U.S. Shale Energy II, LLC v. Laborde Props., L.P.

• Decision Date: 29 June 2018
• Docket Number: No. 17–0111,17–0111
• Citation: 551 S.W.3d 148
• Parties: U.S. SHALE ENERGY II, LLC, Raymond B. Roush, Ruthie Roush Dodge, and David E. Roush, Petitioners, v. LABORDE PROPERTIES, L.P., and Laborde Management, LLC, Respondents
• Court: Texas Supreme Court

551 S.W.3d 148

U.S. SHALE ENERGY II, LLC, Raymond B. Roush, Ruthie Roush Dodge, and David E. Roush, Petitioners,

v.LABORDE PROPERTIES, L.P., and Laborde Management, LLC, Respondents

No. 17–0111

Supreme Court of Texas.

Argued February 28, 2018

OPINION DELIVERED: June 29, 2018

Jeffrey D. Small, Katy Ilen Pier Moore, Nicole Sears, Benjamin G. Robertson, Corey F. Wehmeyer, Raymond B. Roush, for petitioners Ruthie Roush Dodge, Raymond B. Roush and David E. Roush.

Forrest M. Seger, III, Andrew L. Kerr, Michael G. Maloney, for respondents Laborde Management, LLC, and Laborde Properties, L.P.

Jeffrey D. Small, Katy Ilen Pier Moore, Nicole Sears, Benjamin G. Robertson, Corey F. Wehmeyer, Laura H. Burney, for petitioner U.S. Shale Energy II, LLC.

Joshua S. Smith, for amicus curiae Wolf Bone Ranch Partners, LLC.

Justice Lehrmann delivered the opinion of the Court, in which Chief Justice Hecht, Justice Green, Justice Guzman, Justice Devine, and Justice Brown joined.

Debra H. Lehrmann, Justice

We are asked whether the royalty interest reserved to the grantor in a 1951 deed is fixed (set at a specific percentage of production) or floating (dependent on the royalty amount in the applicable oil and gas lease). The trial court concluded it was floating, but the court of appeals disagreed and held it was fixed. In light of the language and structure of the reservation at issue—our sole guide in ascertaining the intent of the parties to this deed—we agree with the trial court that the deed unambiguously reserved a floating 1/2 interest in the royalty in all oil, gas, or other minerals produced from the conveyed property. Accordingly, we reverse the court of appeals' judgment.

I. Background

On January 6, 1951, J.E. and Minnie Bryan conveyed by deed all right, title, and interest in a tract of land in Karnes County, Texas, to S.E. Crews. In this deed, the Bryans reserved a nonparticipating royalty interest in the minerals. The reservation in the Bryan deed states:

There is reserved and excepted from this conveyance unto the grantors herein, their heirs and assigns, an undivided one-half (1/2) interest in and to the Oil Royalty, Gas Royalty and Royalty in other Minerals in and under or that may be produced or mined from the above described premises, the same being equal to one-sixteenth (1/16) of the production. This reservation is what is genaerally [sic] termed a nonparticipating Royalty Reservation ....

Through a series of conveyances, U.S. Shale Energy II, LLC, acquired a share of the Bryans' reserved interest such that, today, the Bryans' heirs and U.S. Shale (collectively, the Bryan successors) own the nonparticipating royalty interest reserved in the Bryan deed. In 2010, Laborde Properties, L.P., acquired all right, title, and interest in portions of the property that is subject to the Bryan successors' nonparticipating royalty interest. At the time Laborde acquired the property, EOG Resources held an oil and gas lease providing for a lessor's royalty of 20%, i.e., 1/5.¹

After acquiring the property, Laborde received a division order from EOG reflecting that the Bryan successors were being credited with 1/2 of that 1/5 royalty (for a total of 1/10 of production). Laborde disputed this position, contending that the Bryan successors should be credited with only 1/16 of total production by virtue of the fixed 1/16 royalty reserved in the Bryan deed. After Laborde notified EOG of its disagreement, EOG suspended payments pending resolution of the dispute.

U.S. Shale sued Laborde,² seeking a declaratory judgment that the Bryan deed reserved a floating 1/2 royalty interest, resulting in a 1/10 royalty under the EOG lease (1/2 of the 1/5 royalty contained in the lease). The Bryans' heirs—Raymond B. Roush, Ruthie Roush Dodge, and David E. Roush—intervened as plaintiffs. Laborde counterclaimed, seeking, in pertinent part, a declaration that the deed reserved a fixed 1/16 royalty.³ The parties filed cross motions for summary judgment as to the declaratory judgment claims. The trial court granted the Bryan successors' motions and denied Laborde's, declaring that the Bryan deed reserved a floating 1/2 royalty interest and, in a separate order, awarding the Bryan successors their attorney's fees.⁴

The court of appeals reversed. ––– S.W.3d ––––, ––––, 2016 WL 5922404 (Tex. App.—San Antonio 2016). Examining the entire deed, the court determined that no provision other than the reservation itself had significance to the nature of the royalty reserved and held that the language " ‘the same being equal to one-sixteenth of the production’ ... qualifies, modifies, or clarifies the preceding undivided one-half language, showing an intent to reserve a fixed one-sixteenth (1/16) interest." Id. at ––––. The court of appeals thus remanded the case to the trial court to reconsider attorney's fees. Id. at ––––. We granted the Bryan successors' petition for review.

II. Discussion

A. Interpretation Principles and Contextual Overview

As is often the case, the parties here agree the deed in question is unambiguous but diverge on its proper interpretation. See, e.g. , Luckel v. White , 819 S.W.2d 459, 461 (Tex. 1991) ; Garrett v. Dils Co. , 157 Tex. 92, 299 S.W.2d 904, 907 (1957). "When construing an unambiguous deed, our primary duty is to ascertain the intent of the parties from all of the language within the four corners of the [instrument]." Wenske v. Ealy , 521 S.W.3d 791, 794 (Tex. 2017). "We examine the entire [instrument] and seek to harmonize and give effect to all provisions so that none will be meaningless." Gilbert Tex. Constr., L.P. v. Underwriters at Lloyd's London , 327 S.W.3d 118, 126 (Tex. 2010) ; Luckel , 819 S.W.2d at 462 (noting that, in construing a deed, we attempt to harmonize provisions that "appear contradictory or inconsistent" so as "to give effect to all of its provisions"). Recently, in Hysaw v. Dawkins , we reaffirmed "our commitment to a holistic approach aimed at ascertaining intent from all words and all parts" of the deed. 483 S.W.3d 1, 13 (Tex. 2016). Further, we consider the words used in light of "the facts and circumstances surrounding the [instrument's] execution." Sun Oil Co. v. Madeley , 626 S.W.2d 726, 731 (Tex. 1981). We may consider such circumstances to the extent they "inform, rather than vary from or contradict, the [instrument's] text." URI, Inc. v. Kleberg County , 543 S.W.3d 755, 767 (Tex. 2018).

In this case, questions arise about the intent of the parties to the deed with respect to the nature of the royalty interest reserved to the grantor. A royalty interest "is a nonpossessory interest in minerals that may be separately alienated." Luckel , 819 S.W.2d at 463. It may be conveyed or reserved in two ways: " ‘as a fixed fraction of total production’ (fractional royalty interest) or ‘as a fraction of the total royalty interest’ (fraction of royalty interest)." Hysaw , 483 S.W.3d at 9 (quoting Luckel , 819 S.W.2d at 464 ). A fractional royalty interest is referred to as a fixed royalty because it "remains constant" and is untethered to the royalty amount in a particular oil and gas lease. Id. A fraction of royalty interest is referred to as a floating royalty because it varies depending on the royalty in the oil and gas lease in effect and is calculated by multiplying the fraction in the royalty reservation by the royalty in the lease. See id. The language used in the conveyance instrument determines whether the interest is fixed or floating. See id. at 11–13 ; Christopher Kulander, Fixed vs. Floating Non–Participating Oil & Gas Royalty in Texas: And the Battles Rage On ... , 4 TEX. A & M L. REV. 41, 44–46 (2016).

Disputes over whether a conveyance or reservation reflects a fixed or floating royalty interest are common when a deed contains multiple fractions.⁵ These so-called double- and restated-fraction cases frequently involve multiples of 1/8, which was "the usual royalty provided in mineral leases" at the time the Bryan deed was executed. Garrett , 299 S.W.2d at 907 ; see also Hysaw , 483 S.W.3d at 9. The ubiquity of the 1/8 landowner royalty led many landowners to presume that the landowner royalty would remain 1/8 in perpetuity. See Hysaw , 483 S.W.3d at 10 ; Luckel , 819 S.W.2d at 462. We have thus recognized that, "[t]hough not inexorably so, the reality is that use of 1/8 (or a multiple of 1/8) in some instruments undoubtedly embodies the parties' expectation that a future lease will provide the typical 1/8th landowners' royalty with no intent to convey a fixed fraction of gross production." Hysaw , 483 S.W.3d at 11.

B. Analysis

The Bryan deed reserved "an undivided one-half (1/2) interest in and to the Oil Royalty, Gas Royalty and Royalty in other Minerals in and under or that may be produced or mined from the above described premises, the same being equal to one-sixteenth (1/16) of the production." Read independently, the sentence's first clause reserves a floating royalty interest equal to one-half of the royalty contained in the oil and gas lease in effect. See id. at 9 (describing a floating royalty "as a fraction of the total royalty interest" (quoting Luckel , 819 S.W.2d at 464 ) ); see also Schlittler v. Smith , 128 Tex. 628, 101 S.W.2d 543, 544–45 (1937). The issue is whether the second clause—"the same being equal to one-sixteenth (1/16) of the production"—indicates an interest fixed at 1/16 of production despite the language in the first clause tying it to the royalty. Of course, as long as the landowner's royalty provided in a lease agreement governing the minerals is set at 1/8, the reservation has the exact same effect regardless of whether the reserved interest is classified as fixed or floating. However, in the event that the royalty deviates from 1/8, as it does in the EOG lease in this case, the classification becomes significant.

The parties agree, and the court of appeals recognized, that apart from the single sentence reserving the royalty interest, no other provisions in the Bryan deed...