Is That Reserved Non-Participating Royalty Interest “Fixed” or “Floating”?

The Latest Development in a Persistent Controversy

  • Laborde Properties, L.P. v. U.S. Shale Energy II, LLC; No. 04-16-00168-CV, ___ S.W.3d ___ (Tex. App. – San Antonio Oct. 12, 2016)

Yesterday, the San Antonio Court of Appeals once again addressed the question of whether a reserved nonparticipating royalty interest (“NPRI”) was “fractional” (i.e., a reserved fixed 1/16 of future production) or a fraction of royalty (i.e., a reserved floating royalty dependent upon the magnitude of the royalty fraction contained in future leases). Arising out of cross-motions for partial summary judgment to determine this very question, the Karnes County district court had held for the grantors’ successors, who claimed their reserved NPRI “floated” and entitled them to receive proceeds of production based upon 1/2 of the 20% lease royalty, and against the grantees’ successors, who claimed the reservation was limited to merely a “fixed” 1/16 of production. The San Antonio court reversed, holding that the 1951 warranty deed, as a matter of law, reserved to the grantors’ successors only a fixed 1/16 NPRI. The operative language in the deed stated:

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 non-participating Royalty Reservation. . . .

(emphases added). When the dispute finally arose, EOG Resources, Inc. had become the lessee under an oil and gas lease providing for a 20% landowner’s royalty. The grantors’ successors argued to the court that they were entitled to 1/2 of 20% (or 10%) of production. Conversely, the grantees’ successors argued EOG Resources was overpaying the grantors’ successors and that their own royalty payments were, therefore, being improperly burdened with a 10% NPRI instead of only 6.25% (1/16) of production.

Deed Construction Outcome

After restating the rules of deed construction under Texas law, the San Antonio court applied those rules to find the 1951 warranty deed to be unambiguous and to provide for the reservation of a fixed 1/16 NPRI. Focusing on the operative reservation language – “an undivided one-half (1/2) interest in and to the . . . Royalty . . . in and under or that may be produced . . ., the same being equal to one-sixteenth (1/16) of the production” – the San Antonio court concluded that none of the remaining terms of the deed altered its decision regarding whether the reserved NPRI was fixed or floating. Both sides argued the court’s prior decision in Graham v. Prochaska, 429 S.W.3d 650 (Tex. App. – San Antonio 2013, pet. denied) (in which Justice Barnard, the author of this current opinion, dissented) in support of their position (“the phrase ‘same being equal to one-sixteenth (1/16th) of all oil, gas and other minerals,’ in the absence of other language, would express an intent to create a fixed interest”). Justice Barnard carefully distinguished both Graham and Hausser v. Cuellar, 345 S.W.3d 462 (Tex. App. – San Antonio 2011, pet. denied) from the deed language at issue in the present dispute (“in both cases we determined the interests at issue were floating interests based on additional language in either the deed or outside documents incorporated into the deed showing an intent to create a floating interest”).

Justice Barnard also reconciled this current opinion with the court’s opinion in Medina Interests, Ltd. v. Trial, 469 S.W.3d 619 (Tex. App. – San Antonio 2015, pet. denied) and the Supreme Court’s most recent pronouncement in Hysaw v. Dawkins, 483 S.W.3d 1 (Tex. 2016).

The “Estate Misconception” Theory to No Avail

It is of acute interest to those following this subject that the opinion concludes: “[e]ven application of the [estate] misconception theory would not change the result.” Justice Barnard explained:

If the grantors and grantee in this case assumed a one-eighth lease royalty, the reference to a one-sixteenth (1/16) of production (in the absence of the more specific language and outside deeds relied upon in Graham) shows an intent to reserve an unchanging one-half (1/2) of the assumed one-eighth (1/8) lease royalty, or one-sixteenth (1/16) of production . . ., i.e., a fixed interest. In Graham, the reference to “one-sixteenth (1/16th),” which the court found was merely a mathematical calculation, did not include, as here, the phrase “of production.” The inclusion of the phrase “of the production” in the 1951 warranty deed suggests a different intent from that found in Graham. There is nothing in the disputed language in the 1951 deed to suggest the parties intended the reservation “come out of the landowner’s royalty and vary in accordance with that fraction of production,” i.e., a floating interest.

Cf., Graham, 429 S.W.3d at 657–58. Finally, the Karnes County trial court had awarded attorneys’ fees to the grantors’ successors because they had prevailed on their declaratory judgment claim that a floating royalty interest was reserved. Tex. Civ. Prac. & Rem. Code § 37.009 (West 2015). Having reversed that outcome, the San Antonio court – citing Hausser, 345 S.W.3d at 471 – remanded the case to the trial court for its reconsideration of attorneys’ fees.

The opinion may be reviewed here in its entirety.

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