Clayton Williams Energy, Inc. and Chesapeake Exploration, L.L.C. v. BMT O & G TX, L.P., Goliad O & G TX, L.P., WD O & G TX, L.P., Keystone O & G TX, L.P. and Thru Line O & G TX, L.P.

COURT OF APPEALS
EIGHTH DISTRICT OF TEXAS
EL PASO, TEXAS

CLAYTON WILLIAMS ENERGY, INC. §
and CHESAPEAKE EXPORATION,
L.L.C., § No. 08-14-00133-CV

Appellants, § Appeal from the

v. § 143rd District Court

BMT O & G TX, L.P., GOLIAD O & G § of Reeves County, Texas
TX, L.P., WD O & G TX, L.P.,
KEYSTONE O & G TX, L.P., and THRU § (TC# 12-02-20072-CVR)
LINE O & G TX, L.P.,
§
Appellees.

OPINION

In this case, we must decide whether a group of mineral right owners can obtain damages

for alleged breaches of a lease’s assignment and operation clauses when the lessee, without

notice, agreed to “farm out” part of the leasehold to a subcontractor in exchange for drilling

services. No party disputes that the subcontractor performed the drilling activities necessary to

perpetuate the lease; the only issue here is whether the lease expired or allowed for termination

when the subcontractor tried to step into the lessee’s shoes as drilling operator. We hold it did

not. We vacate the portion of the trial judgment granting an award to a non-party, reverse the

remainder of the trial court’s judgment, and render a take-nothing judgment against the lessors.

BACKGROUND
 FACTUAL HISTORY
The Bass Lease

The lessors in this case are BMT O & G TX, L.P.; Goliad O & G TX, L.P.; WD O & G

TX, L.P.; Keystone O & G TX, L.P.; and Thru Line O & G TX, L.P. (collectively Lessors). It is

undisputed that on June 1, 2008, the Lessors and Appellant Chesapeake Exploration, L.L.C.

(Chesapeake) signed an oil and gas lease covering tracts of land in Reeves County, Texas,

including the Disputed Tract (the Bass Lease). The Bass Lease’s habendum clause in Paragraph

2 sets out the term length of the lease and what Chesapeake had to do to perpetuate the lease.

Specifically:

Subject to the other provisions herein contained, this Lease shall remain in force
for three (3) years from the Effective Date hereof (hereinafter referred to as the
‘Primary Term’) and as long thereafter as drilling operations are being conducted
hereunder, as hereinafter provided, or this Lease is being maintained by other
provisions hereof or oil and gas, or either one of them, are being produced in
paying quantities hereunder . . . .

Under Paragraph 6, Chesapeake was “deemed to be engaged in continuous drilling

operations if the interval between the deemed date of completion of one well and the

commencement of actual drilling operations . . . for the next succeeding well is not more than

one-hundred and eighty (180) consecutive days.” While Paragraph 26 states that the lease

creates covenants that run with the land and bind each party’s “respective successors, legal

representatives, heirs, assigns, lessees, and sublessees[,]” Paragraph 9 also creates limitations on

the parties’ ability to assign their rights under the lease (the Assignment Clause):

9. Assignment. . . . Any assignment, sale or transfer of, or agreement to sell,
assign or transfer any interest or interests of Lessee in or under this Lease may not
be made by Lessee, other than to Assignee’s [sic]1 subsidiaries, affiliates, internal
partners, AMI partners and Petro-Hunt L.L.C., without the prior written consent
of Lessor, which consent shall not be unreasonably withheld and any assignment,
sale or transfer so made shall expressly be subject to all the terms and provisions

1
Both parties agree that this was a typographical error, and that this provision should have actually said “Lessee’s”
and not “Assignee’s.” The same applies to “Assignor,” which apparently should say “Lessor.”

2
 of this Lease, and the assignee expressly agrees to be bound by the terms hereof in
writing. Lessee shall furnish Assignor [sic] a fully-executed copy of any such
sale, assignment or transfer.

Paragraph 10 sets out the lease’s operational requirements (the Operator Clause):

10. Operator. Lessee shall be designated Operator as to all operations of every
nature conducted on the Leased Premises including but in no way limited to, the
operation of all wells on this Lease and any approved geophysical, seismic, or
other operations conducted on the Leased Premises. Lessee shall remain
primarily liable and obligated to Lessor for the fulfillment of all covenants, both
expressed and implied, and all legal and contractual obligations imposed upon
Lessee as designated Operator hereunder. Operator must at all times adhere to all
Federal, State and Local laws and regulations and maintain good partnership or
corporate standing. Operator must maintain the property free and clear of liens at
all times and further must act as a prudent Operator in accordance with the
provisions of this Lease and standard industry practices. Adherence to the
provisions of this paragraph are material to the granting of this Lease and any
violation or failure to perform the requirements of this provision shall be
considered a material breach. Any assignments to third parties of rights
hereunder shall specifically notify and set forth the requirements of this provision.

Finally, Paragraph 19 sets out both the effect of any breach by Lessee and the lease’s

notice-and-cure provisions (the Default Clause):

19. Default. The breech [sic] or default by Lessee of any of the obligations
arising hereunder shall not work a forfeiture or termination of this lease nor cause
a termination or reversion of the estate created hereby nor be grounds for
cancellation hereof in whole or in part until Lessor has provided written notice to
Lessee that Lessor considers Lessee to be in breech [sic] or default and Lessee
fails to reasonably cure or remedy such default within sixty (60) days of Lessee’s
receipt of such notice.

Chesapeake Farms Out Drilling Operations to Clayton Williams Energy

The Bass Lease’s primary term began June 1, 2008 and was slated to end three years later

on June 1, 2011 per the habendum clause. At that time, the lease would terminate automatically

unless Chesapeake had begun drilling operations. As the Bass Lease’s primary term drew to a

close, Chesapeake and co-Appellant Clayton Williams Energy, Inc. (Clayton Williams Energy)

3
executed a “farmout agreement” on March 1, 2011 (the Farmout Agreement).2 The terms of the

Farmout Agreement specified that Chesapeake and Clayton Williams Energy were “AMI

partners.”3 Under the Farmout Agreement, Clayton Williams Energy agreed to drill at least

twenty carried wells on various Chesapeake leaseholds, including the Bass Lease, at no cost to

Chesapeake by March 1, 2012. In exchange, Clayton Williams Energy would receive a 75

percent interest in 640 acres from Chesapeake’s leaseholds upon completion. If Clayton

Williams Energy failed to drill the required wells, it could face up to $15 million in penalties.

Neither Chesapeake nor Clayton Williams Energy informed the Lessors about the Farmout

Agreement.

At trial, the Lessors stipulated that “Clayton Williams, as operator, commenced the

drilling of the 21 well [located on Bass Lease land] before the expiration of the primary term and

maintained continuous operations as defined in the lease until the time of our notice on October

24th[.]”

Lessors’ Discovery of the Farmout Agreement, Petrohawk’s Offer, and Aftermath

While Appellants were entering into an agreement to drill the Bass Lease, the Lessors

were also apparently entertaining offers on the Bass Lease in anticipation of its primary term

expiring without drilling operations. The Lessors were unaware of Appellants’ partnership or the

Farmout Agreement.

2
“A farmout is a common form of agreement between operators, in which a lease owner that does not want to drill
assigns the lease, or some portion of it, to another operator that does.” Young Refining Corp. v. Pennzoil Co., 46
S.W.3d 380, 389 (Tex.App.--Houston [1st Dist.] 2001, pet. denied). “The primary characteristic of the farmout is
the obligation of the assignee to drill one or more wells on the acreage as a prerequisite to completion of the
transfer.” Id. [Citation and emphasis omitted]. In essence, an oil company will reward another operator who fulfills
its lease obligations with a sublease or rights assignment, often as a way to fulfill its contractual with the landowner
while sharing financial risks of drilling operations and increasing its ability to profit off of petroleum products it
may not be equipped to market by including a third party in the deal. See John S. Lowe, Analyzing Oil and Gas
Farmout Agreements, 41 Sw.L.J. 759, 778-81 (1987).
3
Both parties agree that “AMI” stands for “area of mutual interest.” The significance of this term is addressed in
the Discussion portion of this opinion below.

4
 On July 29, 2011, nearly two months after the Bass Lease’s primary term ended, the

Lessors sought to obtain a signed release of the Bass Lease from Chesapeake. Chesapeake e-

mailed the Lessors back on August 15, 2011, stating that it believed the Bass Lease was being

held open by the drilling activities undertaken by Clayton Williams Energy under the Farmout

Agreement.

On October 24, 2011, the Lessors notified Chesapeake and Clayton Williams Energy by

letter that Chesapeake’s farmout breached the terms of the Bass Lease. They also asserted that

Chesapeake defaulted on the lease because Chesapeake was the only authorized operator, and

that since no authorized operator had begun drilling prior to the expiration of the primary term,

the leasehold reverted back to the Lessors. Clayton Williams Energy, on behalf of itself and

Chesapeake, responded on October 28, 2011. Appellants denied breaching the terms of Bass

Lease, since the lease allowed Chesapeake to assign its rights to any AMI partners without the

Lessors’ notice or prior consent. They also denied that the Operator Clause prohibited

Chesapeake from seeking out Clayton Williams Energy’s assistance, but maintained that if it

constituted a breach, they could “undo” the breach by refiling Texas Railroad Commission

paperwork naming Chesapeake as the well operator.

The cure period set by the Bass Lease’s Default Clause expired on December 23, 2011,

sixty days after the Lessors provided written notice to Appellants on October 24. Clayton

Williams Energy ceased drilling operations on October 24, following receipt of the Lessor’s

letter. In a letter from Clayton Williams Energy to Chesapeake dated December 21, 2011,

Clayton William’s counsel stated that Chesapeake and Clayton Williams Energy had agreed that

Clayton Williams Energy would resign as operator, and that Chesapeake would take

administrative steps to have itself named as operator with the Texas Railroad Commission by

5
filing a P-4 Form, but that “formal recognition of the RRC Lease ID number” was a prerequisite

to filing the P-4, and it had “just received the RRC ID number.” Clayton Williams Energy also

apparently forwarded a copy of the P-4 to Chesapeake for its review and approval. Chesapeake’s

agent purportedly signed the form on December 21. However, a stamp on the form indicates the

Railroad Commission received the P-4 Form on January 18, 2012. The Railroad Commission

issued an order granting the change of operators on January 26, 2012. The effective date of the

change, per the order, was December 21, 2011.

The Lessors alleged in their amended petition that on January 17, 2012, Petrohawk

Properties, L.P. offered to lease 1,022 mineral acres previously leased to Chesapeake under the

Bass Lease for a $3,000 per acre bonus. The Lessors further alleged that they would have

accepted the offer, but Chesapeake and Clayton Williams Energy’s actions prevented them from

entering into the lease with Petrohawk.

PROCEDURAL HISTORY

In February 2012, the Lessors filed suit against Appellants. In their First Amended

Petition, Lessors brought claims for trespass to try title, declaratory judgment, breach of contract

as to Chesapeake, and attorneys’ fees. The trial court divided the case into two phases: the first

purportedly dealt with liability, and the second with damages.4

On January 29, 2013, the trial court signed the Lessors’ Proposed Findings of Fact and

Conclusions of Law. In those findings, the trial court held that Clayton Williams Energy was the

actual designated operator as between Chesapeake and Clayton Williams Energy, and that

Clayton Williams Energy performed drilling operations without authorization under the lease.

As such, Clayton Williams Energy could not perpetuate the lease on Chesapeake’s behalf.

4
We note, as explained further below, that Lessors supplemented their petition to include additional substantive
claims in Phase II.

6
Further, because Chesapeake never conducted drilling operations itself prior to the expiration of

the primary term, the mineral estate terminated and reverted back to the Lessors.

At the beginning of Phase II, Lessors supplemented their petition to include claims for

common law and Kishi5 trespass to the mineral estate, common law failure to release a lease, and

slander of title.6 They also supplemented their trespass to try title and contract claims to include

special damages stemming from the loss of the Petrohawk Lease; loss of hydrocarbons; loss of

value to the mineral estate from June 1, 2011, until the date the trial court issued its Phase I

Findings of Fact and Conclusions of Law on January 29, 2013; and damages to the wellbore,

subsurface, and reservoir. Following a trial to the bench, the trial court entered its Phase II

Findings of Fact and Conclusions of Law on December 19, 2013. The trial court found inter alia

that Appellants’ actions caused Lessors to lose potential income from the Petrohawk deal and

deprived them of income from the mineral estate from Appellants’ unlawful holdover. The trial

court assessed $2,863,476.00 in damages and $780,000.00 in attorneys’ fees accrued through

trial. On January 17, 2014, the trial court entered a final judgment that incorporated its Phase I

and Phase II findings of fact and conclusions of law by reference. Chesapeake and Clayton

Williams Energy timely appealed.

DISCUSSION

Chesapeake, by four issues, and Clayton Williams Energy, by five issues, contend that

the trial court erred in assessing damages against them because they never breached the Bass

Lease and because Chesapeake’s leasehold never terminated prior to the Lessor’s repudiation

5
Humble Oil & Ref. Co. v. Kishi, 276 S.W. 190 (Tex.Comm’n App. 1925, judgm’t affirmed), judgm’t set aside on
reh’g, 291 S.W. 538 (Tex.Comm’n App. 1927, holding approved).
6
The Texas Supreme Court “has established that a cause of action to recover damages for the failure to release a
purported, though not actual, property interest is a cause of action for slander of title.” Ellis v. Waldrop, 656 S.W.2d
902, 905 (Tex. 1983).

7
notice. We agree.

Standard of Review

The threshold question in our review of a contract is whether the instrument is ambiguous

or not. J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223, 230 (Tex. 2003). Ambiguity affects

both the standard and scope of appellate review. We review unambiguous contacts and mineral

deeds de novo, limiting our scope of review to the “four corners” of the document and excluding

any extrinsic evidence from consideration. Victory Energy Corp. v. Oz Gas Corp., -- S.W.3d --,

2014 WL 8045237, at *8 (Tex.App.--El Paso Sept. 17, 2014, pet. denied). An ambiguous

contract opens the door to parol evidence that sheds light on the parties’ true intent. Id.

Consequently, we review interpretation of ambiguous contracts as a mixed question of fact and

law. Id.

To determine if a contract is ambiguous, we look only to its text and do not consult parol.

J.M. Davidson, Inc., 128 S.W.3d at 230. “[I]f a written instrument remains reasonably

susceptible to more than one meaning after the established rules of interpretation have been

applied, then the instrument is ambiguous[.]” Gore Oil Co. v. Roosth, 158 S.W.3d 596, 599

(Tex.App.--Eastland 2005, no pet.). If there is only one reasonable reading of a contract, the

parties’ intent is a pure question of law and we are bound to interpret the terms of the contract as

written and not how the parties would like them to have been written. Hitzelberger v. Samedan

Oil Corp., 948 S.W.2d 497, 504 (Tex.App.--Waco 1997, pet. denied).

We review the trial court’s fact-findings under the legal and factual sufficiency standards.

We sustain a legal sufficiency challenge when the trial court’s decision is unsupportable as a

matter of law because (1) there is “a complete absence of evidence of a vital fact,” (2) “the court

is barred by rules of law or of evidence from giving weight to the only evidence offered to prove

8
a vital fact,” (3) there is “no more than a mere scintilla” of evidence proving a vital fact; or (4)

the evidence conclusively establishes the opposite proposition of a plaintiff’s proffered vital fact.

City of Keller v. Wilson, 168 S.W.3d 802, 810 (Tex. 2005). We view evidence in the light most

favorable to the ruling on a legal sufficiency challenge, indulging “every reasonable inference”

in the trial court’s favor. El Paso Indep. Sch. Dist. v. Pabon, 214 S.W.3d 37, 41 (Tex.App.--

El Paso 2006, no pet.). “Any evidence of probative force supporting a finding requires us to

uphold” the trial court’s ruling. ACS Investors, Inc. v. McLaughlin, 943 S.W.2d 426, 430 (Tex.

1997). Where an outcome-determinative interpretation of evidence falls within the zone of

reasonable disagreement, we are without jurisdiction to disturb the verdict or decision for legal

sufficiency. Khorshid, Inc. v. Christian, 257 S.W.3d 748, 758 (Tex.App.--Dallas 2008, no pet.).

In a factual sufficiency challenge, we review the entire record in a neutral light and set

aside the trial court’s ruling only where it rests on evidence so weak or the finding is so contrary

to the great weight and preponderance of the evidence that it shocks the conscience or is

manifestly unjust. Dow Chem. Co. v. Francis, 46 S.W.3d 237, 242 (Tex. 2001); El Paso

Healthcare Sys., Ltd. v. Carmona, 160 S.W.3d 267, 274 (Tex.App.--El Paso 2005, pet. granted,

judm’t vacated w.r.m.). While the overlap between legal and factual sufficiency is substantial, a

legally sufficient verdict may still be overturned as factually insufficient. See In re Commitment

of Myers, 350 S.W.3d 122, 130 (Tex.App.--Beaumont 2011, pet. denied); In re Estate of Russell,

311 S.W.3d 528, 532 (Tex.App.--El Paso 2009, no pet.). Where an appellate court reverses a

verdict or judgment on factual insufficiency grounds, it “must detail the evidence relevant to the

issue and state in what regard the contrary evidence greatly outweighs the evidence in support of

the verdict.” Francis, 46 S.W.3d at 242 [Internal quotation marks omitted].

Analysis

9
 Although the Lessors and Appellants raise numerous arguments and issues, the ultimate

disposition of this appeal rests on one question: did the lease allow Chesapeake to assign its

drilling rights to Clayton Williams Energy without first asking the Lessors’ permission? If so, all

of the Lessors’ property and contract claims necessarily fail. We find that the lease

unambiguously gave Chesapeake that right.

1. Lease Interpretation

As a threshold matter, we must construe the Bass Lease. At issue here is the interaction

of two separate provisions against the backdrop of the entire lease: the Assignment Clause and

the Operator Clause.

A. The Assignment Clause

We first turn our attention to the Assignment Clause. The parties fundamentally agree

that the Assignment Clause gives Chesapeake the right to assign, without notice, rights to

Chesapeake’s “AMI partners.” The parties also generally agree what an AMI partner is

understood to be, with both pointing to the following industry definition of “area of mutual

interest agreement” from Westland Oil Dev. Corp. v. Gulf Oil Corp., 637 S.W.2d 903, 905 (Tex.

1982):

In an area of mutual interest agreement, the parties attempt to describe a
geographic area within which they agree to share certain additional leases
acquired by any of them in the future. This necessarily contemplates that oil and
gas leasehold interests will be conveyed.

Id. at 905.

Instead, the Lessors and Appellants disagree over which types of AMI partners were

eligible to receive assignments under the Bass Lease. Lessors argue that the purpose of the AMI

partners exception to assignment was “to free a lessee who is subject to an existing AMI

obligation that covers the lands within the lease being negotiated from being forced to elect

10
between breaching the consent requirement for assigning the lease or breaching the AMI’s

assignment obligation.” [Emphasis omitted]. In other words, the Lessors contend that the

language shows the parties intended to restrict the AMI partners exception to only AMI

partnerships existing at the time the Lessors and Chesapeake consummated the lease in order to

let Chesapeake transfer interests to third parties and meet any obligations it might have without

violating its non-assignment agreement with the Lessors. We disagree.

Nothing in the plain language of the Assignment Clause suggests there is a temporal

restriction on its scope that would freeze the parties in time and limit their ability to convey

without notice their interests not only just among a certain class of trusted entities, but a class of

trusted entities in existence at the time of the contract. That reading stretches the meaning of the

words in the Assignment Clause too far. The Lessors point to witness testimony explaining that

they understood the AMI partners language to impose such a restraint. But the Assignment

Clause is not ambiguous, nor do the Lessors argue that the definition of “AMI partner” is

fundamentally ambiguous; thus, we cannot consult parol evidence to vary its terms or write new

clauses into the parties’ contract. Victory Energy Co., 2014 WL 8045237, at *8. Under the plain

terms of the lease, Chesapeake was free to convey whatever rights and obligations it wanted to

its “AMI partners” without notifying the Lessors, regardless of whether those AMI partnerships

existed at the lease’s inception.

The Lessors urge us not to take this reading because it would render the Assignment

Clause meaningless and would lead to absurd results. But the fact that Chesapeake could create

an AMI partnership after signing the Bass Lease and then transfer its interests to the AMI partner

does not render the notice provisions in the Assignment Clause meaningless. Chesapeake would

still have to provide notice to the Lessors if it intended to transfer interests to a non-trusted third

11
party—and the Lessors would still have veto power over that transfer if it was unreasonable. We

also do not see how failing to read an implicit provision into the Assignments Clause would lead

to the absurd result of letting Chesapeake circumvent notice provisions through AMI

partnerships. Chesapeake could easily accomplish the same result by forming new subsidiaries

or obtaining new affiliates, and the Lessors do not argue the temporal restriction applies to the

entire class of trusted entities in the Assignments Clause, only to AMI partners because that was

their subjective intent. As we said before, this stretches the language of the Assignments Clause

too far and asks us to write in new provisions to the lease. We will not do so.

Finally, the Lessors argue that even if Chesapeake could assign its interests to AMI

partners that came into existence after the Bass Lease was signed, Clayton Williams Energy

cannot be Chesapeake’s AMI partner because it is a farmee. Under these facts, this is a

distinction without a difference. The Farmout Agreement arose within the context of a larger

AMI agreement between Appellants. As such, Clayton Williams Energy is both an AMI partner

and a farmee. The Lessors can point to no provision in the Bass Lease that prevents an AMI

partner from also being a farmee, and they cite no legal authority for their contention that an

AMI partner cannot also be a farmee as a matter of law. As such, the Assignments Clause

embraces Clayton Williams Energy as Chesapeake’s AMI partner and allows Chesapeake to

transfer any rights it may have to Clayton Williams Energy without prior approval from the

Lessors.

B. The Operator Clause

We next review the Operator Clause. The Lessors maintain that, notwithstanding any

abilities Chesapeake may have had under the Assignment Clause, the Bass Lease specifically

required Chesapeake to be the “designated Operator” of the leasehold. Under their reading, this

12
phrase meant that Chesapeake had to conduct all drilling operations personally. Because

Chesapeake assigned its drilling rights to Clayton Williams Energy in the Farmout Agreement

and named Clayton Williams Energy as operator for purposes of the Farmout Agreement and

before the Texas Railroad Commission, Chesapeake breached the Bass Lease’s Operator Clause.

Further, because Clayton Williams Energy never received a valid assignment of drilling rights

from Chesapeake, and because Clayton Williams Energy was a stranger to the Bass Lease, its

drilling operations failed to perpetuate the Bass Lease, meaning that Chesapeake’s fee simple

determinable mineral estate terminated automatically and reverted back to the Lessors at the end

of the primary term. We disagree.

First, the Lessor’s contention that the Operator Clause restrains Chesapeake from

alienating its operational rights is belied by the Operator Clause itself, which states: “Any

assignments to third parties of rights hereunder shall specifically notify and set forth the

requirements of this provision.” This sentence indicates that operational rights can be assigned

to third parties. The Lessors’ proposed reading renders this sentence totally nugatory. We must

avoid reading textual provisions as meaningless, if possible. Second, the Lessors’ argument that

Chesapeake was required to perform drilling operations itself is also unreasonable in light of

other lease provisions. References to the Lessee indemnifying the Lessor against wrongful death

claims arising from “Lessee’s contractors and subcontractors” in Paragraph 13 (the Indemnity

Clause) and the Binding Effect Clause in Paragraph 26 that states all terms “shall be binding

upon and inure to the benefit of the Lessee, and Lessor, and each of their respective . . . assigns,

lessees, and sublesses[,]” seem to indicate that the parties contemplated that Chesapeake could

and would assign its rights, including operational rights. [Emphasis added]. See Jackson v. Pure

Oil Operation Co., 217 S.W. 959, 961 (Tex.Civ.App.--Fort Worth 1919, writ dism’d)(lease

13
provisions indicating that covenants and agreement bind “heirs, legal representatives and

assigns” demonstrate parties intent to make lease interests conveyable).

More to the point, the designated operator language’s position within the Bass Lease

sheds light on the parties’ intent. The Lessors appears to suggest that the phrase “designated

Operator” meant not only that Chesapeake had to personally conduct drilling operations, but also

be the designated operator with the Texas Railroad Commission as evidenced by a P-4 Form.

However, when interpreting a legal document, we do not cherry-pick words and read them in a

vacuum; we read them in their context within the document. Additionally, although the Lessors

assert that “Operator” has a “well-defined meaning in Texas” under various “Texas statutes,

Commission regulations, applicable case law, treatises, and industry usage[,]” we note that in the

context of interpreting this lease, all those things constitute parol evidence that we may consult

only where the lease language at issue is ambiguous. See Dynegy Midstream Srvs., L.P., v.

Apache Corp. Partnership, 294 S.W.3d 164, 169-70 (Tex. 2009)(expert testimony on “standard

practice in the industry” constitutes parol that could not vary definition of unambiguous contract

term).

Language is only ambiguous in a legal document where it can be reasonably read in

context two different ways. While the phrase “designated Operator” could mean the party who

appears as operator on a P-4 Form with the Texas Railroad Commission, it is clear from reading

the phrase in context that when the parties at bar used the phrase “designated Operator” in the

Bass Lease, they intended to set up an indemnity-type arrangement between the Lessors and

Chesapeake. The Operator Clause established that the Lessee, i.e. Chesapeake, would be the

“designated Operator.” The Operator Clause in the next sentence states: “Lessee shall remain

primarily liable and obligated to Lessor for the fulfillment of all covenants, both expressed and

14
implied, and all legal and contractual obligations imposed upon Lessee as designated Operator

hereunder.” The Operator Clause further states that “Operator must at all times adhere to all

Federal, State and Local laws and regulations and maintain good partnership or corporate

standing. Operator must maintain the property free and clear of liens at all times and further

must act as a prudent Operator in accordance with the provisions of this Lease and standard

industry practices.” We believe that the unambiguous reading of “designated Operator” as used

in the Bass Lease was that Chesapeake agreed to oversee and remain primarily liable for any

operations, and in the event something went wrong with the Bass Lease, the Lessor’s recourse

would be through Chesapeake.

The Lessors maintain that Chesapeake’s designation of Clayton Williams Energy as

“operator” in the Farmout Agreement invalidated the Bass Lease, which named Chesapeake as

operator, because the two agreements irreconcilably conflict. Litigants raised the same argument

in IMCO Oil & Gas Co. v. Mitchell Energy Corp., 911 S.W.2d 916 (Tex.App.--Fort Worth 1995,

no writ). In IMCO, three oil companies--Mobil, Texaco, and Getty--all owned the mineral

interests in an area known as the Lassater Field. Under a 1945 Operating Agreement, the three

companies agreed that if they wanted to convey an interest in the Lassater Field, they would

grant the other companies the right of first refusal. The 1945 Operating Agreement also

designated Mobil as “operator” of the Lassater Field. The three companies then executed

farmouts with Westland. Westland was able to earn valid mineral rights interests from Mobil

and Getty. Under the Mobil farmout, Westland executed a 1972 Operating Agreement with

Mobil that designated Westland as “operator.” Later, Westland tried to sell IMCO its interest in

the Lassater Field, but Mobil’s successor, which still retained rights in the Lassater Field,

exercised its right of first refusal and purchased the land instead. IMCO then sued Mobil’s

15
successor for tortious interference with a contract. IMCO Oil & Gas Co., 911 S.W.2d at 917-18.

One of the arguments IMCO raised was that the 1972 Operating Agreement was

ineffective because it conflicted with the 1945 Operating Agreement, since the 1945 Operating

Agreement named Mobil as the Lassater Field’s operator but the 1972 Operating Agreement

named Westland as the Lassater Field’s operator. Id. at 919-20. The Fort Worth Court of

Appeals found this argument unpersuasive, stating that the two agreements could be harmonized:

the 1945 Operating Agreement designated Mobil as operator as between the original landowners,

and the 1972 Operating Agreement designated Westland as operator for the purposes of Mobil’s

subcontract. Id. Although this case differs procedurally from IMCO, our sister court’s

interpretation of the two operating agreements is instructive and bolsters our reading of the Bass

Lease and the Farmout Agreement as non-conflicting.

Finally, the Lessors contend that even if Chesapeake could have assigned its lease rights

to Clayton Williams Energy, the Farmout Agreement here did not perpetuate the lease because

Clayton Williams Energy never actually received any ownership rights in the leasehold. Instead,

transfer of title was contingent on fulfillment of the Agreement, which indisputably never

occurred. Since Clayton Williams Energy never received title, it could not as a matter of law

have done anything that have any legal effect on the lease. We again disagree.

The Lessors here conflate ownership rights with drilling rights. “The owner of a mineral

estate possesses a bundle of interests which can be separated, conveyed, or reserved upon any

terms as the mineral owner deems proper.” Marrs & Smith P’ship v. D.K. Boyd Oil & Gas Co.,

Inc., 223 S.W.3d 1, 14 (Tex.App.--El Paso 2005, pet. denied). “These mineral rights consist of

the rights to participate in bonuses, rentals, and royalties; the exclusive right to enter the

premises for the purpose of drilling; and the right to execute oil, gas and mineral leases.” Id.

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Here, the Lessors conveyed a leasehold interest to Chesapeake in the Bass Lease, which included

the rights to drill. Chesapeake, in turn, could convey its own rights to other parties in whatever

combination it wished, provided that those conveyances did not contravene the terms of the

lease. Cf. ExxonMobil Corp. v. Valence Operating Co., 174 S.W.3d 303, 314 (Tex.App.--

Houston [1st Dist.] 2005, pet. denied)(lessee’s farmout of portions of one lease to a third party

violated maintanence-of-interest provision which specifically stated that a transfer was valid only

where lessee conveyed equal undivided interest in all leases in a particular area).

The Lessors are correct that under the Farmout Agreement, Clayton Williams Energy

only obtained a contingent partial ownership interest in the Bass Lease mineral estate. But that is

irrelevant to the question of whether Clayton Williams Energy received valid, fully operative

drilling rights, which can be held separately from ownership rights. Marrs & Smith P’ship, 223

S.W.3d at 14. Here, as we previously concluded, Clayton Williams Energy did receive drilling

rights. And it is axiomatic that when an assignee receives a transfer of rights under a contract,

the assignee steps into the assignor’s shoes for purposes of that contract. Clayton Williams

Energy properly fulfilled Chesapeake’s lease obligations. See Frontier Communications

Northwest, Inc. v. D.R. Horton, Inc., No. 02-13-00037-CV, 2014 WL 7473764, at *1 (Tex.App.--

Fort Worth Dec. 31, 2014, no pet.)(mem. op.).

In sum, Chesapeake validly assigned its drilling rights to Clayton Williams Energy, its

AMI partner, under the aegis of the Bass Lease’s Assignment Clause. The Operator Clause

imposed no substantive limitation on Chesapeake’s ability to assign operational rights, since that

clause’s purpose was only to allocate liability between the original parties to the Bass Lease and

provide the Lessors with a way to obtain recourse from Chesapeake—the “designated

Operator”—in the event something went wrong. As such, Chesapeake never breached the Bass

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Lease’s assignment restrictions. Furthermore, Clayton Williams Energy, as Chesapeake’s

drilling rights assignee, validly stepped into Chesapeake’s shoes for the limited purpose of

fulfilling Chesapeake’s obligations under the Bass Lease. Because the Lessors at trial stipulated

that Clayton Williams Energy’s drilling activities would have perpetuated the Bass Lease had

Chesapeake performed them, and because Clayton Williams Energy validly acted on

Chesapeake’s behalf as its assignee, Clayton Williams Energy perpetuated the lease and

Chesapeake’s fee simple determinable mineral estate continued to be in effect through the

Lessors’ repudiation of the lease.

2. The Lessors’ Claims In Light of Our Lease Construction

Having construed the Bass Lease, applied undisputed facts, and reached the conclusion

that Clayton Williams Energy fulfilled Chesapeake’s lease obligations and perpetuated the

mineral estate created thereunder, we review the legal sufficiency of each of the Lessor’s causes

of action and find them to be untenable.

First, the Lessors brought a cause for trespass to try title and mineral trespass. “[A]

trespass to try title action is the exclusive method to adjudicate rival claims of title to real

property.” Vernon v. Perrien, 390 S.W.3d 47, 54 (Tex.App.--El Paso 2012, pet. denied). “The

prevailing party’s remedy is title to, and possession of, the real property interest at issue.” Id.

“In a trespass-to-try-title action, the plaintiff is required to prove its title by proving (1) a regular

chain of title of conveyances from the sovereign to the plaintiff; (2) a superior title to that of the

defendant out of a common source; (3) title by limitations; or (4) prior possession which has not

been abandoned.” Id. at 54-55. Here, Chesapeake had title to the mineral rights by virtue of the

unexpired lease perpetuated by Clayton Williams Energy. The Lessors’ cause for mineral

trespass must also fail, since Chesapeake held a valid leasehold in the mineral estate, and

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Clayton Williams Energy had permission to drill the leasehold as Chesapeake’s limited purpose

assignee.

Likewise, Chesapeake and Clayton Williams Energy cannot be held liable for slander of

title. “Slander of title is defined as a false and malicious statement made in disparagement of a

person’s title to property which causes him special damage.” Hill v. Heritage Res., Inc., 964

S.W.2d 89, 109 (Tex.App.--El Paso 1997, pet. denied). “The elements are: (1) the uttering and

publishing of the disparaging words; (2) that they were false; (3) that they were malicious; (4)

that the plaintiff sustained special damages thereby; and (5) that the plaintiff possessed an estate

or interest in the property disparaged.” Id. at 110. Here, neither Chesapeake nor Clayton

Williams Energy ever conveyed any false information to anyone—Chesapeake did, in fact, hold

the mineral rights to that land, and Clayton Williams Energy drilled that land pursuant to a valid

assignment.

Lessors’ breach of contract claims and the declaratory judgment are also unsupportable

because they are based on an incorrect reading of the contract. The Lessors’ arguments before

the trial and this Court were that the contract did not fundamentally permit assignment of

operational rights, and the trial court agreed. However, our de novo reading indicates that the

contract did permit Chesapeake to undertake the non-noticed assignment at issue here, and since

the Lessors did not raise any arguments about violation of ancillary covenants related to

assignment, we find no breach occurred.

Finally, the Lessors’ attorneys’ fees award, which was derivative of their declaratory

judgment action, must fail because the underlying declaratory judgment was incorrect and the

Lessors are not actually the “prevailing parties” as provided in Paragraph 22 of the Bass Lease

and TEX.CIV.PRAC.&REM.CODE ANN. 38.001 (West 2015). In short, the Lessors were not

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entitled to damages under any theory presented because none of their claims was meritorious.

3. Judgment in Favor of Non-Party

Appellants also note that the trial court awarded title and injunctive relief to a non-party:

CTV O & G TX, L.P. Appellants assert that the proper remedy in this case is to vacate the

award as to that non-party. We agree. “A trial court lacks jurisdiction to enter judgment for a

non-litigant; to do so constitutes fundamental error on its part if the error is apparent from the

face of the record.” Chesapeake Operating, Inc. v. Denson, 201 S.W.3d 369, 373 (Tex.App.--

Amarillo 2006, pet. denied). Reforming the trial court judgment with respect to the non-litigant

is the appropriate remedy in situations such as this. Id.

CONCLUSION

Appellant Chesapeake’s four issues and Appellant Clayton Williams Energy’s five issues

are sustained. We vacate that portion of the trial court’s judgment awarding title and injunctive

relief to non-litigant CTV O & G TX, L.P. We reverse the remainder of the trial court’s

judgment, and render judgment that the Appellees take nothing against the Appellants.

July 8, 2015
YVONNE T. RODRIGUEZ, Justice

Before McClure, C.J., Rodriguez, and Hughes, JJ.

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