• Dragon v. Harrell, No. 04-14-00711-CV, ___ S.W.3d ___ (Mar. 30, 2016)

In yet another warranty deed construction case originating out of Karnes County, the San Antonio Court of Appeals today issued its opinion in Dragon v. Harrell where it reversed and remanded the trial court’s judgment on cross-motions for summary judgment in favor of the grantors (the Harrells) and against the grantee (Dragon) where the outcome hinged upon the proper characterization of the grantors’ 1991 royalty reservation. Finding the 1991 warranty deed to be unambiguous, the Court construed it as a matter of law. By applying “a holistic approach that considers all of the deed’s words and parts in context,” the Court held it reserved a floating fraction of royalty interest to the Harrell grantors: 1/2 of 15/16ths of whatever royalty is to be paid on the oil, gas, and minerals produced from the property.

The relevant portions of the 1991 warranty deed under consideration included the reservation:

SAVE AND EXCEPT HOWEVER, and there is hereby reserved unto the GRANTORS, their heirs and assigns, a free non-participating interest in and to the royalty on oil, gas and other mineral in and under the hereinabove described property consisting of ONE-HALF (1/2) of the interest now owned by Grantors together with ONE-HALF (1/2) of the reversionary rights in and to the presently outstanding royalty in on and under said property, perpetually from date hereof. It being understood and hereby provided, however, that GRANTORS, their heirs or assigns, shall not be entitled to participate in the bonus money or annual delay rentals paid, or to be paid, under any present or future oil, gas and mineral lease on said premises, and that it shall not be necessary for GRANTORS, their heirs or assigns, to join in the execution of any future oil, gas or mineral lease or leases on said premises. [emphases added]

The Court of Appeals construed the Harrells’ reservation in light of the prior reservations also recited within the text of the 1991 warranty deed:

This conveyance is made SUBJECT, HOWEVER, to the following:
1. Mineral Reservation contained in, and herein quoted verbatim, from a Deed of Conveyance to Claude D. Winerich, from Frank A. Winerich and Ida Lee Winerich, dated February 17, 1940, recorded in Volume 118, Page 615-616, of the Deed Records of Karnes County, Texas, said reservation being as follows, to-wit: “It is expressly agreed under this conveyance that the Grantors hereby retain one-sixteenth (l/16th) or one-half (l/2) of the one-eighth (l/8th) of all minerals in, on and under said above described 611 acres, said interest to be a participating interest.”

2. An undivided one-fourth (l/4th) interest in and to all of the oil royalty, gas royalty and royalty in other minerals reserved for the natural life of C. D. Winerich and Dorice Winerich, and contained in that certain Deed of Conveyance from C. D. Winerich and Dorice Winerich to Frances W. Bowers, said Deed of Conveyance being recorded in Volume 240, Pages 267–269, of the Deed Records of Karnes County, Texas. [emphases added]

First Prior Reservation

Because all five rights of mineral estate ownership had been retained (i.e., the rights to (1) develop, (2) lease, (3) receive bonus payments, (4) receive delay rentals, and (5) receive royalty payments), the first prior reservation referenced in the 1991 warranty deed was determined to be a participating interest. This 1940 deed reserved to Frank and Ida Winerich 1/16 of the mineral estate (“one-sixteenth (l/16th) or one-half (l/2) of the one-eighth (l/8th) of all minerals in, on and under said above described 611 acres, said interest to be a participating interest”). Therefore, as the Harrells acknowledged, they owned “15/16 of the mineral estate.”

Second Prior Reservation

The second prior instrument reserved “an undivided one-fourth (1/4th) interest in and to all of the oil royalty, gas royalty and royalty in other minerals reserved for the natural life of C. D. Winerich and Dorice Winerich.” This reserved a life estate of 1/4 of whatever leasehold royalty was paid on the oil, gas, or other minerals produced. Upon the execution of the 1991 warranty deed, the Harrells’ estate was burdened by the life estate, but the Harrell grantors’ estate retained the entire reversionary interest. Dorice Winerich died before the present suit was filed in 2013.

Construing the 1991 Warranty Deed with the Two Prior Reservations

First, the Court of Appeals reasoned that, when the 1991 warranty deed was executed, the Harrells owned and, therefore, could convey no more than “15/16 of the mineral estate, less a life estate in a 1/4 floating royalty interest, plus a reversionary interest to the then-outstanding life estate royalty interest.” This was the mineral estate owned by the Harrells when they signed the 1991 warranty deed.

Next, the 1991 warranty deed unambiguously reserved an interest in the royalty on the oil, gas, and other minerals. It also identified the two parts making up the reservation:

• ONE-HALF (1/2) of the interest now owned by [the Harrells], together with
• ONE-HALF (1/2) of the reversionary rights in and to the presently outstanding royalty in on and under said property.

The first part of the Harrells’ reservation was “the interest now owned by Grantors,” which recognized that the reserved royalty interest was reduced by the two prior reservations. The second part of their reservation was one-half of “the reversionary rights in and to the presently outstanding royalty in on and under said property,” thereby reserving 1/2 of the reversionary interest in the outstanding royalty life estate, “rather than allowing the entire reversionary interest to be conveyed to Dragon.”

The Harrells had argued “the interest now owned by Grantors” meant the entire estate owned by them at the time the 1991 warranty deed was signed. They maintained the 1991 warranty deed reserved a fixed fraction of the oil, gas, and minerals produced from the land – a fixed fraction of the mineral estate. But the Court of Appeals reasoned that, if “the interest now owned by Grantors” meant the entire estate the Harrells owned at that time, the rest of the sentence (“together with the ONE-HALF (1/2) of the reversionary rights in and to the presently outstanding royalty”) would be rendered meaningless. The Court of Appeals could not accept a construction that would render this phrase meaningless.

Conclusion

In his motion for summary judgment, Dragon argued that the 1991 warranty deed reserved only a fraction of royalty to the Harrells. The Court of Appeals agreed by concluding the Harrells reserved a fixed fraction of the floating royalty interest – that is, 15/32nds (1/2 of 15/16) of whatever royalty may be paid on production in the future. Consequently, assuming a 20% royalty lease, for example, the Court of Appeals held the Harrells would be entitled to only 9.375% of production. The Harrells would not be entitled to one-half of the minerals produced – or a 1/2 royalty on production – as they had argued in their motion for summary judgment.

Holding the 1991 warranty deed reserved only a floating fraction of royalty interest, the Court of Appeals reversed and rendered judgment that the 1991 warranty deed reserved 15/32 of whatever leasehold royalty may be paid on the oil, gas, and other minerals produced from the property and remanded the case to the trial court solely for its reconsideration of the attorneys’ fees, if any, to which Dragon may be entitled.

The opinion may be reviewed here in its entirety.

• Questions about this case or other commercial litigation matters may be referred to Barry Conge Bond LLP litigation partner Robert S. Ballentine, LL.M. either by calling (713) 331-7629 or writing to rballentine@barrycongebond.com.