Minerals v. Xto Energy Inc.

• Decision Date: 16 December 2010
• Docket Number: No. 02–08–00453–CV.,02–08–00453–CV.
• Citation: 335 S.W.3d 344
• Parties: VINSON MINERALS, LTD., Johnny H. Vinson and Chisholm 2000, L.P., Appellants,v.XTO ENERGY, INC., Appellee.
• Court: Texas Court of Appeals

335 S.W.3d 344

VINSON MINERALS, LTD., Johnny H. Vinson and Chisholm 2000, L.P., Appellants,

v.XTO ENERGY, INC., Appellee.

No. 02–08–00453–CV.

Court of Appeals of Texas, Fort Worth.

Dec. 16, 2010.

Moses, Palmer & Howell, LLP and Shayne D. Moses and David A. Palmer, Fort Worth, TX, and Winstead PC and Craig T. Enoch, Austin, TX, for Appellants.Friedman, Suder & Cooke and Jonathan T. Suder, Michael T. Cooke and David Skeels, Fort Worth, TX, and Locke Lord Bissell & Liddell LLP and Charles R. “Skip” Watson, Jr., Austin, TX, for Appellee.PANEL: LIVINGSTON, C.J.; GARDNER and WALKER, JJ.

OPINION

ANNE GARDNER, Justice.

I. INTRODUCTION

Appellants Vinson Minerals, Ltd., Johnny H. Vinson, and Chisholm 2000, L.P. (the Vinsons) and Appellee XTO Energy, Inc. (XTO) filed cross-motions for summary judgment on the Vinsons' claims relating to ten oil and gas leases covering the Vinsons' ranch in Wise County, Texas. The trial court granted XTO's motion and denied the Vinsons' motion. The Vinsons, as one or more of the lessors in each of the leases, contend that they are entitled to terminate the leases with XTO, as successor lessee, because XTO failed to make “undisputed payments” after demand. Because we hold that the Vinsons presented no evidence that they provided XTO with a proper written notice or demand for payment as required by the leases, we affirm.

II. BACKGROUND

The oil and gas leases at issue originated in 2001 between Johnny Vinson, Vinson Minerals, Ltd., and others as lessors and Threshold Development Company as lessee. Threshold is a Vinson family company in that the owners, officers, and directors are members of the Vinson family. In 2003, Antero Resources Corporation bought Threshold's interests as lessee in the leases for $25 million.

In early 2005, the Vinsons began disputing Antero's calculations of royalty payments to the Vinsons from 2003 to 2005 and commenced an audit of Antero's accounting records of royalties. By letter of January 25, 2005, the Vinsons informed Antero that they were “waiting on requested information to complete [the] audit of production and royalty payments” and that the Vinsons' “potential claim” for royalty underpayment was $2 million. In March 2005, the Vinsons provided Antero with audit exceptions listing, among other complaints, improper deductions from royalty payments for compression, fuel, treating, and transportation charges by an “affiliated” pipeline owned by Antero “to be determined” but “estimated ... to be in the range of $600,000.” ¹

The relationship between the parties deteriorated as the Vinsons raised other issues, including claims for reassignment of undeveloped acreage, drill site issues, and road and surface damage issues. On July 11, 2005, the Vinsons filed suit against Antero for numerous claims—including trespass, breach of contract, incorrect calculation and underpayment of royalties and other production costs, surface damages, and failure to develop—seeking an unspecified amount of damages and attorney fees.

In the meantime, two months before the Vinsons filed suit, XTO acquired Antero and the leases. XTO was made aware of the outstanding issues claimed by the Vinsons at the time it acquired the leases. In March 2005, the Vinsons faxed XTO a copy of its January 25 letter to Antero regarding the status of their claims. By letter dated August 5, 2005, XTO's outside litigation counsel initiated settlement dialogue with the Vinsons' counsel, requesting that the Vinsons (1) amend their pleadings to substitute XTO as the sole defendant, (2) agree to suspend their ongoing audit during litigation, and (3) consider opening discussions with XTO “to see if some or all of these issues can be resolved, and good working relations restored, before pursuing litigation aggressively.” ²

In a January 18, 2006 letter to the Vinsons' counsel, confirming delivery of documents in response to discovery, XTO's counsel reaffirmed its “intention to resolve the royalty payment issues both prospectively and [as] to past months, by an agreed method of changed payment and a lump sum settlement for past months once the new payment method is agreed upon.” A few days later, XTO's and the Vinsons' accountants and legal counsel met to discuss settlement of all issues in the suit, including the issue of the new methodology to be agreed upon in order to recalculate the disputed royalties. Under the methodology proposed by XTO, its “estimated” preliminary calculation of royalty payments owed to the Vinsons for the period from November 2003 through April 2005 (the Antero period) totaled $643,548.19. XTO described this number as an estimate, subject to adjustment as XTO continued reviewing Antero's boxes of accounting records.³ The Vinsons and XTO agreed at this meeting to continue working, without the presence of legal counsel, on the changed methodology to recalculate the disputed royalty payments owed to the Vinsons during both the Antero period and the period after May 2005, when XTO acquired Antero (the XTO period). In this regard, the parties obtained a Rule 408 Agreed Protective Order from the trial court that included a provision for informal meetings of representatives of the parties to discuss royalty accounting issues.⁴

On March 16, 2006, XTO's counsel wrote the Vinsons' counsel, summarizing the current status of the ongoing settlement discussions on all issues and proposing that XTO recalculate all prior royalties under a revised methodology and format and “in due course, make a retroactive payment to bring all prior periods up to the new payment methodology.” The letter requested that the Vinsons present a settlement demand “to resolve all issues in the case” as follows:

Please discuss these issues with your client and present XTO a settlement demand to resolve all issues in the case. If we have misunderstood your pleading in any respect, or if you would need to discuss any of these issues prior to submitting a demand, please call me at your convenience.

On May 12, 2006, the Vinsons' counsel responded with a three-page letter faxed to XTO's counsel (the May 12 letter). The letter began with the following paragraph:

In response to your March 16, 2006, letter regarding possible settlement of this matter, [the Vinsons have] been thoroughly engaged in reviewing all of the information available related to this dispute. Now that this review is complete [the Vinsons are] prepared to respond in full to your suggestion as to “what XTO might offer to attempt to resolve the rest of the claims in the lawsuit.”

In the May 12 letter, the Vinsons' counsel characterized their claims as falling into two major categories, summarized as “surface/lessor issues” and “working interest/reassignment issues,” with four main causes of action. He discussed those issues in detail, including the following:

Royalty/Accounting Issues. If XTO makes a retroactive payment as represented, including interest and attorney fees, and revises the format for making future payments then this issue should be resolved. Until agreement on each of these matters is reached, in accordance with the terms of [the Vinson] leases ... demand is hereby made for all undisputed payments due under the Wise County leases. As a part of any settlement of this issue XTO will also have to confirm that it will provide [the Vinsons] with daily production information....

The letter concluded with the following paragraph:

Considering each of these factors, [the Vinsons] conservatively believe [ ]this case has a value greatly in excess of $30,000,000. Recognizing the risks of litigation and the costs associated therewith, I have been authorized to settle all claims in exchange for a payment in the amount of $9,500,000 and XTO bringing itself into compliance with the Barnett Shale Project Agreement by signing JOA's correctly identifying Threshold's before and after payout working interests after XTO acquired Sinclair Oil Corporation's interest in said agreement, in the same manner as all previously executed JOA's.

On May 25, 2006, XTO paid the Vinsons the amount of $103,047.68, representing underpayments for royalties owed for the XTO period, and using the new methodology that had been discussed.⁵ The Vinsons accepted that payment. XTO then began using the new methodology to adjust the royalty calculations previously made by Antero from the 348 boxes of accounting documents, which were incompatible with XTO's computer system, in order to calculate amounts to be paid for the Antero period.⁶

Sixty days after sending the May 12 letter, the Vinsons filed an amended petition substituting XTO as the defendant. In addition to the claims for damages previously asserted, the Vinsons alleged that XTO was in breach of contract by failing to make “undisputed royalty payments” demanded by the Vinsons in the May 12 letter. By the new pleading, the Vinsons added a request for a declaratory judgment seeking termination of the leases under the following portion of Section 3 (entitled “Royalty Payment”) of the leases: ⁷

3. Royalty Payment. Royalties on oil, gas, and other substances produced and saved hereunder shall be paid by [XTO] to [the Vinsons] as follows: ...

e. ... If [XTO] wrongfully or unreasonably withholds any undisputed payment or payments due to [the Vinsons] for a period of sixty (60) days after written demand for payment is made by [the Vinsons] on [XTO at the above address (or such other address as may be specified in writing hereafter by XTO) ], at the election of [the Vinsons] this lease may be terminated. The foregoing sentence shall not apply to payments withheld by [XTO] because [XTO] contests such payments in good faith so long as [XTO] has timely paid to lessor all undisputed payments due to [the Vinsons].⁸

On October 16, 2006, the Vinsons filed a partial motion for summary judgment asking the trial court to declare the leases terminated under Section 3(e) of the leases because of XTO's failure to comply with the Vinsons'...