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.
16
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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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.
Combined Opinion