COURT OF APPEALS
SECOND DISTRICT OF TEXAS
FORT WORTH
NO. 02-10-00455-CV
ROYALCO OIL & GAS APPELLANT
CORPORATION
V.
STOCKHOME TRADING APPELLEE
CORPORATION
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FROM THE 153RD DISTRICT COURT OF TARRANT COUNTY
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OPINION
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Appellant Royalco Oil & Gas Corporation appeals from the trial court‘s
summary judgment in favor of Appellee Stockhome Trading Corporation. In one
issue, Royalco argues that the trial court‘s failure to apply Texas oil and gas law
resulted in an erroneous determination that a partial transfer of a lessee‘s interest
in a disposal well lease agreement was a sublease. Because we hold that the
trial court did not err by declining to apply Texas law relating to mineral leases,
we affirm.
Background
In February 2008, Stockhome entered into a ―Salt Water Disposal Lease
Agreement‖ (the Lease) with Triad Rovan Services, L.P. (a third party not
involved in this appeal). The Lease states that it ―shall in no way affect
ownership of the oil, gas[,] or minerals in, on[,] or under the [lease premises].
This Lease is for the sole purpose of allowing [Triad] to conduct its Business
Activities.‖ ―Business Activities‖ as defined in the Lease includes activities
relating to the disposal and treatment of water produced from oil and gas wells.
The Lease provides a term of ninety-nine years or until Triad discontinues its
―Business Activities.‖ The Lease contains a provision that Triad ―shall not have
the right to sell more than 50% to assign or sublet its interest in this Lease or the
Premises‖ without Stockhome‘s written consent.
The Lease calls for Triad to make monthly rental payments. Failure to
make rental payments is an event of default if Triad does not make the payment
within fifteen days after receiving written notice of nonpayment. In the event of
such default, Stockhome can terminate the Lease by sending Triad final written
notice of its default and Stockhome‘s election to terminate. Triad then has ten
days to cure.
On April 18, 2008, Triad entered into a ―Services Agreement‖ with Royalco.
In the Services Agreement, Royalco agrees to provide services ―as specified on
2
Exhibit A.‖ Exhibit A states that Triad ―has the right to manage a deep well‖
under the Lease with Stockhome, that Triad will continue to manage the well and
the well site, and that Royalco will complete and operate the well, as well as
another saltwater disposal well in Weatherford. The exhibit further states that
―[i]n connection with [Royalco] providing the [s]ervices hereunder, [Triad] assigns
to [Royalco] 50% of [Triad‘s] interest‖ in the Lease. After executing the Services
Agreement, Royalco hired contractors to dig the existing well on the property
another 800 feet.
Triad did not make its April 2008 rent payment to Stockhome when its
check was returned for insufficient funds. Royalco issued a check to Stockhome
to cover the April rent.
Triad failed to pay its May 2008 rent, and on June 25, 2008, Stockhome
gave Triad written notice that it was terminating the Lease for nonpayment of the
rent. Stockhome gave notice to Triad of its default but did not give notice to
Royalco. In July 2008, Royalco offered to cure the default, but Stockhome
declined to accept the offer.
Stockhome sued Triad based on the Lease agreement. Stockhome also
sued Royalco for a declaratory judgment that, among other things, Royalco was
a sublessee of Triad and had no standing under the Lease; that Stockhome
properly terminated the Lease; and that Royalco‘s sublease with Triad terminated
immediately upon Stockhome‘s termination of the Lease. Royalco filed
3
counterclaims for breach of contract, quantum meruit, promissory estoppel,
declaratory relief, and unjust enrichment.
The trial court rendered a default judgment against Triad and subsequently
granted summary judgment for Stockhome on its declaratory judgment action,
decreeing that, among other things, the assignment from Triad to Royalco was a
sublease and that Stockhome had properly terminated the Lease with Triad,
which terminated Royalco‘s sublease. The trial court ordered that Royalco take
nothing on its claims.
Analysis
Royalco brings one multi-part issue, which we construe as a Malooly
issue,1 arguing that the trial court erred by granting summary judgment for
Stockhome. Under this issue, Royalco makes two primary arguments: (1)
Stockhome failed to support its motion with relevant, controlling Texas authority
―i.e., Texas‘s well-developed oil and gas law‖ and (2) the trial court‘s construction
of the assignment as a sublease is inconsistent with and contrary to Texas oil
and gas law.
Royalco‘s arguments on appeal primarily turn on whether the Services
Agreement was an assignment or a sublease. That the Lease and the Services
Agreement use the terms ―assign‖ and ―assignment‖ is not controlling. Parties
1
See Malooly Bros., Inc. v. Napier, 461 S.W.2d 119, 121 (Tex. 1970)
(allowing an appellant in an appeal from the grant of summary judgment to bring
one issue under which the appellant may brief all possible grounds upon which
summary judgment should have been denied).
4
not infrequently use the term ―assignment‖ for instruments that, under the law,
are subleases.2 We look to the substance of an instrument to determine its legal
effect.3
Under the law relating to leases generally, the lessee‘s voluntary transfer
of part or all of its interest under the lease to another is treated as either an
assignment or a sublease, and the rights and liabilities of the parties depend on
the nature of the transfer. 4 If the lessee transfers his entire interest in part or all
of the premises without retaining any reversionary interest, the transfer is an
assignment.5 The assignee becomes the tenant in place of the original lessee
and is in privity of estate with the lessor.6 If the lessee retains any reversionary
interest, the transfer is a sublease, and the transferee is not in privity of estate or
privity of contract.7 Royalco acknowledges in its brief that if the Services
2
See, e.g., Dameron Oil Co., Inc. v. Majeed, No. 10-01-00401-CV, 2004
WL 1211620, at *2–3 (Tex. App.—Waco June 2, 2004, pet. denied) (mem. op.)
(construing an instrument labeled as an ―Assignment of Lease‖ as a sublease
and noting that ―[t]o decide whether there is an assignment or a sublease, the
form of the instrument is not controlling‖); Parr v. Farmers State Bank of Orange
Grove, 659 S.W.2d 883, 884 (Tex. App.—San Antonio 1983, no writ) (holding
that the instrument in the case, though called an ―assignment,‖ was in reality a
sublease).
3
See Parr, 659 S.W.2d at 884.
4
Amco Trust, Inc. v. Naylor, 159 Tex. 146, 150, 317 S.W.2d 47, 50 (1958).
5
Id.
6
Id.
7
Id.
5
Agreement constitutes a sublease rather than an assignment, no privity of
contract or privity of estate exists between Royalco and Stockhome and that in
that scenario, Royalco would have no contractual right to enforce the Lease
against Stockhome.
Royalco first argues that under Texas law, oil and gas leases are different
than ordinary leases and are subject to different rules and that as a matter of
established oil and gas law, and under the Lease‘s express terms, Triad could
and did assign up to fifty percent of its leasehold interest to Royalco. But the
Lease between Stockhome and Triad was not a mineral lease. Nothing in the
Lease, and no evidence in the record that Royalco has directed us to look at,
gives any indication that the Lease was for the recovery of minerals from the
property. The Lease by its plain terms was instead for the purpose of drilling and
operating a disposal well on the premises.
Royalco points out that the Railroad Commission of Texas, which issues
permits for oil and gas wells, issued a permit for this well. That a permit for the
disposal well was issued by the Railroad Commission does not make this Lease
an oil and gas lease. Rather, the Railroad Commission‘s issuance of a permit
merely reflects the legislature‘s adoption of a state policy relating to the
maintenance of the quality of fresh water in the state and its delegation of
responsibility for oversight of injection wells to various state agencies.8 A
8
See Tex. Water Code Ann. §§ 27.003, 27.011 (West 2008). The Texas
Water Code defines an injection well as ―an artificial excavation or opening in the
6
disposal well is an injection well used specifically for the injection of industrial and
municipal waste or oil and gas waste.9
The Railroad Commission is responsible for the control and disposition of
waste and the prevention of pollution water resulting from activities associated
with the production of oil, gas, or geothermal resources, including activities
associated with the drilling of injection water source wells that penetrate the base
of useable quality water.10 Accordingly, the drilling or operation of a disposal well
requires a permit issued by the Railroad Commission.11 Thus, that the Railroad
Commission issued a permit for the disposal well does not make the Lease a
mineral lease subject to oil and gas law.
The Lease in this case was a salt water disposal agreement. The Lease
itself states that it ―shall in no way affect ownership of the oil, gas[,] or minerals
in, on[,] or under the [lease premises].12 This Lease is for the sole purpose of
ground . . . used to inject, transmit, or dispose of industrial and municipal waste
or oil and gas waste into a subsurface stratum‖ or a well that had originally been
drilled to produce oil and gas but now ―is used to transmit, inject, or dispose of
industrial and municipal waste or oil and gas waste into a subsurface stratum,‖ or
―a well used for the injection of any other fluid.‖ Id. § 27.002(11) (West Supp.
2011).
9
Id. § 27.002(10).
10
Id. § 26.131 (West 2008).
11
Id. § 27.031 (West 2008).
12
Cf. Irons v. Fort Worth Sand & Gravel Co., 260 S.W.2d 629, 630 (Tex.
Civ. App.—Fort Worth 1953, writ ref‘d n.r.e.) (―A mineral lease is a sale of an
interest in realty.‖).
7
allowing Lessee to conduct its Business Activities.‖ [Emphasis added.]
―Business Activities‖ as defined in the Lease includes activities relating to the
disposal and treatment of water produced from oil and gas wells, but it does not
include recovery of any minerals, or indeed the recovery of any natural
resource.13 Because this Lease was not a lease for the production of minerals,
the trial court correctly applied the law relating to leases generally, not the law
governing oil and gas leases.14
Royalco next argues that Stockhome failed to prove as a matter of law that
the entire term of the leasehold interest was not assigned and that the
assignment did not convey all of the interest or estate conveyed in the Lease.
Royalco contends that its agreement with Triad ―contains no language that in any
way limits the assignment of Triad‘s interest to Royalco for a period of time less
than the entire term of the Lease.‖ But the Services Agreement between
Royalco and Triad included the following provision:
13
See Killam Oil Co. v. Bruni, 806 S.W.2d 264, 267 (Tex. App.—San
Antonio 1991, writ denied) (stating that ―under Texas law . . . the term
‗production‘ as used in oil and gas leases means the actual physical extraction of
the mineral from the soil‖); Parker v. Standard Oil Co. of Kan., 250 S.W.2d 671,
680 (Tex. Civ. App.—Galveston 1952, writ ref‘d n.r.e.) (―The intention of the
parties to a mineral lease is that minerals shall be produced from the land
lease.‖); see also Minchen v. Fields, 162 Tex. 73, 79, 345 S.W.2d 282, 287
(1961) (noting that ―[t]he sole purpose of a mineral lease is to develop the
property in order to produce the minerals‖) (quoting Sheppard v. Stanolind Oil &
Gas Co., 125 S.W.2d 643, 647 (Tex. Civ. App.—Austin 1939, writ ref‘d)).
14
See Dick Props., LLC v. Paul H. Bowman Trust, 221 P.3d 618, 621 (Kan.
Ct. App. 2010) (acknowledging a difference between an oil and gas lease and a
saltwater disposal agreement).
8
1. Term
(a) The original term of this Agreement shall begin on the
date hereof and shall expire on the 20 (18) year anniversary of the
date hereof, unless sooner terminated in accordance with the terms
of this Agreement.
The Services Agreement then provides for automatic termination if Royalco
restructures. The agreement is unclear whether it expires in twenty years,
eighteen years, or in the year 2018. But although the Services Agreement
arguably raises a question of fact about the exact length of time that the parties
intended the agreement to operate, it clearly was not intended to continue in
effect for the nearly ninety-nine years remaining on the Lease.
And of course, the word ―term‖ as related to leases means more than just
―time‖; to constitute an assignment, the transfer instrument ―must convey both the
entire time for which the lease runs and the entire estate or interest conveyed by
the original lease.‖15 If the transferring party retains any reversionary interest in
the transferred interest, the instrument is a sublease. 16 Under the terms of the
Services Agreement, Triad retained a fifty percent interest in the Lease, and it
15
718 Assocs., Ltd. v. Sunwest N.O.P., Inc., 1 S.W.3d 355, 360 (Tex.
App.—Waco 1999, pet. denied) (emphasis added) (citing Davis v. Vidal, 105 Tex.
444, 447, 151 S.W. 290, 292 (1912)).
16
Id.; see also Tawes v. Barnes, 340 S.W.3d 419, 429 (Tex. 2011) (noting
that in an assignment, ―the original lessee retains no reversionary interest in the
lease whatsoever‖); Amco Trust, 317 S.W.2d at 50 (―In order to constitute an
assignment, the lessee must part with his entire interest in all or part of the
demised premises without retaining any reversionary interest‖) (emphasis
added).
9
had the right to terminate the Services Agreement upon Royalco‘s default and
failure to cure.17 The Services Agreement did not assign the entire leasehold
term, and, consequently, the agreement was a sublease.18
Royalco next argues that the Services Agreement was a valid partial
assignment. Citing cases such as Ridge Oil Co. v. Guinn Investments,19 Royalco
asserts that Texas law unquestionably allows partial assignments ―of oil and gas
leasehold estates like the one at issue in this case.‖ As we have stated, the
Lease is not a mineral lease, and the case law cited by Royalco is therefore
inapplicable.
Royalco then argues that Stockhome failed to conclusively establish that it
properly terminated Royalco‘s interest in the Lease. Royalco‘s argument under
this section of its brief is based on its assertion that its agreement with Triad was
an assignment, not a sublease. Accordingly, we overrule this portion of
Royalco‘s argument.
Finally, Royalco makes two arguments relating to affirmative defenses it
raised in response to Stockhome‘s summary judgment motion. Royalco first
asserts that the trial court erred by granting summary judgment because a fact
17
See Jones v. El Paso Natural Gas Prods. Co., 391 S.W.2d 748, 752
(Tex. Civ. App.—Austin 1965, writ ref‘d n.r.e.) (holding that inclusion in
instruments of the right to terminate the tenancy on the breach of a covenant by
the transferee made the instruments subleases and not assignments).
18
See Amco Trust, 317 S.W.2d at 50.
19
148 S.W.3d 143, 147 (Tex. 2004).
10
issue exists on the affirmative defense of estoppel by contract. In the two
sentences of this part of its brief, Royalco argues that the Lease authorized Triad
to partially assign up to fifty percent of its interest under the Lease and that
―Stockhome‘s agreement to such assignment, at a minimum, creates a material
facts issue as to whether [estoppel by contract] precludes Stockhome from
denying Royalco‘s assigned interest.‖
Estoppel by contract is a doctrine ―whereby a party is bound by the terms
of his own contract . . . until it is set aside by fraud, accident or mistake.‖20 But
Royalco points to no evidence that it raised in the trial court that Stockhome did
not abide by the terms of the Lease. The Lease states that Triad does not have
the right to ―sell more than 50% to assign or sublet [i]ts interest in this Lease or
the Premises‖ without Stockhome‘s consent. But this language does not convert
the Services Agreement into an assignment,21 and unless Triad made a valid
assignment of its lease to Royalco, then Stockhome‘s termination of the Lease
without notice to Royalco does not violate the terms of the Lease. As stated
above, Stockhome and Royalco do not have privity of contract or of estate.
Nothing in the record indicates that Stockhome was a party to a contract with
Royalco. The doctrine of estoppel by contract therefore has no application here.
We overrule Royalco‘s argument.
20
Mathews v. Sun Oil Co., 411 S.W.2d 561, 564 (Tex. Civ. App.—Amarillo
1966), aff’d, 425 S.W.2d 330 (Tex. 1968).
21
See Parr, 659 S.W.2d at 884.
11
Royalco‘s last argument is that the trial court erred by granting summary
judgment because equitable estoppel applies. It argues that ―after being told
about the Triad [a]ssignment, Stockhome accepted payments due under the
Lease directly from Royalco and knowingly allowed Royalco to make valuable
improvements to the [p]roperty.‖
Equitable estoppel is a doctrine by which a party, because of its voluntary
conduct, is precluded from asserting rights it might otherwise have against
another person who has relied on the party‘s conduct and ―has been led thereby
to change his position for the worse.‖ 22 To establish equitable estoppel, a party
must show (1) a false representation or concealment of material facts, (2) made
with knowledge, actual or constructive, of those facts, (3) with the intention that it
should be acted on, (4) to a party without knowledge, or the means of knowledge
of those facts, (5) who detrimentally relied upon the misrepresentation. 23
In its brief, Royalco fails to point out any false representation or
concealment of material facts by Stockhome on which Royalco relied to its
detriment. The Lease gave Triad the right to sell fifty percent of its interest to
another party. In accordance with that provision, Triad executed the Services
Agreement with Royalco. Royalco then made rental payments to Stockhome
22
Farmer v. Thompson, 289 S.W.2d 351, 356 (Tex. Civ. App.—Fort Worth
1956, writ ref‘d n.r.e.).
23
Argyle Indep. Sch. Dist. ex rel. Bd. of Trs. v. Wolf, 234 S.W.3d 229, 241
(Tex. App.—Fort Worth 2007, no pet.).
12
and made improvements on the property, and Stockhome did not stop it from
doing so. But none of these asserted facts show a misrepresentation or
concealment of facts, much less any reliance by Royalco, and none of these
facts show that Stockhome did not abide by the Lease terms.
To the extent that we can construe Royalco‘s brief to argue that
Stockhome represented to Royalco that the provision in the Lease allowing for a
fifty percent sale of interest by assignment or sublease allowed for a true
assignment (as that term is used in landlord-tenant law) without Stockhome‘s
consent, and assuming that this representation by Stockhome would support
estoppel,24 Royalco points to no evidence that Stockhome did so. Royalco points
to no evidence, for example, that Stockhome misrepresented to Royalco that the
Services Agreement agreement created privity of estate or contract between
Royalco and Stockhome or that the Services Agreement gave Royalco the same
rights under the Lease as Triad has, or even that Stockhome represented to
Royalco that if Royalco improved the property, it would treat Royalco as a true
assignee of the Lease rather than as a sublessee. Accordingly, we overrule this
part of Royalco‘s argument, and, having overruled all of Royalco‘s arguments, we
overrule its sole issue.
24
See Fina Supply, Inc. v. Abilene Nat’l Bank, 726 S.W.2d 537, 540 (Tex.
1987) (noting that generally, ―[a] representation as to the legal effect of a
document is regarded as a statement of opinion rather than of fact‖).
13
Conclusion
Having overruled Royalco‘s sole issue, we affirm the trial court‘s
judgment.25
LEE ANN DAUPHINOT
JUSTICE
PANEL: DAUPHINOT, WALKER, and MCCOY, JJ.
DELIVERED: January 26, 2012
25
On January 23, 2012, this court received Stockhome‘s suggestion of
bankruptcy and motion to reinstate. In that motion, Stockhome states that
Royalco filed for bankruptcy on December 19, 2011, and that on January 19,
2012, the bankruptcy court granted Stockhome relief from the automatic stay for
purposes of this appeal. See 11 U.S.C. § 362(a) (2004 & Supp. 2011) (providing
that when a defendant files for bankruptcy, all judicial proceedings against the
defendant are automatically stayed). Stockhome asks this court to reinstate this
appeal. Because this court never previously received notice of Royalco‘s
bankruptcy filing, however, this appeal was never abated in accordance with the
automatic stay. We therefore dismiss this motion as moot.
14