Invalid or unenforceable
under present or future laws, then It Is the Intention of the parties hereto that the
remainder of the lease shall not be affected thereby, and It Is also the Intention of both
parties that, In lieu of each cfause or provision that Is Illegal, Invalid or unenforceable,
there .shall be added as a part of this lease a clause or provision as similar In terms to
the Illegal, Invalid or unenforceable clause or provision as may be possible and be legal,
valid and enforceable.
(h) Failure of either party to declare any default Immediately upon occurrence
thereof, or delay In taking any action In connection therewith, shall not waive such
default, but said party shall have the right to declare any such default at any time and
take such actfon as might b!;llawful or authorized hereunder, either In law or In eqUity.
(I) In the event there Is any ambiguity In this lease, Lessor and Lessee agree
that the ambiguity shall not be construed In favor of the Lessor and against the Lessee;
nor shall the ambiguity be construed In favor of the Lessee and against the Lessor, but
that the parties Interpreting the contract will be required to use other rules of
construction In order to resolve the ambiguity.
(j) No land demised In this lease may be pooled or unitized with any other land.
If this lease now or hereafter covers separate tracts, no pooling or unitization of royalty
Interests as between any such separate tracts Is Intended, or allowed, or shall be
Implied or result merely from the Incfuslon of such separate tracts within this lease. As
1008
used In this lease, the words "separate tract" mean any tract with differing percentage
royalty ownerships, now or hereafter.
(k) Due to the relative positions of Lessor and Lessee In regard to availability of
data relating to operations on and around the Lease, and In order to preclude
unnecessary and costly claims In court, the parties hereto, agree to a toiling of all
applicable statutes of limitations as same relate to any express or Implied duties,
obligations, covenants or conditions Imposed upon Lessee by virtue of this Lease. As
additional consIderation for the executIon of thIs Lease by Lessor, the parties hereto
and our heirs, representatives, successors and assigns agree that the toiling of all
statutes of limitations which might be applicable to any express or Implied duties,
obligations, covenants or conditions arising out of this Lease shall commence on the
effective date of this lease and such toiling of all applicable statutes shall continue until
and be lifted as hereinafter provided. As to a specific matter raised by Lessor or royalty
owner, this toiling of limitation shall be lifted as to such specified Incldence(s) In
question thirty (30) days after Lessee specifically provides Lessor or other royalty
owners hereunder with suffiCient data to enable the requesting parties to adequately be
apprised of the facts or circumstances relating to such Issue and/or InCidences
regardless of whether such circumstance would constitute a reversion of any rights or
breac;h of any expressed or Implied duty, covenant or condition of this Lease, or would
give .fJse to any other cause of action arising out of the relationship between the parties
to tHis lease (Including royalty owners) and our heirs, successors and assigns. In all
events the tolling of all statutes of limitation shall be lifted thirty (30) days after the full
and complete termination of this Lea~e.
(I) In the event Lessee should file for voluntary Bankruptcy or Insolvency
or for reorganization, or should some third party force Lessee Into
Involuntary Bankruptcy or Insolvency for the benefit of creditors In any
court pursuant to any statute either of the United states or and Statel
or shOUld Lessee enter Into an agreement with creditors for the
appOintment of a receiver or trustee, covering all or a portion of
Lessee's Interest In and to the leased premises, then upon the
occurrence of any of the above events and at the election of Lessor,
Lessee, shall not be relieved of any of Its obligations under the lease,
Including but not limited to any unpaid royalty due Lessor, surface
restoration, and the plugging of abandoned, or non-commercial well or
wells. For purposes of enforcing Lessee's obligations In Bankruptcy
Court, Lessor shall be considered for all purposes a preferred secured
creditor with the highest class permitted by law. LESSEE FURTHER
AGREES TO INDEMNIFY LESSOR FOR ALL LOSS AND DAMAGE
·SUFFERED BY LESSOR BY REASON OF SUCH BANKRUPTCY
INCLUDING BUT NOT LIMITED TO REASONABLE ATTORNEYS
FEES AND COURT COSTS, IF ANY.
1009
xx.
As further consideration for this lease, Lessor sh\lll have the right, but not the
obligation, to participate In any oil or gas well drilled on this property. Lessee shall
provide Lessor or his designee with all Information, Including welilogs and Authority For
Expenditures (AFEs) regarding the well drilled within the later of 5 business days of
completion of all tests and operations conducted by Lessee after Its decision to
complete a well as a producer. Lessor shall notify Lessee In writing of Its election to
participate in the well within 5 business days of receipt of the forgoing Information, and
Lessor shall tender Its corresponding share of working Interest costs within 15 business
days after tender of the election. Information shall be provided to Lessor or his
designee on a well by well basis. As to each well, Lessor has the right to partlclpate In
an amount up to Ten percent (10%) of the working Interest In that well. The
relationship between the parties In regard to this working Interest shall be governed by
the Joint Operating Agreement attached hereto as exhIbIt "b". All working Interests
shall be dealt with In an Identical manner regarding rights, obligations and penalties
arising from any working Interest In the wells located on these lands that Lessor'elected
to participate In; provided, however, that the working Interest described In this
paragraph shall never be charged with any cost or expense attributable to monies paid
to orlor the benefit of Lessor.
:'" EXECUTED In duplicate originals on this the .1..1..1(``
'
day 0 2008 It being
agreed that this Lease will not be effective until executed by both p rtl s.
~:~n?lger
LESSOR
Escondido Resources II, l.Le
By: ' !4-d-:-
LESSEE
1010
STATE OFTEXAS §
COUNTY OF WEBB §
This Instrument was acknpwledged before me on the 2£ day of Ju"c
2008 by James K. Jones, Jr., Manager of Justapor Ranch Company, LC. as the act and
deed of such LImited LIability Company.
NO ARYPUB C, STATE OF TEXAS
•
STAle OF TEXAS §
COUNTY OF HARRIS §
This Instrument was acknowledged before me on the 1# day of ,>, the
oaIcuJated poohlon (If the fouUlwest C(JIlI(I((Jflhh (netl
'i1t:BNcn wlth the (I~()u1a!~d postliou of lh~ pruentt)' ocwpled WC61etty right-of·way Una oro,s, W~wa.y No. 83
and (Olltbw``rty llne hettof ,dong tho foUowwg lhru caur~es:
'l'EmNCU North 0"08'35- West 494.13lt«t to 8 JH)lnt (or. an ~tertot comer of lhl5 tl'acll
'l'lIENClt Ncrrth B4'S0132~ }?art or
10,00 Feet to II. poInt for an Interior eomet ibis tract;
'l'HENCE North (\;';'08'35· Wed. 2690.08 ~t to lila calculated }n!Cllcotioll poln! of thls line! wIth (he aoutbeasterty
1100 otSUrfc), 1394, Abstrllct 1999, nosebfo aawfa Ong[nal Oranteo end lhb northwesterly lllle of tho nforemeDtloncd
SUcvcy 1932, fot the northwest GOmer ofl.hla ttael:
'l'IllUiC~ North 69t Zl'M-nasl F¢et aoron l1le flght-or~way (JtV,S. HIghway No. 83 wIth the tOllthwt Une of
SUrvey 1394 ond northwes, Ilno of Survoy 1932, tho .orthwert II.,
h".. f, p... lng at 51.691tect tit. co.IC, of U.S.
IUgllw,yN•• 83, ond 1l4.ISl'«lln,u I•• r"'''''llI''pOsjCUl tIt.wI righl-of,way Ilnootu.B.lH&hway /la. 6l for
the ostenldble4outhwe$1 COrMr ofTnwt 6$ of La Moca ~ BIlbdlvbtollss Sho~n tho Plat of lA Moos Ranch &.st
orHfghwA)' 81lhQt b recorded in Votwno Jl. Psg(l S ofIlIa Plat Records of Webb ty, 'l'exu, wIth th.(& rel1~c.omor
bolng a point (In lMgen.{ in tb(lllOrthweawty Uno Qf!h1s klltt;
. "
\
THENCE HOlth 69'21'14~ Bast 1981.26 Feet OOtltlnulog g~neral'y
$long S-d',(ixJ~tlug fotl~e on Ute oc.cUpfed
sotrtheas!erly llneof&ald "!'reDt 65 (leLa Moos Rant-b Stibdlvkloll',l.be wutheasterlylIne 6f Sutvey J394, a northweBtatly
UnaoCSvrvey 1932,lind anortbwestorlylluo berwf, to 1\ (enQOoomera( tlw UUed ~rtfon orlhD southeasi coI'nIJrof'5l!d
Survey 1394r----
anager
LESSOR
1019
Escondido Resources II, LLC
BY:_-,,-:7?_:~_~,-:.--.c.==.
J. David Wrather, Vice-President
LESSEE
STATE OFTEXAS §
COUNTY OF WEBB §
This Instrument was acknowledged before me on the .21!!'day of JUf\.e.
2008 by James K. Jones, Jr., Manager of Justapor Ranch Company, L.C. as the act and
deed of such Limited Liability Company.
NO ARY PUBLI , STATE OF TEXAS
STATE OFTEXAS §
COUNTY OF HARRIS §
This Instrument was acknowledged before me on the ;)Jd day of ``e .
2008 by J. David Wrather, Vice-President of Escondido Resources II, LLC, as the act
and deed of such Limited Liability Company.
NOTARY PUBLIC, STATE OF TEXAS
1020
Filed
9/5/2014 3:46:44 PM
Esther Degoll do
Distriel lerk
Webb Di riel
2013-cv7-001396 D1
CAUSE NO. 2013-CV7-001396-Dl
JUSTAPOR RANCH COMPANY, L.C., § IN THE DISTRICT COURT OF
Plaintiff, §
§
V. § WEBB COUNTY, TEXAS
§
§
ESCONDIDO RESOURCES II, LLC, §
Dejendant. § 49th JUDICIAL DISTRICT
AFFIDAVIT OF DAVID WRATHER
THE STATE OF TEXAS §
§
COUNTY OF HARRIS §
1. My name is David Wrather. I am employed with Escondido Resources II, LLC
("Escondido") in the position of Senior Vice President. My position includes responsibility for
land operations, including involvement in the negotiation of oil and gas leases on behalf of
Escondido. I participated in the lease negotiations between Escondido and Justapor Ranch
Company, L.C. ("Justapor") for the lease of oil and gas interests on an 803-acre ranch owned by
Justapor in Webb County, Texas (the "Justapor Ranch"). I negotiated the lease with James &.
Jones ("Jones") who I understood to be the owner of Justapor. As a result, I have personal
knowledge of the facts set fOlih in this affidavit and they are true and conect.
2. Jones contacted me in May, 2008, to inquire about Escondido's interest in leasing
the oil and gas minerals on the Justapor Ranch. Jones informed me that he was a lawyer in
Webb County, Texas. Escondido did not have separate counsel representing it in the negotiation
or execution of the lease between it and Justapor.
3. On June 4, 2008, Jones e-mailed me a lease agreement form for the Justapor
Ranch. On June 6, 2008, I e-mailed Jones comments to the lease form and an example of a
proposed royalty provision which Escondido had rccently used in another lease. A hue and
correct copy of the e-mail chain and fOlm are attached to Escondido's response to Jones' Motion
for Summary Judgment (the "Response") at Exhibit 1.
4. During our negotiations, I told Jones that Escondido wanted to base its royalty
payment obligations upon the pricing (enns Escondido had negotiated with Enterprise for a gas
sales agreement (the "Enterprise Gas Sales Agreement") as a minimum price that Escondido
would pay for purposes of royalty payments. On June 13, 2008, I e-mailed Jones the pricing
terms we had negotiated with Enterprisc for thc paymcnt of gas. A true and correct copy of this
e-mail is attached to the Response as Exhibit J. Jones infOlmed me that Justapor would agree to
the payment of royalty based upon the Enterprise pricing terms with Escondido, but not with any
subsequent assignee of Escondido. Jones informed me that Justapor wanted an amendment to
the proposed lease that would incorporate special pricing terms related to Escondido's price
arrangement with Enterprise. Jones provided me with a draft of the proposed amendment. On
1
1325
Ex. S
June 13, 2008, I e-mailed Jones connnents to the proposed amendment wherein I referenced in
c()mlection with the pricing provision, "as per Enterprise offer". A hue and correct copy of this e-
mail and the attached draft are attached to the Response as Exhibit K. Based upon my
discussions and negotiations with Jones, the parties agreed that an amendment was to be drafted
to provide a special royalty pricing provision, based upon the Enterprise price, that would be
available only to Escondido, and not any subsequent assignee.
5. Escondido and Justapor entered into the oil and gas lease dated June 24, 2008,
covering the lease of minerals on the Justapor Ranch (the "Lease Agreement"). On the same
date, Escondido and Justapor also entered into an amendment to the Lease Agreement titled
"Amendment to Oil and Gas Lease" ("Amendment No. I "). Based upon the negotiations and
agreement reached with Jones, Escondido understood and believed Amendment No. I, and its
special pricing provision, to be a replacement provision for the pricing provisions contained in
Alticle III(b) of the Lease Agreement. The patties entered into Amendment No. I so that
Escondido's royalty obligations under the Lease Agreement would correlate to the pricing terms
of the Enterprise Gas Sales Agreement. At the time the Lease Agreement and Amendment No. I
were executed, Enterprise was the only market readily available to transpOit and purchase gas
produced from the Justapor Ranch.
6. In order to sell gas produced fi'om the Justapor Ranch to Enterprise, Escondido
needed to constlUct a meter site on the Justapor Ranch and build a pipeline from the Justapor
Ranch across other adjacent propetties to a cOlll1ection point on the Enterprise System.
Escondido acquired the right of way necessary to constlUct the pipeline. As part of this project,
Escondido and Justapor executed a Surface Site Agreement which included a pipeline right of
way and meter station surface site on the Justapor Ranch, a copy of which is attached to the
Response as Exhibit L. It was discussed with Jones that the Smface Site Agreement and pipeline
would be conveyed to Enterprise when the facilities were conshucted. Escondido did constlUct
the pipeline and ultimately assigned the Surface Site Agreement ,md pipeline to Enterprise with
the consent of Justapor, a copy of which is attached to the Response as Exhibit M.
7. By 201 I, capacity constraints on the Enterprise pipeline system caused Entelprise
to limit the volume of gas which was purchased fi'om Escondido, including gas produced fi'om
the Justapor Ranch. During this period of time, Escondido made sales of gas produced from the
Justapor Ranch to an altemative market, Kinder Morgan Texas Pipeline, LLC ("Kinder
Morgan"). Gas was delivered to Kinder Morgan via a gathering system installed by a new
midstream company that had entered the area, Meritage Midstream Services, LLC. Meritage
acquired a meter site for their pipeline fi'om Justapor and acquired right of way to take
Escondido's gas, including Justapor's gas, to Kinder Morgan.
8. In October 2011, Enterprise informed Escondido that it had capacity available on
its system, and intended to re-initiate gas purchases from the Justapor Ranch. The price which
would be realized from the sale of gas to Enterprise was greater than the price available from
Kinder Morgan. Escondido made plans and was prepared to sell gas from the Justapor Ranch to
Enterprise. However, by letter dated October 19, 20ll, Jones communicated to Entelprise that
the Surface Site Agreement was terminated. Entelprise informed me that it could not purchase
gas from the Justapor Ranch as a result of the termination notice sent to it by Jones and Jones
2
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informed me that he now owned the Enterprise meter and equipment located on the meter site.
Jones informed me that Escondido could not sell gas from the Justapor Ranch to Enterprise as a
result of the termination of the Surface Site Agreement. Because of the termination of the
Enterprise Surface Site Agreement, the right of way and meter station on the Justapor Ranch
were not available to Enterprise to accept gas from the Justapor Ranch. Jones informed me that
Justapor would negotiate with Entelprise for a new surface site agreement containing additional
terms.
9. During the same period of time, Escondido was attempting to access additional
markets for gas produced from the Justapor Ranch. Escondido negotiated processing contracts
with ConocoPhillips Company (dated September 1,2011) and Copano Processing, L.P. (dated
October 25,2011), and expected these additional markets to be available by the end of 2011 or
early 2012. Escondido also believed, based upon Jones' statements regarding negotiations with
Enterprise, that a new surface site agreement would soon be executed again providing Escondido
with access to the Enterprise market. Each of these alternative markets was expected to provide
a higher price for the Justapor Ranch gas than that available from Kinder Morgan, due in part to
processing capability. As a result of the timing ofthe termination of the Surface Site Agreement,
and the expected availability of markets fi'om Copano and ConocoPhillips in the near future,
Escondido decided to shut-in the wells on the Justapor Ranch until those higher-priced markets
became available. I informed Jones that Escondido wanted to shut-in the wells on the Justapor
Ranch nntil higher-price markets became available. The only shOlt-term market available to
Escondido at that point in time, due to the termination of the Surface Site Agreement with
Enterprise, was sales to Kinder Morgan based upon a daily spot price. At that point in time, the
daily spot price was lower than the price which would have been paid by Entelprise if the
Surface Site Agreement had not been tClminated, and lower than the price Escondido expected to
receive in the future for sales to Copano and ConocoPhillips. Jones directed me to continue sales
and not shut-in the wells. I explained to him that Escondido wanted to sell gas to Entelprise and
believed that Jones and Enterprise were working on resolving their issues and that Escondido
would rather shut-in the wells rather than sell the gas at the lower gas daily spot price, without
processing. Jones stated that he wanted Escondido to proceed with sales, even though processing
was not available.
10. Also in 2011, a disagreement arose between Escondido and Justapor over the
calculation of a compensatory royalty payment relating to a well drilled on propelty adjacent to
the Justapor Ranch. There were also issues outstanding between the patties related to drilling
cOllllnitments under the Lease Agreement; a working interest owned by another Jones entity,
JAK Passive Minerals, L.C.; and mineral interests owned by third parties on a portion of acreage
within the Justapor Ranch referred to by the parties as the "Vacancy Tract". Each of these issues
was addressed in a letter agreement entered into between Escondido and Justapor dated August
9,2011 (the "Letter Agreement").
II. Since execution of the Letter Agreement, Escondido has supplied Jones with
executed deeds conveying all mineral interests owned by Escondido at that time, or subsequently
acquired, for the Vacancy Tract. Escondido is not cUlTently the owner of any mineral interests in
the Vacancy Tract or the Justapor Ranch which has not been previously conveyed to Justapor or
another entity owned or controlled by Jones as a result of deeds signed and delivered by
3
1327
Escondido to Jones. It was never discussed, contemplated, 01' agreed that Escondido would
convey any leasehold interest which it currently holds on the Justapor Ranch in connection with
the Letter Agreement.
12. Also in May, 2008, Escondido was attempting to secure leases of minerals on
other propelties in the Webb County area. In particular, Escondido was negotiating to obtain a
mineral lease from William S. Hatte (the "Harte Lease") and one other propelty. These other
leasing negotiations were underway in the same period of time during which Escondido was also
engaged in negotiations with Jones for a mineral lease on the Justapor Ranch.
13. In late May, 2008, Escondido sent leasing proposals for two negotiations it was
engaged in, one of which was the Harte Lease. In early June, 2008, and prior to the execution of
the Justapor Lease, Jones informed me that he could represent Escondido in cOllllection with its
leasing efforts in Webb County. I informed Jones of Escondido's interest in acquiring the Harte
Lease and, at least, one other. Jones informed me thaI he knew the parties involved with both
lease negotiations and that he could represent Escondido in negotiating and securing the Harte
lease. On June 10,2008, I e-mailed Jones with the terms of the lease offer Escondido had made
in connection with one of the negotiations. A hue and COHect copy of the e-mail transmitting the
Benavides Lease offer and the offer itself are attached to Escondido's Response to the Lawyer
Jones Motion for Summary Judgment (the "Lawyer Jones Response") as Exhibit Y (filed under
seal). Negotiations on that Lease did not progress beyond the preliminary stage. However,
Escondido continued negotiations in connection with the Harte Lease.
14. Between June 10,2008, and June 16,2008, Jones and I discussed the terms under
which Jones would undertake the representation of Escondido in connection with the Harte
Lease. Jones informed me that he would represent Escondido in connection with its effOlts to
negotiate and acquire the Harte Lease in exchange for the payment to Jones of a fee in the form
of an overriding royalty interest on the Hatte Lease if the negotiations lead to the execution of a
lease. Jones informed me that in exchange for Escondido's agreement to pay an overriding
royalty interest, he would represent Escondido in connection with the Harte Lease. On June 16,
2008, I spoke with others at Escondido regarding the payment of an overriding royalty interest to
Jones as requested for his legal services. After these discussions, I e-mailed Jones on June 16,
2008, confirming Escondido's agreement to engage Jones in connection with obtaining and
negotiating the Hatte Lease and Escondido's agreement to pay Jones an overriding royalty
interest. Exhibit Z to the Lawyer Jones Response is a true and conect copy of an e-mail
exchange between me and Jones dated June 16,2008 through June 17,2008. The first e-mail in
this exchange on June 16, 2008, is the e-mail setting out the tenns of Escondido's engagement of
Jones. On June 17, 2008, Jones e-mailed me a request to send him a copy of Escondido's
proposal for the Harte Lease as referenced in Exhibit Z, which I did. Jones' e-mail also requested
that I call him. I telephoned Jones on the 17th at which time we discussed his representation of
Escondido in connection with the Harte Lease and the terms of the overriding royalty interest
which Escondido had agreed to pay Jones in connection with that representation. Jones stated he
would represent Escondido in connection with the Hade Lease. At no time did Jones infonll me
that he had not agreed to undertake any representation of Escondido as of that time. As a result
of my conversations with Jones, I understood and believed him to be engaged at that time as
Escondido's counsel in cOlmection with the Harte Lease and other potential leasing effOlts. Jones
4
1328
confIrmed this understanding during out' conversation of June 17, 2008, when the Harte Lease
proposal was discussed, Jones never advised me during this time period that he had not agreed
to represent Escondido, There was no subsequent telephone conversation during the months of
July 01' August, 2008, during which Jones told me he had decided to represent Escondido, I am
aware of no other writing between myself or others at Escondido, on the one hand, and Joncs, on
the other hand, constituting an engagement agreement for Jones other than the e-mail of June 16,
2008, marked as Exhibit Z to the Lawyer Jones Response,
15, Jones did proceed to represcnt Escondido as its attorncy in cOlUlection with the
Harte Lease, Exhibit AA to the Lawyer Jones Response is a copy of a July 23, 2008 e-mail I
sent Jones containing information related to Harte's legal representative, On June 24, 2008, I
sent Mr, Harte an email (Exhibit FF to the Lawyer Jones Response) informing him that Jones
was representing Escondido and to expect a call from him, Exhibit BB to the Lawyer Jones
Response is an e-mail sent to me by Jones relaying to me information regarding his
conversations wlth Harte's attorney and the status of negotiations, Exhibit CC to the Lawyer
Jones Response is an e-mail from Jones to me dated January 7, 2009, setting fOlih his opinions
regarding the terms of the proposed Harte Lease, Exhibits DD and EE to the Lawyer Jones
Response are e-mails from Jones to me dated Jammry 7, 2009, wlth redlined comments to the
proposed Harte Lease,
16, At no time did Jones advise me that Escondido should engage separate counsel in
connection with the negotiation and execution of the Lease Agreement. At no time did Jones
request 01' obtain Escondido's written consent to his representation of Escondido at the same time
he was negotiating with Escondido the Lease Agreement for the Justapor Ranch,
17, While we were negotiating the Lease Agreement for the Justapor Ranch, Jones
told me that he had drafted a tough agreement in case Escondido ever assigned its rights under
the Lease Agreement to another party, but that he would work out with Escondido any issues
Wllich might arise, Based upon this conversation, and the fact that Jones was acting as
Escondido's attol'lley, I assumed that any disagreements which might arise between Escondido
and Justapor would be resolved through a negotiation process, During lease negotiations, Jones
and I never discussed his interpretation of pricing provision III(b)(iv) of the Lease Agreement.
We also did not discuss the termination provision contained in Article XIV, I did request one
change to the annual certification requirement contained in Article III(g); however, Jones and I
never discussed his understanding or interpretation of Article III(g) insofar as it relates to the
obligation to make allllualrcconciliation payments, Prior to this lawsuit, Jones never informed
me that it was his position 01' Justapor's position that the Lease Agreement would terminate if
there were ever an underpayment of royalties which was not correctly and fully reconciled and
paid by March I of the succeeding year, Jones never informed me that it was his position or
Justapor's position that the Lease Agreement would terminate if there was an underpayment of
royalties, Jones never informed me of his 01' Justapor's interpretations of the pricing provisions
in Article III of the Lease Agreement as asselied in this lawsuit, If, prior to the execution of the
Lease Agreement, Jones had informed me of the interpretation and construction being advanced
by him and Justapor in this case, I would not have agreed to the Lease Agreement without further
clarification 01' modification, In particular, Escondido would not have agreed to the pricing
provision contained in Article III(b) of the Lease Agreement if it were not modified by
5
1329
Amendment No. 1 as Escondido understood based on its conversations with Jones. Escondido
would not have agreed to a lease which provided a remedy for underpayment of royalty as
argued by Justapor in this case. Escondido would not have agreed to a lease which provided for
termination for a failure to reconcile an alleged royalty underpayment as argued by Justapor in
this case. None of these arguments 01' interpretations was explained to me by Jones prior to
execution of the Justapor Lease.
FURTHER AFFIANT SAYETH NOT.
David Wrather
SUBSCRIBED and SWORN to before me this the ~;\I day of Sf PTLMlSy;R ,2014.
CTRAVIS WAlNE Notary Public, State of Texas
My Comml&slon Expires
January 25.2016
6
1330
Filed
9/5/2014 3:46:44 PM
Esther Degollado
District Clerk
Webb District
2013-cv7 -001396-D1
NO.2013-CV7-001396-DI
JUSTAPOR RANCH COMPANY, L.C., § IN THE DISTRICT COURT OF
Plaintiff, §
§
V. § WEBB COUNTY, TEXAS
§
§
ESCONDIDO RESOURCES II, LLC, §
Defendant. § 49th JUDICIAL DISTRICT
AFFIDAVIT OF JOHN S. LOWE
THE STATE OF MAINE §
§
COUNTY OF HANCOCK §
BEFORE ME THE UNDERSIGNED NOTARY PUBLIC, on this day personally
appeared Jolm S. Lowe, who after being h me duly sworn, stated under oath:
1. My name is John S. Lowe. I am the George W. Hutchison ProfeSl;or of Energy Law at
Southern Methodist University's Dedman School of Law. I have more than 35 years' experience
teaching courses on issues related to property law, oil and gas law, and oil and gas contracts. I
am also an attorney and member of the bars of Texas, Oklahoma, and Ohio. I am Past President
of the Rocky Mountain Mineral Law Foundation, and Past Chair of the Section of
Environmental, Encrgy, and Resources Law of the American Bar Association. I have published
numerous atiicles dealing with oil and gas contracts. I have also written, or co-written with
others, books on oil and gas leases and contracts. I often present lectures and papers on issues
related to oil and gas leases and contract~. Additional information regarding my experience and
qualifications is set out in my resume, a true and correct copy of which is attached hereto as
Exhibit I and incorporated herein by reference. I am familiar with and have an understanding of
the customary terms used in oil and gas lease agreements, and industry custom, practicc, and
usage in applying those terms. I have specialized knowledge, skill, education, and experience
regarding oil and gas lease provisions and issues related to the custom, usage, and practice in the
oil and gas industry related to provisiops in oil and gas leases, including but not limited to
royalty-calculation provisions, royalty-payment provisions, and audit provisions. I have
reviewcd the oil and gas lease dated June 24, 2008 (the "Lease") that is the subject of this lawsuit
along with amendments thereto including the Amendment to Oil and Gas Lease dated June 24,
2008 ("Amendment No. I "). I have also reviewed Plaintiffs First Amended Petition and exhibits
thereto; deposition testimony of Jimmy K. Jones, David Wrather, William Deupree, Kurt von
Plonski, and Charlie E. Graham; Plaintiffs Designation of Expert Witnesses; Escondido's
Designations of Expert Witnesses; Plaintiffs Motion for Summary Judgment; and, deposition
exhibits 2A, 2B, 3, 11,42,48,57,59,61,62,64,69, and 74. I have personal knowledge of the
facts set forth herein, and am competent to testifY thereto. The facts stated in this affidavit are
true atld correct.
1
Ex. F 1136
2. Article III(b)(iv) of the Lease is not a customary or usual royalty provision. This
provision is unclear and ambiguous. A tyPical lessee in the oil and gas industry would not know
how to apply this provision to the calculation of royalty payments. Unlike the other royalty
provisions contained in the Lease, there is no defined term or definition for the meaning of
royalty provision (iv). Justapor, in the deposition of James K. Jones, contends that royalty-
provision (iv) contains an error in that the word "were" should be "where." Even if the word
"were" was changed to "where," royalty-provision (iv) would remain unclear and ambiguous. As
drafted, pricing-provision (iv) could be interpreted in alternative ways by a typical industry
lessee. The uncertainlY and lack of clarity with regard to the meaning of royalty provision (iv) is
increased by Amendment No. 1. In this instance, it appears Amendment No. I was executed
simultaneous to the Lease in order to afford the lessee, Escondido Resources II, L.L.C.
("Escondido"), with a special pricing provision available only to it, and not to subsequent
assignees. Escondido appears to have operated with the understanding that the provisions of
paragraph 2 of Amendment No. 1 amending Article III of the Lease provided an alternative
royalty methodology that supplanted each of the four royalty provisions contained in Article
III(b) of the Lease. It is reasonable and consistent with industry custom and practice for
Escondido to pay royalties in a manner consistent with this interpretation and wlderstanding of
the effect of Amendment No.1 on the Lease royalty-payment provisions.
3. Industry custom and practice would apply the termination clause contained in Article
XIV of the Lease only to non-payment of royalty. The termination clause would not apply to
Imderpayment or miscalculation of royalty. The industry differentiates royalty non-payment
from royalty underpayment. It is unusual, but not unheard of, to have lease provisions calling for
temlination if a royalty is not paid. But it is unheard of to have a termination provision in the
event of an underpayment. The industry does not consider non-payment of royalty to be the same
as an underpayment of royalty. An unqerpayment is an underpayment, not a non-payment; in
other words, if there is an underpayment, a subsequent failure to correct the llilderpayment does
not change the nature of the underpayment to a non-payment of royalty. Because the termination
provision contained in Article XIV does not expressly apply to the underpayment of royalties, it
also does not apply to a failure to correct an underpayment of royalty through a review or
reconciliation process. A11icle XIV does not condition the continuation of the Lease on the
correction of any or all royalty underpayments by March 1 of the succeeding calendar year.
Industry custom and practice does not consider royalty underpayments to be the same as a failure
to pay royalty. Likewise, industry custom and practice would not consider a failure to reconcile
a royalty underpayment by March I of the succeeding year to be a non-payment of royalty. It is
not usual or customary to have a lease-termination clause for underpayment of royalties or for
the failure to correct or reconcile an underpayment.
4. Article XIV of the Lease states it does not apply in the event of a title dispute or title
defect. That "carve out" is included because it is industry custom and practice to hold payment
of royalties "in suspense" when there is a title dispute or title defect. The carve out for a title
dispute or title defect protects the lessee from termination for non-payment of royalty if there is a
suspension due to a title issue. The inclusion of the carve-out language for title disputes and
defects further evidences that the intent of the parties was that the termination provision
contained in Article XIV would apply to instances of non-payment, rather than instances of
underpayment. This is consistent with industry custom and practice.
2
1137
5. Article III(g) of the Lease calls for the lessee to review prices and production volumes
used in its calculation of royalty payments against the price and production volumes required to
be paid under the terms of the lease by January 31 of each year, and to issue make up payments
for the difference on or before March 1 of each year. From an industry custom and practice
point of view, Escondido appears to have complied with this provision through its periodic
monitoring of prices and volumes throughout the course of the year, and through its periodic
reconciliation payments made to the lessor.
6. The reconciliation provision contained in paragraph IIl(g) deals with underpayments of
royalties. Article JII(g) does not contain any term or condition which would terminate the Lease
in the event lessee fails to correct any underpayment of royalties by the date set forth therein.
This is consistent with industry custom and usage. It is not be customary nor usual to apply a
remedy of termination to a failure to correct royalty underpayments. Industry custom and usage
would not consider the provisions of Article XIV dealing with non-payment of royalties to be
triggered by any non-compliance with the provisions of Atiicle IIl(g) dealing with reconciliation
payments.
7. Industry custom and usage would not interpret a provision relating to the "true up" or
reconciliation of royalty underpayments such as is contained in paragraph III(g) to constitute a
lease-termination event. In the lessorllessee context, there are frequently misunderstandings,
issues, disagreements, and disputes relating to the prices and volumes used to make royalty
payments, and applying a termination provision to underpayment of royalties in these sorts of
circumstances is not customary or usual. A lessee would be placed in an untenable position if it
was at risk of losing its lease in the event of disagreement about the methodology, pricing, or
volumes to be used in royalty calculations, or, if it made a mistake. The lessor would effectively
be able to blackmail a lessee, or conduct audits looking for any type of uncorrected
underpayment in order to declare a lease terminated. The industry does not conduct business in
this manner.
8. Applying industry custom and Practice, it appears Escondido acted reasonably in its
calculation and payment of royalties. The alleged underpayments at issue in this case appear to
have been made using accepted industry practices for the making of royalty payments and appear
to have been done in compliance with at least one of the pricing prongs made the subject of the
royalty-payment provisions and Amendment No. 1. Escondido's conduct in making the royalty
payments in this fashion would not be considered to have been done in "bad faith" from an
industry point of view and standard, but instead appear to have been made in good faith.
9. The parties included specific termination provisions in the Lease at Aliicles X and XIV.
Article X allows for tetmination in the event lessee is not conducting "operations" in compliance
with the terms of the Lease and fails to correct such non-compliance following notice by lessor.
Likewise, as set forth above, the provisions of Article XIV relate to termination for the non-
payment of royalties, not the underpayment of royalties. The inclusion of these two termination
provisions in the Lease coupled with the fact that the Lease does not contain a provision that
calls for termination in the event of an underpayment of royalties or a failure to correct an
underpayment of royalties suggests that the intent of the parties was not to include an
underpayment of royalties or a failure to correct a royalty underpayment as a terminable event.
This is consistent with industry practice.
3
1138
10. According to the deposition testimony and reports of other experts, Escondido has
invested over $30 million making improvement associated with the Lease. Applying a
termination clause to the underpayment of royalties as presented by the circumstances of this
case would, under industry standards, impose a harsh, unusual, disadvantageous, costly, unfair,
and unreasonable consequence upon Escondido.
II. Forfeiture is a harsh remedy. It is the usual and customary practice in the industry to
specify, with clarity, the terms tmder which a lease may terminate. In the absence of an express
and specific provision, industry practice would not consider an act or omission of the lessee to be
a termination event. In this case, the plain language of Article XIV addresses temlination for the
nonpayment of a royalty. Article XIV does not expressly or specifically provide for termination
due to underpayment of a royalty or a failure to reconcile an underpayment. Similarly, Article
XIV does not provide for termination of the lease agreement when there is it dispute between the
lessee and the lessor regarding the calculation of royalty payments.
12. The oil and gas industry recognizes the "doctrine of obstmction," which includes an
implied covenant on the part of the lessor not to interfere with the lessee's performance of the
lease agreement. In this case, testimony indicates that the lessor's termination of the Enterprise
surface-site lease prevented Escondido fwm selling to the high-priced Enterprise market. If the
lessor's termination was not done in accordance with the surface-site lease, then the termination
was not proper and may have prevented Escondido from achieving a higher price for pwduction.
Such conduct would be inconsistent with and contrary to the implied covenant on the part of the
lessor arising under the "doctrine of obstmction."
FURTHER AFFIANT SA YETH NOT.
~.c-)
.9,.,.,J;UBSCRlBED AND SWORN TO BEFORE ME, the undersigned authority, on this
thty<.:_~_':t day of August, 2014, to certify which witness my hand and seal of office.
MARIANNE HUNT
NoIary Pubic. Malle
UyConrr;ss;oo Expires Augusl 16. 2020
4
1139
John S. Lowe
George W. Hutchison Pl'ofessor of Energy Law
Scnior Associate Dean fOI' Academic Affairs
Southcl'll Mcthodist Univel'sity
Dedman School of Law
3315 Daniel Ave.
Dallas, TX 75275·0116
214·768·2595
ilowc@smu.cdu
PROFESSIONAL EXPERIENCE
'George W. Hutchison Professor of Energy Law at SOllthe1'll Methodist University, since
1989. Senior Associate Dean for Academic Affairs, Dedman Law School, since 2009.
-Honorary Lecturer and Principal Research Fellow, Centre for Energy, Petroleum and
Mineral Law, the University of Dundee, Scotland, 2000·2014.
·Senior Fellow, Faculty of Law, University of Melbourne, Victoria, Australia, since 2007.
-Visiting Professor, Faculty of Law, University of Sydney, NSW, Australia, since 2008.
'Visiting Professor, School of Energy and Resources, University College London in
Adelaide, SA, Australia, 2010·2012.
-Visiting Professor, Universidad de ESAN, Lima, Peru, 2008.
'Fulbright Senior Specialist and Visiting Borden Ladner Gel'Vais LLP Chair of Energy Law
and Policy, University of Albetta, Edmonton, Ala., Canada, 2008 .
• Visiting Professor, Universidade Agostinho Neto, Luanda, Angola, 2009.
- Visiting Professor, Chulalongkorn University Faculty of Law, Bangkok, Thailand, 2010,
2012.
-International Legal Advisor and Chair, International Legal Standards Advisory Group,
COlllmercial Law Development Program, U.S. Department of Conmlerce, 2006·2009.
·FromI978·1989 Professor of Law and Associate Director of the National Energy Law &
Policy Institute, the University of Tulsa.
-Frolll 1975·1978 Assistant and Associate Professor, the University of Toledo.
-Visiting Professor at Texas (1983), Denver [Distinguished Professor of Natural Resources
Law] (1986), and New Mexico [Visiting Judge Leon Kal'elitz Chair] (1996).
'Private practice 1970·1975.
-Government practice (Govcl'Jlment of Malawi) 1966·1969.
1 1140
EDUCATIONAL BACKGROUND
·B.A. Denison 1963. (Highest Honors, Phi Beta Kappa, Omicron Delta Kappa, General
Motors Scholar);
·LL.B. Harvard 1966. (Harvard Entering Scholar, Maxwell Scholar).
PROFESSIONAL LICENSURE AND CERTIFICATIONS
'Member ofthe bars of Texas, Oklahoma, alld Ohio.
'Admitted to practice before the U.S. Supreme Comt, the U.S. Tax COtllt, the U.S. Fifth
Circuit, and the U.s. District Courts for the Southern and NOIthern Districts of Ohio
·Member of the commercial arbitration panels of the American Arbitration Association, the
CPR Institute for Dispute Resolution and the International Chamber of Commerce.
COURSES TAUGHT
'Property Law, at SMU, Tulsa, and Toledo, as needed from 1975 to the present;
'Oil and Gas Law, at SMU [since 1987J, Tulsa [1978-87], Texas [1983], Denver [1986], and
New Mexico [1996];
'Oil and Gas Contracts, at 8MU [since 1987], Dundee [since 2000], Melbourne [since 2007],
Sydney [since 2008], University College London in Adelaide [2010-2012].
PUBLICATIONS: BOOKS AND BOOK SUPPLEMENTS
·OIL AND GAS LA WIN ANUTSHELL, West Publishing Company, 61h edition 2014) (1 sl through
5"1 editions published in 1983, 1988, 1995,2003,2008);
,CASES AND MATIlRIALS ON OIL AND GAS LA IV (West Publishing Company, 61h edition 2012)
(with Professors Owen Anderson, Ernest Smith, David Pierce, and Christopher Kulandel').
(1 SI through 51h editions published in 1986, 1993, 1998,2003,2008);
'OIL AND GAS FORMS MANUAL 5"1 edition (West Publishing Com~any 2009) (with Professors
Owen Anderson, Ernest Smith, and David Pierce). (l" through 5 editions published in
1987,1993, 1998,2004);
'INTIlRNATIONALPETROLEUM TRANSACTIONS (Rocky Mtn. Min. Law Fnd. 3rd edition 2010)
(with Professors Ernest Smith, Jo1m Dzicnkowski, Owen Anderson, Bruce Kramer and
Jacqueline Weaver). (lSI edition published in 1993);
'HEMINGWAY OIL AND GAS LAW AND TAXATION (West Publishing Company 4'h edition
2004) (with Professors Owen Anderson, John Dzienkowski, David Pierce, Robel1 Peroni and
El'llest Smith);
·1996-2013 Cumulative Pocket Parts, KUNTZ LAW OF OIL AND GAS (Maintained and updated
annually for LexisfNexis since 1996 with Professors Anderson, Smith and Pierce.);
2
1141
·1989-2007 Cumulative Pocket Patts, SUMMERS OIL AND GAS LAW (Maintained and updated
annually for West from 1989 to 2007);
•Yol. 28, WBST'S LEGAL FORMS (3,d Ed. 1997) (with Professor Bradford Stone) (Maintained
and updated annually from 1997 to 2007);
'Yolumes 6, 7 & 7A, WEST'S TEXAS FORMS (3,d ed. 1997) (Maintained and updated annually
from 1997 to 2008).
SELECTED PUBLICATIONS: MAJOR LAW JOURNAL ARTICLES
·Recent Significant Developments Affecting Farmout Agreements, 50 Hl Oil & Gas Inst 3-1
(Matthew Bendel' 1999). (Peer reviewed);
'Royalty Calculation in Texas, Ch. 3 in Oil and Gas Law for a New CentUl'Y: Precedent as
Prologue (Appendix to the Proceedings of the 50 lh Anniversary Celebration of the
Southwestern Legal Foundation, Matthew Bender, 1999) (Peer reviewed);
·The Lessee's Right to Free Use ofProduccd Substances: New Wine in Old Bottles, 37 Nat.
Res. J. 729 (1997) (not peer reviewed);
'Defining the Royalty Obligation, 49 SMU LJ. 223 (1996). (Not peer reviewed) [Selected
as the Outstanding Law Review Alticle of 1996 by the Texas Bar FOtmdation. Reprinted at
33 Pub. Land & Res. Dig. 257 (1996)];
·The Easement of the Mineral Estate for Smface Use, THE NATURAL RESOURCES LAW
MANUAL 239-25 1 (ABA 1995) (Peer reviewed);
'The Easement of the Mineral Estate for Surface Use: An Analysis ofIts Rationale, Status
and Prospects, 39th Rocky Mtn. Min. 1. Inst. Ch. 4 (1993) (Peer reviewed);
·Principles of Energy Policy, 32 Washbul'll 1. J. I (1992) (Not Peer reviewed);
'Developments in NonregulatOll Oil and Gas Law: Al'e We Moving Toward a Kinder and
Gentler Law of Contracts?, 42n Oil & Gas Inst. 1-1 (Matthew Bender, 1991) (Peer
reviewed);
-The Meaning of "Payout" in Oil and Gas Farmout Agreements, 10th Eastel'll Min. 1. Inst.,
13-1 (Matthew Bender, 1989) (Peer reviewed);
·A New Generation of Gas Contracts, YIII Corp. Counsel Rev. I (1989) (Peer reviewed);
'Developments in Non-Regulatory Oil and Gas Law, 39th Oil & Gas Inst. Ch. 1 (Matthew
Bender, 1988) (Peer reviewed);
'Current Lease and Royalty Problems in the Gas Industry, 23 Tulsa 1.J. 547 (1988) (Not peel'
reviewed);
•Analyzing Oil and Gas Farmout Agreements, 41 Southwestern 1. J. 759 (1987); reprinted at
25 Pub. Land & Res. Dig. 5 (1988). (Not peer reviewed). [Selected as the Outstanding Law
Review Atticle of 1988 by the Texas Bar FOlmdation];
3
1142
-What Substances are "Minerals"? 30th Rocky Mtn. Min. L. Ins!. 2-1 (1985) (peel'
reviewed);
-Severance Taxes as an Issue of Energy Sectionalism, 5 Energy L.J. 357 (1984) (Peel'
reviewed);
-Developments in Non-Regulatory Oil and Gas Law: The Issues of the Eighties, 35th Oil &
Gas Ins!. I (Matthew Bender 1984) (Peer reviewed);
-Shut-In Royalty Payments, 5th Easte1'll Min. L. Inst. Ch. 18 (1984) (Peer reviewed);
-Eastern Oil and Gas Operations: Do Recent Developments Suggest New Answers to Old
Problems?, 4th East. Min. L. Inst. Ch. 20 (1983) (Peel' reviewed);
-Developments in Non-Regulatory Oil and Gas Law, 32nd Oil and Gas Ins!. 117 (Matthew
Bendel' 1981) (Peel' reviewed);
-Beyond Section 858A - A Proposed System of Ground Water Liability and Management for
Eastern States, 8 Ecology L.Q. 131 (1979) (with Lon C. Reudisili and Bruce Graham) (Not
peel' reviewed);
-Representing the Landowner in Oil and Gas Leasing Transactions, 31 Okla. L. Rev.
257 (1978). Abstracted inl6 Pub. Land & Res. L. Dig. 188 (1979) (Not pee1'1'eviewed);
-Ohio Oil and Gas Conservation Law - The First Ten Years (1965-1975), 37 Ohio State L.1.
31 (1976) (with J. R. Emens) (Not pee1'1'eviewed).
SELECTED PRESENTATIONS, LECTURES, AND PAPERS
-March 2004, "History ofthe Energy Law Journal," Energy Bar Association, Washington,
D.C.;
-May 2004, "Inte1'llational Gas Trade," Oman Rule of Law Forum, Washington, D.C.;
-September 2004, "Royalty and Implied Covenants," National Association of Royalty
Owners' national convention, Denver, CO;
-September 2004 and 2005, "Inte1'llational Environmental Issues in Petroleum Development,"
Association of International Petrolellm Negotiators, Houston, TX;
-February 2006, "Inte1'llational Minerals Development and Trade," Kyrgyzstan Rule of Law
Forum, Dallas, TX;
-April 2006, "U.S. Energy Policy," Oklahoma City Mineral Bar Assoc., Oklahoma City, OK,
and SMU Law Reunion Weekend, Dallas, TX;
-May 2006, US Oil Policy in the Middle East. Institute of Foreign Relations, Ministry
of Foreign Affairs, Riyadh, Saudi Arabia;
-October 2007, "Damages in International Arbitration," American University, Washington;
-December 2007, "The International Arbitration Process," Qatar University, Doha, Qatar
[two presentations];
4
1143
-December 2007, "Teaching in American Law Schools," faculty presentation, Qatar
University, Doha, Qatar;
-March 2008, "Operator Liability, Removal and Succession," Rocky Mountain Mineral Law
Fnd. Special Inst. on Operating Agreements, Denver, CO;
-November 2008, "US Energy Policy," to the Institute of United States Policy Stlldies,
Edmunton, Albelia;
-March 2009, "Iraq's Draft Technical Services Contract," to officers of the Iraq Ministry of
Oil, Dead Sea, Jordan;
-May 2009, "International Farmout Agreements" to students in the LLM program at
Universidade Agostinho Neto, Luanda, Angola;
-May 2009, "Intel'l1ational Operating Agreements" to students in the LLM program at
Universidade Agostinho Neto, Luanda, Angola;
-May 2009, "Legal Drafting of International Contracts" to Association of International
Petroleum Negotiators Regional Meeting, Luanda, Angola;
-October 2009, "The Future of Oil and Gas Law," Symposium at Washburn University Law
School, Topeka, KS;
·October 2009, "Principles of U.S. Energy Policy," Cornell Institute of Public Affairs, Ithaca,
NY;
'February 2010, "Inte1'llational Unitization Issues," seminar for Iraqi Ministry of Oil officials,
Dallas, TX;
-March 2010, "Operating Agreement Problems," University of Texas CLE, Houston, TX;
-May 2010, Selected Issues in International Operating Agreements, University College
London in Adelaide, South Allstralia.
-June 2010, Short Comse in International Petroleum Contracts, University of Dunclee, UK.
-September 2010, International Petroleum Contracts and Issues, Chulalongkorn University
Faculty of Law, Bangkok, Thailand.
'September 2010, Implications ofthe Macando Oil Spill, Petroleum Institute of Thailand
Executive Session, Bangkok, Thailand.
·October 20 I0, Short Comse in Oil and Gas Law, Rocky Mountain Mineral Law Fnd.,
Westminster, CO.
·March 2011, OperatorlNon-Operator Issues, University of Texas Fundamentals of Oil and
Gas Law, Houston, TX.
'May 2011, Selected Issues in International Operating Agreements, University
College London in Adelaide, South Australia.
5
1144
'May 2011, Intensive Masters' Course in Global Oil and Gas Contracts, University of
Sydney
'May 2011, Legal Issues in the Development of Petroleum Resources, Australia National
Tax Office, Perth, WA, Australia.
·June 2011, Intensive Masters Course in Global Oil and Gas Contracts, University of Sydney
LLM program, British Institute for International and Comparative Law, London, UK.
·June 2011, Short Course in International Petroleum Contracts, University of Dundee, UK.
'November 2011, Contracts Used in International Petroleum Transactions, Agencia Nacional
do Petroleo, Rio de Janeiro, Brazil.
-March 2012, Operator/Non-Operator Issues, at the University of Texas' program on Fundamentals of
Oil and Gas Law, Houston, TX.
'March 2012, Energy's Future, 2012 Energy Symposium, Thurgood Marshall Law School, Houston, TX,
-April and May 2012, Intensive Masters' Course in Global Oil and Gas Contracts, University of Sydney
LLM program, NSW, Australia.
-May 2012, Selected Issues in International Operating Agreements, at University College London's
Natural Resources LLM program in Adelaide, South Australia.
-May 2012, Intensive Masters/JD Course in International Petroleum Contracts, University of
Melbourne, Vic., Australia.
'May 2012, Legal Issues in the Development of Petroleum Resources, Australia National Tax Office,
Melbourne, Vic., Australia.
-May 2012, International Petroleum Contracts, University of Dundee, Scot/and, UK.
-June 2012, Cross-Border Unitization, for senior Iraqi government officials and officials of the US
Departments of State, Interior, and Commerce, in Washington, D.C.
'September 2012, International Farlllout and Operating Agreements, Chulalongkorn
University Faculty of Law, Bangkok, Thailand .
• November 2012, Panelist, "Emerging Issues in US Energy Law," Appellate Judges
Education Institute, in New Orleans.
-February 2013, Moderator and Panelist, Energy and the Arab Spring, ABA International
6
1145
Law Section meeting, Dallas, TX.
'March 2013, "Issues in Operating Agreements," at the University of Texas' program on Fundamentals
of Oil and Gas Law, Houston, TX.
'May 2013, International Petroleum Contracts, University of Dundee, Scotland, UK.
'Jlllle 2013, "International Petroleum Contracts Overview," for lawyers from the Afghan Ministry of
Mines and Petroleum and members of the Afghanistan parliament, Doha, Qatar.
SELECTED APPOINTMENTS AND ELECTED POSITIONS
'President, the Rocky Mountain Mineral Law Foundation, 2003-2004 (previously held other
offices);
'Chair of the Section of Enviromuent, Energy, and Resources Law of the American Bar
Association, 1992-1993 (previously held other offices);
·Member, ABA Coordinating Group on Energy Law, 1989-1992,1993-2001;
•Vice Chair and member of the Executive Conmlittee of the Energy Law Institute of the
Center for American and International Law, 1999-2004;
'Member of the Council of the Oil, Gas, and Mineral Law Section of the Texas State Bar,
1994-1997;
'Member of the Council of the Energy Law Section (1994-1997) and Member of the Council
ofthe International Law Section (1994-1999), the Dallas Bar Association; -
'Member of the Advisory Board, SMU-in-Legacy Dispute Resolution Program, 2001-2004;
'Editor, the Oil and Gas Reporter (LexislNexis) 1987-present.
AWARDS/SPECIAL RECOGNITIONIHONORS
'Recipient of the 2013 Clyde Mattz Award for teaching excellence from the Rocky Mountain
Mineral Law Foundation;
'Co-recipient ofthe John Rogers Award for distinguished service to the oil and gas industry
(Sponsored by the Center for American and International Law);
'Recipient, Dr. Don C. Smart Prize for Teaching Excellence (sponsored by SMU Law
School);
'Recipient, Dr. Don C. Smatt Prize for Directed Research (sponsored by SMU Law School);
·Twice awarded the Texas Bar Foundation Outstanding Law Journal Article Award.
PROIIESSIONAL/COMMUNITY SERVICE
·Oil and Gas International Legal Advisor and Chair, International Legal Standards Advisory
7
1146
Group, Commercial Law Development Program, United States Depal1ment of Commerce,
2006-2009 (working with the Iraqi Government, the U.S. Embassy in Baghdad, and the State
Department on the Iraq Oil Law and related statutes and contracts);
'Chair, SMU Law School Appointments Committee, 1997-2006 (Member 2007 - present);
'COllStlitant, Commercial Law Development Program, United States Department of
Commerce, 2009 to present (working with lawyers from Iraq, Afghanistan, Yemen, India,
and Poland).
8
1147
Filed
9/5/2014 3:46:44 PM
Esther Degoll do
Distriel CI rk
Webb Dis riel
2013-cv7-001396 D1
NO.2013-CV7-00I396-Dl
JUSTAPOR RANCH COMPANY, L.C., § IN THE DISTRICT COURT OF
Plaintiff, §
§
V. § WEBB COUNTY, TEXAS
§
§
ESCONDIDO 'RESOURCES II, LLC, §
Defendant. § 49th JUDICIAL DISTRICT
AFFIDAVIT OF WILLIAM B. ABINGTON
THE STATE OF TEXAS §
§
COUNTY OF HARRIS §
BEFORE ME THE UNDERSIGNED NOTARY PUBLIC, on this day personally
appeared William B. Abington, who after being by me duly sworn, stated under oath:
1. My name is William B. Abington.' I am a Certified Public Accountant, Certified in
Financial Forensics, a Certified Fraud Examiner, and an honors graduate of Texas State
University. I am a member of the American Institute of Celtified Public Accountants,
Association of Certified Fraud Examiners, and American Bar Association Section of Natural
Resources, Energy and Environmental Law. I am the Managing Director for Alvarez & Marsal's
Global Forensic and Dispute Selvices Group. I have over 25 years experience providing
accounting and complex financial analysis, forensic investigations and advisOlY selvices. I lead
Alvarez & Marsal's dispute and forensic services in the energy sector. Additional information
regarding my qualifications is set out in my resume, a tme and correct copy of which is included
in Exhibit I attached hereto. I have personal knowledge of the facts set fOlth hcrein, and alll
competent to testilY thereto.
2. Attached as Exhibit 1 to my affidavit is a true and correct copy of my report prepared in
this case.
3. I have calculated the royalties Escondido paid Justapor in cOllllection with the Lease
Agreement. Escondido paid Justapol' $5,749,323 in royalty payments for production under the
pal1ies' Lease Agreement from June, 2009, through April, 2014.
4. According to the expert l'epOli prepared by Chal'les E. Graham, Ill, Escondido allegedly
"underpaid" Justapol' royalties totaling $80,958. This alleged "underpayment" represents 1.4%
of total royalties paid to Justapol' dUl'ing the period of time set forth in the preceding paragraph.
Mr. Graham alleges royalties in the amount of $3,851 were underpaid for the months of October,
20 II, November, 2011, and Januaty, 2012. This amount represents 0.00067 of the total royalty
paid.
1
Ex. G 1148
5. I reviewed the amount of money expended by Escondido on capital improvements made
under the pat1ies' Lease Agreement. Escondido incurred $33,100,287 of costs on capital
improvements to the propel1y which is the subject of the pat1ies' Lease Agreement.
6. Article III and Article XIV ofthe Lease Agreement both address royalties; however, they
address two different accounting aspects of royalty payment. Al1iclc III of the parties' Lease
Agreement addresses the accounting of how to calculate royalty and when to make adjustments
to the royalty calculation. Article XIV of the Lease Agreement addresses the accounting of
when royalty payments are to be paid to the lessor. At1icle lU(g) describes when to make
adjustments, 01' "hue-ups" to the royalty calculation. Article III does not call for the Lease
Agreement to terminate if adjustments are not identified by lessee and processed by March I of
the succeeding year. It is common in the oil and gas industry for companies to periodically
review royalty calculations and to make hue-up payments. It is also common for producers to
receive adjustments from purchasers that impact the volume or the price upon which the royalty
payment was based. These adjllstments may be received numerous months following the initial
royalty payment and require the company to make a tme up payment to the royalty owner.
7. At-ticle XIV describes the timing of when the royalty payment is due, for both existing
and first production, and describes the consequences for not making the royalty payment.
Specifically, Article XIV states "Royalties payable to Lessor in the malmer hereinabove provided
for are due and payable to Lessor within a period of sixty (60) days following each month's
production of oil 01' gas produced and sold from the premises". Unlike At1icle III(g), which
describes the manner and timing to account for potential adjustments to royalty, At1icle XIV
describes when the initial payment on monthly production should be accounted for to the royalty
owner and the penalty for a delinquent payment. In other words, it addresses lIOn-payment of the
royalty in a timely manner. The reference to a title dispute 01' defect demonstrates this point. If a
title dispute 01' a title defect exists, royalty payments are typically not paid and are instead
accounted for as "suspense" and held accordingly until the title matter can be resolved. In such
circumstances, Article XIV provides an exception for non-payment of royalty on a timely basis.
The lease termination clause contained in Article XIV is tied to the monthly production and
requirement to pay royalty within 60 days following each month's production. Underpayments
and adjustments to underpayments are not addressed in Al1icle XIV.
8. I have reviewed the royalty payment information related to the pat1ies' Lease Agreement.
Production under the Lease Agreement began during June, 2009. Escondido has routinely made
royalty payments to Justapor for production since that time. Additionally, Escondido has made
true-up 01' reconciliation payments to Justapor over the life of the Lease Agreement. Escondido
made 15 true-up or reconciliation payments to Justapor fl'om September, 2009, through June,
2014, totaling $441,596.
9. Escondido's interpretation of the methodology for royalty payment calculation is
reasonable. David Wrather of Escondido testified that he believed Alnendment No. 1 to the
Lease Agreement replaced the entire pricing provision contained in Article III of the Lease
Agreement so that the pricing provision would mirror the Enterprise contract and limit
Escondido's royalty exposure to what it was receiving fi'om Enterprise. Lease agreements often
contain language providing that royalties will be paid based on the lessee's proceeds. Oil and gas
companies generally strive to align their cash outflows (in this case royalty payments), to their
2 1149
cash inflow (in this case gas sales). Gas accounting involves many complexities, and companies
generally desire to pay royalties bused on the same pricc which the company sold the gas to a
third party.
10. The royalty pricing provisions in the, tease Agreement are not entirely clear. Article
III(b) of the Lease Agreement, as it reads without Amendment No.1, sets f011h a royalty pricing
methodology calling for gas royalties to paid at the highest of:
(i) Current Market Value
(ii) Current Houston Ship Channel Price
(iii) Current Proceeds Realized by Lessee, 01'
(iv) The highest sales price of any gas were gas produced from the property
could be present when sold to a third pat1y.
Oil and gas leases commonly include pricing provisions based on current market value, the
HOllston Ship Channel Price and/or cllrrent proceeds. Even so, the Lease Agreement goes on to
provide definitions of each of three terms. An accountant can detemline the value associated
with each of these provisions. However, the fourth provision appears unclear, but the Lease
Agreement does not define this provision.
11. Amendment No. 1 to the Lease Agreement sets forth pricing amendments to Article III of
the Lease Agreement. Amendment No. 1 includes a paragraph that addresses the Houston Ship
Channel Price. At the end of this pat'agraph, a provision states, in patt:
"provided, however, Lessee shall have the right to enter into gas sales contracts
that will determine the price upon which gas royalty is calculated if such contracts
provide no less than a price redetermination every six months and provide the
following minimum terms:"
(hereinafter referred to as the "Pricing Provision").
Although the Pricing Provision is inclUded in the satUe section that describes the Houston Ship
Channel Price, Mr. Wrather testified that he believed the Pricing Provision replaced the royalty
pricing terms :110m the Lease Agreement. Interpreting the Pricing Provision to only relate to the
Houstoll Ship Channel Price, as Justapor contends, appears to bhu' the meaning of the pricing
points contained in Alticle Ill(b) of the Lease Agreement. Accountants are routinely required to
read and apply oil and gas royalty pricing terms in leases. The language in Amendment No. I
that describes the circumstances of the Pricing Provision is describing a current proceeds
circumstance. Therefore, if the Pricing Provision in Amendment No. I amends the entire royalty
pricing terms set forth in the Lease Agreement, as testified to by MI'. Wrather, royalties would be
calculated based upon the CUI'rcnt proceeds so long as the sales price is greater than the minimum
price set forth in the Pricing Provision. This interpretation allows each pricing point to
concurrently exist in the Lease Agreement, as atllended. However, if the Pricing Provision
applies only 10 the Houston Ship Chanllel Price, then the Pricing Provision is stating that the
current proceeds can be paid instead of the Houston Ship Chmmel Price. Further, if such currcnt
3 1150
proceeds are received from a third party at an arms-length basis, then those proceeds represent a
market value transaction. Thus, if the Pricing Provision only applies to the Houston Ship
Channel Price, then the Houston Ship Channel Price would be the same as currcnt proceeds and
would be the same as market value price. This intelpretation appears to blur the distinction of
the pricing points and appears to create two different definitions of current proceeds.
12. The affidavit of Charles E. Graham, III and the copy of his report attached thereto, both
included as Exhibit F to Plaintiff's Motion for Summary Judgment, sets out alleged trespass
damages in the amount of $10,413,114 from March 2, 2012, to Feb11lary 28, 2014, or
alternatively, $4,825,866 from March 2,2013, to February 28, 2014. According to the Graham
report, these numbers are calculated based on "net proceeds" but subtract only royalties and taxes
paid from gross proceeds. The amounts set fOlih by MI'. Graham in his affidavit and report do
not account for other operating costs incurred by Escondido. An acc\ll'ate calculation of the
value of the net proceeds to Escondido would include a reduction for the costs associated with
production. Taking into account the operating costs incuned, the actual value of the net
proceeds realized by Escondido was $6,671,268 from March, 2012, to February, 2014, and
$2,820,095 from March, 2013, through February, 2014. A monthly breakdown of these amounts
is set forth in my report attached hereto as Exhibit I.
13. The Graham report alleges royalties were underpaid in the amount of $77,107 for the
time period of February, 2012, through January, 2013. It appears the Graham repoli does not
consider two factors relating to the calculation of this amount. First, the Graham report does not
account for the time period from February 1,2012, tlU'ough February 21, 2012, when Escondido
was selling gas only to Kindel' Morgan. Instead, the Gmham report calculates an alleged
underpayment related to Escondido's use of a weighted average price for the entire month,
thereby applying the higher Conoco sales price to the time period during which Escondido was
not selling to Conoco. Second, it appears that the Graham report does not consider the difference
between the entrained NGL mix that exists in the Justapor gas stream and the NGL composition
of the co-mingled gas stream delivered to Conoeo for processing. I have calculated adjustments
to the alleged underpayment for the two above factors, which result in a decrease of more than
$55,000 to the alleged underpayment amount of $77, 107. A similar adjustment may be in order
for the entmined NGL mix of sales to Copano.
14. The facts stated in this affidavit are true and correct.
FURTHER AFFIANT SA YETH NOT.
William BAbington
SUBSCRIBED AND SWORN TO BEFORE ME, the undersigned authorHy, on this
the :') ~ day of September, 2014, to certify which witness my hand and seal of office.
4
1151
Filed
9/5/2014 3:46:44 PM
Esther Degollado
District Clerk
Webb District
2013-cv7 -001396-D1
(
Escondido Resources II, llC
526 Kingwood Drive, /1353
Kingwood, Texas 77339
(lSl) 359-6780 oHice
(281) 361·6780 fax
blll@es(:ondldo·resources,com
August 9, 2011
Mr. James I<. Jones, Jr.
Justapor Ranch Company, L. C.
JAI< Passive Minerals, L.C.
5601 San Dario Ave., Ste #5
Laredo, Texas 78041
Re: Oil and Gas Lease dated June 24, 2008, executed by Justapor Ranch
Company, L.C., as Lessor, to Escondido Resources Ii, L.C., as Lessee
covering a tract of 803 acres of land located in Webb County, Texas, as to
depths from 9,000 feet below the surface t6 all deeper depths (the "Deep
Rights Lease"), a Memorandum of which dated January 5, 2009, Is
recorded in Votume 2701, page 269, Official Public Records of Webb
County, Texas, and which lease has been amended by instruments dated
effective June 24, 2008 by instrument dated October 21, 2008; and
011 and Gas Lease dated June 24, 2008, executed by Justapor Ranch
Company, l.C., as Lessor, to Escondido Resources II, L.e., as Lessee
covering the same tract of 803 acres of land located in Webb County,
Texas, as the Deep Rights Lease, but limited the depths from the surface
to 9,000 feet below the surface (the "Shallow Lease"), a Memorandum of
which is recorded in Votume 2609, page 16, Official Publio Records of
Webb County, Texas, and which lease has been amended by instruments
dated effective June 24, 2008, and October 21,2008.
Dear Mr. Jones:
Reference Is here made to each of the Deep Rights Lease and the Shallow
Lease referenced In the caption above (collectively, the "Leases"). By Instruments of
even date herewith, each denominated the Third Amendment of Oil and Gas Lease (the
"Third Amendment"), each of Justapor Ranch Company, L.C. (the "Ranch Company"),
and Escondido Resources Ii, L.C. ("Escondido"), has agreed to certain amendments to
each of the two Leases.
The purpose of this letter Is to confirm the agreement between each of the Ranch ~
Com~"Y '"' "ooMid. ~. "~::FI:E::'`` _., 00_ ~ \) ``````````?
c)! ''-''<-<-<'hl ~(),,?~,o-o
N-I:r'"-~\ 6. "':""''d-v,<;
c;:tJJ-:::00q:;:l(b..
``~ ~'1VVV"V-"-
. _ ._ .•L \. ~
~v~
.... /
~J
()
\..vJ-ln adrn: the foregoing, this letter sets forth the terms of an agreement
~\J between JAK Passive Minerals, L.C. ("JAK"), and the Ranch Company (collectively,
'\ "Jones Entity') and Escondido pertaining to the Shallow Lease.
Under the terms and provisions of Paragraph XX of each of the Leases, Lessor
has the right to partiCipate for up to a ten percent (10%) working interest In any well
drilled on the leased premises. Jones Entity has agreed, and contemporaneously with
the execution and delivery of this letter and the Third Amendments referred to herein, Is t1}//
assigning, or causing to be assigned, to Escondido all of its working Interest righi, title
and Interest, In and to any rights It owns In the Leases, effective as of 8eeembeH34;Nov.",,,.r I
2010. The form of this assignment is attached hereto as Annex A, and the
consideration for this assignment is the Inclusion in the Third Amendment of each of the
. Leases of an Increase In the royalty provided for In the Leases from 25% to 30%, i.e. an
increase of 5% of 100% in and to production of oil, gas and related hydrocarbons from
the Leases.
If the foregoing reflects your understanding of our meetings and discussions, and
you are In agreement, please execute and'return: (I) a copy of this letter agreement, (II)
each of the two Third Amendments to 011 and Gas Lease and (iii) an assignment In the
form attached as Annex A In exchange for your execution and delivery of these
documents, Escondido will simultaneously execute and deliver to YOLi (i) a counterpart
of this agreement and (II) counterparts of each of the two Third Amendments to Oil and~, ~
Gas Lease. An apprQpriate acc9.~ntlng shall follow ~ execun9n 9f documents.v-\~ "'-'
'V.> .. ~.~ v.... "-4.0D,oOO~'-~ liYJV
This agreement may be executed In mulliple counterpart caples, each of which
shall be deemed an original of but one and the same instrument
Very truly yours,
ESCONDIDO RESOURCES II, LLC
;::/
{:?A>?-· ..·. .
By: ,,-
J. David Wrather, Vice President (signatures continue on following page]
'Y\~
\J
CONFIDENTIAL
ESC004108
1310
Mr. James K. Jones, Jr, i .
Justapor Ranch Company, l.C,
JAK Passive Minerals, l.C.
August 9, 2011
Page 4
~
AGREED TO and ACCEPTED this L day of August 2011,
JUSTAPOR RANCH COMPANY, L.C,
CONFIDENTIAL
ESC004109
1311
Filed
7/23/20149:37:20 AM
Esther Degollado
District Clerk
Webb District
2013-cv7 -001396-D1
Escondido Resources II, lLC
526 Kingwood Drive, 11353
Kingwood, Texas 77339
(281) 359-6780 office
(281) 361-6780 fax
bill@escondldo-resources.com
August 9, 2011
Mr. James K. Jones, Jr.
Justapor Ranch Company, L.C.
JAK Passive Minerals, L.C_
5601 San Daria Ave., Ste #5
Laredo, Texas 78041
Re: Oil and Gas Lease dated June 24, 2008, executed by Justapor Ranch
Company, L.C., as Lessor, to Escondido Resources II, L.e., as Lessee
covering a tract of 803 acres of land located in Webb County, Texas, as to
depths from 9,000 feet below the surface to all deeper depths (the "Deep
Rights Lease"), a Memorandum of which dated January p, 2009, is
recorded in Volume 2701, page 269, Official Public Records of Webb
County, Texas, and which lease has been amended by instruments dated
effective June 24, 2008 by instrument dated October 21, 2008; and
Oil and Gas Lease dated June 24, 2008, executed by Justapor Ranch
Company, L.C., as Lessor, to Escondido Resources II, L.e., as Lessee
covering the same tract of 803 acres of land located in Webb County,
Texas, as the Deep Rights Lease, but limited the depths from the surface
to 9,000 feet below the surface (the qShaliow Lease"), a Memorandum of
which is recorded in Volume 2609, page 16, Official Public Records of
Webb County, Texas, and which lease has been amended by instruments
dated effective June 24, 2008, and October 21, 2008.
Dear Mr. Jones:
Reference is here made to each of the Deep Rights Lease and the Shallow
Lease referenced in the caption above (collectively, the "Leases"). By instruments of
even date herewith, each denominated the Third Amendment of Oil and Gas Lease (the
"Third Amendment"), each of Justapor Ranch Company, L.C. (the "Ranch Company"),
and Escondido Resources II, L.C. ("Escondido"), has agreed to certain amendments to
each of the two Leases.
The purpose of this letter is to confirm the agreement between each of the Ranch ~
Company and Escondido with respect to certain matters covered by the Third ~
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- 445
Mr. James K. Jones, Jr.
Justapor Ranch Company, L.C.
JAK Passive Minerals, L.C.
August 9, 2011
Page 2
Amendments to the Leases, anything set forth in each of the amendments to the
contrary.
Paragraph XIII of each of the two Leases has been amended to provide as
follows:
After the expiration of the primary term of this lease, Lessor and lessee agree
that the commencement of drilling operations on three (3) horizontal wells to any
formation on the lands covered by this lease or covered by the [Deep Rights or Shallow
Rights] Lease, in any twelve month period beginning July 1 shall satisfy this continuous
drilling provision and this lease the [Deep Rights or Shallow Rights] lease shall remain in
full force and effect until the end of a twelve month period beginning July 1 in which
Lessee does not commence drilling operations on three (3) horizontal wells. At the end
of the twelve month period during which lessee has not commenced drilling operations
on three (3) horizontal wells, this lease and all rights granted hereunder shall
automatically terminate as to all acreage covered by this lease, SAVE AND EXCEPT all
acreage allocated to each producing oil or gas well, on a well by well basis (whether
vertical or horizontal), and designated as provided above. lessee shall be obligated to
release all acreage and depths not so allocated to a producing oil or gas well as herein
provided for.
As between the Ranch Company and Escondido, only, and personal only to Escondido
(and not its successors and assigns), each reference in the foregOing paragraph, as set
forth in each of the Third Amendments, shall be deemed to read "two (2) wells" in place
of three. To the extent that Escondido drills and completes more than two (2) wells per
year, it shall receive credit for those additional wells against future years drilling
commitments.
The drilling of the following wells, in addition to wells already drilled on the 803
acre tract covered by the Leases as of the date of this agreement, will develop fully the
lands covered by the Shallow Lease and the Deep Rights Lease as to the formations
indicated:
Formation No. of Wells
Eagle Ford shale 5
Olmos 5
Escondido :3
Total: 13
JJ 2175
446
Mr. James K Jones, Jr.
Justapor Ranch Company, L.C.
JAK Passive Minerals, L.C.
August 9, 2011
Page 3
Escondido commits to drill two (2) wells in the Escondido, (1) well in the Olmos, and one
(1) Eagle Ford Shale well. If Escondido fails to drill these commitment wells prior to
breakup or release of either lease, it shall pay three hundred fifty thousand dollars
($350,000) per well not drilled and completed !o Ranc~Company. ffa( r/tf 1.)"': ' I ~ .J t-v- .~
~"v~ ...,yr.... -c:.t."t-~ C..al-.. "'-1 .."t-~ ."''' ~tr.-t.''1 ifJl- Yev
'''''t'~Y-(.lo(' I.....e.
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ac~..) ~ ... e,..,~U "'-J Pi,/( o-tk......V"~&cl\-r\o'-"'\ ,,,t--eV"<:..Jr.} tv-'L. .'.
G( cflA;..r~ \1.,. ~',~ /ej\. . ..l a.J..,..`` yo",\(" "\p~.r<::;"<1 C\,I-...A c~\.,j~ ....+, ".
In addition to the foregoing, this le1tter sets forth the terms of an agreement .
between JAK Passive Minerals, L.C. ("JAK"), and the Ranch Company (collectively,
"Jones Entity") and Escondido pertaining to the Shallow Lease.
Under the terms and provisions of Paragraph XX of each of the Leases, Lessor
has the right to participate for up to a ten percent (10%) working interest in any well
drilled on the leased premises. Jones Entity has agreed, and contemporaneously with ~
the execution and delivery of this letter and the Third Amendments referred to herein, is if'
assigning, or causing to be assigned, to Escondido all of its working interest right. title ~. 1
and interest, in and to any rights it owns in the Leases, effective as of Qeeember 31, NoY '. . .....
2010. The form of this assignment is attached hereto as Annex A. and the1S' ... ~. ' .
consideration for this aSSignment is the inclusion in the Third Amendment of each of the . .'.
Leases of an increase in the royalty provided for in the Leases from 25% to 30%, i.e. an' . '. .
increase of 5% of 100% in and to production of oil, gas and related hydrocarbons from
the Leases.
If the foregoing reflects your understanding of our meetings and discussions, and
you are in agreement, please execute and return: (i) a copy of this letter agreement, (ii)
each of the two Third Amendments to Oil and Gas Lease and (iii) an assignment in the
form attached as Annex A. In exchange for your execution and delivery of these
documents, Escondido will simultaneously execute and deliver to you (i) a counterpart
~
of this agreement and (ii) counterparts of each of the two Third Amendments to Oil and
.
. . ' Gas Lease. An appropriate accounting shall follow the execution of documentsLN '" ~ we....
\.... o.,v....... c.. ~-t...~ et. -t".o b~ .It SD u./OD297 S.W.3d 768 (2009)
53 Tex. Sup. Ct. J. 89
297 S.W.3d 768
Supreme Court of Texas.
AQUAPLEX, INC. and James Edward Jones, Jr., Petitioners,
v.
RANCHO LA VALENCIA, INC. and Charles R. “Randy” Turner, Respondents.
No. 08–0280. | Oct. 30, 2009.
Synopsis
Background: Real estate developer brought claims against managing joint venturer to recover for
fraud, breach of joint venture agreement (JVA), and destruction of property. Joint venturer filed
counterclaims and sought declaratory and injunctive relief. Parties entered into a memorandum
of settlement agreement (MSA). Joint venturer then added claim of fraudulent inducement to
enter the MSA. Following directed verdict against developer on all claims, and jury trial on
joint venturer's claims, the 201st District Court, Travis County, Suzanne Covington, J., entered
judgment for venturer on fraudulent inducement claim and awarded declaratory and injunctive
relief and attorney fees for breach of JVA. Developer appealed. The Amarillo Court of Appeals,
Mackey K. Hancock, J., 253 S.W.3d 728, reversed and rendered. Review was granted.
Holdings: The Supreme Court held that:
[1] developer's assignment of right, title, and interest in joint venture was a security interest and,
therefore, did not divest developer of its interest;
[2] evidence supported finding of developer's intent not to perform the MSA; and
[3] evidence supported an award of damages, but not amount awarded.
Affirmed in part, reversed in part, and remanded.
West Headnotes (20)
[1] Damages Nature and theory of compensation
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 1
Aquaplex, Inc. v. Rancho La Valencia, Inc., 297 S.W.3d 768 (2009)
53 Tex. Sup. Ct. J. 89
An application of the single injury rule does not arise unless there is more than one
recovery for a single injury.
1 Cases that cite this headnote
[2] Joint Adventures Mutual Rights, Duties, and Liabilities of Parties
Secured Transactions Requisites and validity in general
Secured Transactions Rights and liabilities of parties
Joint venturer's assignment of right, title, and interest in joint venture in consideration of
and as security for the payment of all indebtedness owed to lender was a security interest
and, therefore, did not divest joint venturer of its interest, where assignee was not obligated
to perform any duties and was not obligated for any liabilities, the assignment would have
been void upon payment in full, and assignee never elected to exercise any rights upon
default.
Cases that cite this headnote
[3] Secured Transactions Requisites and validity in general
An assignment where the creditor does not assume any obligations and the effectiveness
of the instrument is terminated on final payment is a security interest.
Cases that cite this headnote
[4] Joint Adventures Mutual Rights, Duties, and Liabilities of Parties
Any breach of joint venture agreement entitling managing venturer to sell the property as
long as the amount of the sale equaled $60,000 or more per condominium and entitling
co-venturer to buy out managing venturer would not support a forfeiture of co-venturer's
interest.
Cases that cite this headnote
[5] Contracts Discharge of contract by breach
Forfeitures are not favored, and contracts are construed to avoid them.
2 Cases that cite this headnote
[6] Contracts Nature and Form of Remedy
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 2
Aquaplex, Inc. v. Rancho La Valencia, Inc., 297 S.W.3d 768 (2009)
53 Tex. Sup. Ct. J. 89
Generally, the proper remedy for breach of contract is damages.
Cases that cite this headnote
[7] Injunction Interference with contractual or business relations
Managing joint venturer was not entitled to injunction to prevent co-venturer from
interfering in sale of property, since co-venturer had not been divested of interest in joint
venture and, thus, there was no threat of imminent harm.
1 Cases that cite this headnote
[8] Fraud Elements of Actual Fraud
The elements of fraud are as follows: (1) a material representation was made; (2) the
representation was false; (3) when the representation was made, the speaker knew it was
false or made it recklessly without any knowledge of the truth and as a positive assertion;
(4) the speaker made the representation with the intent that the other party should act upon
it; (5) the party acted in reliance on the representation; and (6) the party thereby suffered
injury.
85 Cases that cite this headnote
[9] Appeal and Error Considering questions not raised or passed upon in intermediate
court
Issue whether legally sufficient evidence supported intent element of fraud claim by
managing joint venturer was not waived by co-venturer's failure to raise this alternative
ground for affirmance as a cross-point in its response to managing venturer's petition for
review; the Court of Appeals did not consider the intent element, but co-venturer raised
that issue before the Court of Appeals and in its brief on the merits before Supreme Court.
Rules App.Proc., Rules 53.3(c)(2), 53.4.
Cases that cite this headnote
[10] Appeal and Error Verdict
In reviewing a verdict for legal sufficiency, Supreme Court must view the evidence in the
light favorable to the verdict, crediting favorable evidence if reasonable jurors could, and
disregarding contrary evidence unless reasonable jurors could not.
2 Cases that cite this headnote
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 3
Aquaplex, Inc. v. Rancho La Valencia, Inc., 297 S.W.3d 768 (2009)
53 Tex. Sup. Ct. J. 89
[11] Fraud Existing facts or expectations or promises
A promise of future performance constitutes an actionable misrepresentation if the promise
was made with no intention of performing at the time it was made.
15 Cases that cite this headnote
[12] Fraud Intent
While breach of the contract alone is not evidence that a party did not intend to perform,
breach combined with slight circumstantial evidence of fraud is some evidence of
fraudulent intent, enough to support a verdict.
6 Cases that cite this headnote
[13] Fraud Intent
Fraud Presumptions and burden of proof
A party's intent is determined at the time the party made the representation, but it may be
inferred from the party's subsequent acts after the representation is made.
65 Cases that cite this headnote
[14] Fraud Intent
Withdrawal of joint venturer's attorney on belief of his client was perpetrating a fraud and
timing of venturer's bankruptcy just after execution of the master settlement agreement
with managing venturer provided circumstantial evidence of joint venturer's lack of intent
to perform the agreement and satisfied the slight circumstantial evidence standard to
establish fraudulent intent not to perform.
2 Cases that cite this headnote
[15] Fraud Difference between actual and represented value
Fraud Amount awarded
Evidence supported an award of damages under benefit-of-the-bargain measure for joint
venturer's fraud in inducing managing venturer to enter master settlement agreement,
including award of $35,000 for joint venturer's bad faith bankruptcy filing, damages for
joint venturer's failure to provide funding and permit sale of property to third party, and
damages for loss of lender's forbearance agreement.
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 4
Aquaplex, Inc. v. Rancho La Valencia, Inc., 297 S.W.3d 768 (2009)
53 Tex. Sup. Ct. J. 89
2 Cases that cite this headnote
[16] Fraud Difference between actual and represented value
Fraud Difference between value and price paid
The “out-of-pocket measure” of damages for fraud computes the difference between the
value paid and the value received, but the “benefit-of-the-bargain measure” computes the
difference between the value as represented and the value received.
6 Cases that cite this headnote
[17] Fraud Weight and Sufficiency
Fraud Difference between actual and represented value
Under the benefit-of-the-bargain measure of damages for fraud, lost profits on the bargain
may be recovered if such damages are proved with reasonable certainty; but the damages
cannot be based upon an entirely hypothetical, speculative bargain that was never struck
and would not have been consummated.
8 Cases that cite this headnote
[18] Fraud Difference between actual and represented value
Award to managing joint venturer for co-venturer's fraud in inducing joint venturer to enter
master settlement agreement for sale to third party needed to reflect offset for managing
venturer's interest that survived the failed sale that co-venturer refused to permit.
1 Cases that cite this headnote
[19] Fraud Amount awarded
Managing joint venturer's loss of benefit of bargain as result of co-venturer's fraudulent
inducement to enter master settlement agreement requiring co-venturer to deposit
$100,000 into bank account to pay interest, taxes, and expenses on property would
not necessarily be $100,000 and needed to be recalculated, as managing venturer had
ownership interest and could recover only to the extent of injury.
Cases that cite this headnote
[20] Appeal and Error Remission of Part of Recovery
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Aquaplex, Inc. v. Rancho La Valencia, Inc., 297 S.W.3d 768 (2009)
53 Tex. Sup. Ct. J. 89
Supreme Court may not order a remittitur, but the courts of appeals may. Rules App.Proc.,
Rule 46.3.
Cases that cite this headnote
Attorneys and Law Firms
*770 D. Douglas Brothers, Ben Jay Cunningham, Gary L. Lewis, Amy L. Saberian, George &
Brothers, L.L.P., Austin, TX, for Petitioners.
Brian Alan Turner, Law Office of Brian Turner, Craig T. Enoch, James G. Ruiz, Elliot Clark,
Winstead PC, Austin, TX, for Respondents.
Opinion
PER CURIAM.
In this case, we decide whether the evidence presented at trial was legally sufficient to support the
award of damages. The trial court believed so and entered judgment on the jury verdict, but the
court of appeals reversed, holding that no evidence supported the amount of damages awarded.
“[B]ecause there is no legally sufficient evidence to support the entire amount of damages, but
there is some evidence of the correct measure of damages,” Formosa Plastics Corp. USA v.
Presidio Eng'rs & Contractors, Inc., 960 S.W.2d 41, 51 (Tex.1998), we reverse the damages
portion of the court of appeals' judgment and remand the case to the court of appeals.
Randy Turner established Rancho La Valencia, Inc. to acquire a piece of land called the
Tumbleweed Property located in Austin. Rancho took out a $2.4 million loan from OmniBank
to develop the property, with Turner as the guarantor. Problems arose during the development,
so OmniBank required Rancho to bring in a new partner before it would continue financing.
A Rancho employee put Turner in touch with Eddie Jones who agreed to a joint venture. For
purposes of the joint venture, Jones established Aquaplex, Inc. Rancho and Aquaplex (through
their representatives Turner and Jones) then signed the Tumbleweed Investment Joint Venture
Agreement (JVA), which included the following provisions:
• Contributions: Rancho would contribute the property and existing project; Aquaplex would
contribute $400,000.
*771 • Loans: Only Rancho and the property remained responsible for the existing $2.4 million
OmniBank loan—Aquaplex had no liability. Aquaplex also made a $644,000 loan to the joint
venture, with repayment priority second only to the OmniBank loan.
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 6
Aquaplex, Inc. v. Rancho La Valencia, Inc., 297 S.W.3d 768 (2009)
53 Tex. Sup. Ct. J. 89
• Ownership Interest: Aquaplex—60%; Rancho—40%.
• Management: Aquaplex would be managing partner and would be paid up to a $6,000 monthly
management fee. Aquaplex could make all but “major decisions” without Rancho's approval.
One “major decision” was selling any of the development's properties for less than $60,000
per unit. Even in a major decision, however, a partner could not unreasonably withhold its
approval.
• Cash Calls: Aquaplex, as managing partner, could issue a cash call when needed and both
partners would be responsible for their pro-rata share. If a partner failed to comply with the
cash call, then the other partner could either contribute the amount, loan the joint venture the
amount, or could seek to dissolve the joint venture.
• Third-party Offers: On an offer of purchase by a third-party of the property, either party that
dissented to the sale could make a matching offer to buy the property. If no offer was made,
the sale would go through.
Disputes between Aquaplex and Rancho arose soon after the JVA was signed. Aquaplex
terminated the project manager and took over the day-to-day management. Aquaplex also
demolished the clubhouse, which Rancho had already completed. Aquaplex then issued a cash
call under the terms of the JVA, but Rancho refused to contribute. Rancho sued Aquaplex,
alleging fraud, breach of duties under the JVA, and conversion and destruction of partnership
assets. Rancho claimed that Aquaplex overstated the budgetary needs that led to the cash call and
was needlessly destroying property. Aquaplex counter-claimed, alleging frivolous suit, negligent
misrepresentation, fraud, breach of the JVA, and breach of warranty. Aquaplex claimed that, prior
to the JVA, Rancho misrepresented the status of the project and Rancho's own financial ability to
meet continuing financial obligations. In the meantime, Rancho's loan with OmniBank went into
default, causing concerns about a potential foreclosure.
The parties proceeded to mediation. They entered into a Rule 11 memorandum of settlement
agreement (MSA), which envisioned selling the property or ending the joint venture within six
months. The terms of the MSA provided that:
• OmniBank would roll all existing interest into the note and extend it for six months.
• Rancho would deposit $100,000 into an OmniBank account to pay all interest, taxes, and
expenses on the property for those six months.
• The property would be listed for six months at $5 million, but that the property could be sold
at any price exceeding $4 million. Rancho retained a right of first refusal on any offer.
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 7
Aquaplex, Inc. v. Rancho La Valencia, Inc., 297 S.W.3d 768 (2009)
53 Tex. Sup. Ct. J. 89
• Rancho could acquire Aquaplex's interest in the joint venture for $1,645,425 (the approximate
amount of Aquaplex's capital contribution, loan, interest, and management fees) at any time
in the next six months.
• If the property was not sold or acquired in six months, Rancho's interest passed to Aquaplex.
OmniBank also agreed under a forbearance agreement not to post the property for foreclosure
and if the property was not sold, to extend the maturity of the note *772 with interest at the
then-existing federal funds rate. The MSA contemplated the later execution of a formal settlement
agreement. However, Rancho never established the $100,000 account and a formal settlement
agreement was never executed, causing OmniBank's forbearance agreement to lapse.
After the collapse of the settlement, the case proceeded to trial. A few days before trial, Rancho's
trial counsel filed a motion to withdraw, claiming that his services were being used to perpetuate
a fraud. Rancho then filed for bankruptcy, which temporarily stayed the trial court proceedings.
During the bankruptcy, an individual named Jeff Greenberg offered to purchase the Tumbleweed
Property (the “Greenberg Offer”) for $4.05 million. Rancho refused to consent to the sale and filed
a lis pendens on the property to prevent a sale of the property until the dispute was adjudicated.
The bankruptcy court later dismissed Rancho's bankruptcy suit as a bad-faith filing. The trial then
resumed. Aquaplex amended its petition to include allegations of breach and fraud related to the
MSA. At the close of Rancho's case in chief, the court directed a verdict against Rancho on all
of its claims, ruling that Rancho breached the MSA as a matter of law for failing to fund the
$100,000 account. This left Aquaplex's claims as the subject of the remainder of the trial. In a video
deposition shown at trial, Rancho's former attorney testified under the crime-fraud exception about
his dealings with Turner. See TEX.R. EVID. 503(d)(1) (“There is no [attorney-client privilege] ...
[i]f the services of the lawyer were sought or obtained to enable or aid anyone to commit or plan
to commit what the client knew or reasonably should have known to be a crime or fraud.”). The
former attorney testified that he discovered that Rancho did not intend to put up the $100,000
deposit required under the MSA and that Rancho was negotiating with bankruptcy attorneys on
the side during the settlement process. The jury found that Rancho had breached both the JVA and
the MSA and also committed fraud in connection with both. The jury also found that Rancho had
assigned its interest in the joint venture to OmniBank in an earlier document.
Aquaplex elected to recover damages for fraud under the MSA and pursued declaratory and
injunctive relief for the breach of the JVA. The trial court entered judgment on the jury verdict,
which awarded Aquaplex:
• actual damages for fraudulent inducement under the MSA, itemized as:
# $597,183.70 for the loss of the Greenberg Offer;
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 8
Aquaplex, Inc. v. Rancho La Valencia, Inc., 297 S.W.3d 768 (2009)
53 Tex. Sup. Ct. J. 89
# $100,000 for the OmniBank deposit that Rancho failed to set up;
# $279,000 for the loss of the forbearance agreement with OmniBank; 1
# $35,000 for the amount Aquaplex spent on legal representation during the bankruptcy
proceedings.
• punitive damages of $1.5 million under the MSA
• declaratory relief that Rancho had no rights under the JVA because they were divested
by either: (1) the MSA; (2) an assignment of the JVA to OmniBank; (3) paragraph
5.2(j) of the JVA;(4) paragraph 5.9 of the JVA
• injunctive relief that Rancho has no rights in the property and cannot interfere with
the sale of the property
*773 • $283,624 in attorney's fees
• an avoidance of the lis pendens on the property.
[1] Rancho appealed. In its initial opinion, the court of appeals reversed the trial court's judgment,
holding that: (1) the single injury doctrine precluded recovery under both the JVA and the MSA; 2
(2) there was no evidence that fraud relating to the MSA caused damages to Aquaplex; and (3)
Aquaplex was barred from punitive damages because it did not prove actual damages. 253 S.W.3d
728, 732–36 (Tex.App.-Amarillo 2007). On rehearing, the court of appeals acknowledged that its
initial opinion failed to address the declaratory and injunctive relief awarded for Rancho's breach
of the JVA. 297 S.W.3d 781, 783. The court held that there was no evidence supporting this relief
and rendered judgment that Aquaplex take nothing. Id. at 783.
[2] [3] [4] [5] [6] The trial court's judgment declared that Rancho no longer had any interest
in the joint venture because the interest was divested by one or more of: (1) the MSA; (2) an
assignment of Rancho's interest in the joint venture to OmniBank; (3) paragraph 5.2(j) of the
JVA; 3 or (4) paragraph 5.9 of the JVA. 4 We agree with the court of appeals that none of these
is a proper basis for this relief. First, Aquaplex's counter-claim for declaratory and injunctive
relief was premised on breach of the JVA, not the MSA. Second, the unambiguous language of
the “assignment” makes clear it was a security interest. It states that Rancho “assigns, transfers
and conveys unto OMNIBANK ... all of Assignor's right, title and interest in and to Assignor's
40% ownership in [the joint venture] ... including, but not limited to all rights to cash and other
distributions from the Venture.” It states that “[t]his assignment is given in consideration of and
as security for the payment of all the indebtedness ... owing by Assignor ... to Lender.” It further
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 9
Aquaplex, Inc. v. Rancho La Valencia, Inc., 297 S.W.3d 768 (2009)
53 Tex. Sup. Ct. J. 89
provides that “[s]o long as there shall exist no default ... Assignor shall have the right to collect ...
property and other distribution rights ... pursuant to the terms of the [JVA].” In addition, OmniBank
would not be obligated to perform any duties or be obligated for any liabilities under the JVA and,
upon default, OmniBank could notify the joint venture that all further distributions under the JVA
shall be made to OmniBank. Lastly, it provided that, upon payment in full, the assignment was
void. An “assignment” such as this, where the creditor does not assume any obligations and the
effectiveness of the instrument is terminated on final payment, is a security interest. See Amco
Trust, Inc. v. Naylor, 159 Tex. 146, 317 S.W.2d 47, 51 (1958). Nevertheless, we agree with the
court of appeals that nothing in the record indicates OmniBank ever elected to exercise any rights
it had under the “assignment” upon Rancho's default. Finally, relief cannot *774 be premised on
Paragraphs 5.2(j) and 5.9 of the JVA. Under 5.2(j), Aquaplex, as managing venturer, had a right
to sell the property as long as the amount of the sale equaled $60,000 or more per condo. The
Greenberg sale would have fit that description. Under 5.9, Rancho could have offered to buy out
Aquaplex, but did not. There is some evidence that Rancho's actions prevented the Greenberg sale.
But none of the contractual provisions cited by Aquaplex in the JVA or MSA explicitly supports a
forfeiture of interest in the event of a breach. Forfeitures are not favored in Texas, and contracts are
construed to avoid them. See Sirtex Oil Indus., Inc. v. Erigan, 403 S.W.2d 784, 787 (Tex.1966).
Generally, the proper remedy for breach is damages. See Phillips v. Phillips, 820 S.W.2d 785,
788 (Tex.1991).
[7] As held by the court of appeals, the injunctive relief can no longer stand because there was no
evidence to support the trial court's declaratory relief under the JVA. Thus, the denial of injunctive
relief is proper as there was no threat of imminent harm. See Schneider Nat'l Carriers, Inc. v.
Bates, 147 S.W.3d 264, 285 (Tex.2004).
[8] [9] [10] While we agree with the court of appeals with regard to relief under the JVA, we
do not agree with regard to the fraud claim under the MSA. The elements of fraud are:
(1) that a material representation was made; (2) the representation was false;
(3) when the representation was made, the speaker knew it was false or made it
recklessly without any knowledge of the truth and as a positive assertion; (4) the
speaker made the representation with the intent that the other party should act
upon it; (5) the party acted in reliance on the representation; and (6) the party
thereby suffered injury.
In re FirstMerit Bank, N.A., 52 S.W.3d 749, 758 (Tex.2001) (citing Formosa Plastics Corp. v.
Presidio Eng'rs & Contractors, Inc., 960 S.W.2d 41, 47 (Tex.1998)). The court of appeals focused
on the injury (or damages) element, holding that no evidence supported the damages awarded by
the trial court. But first we consider whether, as Rancho argues, the intent element is not supported
by legally sufficient evidence. 5 In reviewing a verdict for legal sufficiency, we “must view the
evidence in the light favorable to the verdict, crediting favorable evidence if reasonable jurors
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Aquaplex, Inc. v. Rancho La Valencia, Inc., 297 S.W.3d 768 (2009)
53 Tex. Sup. Ct. J. 89
could, and disregarding contrary evidence unless reasonable jurors could not.” City of Keller v.
Wilson, 168 S.W.3d 802, 807 (Tex.2005).
[11] [12] [13] “A promise of future performance constitutes an actionable misrepresentation if
the promise was made with no intention of performing at the time it was made.” Formosa Plastics,
960 S.W.2d at 48. “Proving that a party had no intention *775 of performing at the time a contract
was made is not easy, as intent to defraud is not usually susceptible to direct proof.” Tony Gullo
Motors I, L.P. v. Chapa, 212 S.W.3d 299, 305 (Tex.2006) (citing Spoljaric v. Percival Tours, Inc.,
708 S.W.2d 432, 435 (Tex.1986)). While breach of the contract alone is not evidence that a party
did not intend to perform, “breach combined with ‘slight circumstantial evidence’ of fraud” is some
evidence of fraudulent intent, enough to support a verdict. Id. “[A] party's intent is determined at
the time the party made the representation, [but] it may be inferred from the party's subsequent
acts after the representation is made.” Spoljaric, 708 S.W.2d at 434 (citing Chicago, T. & M.C.
Ry. Co. v. Titterington, 84 Tex. 218, 19 S.W. 472, 474 (1892)).
[14] Here, Rancho's attorney withdrew and then testified that he believed his client was
perpetrating a fraud. The timing of the bankruptcy, filed just after the execution of the MSA,
constitutes further circumstantial evidence of Rancho's lack of intent to perform. These examples
satisfy the “slight circumstantial evidence” standard enunciated in Tony Gullo Motors I and
Spoljaric, and when combined with Rancho's breach, establish the fraudulent intent requirement.
See, e.g., Tony Gullo Motors I, 212 S.W.3d at 305–06 (breach plus spoliation of evidence and
forged signatures met standard); Spoljaric, 708 S.W.2d at 435–36 (breach plus evidence that
employer refused to commit bonus plan to writing and remained silent when asked if plan would
be approved after it had already been approved met standard). Contrary to the court of appeals'
conclusion, there is legally sufficient evidence to support a finding of fraudulent intent.
[15] [16] The court of appeals held that no evidence supported the award of damages. 253
S.W.3d at 736. We disagree. “Texas recognizes two measures of direct damages for common-
law fraud: the out-of-pocket measure and the benefit-of-the-bargain measure. The out-of-pocket
measure computes the difference between the value paid and the value received, while the benefit-
of-the-bargain measure computes the difference between the value as represented and the value
received.” Formosa Plastics, 960 S.W.2d at 49 (citations omitted); see also Baylor Univ. v.
Sonnichsen, 221 S.W.3d 632, 636 (Tex.2007) (per curiam) (observing that out-of-pocket damages
“derive from a restitutionary theory,” while benefit-of-the-bargain damages “derive from an
expectancy theory”).
The trial court entered judgment on the jury verdict, which awarded the following monetary
damages: (1) $35,000 in attorney's fees and expenses incurred by Aquaplex as a result of Rancho's
bankruptcy proceedings; (2) $597,183.70 as the amount Aquaplex lost due to Rancho's failure to
permit a sale of the property after the execution of the MSA; (3) $100,000 as the amount Rancho
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Aquaplex, Inc. v. Rancho La Valencia, Inc., 297 S.W.3d 768 (2009)
53 Tex. Sup. Ct. J. 89
was obligated to provide under the MSA; and (4) $279,000 as the amount that Aquaplex lost due
to the loss of the OmniBank forbearance agreement. Under the benefit-of-the-bargain measure,
Aquaplex suffered some damages under each of these categories.
Rancho argues that there is no evidence supporting a causal relationship between the alleged fraud
and the $35,000 attorney's fees awarded in relation to the bankruptcy filing. But the bankruptcy
delay was in direct contradiction to the purpose of the MSA—to end the litigation. The attorney's
testimony that Rancho was consulting with bankruptcy counsel and that it did not intend to fund
the $100,000 as it agreed in the MSA, along with the evidence of the bad faith bankruptcy filing
is *776 legally sufficient evidence to support these damages.
[17] Some evidence also supports Aquaplex's claim that it lost the benefit of the sale of
the property due to Rancho's fraud. “Under the benefit-of-the bargain measure, lost profits
on the bargain may be recovered if such damages are proved with reasonable certainty.”
Formosa Plastics, 960 S.W.2d at 50. But the damages cannot be based upon an “entirely
hypothetical, speculative bargain that was never struck and would not have been consummated.”
Id. “[D]etermining whether lost profits have been proved with reasonable certainty is a fact-
intensive determination dependent upon the circumstances of a particular case,” but “[w]hen a
review of the surrounding circumstances establishes that the profits are not reasonably certain,
there is no evidence to support the lost profits award.” Id. at 50 n. 3. Here, there is some evidence
that Aquaplex lost profits due to the fraud—specifically the loss of a sale to Greenberg. Greenberg
offered $4.05 million for the property, which under the terms of the MSA, satisfied the minimum
offer amount of $4 million. Rancho refused to consent to the sale and filed a lis pendens, effectively
blocking the sale. The court of appeals held, and Rancho argues, that there is no evidence as to
why the Greenberg Offer failed, and it is thus speculative to claim the alleged fraud caused its
failure. But both parties testified that they knew of the Greenberg Offer, and Rancho testified that
it filed the lis pendens to prevent the sale. This is sufficient evidence that the sale fell through due
to Rancho's actions. Therefore, damages were proper.
[18] The damages were calculated incorrectly, however. The jury and trial court awarded
$597,183.70 for the loss of the sale. It appears from the record that this figure was reached by
subtracting Aquaplex's original investment of $1,044,000 ($400,000 in contribution and $644,000
loan) from $1,641,183.70, which is the amount Aquaplex argued it was due (including interest)
under the JVA had the property been sold to Greenberg. But this figure does not take into account
that Aquaplex still received an interest in the property by way of its interest in the joint venture,
which survived the failed sale under the Greenberg Offer. The damages figure must reflect this
offset. See Formosa Plastics, 960 S.W.2d at 49–50. Therefore, the trial court's award was not
proper and must be recalculated.
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Aquaplex, Inc. v. Rancho La Valencia, Inc., 297 S.W.3d 768 (2009)
53 Tex. Sup. Ct. J. 89
[19] The trial court also awarded $100,000 for the OmniBank account Rancho failed to fund. The
court of appeals held that there was no evidence that the money was to be paid to Aquaplex or that
Aquaplex had to make the payments in lieu of Rancho. 253 S.W.3d at 736. Aquaplex argues that
the $100,000 was a benefit-of-the-bargain, and that it was damaged by Rancho's failure to fund
the $100,000 because the property remained encumbered with this amount. The court of appeals
is partially correct: Rancho's failure to fund the $100,000 damaged the joint venture because its
asset is encumbered by additional interest. Because of its ownership interest in the joint venture,
Aquaplex was injured and may recover to the extent of that injury. This amount, though, would
not necessarily be $100,000, and must be recalculated.
The court of appeals also held that the evidence did not support $279,000 in damages for the loss of
the forbearance agreement because Aquaplex put on evidence of damages over a two-year period
when the agreement at issue was only a one-year period. 253 S.W.3d at 735. The court of appeals
is correct here. Aquaplex outlined the value of a two-year forbearance agreement in a chart at trial,
but the agreement *777 introduced into evidence was only for one year. Thus, while there may
have been damages, it was only for one year and Aquaplex failed to put on any evidence of the
appropriate amount of damages for a one-year period.
[20] We hold that some evidence supported an award of damages for fraud under the MSA, just
not at the level awarded by the trial court. This Court may not order a remittitur, but the courts of
appeals may. TEX.R.APP. P. 46.3; Tony Gullo Motors I, 212 S.W.3d at 310. Therefore, we affirm
the portion of the court of appeals' judgment rejecting Aquaplex's declaratory and injunctive relief,
and reverse the portion of the court of appeals' judgment related to the monetary damages. We
remand the case to the court of appeals so that it may determine whether to remand for a new
trial on damages, see Formosa Plastics, 960 S.W.2d at 51, or whether to suggest a remittitur, see
TEX.R.APP. P. 46.3; Tony Gullo Motors I, 212 S.W.3d at 310. Furthermore, because we hold
that actual damages were proper, the court of appeals must reconsider whether punitive damages
are appropriate. See Twin City Fire Ins. Co. v. Davis, 904 S.W.2d 663, 665 (Tex.1995) (“[A]ctual
damages sustained from a tort must be proven before punitive damages are available.”). The court
of appeals must also consider the factual sufficiency issues raised by Rancho, but not yet addressed
by the court of appeals. See TEX.R.APP. P. 53.4.
Parallel Citations
53 Tex. Sup. Ct. J. 89
Footnotes
1 The jury actually awarded $279,010 for the loss of the forbearance agreement, but based on the judgment's actual damages award of
$1,011,183.70, it appears the trial court rounded this number down to $279,000.
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 13
Aquaplex, Inc. v. Rancho La Valencia, Inc., 297 S.W.3d 768 (2009)
53 Tex. Sup. Ct. J. 89
2 We do not reach the single injury issue or consider whether Aquaplex suffered more than one injury. An application of the single
injury rule does not arise unless there is more than one recovery for a single injury. See Tony Gullo Motors I, L.P. v. Chapa, 212
S.W.3d 299, 303 (Tex.2006). Under our holding, Aquaplex has only one recovery.
3 This provision in the JVA listed Aquaplex's authority as “managing venturer.” It provided that Aquaplex is authorized to “[sell] all
or a portion of the Land or the Project for $60,000.00 per condominium unit or more.”
4 This provision in the JVA discussed third-party offers. It provided that if an offer was made, a dissenting partner may buy out the
other partner for the amount that partner would have made if the sale went through and the joint venture was immediately liquidated.
Otherwise, the third-party offer shall be accepted.
5 Rancho did not raise this alternative ground for affirmance as a cross-point in its response to the petition for review. It raised it for
the first time in its brief on the merits. Aquaplex argues Rancho has waived this point. See TEX.R.APP. P. 53.3(c)(2) (providing
that the issues presented section in the response to the petition for review must include any “independent grounds for affirmance of
the court of appeals' judgment”). Rancho's “Issues Presented” section did not assert that the court of appeals could have found no
evidence supporting the intent element. But Rule 53.4 of the Rules of Appellate Procedure provides: “[T]o request that the Supreme
Court consider [points briefed in the court of appeals but not decided by that court], a party may raise those issues or points in the
petition, the response, the reply, any brief, or a motion for rehearing.” TEX.R.APP. P. 53.4. The court of appeals did not consider
the intent element, but Rancho raised that issue before the court of appeals and its brief on the merits before this Court. Therefore,
the point is not waived.
End of Document © 2015 Thomson Reuters. No claim to original U.S. Government Works.
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 14
Decker v. Kirlicks, 110 Tex. 90 (1919)
216 S.W. 385
110 Tex. 90
Supreme Court of Texas.
DECKER
v.
KIRLICKS et al.
No. 3189. | Nov. 12, 1919.
Error to Court of Civil Appeals of First Supreme Judicial District.
Action by H. R. Decker against John A. Kirlicks and others. The trial court directed a verdict for
plaintiff, and the Court of Civil Appeals reversed and remanded the cause (Kirlicks v. Texas Co.,
201 S.W. 687), and plaintiff brings error. Affirmed with directions.
Hawkins, J., dissenting in part.
West Headnotes (5)
[2] Mines and Minerals Surrender, Abandonment, or Forfeiture
An oil lease, providing that if oil is found in paying quantities in the first well the lease
will in 30 days begin boring a second well on some other acre of the tract and continue to
bore as developments may justify, until at least five or six wells have been completed, or
the acre on which lessee has failed to drill a well reverts to lessor, is ambiguous, and will
not sustain a forfeiture because of failure to bore all of five wells upon different acres.
27 Cases that cite this headnote
[3] Contracts Discharge of Contract by Breach
An ambiguous and uncertain forfeiture provision in a contract will not be enforced.
7 Cases that cite this headnote
[4] Appeal and Error Cases in Intermediate Courts
Ruling of Court of Civil Appeals that issues both of an entire forfeiture and a partial
forfeiture of oil lease should have been submitted to jury held, even if erroneous, not
so clearly wrong as to bring it properly within the Supreme Court's jurisdiction under
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 1
Decker v. Kirlicks, 110 Tex. 90 (1919)
216 S.W. 385
Rev.St.1911, art. 1521, subd. 6, as amended by Acts 1917, c. 75, § 1, Vernon's Ann.Civ.St.
arts. 1728, 1741.
14 Cases that cite this headnote
[5] Appeal and Error Cases in Intermediate Courts
A ruling of the Court of Civil Appeals in a particular case that there was some evidence
warranting the submission of a given issue to the jury, or that there was no evidence
justifying its submission, is not within Rev.St.1911, art. 1521, subd. 6, as amended by
Acts 1917, c. 75, § 1, Vernon's Ann.Civ.St. arts. 1728, 1741, as to appellate jurisdiction
of the Supreme Court, unless it can be fairly regarded as so flagrantly wrong as to amount
to a virtual denial and abrogation of established rules of law.
10 Cases that cite this headnote
[5] Appeal and Error Direction of Verdict
Assignments of error as to the giving of peremptory instruction are entitled to
consideration, though objection to the giving of it was not made.
4 Cases that cite this headnote
Attorneys and Law Firms
*91 **385 Carothers & Brown, of Houston, for plaintiff in error.
*92 McMeans, Garrison & Pollard, of Houston, for defendants in error.
Opinion
*93 PHILLIPS, C. J.
The suit was by H. R. Decker against John A. Kirlicks to quiet the rights of Decker under an oil
lease granted by Kirlicks and others, and to recover from the Texas Company the purchase price
of certain oil from wells developed under the lease to which Kirlicks and others were asserting an
adverse claim. The Texas Company declared its willingness to pay the amount due for the oil to
the rightful owner, and impleaded other parties. Some of these joined with Kirlicks in a plea that
Decker had forfeited his rights under the lease. Upon the trial a verdict for Decker was directed.
The honorable Court of Civil Appeals reversed the judgment and remanded the cause.
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 2
Decker v. Kirlicks, 110 Tex. 90 (1919)
216 S.W. 385
[1] The ruling of the Court of Civil Appeals that under the Act of 1913 the peremptory direction of
the verdict was subject to challenge on the appeal though not objected to in the trial court before
read to the jury, presented a conflict with decisions of other Courts of Civil Appeals, and we
granted a writ of error in order to settle the question. We decided it at the last term in Walker v.
Haley which involved a similar conflict. 109 Tex. --, 214 S.W. 295. That decision sustains the
holding of the Court of Civil Appeals in the present case.
[2] The oil lease contained this provision:
‘It is further agreed that in the event oil is found in paying quantities in said
first well, then the lessee agrees and covenants that within thirty days from the
completion of such successful well he will begin the boring of a second well on
some other acre of said tract herein leased, and continue to bore additional wells
with due diligence in such order as to additional wells on the tract herein leased
as developments may justify, until at least five or six wells have been completed,
or the acre upon which said second party has failed to drill a well reverts to the
first party by written notice to that effect being served upon said second party by
said first party.’
The tract of land leased embraced about 20 acres and was laid off in acre blocks. Decker bored his
first two wells upon different acres. He completed five wells with due diligence, but four of them
*94 were upon the same acre. **386 Upon the question as to whether this provision in the lease
would sustain a forfeiture because of a failure to bore all of the five wells upon different acres, the
Court of Civil Appeals held that the provision was ambiguous and that its meaning should have
been submitted to the jury for decision.
[3] If the provision is ambiguous, that alone condemns it as a forfeiture provision. A forfeiture
should rest upon surer ground. Where a contract is so vague in its terms that a court cannot
determine its meaning, it would be unjust to enforce a forfeiture under it against one whose only
fault has been to possibly mistake its meaning. Forfeitures are harsh and punitive in their operation.
They are not favored by the law, and ought not to be. The authority to forfeit a vested right or
estate should not rest in provisions whose meaning is uncertain and obscure. It should be found
only in language which is plain and clear, whose unequivocal character may render its exercise
fair and rightful.
It is not necessary that we determine whether this clause in the lease requires the boring of the five
wells upon five different acres, or sanctions their location upon but two different acres. If it be
conceded that it admits of the first construction, it is not certain that such is its true construction.
It does not plainly say that each of the wells shall be upon a different acre. It is only by inference,
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 3
Decker v. Kirlicks, 110 Tex. 90 (1919)
216 S.W. 385
at best, that such meaning can be gained from the language. A provision so indefinite as to the
obligation imposed, in incapable of supporting a forfeiture. Benavides v. Hunt, 79 Tex. 383, 15
S.W. 396.
Another clause in the lease was as follows:
‘It is further mutually agreed that in case lessee abandons said property; or in case
he fails to operate any particular well which is in actual operation on said tract,
which is producing either oil or gas, for the period of thirty days, and fails to operate
same for said period, unless such failure is unavoidable and is because of broken
machinery that cannot by proper care and diligence be sooner replaced or put in
order, or because of the wells clogging so as to reasonably require a longer time
to clean and put them in order, then this lease and such producing well and the
land hereinabove provided to operate it, shall revert to the lessors, and the lessors
shall in such event have the right to take possession of said premises and such well,
together with all of its equipments, and operate same, or have same operated for
their own benefit without further proceedings, or any legal proceedings, of any
kind or character but in such event the lessee shall have the right to remove his
equipments and machinery from such well so forfeited, and from said land herein
leased on which said well is directly located, and not to exceed one acre in area,
but in no event to so operate as to interfere with other wells operated by lessee
or with other drilling by him for other wells unless the lessors shall within thirty
*95 days after such forfeiture elect to pay and do pay to the lessee fifty per cent.
of the market price for the piping in such well or wells, and the market value of all
equipments retained, and should lessors fail to make such payment within thirty
days after such forfeiture on the part of lessee and the taking over of said well by
lessors, the lessee shall have the right to remove said pipe and equipment from
such well and from such land.’
A further ruling of the Court of Civil Appeals, complained of here by Decker, was that in the state
of the proof an issue of fact was presented as to whether under this clause Decker had forfeited
the lease in whole or in part.
The clause provides two different conditions as grounds for forfeiture, and different measures
of forfeiture as the consequence: (1) an abandonment of the property, whereon the entire lease
should terminate; and (2) a failure to operate a producing well for thirty days unless due to an
excepted cause, whereon such well and the immediate land upon which it was located in extent
sufficient for its operation but not to exceed one acre, should revert to the lessors. In the event of
the latter happening, the lessee is given the right to remove his machinery and equipment from
such forfeited well and land unless within 30 days after such forfeiture the lessors shall pay him
therefor as stipulated.
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 4
Decker v. Kirlicks, 110 Tex. 90 (1919)
216 S.W. 385
[4] As we understand its opinion the Court of Civil Appeals did not construe the clause as
authorizing a forfeiture of the entire lease upon a failure to operate one of the producing wells. It
held that there was evidence tending to establish an entire abandonment of the land by the lessee,
and also evidence of his failure to operate producing wells for 30 days and longer. Its ruling simply
was that such being the record the issues both of an entire forfeiture and a partial forfeiture should
have been submitted to the jury.
If we have jurisdiction to review this holding of the Court of Civil Appeals, it is in virtue
of subdivision 6 of article 1521 as amended by the Act of 1917 (chapter 75), by which the
appellate jurisdiction of the Supreme Court is now governed. That is, it must appear that the
ruling constitutes ‘an error of law * * * of such importance to the jurisprudence of the State, as
in the opinion of the Supreme Court requires correction.’ The amendment of this subdivision by
the Act of 1917 was plainly intended to further limit the jurisdiction of the Supreme Court as
conferred by the Act of 1913. Whether the Court of Civil Appeals ‘has erroneously declared the
substantive law of the case’ is no longer the test as applied to cases falling within the subdivision.
The amendment declares, in effect, that it is not enough that the error of law be obvious, in the
opinion of the Supreme Court; nor that it be of importance to the aggrieved party; nor **387
that its correction be necessary in the view of the Supreme Court to prevent an injustice in the
immediate case; nor even that it be ‘of importance’ to the jurisprudence of the *96 State. For
the Supreme Court to be invested with the power to revise the ruling, it is required that it amount
to an error of law ‘of such importance’ to the jurisprudence of the State as in the opinion of the
court requires correction. This clearly presupposes a ruling of such erroneous consequence as, if
permitted to stand, would constitute a serious departure from the established law or introduce a
doctrine violative of fundamental principles.
Whatever may be the difficulties of its administration, this is the theory and plain meaning of the
amendment. It is the written law, and our duty is to give it effect.
[5] We do not consider a ruling of the Court of Civil Appeals in a particular case either that there
was some evidence warranting the submission of a given issue to the jury, or that there was no
evidence justifying its submission, as within the purview of the amendment unless it can be fairly
regarded as so flagrantly wrong as to amount to a virtual denial and abrogation of the established
rules of law which, in the one instance, enjoin upon the trial court the exercise of its essential
function, and in the other preserve the right of jury trial. Where these questions are presented, our
practice is to examine the record; but unless it discloses that the ruling is of the character stated,
we do not regard it as one within the court's power to revise.
We have examined the record here under the assignment challenging the ruling of the Court of
Civil Appeals above noted. If erroneous at all, the ruling was not so clearly wrong as to bring it
properly within the Supreme Court's jurisdiction.
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Decker v. Kirlicks, 110 Tex. 90 (1919)
216 S.W. 385
Other questions are presented, but they are equally without our jurisdiction.
The judgment of the Court of Civil of Appeals reversing that of the District Court is affirmed, but
with the direction that the further trial of the case be in accordance with this opinion.
HAWKINS, J.
In so much of the foregoing majority opinion by our Chief Justice as deals with issues of which
this court has entertained jurisdiction I concur; but I do not concur entirely in the application made,
in that opinion, of amended subdivision 6, R. S. art. 1521, Acts of 1917.
It is my opinion that whenever it is shown here, to the satisfaction of this court, that a Court of
Civil Appeals has held erroneously that a given issue is or is not supported by some evidence,
thereby determining whether such issue is or is not properly referable to the jury, such error should
be treated by this court as being, in and of itself, of such importance to the jurisprudence of the
state as to require correction.
I believe that the requirements of this jurisdictional statute are met in every such instance, and that
intrinsically such error is of the stated importance, even though such error may have been *97
committed in treating an issue which is not of frequently recurring nature or of general interest,
and even though such erroneous ruling may not have been intended as an assertion of a general
principle or a general rule of practice.
I think that a holding by the Court of Civil Appeals, approving or directing the submission by the
district court to the jury of a given issue when in the opinion of the Supreme Court there is no
evidence to support it, or approving or directing refusal of a district court to submit to the jury a
given issue when in the opinion of the Supreme Court there is evidence to support it, constitutes
inevitably in every instance ‘a serious departure from the established law,’ and introduces into our
jurisprudence ‘a doctrine violative of fundamental principles.’ Instances of the former character
involve refusal of the trial court to perform an ‘essential function’-to discharge a legal duty which
ought not to be shifted to the jury; and instances of the latter character involve a practical denial
of the right of trial by jury, in plain contravention of our state Constitution.
Such errors very naturally will occur occasionally, and that is bad enough, even though all such
errors be subject to correction by our Supreme Court; but for any such error to be recognized
by this court and yet not be subject to correction by it, for lack of jurisdiction in this court, is, I
think, a very serious reproach to our jurisprudence. In view of the phraseology of said amended
subdivision 6 I cannot concur in a construction of it which entails that deplorable result.
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 6
Decker v. Kirlicks, 110 Tex. 90 (1919)
216 S.W. 385
I think that the practice of this court, under said statute, should be to examine the record whenever
such a question is duly presented here, and, if such error be found, to correct it in every instance,
upon the theory that such error is of vital importance to our jurisprudence.
As to the construction properly attributable to said statute I refer to ‘In re Subdivision 6 of Supreme
Court, Jurisdiction Act of 1917,’ 201 S.W. 390 et seq. In so doing it is not my purpose to reopen
or deal with any question concerning the constitutionality of said statute further than such question
may be involved in the construction placed upon it by the majority opinion of this court in this
present case.
Parallel Citations
216 S.W. 385
End of Document © 2015 Thomson Reuters. No claim to original U.S. Government Works.
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 7
Outdoor Systems, Inc. v. BBE, L.L.C., 105 S.W.3d 66 (2003)
105 S.W.3d 66
Court of Appeals of Texas,
Eastland.
OUTDOOR SYSTEMS, INC., Appellant,
v.
BBE, L.L.C. a/k/a BBE/Arromid, L.L.C., Appellee.
No. 11–01–00052–CV. | March 20, 2003.
Lessor of two tracts of property upon which lessee maintained billboards brought action against
lessee, alleging trespass and breach of leases. In a bench trial, the trial court, Dallas County, W.
Bruce Woody, J., found that lessee breached the leases and, for having remained in possession
of property after termination of leases, committed trespass, and awarded lessor damages of
$80,034.71, title to two billboards, and attorney fees. Lessee appealed. On motions for rehearing,
the Court of Appeals, Austin McCloud, Senior Justice (Retired), held that: (1) lessor's notice of
default was legally insufficient to justify lessor's forfeiture of leases, (2) lessor made an excessive
demand in its letter to lessee and, thus, could not recover any attorney fees from lessee, and (3)
lessee's “excessive demand” defense to liability for attorney fees was tried by implied consent.
Reversed and rendered in part; modified in part; and, as modified, affirmed in part.
West Headnotes (13)
[1] Estates in Property Ground rents
Lessor's demand for rent, in lessor's written notice of default, was not specific, but was
instead excessive, imprecise, and unreasonable, and thus notice of default was legally
insufficient to permit forfeiture of two billboard ground leases, where first letter sent to
lessee made no demand but merely was a reminder that the rent for the month had not been
paid, and second letter, sent two weeks later, demanded total arrearages from the inception
of the 12-year-old lease within 10 days, an amount which lessee could not calculate in
10 days.
1 Cases that cite this headnote
[2] Estates in Property Ground rents
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 1
Outdoor Systems, Inc. v. BBE, L.L.C., 105 S.W.3d 66 (2003)
Lessor could not base forfeiture of two billboard ground leases on lessee's failure to
provide advertising contracts so that lessor could audit and calculate the percentage
payments that were owed throughout the term of leases, where leases did not contain a
requirement or obligation on part of lessee to provide lessor with advertising contracts
relating to billboards.
Cases that cite this headnote
[3] Estates in Property Ground rents
Notice of default that lessor sent to lessee of billboard ground leases, and not lessee's
response, determined the legal sufficiency of the notice.
Cases that cite this headnote
[4] Landlord and Tenant Breach of Covenant or Condition
A landlord cannot base a forfeiture on the breach of an obligation that does not exist in
the lease.
Cases that cite this headnote
[5] Landlord and Tenant Costs and attorney fees
Lessor made an excessive demand in its letter purportedly notifying lessee of its default
under billboard ground leases, and thus lessor could not recover any attorney fees in its
suit against lessee to recover unpaid rent and other damages, where lessor did not demand
a specific liquidated sum, but instead demanded that lessee, within 10 days, pay lessor
an unspecified amount based upon “total arrearages from the inception of the [l]eases,”
lessee acquired the leasehold interest 10 years after the leases were executed, and lessor
demanded that lessee provide advertising contracts from the inception of the leases, despite
fact that leases contained no such requirement.
2 Cases that cite this headnote
[6] Costs Particular Actions or Proceedings
A creditor who makes an excessive demand upon a debtor is not entitled to attorney fees
for subsequent litigation required to recover the debt.
1 Cases that cite this headnote
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Outdoor Systems, Inc. v. BBE, L.L.C., 105 S.W.3d 66 (2003)
[7] Pleading Objections to evidence as not within issues
Lessee's defense to any liability for attorney fees, claiming that lessor had made an
excessive demand, was tried by implied consent in lessor's suit for breach of billboard
ground leases, and thus lessee could rely upon such defense even though it failed to
expressly plead the defense, where lessor did not argue in the trial court that lessee had
failed to sufficiently plead the issue of the excessive demand defense to attorney fees
liability, and lessor instead raised the issue in its trial brief and argument.
Cases that cite this headnote
[8] Appeal and Error Issues not passed on below
After the Court of Appeals partially reversed the trial court's judgment in favor of lessor
in its action against lessee for breach of billboard ground leases and for trespass, it was
not necessary to remand lessee's counterclaims to the trial court for consideration, where
trial court had conducted a nonjury trial on the merits and had entered judgment providing
that “all relief not expressly granted herein is denied,” thereby showing that trial court had
considered the counterclaims and denied them.
Cases that cite this headnote
[9] Appeal and Error Defects in proceedings in lower court in general
Appeal and Error Persons entitled to restitution
After the Court of Appeals partially reversed the trial court's judgment in favor of lessor
in its action against lessee for breach of billboard ground leases and for trespass, it was
not necessary to remand matter to the trial court in order to permit lessee to seek recovery
of the billboards pursuant to the Court of Appeals' holding; under preexisting procedure,
lessee could instead seek restitution after the Court of Appeals' judgment became final by
issuance of the mandate.
Cases that cite this headnote
[10] Appeal and Error Persons liable
A party obtaining any advantage or benefit through a trial court's judgment that is later
reversed must return the benefit to the other party.
2 Cases that cite this headnote
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Outdoor Systems, Inc. v. BBE, L.L.C., 105 S.W.3d 66 (2003)
[11] Appeal and Error Making or Compelling Restitution
When an erroneous judgment has not been suspended pending appeal, and the relief
granted has already been obtained, the successful appellant may reclaim what he has been
deprived of, and if his demands are wrongfully resisted, he is entitled to the assistance of
the courts; the assistance which the successful appellant is entitled to seek from the courts
is characterized as the right of restitution.
1 Cases that cite this headnote
[12] Appeal and Error Making or Compelling Restitution
A party may have restitution of a benefit transferred under a trial court's judgment, which
is later reversed on appeal, upon its own motion after an evidentiary hearing establishing
with certainty what he has lost.
2 Cases that cite this headnote
[13] Appeal and Error Making or Compelling Restitution
A successful appellant, who has lost a benefit as a result of trial court's erroneous judgment,
is entitled to seek restitution in the same proceeding without resorting to a new suit.
3 Cases that cite this headnote
Attorneys and Law Firms
*68 Ernest Figari, Parker D. Young, Figari Davenport & Graves, Dallas, for appellant.
Steven Harr, Greg Noschese, LaDawn Conway, Munsch Hardt Kopf & Harr, Dallas, for appellee.
Panel consists of: ARNOT, C.J., and McCALL, J., and McCLOUD, S.J. *
Order
AUSTIN McCLOUD, Senior Justice (Retired).
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 4
Outdoor Systems, Inc. v. BBE, L.L.C., 105 S.W.3d 66 (2003)
The motions for rehearing filed by Outdoor Systems, Inc. and BBE, L.L.C. a/k/a BBE/Arromid,
L.L.C. are denied. Our former opinion and judgment dated November 14, 2002, are withdrawn,
and our opinion and judgment dated March 20, 2003, are substituted therefor.
Opinion
The controlling issue in this case is whether the landlord's written notice of default because of
nonpayment of rent was legally sufficient to permit forfeiture of two billboard ground leases. We
hold that the notice was insufficient, as a matter of law, because the notice was not specific; the
notice was excessive, imprecise, and unreasonable; and the notice required the tenant to perform,
in order to cure the default, certain acts not required in the leases.
The trial court, in a nonjury trial, found that the tenant, Outdoor Systems, Inc. (Outdoor Systems),
breached the leases and awarded the landlord, BBE, L.L.C. a/k/a BBE/Arromid, L.L.C. (BBE),
damages of $80,034.71, title to the two billboards located on the land, and attorney's fees. We
reverse and render in part; modify in part; and, as modified, affirm in part.
The significant economic issue between the parties is who owns the two billboards located in
Dallas. If the forfeiture was effective, the billboards are owned by the landlord, BBE. If the
forfeiture was ineffective, the billboards are owned by the tenant, Outdoor Systems, who has the
right under the leases to come upon the land and remove the billboards. In 1998, the city of Dallas
enacted a moratorium prohibiting the construction of new billboards within the city limits. The
effect of that moratorium significantly increased *69 the value of the two billboards. The trial
court found that the value of the billboards as constructed on the land is substantial and that the
value of the billboards removed from the land is minimal.
The two leases were dated July 20, 1987, and each provided for a primary term of 10 years. After
the expiration of the 10–year term, each lease was automatically renewed for 1–year terms unless
terminated in writing by either party 60 days prior to the anniversary date of the respective lease.
The anniversary date for each lease was September 1.
In February of 1997, Outdoor Systems acquired the leasehold interest in two tracts of land which
contained a billboard on each tract. At that time, the land was owned by Sun NLF Limited
Partnership. BBE purchased the land from Sun on or about June 29, 1999. On or about June 28,
1999, Sun sent a letter to its tenant, Outdoor Systems, advising Outdoor Systems that it was selling
the land to BBE and that future rent payments should be sent to BBE. Before receiving the letter,
Outdoor Systems had mailed the July rent to Sun.
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Outdoor Systems, Inc. v. BBE, L.L.C., 105 S.W.3d 66 (2003)
On July 2, 1999, BBE sent a letter (first default notice) to Outdoor Systems stating that future rent
payments under the two leases should be mailed to BBE. Upon receipt of the July 2 letter, Tanya
Lillie, an employee of Outdoor Systems, contacted Donald L. Woodsmall, BBE's manager, and
told Woodsmall that the July rent had been sent to Sun. Because Sun had returned the July rent
payment to Outdoor Systems and because Outdoor Systems only cut rent checks once a month,
Lillie asked Woodsmall if Outdoor Systems could reissue the July payment when the rent check for
August was sent out. Woodsmall told Lillie that he would get back to her regarding her proposal.
Woodsmall did not get back in touch with Lillie.
On July 16, 1999, BBE sent a second letter (second default notice) to Outdoor Systems. This
letter stated that Outdoor Systems had miscalculated the amount of rent owed under the leases
and demanded that Outdoor Systems perform other acts within ten days or the leases would be in
default and BBE would look “to all of our remedies both at law and under the Leases.” The July
rent, as calculated by Outdoor Systems, was tendered with the August payment. 1 BBE rejected
both the July and August payments.
Each lease contained the following provisions:
4. Rentals.
(c) It shall be deemed a default by Lessee under the terms of this Agreement if Lessee fails to
make any payment to Lessor pursuant to the terms of this Agreement and such failure continues
for a period of ten (10) days following receipt by Lessee of written notice from Lessor specifying
such default.
5. Termination.
(a) Lessor may terminate this Agreement at any time following the nonpayment by Lessee of
any amounts due to Lessor hereunder, and the failure to pay *70 such amounts within the
applicable cure period set forth in Paragraph 4 above.
(c) Upon termination of this Agreement by Lessee or Lessor, for any reason other than default
by Lessee, Lessee shall have the right for a period of sixty (60) days following the date of
such termination to remove the Board and any other associated facilities which had previously
been installed by Lessee in connection with the operation of the Board. Lessor shall cooperate
with Lessee in order to accomplish such removal. In the event of default by Lessee Board shall
become sole property of Lessor and Lessee has no further recourse or claim to the board or
against Lessor. (Emphasis added)
The July 2, 1999, letter from Donald Woodsmall to Outdoor Systems provides in part:
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Outdoor Systems, Inc. v. BBE, L.L.C., 105 S.W.3d 66 (2003)
You recently received a letter from STERLING PACIFIC MANAGEMENT SERVICES, INC.,
the Asset Manager for Sun NLF Limited Partnership, notifying you that they have sold the
Property to BBE, l.l.c., and that the July 1, 1999 payments under the Leases should be paid to
BBE. Please note that the payments should be made payable and sent to:
BBE, l.l.c.
P.O. Box 690348
San Antonio, Texas 78269
(301) 6957505 FAX (301) 6957510
We have not yet received the July 1, 1999 payments. (Emphasis added)
The July 16, 1999, letter from Donald Woodsmall provides in part:
Dear Ms. Lillie:
In reviewing the payments made under the Leases in the last year, it is apparent that Outdoor
Systems has been miscalculating how the payments are to work. The payments are not to
fluctuate on a monthly basis, but a new minimum is to be set each year based on 25% of the
previous year's gross billings. Outdoor Systems method miscalculates the Lease payments
owing and results in an understatement of the true payments. The arrearages for the last
ten months alone equal $878.50. The amount of the arrearages prior to the last ten months
is unknown to us as we do not have the information needed to calculate those payments.
Inasmuch as BBE, l.l.c. has succeeded to all of the rights, title and interest of the previous
Property owner in and to the Leases, these arrearages under the Leases belong to BBE. I
would appreciate receiving within ten days from the date hereof both the $878.50 relating to
the last ten months and the total arrearages from the inception of the Leases up to the last
ten months; failing which, Outdoor Systems will be in default under the Leases and we will
look to all of our remedies both at law and under the Leases.
We would also ask that you forward to us your advertising contracts from the inception of the
Leases to the present so that we may audit and calculate the percentage payments that are
owed throughout the term of the Leases. We are preserving all of our rights with regard to
the previous underpayments of rent until such audit has been performed. (Emphasis added)
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Outdoor Systems, Inc. v. BBE, L.L.C., 105 S.W.3d 66 (2003)
Under the leases, in order for there to be a “default” for nonpayment of rent, BBE was required to
give Outdoor Systems written notice “specifying such default.”
Forfeiture is a harsh and punitive remedy, and it is not favored in law or equity. 41 TEX. JUR.
3D Forfeitures and Penalties § 5 (1998). Some of the appropriate *71 rules regarding forfeiture
pursuant to a contract are discussed in 41 TEX. JUR. 3D Forfeitures and Penalties § 6 (1998):
Forfeiture under a contract will not be declared unless the language of the contract can be
construed in no other way. A forfeiture will be avoided when another reasonable reading of the
contract exists.
The right to a forfeiture may be found only in language that is plain, clear, and unequivocal.
Thus, when forfeitures are intended to take place upon the happening of certain events, cause
of forfeiture is to be plainly and clearly stated, and the time definitely fixed. Where grounds for
a forfeiture are specified in a contract, a forfeiture cannot be had on other grounds.
The court in Wendlandt v. Sommers Drug Stores Company, 551 S.W.2d 488 (Tex.Civ.App.-Austin
1977, no writ), discussed the general rules regarding notice:
Notice of default in payment of rent must convey a message that the notifier
is initiating steps necessary to finally assert his legal rights that if default is
not cured, he may take final action as provided in the contract. In this respect
see: Moore v. Richfield Oil Corp., 233 Or. 39, 377 P.2d 32 (1962); Hocker v.
Heins, 231 N.Y.S.2d 481 (Sup.Ct. of Suffolk County, N.Y.1962)....The cases in
this State hold that a landlord cannot forfeit the lease of his tenant for failure
to comply with the provisions without first making demand upon the tenant for
performance. Gray v. Vogelsang, 236 S.W. 122 (Tex.Civ.App.1921, no writ);
Shepherd v. Sorrells, 182 S.W.2d 1009 (Tex.Civ.App.1944, no writ); Conn v.
Southern Pine Lumber Co., 11 S.W.2d 199 (Tex.Civ.App.1928, no writ).
See 41 TEX. JUR.3d Forfeitures and Penalties § 16 (1998).
Regarding the sufficiency of a demand, it is stated in 51C C.J.S. Landlord & Tenant § 114(2)(b)
(1968):
Where forfeiture of a lease is dependent on the making of a demand for
performance, the demand must be a proper, specific, and reasonable one.
The demand for rent must not be excessive. It is stated in 49 AM. JUR.2d Landlord and Tenant
§ 303 (1995):
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Outdoor Systems, Inc. v. BBE, L.L.C., 105 S.W.3d 66 (2003)
As a general rule, the demand for rent, for the nonpayment of which the lessor
may declare the lease forfeited, must be for the precise amount of rent due, and
if an excessive amount is demanded the demand will be ineffectual.
[1] [2] The notice by BBE of default and the demand upon Outdoor Systems to pay the rent
pursuant to the leases was necessary in order to provide Outdoor Systems an opportunity to cure the
default prior to the harsh consequences of forfeiture. Cf. Ogden v. Gibraltar Savings Association,
640 S.W.2d 232, 234 (Tex.1982).
The July 2 letter made no demand. It was merely a reminder that the July rent had not been
paid. The July 16 letter demanded too much. The demand was not specific but was excessive,
unreasonable, imprecise, and required Outdoor Systems to perform acts not required by the leases.
[3] The July 16 letter demanded that Outdoor Systems, within 10 days, pay to BBE an unspecified
amount based upon “total arrearages from the inception of the Leases.” The leases were signed by
the original tenant and landlord in 1987. Lillie, an employee of Outdoor Systems, testified that she
was responsible for calculating and paying the rent on the billboards. Lillie testified that, assuming
there was an arrearage owed on the two leases, neither she nor anyone else at Outdoor Systems
had the information or ability to calculate, within the 10–day period, any arrearage *72 that might
have been owed back to 1987. The trial court, in its findings of fact, found that Outdoor Systems
ignored the July 16 demand from BBE and that Outdoor Systems made no effort to calculate
or pay any rental arrearages. We look at the notice of default that was sent to Outdoor Systems
by BBE to determine if the notice was sufficient. The response of Outdoor Systems does not
determine the legal sufficiency of the notice. The demand letter purported to address both of the
leases; however, it failed to segregate the amount demanded to cure the alleged default under each
agreement. Furthermore, BBE demanded that Outdoor Systems provide advertising contracts from
the inception of the leases so that BBE could audit and calculate the percentage payments that
were owed throughout the term of the leases.
[4] Outdoor Systems was not personally liable for any unpaid rent prior to the time it became the
tenant under the leases in February 1997. See Regency Advantage Limited Partnership v. Bingo
Idea–Watauga, Inc., 936 S.W.2d 275 (Tex.1996); 49 AM. JUR.2d Landlord and Tenant § 1145
(1995). There is no requirement or obligation in the leases on the part of the tenant to provide the
landlord with advertising contracts relating to the billboards. A landlord cannot base a forfeiture
on the breach of an obligation that does not exist in the lease. See Deauville Corporation v. Garden
Suburbs Golf and Country Club, 164 F.2d 430 (5th Cir.1947), cert. den'd, 333 U.S. 881, 68 S. Ct.
912, 92 L. Ed. 1156 (1948).
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Outdoor Systems, Inc. v. BBE, L.L.C., 105 S.W.3d 66 (2003)
Both parties discuss Rohrt v. Kelley Manufacturing Company, 162 Tex. 534, 349 S.W.2d 95
(1961). The issues involved in this appeal were not discussed in Rohrt. There, the court observed
that the effect of the default notice was not “disputed.”
Neither the July 2 letter nor the July 16 letter was a sufficient notice of default. On August 11,
1999, BBE sent a “Notice of Termination” to Outdoor Systems purporting to terminate both leases
and to declare that title to the billboards had “automatically” vested in BBE. We hold that the
notice of termination was ineffective because it was not preceded by a proper notice of default.
See Ogden v. Gibraltar Savings Association, supra.
Outdoor Systems refused to vacate the land and continued to operate the billboards and tender
monthly rental payments to BBE who rejected each of the tendered rent payments. On May 12,
2000, BBE sent a letter to Outdoor Systems stating that the leases had terminated because of
numerous defaults by Outdoor Systems. However, to remove any misunderstanding, BBE notified
Outdoor Systems that, pursuant to Paragraph 3(b) of the leases, the May 12 letter constituted
Outdoor Systems's 60–day notice of termination. The letter stated, “The Leases shall not renew
but shall cease and expire on the anniversary date thereof, which can in no event be later than
September 1, 2000.” Outdoor Systems agrees that this was a proper termination of the leases
between the parties.
Outdoor Systems vacated the land prior to the September 1, 2000, anniversary date and advised
BBE that it was prepared to remove the billboards. BBE objected to the removal of the billboards
and refused to permit Outdoor Systems to remove the structures.
We reverse the trial court's judgment awarding title to the two billboards to BBE, and we render
judgment that the two billboards located on the separate tracts of real property described in the
judgment as Exhibits A and B are owned by Outdoor Systems and that Outdoor Systems *73 has
the right to remove the two billboards.
In its conclusions of law, the trial court found that the leases terminated on August 11, 1999, and
that Outdoor Systems violated TEX. CIV. PRAC. & REM. CODE ANN. § 80.002 et seq. (Vernon
1997 & Supp.2002) by remaining in possession after that date and by failing to remove advertising
from the billboards after August 11. The court assessed trespass damages against Outdoor Systems
in the amount of $75,604.58. We reverse this award and render judgment that Outdoor Systems
is not liable to BBE for trespass damages because the leases did not terminate on August 11. The
termination letter was ineffective because it was based upon an insufficient notice of default.
As part of its damages award, the trial court found that Outdoor Systems was liable to BBE for
unpaid rent of $4,430.13. Outdoor Systems does not challenge this finding. We, therefore, will
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Outdoor Systems, Inc. v. BBE, L.L.C., 105 S.W.3d 66 (2003)
modify the trial court's judgment to provide that BBE recover judgment against Outdoor Systems
in the amount of $4,430.13.
[5] [6] The trial court awarded BBE attorney's fees of $75,000.00 through trial and additional
attorney's fees in the event of an appeal. Outdoor Systems contends that BBE is not entitled to
attorney's fees because BBE's demand was excessive. A creditor who makes an excessive demand
upon a debtor is not entitled to attorney's fees for subsequent litigation required to recover the
debt. Collingsworth v. King, 155 Tex. 93, 283 S.W.2d 30 (1955); Ingham v. Harrison, 148 Tex.
380, 224 S.W.2d 1019 (1949). The court in Findlay v. Cave, 611 S.W.2d 57 (Tex.1981), observed
that Collingsworth and Ingham involved liquidated sums. However, the court stated that a party
could make an excessive demand for an unliquidated sum. The court said:
Certainly one can conceive of circumstances in which a demand for an
unliquidated sum would have to be characterized as excessive, and attorney's
fees denied.
The Findlay court also held:
[W]e do not find a sufficient level of unreasonableness or bad faith to warrant
finding excessive demand as a matter of law.
We find in the present case, as a matter of law, that the demand made by BBE in the July 16
letter was an excessive demand for an unliquidated sum and, thus, discharged any liability for fees
expended thereafter.
BBE's demand was not for a specific liquidated sum. As pointed out earlier in this opinion, the July
16 letter demanded that Outdoor Systems, within 10 days, pay BBE an unspecified amount based
upon “total arrearages from the inception of the Leases.” The original lessor and lessee executed
the leases in 1987. Outdoor Systems acquired the leasehold interest in 1997. BBE demanded that
Outdoor Systems provide advertising contracts from the inception of the leases. The leases were
forfeited by the trial court, and title to the billboards was awarded to BBE. We have reversed that
finding. The trial court found that Outdoor Systems was a trespasser because it failed to comply
with the demand and awarded BBE $75,604.58. We have reversed that finding. Under our decision,
BBE has a judgment against Outdoor Systems for $4,430.13. Unlike the court in Findlay, we do
find a sufficient “level of unreasonableness ... to warrant finding excessive demand as a matter
of law.”
[7] BBE argues that Outdoor Systems cannot rely upon the defense of “excessive demand”
because Outdoor Systems failed to expressly plead the defense. See Tuthill *74 v. Southwestern
Public Service Company, 614 S.W.2d 205, 212 (Tex.Civ.App.-Amarillo 1981, writ ref'd n.r.e.).
The record in this case reveals that, after the evidence closed and before judgment was entered,
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Outdoor Systems, Inc. v. BBE, L.L.C., 105 S.W.3d 66 (2003)
the parties filed trial briefs. In Paragraph IV of BBE's trial brief submitted to the trial court, BBE
stated:
Excessive Demand—A creditor who makes an excessive demand upon a debtor is not entitled
to attorneys' fees for subsequent litigation. An excessive demand is one which is manifestly
unreasonable, or made in bad faith. Findlay v. Cave, 611 S.W.2d 57, 58 (Tex.1981). Where
the demand in Findlay was for more than a jury awarded the close of the trial, the Court
found that was some evidence of excessive demand, but not enough to support the “manifestly
unreasonable” or “bad faith” standard. The court noted that the cases on excessive demand
occurred where the amount in controversy was liquidated and the creditor made demand for
more than it was entitled. Clearly the testimony in this case shows that BBE's demand for a
specific sum of money was for less than the amount due and that its further demand was for
an amount that could reasonably be thought to be within the knowledge and control of Outdoor
Systems. There is no authority to support that an excessive demand is otherwise void or vitiated.
BBE did not argue in the trial court that Outdoor Systems had failed to sufficiently plead the
defense. On the contrary, it is apparent that the issue was before the court, as evidenced by BBE's
briefing and argument presented to the trial court. We hold that Outdoor Systems's “excessive
demand” defense to any liability for attorney's fees was tried by implied consent. See City of Los
Fresnos v. Gonzalez, 848 S.W.2d 910 (Tex.App.-Corpus Christi 1993, no writ). The award of
attorney's fees, both trial and appellate, to BBE is reversed; and we render judgment that Outdoor
Systems is not responsible for attorney's fees.
[8] In its brief, under issues presented, Outdoor Systems states:
[T]his case should be remanded for consideration of Outdoor Systems'
counterclaims, including its claim for conversion of the billboards. (Emphasis
added)
Outdoor Systems argues that, because the trial court erroneously concluded that BBE's termination
complied with the leases, the trial court improperly failed to consider Outdoor Systems's
counterclaims. This was a conventional nonjury trial on the merits. The judgment provides that
“all relief not expressly granted herein is denied.” The trial court considered the counterclaims,
and they were denied. We overrule Outdoor Systems's request that its counterclaims be remanded
to the trial court for consideration.
[9] [10] [11] Finally, Outdoor Systems seeks a remand of this matter to the trial court in order to
seek the recovery of the billboards pursuant to our holding. 2 It would appear that Outdoor Systems
has an avenue for seeking the recovery of the billboards without the case being remanded to the
trial court. Texas courts have long held that a party obtaining any advantage or benefit through a
trial court's judgment that is later reversed must return the benefit to the other party. Peticolas v.
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Outdoor Systems, Inc. v. BBE, L.L.C., 105 S.W.3d 66 (2003)
Carpenter, *75 53 Tex. 23 (1880); Currie v. Drake, 550 S.W.2d 736, 739 (Tex.Civ.App.-Dallas
1977, writ ref'd n.r.e.); Salgo v. Hoffman, 521 S.W.2d 922, 925 (Tex.Civ.App.-Dallas 1975, no
writ). As noted in Salgo v. Hoffman, supra at 925:
When an erroneous judgment has not been suspended pending appeal, and the relief granted has
already been obtained, the successful appellant may reclaim what he has been deprived of, and
if his demands are wrongfully resisted, he is entitled to the assistance of the courts.
[12] [13] The assistance which the successful appellant is entitled to seek from the courts is
characterized as the right of restitution. Currie v. Drake, supra at 740 (“The right of restitution
of what one has lost by the enforcement of a judgment subsequently reversed has long been
recognized.”) A party may have restitution upon its own motion after an evidentiary hearing
establishing with certainty what he has lost. Currie v. Drake, supra at 740. Furthermore, the
successful appellant is entitled to seek restitution in the same proceeding without resorting to a
new suit. Cleveland v. Tufts, 69 Tex. 580, 7 S.W. 72, 74 (1888); Peticolas v. Carpenter, supra;
Baca v. Hoover, Bax & Shearer, 823 S.W.2d 734, 739 (Tex.App.-Houston [14th Dist.] 1992, writ
den'd); Currie v. Drake, supra at 740–41. We, therefore, decline Outdoor Systems's request for a
remand of this case in light of the existing procedure for Outdoor Systems to seek restitution after
our judgment becomes final by the issuance of our mandate. See TEX.R.APP.P. 18.1(a).
The judgment of the trial court is reversed and rendered in part; modified in part; and, as modified,
affirmed in part.
Footnotes
* Austin McCloud, Retired Chief Justice, Court of Appeals, 11th District of Texas at Eastland sitting by assignment.
1 The method used by Outdoor Systems to calculate the rent had been used for several years by a prior tenant. None of the prior
landlords had complained. At trial, Outdoor Systems attempted to prove an alleged oral modification between a prior tenant and
landlord. The trial court agreed with BBE that Outdoor Systems and prior tenants had not followed the contract in the method used
to calculate the rent. The trial court found that the alleged modification was invalid. Outdoor Systems argues that the earlier conduct
of BBE and its predecessors waived, as a matter of law, any claimed forfeiture arising from payment of reduced rents. Because we
hold that the forfeiture was invalid, it is not necessary that we reach this argument urged by Outdoor Systems. TEX.R.APP.P. 47.1.
2 A supplemental clerk's record has been filed in this appeal which details events that transpired after the entry of the trial court's
judgment on November 3, 2000. The supplemental clerk's record reflects that BBE conveyed title to the two billboards and the
underlying real property to Sterling Samuel, Ltd. in December of 2000. Sterling then sold the billboards to Lamar Whiteco Outdoor
Corporation for $675,000.00.
End of Document © 2015 Thomson Reuters. No claim to original U.S. Government Works.
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 13
T-Anchor Corp. v. Travarillo Associates, 529 S.W.2d 622 (1975)
529 S.W.2d 622
Court of Civil Appeals of Texas,
Amarillo.
T—ANCHOR CORPORATION, Appellant,
v.
TRAVARILLO ASSOCIATES, a California Limited Partnership, Appellee.
No. 8563. | Oct. 31, 1975.
A vendor of motel property brought an action against the purchaser and its assignee for a permanent
injunction against interference with its right of possession pursuant to a forfeiture provision
contained in the installment sale contract. The District Court, Potter County, Don M. Dean, J.,
rendered judgment against the vendor, and it appealed. The Court of Civil Appeals, Ellis, C.J.,
held, inter alia, that the trial court had acted correctly in concluding that equity required relief from
the forfeiture provisions of the sale contract.
Affirmed.
West Headnotes (14)
[1] Trial Ultimate or Evidentiary Facts
In action to court, court is not required to make findings of fact on evidentiary matters as
distinguished from controlling matters.
2 Cases that cite this headnote
[2] Vendor and Purchaser Effect of Default or Delay
Where trial court, in action by vendor of motel properties seeking control of such
properties after alleged forfeiture on default of payments called for by installment contract,
found that purchaser's assignee was entitled to equitable relief from such forfeiture, finding
of waiver or default by vendor was not necessary to support judgment.
1 Cases that cite this headnote
[3] Vendor and Purchaser Effect of Default or Delay
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T-Anchor Corp. v. Travarillo Associates, 529 S.W.2d 622 (1975)
Where court found that assignee of installment purchaser of motel properties was entitled
to equitable relief from forfeiture provisions of contract after purchaser had defaulted
thereunder, and that contract was in full force and effect so that equity of redemption
mentioned in contract was not required to be invoked, assignee was not required to pay
balance of unpaid purchase price, but merely to make vendor whole under contract by
bringing contract obligations up to date.
Cases that cite this headnote
[4] Vendor and Purchaser Effect of Default or Delay
Evidence supported holding of trial court that assignee of purchaser of motel properties
under installment contract was entitled to equitable relief from forfeiture after default of
purchaser.
1 Cases that cite this headnote
[5] Contracts Discharge of Contract by Breach
Although parties may contract to provide for forfeiture upon default, where equities are
shown which justify continuation of contract rather than forfeiture of it, forfeiture will be
prevented.
3 Cases that cite this headnote
[6] Vendor and Purchaser Rents and Profits
Where, after default by purchaser of motel properties under installment contract, forfeiture
under contract was prevented by restraining order of bankruptcy court, and where relief
from forfeiture was later granted by court on equitable grounds, purchaser's assignee, as
owner of complete title to motel, was entitled to its net profits during period after default,
despite fact that motel was in possession and under operation of vendor during such period.
2 Cases that cite this headnote
[7] Trial Construction and Operation
Where express findings of fact are made by trial court in court-tried action, independent
issuable facts may not be supplied by extension of express findings.
Cases that cite this headnote
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T-Anchor Corp. v. Travarillo Associates, 529 S.W.2d 622 (1975)
[8] Trial Ultimate or Evidentiary Facts
Trial court in court-tried action need not make findings of fact on mere evidentiary matters
with respect to ultimate issue.
2 Cases that cite this headnote
[9] Trial Failure to Find on Particular Questions
Where findings of fact requested of court in court-tried action would not have compelled
result different from that reached by court, it was not error to reject such proposed findings.
Cases that cite this headnote
[10] Bankruptcy Arrangements
Purpose of chapter XI of Bankruptcy Act is to provide quick and economical means
of facilitating simple compositions among general creditors who have been deemed by
Congress to need only minimal disinterested protection provided by chapter. Bankr.Act,
§ 301 et seq., 11 U.S.C.A. § 701 et seq.
1 Cases that cite this headnote
[11] Bankruptcy Arrangements
Congressional intent in establishing chapter XI of Bankruptcy Act is to provide for
efficient and orderly method by which claims of unsecured or common creditors of debtor
might be satisfied without resort to general bankruptcy.
1 Cases that cite this headnote
[12] Trial Ultimate or Evidentiary Facts
Trial Failure to Find on Particular Questions
In court-tried action brought by vendor of motel properties under installment contract to
obtain permanent injunction against interference with right of possession after claimed
forfeiture of motel by default under contract, trial court was not required to make finding as
to why assignee of purchaser filed petition under chapter XI of Bankruptcy Act where such
finding would have been merely evidentiary and would not necessarily have compelled
different conclusion by trial court as to ultimate and vital issue of termination of contract.
Bankr.Act, § 301 et seq., 11 U.S.C.A. § 701 et seq.
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T-Anchor Corp. v. Travarillo Associates, 529 S.W.2d 622 (1975)
Cases that cite this headnote
[13] Vendor and Purchaser Waiver of Default in Payment
Whether seller has effectively exercised option of forfeiture for default in payment
depends not upon number of hours or days that have elapsed since default in question, but
upon whether facts and circumstances are such that buyer has, by conduct of seller, been
led reasonably to believe that strict application of right of forfeiture will not be insisted
upon, for time being.
Cases that cite this headnote
[14] Vendor and Purchaser Right to Rescind
Suspension of right of forfeiture under installment contract depends upon facts in each
case.
Cases that cite this headnote
Attorneys and Law Firms
*623 Stalcup, Johnson, Meyers & Miller, David J. White, Dallas, Miller, Sanders & Baker, Dee
Miller, Amarillo, for appellant.
Stokes, Carnahan & Fields, O. P. Fields, Amarillo, for appellee.
Opinion
*624 ELLIS, Chief Justice.
This is a suit for permanent injunction against interference with the right of possession claimed by
plaintiff-appellant, T—Anchor Corporation, a Texas corporation, pursuant to a forfeiture provision
contained in an installment contract for the sale of real property designated as Travelodge West
Motel, in Amarillo, Texas, entered into between T—Anchor as seller and Young Properties
Corporation, a California corporation, as buyer. After trial without a jury, the trial court rendered
judgment against T—Anchor that it take nothing by its suit, and for defendant-appellee, Travarillo
Associates, a California limited partnership, the assignee of Young Properties, on its cross-action
for possession of the motel property. T—Anchor brings this appeal from the judgment of the trial
court. Affirmed.
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T-Anchor Corp. v. Travarillo Associates, 529 S.W.2d 622 (1975)
The right to forfeiture which T—Anchor claims and upon which it bases its suit for injunction
is contained in paragraph XIII of the contract of sale. After setting out that time shall be of the
essence, the contract further provided that if the buyer fails to pay any of the installments or
breaches any of the conditions of the contract, the seller shall have the right, after giving written
notice to the buyer, to declare the contract forfeited and cancelled and of no further force and effect.
Appellant asserts its entitlement to exercise its contractual right of forfeiture by reason of default
on the part of the buyer and its assignee in making the required installment payments. We note
that, among other contentions, appellee insists that appellant's claim for possession and title
based on termination or forfeiture of the contract was not raised at the trial level and cannot
properly be advanced for the first time and considered in this appeal. However, after reviewing the
entire record, including the pleadings and the evidence admitted, we have determined to consider
appellant's asserted rights concerning the alleged forfeiture and the injunctive relief sought.
After trial on the merits, the trial court rendered its judgment which decreed that: (1) certain
interlocutory orders be dissolved which had restrained and enjoined Travarillo Associates, the
assignee of Young Properties, the original purchaser, from the taking possession of the Travelodge
West Motel, the subject of the contract of sale entered into on April 4, 1973; (2) Travarillo is
the owner and holder of all rights of ‘purchaser’ as formerly held by Young Properties under the
contract of sale; (3) the contract of sale is in full force and effect, and Travarillo with its acquired
rights as purchaser is entitled to possession of the Travelodge West Motel described therein; (4)
certain monies tendered into the registry of the court by Travarillo be paid to T—Anchor, the seller,
and that the balance in the registry be paid to Travarillo; (5) the only real parties in interest in this
case are T—Anchor and Travarillo; and (6) all other parties named as defendants have no interest
in this controversy and are dismissed from the suit. Subsequent to the judgment, the trial court
ordered that the agreement of the parties with respect to the payment and receipt of the monies
paid out from the registry of the court would not constitute any agreement to the judgment entered
in this cause by T—Anchor nor in any manner affect T—Anchor's notice and right of appeal.
Upon request, findings of fact and conclusions of law were made by the trial court. Since this
appeal is determinable from competing equitable considerations necessarily based upon a series of
acts and conduct of the parties, we shall set out what we deem to be the court's significant factual
findings and legal conclusions.
Among other facts found by the trial court were that: on April 4, 1973, T—Anchor, the seller,
entered into a contract for the sale of the Travelodge West Motel in Amarillo, Texas, with Young,
the buyer; as a part of the same transaction, Young and Travarillo entered into an agreement of
purchase and sale of the motel whereby Travarillo acquired all of Young's interest *625 in the
motel; T—Anchor consented to the assignment of the contract interest from Young to Travarillo
upon the terms that Travarillo could acquire all of Young's interest in the motel if Young should
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T-Anchor Corp. v. Travarillo Associates, 529 S.W.2d 622 (1975)
default in its contract payments to Travarillo; and on the same date, April 4, 1973, Young was
placed in possession of the motel under a leaseback agreement with Travarillo.
Although there was evidence of prior late payments and acceptance thereof by T—Anchor, the
trial court found that beginning with the payment due in November, 1973, Young defaulted in its
monthly payments to T—Anchor in the amount of $10,812.17 each, and in each of its monthly
lease payments to Travarillo in the amount of $6,471.00. The court further found that pursuant to
a proceeding brought by Young, on October 31, 1973, a bankruptcy court in California entered
its order restraining all creditors of Young from accelerating or attempting to accelerate any
indebtedness of Young, from enforcing any rights or remedies provided in any agreements with
Young, and from cancelling any such agreements or commencing any kind of forfeiture proceeding
against Young; and that throughout the restraining period ordered by the bankruptcy court, Young
remained in possession of the motel, but made no payments to T—Anchor or to Travarillo.
Additionally, the court found that: T—Anchor defaulted in the first and second lien payments
which it was required to make to Home Savings and Loan Association of Waterloo, Iowa, and to
Amarillo National Bank of Amarillo, Texas, under the sale contract with Young; both T—Anchor
and Travarillo appeared in the bankruptcy proceeding seeking relief from the bankruptcy court's
restraining order, T—Anchor seeking cancellation of the sales contract and Travarillo seeking
cancellation of the lease agreement and possession of the motel; T—Anchor, in its pleadings in
bankruptcy court, fully recognized that Travarillo was the assignee of Young and held all of the
interest of Young in the motel and that Young was only a defaulting lessee at the time of the
bankruptcy; on April 2, 1974, the bankruptcy court entered an order directing Young to vacate
the motel ten days after the date of the order, and dissolving the restraining orders against T—
Anchor and Travarillo on or about April 12, 1974; as of the date of the dissolution of the restraining
orders, Travarillo was the owner of all of the interest of Young in the sales contract with T—
Anchor; immediately after the bankruptcy court entered its order on April 2, 1974, the general
partner of Travarillo tendered full payment of all delinquent land sales contract installments to
T—Anchor and otherwise tendered performance of all delinquent obligations of Young to T—
Anchor to make performance current under the contract; and T—Anchor wrongfully refused the
tender by Travarillo and assumed possession of the motel as Young vacated.
The trial court further found that: the money contributed to the purchase of the motel was
principally that of Travarillo in the amount of $300,000; T—Anchor received as cash consideration
for the motel $137,500; and some $200,884.32 was required to bring the obligations of Young
current under the land sales contract, including delinquent interest and penalty due from T—
Anchor to the first lienholder plus attorneys' fees paid by T—Anchor in attempting to secure
performance of the contract or possession, all of which, ought equitably to be reimbursed to T
—Anchor.
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T-Anchor Corp. v. Travarillo Associates, 529 S.W.2d 622 (1975)
Also, the court made findings that: since T—Anchor was in possession of the motel from April 20,
1974, to the time of trial on the merits, it had realized from motel operations a profit of $113,097.09
after expenses; after deducting the profits of T—Anchor from the amount required to bring the
contract obligations current, the sum of $87,787.23 was found to be owing to T—Anchor by
Travarillo; Travarillo paid into the registry of the trial court the sum of $100,000, a sum sufficient
to make T—Anchor whole under the land sales contract; and *626 receipt of $87,787.23 thereof
by T—Anchor would fully adjust the equities of the parties and all accounts between them up to
September 5, 1974, the date of the trial on the merits.
Additionally, the trial court found that: it would be exceptionally harsh and unjust to forfeit the
monies contributed by Travarillo to the motel project and an unjust enrichment to T—Anchor by
allowing forfeiture of the purchaser's rights under the land sales contract in the face of unusual
circumstances where a debtor in bankruptcy was continued in possession of the property while
making payments to no one; it would be unreasonable to refuse Travarillo the right to pick up
the obligations of Young once the bankruptcy restraining order was terminated; upon payment
to T—Anchor of $87,787.23 from the registry of the trial court Travarillo would be entitled to
possession of the motel as owner and holder of the land sales contract of April 4, 1973, and the
contract is in full force and effect with all payments due thereunder made current through the
month of September, 1974.
The conclusions of law by the trial court were that: (1) Travarillo is entitled to equitable relief
from forfeiture of the purchaser's rights under the land sales contract; (2) the land sales contract
is in full force and effect and that Travarillo is the owner of all the rights of purchaser thereunder;
(3) T—Anchor is entitled to recover from the registry of the trial court $87,787.23; (4) Travarillo
is entitled to possession of the motel; and (5) T—Anchor is not entitled to any injunctive relief.
T—Anchor predicated its appeal upon thirty-two points of error. For convenience we shall discuss
T—Anchor's points of error in the same groupings as in its brief.
[1] [2] In its first two points T—Anchor contends that the judgment of the trial court denying
forfeiture of the contract cannot be supported without findings of waiver and default on the part of
T—Anchor. T—Anchor requested amended and additional findings of fact and conclusions of law
which would have established and held that T—Anchor did not waive its right under the contract
to forfeiture and that through the effective date of forfeiture, T—Anchor fulfilled its obligations
under the contract. Both of these theories of waiver and default by T—Anchor as requested are
inconsistent with and contrary to the findings of fact and conclusions of law made by the trial court.
The trial court need not make findings of fact or conclusions of law which are in conflict with
the original findings and conclusions made. Neither is the trial court required to make findings
of fact on evidentiary matters as distinguished from controlling matters. Plaza Co. v. White, 160
S.W.2d 312 (Tex.Civ.App.—San Antonio 1942, writ ref'd); Wade v. Taylor, 228 S.W.2d 922
(Tex.Civ.App.—Amarillo 1949, no writ). The findings of fact and conclusions of law requested
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T-Anchor Corp. v. Travarillo Associates, 529 S.W.2d 622 (1975)
by T—Anchor either are evidentiary if no forfeiture was found to exist prior to a possible waiver
or default by T—Anchor, or, if they are controlling matters, then such requested findings and
conclusions are in conflict with the findings of fact and conclusions of law originally made by
the trial court that no forfeiture occurred. Further, in view of the holding of the trial court that
Travarillo is entitled to equitable relief from forfeiture, a finding of waiver or default by T—
Anchor is not necessary to support the judgment. Points of error numbers 1 and 2 are overruled.
[3] In points of error numbers 3 through 11, T—Anchor contends that the tender of performance
by Travarillo was deficient and thus cannot operate to prevent forfeiture of the contract of sale.
Points of error numbers 3, 5—7, and 9—11 all concern the amount of the tender of money made
by Travarillo. T—Anchor contends that a tender of the amount necessary to bring the contract
payments current is not tender of a sufficient amount to put Travarillo in possession of the motel as
its owner. Such a contention by T—Anchor is *627 predicated upon its assertion that the contract
was, indeed, forfeited; therefore, T—Anchor contends that the only amount that can be tendered
by Travarillo to put Travarillo in possession of the motel is the balance of the unpaid purchase
price under the contract of sale. However, the holding of the trial court was that the contract was in
full force and effect so that the equity of redemption mentioned in paragraph XIII of the contract
was not required to be invoked. Thus, Travarillo was not required to pay the balance of the unpaid
purchase price since it had never forfeited the contract. By bringing the contract obligations up to
date, Travarillo made T—Anchor whole under the contract of sale which was held to be in full
force and effect.
Further, in points of error numbers 3—11, T—Anchor contends that the equities are in its favor
to allow a forfeiture and not in favor of Travarillo to deny forfeiture. The trial court found that it
would be exceptionally harsh and unjust to forfeit the monies contributed to the motel project and
unjust enrichment to T—Anchor to allow forfeiture of Travarillo's rights under the contract in the
face of unusual circumstances, namely, that the debtor in bankruptcy, Young, was continued in
possession of the motel while paying no one. The trial court held that the order of the bankruptcy
court prevented forfeiture of the contract until April 12, 1974. The trial court further held that since
Travarillo was tendering performance in full prior to April 12, 1974, it would be unreasonable
to refuse Travarillo the right to pick up the contract obligations of its assignor Young upon
termination of the restraining order of the bankruptcy court. The trial court found that T—Anchor
defaulted on its first and second lien payments because of the restaining orders which continued
Young in possession without requiring Young to make contract payments to T—Anchor.
[4] [5] It is our opinion that the evidence supports the holding of the trial court that Travarillo
was entitled to equitable relief from forfeiture. It is an established rule of law that forfeitures are
disfavored. Although parties may contract to provide for forfeiture upon default, where equities
are shown which justify a continuation of the contract rather than forfeiture of it, the forfeiture will
be prevented. Stevenson v. Lohman, 218 S.W.2d 311(Tex.Civ.App.—Beaumont 1949, writ ref'd);
Baines v. Clinton Park Development Co., 224 S.W.2d 729 (Tex.Civ.App.—Galveston 1949, no
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T-Anchor Corp. v. Travarillo Associates, 529 S.W.2d 622 (1975)
writ). In view of the disfavor with which the law looks upon forfeitures in a contract for the sale
of land and in the light of the unusual chain of events which eventually left Travarillo as the buyer
under the contract ready, willing and able to perform, we overrule points of error numbers 3—11.
[6] T—Anchor contends in point of error number 12 that the trial court erred in holding that
the net profits of the motel earned during a period of possession and operation by T—Anchor
were the property of Travarillo as owner of complete title to the motel. T—Anchor presupposes
that a forfeiture has, in fact, occurred. The trial court held that a forfeiture was prevented by the
restraining order of the bankruptcy court. Therefore, possession of the motel by T—Anchor was
during a period when Travarillo was entitled to possession, and, under the holding of the trial
court that the contract is in full force and effect, Travarillo is, and T—Anchor is not, entitled to
the profits of the operation. It is our opinion that the holding of the trial court is sustained by the
evidence and the equities of this particular situation. Point of error number 12 is overruled.
[7] In points of error numbers 13—15, T—Anchor contends that it was error to hold that
default in the payment of monthly installments by Young commenced with the failure to make
the November, 1973 payment. T—Anchor points to undisputed testimony that payments were
late in more than one month prior to November, 1973, and that notices of default were sent to
Young. The trial court made no express *628 finding of waiver by T—Anchor. We recognize
that where express findings of fact are made by the trial court, independent issuable facts may not
be supplied by extension of the express findings. Duncan v. Willis, 157 Tex. 316, 302 S.W.2d
627 (1957), McKenzie v. Carte, 385 S.W.2d 520 (Tex.Civ.App.—Corpus Christi 1964, writ ref'd
n.r.e.). However, the same evidence that would support a finding of waiver by T—Anchor supports
the trial court's application of equitable principles which would efficiently prevent forfeiture of
the contract sale. Testimony by Boyce Box, president of T—Anchor, revealed that T—Anchor
ultimately received purchase money installments up to the payment due in November, 1973, and
that an oral extension of time until October 11 was agreed to by T—Anchor after the September,
1973 payment was made late. This testimony tends to show that T—Anchor considered the
contract as continuing after making its initial gesture with respect to forfeiture, and supports the
granting of equitable relief to prevent forfeiture. Points of error numbers 13—15 are overruled.
In points of error numbers 16—22, T—Anchor next contends that the trial court erred in failing
to find certain facts since such findings are, as stated in T—Anchor's brief, ‘supported by the
uncontroverted evidence.’ The findings requested by T—Anchor relate to the defaults, notices of
such defaults sent to Young and absence of tender of performance by Young, prior to November,
1973, as claimed by T—Anchor to establish forfeiture of the contract and termination of Young's
and, therefore, Travarillo's interest under the contract.
[8] Even if the specific findings requested by T—Anchor had been made, the result reached by
the trial court would not necessarily be changed. In fact, the record reveals that there is evidence
of conduct by T—Anchor showing an intent not to terminate the contract but to continue in a
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T-Anchor Corp. v. Travarillo Associates, 529 S.W.2d 622 (1975)
contractual relationship. Even after giving notice concerning forfeiture, T—Anchor accepted late
payments of purchase price installments although Young failed to comply with its agreement to
bring the delinquent payments to a current status or to vacate the motel. The findings requested
by T—Anchor even if made would not, in the light of all the evidence, compel a conclusion of
law by the trial court that the contract was forfeited and cancelled in October, 1973, as contended
by T—Anchor. The trial court need not make findings of fact on mere evidentiary matters with
respect to the ultimate issue. Plaza Co. v. White, supra; Wade v. Taylor, supra. Points of error
numbers 16—22 are overruled.
[9] With respect to points of error numbers 23—28 we believe that the requested findings of fact
on which they are grounded relate only to evidentiary matters not required to be included in the
trial court's findings of fact. The facts they seek to establish would show that Travarillo failed to
make various payments to T—Anchor prior to trial. Such facts, even if included in the trial court's
findings of fact, would not compel a result different from that reached by the trial court since there
was evidence that Travarillo made tender of performance to bring its contract obligations current
early in April, 1973, just prior to dissolution of the Young bankruptcy restraining order. Points of
error numbers 23—28 are overruled.
The testimony reveals that after this suit was filed and hearing had on temporary injunction,
Travarillo attempted to put the motel under the jurisdiction of the bankruptcy court by filing for
an arrangement under Chapter XI of the Bankruptcy Act. By its points numbered 29—32, T—
Anchor contends it was error for the trial court to fail to find that by this action, Travarillo, in
effect, failed to do equity and effectively withdrew its tender of any sums to T—Anchor, resulting
in the defeat of any right to prevent forfeiture.
The trial court made no findings of fact with respect to the Chapter XI proceeding initiated
by Travarillo. There is much controversy *629 about the reasons for filing the petition for
arrangement under Chapter XI. T—Anchor insists that Travarillo sought to repeat the actions of
Young, and thus remain in possession of the motel without being required to make payments to
T—Anchor. Travarillo insists, on the other hand, that by filing a bankruptcy petition it was only
‘trying to litigate in every conceivable form’ to protect its rights. Travarillo contends that it wanted
to use the Chapter XI proceeding ‘to get a court to make a determination that (it) had a right
to cure because (it) had substantial equities' it was in danger of losing. Morgan Jones, a lawyer
for Travarillo, testified that it was upon his advice that the Chapter XI proceeding was initiated,
asserting that insolvency is not presumed in a Chapter XI proceeding. The only evidence before
us on the issue of solvency is that Travarillo was solvent.
[10] [11] The purpose of Chapter XI of the Bankruptcy Act is to provide a quick and economical
means of facilitating simple compositions among general creditors who have been deemed by
Congress to need only the minimal disinterested protection provided by the Chapter. In Re Texas
Consumer Finance Corporation, 480 F.2d 1261 (5th Cir. 1973). Further, the Congressional intent
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T-Anchor Corp. v. Travarillo Associates, 529 S.W.2d 622 (1975)
in establishing Chapter XI is to provide for an efficient and orderly method by which the claims of
unsecured or common creditors of a debtor might be satisfied without resort to general bankruptcy.
9 Remington on Bankruptcy s 3565, p. 32 (Supp.1975).
[12] In any event, we do not think that the trial court was required to make a finding that Travarillo
filed a petition under Chapter XI because such a finding would be evidentiary. Plaza Co. v. White,
supra; Wade v. Taylor, supra. Moreover, the evidentiary finding would not necessarily compel
a different conclusion by the trial court regarding such ultimate and vital issue of termination of
the contract.
Further, it is our opinion that the case of Smith v. Owen, 43 Tex. Civ. App. 51, 107 S.W. 929 (1908,
writ ref'd), cited in appellant's brief in support of its contention that tender had been withdrawn, is
not applicable to the facts in the instant case. In that case the vendee pleaded defenses inconsistent
with his tender of the purchase money; the court held that the plea of limitation title precluded the
adjustment of any equities in the vendee's favor that might allow him to pay the unpaid balance
of the purchase money and hold the land. Id. at 930. The court stated in Smith v. Owens, supra,
there were no equities pleaded or proved that would entitle the vendee to defeat the remedy of
rescission of the contract sought in that case.
In the instant case we have no pleading by Travarillo of any theory inconsistent with its tender
of whatever amount the trial court determined to be owing. Further, in the instant case, we find
evidence to support a judgment in favor of Travarillo upon equitable grounds. By way of cross-
action Travarillo invoked the equity jurisdiction of the trial court to deny cancellation of the
contract.
Here, Travarillo had paid into the registry of the trial court which, in turn, has paid to T—Anchor,
an amount making Travarillo current in its obligations. The Chapter XI proceeding initiated
by Travarillo was dismissed, with no change in possession resulting from the proceeding. T—
Anchor's conduct with reference to the forfeiture that it claims occurred on October 11, 1973
was not consistent with such claim of forfeiture. By accepting late payments and by making a
subsequent agreement for cure of defects T—Anchor indicated that it continued to consider the
contract in force. This is a case where the seller recognized the contract as still in force even
after default. Hoover v. General Crude Oil Co., 147 Tex. 89, 212 S.W.2d 140 (1948); Tom v.
Wollhoefer, 61 Tex. 277 (1884). Although it may be contended that T—Anchor may have made
moves toward some definite action to exercise its right of forfeiture, yet there is evidence of
probative force to support a finding that T—Anchor had not unequivocally *630 declared the
contract cancelled at the time Young went into bankruptcy on October 31, 1973.
[13] [14] Whether the seller has effectively exercised an option of forfeiture for default in
payment depends not upon the number of hours or days that have elapsed since the default in
question, but upon whether the circumstances are such that the buyer has, by the conduct of the
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T-Anchor Corp. v. Travarillo Associates, 529 S.W.2d 622 (1975)
seller, been led reasonably to believe that strict application of the right of forfeiture will not be
insisted upon, for the time being. A. L. Carter Lumber Co. v. Saide, 140 Tex. 523, 168 S.W.2d 629
(1943). Suspension of the right of forfeiture depends upon the facts in each case. 77 AmJur.2d,
Vendor and Purchaser, s 589, p. 716; 91 C.J.S. Vendor & Purchaser, s 137, pp. 1076—1077, s 144.
T—Anchor cites Stevenson v. Lohman, supra, in support of its contention that equitable relief
should be denied. It is noted that the buyer in Stevenson made no tender of all or part of the contract
payments until after suit in trespass to try title was filed. The buyer advised the seller that he would
make no further monthly payments, and the seller treated the contract as abandoned. Travarillo
has tendered performance to bring the contract obligations up to date before this suit was filed
in April, 1974. In the instant case there is evidence that subsequent to the time when T—Anchor
contends it first declared a forfeiture, it treated the contract as continuing and not as abandoned.
Also, in Stevenson, the court significantly pointed out that the vendor's right of possession upon
default could be defeated by the vendees ‘upon pleading and proving such facts as would make it
inequitable to enforce it.’ In view of the equities pleaded and proved here, points of error numbers
29—32 are overruled.
We recognize that this is a case that requires the weighing of competing equities and that the
equities do not lie wholly in favor of either party. However, we hold that the trial court's judgment,
based on a balancing of equities, is supported by the record, and that the findings requested by T
—Anchor, even if established, would not compel the trial court to reach a different result.
The judgment of the trial court is affirmed.
End of Document © 2015 Thomson Reuters. No claim to original U.S. Government Works.
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 12
Vinson Minerals, Ltd. v. XTO Energy, Inc., 335 S.W.3d 344 (2010)
335 S.W.3d 344
Court of Appeals of Texas,
Fort Worth.
VINSON MINERALS, LTD., Johnny H. Vinson and Chisholm 2000, L.P., Appellants,
v.
XTO ENERGY, INC., Appellee.
No. 02–08–00453–CV. | Dec. 16, 2010.
Synopsis
Background: Mineral rights owners brought action against lessee for numerous claims relating
to operation of oil and gas leases, including trespass, breach of contract, incorrect calculation and
underpayment of royalties and other production costs, surface damages, and failure to develop, and
sought unspecified amount of damages and attorney fees. After successor acquired lessee and the
leases, owners amended petition by substituting successor as party and adding breach of contract
claim and request for a declaratory judgment seeking termination of the leases. The 271st District
Court, Wise County, John H. Fostel, J., granted successor's motion for summary judgment without
specifying the grounds, and dismissed the owners' action with prejudice.
Holdings: The Court of Appeals, Gardner, J., held that:
[1] letter from owners was an inadmissible settlement offer, and
[2] owners were only entitled to damages, rather than forfeiture of oil and gas leases.
Affirmed.
Terrie Livingston, C.J., concurred and filed opinion.
West Headnotes (16)
[1] Evidence Offers of Compromise or Settlement
Letter from mineral rights owners to oil and gas lessee was an inadmissible “settlement
demand,” rather than a “demand letter” sufficient to trigger a forfeiture under the terms of
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Vinson Minerals, Ltd. v. XTO Energy, Inc., 335 S.W.3d 344 (2010)
the leases, though letter included sentence demanding undisputed amounts, where letter
otherwise was devoted to compromise and settlement; letter began with discussion of
settlement, stated that it was in response to lessee's request for a settlement demand,
concluded with a valuation of case greatly in excess of $30 million, offered to settle
all claims for $9.5 million, and was written during the parties' ongoing negotiations for
settlement of an existing lawsuit. Rules of Evid., Rule 408.
Cases that cite this headnote
[2] Evidence Offers of Compromise or Settlement
Witnesses Competency of Impeaching Evidence
In an “offer of settlement or compromise,” which is inadmissible to prove liability for or
invalidity of claim or its amount, a party concedes some right to which he believes he is
entitled in order to bring about a mutual settlement; but settlement offers are admissible
when offered for another relevant purpose such as to demonstrate bias or prejudice. Rules
of Evid., Rule 408.
Cases that cite this headnote
[3] Evidence Preliminary Evidence
The burden is on the party objecting to evidence as offer of settlement to show that it
was a part of settlement negotiations and not offered for another purpose. Rules of Evid.,
Rule 408.
Cases that cite this headnote
[4] Appeal and Error Rulings on admissibility of evidence in general
Only when the trial court abuses its discretion will its ruling whether to exclude evidence
as offer of settlement be disturbed on appeal. Rules of Evid., Rule 408.
Cases that cite this headnote
[5] Evidence Offers of Compromise or Settlement
Purpose of rule excluding evidence of offer to compromise a claim is to encourage
settlement. Rules of Evid., Rule 408.
Cases that cite this headnote
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Vinson Minerals, Ltd. v. XTO Energy, Inc., 335 S.W.3d 344 (2010)
[6] Mines and Minerals Forfeiture and re-entry for nonpayment
Mineral rights owners did not make adequate written demand for performance under
terms of oil and gas leases, as required to be entitled to forfeiture of leases for lessee's
nonpayment of royalties, although owners sent letter to lessee that included demand for
all royalties due, where letter was primarily offer to settle and did not indicate owners
would be seeking forfeiture, and owners did not inform lessee of specific amount due or
time within which to cure.
Cases that cite this headnote
[7] Mines and Minerals Forfeiture and re-entry for nonpayment
Promise in oil and gas lease to pay royalties is generally a covenant, which will give
rise only to a remedy of damages in absence of a specific clause allowing the option of
termination of the lease upon the lessee's failure to pay.
1 Cases that cite this headnote
[8] Mines and Minerals Forfeiture for breach in general
Mines and Minerals Forfeiture and re-entry for nonpayment
Upon breach of a condition subsequent in oil and gas lease, the lessor must elect between
seeking damages or forfeiture; the lease is not automatically terminated upon breach.
2 Cases that cite this headnote
[9] Mines and Minerals Forfeiture for breach in general
To obtain forfeiture of oil and gas leases upon breach of condition subsequent, the lessor
must take affirmative steps by re-entering or seeking a judicial declaration of forfeiture.
Cases that cite this headnote
[10] Mines and Minerals Forfeiture for breach in general
Mines and Minerals Forfeiture and re-entry for nonpayment
Rule of strict construction disfavoring forfeiture of oil and gas lease applies when a
forfeiture is claimed for breach of a condition subsequent.
Cases that cite this headnote
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Vinson Minerals, Ltd. v. XTO Energy, Inc., 335 S.W.3d 344 (2010)
[11] Mines and Minerals Surrender, abandonment, or forfeiture
Mines and Minerals Forfeiture for breach in general
Mines and Minerals Forfeiture and re-entry for nonpayment
If the oil and gas lease contract is susceptible of two reasonable interpretations, it should
be construed as to prevent a forfeiture.
Cases that cite this headnote
[12] Mines and Minerals Surrender, abandonment, or forfeiture
Mines and Minerals Forfeiture for breach in general
Mines and Minerals Forfeiture and re-entry for nonpayment
If oil and gas lease contains a provision giving the lessee a right of notice of any breach
or default before declaring any forfeiture, it must be literally complied with; under such
a provision, the lessor cannot claim a forfeiture without giving the lessee the benefit of
notice of any default and an opportunity to remedy it.
1 Cases that cite this headnote
[13] Mines and Minerals Forfeiture and re-entry for nonpayment
For payment to be “undisputed,” under provision of oil and gas leases permitting
termination by owners if lessee wrongfully or unreasonably withheld payment after proper
written demand, the amount had to be undisputed by both parties, not just the lessee.
Cases that cite this headnote
[14] Landlord and Tenant Breach of Covenant or Condition
Where forfeiture of a lease is dependent on the making of a demand for performance, the
demand must be proper, specific, and reasonable.
Cases that cite this headnote
[15] Landlord and Tenant Sufficiency
Written notice seeking to invoke the harsh remedy of termination or forfeiture of lease
must be clear and unambiguous.
1 Cases that cite this headnote
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Vinson Minerals, Ltd. v. XTO Energy, Inc., 335 S.W.3d 344 (2010)
[16] Mines and Minerals Demand and notice before forfeiture
By precluding initiation of litigation until notice of default had been provided, oil and gas
lease agreements effectively prevented the use of a pleading to make a proper demand for
payments due under leases, as condition of seeking forfeiture.
Cases that cite this headnote
Attorneys and Law Firms
*346 Moses, Palmer & Howell, LLP and Shayne D. Moses and David A. Palmer, Fort Worth,
TX, and Winstead PC and Craig T. Enoch, Austin, TX, for Appellants.
Friedman, Suder & Cooke and Jonathan T. Suder, Michael T. Cooke and David Skeels, Fort Worth,
TX, and Locke Lord Bissell & Liddell LLP and Charles R. “Skip” Watson, Jr., Austin, TX, for
Appellee.
PANEL: LIVINGSTON, C.J.; GARDNER and WALKER, JJ.
OPINION
ANNE GARDNER, Justice.
I. INTRODUCTION
Appellants Vinson Minerals, Ltd., Johnny H. Vinson, and Chisholm 2000, L.P. (the Vinsons) and
Appellee XTO Energy, Inc. (XTO) filed cross-motions for summary judgment on the Vinsons'
claims relating to ten oil and gas leases covering the Vinsons' ranch in Wise County, Texas. The
trial court granted XTO's motion and denied the Vinsons' motion. The Vinsons, as one or more of
the lessors in each of the leases, contend that they are entitled to terminate the leases with XTO, as
successor lessee, because XTO failed to make “undisputed payments” after demand. Because we
hold that the Vinsons presented no evidence that they provided XTO with a proper written notice
or demand for payment as required by the leases, we affirm.
II. BACKGROUND
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Vinson Minerals, Ltd. v. XTO Energy, Inc., 335 S.W.3d 344 (2010)
The oil and gas leases at issue originated in 2001 between Johnny Vinson, Vinson Minerals, Ltd.,
and others as lessors and Threshold Development Company as lessee. Threshold is a Vinson family
company *347 in that the owners, officers, and directors are members of the Vinson family. In
2003, Antero Resources Corporation bought Threshold's interests as lessee in the leases for $25
million.
In early 2005, the Vinsons began disputing Antero's calculations of royalty payments to the
Vinsons from 2003 to 2005 and commenced an audit of Antero's accounting records of royalties.
By letter of January 25, 2005, the Vinsons informed Antero that they were “waiting on requested
information to complete [the] audit of production and royalty payments” and that the Vinsons'
“potential claim” for royalty underpayment was $2 million. In March 2005, the Vinsons provided
Antero with audit exceptions listing, among other complaints, improper deductions from royalty
payments for compression, fuel, treating, and transportation charges by an “affiliated” pipeline
owned by Antero “to be determined” but “estimated ... to be in the range of $600,000.” 1
The relationship between the parties deteriorated as the Vinsons raised other issues, including
claims for reassignment of undeveloped acreage, drill site issues, and road and surface damage
issues. On July 11, 2005, the Vinsons filed suit against Antero for numerous claims—including
trespass, breach of contract, incorrect calculation and underpayment of royalties and other
production costs, surface damages, and failure to develop—seeking an unspecified amount of
damages and attorney fees.
In the meantime, two months before the Vinsons filed suit, XTO acquired Antero and the leases.
XTO was made aware of the outstanding issues claimed by the Vinsons at the time it acquired
the leases. In March 2005, the Vinsons faxed XTO a copy of its January 25 letter to Antero
regarding the status of their claims. By letter dated August 5, 2005, XTO's outside litigation
counsel initiated settlement dialogue with the Vinsons' counsel, requesting that the Vinsons (1)
amend their pleadings to substitute XTO as the sole defendant, (2) agree to suspend their ongoing
audit during litigation, and (3) consider opening discussions with XTO “to see if some or all
of these issues can be resolved, and good working relations restored, before pursuing litigation
aggressively.” 2
In a January 18, 2006 letter to the Vinsons' counsel, confirming delivery of documents in response
to discovery, XTO's counsel reaffirmed its “intention to resolve the royalty payment issues both
prospectively and [as] to past months, by an agreed method of changed payment and a lump sum
settlement for past months once the new payment method is agreed upon.” A few days later,
XTO's and the Vinsons' accountants and legal counsel met to discuss settlement of all issues in
the suit, including the issue of the new methodology to be agreed upon in order to recalculate
the disputed royalties. Under the methodology proposed by XTO, its “estimated” preliminary
calculation of royalty payments owed to the Vinsons for the period from November 2003 through
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Vinson Minerals, Ltd. v. XTO Energy, Inc., 335 S.W.3d 344 (2010)
April 2005 (the Antero period) totaled $643,548.19. XTO described this number as an estimate,
subject to adjustment as XTO continued reviewing Antero's boxes of accounting *348 records. 3
The Vinsons and XTO agreed at this meeting to continue working, without the presence of legal
counsel, on the changed methodology to recalculate the disputed royalty payments owed to the
Vinsons during both the Antero period and the period after May 2005, when XTO acquired Antero
(the XTO period). In this regard, the parties obtained a Rule 408 Agreed Protective Order from
the trial court that included a provision for informal meetings of representatives of the parties to
discuss royalty accounting issues. 4
On March 16, 2006, XTO's counsel wrote the Vinsons' counsel, summarizing the current status
of the ongoing settlement discussions on all issues and proposing that XTO recalculate all prior
royalties under a revised methodology and format and “in due course, make a retroactive payment
to bring all prior periods up to the new payment methodology.” The letter requested that the
Vinsons present a settlement demand “to resolve all issues in the case” as follows:
Please discuss these issues with your client and present XTO a settlement
demand to resolve all issues in the case. If we have misunderstood your pleading
in any respect, or if you would need to discuss any of these issues prior to
submitting a demand, please call me at your convenience.
On May 12, 2006, the Vinsons' counsel responded with a three-page letter faxed to XTO's counsel
(the May 12 letter). The letter began with the following paragraph:
In response to your March 16, 2006, letter regarding possible settlement of this matter, [the
Vinsons have] been thoroughly engaged in reviewing all of the information available related
to this dispute. Now that this review is complete [the Vinsons are] prepared to respond in full
to your suggestion as to “what XTO might offer to attempt to resolve the rest of the claims in
the lawsuit.”
In the May 12 letter, the Vinsons' counsel characterized their claims as falling into two major
categories, summarized as “surface/lessor issues” and “working interest/reassignment issues,”
with four main causes of action. He discussed those issues in detail, including the following:
Royalty/Accounting Issues. If XTO makes a retroactive payment as represented, including
interest and attorney fees, and revises the format for making future payments then this issue
should be resolved. Until agreement on each of these matters is reached, in accordance with the
terms of [the Vinson] leases ... demand is hereby made for all undisputed payments due under
the Wise County leases. As a part of any *349 settlement of this issue XTO will also have to
confirm that it will provide [the Vinsons] with daily production information....
The letter concluded with the following paragraph:
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Vinson Minerals, Ltd. v. XTO Energy, Inc., 335 S.W.3d 344 (2010)
Considering each of these factors, [the Vinsons] conservatively believe [ ]this
case has a value greatly in excess of $30,000,000. Recognizing the risks of
litigation and the costs associated therewith, I have been authorized to settle
all claims in exchange for a payment in the amount of $9,500,000 and XTO
bringing itself into compliance with the Barnett Shale Project Agreement
by signing JOA's correctly identifying Threshold's before and after payout
working interests after XTO acquired Sinclair Oil Corporation's interest in said
agreement, in the same manner as all previously executed JOA's.
On May 25, 2006, XTO paid the Vinsons the amount of $103,047.68, representing underpayments
for royalties owed for the XTO period, and using the new methodology that had been discussed. 5
The Vinsons accepted that payment. XTO then began using the new methodology to adjust the
royalty calculations previously made by Antero from the 348 boxes of accounting documents,
which were incompatible with XTO's computer system, in order to calculate amounts to be paid
for the Antero period. 6
Sixty days after sending the May 12 letter, the Vinsons filed an amended petition substituting XTO
as the defendant. In addition to the claims for damages previously asserted, the Vinsons alleged
that XTO was in breach of contract by failing to make “undisputed royalty payments” demanded
by the Vinsons in the May 12 letter. By the new pleading, the Vinsons added a request for a
declaratory judgment seeking termination of the leases under the following portion of Section 3
(entitled “Royalty Payment”) of the leases: 7
3. Royalty Payment. Royalties on oil, gas, and other substances produced and saved hereunder
shall be paid by [XTO] to [the Vinsons] as follows: ...
e. ... If [XTO] wrongfully or unreasonably withholds any undisputed payment or payments
due to [the Vinsons] for a period of sixty (60) days after written demand for payment is made
by [the Vinsons] on [XTO at the above address (or such other address as may be specified in
writing hereafter by XTO) ], at the election of [the Vinsons] this lease may be terminated. The
foregoing sentence *350 shall not apply to payments withheld by [XTO] because [XTO]
contests such payments in good faith so long as [XTO] has timely paid to lessor all undisputed
payments due to [the Vinsons]. 8
On October 16, 2006, the Vinsons filed a partial motion for summary judgment asking the trial
court to declare the leases terminated under Section 3(e) of the leases because of XTO's failure to
comply with the Vinsons' alleged May 12 demand that “all undisputed amounts” be paid within
sixty days. 9
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Vinson Minerals, Ltd. v. XTO Energy, Inc., 335 S.W.3d 344 (2010)
On November 1, 2006, XTO paid the Vinsons $725,942—the “estimated” amount of $643,548.19
in royalty underpayments during the Antero period for improper transportation charges on the
Antero affiliated pipeline, plus $61,006 in interest and $21,387 in surface damages. XTO made
subsequent payments of $16,972.79 and $2,380.82 to the Vinsons later in November 2006 as
further adjustments for the underpaid amounts by Antero, as well as $150,000 in attorney's
fees. After a hearing, the trial court denied the Vinsons' motion for partial summary judgment.
Eventually, the parties settled all other claims and issues, with the Vinsons reserving their right
to pursue the lease forfeiture claim.
XTO then filed a motion to exclude the May 12 letter under Texas Rule of Evidence 408, together
with a motion for no-evidence summary judgment. XTO's no-evidence summary judgment motion
asserted that the Vinsons had no evidence
(1) that it fully and sufficiently described in writing the alleged breach or default and properly
notified XTO of the forfeiture to result from said breach;
(2) that undisputed royalty payments were due and owing under the Leases;
(3) that undisputed payments were withheld in bad faith; and
(4) that undisputed payments were wrongfully or unreasonably withheld.
The Vinsons responded to XTO's motion and also requested that the court reconsider their motion
for partial summary judgment. The trial court granted XTO's motions to exclude and for summary
judgment without specifying the grounds relied on, denied the Vinsons' motion for reconsideration,
and dismissed the Vinsons' case with prejudice. This appeal followed.
III. ISSUES
On appeal, the Vinsons raise three issues. First, they contend that the trial court erred by denying
their motion for summary judgment and granting XTO's motion for summary judgment because
the Vinsons made written demand for payment of undisputed sums in the May 12 letter, XTO
failed to pay those sums within sixty days, and the leases expressly provide that they may be
terminated if “undisputed” sums are not paid within sixty days of written demand. Second, the
Vinsons assert that the trial court abused its discretion by excluding from evidence the May 12
letter, which they contend was their “written demand” pursuant to the terms of the leases. Third,
the Vinsons argue that the trial court erred by excusing XTO from complying with the leases and
by *351 applying the doctrine of disproportionate forfeiture.
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Vinson Minerals, Ltd. v. XTO Energy, Inc., 335 S.W.3d 344 (2010)
XTO responds that the trial court correctly excluded the May 12 letter from evidence and that
the trial court correctly granted its summary judgment motion because the Vinsons produced no
evidence of a proper demand, no evidence that unpaid royalties were “undisputed,” no evidence
that amounts claimed were “wrongfully or unreasonably” withheld, and no evidence that the
Vinsons gave proper notice “fully describing” any breach or default by XTO as required by the
leases for forfeiture. XTO further asserts that the Vinsons were made whole by the payments they
accepted, which foreclosed any election to sue for forfeiture of the leases.
IV. ANALYSIS
At the core of the Vinsons' appeal is their complaint that the trial court abused its discretion
by excluding from evidence and refusing to consider the May 12 letter, which the Vinsons
characterize as their “Demand Letter.” The Vinsons contend that the May 12 letter was admissible
and was a proper written demand that met the requirements of Section 3(e) of the leases. We will
first consider whether the trial court abused its discretion by excluding the May 12 letter from
evidence.
A. The May 12 Letter Was Not a “Demand Letter.”
[1] The Vinsons argue that the trial court abused its discretion by excluding the May 12 letter
from evidence under Texas Rule of Evidence 408 as a compromise offer because the letter was
not a compromise settlement demand but was clearly a “Demand Letter” notifying XTO of its
obligation to pay an amount that XTO knew it owed but was withholding until all issues could be
resolved. The Vinsons point out that the letter contained wording from Section 3(e) of the leases
making “demand ... for all undisputed payments due” and that it expressly referred to the Wise
County leases, which was, according to the Vinsons, sufficient language to put XTO on notice that
the leases gave it sixty days to respond in order to defeat forfeiture of the leases. Thus, the Vinsons
argue that the letter was admissible as evidence of a demand. XTO replies that the language of
the letter is couched as a global settlement demand offering to compromise all issues in the case
for a total specific amount (the only amount demanded in the letter); that the amount owed for
royalties was disputed; that if the Vinsons intended a demand for payment in the letter, it was not
recognized as such by XTO's forty-year veteran oil and gas litigation attorney; and that the alleged
demand was misleading and surreptitious with no specified amount to cure a default and did not
specify a time within which to pay but, instead, indicated it would remain open until settlement.
Thus, XTO argues the May 12 letter was properly excluded by the trial court.
[2] Offers of settlement are not admissible to prove liability or invalidity of a claim or its amount.
Tex.R. Evid. 408; Ford Motor Co. v. Leggat, 904 S.W.2d 643, 649 (Tex.1995) (orig. proceeding);
Tatum v. Progressive Polymers, Inc., 881 S.W.2d 835, 837 (Tex.App.-Tyler 1994, no writ). In
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Vinson Minerals, Ltd. v. XTO Energy, Inc., 335 S.W.3d 344 (2010)
an offer of settlement or compromise, a party concedes some right to which he believes he is
entitled in order to bring about a mutual settlement. Mercedes–Benz of N. Am. v. Dickenson, 720
S.W.2d 844, 857 (Tex.App.-Fort Worth 1986, no writ). But rule 408 does not bar the admission
of settlement offers when offered for another relevant purpose. Tex.R. Evid. 408; Barrett v. U.S.
Brass Corp., 864 S.W.2d 606, 633 (Tex.App.-Houston [1st Dist.] 1993), rev'd on other grounds
sub *352 nom, Amstadt v. U.S. Brass Corp., 919 S.W.2d 644 (1996). Thus, an offer or demand
for settlement may be admissible for another purpose, such as to demonstrate bias or prejudice.
Tex.R. Evid. 408; Gen. Motors Corp. v. Saenz, 829 S.W.2d 230, 243 (Tex.App.-Corpus Christi
1991), rev'd on other grounds, 873 S.W.2d 353 (Tex.1993); C & H Nationwide, Inc. v. Thompson,
810 S.W.2d 259, 269 (Tex.App.-Houston [1st Dist.] 1991), rev'd on other grounds, 903 S.W.2d
315 (Tex.1994); Ochs v. Martinez, 789 S.W.2d 949, 959–60 (Tex.App.-San Antonio 1990, writ
denied) (op. on reh'g).
[3] [4] The burden is on the party objecting to evidence under rule 408 to show that it was a
part of settlement negotiations and not offered for another purpose. TCA Bldg. Co. v. Nw. Res.
Co., 922 S.W.2d 629, 636 (Tex.App.-Waco 1996, writ denied); Haney v. Purcell Co., Inc., 796
S.W.2d 782, 790 (Tex.App.-Houston [1st Dist.] 1990, writ denied). Whether the evidence is being
impermissibly offered as evidence of liability or for some other valid reason is a matter within the
trial court's discretion. Tatum, 881 S.W.2d at 837. Only when the trial court abuses its discretion
will its ruling be disturbed on appeal. 10 See id.
XTO contends that, when the “demand” language is properly viewed in the context of the
remainder of the May 12 letter and the parties' ongoing negotiations, the letter was clearly a part of
settlement negotiations, not a demand for payment of undisputed amounts triggering forfeiture of
the leases if not paid. 11 XTO points out that the May 12 letter's first paragraph begins: “In response
to your March 16, 2006, letter regarding possible settlement of this matter, ....” [Emphasis added.]
Moreover, the very paragraph of the letter the Vinsons rely upon as setting forth the demand
begins by expressly acknowledging, immediately before the words they claim to be a demand
for payment, that a settlement had not been reached, stating: “Until agreement on each of these
matters is reached. ...” [Emphasis added.] Immediately following the demand language, that same
paragraph references payment of such undisputed amounts as a part of a proposed settlement,
stating that “[A]s a part of any settlement of this issue, XTO will also have to confirm” that it will
provide various production information in a timely manner. [Emphasis added.]
Then, as XTO notes, the letter closes with a straightforward compromise settlement demand for
the entire case, stating that the Vinsons value the case at more than $30 million, but “[r]ecognizing
the risks of litigation and the costs associated therewith, I have been authorized to settle all claims
in exchange for a payment in the amount of $9,500,000.” [Emphasis added.] The Vinsons deny
that the last paragraph of the letter was intended to constitute a settlement demand for all claims
—including their claim for unpaid royalties—and insist that the letter made clear that the Vinsons'
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Vinson Minerals, Ltd. v. XTO Energy, Inc., 335 S.W.3d 344 (2010)
counsel was only authorized to settle all other matters for a specified amount. We disagree with
the Vinsons' post hoc interpretation. “All claims” necessarily includes the Vinsons' *353 claim
for unpaid royalties, which were sought in the pending litigation.
The May 12 letter speaks for itself. It begins with a discussion of settlement, states that it is in
response to XTO's request for a settlement demand, clearly and unambiguously concludes with a
settlement demand for “all claims,” and was written during the parties' ongoing negotiations for
settlement of an existing lawsuit that included the Vinsons' claim for underpayment of royalties.
The May 12 letter also concludes by conceding a right to which the Vinsons believe they are
entitled. See Mercedes–Benz, 720 S.W.2d at 857 (holding that an offer of compromise exists when
a party concedes some right to which he believes he is entitled to bring about a mutual settlement).
Specifically, the letter concludes with a valuation of “this case” greatly in excess of $30 million
and an offer to settle “all claims” for $9.5 million. The language and context of the letter negate
any reasonable interpretation of the language buried in the middle of a sentence, buried in the
middle of a paragraph, and buried in the middle of the three-page letter as a stand-alone “demand”
for payment under Section 3(e) of the leases that can be considered separate and apart from the
rest of the letter.
[5] The purpose of rule 408 is to encourage settlement. See MG Bldg. Materials, Ltd. v. Moses
Lopez Custom Homes, Inc., 179 S.W.3d 51, 61 (Tex.App.-San Antonio 2005, pet. denied); State
Farm Mut. Auto. Ins. Co. v. Wilborn, 835 S.W.2d 260, 261 (Tex.App.-Houston [14th Dist.] 1992,
orig. proceeding) (noting settlement offers are excluded to allow a party to “buy his peace and
encourage settlement of claims outside the courthouse”). Permitting a party to recharacterize, after
the fact, what was clearly a settlement demand as a “Demand Letter,” to use the Vinsons' label,
based upon part of a sentence inserted in the middle of a letter otherwise ostensibly devoted from
beginning to end to compromise and settlement, in order to invoke the harsh consequences of
forfeiture, would reward obfuscation and “gotcha” tactics and would chill rather than encourage
parties to negotiate in good faith toward a compromise and settlement of their claims.
By granting XTO's motion to exclude, the trial court could have found, within its discretion, that
the May 12 letter was not a “demand letter” sufficient to trigger a forfeiture under the terms of
the leases but was part of a settlement demand inadmissible under rule 408 offered solely to prove
XTO's liability for forfeiture of its leases. Cf. Mercedes–Benz, 720 S.W.2d at 857 (holding trial
court was within its discretion to determine a letter “was more in the nature of an ultimatum than
an offer to compromise” and, therefore, admissible into evidence). We will not disturb the exercise
of the trial court's discretion in excluding the May 12 letter from the summary judgment evidence.
See id.; Allen v. Avery, 537 S.W.2d 789, 791 (Tex.Civ.App.-Texarkana 1976, no writ) (upholding
trial court's exclusion of compromise settlement from evidence). We overrule the Vinsons' second
issue.
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Vinson Minerals, Ltd. v. XTO Energy, Inc., 335 S.W.3d 344 (2010)
B. Insufficient Evidence Existed to Raise an Issue of Fact as to Notice and Demand to
Entitle the Vinsons to Forfeiture of the Leases.
[6] The Vinsons contend in their first issue that the trial court erred by denying their motion for
summary judgment and granting XTO's motion for summary judgment because the May 12 letter
constituted written demand for payment, XTO failed to pay those sums within sixty days, and the
leases expressly provide that they may be terminated if “undisputed” sums are not paid within
sixty days of written *354 demand. But even if the trial court erred by excluding the May 12
letter from evidence as a demand, the Vinsons were only entitled to damages, not forfeiture of
the leases. Thus, the Vinsons have failed to show how the exclusion of the May 12 letter led to
rendition of an improper judgment. See Tex.R.App. P. 44.1(a).
[7] The promise to pay royalties is generally a covenant, 12 which will give rise only to a remedy
of damages in absence of a specific clause allowing the option of termination of the lease upon
the lessee's failure to pay. Blackmon, 276 S.W.3d at 606 (citing Linton E. Barbee, The Lessor's
Remedies for Nonpayment of Royalty, 45 Tex. L.Rev. 132, 159 (1966)). As XTO acknowledges,
the Vinson leases are among the “few” that contain a specific clause making non-payment of
royalties a condition subsequent, expressly permitting the Vinsons, as lessors, to elect to seek
forfeiture of the lease. See Barbee, 45 Tex. L.Rev. at 159–60.
[8] [9] Upon breach of a condition subsequent, the lessor must elect between seeking damages
or forfeiture; the lease is not automatically terminated upon breach. Blackmon, 276 S.W.3d at 605;
see Chicago, T. & M.C. Ry. Co. v. Titterington, 84 Tex. 218, 223–24, 19 S.W. 472, 474 (1892).
The lessor must take affirmative steps by re-entering or seeking a judicial declaration of forfeiture
as the Vinsons did in this case. See Barbee, 45 Tex. L.Rev. at 159.
[10] [11] The rule of strict construction disfavoring forfeiture applies when a forfeiture is
claimed for breach of a condition subsequent. Coastal Oil & Gas Corp. v. Roberts, 28 S.W.3d 759,
763 (Tex.App.-Corpus Christi 2000, pet. granted, judgm't vacated w.r.m.); Tickner v. Luse, 220
S.W. 578, 580 (Tex.Civ.App.-El Paso 1920, writ ref'd); see Patrick H. Martin & Bruce M. Kramer,
3 Williams & Meyers, Oil and Gas Law § 656.2 (2008) (stating that strict construction “governs
forfeiture provisions based on failure to make proper and timely payment of royalty”). It is settled
law that the rule of construction against the right of forfeiture applies to oil and gas leases. Wisdom
v. Minchen, 154 S.W.2d 330, 334 (Tex.Civ.App.-Galveston 1941, writ ref'd w.o.m.) (citing Ryan
v. Kent, 36 S.W.2d 1007, 1011 (Tex. Comm'n App.1931, judgm't adopted)). Thus, if the lease
contract is susceptible of two reasonable interpretations, it should be construed as to prevent a
forfeiture. Ryan, 36 S.W.2d at 1011; Wisdom, 154 S.W.2d at 334.
[12] Additionally, if the lease contains a provision giving the lessee a right of notice of any breach
or default before declaring any forfeiture, it must be “literally complied with.” Coastal, 28 S.W.3d
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at 763 (citing Deace v. Stribling, 142 S.W.2d 564, 566 (Tex.Civ.App.-Austin 1940, no writ)).
Under such a provision, the lessor cannot claim a forfeiture without giving the lessee the benefit
of notice of any default and an opportunity to remedy it. Wisdom, 154 S.W.2d at 334.
The Vinsons contend that this case is controlled by Coastal Oil & Gas Corp. v. Roberts, in which
a global demand referencing no stated amount of royalties due, and not mentioning termination,
was nevertheless held sufficient to entitle the lessor to forfeiture of a lease under a provision that,
according to the Vinsons, is almost identical to Section 3(e) of their *355 leases. See 28 S.W.3d at
764–65. We agree that Coastal is similar to this case but find it distinguishable in material respects.
Paragraph 3 of the Coastal leases, specifically regarding royalties and other payments for
production, and similar to section 3(e) of the Vinsons' leases, provided:
Royalties and other payments for production shall be due and owing to Lessor
within 120 days from the date of first production.... If Lessee wrongfully or
unreasonably withholds any such payment or payments due to Lessor for a
period of thirty (30) days after written demand for payment is made by Lessor
on Lessee at the above address (or other such address as made by [sic] specified
in writing hereafter by Lessee), at the election of Lessor this lease may be
terminated.
Id. at 761–62.
Litigation had been pending by the lessor against Coastal for several years for underpaid royalties
on several other leases, but not for the “E” or “F” lease. See id. at 761. Coastal, as lessee, failed
to pay any royalties due on the F–6 well on its “F” lease by the 120th day after first production
of gas from the well it drilled on that property. See id. at 762. Coastal suspended payment of any
royalties due on the F–6 well while it awaited return of a signed division order from the lessor.
See id. Without returning the division order, the lessor sent a written demand letter that read, in
toto, as follows:
Plaintiffs hereby make demand for all royalties due and owing pursuant to each
paragraph 3 of the (a.) Coates “E” lease and (b.) Coates “F” lease. Plaintiffs
demand payment in full from each separate defendant, their proportionate share
of all amounts due. You have thirty (30) days, after receipt of this letter, to pay
said amounts. We appreciate your immediate attention to this matter.
Id. The lessor subsequently amended its pleadings in the existing suit and sought to terminate
the lease based upon Coastal's “wrongful or unreasonable” failure to pay royalties after written
demand for payment. See id. Coastal contended that the lessor failed to give proper notice because
the generic written demand letter did not explain the amounts owed, how Coastal had improperly
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calculated royalties, or how the lessor wished royalties to be calculated, and was thus “insufficient,
deliberately vague and written in such a way as to keep [Coastal] from being able to adequately
respond.” Id. The Corpus Christi Court of Appeals affirmed a summary judgment for the lessor,
holding that the written demand sufficed to invoke the right of the lessor to terminate, despite
the rule that oil and gas leases must be construed against forfeiture, 13 and despite the additional
rule that the prerequisites of notice of forfeiture must be “literally complied with” 14 because the
Coastal lease did not require the lessor to explain the particulars of the breach or to specify how
the lessee had defaulted and, thus, the lessor's global demand did “literally compl[y]” with the
requirement of written demand for *356 payment. Id. at 763–65. Coastal differs significantly
from this case. First, the demand in Coastal was clearly a “written demand” as required by the
lease, unlike the alleged demand here, which was contained within a letter offering to settle
the pending litigation. See id. at 762. Coastal clearly recognized the demand as such because it
responded and complained that the demand letter was inadequate. See id. Most significantly, the
Corpus Christi court's holding in Coastal that the lessor “literally complied” with the forfeiture
clause rests upon the absence of any language in that lease requiring the lessor to describe the
breach or specify the particulars of the default. See id. at 764. Holding that “literal compliance”
with the prerequisite of notice to forfeit did not require the lessor to identify the specifics of the
breach, the court of appeals noted in a footnote:
An example of a clause in a lease requiring the lessor to indicate the specifics of the breach is
found in 4 HOWARD R. WILLIAMS & CHARLES J. MEYERS, OIL & GAS LAW § 682.1,
at 340 (1984) (citing Ridl v. E.P. Operating Limited Partnership, 553 N.W.2d 784 (N.D.1996)).
The clause provides, in relevant part, “In the event the Lessor considers that Lessee has failed to
comply with an obligation hereunder, express or implied, Lessor shall notify Lessee in writing
specifying in what respect Lessor claims Lessee has breached this lease....”
Id. at 764 n. 3.
The leases in this case, unlike the one in Coastal, do contain such a clause as the example cited
in the footnote, requiring the Vinsons, as lessors, to provide written notice “fully describing the
breach or default” to entitle them to forfeiture of the leases. Section 11 of the leases, applicable
to all breaches or defaults, states:
No litigation shall be initiated by [the Vinsons] for damages, forfeiture, or
cancellation with respect to any breach or default by [XTO] hereunder, for a
period of at least sixty (60) days after [the Vinsons] ha[ve] given [XTO] written
notice fully describing the breach or default, and then only if [XTO] fails to
remedy the breach or default within such period. [Emphasis added.]
The lease in Coastal contained no such provision, and the court refused to write into the contract
a requirement that it did not provide. Id. at 764–65. Compare Ridl, 553 N.W.2d at 784 (lessor's
demands not “specifying in what respects” lessee breached lease, as required by notice clause, not
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Vinson Minerals, Ltd. v. XTO Energy, Inc., 335 S.W.3d 344 (2010)
appropriate demand entitling lessor to forfeiture), and Savoy v. Tidewater Oil Co., 218 F. Supp.
607, 610 (W.D.La.1963) (notice required lessor to “point out the particulars in which they were
deemed deficient” to allow forfeiture), aff'd, 326 F.2d 757 (5th Cir.1964), and Mont. E. Pipe Line
Co. v. Shell Oil Co., 216 F. Supp. 214, 221 (D.Mont.1963) (notice should “express clearly the
dereliction of which complaint is made”), with Sowell v. Natural Gas Pipeline Co. of Am., 789
F.2d 1151, 1156 (5th Cir.1986) (applying Texas law) (notice and demand clause contained no
condition requiring specific facts of breach but demand letter identified proper royalty as based
upon six-county average gas price specified in division order).
[13] [14] The Vinsons did not comply with Section 11's notice provision requiring them to
“fully describe” the breach or default. They offered no answer to the prerequisites of notice and
cure under Section 11 of the leases in their opening brief except to assert that Sections 11 and
3(e) involve “different circumstances.” For the first time in their reply brief, they argue that
they repeatedly made their complaints *357 known in writing in their audit exceptions provided
to XTO as early as March 2005, and more than 60 days expired before they brought suit. But
none of those communications specified any amount due or gave XTO a time within which to
cure the alleged default. For example, the Vinsons' audit exception with respect to the improper
transportation charges stated only that “the Dollar amount ... to be determined but is estimated ...
to be in the range of $600,000.” And none of their communications claimed any amount to be
“undisputed.” 15 Thus, even if the language in the May 12 letter was intended to constitute notice, it
was for an unspecified amount to be paid by an unspecified time for unspecified claims or charges,
as to all of which XTO was left to guess. Where forfeiture of a lease is dependent on the making of
a demand for performance, the demand must be proper, specific, and reasonable. Outdoor Sys., Inc.
v. BBE, L.L.C., 105 S.W.3d 66, 71 (Tex.App.-Eastland 2003, pet. denied) (holding that a lessor's
demand letter was excessive, unreasonable, and imprecise when it demanded payment within ten
days of an unspecified amount based upon “total arrearages from the inception of the Leases”).
The Vinsons' May 12 letter states neither a time limit within which XTO is to make the payments
nor notice of any amount other than the $9.5 million proposed for settlement of all claims. See id.
Moreover, the Vinsons have never identified any amount that was “undisputed” either in the trial
court or in this court. The Vinsons acknowledge as much in their reply brief in this court, conceding
that they “could not know what was undisputed by XTO; thus, [they] could not demand a specific
amount.” If the Vinsons could not know the amount they were demanding to be paid by XTO, it
is difficult to see how they can argue that XTO had notice of what amount was “undisputed.”
The Vinsons' solution to this conundrum is to argue that “[e]ven if XTO was uncertain as to exactly
how much money it owed, it clearly knew (from the parties' prior dealings and discussions) that it
owed [the Vinsons] in excess of $600,000; accordingly, it had a duty to tender the portion that was
undisputed.” The Vinsons also quote from the September 25, 2006 deposition of XTO's accounting
representative, in which she stated that upon recalculating the monies due to the Vinsons, she
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Vinson Minerals, Ltd. v. XTO Energy, Inc., 335 S.W.3d 344 (2010)
came up with an amount “in the neighborhood of $650,000 to $700,000,” that she estimated the
amount owed for the Antero period for transportation charges was $643,548.19, and that she agreed
with the Vinsons' counsel's estimate that XTO recognized since at least January of 2006 that it
owed “something north of $600,000” for past due royalty. The Vinsons cite no authority defining
“undisputed” to include an “estimated” amount, nor do we agree that “in the neighborhood of” or
“something north of” a particular amount equates to an “undisputed amount.”
The May 12 letter is insufficiently specific to constitute “written notice fully describing the
breach or default” as required *358 by Section 11 of the leases, particularly in the context of
the remainder of the letter and the ongoing negotiations for settlement. See id.; see also Cedar
Rapids Television Co. v. MCC Iowa LLC, 560 F.3d 734, 739–40 (8th Cir.2009) (holding notice
of termination of a contract must be “clear and unequivocal” and state a definite intent to cancel
or terminate the contract); Laverty v. Hawkeye Sec. Ins. Co., 258 Iowa 717, 140 N.W.2d 83,
87 (1966); Morris Silverman Mgmt. Co. v. W. Union Fin. Serv., Inc., 284 F. Supp. 2d 964, 974
(N.D.Ill.2003) (citing LA–Nev. Transit Co. v. Marathon Oil Co., 985 F.2d 797, 800 (5th Cir.1993)
(“The focus is on whether the notice is sufficiently clear to apprise the other party of the action
being taken.”)); see also Accu–Weather, Inc. v. Prospect Comm. Inc., 435 Pa.Super. 93, 644 A.2d
1251, 1254 (1994) (holding conditions precedent to termination must be strictly complied with,
and clear and unequivocal language is necessary to terminate); Morris Silverman, 284 F. Supp. 2d
at 974 (“[T]o be effective, notice of termination must be ‘clear and unequivocal.’ ”); Todd v. Corp.
Life Ins. Co., No. 89–C–7711, 1990 WL 16430, at *4 (N.D.Ill. Feb. 15, 1990), aff'd in part, rev'd
on other grounds, 945 F.2d 204, 208 (7th Cir.1991) (“[N]otice to terminate a contract under an
express provision must be clear and unequivocal.”).
[15] The May 12 letter also fails to give XTO notice that the Vinsons intended to seek the drastic
remedy of forfeiture of the leases if payment was not made within any certain time. Specifically,
written notice seeking to invoke the harsh remedy of termination or forfeiture must be clear and
unambiguous. See Ogden v. Gibraltar Sav. Ass'n, 640 S.W.2d 232, 233–34 (Tex.1982) (holding
that equity demands clear and unequivocal notice be given of a party's intent to exercise such harsh
consequences as acceleration or foreclosure); see also Shumway v. Horizon Credit Corp., 801
S.W.2d 890, 891–92 (Tex.1991) (holding harshness of option of accelerating maturity of extended
indebtedness requires both strict reading of terms of option and notice to debtor, and notice of
intent and notice of acceleration must be clear and unambiguous); Outdoor Sys., Inc., 105 S.W.3d
at 71 (“The cases in this State hold that a landlord cannot forfeit the lease of his tenant for failure
to comply with the provisions without first making demand upon the tenant for performance.”);
Barbee, 45 Tex. L.Rev. at 161 (stating terms of a claim for forfeiture of an oil and gas lease must
be clear and unambiguous and lessor is held to strict proof of compliance with notice and demand
requirements).
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Vinson Minerals, Ltd. v. XTO Energy, Inc., 335 S.W.3d 344 (2010)
The Vinsons argue that the reference in the letter to the Wise County leases and the words
“undisputed payments” and “demand” were sufficient to alert XTO that the Vinsons were seeking
to invoke Section 3(e) of the leases, which allowed an election for forfeiture. Even if the letter
was sufficient to invoke Section 3(e) as a demand for payment, it was not sufficient for them to
invoke termination under Section 11. The May 12 letter was written in the context of settlement
negotiations for numerous claims for alleged breaches of covenants and conditions. At best, an
analogy may be made to cases under the Uniform Commercial Code, where attempted notices
of termination of a contract—“mixed” with words of negotiation and compromise—have been
held ineffective as a matter of law. See, e.g., Stovall v. Pub. Paper Co., 284 Or. 53, 584 P.2d
1375, 1380 (1978) (holding notice of termination insufficient where it mixed words of termination
with words of compromise, negotiation, and present obligation); Morris Silverman, 284 F. Supp. 2d
at 974 (holding notice of termination ineffective where *359 party made repeated oral and
written statements that it intended to continue contract); Gatt Trading Inc. v. Sears, Roebuck, &
Co., No. 02–CV–1573–B, 2004 WL 2511894, at *10 (N.D.Tex. Nov. 8, 2004) (holding letter
attempting to terminate insufficient where it invited further negotiation); Accu–Weather, 644
A.2d at 1254 (holding notice of termination that made reference to continuing contract to later
date held “ineffectively ambiguous”); cf. Dresser Indus., Inc. v. Pyrrhus AG, 936 F.2d 921, 930
(7th Cir.1991) (holding notice clearly invoking termination clause that also indicated willingness
to negotiate sufficient where notice also stated further discussions would not limit effect of
termination notice).
Because we have determined that the trial court did not abuse its discretion by excluding the May
12 letter from evidence, and because we conclude that the May 12 letter was also insufficient as
a matter of law to constitute a proper written notice fully describing the breach or default in order
for the Vinsons to seek forfeiture, we hold that the May 12 letter is no evidence that the Vinsons
provided XTO with a proper “written demand” for payment or notice of default as required by the
leases, entitling them to a declaratory judgment forfeiting the leases.
[16] Alternatively, the Vinsons argue that they made a sufficient demand by filing their amended
petition and attaching the May 12 letter with all three pages of text redacted except the few words
in the middle of the letter that they contend is a demand. However, by precluding initiation of
litigation until notice has been provided, the lease agreements effectively prevent the use of a
pleading to make a demand. Moreover, the Vinsons did not make a “demand” by their amended
pleading. Rather, they used XTO's alleged failure to pay within sixty days after May 12, 2006, as
the reason to assert their election to terminate.
As previously discussed, Section 11 of the leases precluded the Vinsons from “initiat[ing]
litigation” unless XTO had received “written notice fully describing the breach or default” and
had “fail[ed] to remedy the breach or default within” sixty days of receiving the notice. Because
suit could not be filed until XTO had at least sixty days after notice in which to remedy the breach
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Vinson Minerals, Ltd. v. XTO Energy, Inc., 335 S.W.3d 344 (2010)
or default, the letter's attachment to the Vinsons' amended petition could not serve as the required
notice of default. See Deace, 142 S.W.2d at 566 (holding prerequisite of thirty days' written
notice to cancel or terminate lease prior to filing of suit not literally complied with and, therefore,
ineffective where suit was brought twenty-five days after notice); see also Westwind Exploration
Inc. v. Homestate Sav. Ass'n, 696 S.W.2d 378, 382 (Tex.1985) (holding that contracting parties
intend every clause to have some effect); Lacquement v. Handy, 876 S.W.2d 932, 937 (Tex.App.-
Fort Worth 1994, no writ) (stating that language in contracts is given its plain, ordinary meaning).
Moreover, we do not agree that attaching the redacted letter to XTO's amended petition was
sufficient to meet the leases' pre-suit notification requirement. See Huff v. Fid. Union Life Ins.
Co., 158 Tex. 433, 443, 312 S.W.2d 493, 500 (1958) (holding that neither the filing of a lawsuit
“arising out of a contract nor the allegation of a demand in the pleadings constitutes presentment
of a demand” to entitle a party to attorney fees as required by Chapter 38 of the Texas Civil
Practice and Remedies Code); see also Richardson v. Foster & Sear, L.L.P., 257 S.W.3d 782, 785
(Tex.App.-Fort Worth 2008, no pet.) (stating that the filing of a lawsuit does not constitute the
sixty-day pre-suit notice of a Deceptive Trade Practices Act claim as *360 required by section
17.505(a) of the business and commerce code).
Absent proper notice under Section 11 of the leases, the Vinsons are not entitled to forfeiture of the
leases, even if the May 12 letter constituted a proper “written demand” for payment. Finding no
evidence that the Vinsons provided XTO legally sufficient written notice or demand for payment
of undisputed sums as required by the terms of the leases, we hold that the trial court correctly
granted XTO's no-evidence motion for summary judgment. For the same reasons, we hold that
the Vinsons failed to establish entitlement to a traditional summary judgment declaring the leases
forfeited for XTO's failure to pay undisputed amounts within sixty days of a written demand. We
overrule the Vinsons' first issue. 16
V. CONCLUSION
Having overruled the Vinsons' first and second issues and having found it unnecessary to address
the Vinsons' third issue, we affirm the trial court's judgment.
LIVINGSTON, C.J. filed a concurring opinion.
TERRIE LIVINGSTON, Chief Justice, concurring.
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Vinson Minerals, Ltd. v. XTO Energy, Inc., 335 S.W.3d 344 (2010)
I respectfully concur with the majority opinion and write separately only to make some distinctions
regarding the rule 408 admissibility question raised by the Vinsons' May 12, 2006 “demand” letter
and the sufficiency of their “election of forfeiture.” See Tex.R. Evid. 408.
Texas Rule of Evidence 408 mandates exclusion of evidence of settlement offers unless offered for
some reason other than to establish liability. Id. Additionally, the burden is on the objecting party
to show that the evidence was not offered for some other reason or purpose allowed by rule 408.
See In re Univar USA, Inc., 311 S.W.3d 175, 182 (Tex.App.-Beaumont 2010, orig. proceeding).
And courts have recognized the admission of some portions of settlement agreements if relevant
for proof of some other element than liability. Id.
Because the letter was written in response to XTO's request to provide such a “settlement demand,”
the Vinson demand letter must be read in context with that preceding request. Basically, XTO
asks, “What will it take to settle all the various other/remaining claims [other than the accounting/
royalty issues] asserted in the Vinsons' latest pleading?” In other words, XTO's letter implies
that it believes they have basically resolved the accounting/royalty issues. And apparently, the
May 12, 2006 Vinson letter acknowledges this: “[T]his issue should be resolved.” However, that
belief is clearly contingent upon XTO's performance in accordance with the representations it had
made to the Vinsons regarding the accounting/royalty issues. Furthermore, the Vinsons follow this
statement with a clear demand for “all undisputed payments due under the Wise County leases.” As
the Vinsons point out, XTO admits that it has calculated and is ready to pay undisputed amounts,
amounts that necessarily can only be fully determined by XTO. Thus, I believe that this *361
portion of the May 12, 2006 letter is a demand for payment of undisputed amounts, not evidence
of a settlement offer, and that the trial court abused its discretion in excluding this portion of the
Vinsons' response under rule 408. This portion of the letter was admissible because it was offered
for “another purpose than validity of the claim.” Tex.R. Evid. 408.
As to the forfeiture issue, we are to construe oil and gas leases disfavoring forfeiture. See Coastal
Oil & Gas Corp. v. Roberts, 28 S.W.3d 759, 763 (Tex.App.-Corpus Christi 2000, pet. dism'd by
agr.). If a lease states how to give notice of demand or forfeiture, such notice must comport with
the lease. Id. at 764.
Here, the remaining question is whether this portion of the letter is a sufficient demand and whether
it made clear that failure to perform within a certain time would result in the Vinsons exercising
their forfeiture rights. I would agree with the majority as to the insufficiency of the forfeiture. The
accounting/royalty demand portion gave no notice of a time limit within which to perform, which
the lease states can be no less than sixty days with prior written notice. Furthermore, and more
importantly, the last paragraph of the letter, which would have also had to have been admitted,
includes the value of the entire “case” and is an offer to settle “all claims.” Again, there is no
notice or mention of the possibility of forfeiture. And as XTO points out, the last paragraph refutes
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Vinson Minerals, Ltd. v. XTO Energy, Inc., 335 S.W.3d 344 (2010)
the claim of forfeiture because the Vinsons offered to settle all aspects of the case for a sum
certain. Thus, I believe, and would conclude, that the letter, although admissible in part, provided
insufficient notice of what performance was required and when and insufficient notice that the
failure to timely perform would result in the exercise of the election to forfeit the leases.
Because my analysis would result in the same affirmance of the trial court's granting of XTO's
motion for summary judgment, I join in the judgment of the court and concur only to set forth
these distinctions.
Footnotes
1 In his affidavit, Threshold's CFO stated, “Although I was unable to calculate a precise figure at that time because I had not received
all documentation I had requested, I was able to arrive at the estimate within a matter of hours, and I noted it in the audit exceptions.”
2 In the letter, XTO observed that “relations between Antero and [the Vinsons] had deteriorated to a point that discussions for a
reasonable resolution of some or all of the issues of the lawsuit became impossible.”
3 Following XTO's acquisition of Antero, XTO received 348 boxes of Antero records. To establish the $643,548.19 estimate, XTO
“pieced together” information contained in 59 boxes from Antero labeled “accounting records.” However, at the time of this estimate,
XTO was finding numerous accounting records in the other 289 boxes. The document XTO provided to the Vinsons that contained
its estimate was titled “Preliminary Accounting Review” and included the following notation: “These are preliminary findings only.
All calculations are subject to further examination and revision by XTO Energy, Inc. Accounting personnel.”
4 The last paragraph of the order, in part, states:
[The Vinsons] and [XTO] further agree that at certain times in this Lawsuit, it may be necessary for representatives of both [the
Vinsons] and [XTO] to meet in person or via telephone, without counsel for either [the Vinsons] or [XTO] present, to discuss
certain accounting issues raised in this Lawsuit. Such informal meetings ... shall be governed by Texas Rule of Evidence 408.
5 Joni Van Meter, XTO's accounting representative, explained in her September 2007 deposition that she was able to calculate
applicable charges for gathering and transporting already in XTO's own computer system, to give them separate deduct codes, and
to flag royalties for each individual owner as being exempt from those deductions.
6 The Vinsons dispute that the “methodology” issue had anything to do with the amounts they claim for underpaid royalties but had
to do with Antero's improper use of weighted averages and composite rates in calculating the royalties. According to the Vinsons,
royalties were not being calculated on the higher of the proceeds from sale of the gas or the market value but simply on the amount
realized, contrary to the leases, and XTO's proposal was to use an index price to simplify calculations. The Vinsons provide no
record references to support this proposition but contend that the changed methodology would have no effect on the “undisputed
amounts” at issue.
7 The Vinsons' amended pleading attached a copy of the May 12 letter with all parts redacted except the single paragraph relied upon
by the Vinsons as their demand for payment. Only when this amended pleading was filed did XTO's counsel learn of the Vinsons'
interpretation of the May 12 letter as a “demand” that allegedly entitled them to termination of the leases.
8 The Vinsons omitted the last sentence of Section 3(e) of the leases in their amended petition and in their opening brief in this Court.
Because we resolve this appeal on other grounds, we do not reach XTO's cross-point that the summary judgment may be upheld on
the ground, raised in its motion for summary judgment and not addressed by the Vinsons on appeal, that the Vinsons produced no
evidence that the payments were not contested by XTO in good faith.
9 The Vinsons sought partial summary judgment because other claims were pending at the time the motion was filed.
10 The abuse of discretion standard of review is limited to the trial court's determination to exclude the May 12 letter from evidence.
We review the trial court's summary judgment ruling de novo. Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding, 289 S.W.3d
844, 848 (Tex.2009).
11 As late as October 2007, the Vinsons represented to the trial court in a “Memorandum of Settlement,” filed in response to an order
of the trial court prior to a scheduling conference, that the “bulk of the parties' settlement discussions to date have focused on [the
Vinsons'] royalty claims.”
12 There are three primary qualifications generally imposed on the various ownership interests created by an oil and gas lease: (1)
general and special limitations, (2) conditions subsequent, and (3) covenants. A.W. Walker, Jr., The Nature of the Property Interests
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Vinson Minerals, Ltd. v. XTO Energy, Inc., 335 S.W.3d 344 (2010)
Created by an Oil and Gas Lease in Texas, 8 Tex. L. Rev. 483, 483–84 (1930); see Blackmon v. XTO Energy, Inc., 276 S.W.3d 600,
605 (Tex.App.-Waco 2008, no pet.).
13 See id. at 763 (citing Cambridge Oil Co. v. Huggins, 765 S.W.2d 540, 542–43 (Tex.App.-Corpus Christi 1989, writ denied); see also
Reilly v. Rangers Mgmt. Inc., 727 S.W.2d 527, 530 (Tex.1987); TSB Exco, Inc. v. E.N. Smith, III Energy Corp., 818 S.W.2d 417,
422 (Tex.App.-Texarkana 1991, no writ)).
14 Coastal, 28 S.W.3d at 763; see Deace, 142 S.W.2d at 566 (holding that suit brought twenty-five days after notice to lessee could
not be maintained where lease required thirty days notice because authorities hold “prerequisite of notice to forfeit contained in a
lease must be literally complied with”).
15 During oral argument, the parties vehemently disputed the meaning of the term “undisputed” contained in Section 3(e) of the leases.
XTO contended that both parties must have agreed on an amount for it to be “undisputed,” whereas the Vinsons argued that only
XTO could know whether it disputed the amount owed. To the extent that both interpretations may be reasonable, we must adopt the
construction that avoids forfeiture. Coastal, 28 S.W.3d at 763; Wisdom, 154 S.W.2d at 334. We conclude that the term “undisputed”
as used in Section 3(e) of the leases requires a specific amount to be undisputed by both parties, which was never the case here.
16 Because the summary judgment in favor of XTO may be upheld based upon no evidence of a sufficient demand, we need not
consider the Vinsons' third issue as to whether the trial court erred by excusing XTO's compliance and by applying the doctrine of
disproportionate forfeiture, nor need we consider XTO's alternative grounds raised in the trial court to sustain its summary judgment
based on no evidence that it “wrongfully or unreasonably” withheld undisputed payments or did not act in “good faith” in contesting
such payments under Section 3(e). See Tex.R.App. P. 47.1.
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§ 22.021. Claim for Improvements, TX PROPERTY § 22.021
Vernon's Texas Statutes and Codes Annotated
Property Code (Refs & Annos)
Title 4. Actions and Remedies
Chapter 22. Trespass to Try Title (Refs & Annos)
Subchapter B. Judgment and Damages (Refs & Annos)
V.T.C.A., Property Code § 22.021
§ 22.021. Claim for Improvements
Currentness
(a) A defendant in a trespass to try title action who is not the rightful owner of the property, but
who has possessed the property in good faith and made permanent and valuable improvements
to it, is either:
(1) entitled to recover the amount by which the estimated value of the defendant's improvements
exceeds the estimated value of the defendant's use and occupation of and waste or other injury
to the property; or
(2) liable for the amount by which the value of the use and occupation of and waste and other
injury to the property exceeds the value of the improvements and for costs.
(b) In estimating values of improvements or of use and occupation:
(1) improvements are valued at the time of trial, but only to the extent that the improvements
increased the value of the property; and
(2) use and occupation is valued for the time before the date the action was filed that the
defendant was in possession of the property, but excluding the value resulting from the
improvements made by the defendant or those under whom the defendant claims.
(c) The defendant who makes a claim for improvements must plead:
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 1
§ 22.021. Claim for Improvements, TX PROPERTY § 22.021
(1) that the defendant and those under whom the defendant claims have had good faith adverse
possession of the property in controversy for at least one year before the date the action began;
(2) that they or the defendant made permanent and valuable improvements to the property while
in possession;
(3) the grounds for the claim;
(4) the identity of the improvements; and
(5) the value of each improvement.
(d) The defendant is not liable for damages under this section for injuries or for the value of the
use and occupation more than two years before the date the action was filed, and the defendant
is not liable for damages or for the value of the use and occupation in excess of the value of the
improvements.
Credits
Acts 1983, 68th Leg., p. 3509, ch. 576, § 1, eff. Jan. 1, 1984.
Notes of Decisions (239)
V. T. C. A., Property Code § 22.021, TX PROPERTY § 22.021
Current through the end of the 2013 Third Called Session of the 83rd Legislature
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