In Callon (Permian) LLC v. KWF Enterprises, LP, No. 08-24-00043-CV, 2025 WL 322862 (Tex. App.—El Paso Jan. 28, 2025, no pet. h.), the El Paso Court of Appeals reversed a trial court's summary judgment and held that post-closing "corrections" to overriding royalty assignments were invalid and unenforceable against a subsequent purchaser. The court concluded that the underlying sales contracts did not require the seller to assign any particular percentage of its extra working interest, rendering the attempted post-closing corrections ineffective.
The High-Stakes Transaction That Started It All
This dispute arose from a series of complex oil and gas transactions involving hundreds of leases across thousands of acres. Id. at *1. KEW Drilling (KEW) sold its interests in these leases to three buyers—ExL Petroleum Management, LLC (Callon's predecessor), Silverback Exploration, LLC, and Arris Delaware Basin, LLC—through contracts executed in 2015 with closings occurring between June 2015 and February 2016. Id.
The distinguishing feature of the 24 leases at issue was that KEW owned up to an 80% working interest in them (compared to 75% in all other leases being sold). Id. The sales contracts addressed this extra up-to-5% interest through Section 8.1(iii), which provided that KEW "may assign overriding royalty interests in the Leases to certain key personnel of [KEW] (or their Affiliates), provided that after giving effect to such assignments, the Designated NRI is satisfied." Id. at *2. The contracts defined "Designated NRI" as 75%. Id.
Before closing, KEW executed assignments conveying only 65% of its extra up-to-5% interest to its affiliate KWF Enterprises, LP. Id. This meant KWF received an up-to-3.25% overriding royalty interest (65% of the extra 5%), while the buyers received the 75% Designated NRI plus an additional up-to-1.75% interest. Id.
Callon acquired and recorded its ownership interest in August 2017. Id. at *3. Three months later, in November 2017, KEW and KWF executed "corrected" assignments that purported to fix a "scrivener's error" by changing the assigned percentage from 65% to 100%. Id. If valid, these corrected assignments would reduce Callon's ownership interest by granting KWF the full up-to-5% overriding royalty. Id.
Why 'May' Became the Million-Dollar Word
The court framed the central question as "whether an assignment under Section 8.1(iii) involves a permissive or mandatory act." Id. at *4. KWF argued that the contracts required KEW to convey exactly 75% NRI to the buyers, which necessitated assigning 100% of any extra interest as overriding royalties. Id. Callon countered that Section 8.1(iii) merely permitted, but did not require, such assignments. Id.
The court sided with Callon, emphasizing that Section 8.1(iii) used the word "may" rather than "shall" or "must." Id. at *5. Citing established Texas precedent, including G.T. Leach Builders, LLC v. Sapphire V.P., LP, 458 S.W.3d 502, 525 (Tex. 2015), the court noted that "may" is generally construed as permissive. Id.
KWF attempted to distinguish these cases by arguing that the juxtaposition of "may" with "shall not" in Section 8.1 suggested both terms were mandatory. Id. The court rejected this argument, finding "no reason why construing 'may' and 'shall not' in accordance with their plain meanings—i.e., as permissive and mandatory, respectively—would lead to an absurd or improbable result here." Id.
The Symmetry Argument That Changed Everything
The court found additional support for its interpretation in the contract's overall structure. Id. at *6. Section 3.2B provided for downward price adjustments if title defects reduced a lease's value below 75% NRI, but only if the buyer timely notified the seller of such defects. Id. The court observed a "symmetry" between this provision and Section 8.1(iii): both required a party to take timely action to ensure conveyance of exactly 75% NRI, but neither allowed post-closing corrections. Id.
Exhibit B Did Not Require 100% Assignment
KWF also argued that Exhibit B to the contracts, which contained a fill-in-the-blank form ending with "TOTAL 100%," mandated assignment of the full extra interest. Id. at *7. The court disagreed, analogizing to Texas Pattern Jury Charge 4.3, which similarly ends with "Total 100%" but explicitly instructs that "The percentages you find must total 100 percent." Id. at *8. The court reasoned that if the contract drafters intended to require 100% assignment, they would have included express language to that effect. Id.
What This Means for Your Next Deal
The El Paso Court of Appeals' decision in Callon provides important guidance on contract interpretation in oil and gas transactions. The case reinforces that courts will give contract terms their plain meaning absent compelling reasons to do otherwise. For practitioners, the decision highlights the importance of precise drafting when allocating interests in complex multi-party transactions.
Most significantly, the case stands for the proposition that material post-closing "corrections" to assignments cannot be used to unilaterally alter the original assignment, particularly when the underlying contract grants only permissive authority to make such assignments. Parties drafting PSAs with an eye to preserve flexibility in allocating overriding royalty interests should ensure their PSAs clearly specify whether such allocations are mandatory or optional, and whether any right to correct errors or allocations will survive closing. The court's emphasis on contractual symmetry and the need for express language when imposing obligations provides a useful framework for analyzing similar provisions in future transactions.
