In a 7-2 ruling last week, the Supreme Court of Texas issued an opinion in favor of Piranha Partners, et al., reversing the court of appeals and providing a win for the “all right, title, and interest” camp.
Piranha[1] concerns the scope of a conveyance when an exhibit was attached to a boilerplate “all right, title, and interest” assignment. How should we construe information on an exhibit when the information appears to limit the conveyance? Is it possible, though, that the information was included for descriptive purposes and was not intended to limit the conveyance? The Supreme Court of Texas found that the information on an exhibit (in this case, the name of a well and the quarter section where the well was located) was merely descriptive, and therefore did not limit the conveyance of an overriding royalty interest in the entire section.
Background and Relevant Parts of the Assignment
In 1999, Neuhoff Oil & Gas Corporation (“Neuhoff Oil” or “Neuhoff”) dissolved and subsequently used a form assignment for the auction of many of its properties. Neuhoff owned a 3.75% overriding royalty interest in all of the production under a certain oil and gas lease (the “Puryear Lease”), which covered all of Section 28, Block A-3, H&GN Ry. Co. Survey, Wheeler County, Texas.
The granting clause in the assignment reads:
[Neuhoff Oil] does hereby assign, sell and convey unto [Piranha]…
without warranty or covenant of title, express or implied, subject to
the limitations, conditions, reservations and exceptions hereinafter
set forth…all of [Neuhoff Oil’s] right, title and interest in and to the
properties described in Exhibit “A” (the “Properties”).
Additionally, the assignment provides the following:
All oil and gas leases, mineral fee properties or other interests,
INSOFAR AND ONLY INSOFAR AS set out in Exhibit A… whether
said interest consists of leasehold interest, overriding royalty
interest, or both….
The second page of the two-page Exhibit A references Neuhoff’s interest in the Puryear Lease and the Puryear B #1-28 well:
Lands and Associated Well(s):
Puryear #1-28[2]
Wheeler County, Texas
NW/4, Section 28, Block A-3, HG&N Ry Co. Survey
Oil and Gas Lease(s)/Farmout Agreement(s):
Oil & Gas Lease(s)
Lessor: [the Puryears]
Lessee: Marie Lister
Recorded: Volume 297, Page 818[3]
Issue and Majority Reasoning
The issue the Court faced was whether the assignment conveyed Neuhoff’s interest in production:
1. from the identified well only (what the Neuhoffs believed at the trial court level);
2. from any well drilled in the NW/4, but not from the other lands covered by the Puryear Lease (what the court of appeals believed, and what the Neuhoffs adopted on appeal to the Supreme Court of Texas); or
3. under the Puryear Lease, including from any well in Section 28 (what Piranha believed).
Justice Boyd, joined by Justices Hecht, Green, Guzman, Devine, Blacklock, and Busby, held that (iii) was the correct interpretation; that the assignment unambiguously conveyed all of Neuhoff’s interest in production under the Puryear Lease, thereby reversing the court of appeals’ judgment[4] and reinstating the trial court’s summary judgment.
The majority found none of the parol evidence offered by the parties to be illuminating and instead focused on the language of the assignment itself. They arrived at their decision by pointing to the following:
1. The assignment allows for the conveyance of “working interest, leasehold rights, overriding royalty interests and reversionary rights.”[5] Neuhoff only owned an overriding royalty interest in the land, and overriding royalty rights are intimately tied to the lease from which they arise;[6]
2. The assignment indicates that the conveyance included leases (as opposed to the wells or the lands); and
3. The assignment states that the “overriding royalty interest(s) herein assigned, if any, are payable out of and only out of the oil and gas produced, saved and marketed pursuant to the terms and provisions of the oil and gas leases described in EXHIBIT A. [Emphasis added.]”[7]
Essentially, the majority focused on the importance of the presence of the oil and gas lease itself in the exhibit, as “lease” and its derivatives are mentioned multiple times in the assignment.
It is worth noting, however, that in a footnote, the majority notes, “If, for example, Exhibit A identified only the well and the land but not the lease, we could not rely on other provisions to conclude that the [a]ssignment actually conveys all interests under the lease.”[8] [Emphasis added.] Indeed, the majority emphasized throughout their opinion that because the override exists only because of an effective lease, the lease information is of upmost importance for the conveyance of an overriding royalty interest; and here, the majority thought the exhibit’s inclusion of the NW/4 and the well’s name was descriptive rather than limiting, since the Puryear B #1-28 well was the only producing well for the entire Puryear Lease, and likewise, the only source of overriding royalty payments.[9]
The Dissenting Opinion
In a short dissent, Justice Bland, joined by Justice Lehrmann, indicated that because she thought the property descriptions were ambiguous, the case should have been remanded for a jury to determine its meaning. The dissenters added that the interests conveyed were expressly limited by language in all-capital letters in the assignment (excerpt above). They also took issue with the inclusion of the reference to the NW/4 in the exhibit; an inclusion that the majority felt was only important for descriptive, but not limiting, purposes.
Potential Applications of Piranha
Based on its facts, the holding in Piranha is likely limited to conveyances of overriding royalty interests; however, the holding in Piranha is probably limited even further. A key fact that the majority was willing to hang its hat on was that at the time of the conveyance, the only well in the entire section, i.e., the only thing that gave rise to the payment of the overriding royalty interest, was located in the NW/4. Would the Court have reached the same holding if the exhibit listed the NE/4 or the S/2, either separate from or without the NW/4? The Court then may have reasoned that the assignor intended to carve up its overriding royalty interest in the section, in which case it is likely they would have found the exhibit to be limiting and not descriptive.
Although much of the discussion in the majority opinion addresses the conveyance of overriding royalty interests, the Court’s reasoning may be relevant for disagreements that arise over the interpretation of working interest assignments as well. Oil and gas attorneys sometimes encounter leasehold assignments containing granting language that is loosely referential to some of the property interest described in an exhibit, followed by an exhibit containing a variety of information. That information can be interpreted either as descriptive or limiting.
For example, an assignment might purport to cover “all right, title, and interest” in the “leases” attached in an exhibit, and the leases are presented alongside land references that include only a portion of the land covered by the leases, or alongside depth references that do not encompass all depths in which the assignor holds an interest. What is the scope of the conveyance in this situation? Or likewise, in a situation in which the assignment appears to convey “all right, title, and interest,” yet the exhibit unhelpfully provides a table with what appears to be less working interest and net revenue interest than what the attorney believes the assignor to own. Is the assignment nevertheless a conveyance of all right, title, and interest and the exhibit is merely an out-of-date, copied-and-pasted table from the operator’s records which is intended to be included only as a reference? Or, despite the fact that the assignment appears to convey all right, title, and interest, is the conveyance limited to a conveyance of the specified working interest and net revenue interest?
Under these examples, most attorneys would likely say that the assignor’s entire leasehold interest passes. However, the answer may depend on the specific language and clues found in the body of the assignment. Is there limiting language? For instance, are the interests conveyed “only insofar as they are described on Exhibit A”? Or, on the other hand, does the assignment anticipate the conveyancing of all interest in the leases “whether or not such interests are accurately or completely described on Exhibit A,” in which case the answer is clearer.
Drafting Assignments Post Piranha
Whether an assignment conveys an override or working interest, the takeaway from Piranha should be the importance of careful and thoughtful drafting. It also should be a reminder that the body of the assignment and the exhibit ought to work together in order to clearly communicate your intentions. They should be prepared together and read as a unit before the assignment is executed.
This is not the first time a potentially ambiguous instrument has been litigated, and the courts of this state will continue to see variations on this theme as long as poorly worded assignments are executed. Furthermore, there are consequences for everyone who is tasked with interpreting such an assignment. For title examiners and landmen alike, a misinterpretation of a poorly drafted assignment can have catastrophic consequences. For purchasers, the takeaway from Piranha may be the importance of due diligence in order to more fully understand the extent of what is being sold.
In Piranha, the Supreme Court of Texas ruled that the information on an exhibit was descriptive rather than limiting. But this is not a hard and fast rule for exhibits everywhere. As discussed above, there are any number of ways in which the tweaking of any of the facts of Piranha might have given rise to a different outcome. Interpretation is always going to turn on the particular language of the instrument at issue. This should be a reminder to everyone in our industry to slow down and draft carefully.
Written by: Amanda Hale
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[1] Piranha Partners, et al. v. Joe B. Neuhoff and Nancy M. Neuhoff, et al., No. 18-0581, 2020 Tex. LEXIS 136 (Feb. 21, 2020)
[2] The correct well is the Puryear B #1-28 well; however, both parties agree that this referred to the Puryear B #1-28 well.
[3] The correct Volume is 247; however, both parties concede that this was a scrivener’s error.
[4] Neuhoff v. Piranha Partners, 578 S.W.3d 543 (Tex. App.—Amarillo 2018).
[5] Piranha Partners v. Neuhoff, No. 18-0581, 2020 Tex. LEXIS 136, at *26 (Feb. 21, 2020).
[6] “…one of the most essential elements of a contract for the conveyance of such an overriding royalty interest is a description of the lease from which it comes; for it is the lease which denotes the life and breadth of the estate to be assigned.” Gruss v. Cummins, 329 S.W.2d 496, 501 (Tex. Civ. App.—El Paso 1959, writ ref’d n.r.e.).
[7] Piranha Partners, No. 18-0581 at *27.
[8] Id. at *25 n.20.
[9] Id. at *21.
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