10 Jul Interpreting Mineral/Royalty Assignments – Piranha Partners v. Neuhoff

by Adam W. Burke with editor Robert V. Mongole

Conveying mineral interests in Texas can be quite complicated, especially as the ownership of the original fee mineral estate gets broken down into fractionalized ownership among leasehold rights, working interests, non-participating and overriding royalties, etc., oftentimes broken up among various sections of land and depths. As oil and gas exploration proliferates so too do oil and gas conveyances, many of which leave something to be desired regarding the parties’ intent. Texas case law has no shortage of decisions regarding the interpretation of these mineral conveyances, but as the very legal understanding of minerals and mineral conveyances has evolved, so too has the legal profession’s attempt to convey them and then understand just what those conveyances mean.

Texas courts’ primary concern is determining the parties’ intent as expressed in the four-corners of the instrument. In determining that intent, the Texas Supreme Court made clear in Wenske v. Ealy, 521 SW3d 791 (Tex. 2017), that “[r]igid, mechanical, arbitrary, and arcane rules, which at one time offered certainty at the expense of effectuating intent, are relics of a bygone era.” In Piranha Partners v. Neuhoff, 596 SW3d 740 (Tex. 2020), the Texas Supreme Court showed its commitment to continuing that trend.

Piranha Partners purchased an overriding royalty interest (“ORI”) from Neuhoff at a large auction wherein the ORI was described as one specific well along with the land on which the well was located. The assignment from Neuhoff to Piranha conveyed all of Neuhoff’s interest in the properties described in an attached Exhibit “A” which also described the well and the land thereon as well as a description of the underlying lease. The assignment also stated that the interests were conveyed “insofar and only insofar” as set out in Exhibit “A”.

At the time of the auction and assignment the described well was the only well under the lease, but after the operator successfully drilled additional wells a dispute arose as to the ownership of the ORI. Did Neuhoff convey the ORI only in the well, the land described, or under the entire lease? Neuhoff claimed they had only conveyed the ORI as to the described well but Piranha Partners claimed the ORI under the entire lease.

The Texas Supreme Court dismissed Piranha’s arguments regarding any rules of construction in its favor, expressly refusing to draw any distinctions as to which specific rules of construction were “relics” under Wenske and which were still reliable principles of interpretation, stating that none supported Piranha in any case. Neuhoff’s arguments that the circumstances surrounding the execution of the underlying assignment, i.e. that the auction only discussed the well and described land, were similarly dismissed as “unhelpful.” Instead, the court determined that a “holistic and harmonizing approach” of all of the assignment’s provisions properly revealed the parties’ intent.

While the assignment was limited “insofar” as described in Exhibit “A”, such limiting language was followed by additional language which stated that the assignment “shall include any … overriding royalty interests… held by Assignor” which the court interpreted as conveying any ORI owned by Neuhoff to the extent it was identified in the Exhibit “A”. Other provisions in the assignment regarding assigning existing contracts “to the extent they affect the Leases” and which described assigning interests in oil and gas leases convinced the court that the assignment unambiguously stated an intent to convey the entire ORI under the lease.

Drafters should take care to be specific regarding the interest to be conveyed, those interests not conveyed, and any disproportionate burdens involved while being mindful of the potential consequences that the various clauses their instruments might have, as Texas courts will consider every clause equally in order to determine intent. Likewise, as default rules of construction become less reliable, title examiners should be wary of ambiguous instruments and ensure their clients are advised of any potential negative interpretations.