Headington Royalty, Inc. v. Finley Res., Inc.

• Decision Date: 18 March 2021
• Docket Number: No. 05-19-00291-CV,05-19-00291-CV
• Citation: 623 S.W.3d 480
• Parties: HEADINGTON ROYALTY, INC. and Headington Energy Partners, LLC, Appellants v. FINLEY RESOURCES, INC., Finley Production Co. L.P. and Petro Canyon Energy, LLC, Appellees
• Court: Texas Court of Appeals

623 S.W.3d 480

HEADINGTON ROYALTY, INC. and Headington Energy Partners, LLC, Appellants

v.FINLEY RESOURCES, INC., Finley Production Co. L.P. and Petro Canyon Energy, LLC, Appellees

No. 05-19-00291-CV

Court of Appeals of Texas, Dallas.

Opinion Filed March 18, 2021

Rehearing Denied May 21, 2021

William Scott Hastings, Joseph Unis Jr., Locke Lord LLP, Dallas, Richard M. Abernathy, Abernathy, Roeder, Boyd & Hullett, P.C., McKinney, for Appellants.

David E. Keltner, Kelly Hart & Hallman LLP, Robert C. Vartabedian, Connor R. Bourland, Conrad D. Hester, Nicholas S. Davis, Alston & Bird LLP, John Randolph Thompson III, Niravkumar Patel, Kelly Hart & Hallman LLP, Fort Worth, Lewis L. Isaacks, Saunders, Walsh & Beard, McKinney, Richard B. Phillips Jr., Stephanie Dooley Nelson, Thompson & Knight LLP, Dallas, for Appellees.

Before Justices Osborne, Partida-Kipness, and Pedersen, III¹

OPINION

Opinion by Justice Pedersen, III

This is a summary judgment appeal about the interpretation of a release provision found in a contract that involves the exchange of mineral rights. The trial court determined as a matter of law that (i) the release is unambiguous and (ii) the term "predecessor" includes an entity that is a "predecessor-in-title" to the subject property interest. Consequently, the trial court granted appellees' motions for summary judgment and denied appellants' cross-motion for summary judgment. Because precedent requires (i) narrow construction of categorical releases and (ii) released parties to be named with such descriptive particularity that their identity or connection is not in doubt, we reverse the final judgment and remand the case to the trial court.

I. BACKGROUND

A. History of the Parties

The Arrington Lease, an oil and gas lease, covered all of Section 3, Block C-27, PSL Survey in Loving County, Texas (the "Loving County Tract"). The mineral rights under the Arrington Lease were horizontally severed, resulting in different parties' holding the rights to explore for, and develop the minerals at different depths.

From September 2012 to August 31, 2017, appellees Finley Resources, Inc. and Finley Production Co., L.P. (collectively "Finley") were the record-title owners of certain "shallow rights" under the Arrington Lease. Finley's "shallow rights" from the Arrington Lease consisted of the rights, title, and interest in and to oil, gas, and other minerals from the surface to 5,000 feet below the surface of the leasehold estate in the Loving County Tract created by the Arrington Lease. During that time, Finley operated two wells on the Loving County Tract (the "Arrington Wells"), which produced oil from the shallow rights.

From an assignment effective December 1993, appellants Headington Royalty, Inc. and Headington Energy Partners, LLC (collectively "Headington") held an 87.5% net revenue leasehold interest in the "deep rights" under the Arrington Lease.² Headington held an interest to the minerals in the depths below 5,000 feet from the surface. Furthermore, in 2014, Headington notified Finley that Headington was a successor to certain shallow rights in the Arrington Lease.

In early 2017, Petro Canyon Energy, LLC ("Petro Canyon") obtained a top lease³ covering all of the Loving County Tract from WIRC, LLC (the "WIRC Lease"). The WIRC Lease provided Petro Canyon the shallow rights and the deep rights from the entirety of the Loving County Tract for the purpose of exploring, drilling, operating for, and producing oil and gas and minerals. Those rights, however, were made expressly subordinate to any preexisting oil and gas leases "which may or may not have expired and/or been released of record."

B. Notice of Potential Arrington Lease Termination and Assignment to Petro Canyon

In June 2017, Petro Canyon notified Finley that the Arrington Lease might have terminated by failing to produce in paying quantities. Petro Canyon requested information concerning Finley's operating expenses. Petro Canyon and Finley began negotiating an assignment of Finley's interest in the Loving County Tract. Those negotiations resulted in Finley's (i) making an Affidavit and Certification of Nonproduction and Operation, (ii) assigning to Petro Canyon by Quitclaim Assignment (the "Assignment") all its right, title, and interest, if any, in the Arrington Lease, effective August 31, 2017, and (iii) transferring operatorship of the Arrington Wells to Double Eagle Operating, LLC ("Double Eagle"), an affiliate of Petro Canyon, as of August 31, 2017.⁴ The Assignment contained the following assumption and indemnification provision:

[Petro Canyon] agrees to assume and perform, any and all of the liabilities and obligations, or alleged or threatened liabilities and obligations, of [Finley] under or with respect to the [Loving County Tract]....

C. Dispute Arises Between Headington and Finley

Before quitclaiming its interest in the Arrington Lease to Petro Canyon, Finley notified Headington that Finley intended to plug and abandon the Arrington Wells. However, according to Headington, this "notice" was too late because the Arrington lease, including Headington's deep rights, had already terminated months earlier due to Finley's ceasing production on the wells.

Specifically, Headington alleges that Finley (i) ceased production on the Arrington Wells in December 2016 and (ii) did not restart production or commence or continue operations on the lands subject to the Arrington lease for over 90 days thereafter. Headington alleges (i) Finley's actions terminated both Finley's shallow rights and Headington's deep rights under the Arrington Lease and (ii) Finley's late notice constituted a breach of the assignments through which Finley had obtained its shallow rights under the Arrington Lease.

D. Acreage Swap Agreement and Release Between Headington and Petro Canyon

Headington asserted in its original petition that (i) to mitigate the damages purportedly caused by Finley and (ii) to recoup lost revenues, it sought to acquire deep rights under the lands previously subject to the Arrington Lease. The summary judgment record shows that, in August 2017, Scott Mahand, a vice president at Headington, contacted Cody Campbell of Petro Canyon to negotiate an acreage swap related to the Loving County Tract. On September 12, 2017, Mahand proposed an acreage swap to Petro Canyon whereby (i) Petro Canyon would assign its interest in the Loving County Tract (i.e., the WIRC Lease) to Headington and (ii) Headington would assign its interest in other tracts (the Four Corners Tracts) to Petro Canyon. The WIRC Lease was valuable to Headington because it included both the shallow rights and the deep rights of the Loving County Tract.

On October 3, 2017, Headington and Petro Canyon executed an agreement to swap the respective acreage (referred to as the "PCH Agreement"), which included a release provision (the "Release").⁵ The PCH Agreement recites the following regarding Headington's understanding:

(a) each of W.I.R.C., LLC ("W.I.R.C.") and Dallas Petroleum Group LLC ("DPG") purports to own the oil, gas and minerals in and under the Loving County Tract;

(b) W.I.R.C. LLC has executed and delivered to Petro Canyon Energy LLC ("Petro Canyon") an oil, gas and mineral lease dated April 28, 2017, a memorandum of which is recorded as No. 2017-2126, in the records of such county, purporting to cover the Loving County Tract in its entirety (the "W.I.R.C. Lease"); and

(c) there is pending Cause No. 08-17-00017-CV, in the El Paso Eighth Court of Appeals of Texas, to determine the respective interests of W.I.R.C., LLC and DPG in the Loving County Tract.

The Release provides:

HEP⁶ waives, releases, acquits and discharges Petro Canyon and its affiliates and their respective officers, directors, shareholders, employees, agents , predecessors and representatives for any liabilities, claims , demands, causes of action or obligations, of whatever kind or character, including, without limitation, breach of contract, negligence, strict liability, indemnity or contribution that HEP has or may have in the future, whether asserted or unasserted, known or unknown, fixed or contingent, related in any way to the Loving County Tract ; provided, however, that the foregoing release shall not apply to any obligations arising under this agreement.

(emphasis added). No part of the PCH Agreement explicitly identifies, describes, or includes either Finley Resources, Inc. or Finley Production Co. L.P. Finley did not execute the PCH Agreement.

E. Headington Files Suit Against Finley, and Petro Canyon Intervenes

On March 9, 2018, Headington filed this lawsuit against Finley. Stemming from the late notice allegation, Headington sought to recover damages allegedly caused by what Headington believes was a premature and unnecessary termination of its deep rights under the Arrington Lease. Finley answered and, in addition to a general denial, raised several affirmative defenses including release, waiver, and third-party beneficiary. Finley did not plead a request for declaratory judgment.

On July 5, 2018, Petro Canyon intervened, arguing the Release barred Headington's claims in the underlying lawsuit because (i) Finley had assigned its interest in the Arrington Lease to Petro Canyon, thereby making Finley Petro Canyon's "predecessor" to those lease rights; (ii) Headington knew Finley was Petro Canyon's "predecessor" to those lease rights; and (iii) Headington released Petro Canyon and its "predecessors" from all claims relating to the Loving County Tract in the PCH Agreement. Petro Canyon sought a declaratory judgment that Finley was a predecessor under the Release and that Headington's claims against Petro Canyon and Finley were barred pursuant to the Release.

F. Competing Summary Judgments and Final Judgment

Headington, Finley, and Petro Canyon each filed traditional summary judgment motions. Headington sought a partial summary judgment determination against Finley and Petro Canyon's affirmative defenses of waiver and release. Based on...