Where parties assign an interest in a lease with a single existing well, disputes can sometimes arise when the leasehold is further developed. Was the parties’ intent for the assignment to be limited to that single wellbore or did it also include production from later-drilled wells?
In this recent case, often referred to as the "Piranha case," the Texas Supreme Court reviewed a dispute as to whether an assignment of an overriding royalty interest conveyed an interest limited to an entire lease, a single well, or to the lands identified in the assignment.
The citation is: Piranha Partners v. Neuhoff, No. 18-0581, 63 Tex. Sup. Ct. J. 474, 2020 Tex. LEXIS 136 (Tex. Feb. 21, 2020).
In 1975, Neuhoff Oil & Gas (“Neuhoff”) purchased a two-thirds interest in the Puryear Lease, an existing lease covering all the minerals under a tract of land. Neuhoff later sold its two-thirds interest in the Puryear Lease but reserved a 3.75% overriding royalty interest on all production under the Puryear Lease. For twenty-four years, only one well was completed on the lands covered by the lease, the Puryear B #1-28. Then, in 1999, Neuhoff sold its overriding royalty interest at auction to Piranha Partners (“Piranha”). Neuhoff then went out of business, assigning its remaining assets to individual family members (the “Neuhoff Heirs”).
The operator under the Puryear Lease paid Piranha an overriding royalty on the Puryear B #1-28, but on additional wells it drilled on the lease, it paid an overriding royalty to the Nuehoff Heirs, believing Piranha had only been conveyed the overriding royalty interest in the specific well and not on all production under the Puryear Lease. The Piranha Assignment’s granting clause conveyed all of Neuhoff’s interest in properties described in an attached “Exhibit A” which described Neuhoff’s overriding royalty interest by reference to the Puryear #1-28, the land, and the Puryear Lease.
The Texas Supreme Court indicated Piranha erroneously relied upon numerous rules of construction that were not applicable. For instance, Piranha argued that the “greatest estate” canon applied since the assignment used the word “all.” The Court dismissed the canon’s applicability because the Assignment was unambiguous and the remainder of the sentence Piranha focused on included “all…right, title, and interest in and to the properties described in Exhibit ‘A’,” which, nevertheless, required analysis of Exhibit A.
Piranha also erroneously relied on construction rules regarding the clarity by which an instrument must describe a reservation or exception. The Court found those rules inapplicable because the issue was the scope of the grant to Piranha, not a reservation or exception. The Court also dismissed Piranha’s “construe against the grantor” argument, because the assignment was unambiguous.
The Neuhoff Heirs, on the other hand, primarily relied upon so-called “surrounding circumstances evidence,” including descriptions that appeared in the auction documentation and argued this information showed the interest offered was limited to the well. Arguing the flip side, Piranha contended those same documents did not describe the interest as “WBO,” an acronym sometimes used in auction materials to show an offered interest pertained to “wellbore only.” Piranha also pointed to the agreement Neuhoff signed with the auction house, indicating it was not selling a “fractionalized interest.” The Neuhoff Heirs, however, argued that the agreement applied to Neuhoff selling 100% of its interest in the Puryear B #1-28. The Court concluded the auction documents failed to support either side as the documents disclaimed the reliance placed on them by the parties, requiring that the parties instead look to the actual Assignment to Piranha.
The Court ultimately held that Piranha Assignment included all overriding royalty in the Puryear Lease, not just in the land or the wellbore. Rather than apply rules of construction or surrounding circumstances, the Court used a “holistic and harmonizing approach” in construing the language within the Assignment and its Exhibit A. Specifically, the Court focused on several provisions in the Assignment referencing the interest in the lease (as opposed to in a well or lands), and language describing the interest being conveyed as “all oil and gas leases…which shall include any… overriding royalty interests…held by [Neuhoff], as of the Effective Date,” to mean the Assignment to Piranha included all interest then owned by Neuhoff.
In addition, the Court noted the language “All presently existing contracts…to the extent they affect the Leases,” indicated “Neuhoff Oil conveyed its entire interest under the Puryear Lease,” further discrediting the assignment to Piranha was limited to the wellbore or land itself. Other provisions also referenced the lease, including a provision which indicated that the overriding royalty was payable out of oil produced under the lease and pursuant to the terms of the lease. The proportionate reduction clause also referenced the assignor’s interest in the lease.
As a result, the Court concluded that the Assignment to Piranha conveyed the overriding royalty interest as to all production under the Puryear Lease, not just in the Puryear #1-28.
Taken as a whole, the conclusion in this case is largely consistent with the body of case law emphasizing a holistic and harmonizing approach to deed interpretation. This case underscores the importance of ensuring that not only the body of an assignment, but also the exhibits, both carefully describe the intended scope of the conveyance. It also underscores that boilerplate “all right, title, and interest” language is not always merely expansive quitclaim language, but sometimes can have material meaning. It is important to evaluate the rights of either party in the event circumstances change in the future (i.e. drilling and production of an additional well).
