Ridge Natural Res., L.L.C. v. Double Eagle Royalty, L.P.

• Decision Date: 24 August 2018
• Docket Number: No. 08-17-00227-CV,08-17-00227-CV
• Citation: 564 S.W.3d 105
• Parties: RIDGE NATURAL RESOURCES, L.L.C., Calvin Smajstrla, Christopher Hawa, and Wilson Hawa, Appellants, v. DOUBLE EAGLE ROYALTY, L.P., Appellee.
• Court: Texas Court of Appeals

564 S.W.3d 105

RIDGE NATURAL RESOURCES, L.L.C., Calvin Smajstrla, Christopher Hawa, and Wilson Hawa, Appellants,

v.DOUBLE EAGLE ROYALTY, L.P., Appellee.

No. 08-17-00227-CV

Court of Appeals of Texas, El Paso.

August 24, 2018

OPINION

YVONNE T. RODRIGUEZ, Justice

This is an arbitration case in which two oil companies are fighting for title to a disputed royalty interest in minerals located in Winkler County. Both oil companies claim this interest was transferred to them at different times by siblings James William McDaniel and Jolinda McDaniel Benjamin (the McDaniels). The McDaniels are not parties to this lawsuit, but their actions bear heavily on the case at hand.

When Double Eagle Royalty—the second-in-time transferee that purportedly acquired the McDaniels' mineral interests—filed suit to quiet title to the disputed royalty interest, first-in-time transferee Ridge Natural Resources, L.L.C., moved to compel arbitration based on an arbitration clause in a "lease agreement" it signed with the McDaniels prior to Double Eagle’s purported acquisition of the McDaniels' interests. Double Eagle does not dispute that if the arbitration agreement is valid, the agreement binds Double Eagle as the McDaniels' successor-in-interest. But Double Eagle maintains that the arbitration clause contained in the lease agreement should be struck down because it is substantively and procedurally unconscionable. The trial court agreed, denying Ridge’s motion to compel arbitration.

We will reverse. While we agree that the agreement’s cap on punitive damages is against public policy and must be stricken, Double Eagle has not provided sufficient evidence to meet the high bar of unconscionability necessary for this Court to dissolve this arbitration agreement in its entirety.

I.BACKGROUND

A Brief Synopsis of Oil and Gas Rights

Although an in-depth examination of oil-and-gas principles is not necessary to resolve the merits of this appeal, we pause briefly to define the various rights at issue in a mineral estate so as to ground our subsequent discussion and provide context as to what rights the McDaniels purportedly believed they were conveying, and what rights may have actually been conveyed in the agreement the McDaniels signed.

Interests in oil and gas rights, including royalty interests, are considered to be real property. Navasota Res., Ltd. v. Heep Petroleum, Inc. , 212 S.W.3d 463, 480 n.11 (Tex.App.—Austin 2006, no pet.). "A property owner’s rights are often described as a bundle of rights, or a bundle of sticks." Lightning Oil Co. v. Anadarko E & P Onshore, L.L.C. , 520 S.W.3d 39, 48 (Tex. 2017). A property owner is free to retain all rights in a piece of real estate for himself or herself, or else sever the sticks from one another and distribute individual rights in whatever fashion or combination he or she so chooses. Id.

When a mineral estate is severed from the surface estate, there are five "sticks" available for distribution related to that estate: (1) the right to develop; (2) the right to lease; (3) the right to receive bonus payments; (4) the right to receive delay rentals; and (5) the right to receive royalty payments. Id. at 49. The right to develop is a possessory right that gives the holder "the exclusive right to possess, use, and appropriate gas and oil[.]" Id. The right to lease is an executive right; the holder "enjoys the exclusive right to make and amend mineral leases and, correspondingly, to negotiate for the payment of bonuses, delay rentals, and royalties, subject to a duty of utmost good faith and fair dealing to non-executive interest holders." Hysaw v. Dawkins , 483 S.W.3d 1, 9 (Tex. 2016). The last three rights are all passive, non-possessory, non-executive rights to the proceeds from the production of minerals. Id. Bonuses are payments made in addition to royalties and rent that act as incentives for a lessor to sign a lease. In re Estate of Slaughter , 305 S.W.3d 804, 811 (Tex.App.—Texarkana 2010, no pet.). Delay rentals are payments made by the lessee during the primary term to perpetuate a lease when the lessee is not actively drilling or developing the leasehold. Id. ; 55A TEX.JUR.3D OIL AND GAS § 344 (2018). And a royalty interest is "a share of production—or the value or proceeds of production, free of the costs of production—when and if there is production." [Internal citation omitted]. In re Estate of Slaughter , 305 S.W.3d at 811. "These interests differ significantly in their nature, and ordinarily, at any given time, only one of these types of consideration is payable; one receiving royalties is not receiving rentals, and usually not receiving bonuses, royalties being no part of bonuses or rentals." 55A TEX.JUR.3D OIL AND GAS § 343 (2018).

Bearing these distinctions in mind, we proceed.

The McDaniels Sign a "Royalty Lease" with Ridge

In October 2016, Ridge, through its agents, reached out to the McDaniels and made an offer to lease certain mineral interests in Winkler County. The McDaniels had previously executed a production lease on their land with SWEPI, L.P., in 2004. The McDaniels informed Ridge about the SWEPI lease. According to the McDaniels, Ridge assured them that a pre-existing lease was "no problem" and would not affect the validity of Ridge’s offer. Ridge then emailed both the McDaniels a cover letter with a proposed agreement attached.

The cover letter reads as follows:

Dear Mr. McDaniel [and Mrs. Benjamin],

We are interested in leasing your interest located in Winkler County, Texas to the following Land:

Section 9, Block 27, Public School Land Survey, Winkler County, Texas.

Ridge Natural Resources is aware that there may currently be existing oil and gas lease or leases [sic] on this Land. This lease offer is made subject to any existing lease(s) that you may have in place on this Land, and shall in no way invalidate or interfere with those existing leases.

On behalf of Ridge Natural Resources, we would like to offer you $325.00/net royalty acre along with a 1/4 Royalty to lease your interest in the above-described tract of Land.

Therefore, your Lease Payment would be:

320.00 Net Royalty Acres X $325.00/acre = $104,000.00

Therefore, we are offering you $104,000.00 and 1/4th of the Royalty to lease your interest for 5 years and an additional 3 year option to extend. We do not extend open-ended offers, so this offer is valid for one month, or until November 10th, 2016.

I have enclosed the Lease for your review. If you are interested in leasing, please insure that your information (name and address) are entered and spelled correctly. When you are ready to sign, you will need to sign the document in the presence of a Notary Public. Once the Lease is signed and notarized, please send it back to the address listed below.

...

Once we receive the Lease in the mail, we will promptly get a Check for $104,000.00 made out to you and sent to your address. This should take between 3 to 5 days.

Jolinda McDaniel testified in an affidavit that she believed the lease offer was for a traditional top lease.¹ In fact, although the interpretation and validity of the interest conveyed by the lease are in dispute, the contract the McDaniels signed appears to be more akin to a non-participating royalty agreement² that entitled Ridge to 75 percent of royalties, but that did not grant Ridge any executive rights or require Ridge to perform any exploration or development itself.³ Although Ridge referenced a ¼-royalty interest in the offer letter, the terms of the lease actually meant that after signing the offer and receiving $104,000 each, the McDaniels would retain a fourth—or 25 percent—of the original royalty interest. The thorny issue of defining the exact nature of that royalty interest is not before the Court in this case, and the parties in their briefs point us to no record evidence as to what the precise estimated value of the Disputed Interest may be.

The Royalty Lease’s Arbitration Clause

At issue in this appeal is Paragraph 5, the Royalty Agreement’s arbitration clause. It reads as follows:

In the event of any dispute(s), claim or controversy arising out of or relating to this contract or the breach, termination, enforcement, interpretation or validity thereof, including the determination of the scope or applicability of this agreement to arbitrate, the parties agree to participate in at least four (4) hours of mediation in accordance with the commercial mediation rules of the American Arbitration Association before having recourse to arbitration. If the mediation procedure provided for herein does not resolve any such dispute, the parties agree that all disputes between the parties shall be resolved solely by binding arbitration administered by the American Arbitration Association in accordance with its commercial arbitration rules pursuant to the Texas General Arbitration Act. The parties expressly exclude the application of the Federal Arbitration Act. The arbitration shall be administered by JAMS pursuant to its Comprehensive Arbitration Rules and Procedures and in accordance with the Expedited Procedures in those Rules. All proceedings shall be conducted in the City of San Antonio, State of Texas. There shall be one arbitrator. The arbitrator shall apply the internal laws of the State of Texas. ... The term ‘dispute(s)’ shall include, but is not limited to all claims, demands and causes of action of any nature, whether in contract or in tort, at law or in equity, or arising under or by virtue of any statute or regulation or judicial reasons, that are now recognized by law or that may be created or recognized in the future, for resulting past, present and future personal injuries, contract damages, intentional and/or malicious conduct, actual and/or constructive fraud, statutory and/or common law fraud, class action suit, misrepresentations of any kind and/or character, liable [sic], slander, negligence, gross negligence, and/or deceptive trade practice/consumer protection act damages, all attorney’s fees and

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