Finley Res. v. Headington Royalty, Inc.
| Decision Date | 12 May 2023 |
| Docket Number | 21-0509 |
| Parties | Finley Resources, Inc., Finley Production Co., L.P. and Petro Canyon Energy, LLC, Petitioners, v. Headington Royalty, Inc. and Headington Energy Partners, LLC, Respondents |
| Court | Supreme Court of Texas |
Argued November 30, 2022
On Petition for Review from the Court of Appeals for the Fifth District of Texas
This appeal involves a dispute over the interpretation of a release provision in an agreement exchanging mineral interests. The trial court held that contract language releasing claims against a named entity's "predecessors" barred the releasor's recovery against an unaffiliated and unrelated "predecessor in title." The court of appeals reversed and rendered judgment that, as used in the release agreement, the term "predecessors" refers only to corporate predecessors. Construing the term in context, we agree with the court of appeals and affirm its judgment.
The underlying breach-of-contract and negligence suit arises from the alleged termination of a 1966 oil-and-gas lease (the Arrington Lease) covering interests in a tract of land in Loving County, Texas (the Loving County Tract). Over the years, various assignments and conveyances resulted in horizontal severance of the mineral rights. Headington Royalty, Inc. and Headington Energy Partners, LLC (collectively, Headington) ultimately acquired the deep rights while Finley Resources, Inc. and Finley Production Co., L.P. (collectively, Finley) ultimately acquired the shallow rights. At some point, Finley Resources also became the operator of record for two wells producing oil from the shallow zone (the Arrington Wells).
Headington alleges it lost its mineral rights under the Arrington Lease due to nonproduction from the Arrington Wells. According to Headington, the Arrington Lease terminated as to both the deep and shallow rights no later than March 31, 2017, because the wells stopped producing in paying quantities and neither party engaged in other lease-perpetuating operations. Headington claims that Finley's persistent failure to provide Headington with contractually required notices and well data left Headington in the dark about both the impending and actual termination of the mineral lease.
Petro Canyon Energy, LLC entered the picture in June 2017 when it acquired a top lease from W.I.R.C., LLC for the entirety of the Loving County Tract (the WIRC Lease). The top lease would become valid only when the Arrington Lease expired.[1] So to determine if that event had occurred, counsel for Petro Canyon's affiliate, Double Eagle Development, sent a letter to Finley requesting well revenue and expense information for the preceding eighteen-month period.
The following month, Headington began its own inquiry into the Arrington Lease's status. Headington's legal counsel sent a letter to Finley, requesting production of "complete and current data and information" about Finley's operations. The letter was not so subtle in intimating that Headington was prepared to take legal action if Finley failed to comply. The next day, Finley Resources as operator of the Arrington Wells, dispatched a responsive letter to Headington Energy's land department, declaring Finley's intent to plug and abandon the wells and offering Headington an opportunity to step into its shoes as well operator. Headington concedes that, by this point, it was already contemplating litigation, and on August 2, its attorneys issued a written demand that Finley produce any information showing the Arrington Lease had not already terminated.
The issue now on appeal arises in connection with a series of unusual transactions that followed Headington's August 2 demand letter.
First in August 2017, Finley and Petro Canyon collaborated to resolve any doubt about the Arrington Lease's continuing subsistence.
To that end, Finley assigned its Arrington Lease interests, if any, to Petro Canyon via a Quitclaim Assignment and executed an affidavit confirming the absence of production and any other well operations since January 1, 2017. In return, Petro Canyon agreed to (1) "assume and perform, any and all of [Finley's] liabilities and obligations, or alleged or threatened liabilities and obligations" under the Arrington Lease and (2) indemnify Finley "against any and all claims, losses, damages . . . or judgments . . . [for] any and all [alleged or threatened] liabilities and obligations . . . arising out of . . . ownership or operation of the [Arrington Lease]." Although the Quitclaim Assignment bore an August 31 effective date, it was not filed in the public record until October 31.
In the meantime, Headington was separately negotiating with Petro Canyon to acquire the WIRC Lease for the asserted purpose of mitigating losses ensuing from termination of its deep-rights interests under the Arrington Lease. Acquisition of the WIRC Lease would allow Headington to expand its interests in the Loving County Tract to include both the deep and shallow rights but at a lower net-revenue interest than it held under the Arrington Lease. In exchange, Headington offered to convey the deep rights in another tract of land to Petro Canyon.
While the acreage-swap negotiations were ongoing, Petro Canyon's affiliate-Double Eagle-became the operator of record for the Arrington Wells, as reported in public filings on September 5. A week later, Headington's counsel informed Headington's vice president in a voicemail message that Finley had "assigned [its] interest in the lease [and] the wellbore to . . . Petro Canyon or Double Eagle." A few days after that, Petro Canyon proposed that, as part of the acreage-swap agreement, the parties would execute mutual releases pertaining only to the Loving County Tract.
The well-plugging and restoration liability Petro Canyon had previously assumed was, however, expressly carved out:
Notwithstanding the above, the above release does not cover, and Petro Canyon agrees to accept, plugging and restoration liability existing prior to the date hereof on the Loving County Tract with respect to, and only with respect to, the [Arrington Wells].
Finley was not named in the release or elsewhere in the acreage-swap agreement. Nor were Headington's putative claims against Finley mentioned.[3] The agreement referenced the Arrington Wells for the limited purpose of excluding restoration and well-plugging liability from the scope of the releases but did not refer to the Arrington Lease at all.
Less than six months after executing the acreage-swap agreement, Headington sued Finley seeking $54.4 million in damages for breach of contract and, in the alternative, negligence and negligent misrepresentation.[4] Headington asserted that Finley's noncompliance with contractual notice and disclosure obligations caused Headington to lose its mineral interests when the Arrington Lease terminated due to nonproduction from the Arrington Wells. Finley's answer asserted, among other things, the affirmative defenses of release, waiver, and third-party beneficiary to the acreage-swap agreement.[5]
As Finley's potential indemnitor under the Quitclaim Assignment, Petro Canyon intervened, seeking a declaration that the release bars Headington's claims against Finley as a "predecessor" to Petro Canyon or Double Eagle. Like Finley, Petro Canyon alleged that, with knowledge of Finley's assignment to Petro Canyon, Headington had released Petro Canyon and its "predecessors" from all claims "related in any way to the Loving County Tract."
In cross-motions for summary judgment on the affirmative defenses, the parties framed the controlling question as whether Headington's broad release of "Petro Canyon and its affiliates and their respective . . . predecessors" for all claims and causes of action that are "related in any way to the Loving County Tract" extinguished Headington's claims against Finley.
For the most part, the parties locked horns over the meaning of "predecessors." Finley's and Petro Canyon's separately filed summary-judgment motions tracked one another in asserting that "predecessor" simply means "one who precedes another in office or position," making the release applicable to Finley as a (1) predecessor-in-title to Petro Canyon under the Quitclaim Assignment, (2) predecessor-in-interest to Petro Canyon based on its assumption of Finley's liabilities and obligations under the Arrington Lease, and (3) predecessor well operator to Petro Canyon's affiliate, Double Eagle. Headington's summary-judgment motion argued that, as used in the release, "predecessors"...
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