Earlier this year, we reported the San Antonio Court of Appeals decision in Dragon v. Harrell, a fixed versus floating royalty case. Here, the court is again confronted with the same issue. Relying on its decision in Graham v. Prochaska, the court explains why the estate misconception theory does not apply and explains how the interest in dispute is a fixed nonparticipating royalty interest.
The San Antonio Court of Appeals reversed the 218th (Karnes County) District Court’s final judgment which found that a 1951 warranty deed included a reservation of a floating non-participating royalty interest. Laborde Properties, LP and Laborde Management, LLC (collectively, “Laborde”) appealed the court’s final judgment and argued that a reservation in a 1951 warranty deed created a “fixed,” rather than a “floating” NPRI. The reservation provided:
There is reserved and excepted from this conveyance unto the grantors herein, their heirs and assigns, an undivided one-half (1/2) interest in and to the Oil Royalty, Gas Royalty and Royalty in other Minerals in and under or that may be produced or mined from the above described premises, the same being equal to one-sixteenth (1/16) of the production. This reservation is what is generally termed a nonparticipating Royalty Reservation . . .
The San Antonio Court of Appeals agreed with Laborde and held that the above-quoted language shows an objective intent by the parties to create a fixed interest. Specifically, the court relied on reference to a “one-half (1/2) interest” and the use of the phrase “same being equal to one-sixteenth (1/16) of the production” as indicative of a fixed, rather than floating interest. The court discussed at length its previous opinion in Graham v. Prochaska, 429 S.W.3d 650 (Tex. App. —San Antonio 2013, pet. denied) where similar language was used in a deed, but the court ultimately concluded the interest in Graham to be floating. The court explained the differing results by pointing out that the similar language in Graham would also indicate an intent to create a fixed interest, but that the deed in Graham included other language which established otherwise. The court found that the deed at issue in Laborde did not contain any language similar to the Graham deed which could alter the court’s conclusion.
The court rejected the arguments put forward by U.S. Shale and others (“Appellees”). First, the court rejected Appellee’s argument that the court’s holding in Graham stood for the proposition that the language “same being equal to one-sixteenth (1/16)” does not render an interest fixed. While the court recognized that the reservation contains language used to create both floating and fixed interests; it was able to harmonize that language to determine that the parties intended to create a fixed royalty interest equal to one-sixteenth (1/16) of production. To the contrary, the court explained that the provision is indicative of a fixed interest, but will not control if other language instrument establishes a different intent. The Laborde court explained that language establishing a different intent was present in Graham, but was absent in Laborde. The court also reasoned that if the parties had intended to reserve a floating interest, the deed would not have included the phrase “of the production.”
The Appellees also argued that the “estate misconception” theory should be utilized in analyzing the disputed language which, according to Appellees, would require that the court find the interest to be floating. Again, the court disagreed. The Laborde court analyzed the treatment of the estate misconception theory in Graham as well as the recent Supreme Court case, Hysaw v. Dawkins. Generally, the estate-misconception theory refers to a once-common misunderstanding that a landowner retained 1/8 of the minerals upon executing an oil and gas lease. In other words, all landowners believed that all future leases would contain a 1/8 royalty, and that interest was in the form of a fractional mineral estate.
The Graham court applied the estate-misconception theory based on both the language in the deed demonstrating the parties’ assumption that all future leases would have a one-eighth (1/8) royalty and the language in prior deeds, referenced within the deed contain the reservation, which evidenced the creation of a floating royalty interest. The court concluded that, while the estate misconception may be used as a tool in analyzing older deeds, it cannot be used unless language in the deed objectively establishes that the author was under the mistaken belief that royalties would always be 1/8. In Laborde, the court refused to apply the estate-misconception theory because the 1951 deed did not contain any language showing the parties assumed that all future leases would contain a one-eighth (1/8) royalty or any reference to an instrument evidencing that assumption. For example, there was no reference to any current lease, lease royalty, or to a particular royalty (i.e., the one-eighth royalty to be provided).
Laborde comes on the heels of another fixed vs. floating royalty case decided by the Texas Supreme Court, Hysaw v. Dawkins, 483 S.W.3d 1 (Tex. 2016). While the Texas Supreme Court recognized the existence of the estate-misconception theory in Hysaw, it reiterated that the estate-misconception theory is not dispositive and will not alter clear and unambiguous language that can otherwise be harmonized. Here, there was no reason to invoke the estate-misconception theory. However, courts may be confronted in the future with deeds containing both some language supporting the application of the estate-misconception theory and also clear and unambiguous language that could trump the application of the estate-misconception theory. Thus, courts may now be forced to wrestle with when and when not to apply the estate-misconception theory.
Case Citation: Laborde Properties, L.P. v. U.S. Shale Energy II, LLC, 2016 WL 5922404 (Tex. App. —San Antonio 2016).
Footnotes [ + ]
|1.||↑||For example, there was no reference to any current lease, lease royalty, or to a particular royalty (i.e., the one-eighth royalty to be provided).|