Martha N. Hill and Gary Hill v. Winnon Earl Sword

ACCEPTED
12-13-00379-CV
TWELFTH COURT OF APPEALS
TYLER, TEXAS
2/6/2015 3:35:13 PM
CATHY LUSK
CLERK

12-13-00379-CV
FILED IN
12th COURT OF APPEALS
IN THE TWELFTH COURT OF APPEALSTYLER, TEXAS
TYLER, TEXAS 2/6/2015 3:35:13 PM
CATHY S. LUSK
Clerk

MARTHA N. HILL AND GARY HILL
Appellants

Vs.

WINNON EARL SWORD
Appellee

An Appeal from the 114th Judicial District Court of Smith County

APPELLANTS’ MOTION FOR REHEARING

SHACKELFORD, MELTON, MCKINLEY FLOWERS DAVIS, PLLC
AND NORTON, LLP

Joseph G. Chumlea Julie P. Wright
SBN 04241500 SBN 00794883
jchumlea@shackelfordlaw.net jpw@flowersdavis.com
Frances A. Smith Lead Counsel for Appellants
SBN 24033084 1021 ESE Loop 323
fsmith@shackelfordlaw.net Suite 200
3333 Lee Parkway, Tenth Floor Tyler, Texas 75701
Dallas, Texas 75219 903-534-8063
214-780-1436 Fax: 903/534-1650
Fax: 214-889-9736

ATTORNEYS FOR APPELLANTS
 TABLE OF CONTENTS

Table of Contents ...................................................................................................... ii

Index of Authorities ............................................................................................. iii-iv

Issues Presented ......................................................................................................... 1

ISSUE NO. 1: This Court failed to properly apply the analysis set forth by
our Texas Supreme Court in Sims, and incorrectly
determined that the new note executed by the Hills in 2011
was not a new extension of credit which had to satisfy the
provisions of Section 50 of our Constitution in order to
create a valid lien on the Hills’ homestead.

ISSUE NO. 2: This Court erred in holding that the fourteen new
obligations imposed on the Hills by Sword’s 2011 Deed of
Trust did not, by themselves, constitute a new extension of
credit which had to satisfy the provisions of Section 50 of
our Texas Constitution in order to create a valid lien on the
Hills’ homestead.

ISSUE NO. 3: This Court’s decision ignores and fails to comport with the
agreement and intentions of the parties, as expressed in the
four corners of the 2011 Agreed Judgment, the 2011 Note
and Deed of Trust, and the Rule 11 Agreement and
Stipulation of the Parties executed in the underlying suit.

Argument and Authorities.......................................................................................... 2

Conclusion and Request for Relief .......................................................................... 18

ii
 INDEX OF AUTHORITIES

Burkhardt v. Lieberman, 159 S.W.2d 847
(Tex. Comm’n App. 1942).................................................................................14, 17

Heritage Resources, Inc. v. NationsBank, 939 S.W.2d 118 (Tex. 1996) ................ 12

Lincoln v. Bennett, 138 Tex. 56, 156 S.W.2d 504 (Tex. 1941) .........................14, 17

McGeorge v. Van Meter, 358 S.W.2d 580 (Tex. 1962)............................................. 7

Sims v. Carrington Mortg. Services, L.L.C.,
440 S.W.3d 10 (Tex. 2014) ....................................................... 2, 3, 4, 5, 8, 9, 10, 18

State Farm Life Ins. Co. v. Beaston, 907 S.W.2d 430 (Tex. 1995) ......................... 12

Texas Land & Loan Co. v. Blalock, 13 S.W. 12 (Tex. 1890) ............................14, 17

Valence Operating Co. v. Dorsett, 164 S.W.3d 656 (Tex. 2005)............................ 11

STATUTES AND RULES

TEX. CIV. PRAC. & REM. CODE § 37.001 et.seq. ...................................................... 13

TEX. R. APP. P. 9.4(i)(1) ........................................................................................... 19

TEX. R. APP. P. 9.4(i)(2)(D)...................................................................................... 19

CONSTITUTIONAL PROVISIONS

TEX. CONST. art. XVI § 50 ................................................... 2, 3, 4, 7, 8, 9, 11, 14, 17

TEX. CONST. art. XVI § 50(a) ..................................................................................... 6

TEX. CONST. art. XVI § 50(a)(1)-(8)..................................................................... 2, 11

TEX. CONST. art. XVI § 50(a)(4) ............................................................................. 6, 7

TEX. CONST. art. XVI § 50(a)(6) .................................................................4, 5, 10, 18

iii
TEX. CONST. art. XVI § 50(a)(6)(P) .......................................................................... 11

SECONDARY SOURCES

BLACK’S LAW DICTIONARY 1299 (6th ed. 1990) ........................................................ 5

www.dictionary.com ................................................................................................ 13

www.thesaurus.com ................................................................................................. 13

iv
 12-13-00379-CV

IN THE TWELFTH COURT OF APPEALS
TYLER, TEXAS

MARTHA N. HILL AND GARY HILL
Appellants

Vs.

WINNON EARL SWORD
Appellee

An Appeal from the 114th Judicial District Court of Smith County

APPELLANTS’ MOTION FOR REHEARING

TO THE HONORABLE TWELFTH COURT OF APPEALS:

COME NOW, Gary and Martha Hill, Appellants (the Hills), and file this

Motion for Rehearing of the Court’s Opinion and Judgment rendered on January 7,

2015, and request that the Court consider the following issues:

ISSUES PRESENTED

This Court erred in three significant respects, resulting in an erroneous

judgment which does not comport with the expressed intentions of the parties, with

precedential law, or the Texas Constitution.

1
ISSUE NO. 1: This Court failed to properly apply the analysis set forth by
our Texas Supreme Court in Sims, and incorrectly
determined that the new note executed by the Hills in 2011
was not a new extension of credit which had to satisfy the
provisions of Section 50 of our Constitution in order to
create a valid lien on the Hills’ homestead.

ISSUE NO. 2: This Court erred in holding that the fourteen new
obligations imposed on the Hills by Sword’s 2011 Deed of
Trust did not, by themselves, constitute a new extension of
credit which had to satisfy the provisions of Section 50 of
our Texas Constitution in order to create a valid lien on the
Hills’ homestead.

ISSUE NO. 3: This Court’s decision ignores and fails to comport with the
agreement and intentions of the parties, as expressed in the
four corners of the 2011 Agreed Judgment, the 2011 Note
and Deed of Trust, and the Rule 11 Agreement and
Stipulation of the Parties executed in the underlying suit.

ARGUMENT AND AUTHORITIES

ISSUE NO. 1: This Court failed to properly apply the analysis set forth by
our Texas Supreme Court in Sims, and incorrectly
determined that the new note executed by the Hills in 2011
was not a new extension of credit which had to satisfy the
provisions of Section 50 of our Constitution in order to
create a valid lien on the Hills’ homestead.

The constitution protects homesteads from forced sales, except in eight

limited circumstances. TEX. CONST. art. XVI §50(a)(1)-(8). If the loan does not

meet one of those exceptions, and satisfy all of the constitutional criteria included

within that exception, the attempted lien against the homestead is invalid. Id.

2
 This Court framed the issue as “whether the 2011 documents constitute a

refinance of a valid lien on a homestead (as Sword contends) or an extension of

credit (as the Hills urge).” (Slip Op. p.2) In attempting to apply the decision by

the Supreme Court in Sims to the facts at hand, this Court has made several

significant errors. Sims v. Carrington Mortg. Servs., LLC, 440 S.W.3d 10 (Tex.

2014).

As stated by the Sims Court:

“…the restructuring of a home equity loan that, …involves
capitalization of past-due amounts owed under the terms of the initial
loan and a lowering of the interest rate and the amount of installment
payments, but does not involve the satisfaction or replacement of the
original note, an advancement of new funds, or an increase in the
obligations created by the original note, is not a new extension of
credit that must meet the requirements of Section 50.”

Id. at 17 (emphasis added). Per the Supreme Court’s language, a restructuring of a

home equity loan that does involve any one of the following: 1) satisfaction of the

original note; 2) replacement of the original note; 3) an advancement of new funds;

or 4) an increase in the obligations created by the original note... is a new

extension of credit that must meet the requirements of Section 50. Id.

It must be noted at the outset that, unlike this case, in Sims it was undisputed

that the original extension of credit complied with Section 50 and thus originally

created a valid lien upon the homestead. Id. at 18. Nevertheless, even assuming

arguendo that the 2004 and 2006 notes and deeds of trust complied with Section

3
50 and originally created valid homestead liens (which they did not), the creation

of the 2011 note and deed of trust constituted a new extension of credit as defined

by Sims, which needed to meet the requirements of Section 50 in order to create a

valid lien upon the Hills’ homestead property.

Despite undisputed evidence that the original notes were replaced with a

new note, (CR 113-14) and that the Hills were burdened with fourteen new

obligations in the accompanying deed of trust (CR 96-107), this Court, citing Sims,

concluded “… that the 2011 promissory note is a renewal and extension of the

2004 and 2006 notes, and does not satisfy and replace them such that the 2011

restructuring constitutes a new extension of credit” which must meet the

requirements of Section 50(a)(6) of art. XVI of the Texas Constitution. (Slip Op.

pp. 6-7).

First, this Court erred, per the clear holding in Sims, by requiring both the

satisfaction and replacement of the original promissory note in order for the Hills’

loan to be a new extension of credit subject to the requirements of art. XVI,

Section 50(a)(6) of the Constitution. (Slip Op. p. 4). Those requirements were

listed by the Supreme Court in the disjunctive, and either of them alone constitutes

a new extension of credit which must meet the requirements of Section 50(a)(6).

Sims, 440 S.W.3d 10, 17. This Court defined and addressed satisfaction, while

ignoring replacement, and treated them as being one-and-the-same. They are not.

4
Unlike satisfaction (which this Court defined as the fulfillment of an obligation

(Slip. Op. 4)), replacement means to take the place of. BLACK’S LAW DICTIONARY

1299 (6th ed. 1990).

Here, it cannot be disputed that the 2011 Promissory Note was intended to,

and did in fact, take the place of the previous promissory notes. All amounts

previously owing under the 2004 and 2006 notes were included in the 2011 note,

plus some additional monies. Unlike Sims, where the original notes were left in

place/ intact, the Hills and Sword executed the 2011 Agreed Judgment awarding a

monetary judgment to Sword which included the outstanding balances on the 2004

and 2006 promissory notes, (CR 35-39), and then entered into yet another new note

for payment of the debt to Sword (CR 113-14).

The Rule 11 Agreement discussed above provides evidence of clear intent to

replace the old promissory notes with the 2011 Promissory Note. (CR 415-518) It

states that the 2011 Note “was in renewal and extension of the balance owed by

Plaintiffs to Sword under the terms of the agreed judgment signed by Plaintiffs on

February 27, 2011…. Because the 2011 Note renewed and extended the balance

owed by Plaintiffs to Sword under the 2011 Judgment, the debt represented by the

2011 Judgment was merged into the 2011 Note.” (CR 415). It was error for this

court to require both satisfaction and replacement in order to have a new extension

of credit under Section 50(a)(6), and error for the Court to ignore the fact that the

5
previous notes were replaced with the 2011 Promissory Note constituting a new

extension of credit.

Instead of correctly recognizing the transaction as a new extension of credit,

this Court determines that it was a refinance of a valid lien on a homestead as

allowed by Section 50(a)(4) (the provision relied upon by Sword). However,

again, the analysis is flawed. For Section 50(a)(4) to apply, the refinance must be

for one of the eight specific items allowed by the constitution if the loan will be

secured by the parties’ homestead. That is, the purpose of the refinance must

independently meet the criteria of Section 50(a).

This Court seems to be attempting to rely upon the language contained in the

2011 Deed of Trust and in the 2011 Agreed Judgment as support for its conclusion

that the 2011 transaction is for a refinance of a valid lien upon homestead. This is

incorrect for two reasons.

First, and most fundamental, in order for the transaction to qualify under

Section 50(a)(4), the transaction itself must pass constitutional scrutiny. It must be

“valid” as defined by the constitution when the refinance is done – meaning that it

qualifies as one of the eight allowable debts which can be secured by a homestead.

Here, the transaction fails to qualify – as it is undisputed that the purpose of the

refinance was to pay off a money judgment arising from default on a business loan,

and not one of the eight enumerated items under the constitution.

6
 Second, neither of the documents to which the Court makes reference, ever

concluded that these were valid liens upon homestead. They were noted to be

valid, perfected, enforceable, but never, in any document were they recognized to

be homestead liens. Because they were not.

As further support of its conclusion that the transaction was a refinance of a

lien against a homestead under Section 50(a)(4), this Court placed improper and

undue emphasis upon two words contained in the 2011 Deed of Trust “renewal”

and “extension” and incorrectly relies upon McGeorge v. Van Meter, 358 S.W.2d

580, 581 (Tex. 1962) as authority that “[s]imilar language for renewing and

extending promissory notes has been approved by the Texas Supreme Court. Id. at

581. Such reliance is misplaced. In McGeorge the note itself was renewed and

extended, with original terms left intact. Id. Here, the parties executed a brand new

note, and the language used by the parties in the 2011 Deed of Trust proves that the

parties did not intend to renew and extend the old notes. The 2011 Note and Deed

of Trust were given to renew and extend sums left owing and unpaid from the two

old notes, and in renewal and extension of the balance owed under the agreed

judgment – but under a new note with different terms and with different and

greater obligations.

ISSUE NO. 2: This Court erred in holding that the fourteen new
obligations imposed on the Hills by Sword’s 2011 Deed of
Trust did not, by themselves, constitute a new extension of
credit which had to satisfy the provisions of Section 50 of
7
 our Texas Constitution in order to create a valid lien on the
Hills’ homestead.

As stated in Sims, any increase in the obligations created by the original note

is sufficient, by itself, to create a new extension of credit that must meet the

requirements of Section 50. As compared to the 2004 and 2006 notes and deeds of

trust, the 2011 Note and Deed of Trust placed fourteen new obligations upon the

Hills. (Slip Op. pp. 5-6). In concluding that the fourteen new obligations imposed

upon the Hills did not constitute a new extension of credit, this Court appears to

have imposed its own requirement that such obligations must be monetary. In so

doing, it has misapplied the definitions set out in Sims to the facts of this case.

This Court held that the “items cited by the Hills do not afford them a new right to

assume a debt” and that “[t]he only debt secured by the deed of trust lien on the

property under the 2011 restructuring is the debt previously existing under the

earlier notes and agreed judgment.” (Slip Op. p. 6) (emphasis added). That

analysis focuses solely upon the amount of the debt.

The Supreme Court made no such limitation. It explained that in addition to

satisfaction of a borrower’s note, replacement of the note, or extension of new

money to the borrower, an increase in the obligations created by the original note

will constitute a new extension of credit. It stated that “the test should be whether

the secured obligations are those incurred under the terms of the original loan.”

Sims, 440 S.W.3d at 16-17. In this instance, the fourteen new secured obligations
8
(recognized by this Court) were not created or incurred under the terms of the

original loans. They are new and more onerous obligations than those contained in

the original loans, and undoubtedly satisfy the Supreme Court’s decision in Sims

for determining that a new extension of credit occurred which must meet the

requirements of Section 50.

Moreover, this Court’s statement that “[t]he only debt secured by the deed of

trust lien on the property under the 2011 restructuring is the debt previously

existing under the earlier notes and agreed judgment” is untrue. (Slip Op. p. 6)

Under item 4, the cross-collateralization provision, other debt to Sword does exist

which is immediately captured by this new provision. Specifically, the Court first

questioned whether, in fact, there exists any other debt to Sword. The record

demonstrates that there was – the September 28, 2006 Note for $40,000.00, signed

by Gary Hill. (CR 193.)1 Also, the new cross-collateralization obligation did not

limit itself to past debt and was enforceable to secure any new debt, which was

sufficient to render it “an increase in the obligations created by the original note.”

Sims, 440 S.W.3d at 17.

The Court also concluded that, because the 2006 Deed of Trust also

contained a cross-collateralization provision similar to the one in the new 2011

1
The Court’s Opinion, at footnote 2, incorrectly states that this Note was forgiven. The
summary-judgment record does not show the Note was forgiven. Sword sued on the Note in
2011. The evidence shows that the Agreed Judgment did not include the amount of this Note
(see Appellants’ Brief, p. 4 at n. 1), but there is no evidence the debt was forgiven.
9
deed of trust, accordingly, “this is not a new obligation and not a new extension of

credit.” But this plainly is not the case for the 2004 Deed of Trust, which the Court

overlooked. The 2004 Deed of Trust had no cross-collateralization clause and did

not secure any other indebtedness. Accordingly, the 2011 Deed of Trust, by

adding the cross-collateralization provision, certainly constituted “an increase in

the obligations created by the original note[ ]” as to the 2004 Deed of Trust. This

language contained in the new note/deed of trust would immediately capture the

outstanding $40,000.00, an existing known debt, plus any future indebtedness to

Sword.

Pursuant to Sims v. Carrington Mortgage Services, the fourteen new

obligations constitute a new extension of credit under Section 50(a)(6).

ISSUE NO. 3: This Court’s decision ignores and fails to comport with the
agreement and intentions of the parties, as expressed in the
four corners of the 2011 Agreed Judgment, the 2011 Note
and Deed of Trust, and the Rule 11 Agreement and
Stipulation of the Parties executed in the underlying suit.

In initially framing the issues for its discussion, the Court states that “[t]he

Hills have not challenged, either in their briefs or at oral argument, the validity of

the 2004 and 2006 deeds of trust, or that of the 201l Agreed Judgment.” (Slip Op.

p. 2). If the Court perceives the Hills’ lack of such challenge as an implicit

recognition of the validity of the 2004 and 2006 deeds of trust, the Court is

10
misguided and indulging an erroneous assumption.2 Nevertheless, the parties’ joint

execution of the 2011 Agreed Judgment (as explained herein) rendered those

challenges unnecessary because it awarded a monetary judgment to Sword,

validated the enforceability of Sword’s liens as judgment liens to satisfy that

judgment, but expressly protected the Hills’ homestead property from execution of

those liens. Moreover, the parties stipulated that the debt secured by the original

deeds of trust and by the Agreed Judgment on that debt was merged into the 2011

Note. (CR 415 at ¶¶ 1 and 2.) Accordingly, as also explained herein, Sword is

barred from enforcing his liens as to the Hills’ homestead, as extended under the

2011 deed of trust, because they violated art. XVI, Section 50 of the Constitution.

In construing the 2011 documents, the primary concern of the court is to

ascertain the true intentions of the parties as expressed in the instruments. Valence

Operating Co. v. Dorsett, 164 S.W.3d 656, 662 (Tex. 2005). Courts should

examine the entire writing (in this case, writings) “to harmonize and give effect to

all the provisions of the contract so that none will be rendered meaningless.” Id.
2
The 2004 and 2006 deeds of trust and accompanying notes indisputably fail to satisfy
the requirements of Section 50 of our Constitution. First, Sword was not a qualified lender as
required under the constitutional provision. He could not make a loan creating a homestead lien
unless he was doing so in favor of family members, and therefore could never, under any
circumstance create a homestead lien on the Hills’ property. TEX. CONST. art. XVI, §
50(a)(6)(P). Second, the loans from Sword were advancements of monies on paper to the Hills,
which they never actually received, but which were instead kept by Sword and used by him in
connection with the joint businesses owned by Sword and the Hills. (CR 374) The loans were not
qualifying debts which could be secured by a homestead as exclusively allowed in Section
50(a)(1)-(8). Although the notes created contractual liability on behalf of the Hills for the
amount of the notes, the accompanying deeds of trust did not create a valid lien against the Hills
exempt homestead property.
11
Contract terms are given their plain, ordinary, and generally accepted meanings

unless the contract itself shows them to be used in a technical or different sense. Id.

Courts must look at all of the contract’s parts together and be “particularly wary of

isolating from its surroundings or considering apart from other provisions a single

phrase, sentence, or section of a contract,” State Farm Life Ins. Co. v. Beaston, 907

S.W.2d 430, 433 (Tex. 1995), and must presume that the parties to a contract

intend every clause to have some effect. Heritage Resources, Inc. v. NationsBank,

939 S.W.2d 118, 121 (Tex. 1996).

Here, the “2011 documents” referenced by this Court (Slip Op. p. 2) in

reaching its decision included the 2011 Agreed Judgment, Deed of Trust and

Promissory Note. The Agreed Judgment represented the agreement of the parties,

and the Promissory Note and Deed of Trust were executed to carry out the terms of

that Agreed Judgment. However the Court’s interpretation of the “2011

documents” and holding, ignores and renders meaningless a significant provision

contained in the Agreed Judgment.

It provides in relevant parts:

… W.E. Sword, Plaintiff, have and recover of and from Gary R. Hill
and Martha N. Hill, jointly and severally, the sum of $327,811.98,
including the balance of the debt made the subject of this suit, all pre-
judgment interest and all reasonable and necessary attorney’s fees,
with interest thereon at six percent (6%) per annum from date of
judgment until paid, together with costs of Court in Plaintiff’s behalf
expended.

12
 … Plaintiff is the holder and beneficiary of a valid, perfected and
enforceable deed of trust liens against the following described real
property (the “Property”) and the Court hereby makes its declaratory
determination pursuant to Tex. Civ. Prac. & Rem Code §37.001 et.
seq. that Plaintiff’s liens against the Property are valid, perfected, and
enforceable…

… that the [2004 and 2006] deeds of trust covering the Property (the
“Deeds of Trust) are valid and enforceable and that there are no
defenses allowed by the laws of the State of Texas or otherwise
against or with respect to the liens conveyed to Plaintiff…

… notwithstanding the above, nothing herein shall constitute a
waiver of any of Gary R. Hill’s and/or Martha Nell Hill’s
homestead rights under the laws of the State of Texas.

(CR 36-37) The Court’s holding disregards the provision regarding the Hill’s

homestead rights. This provision must not only be considered and harmonized

with the other provisions, but, according to the plain meaning of “notwithstanding”

it must be given priority over the preceding provisions, i.e. what comes after the

word notwithstanding prevails if there is a conflict with what goes before.3

Reading all of the provisions in harmony, as this Court is mandated to do,

yields the following conclusion which gives purpose to each of the provisions: the

first provision awards a money judgment to Sword; the second and third provisions

recognize that his liens securing that judgment are valid and enforceable against

the Property (just as an abstracted judgment lien would be). These provisions do

not recognize or create properly secured homestead liens (which can only be
3
The plain ordinary meaning of notwithstanding is “in spite of” or “without being opposed or prevented
by” nevertheless”. (www.dictionary.com). It also means nevertheless, at any rate, despite, in any event, in spite of,
regardless of. (www.thesaurus.com).

13
accomplished by strict compliance with Section 50 of our Constitution), but rather

judgment liens which may be satisfied out of the sale of the Property if it is

abandoned as their homestead. In fact, nowhere in the first three provisions is the

word homestead mentioned or the liens designated as homestead liens. (CR 36-37)

Because they are not – they are simply judgment liens arising by virtue of the

Agreed Judgment, which are attached to the Hills’ Property in the event the

property ceases to be their homestead.

The trial court did not find that the subject property was not the Hills’

homestead, and such a challenge was not made by Sword. (CR 35-39) To the

contrary, the Agreed Judgment implicitly recognized the homestead character of

the property and expressly stated that no waiver of those rights had occurred. (CR

37). The Hills did not waive their homestead rights at any point in time, nor did

they intend to. In fact, parties cannot waive their homestead rights. Texas Land &

Loan Co. v. Blalock, 13 S.W. 12, 13 (Tex. 1890) (citations omitted); see also

Burkhardt v. Lieberman, 159 S.W.2d 847, 852 (Tex. Comm’n App. 1942, opinion

adopted); Lincoln v. Bennett, 156 S.W.2d 504, 506–07 (Tex. 1941). The Hills

agreed to the amount of the award, they agreed to the validation of the liens against

their property, but they also preserved their homestead protection as to those liens.

(CR 35-39). As long as they maintain the homestead character of their property, it

cannot be subject to foreclosure in satisfaction of Sword’s judgment liens.

14
 This is the only interpretation of the 2011 Agreed Judgment that harmonizes

all of the provisions contained therein, and the subsequent actions of the parties, as

reflected in the record support this interpretation. Following the signing of the

Agreed Judgment, (even though the judgment provided that “Plaintiff is allowed

such writs and processes as may be necessary in the enforcement and collection of

this judgment….”) (CR 37) Sword did not attempt to execute or foreclose on those

liens. Instead, he had the Hills sign the new Note (89 at ¶10, 113-14) and Deed of

Trust (CR 96-107) (which as explained herein below, replaced the old notes).

In 2013, when Sword attempted to foreclose upon the Hills homestead, the

underlying litigation began. During that litigation, and equally significant to this

Court’s determination, the parties entered into a Rule 11 Agreement and

Stipulation of the Parties (CR 415-418) before the Court rendered its erroneous

judgment. The Rule 11 Agreement makes clear that none of the parties intended

for the 2011 documents to perpetuate the 2004 or 2006 notes or deeds of trust or to

waive the Hills’ homestead protection. (Id.)

It provides in pertinent part:

1. The promissory Note dated February 28, 2011…was in renewal and
extension of the balance owed by Plaintiffs to Sword under the terms
of the agreed judgment signed by Plaintiffs on February 27, 2011….

2. Because the 2011 Note renewed and extended the balance owed to
plaintiffs to Sword under the 2011 Judgment, the debt represented by
the 2011 Judgment was merged into the 2011 Note …

15
 3. Because of the agreements set forth in paragraphs 1 and 2 above,
Plaintiffs agree that the affirmative defenses of estoppel, contributory
negligence, denial of conditions precedent, mutual mistake, waiver
and “double recovery” asserted by Gary Hill to the Counterclaim filed
against him by W.E. Sword for default in payment of the 2011 Note
are withdrawn.… Notwithstanding the foregoing sentences, nothing
herein constitutes a withdrawal or waiver of any defense claimed
by the Hills respecting Sword’s claims to enforce any lien on
property owned by the Hills. (emphasis added).

(Id.) The plain language of the stipulation ties the 2011 Promissory Note solely to

the balance owed under the terms of the 2011 Agreed Judgment. And again

reiterates, above all else, that the Hills were not waiving their homestead rights.

When all of the provisions of each of these documents are harmonized, the

conclusion must be that the liens acknowledged by the parties’ were not

homestead liens, but judgment liens which could be enforced upon any of the Hills

non-exempt property or upon the subject property if it ever ceased to be their

homestead. The conclusion by this Court to the contrary was erroneous.

As the Texas Supreme Court stated nearly a century ago:

The Constitution forbidding the fixing on the homestead of liens other
than such as are thereby expressly permitted, no estoppel can arise in
favor of a lender who has attempted to secure a lien on homestead in
actual use and possession of the family, based on declarations of the
husband and wife made orally or in writing contrary to the fact. To
hold otherwise would practically abrogate the Constitution.

If property be homestead in fact and law, lenders must understand that
liens cannot be fixed upon it, and that declarations of husband and
wife to the contrary, however made, must not be relied upon. They
must further understand that no designation of homestead contrary to

16
 the fact will enable parties to evade the law and encumber homesteads
with liens forbidden by the Constitution.

Texas Land & Loan Co. v. Blalock, 13 S.W. at 13; see also Burkhardt v.

Lieberman, 159 S.W.2d at 852; Lincoln v. Bennett, 156 S.W.2d at 506–07.

The constitutional prohibition against placement of liens upon homesteads is

longstanding, and exists for the protection of lenders and homeowners alike. As

stated in the cases cited immediately above, the homestead declaration cannot be

waived, and oral or written representations to the contrary are of no consequence.

In other words, even if a landowner is attempting to waive his/her homestead rights

in order to obtain a loan, such attempt is invalid. If a lender could simply require

the debtor to agree that a lien was valid and so make it valid, then every lender

would use that process and effectively render the constitutional provisions of

Section 50 meaningless.

Giving full weight to all of the documents contained in the record, when

analyzed within the framework of Section 50 and cases construing the scope and

applicability of that constitutional provision, logic dictates that the Hills are

entitled to protection of their homestead rights. They have steadfastly maintained

the homestead character of their property, they have never abandoned the property,

and they made certain to provide for protection of their homestead in the 2011

Agreed Judgment and the Rule 11 Agreement. They are not challenging the

validity of the underlying debt they owe to Sword, or the validity or enforceability
17
of his lien as a judgment lien -- just his ability to foreclose upon their homestead in

his effort to recover on defaulted business loans.

CONCLUSION AND REQUEST FOR RELIEF

Here, the Hills’ existing note obligations were first reduced to an agreed

judgment that authorized Sword to enforce immediate collection against them.

Instead of doing so, Sword and the Hills agreed to a new extension of credit on that

obligation which replaced the previous obligations, i.e., the ability to once again

assume the debt (rather than pay it immediately), such that it was repayable over

time under a new note, secured by a new deed of trust on the homestead. That is

precisely what the Sims decision characterizes as a new extension of credit which

must meet the requirements of Section 50(a)(6) of the Constitution.

Respectfully, this Court’s Opinion and Judgment are in error and should be

reconsidered and modified, such that the Hills’ requested relief herein is granted.

The Hills respectfully request the Court to grant this motion for rehearing,

withdraw the January 7, 2015 opinion and judgment, and render judgment in

conformity with the relief previously requested by the Hills.

18
 Respectfully submitted,

Flowers Davis, P.L.L.C.

By: /s/ Julie P. Wright
JULIE P. WRIGHT
SBN 00794883
jpw@flowersdavis.com
LEAD COUNSEL
1021 ESE Loop 323, Suite 323
Tyler, Texas 75701
903-534-8063; Fax: 903-534-1650

Shackelford Melton McKinley & Norton,
L.L.P.

JOSEPH G. CHUMLEA
SBN 04241500
jchumlea@shackelfordlaw.net
FRANCES A. SMITH
SBN 24033084
fsmith@shackelfordlaw.net
3333 Lee Parkway, Tenth Floor
Dallas, Texas 75219
214-780-1436; Fax: 214-889-9736

ATTORNEYS FOR APPELLANTS

CERTIFICATE OF COMPLIANCE

I certify that this Motion for Rehearing complies with the limitation of TEX.
R. APP. P. 9.4(i)(2)(D) because it contains 4,426 words, excluding the parts of the
motion exempted by TEX. R. APP. P. 9.4(i)(1).

/s/ Julie P. Wright
JULIE P. WRIGHT

19
 CERTIFICATE OF SERVICE

A true and correct copy of the foregoing Motion for Rehearing was served
by U. S. Mail, Certified, R.R.R., and/or Electronic Filing Service on February 6,
2015 on:

Mr. Scott Ritcheson
Ritcheson, Laufer & Vincent, PC
821 ESE Loop 323, Suite 530
Tyler, Texas 75701
scottr@rllawfirm.net
/s/ Julie P. Wright
JULIE P. WRIGHT

20
159 S.W.2d 847 Page 1
138 Tex. 409, 159 S.W.2d 847
(Cite as: 138 Tex. 409, 159 S.W.2d 847)

Cases
Acts or omissions alleged to constitute
Commission of Appeals of Texas, Section A. “estoppel” against claim of homestead by husband
BURKHARDT et ux. and wife must be acts or omissions of both husband
v. and wife, and fact that husband might so have acted
LIEBERMAN et al. or failed to act under circumstances which law re-
gards as sufficient to estop him to claim property as
No. 2394-7784
homestead does not estop wife unless equivalent
Feb. 4, 1942
conduct or omission is proved as to her, and if wife
Motion for Rehearing Overruled March 11, 1942
is not estopped, husband is not. Vernon's
Error to Court of Civil Appeals of First Su- Ann.St.Const. art. 16, § 50.
preme Judicial District.
[3] Homestead 202 177(2)
Action in trespass to try title by Otto Burkhardt
202 Homestead
and wife against George Lieberman and another. A
202IV Abandonment, Waiver, or Forfeiture
judgment for defendant was affirmed by the Court
202k177 Estoppel to Claim Homestead
of Civil Appeals, 142 S.W.2d 283, and plaintiffs
202k177(2) k. Statements and Representa-
bring error.
tions Operating as Estoppel. Most Cited Cases
Affirmed in part, reversed and remanded in Affidavit purportedly executed by husband and
part with instructions, and reversed and rendered in wife as owners of homestead as part of transaction
part. terminating in execution of deed of trust on
homestead, reciting, contrary to the fact, that land
West Headnotes was not being used as business or residence
homestead, and that they had no intention so to use
[1] Homestead 202 115(1) it did not “estop” wife from claiming homestead
right in property, even if the affidavit signed by
202 Homestead
both owners would constitute an estoppel, in view
202II Transfer or Incumbrance
of form of affidavit, its date, and other circum-
202k115 Mortgage
stances surrounding execution indicating that wife
202k115(1) k. In General. Most Cited
had no knowledge of deed of trust. Vernon's
Cases
Ann.St.Const.art. 16, § 50.
Deeds of trust on a homestead given to a bank
to secure payment of past and future indebtedness, [4] Homestead 202 121
not being for one of the three excepted purposes
specified in Constitution, were utter nullities. Ver- 202 Homestead
non's Ann.St.Const. art. 16, § 50. 202II Transfer or Incumbrance
202k121 k. Sale on Foreclosure. Most Cited
[2] Homestead 202 177(1) Cases

202 Homestead Homestead 202 128
202IV Abandonment, Waiver, or Forfeiture
202k177 Estoppel to Claim Homestead 202 Homestead
202k177(1) k. In General. Most Cited 202II Transfer or Incumbrance
202k127 Rights of Purchasers and Mort-

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159 S.W.2d 847 Page 2
138 Tex. 409, 159 S.W.2d 847
(Cite as: 138 Tex. 409, 159 S.W.2d 847)

gagees 202IV Abandonment, Waiver, or Forfeiture
202k128 k. In General. Most Cited Cases 202k177 Estoppel to Claim Homestead
Where deeds of trust executed by husband on 202k177(2) k. Statements and Representa-
homestead were void because not executed for one tions Operating as Estoppel. Most Cited Cases
of three purposes authorized by constitution, trust- The fact that homestead was claimed on six
ee's subsequent sale under deeds of trust and pur- different contiguous tracts, with owners' residence
chaser's later conveyance of portion of land to an- located on a rented tract a mile or more distant, was
other were void. Vernon's Ann.St.Const. art. 16, § immaterial on question whether owners were es-
50. topped from claiming homestead as against sub-
sequent purchasers of property at sale under trust
[5] Homestead 202 177(2) deed. Vernon's Ann.St.Const. art. 16, § 50.

202 Homestead [8] Homestead 202 162(1)
202IV Abandonment, Waiver, or Forfeiture
202k177 Estoppel to Claim Homestead 202 Homestead
202k177(2) k. Statements and Representa- 202IV Abandonment, Waiver, or Forfeiture
tions Operating as Estoppel. Most Cited Cases 202k160 Removal from Homestead
Where property was actually occupied by hus- 202k162 Intent to Return
band and wife as homestead, fact that purchaser, 202k162(1) k. In General. Most Cited
before buying property at sale under trust deed, in- Cases
quired of husband whether property was It must be clear and beyond almost a shadow,
homestead, and that husband said it was not, did not at least, of all reasonable ground of dispute that
“estop” wife and, therefore, did not estop husband there has been a total abandonment of homestead
from subsequently claiming homestead right in with intention not to return and claim the exemp-
property, where purchaser made no inquiry of wife. tion before court will find “abandonment” of
Vernon's Ann.St.Const. art. 16, § 50. homestead. Vernon's Ann.St.Const. art. 16, § 50.

[6] Homestead 202 177(1) [9] Homestead 202 163

202 Homestead 202 Homestead
202IV Abandonment, Waiver, or Forfeiture 202IV Abandonment, Waiver, or Forfeiture
202k177 Estoppel to Claim Homestead 202k160 Removal from Homestead
202k177(1) k. In General. Most Cited 202k163 k. Acts Constituting Abandon-
Cases ment. Most Cited Cases
Where deeds of trust on homestead of husband A husband cannot abandon a homestead as part
and wife were void because not executed for one of of a “plan of action”, deliberate or innocent on his
three purposes authorized by Constitution, fact that part, that begins with void deed of trust executed by
wife did not sue to enjoin sale of property under him alone for purpose not authorized by Constitu-
deed of trust and thereby save innocent purchasers tion and ends in sale to which wife is not party, and
from harm, did not “estop” wife from claiming about which she knows nothing, especially where
homestead right in property. Vernon's husband surrenders property to purchasers at trust-
Ann.St.Const. art. 16, § 50. ee's sale reluctantly and in ignorance of his rights.
Vernon's Ann.St.Const. art. 16, § 50.
[7] Homestead 202 177(2)
[10] Vendor and Purchaser 400 89
202 Homestead

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159 S.W.2d 847 Page 3
138 Tex. 409, 159 S.W.2d 847
(Cite as: 138 Tex. 409, 159 S.W.2d 847)

400 Vendor and Purchaser “volunteer” and is not entitled to reimbursement.
400III Modification or Rescission of Contract
400III(B) Rescission by Vendor [13] Taxation 371 2768
400k88 Right to Rescind
371 Taxation
400k89 k. In General. Most Cited
371III Property Taxes
Cases
371III(J) Payment and Refunding or Recov-
Vendor's remedy of rescission is harsh and is
ery of Tax Paid
not favored, and relative equities will be weighed
371k2767 Rights, as Against Persons or
and unless they clearly favor vendor, rescission will
Property Liable, of Other Persons Making Payment
be denied and vendor, as holder of vendor's lien,
371k2768 k. In General. Most Cited
will be put to his remedy of foreclosure.
Cases
[11] Vendor and Purchaser 400 99 (Formerly 371k531(1))
One holding a mortgage can recover taxes paid
400 Vendor and Purchaser to protect lien if he includes amount of taxes paid in
400III Modification or Rescission of Contract amount for which he forecloses, otherwise, he has
400III(B) Rescission by Vendor no right to reimbursement.
400k99 k. Defenses or Objections. Most
Cited Cases [14] Taxation 371 2768
Where holder of vendor's lien note on tract in-
371 Taxation
volved in trespass to try title action brought by
371III Property Taxes
makers of note, alleged that makers had not paid or
371III(J) Payment and Refunding or Recov-
offered to pay note or part thereof, and that holder,
ery of Tax Paid
therefore, elected to rescind, makers' reply alleging
371k2767 Rights, as Against Persons or
that they were ready and willing to pay holder the
Property Liable, of Other Persons Making Payment
amount he had paid to take up note, that they
371k2768 k. In General. Most Cited
tendered into court whatever amount court found to
Cases
be necessary to reimburse holder, and offering to do
(Formerly 371k531(1))
equity, was sufficient to constitute “tender”, en-
titling makers to reasonable opportunity to perform Taxation 371 2769
their tender.
371 Taxation
[12] Taxation 371 2768 371III Property Taxes
371III(J) Payment and Refunding or Recov-
371 Taxation
ery of Tax Paid
371III Property Taxes
371k2767 Rights, as Against Persons or
371III(J) Payment and Refunding or Recov-
Property Liable, of Other Persons Making Payment
ery of Tax Paid
371k2769 k. Right to Lien. Most Cited
371k2767 Rights, as Against Persons or
Cases
Property Liable, of Other Persons Making Payment
(Formerly 371k531(2))
371k2768 k. In General. Most Cited
One holding land under a void tax deed is not
Cases
“subrogated” to the lien, nor is he entitled to a per-
(Formerly 371k531(1))
sonal judgment for taxes paid by him because he is
One who pays taxes due on another's property
a mere “trespasser.”
without any request by debtor or any contractual
right so to do or any joint liability therefor is a [15] Taxation 371 2768

© 2015 Thomson Reuters. No Claim to Orig. US Gov. Works.
159 S.W.2d 847 Page 4
138 Tex. 409, 159 S.W.2d 847
(Cite as: 138 Tex. 409, 159 S.W.2d 847)

371 Taxation (Formerly 371k531(1))
371III Property Taxes The purchaser of homestead lands under void
371III(J) Payment and Refunding or Recov- sale under trust deed was, as to taxes paid by pur-
ery of Tax Paid chaser on portion of lands as against which he held
371k2767 Rights, as Against Persons or a vendor's lien note, not a “volunteer”, and was en-
Property Liable, of Other Persons Making Payment titled to recover the taxes assessed so paid. Ver-
371k2768 k. In General. Most Cited non's Ann.St.Const. art. 16, § 50.
Cases
(Formerly 371k531(1)) [18] Homestead 202 129(1)
One buying at a tax sale under foreclosure
202 Homestead
where record owner is not made party is not entitled
202II Transfer or Incumbrance
to reimbursement for taxes paid because, having
202k127 Rights of Purchasers and Mort-
“constructive notice” that title is in another, he is
gagees
not considered as acting in “good faith”.
202k129 Bona Fide Purchasers
[16] Taxation 371 2768 202k129(1) k. In General. Most Cited
Cases
371 Taxation A purchaser of homestead property at sale un-
371III Property Taxes der trust deed which was void because not executed
371III(J) Payment and Refunding or Recov- for purposes authorized by Constitution, could not
ery of Tax Paid recover from owners in possession for improve-
371k2767 Rights, as Against Persons or ments made by him thereon, because owners' pos-
Property Liable, of Other Persons Making Payment session was “notice” of homestead interest of own-
371k2768 k. In General. Most Cited ers, and, therefore, improvements were not made in
Cases “good faith”. Vernon's Ann.St.Const. art. 16, § 50.
(Formerly 371k531(1))
The purchaser of homestead property at trust- [19] Appeal and Error 30 1001(1)
ee's sale under trust deed which was void because
30 Appeal and Error
not executed for purposes authorized by Constitu-
30XVI Review
tion, and because purchaser was charged with no-
30XVI(I) Questions of Fact, Verdicts, and
tice, by owners' occupancy, that lands constituted
Findings
their homestead, was a “volunteer” when he paid
30XVI(I)2 Verdicts
taxes on property, and was, therefore, not entitled
30k1001 Sufficiency of Evidence in
to recover taxes paid. Vernon's Ann.St.Const. art.
Support
16, § 50.
30k1001(1) k. In General. Most
[17] Taxation 371 2768 Cited Cases
Where claim of plaintiffs in trespass to try title
371 Taxation for damages for reasonable rental value of land dur-
371III Property Taxes ing time they were excluded from occupancy in an
371III(J) Payment and Refunding or Recov- amount much larger than amount awarded by jury
ery of Tax Paid was not supported by any competent evidence in re-
371k2767 Rights, as Against Persons or cord, trial court's judgment in defendants' favor on
Property Liable, of Other Persons Making Payment that phase of case was affirmed on appeal.
371k2768 k. In General. Most Cited
Cases **849 *410 H. Fletcher Brown and Walter F.

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159 S.W.2d 847 Page 5
138 Tex. 409, 159 S.W.2d 847
(Cite as: 138 Tex. 409, 159 S.W.2d 847)

Brown, both of Houston, for plaintiffs in error. the judgment of the Court of Civil Appeals but, as
we view the case, only a few of them need be con-
W. E. Daly and Chas. L. Terry, both of Houston, sidered. They concede that the judgment of the trial
for defendants in error. court in favor of Lieberman as to the city lot in
Houston was correct.
*411 BREWSTER, Commissioner.
On January 28, 1932, Burkhardt executed to W.
This is an action in trespass to try title brought
S. Cochran, as trustee for the First National Bank of
by petitioners Otto Burkhardt and wife, Mary
Houston, a deed of trust covering the lands above
Burkhardt, against the respondents, George Lieber-
described to secure said bank in the payment by
man and O. C. Riedel, for title and possession of
Burkhardt of one note in the sum of $1,300 of date
71.6 acres of land situated in Harris County, Texas,
October 30, 1931, due January 28, 1932, and anoth-
and a lot in the City of Houston. The 71.6 acres
er in the principal sum of $1,500 of date December
consisted of six tracts, three of 25, 16 and .6 acres,
21, 1931, due March 20, 1932, and to secure all re-
respectively, and three of 10 acres each, all contigu-
newals and extensions of said notes and any other
ous except that a small tract of 16 acres belonging
debts then or thereafter owing by Burkhardt to said
to a daughter of the Burkhardts lay between the
bank. These notes were in renewal of an indebted-
three 10-acre tracts and the other three.
ness already due by Burkhardt to said bank. On
Lieberman pleaded a general denial and “not September 24, 1935, Burkhardt executed to W. S.
guilty.” He specially pleaded (1) that he was an in- Cochran, as trustee for said bank, another deed of
nocent purchaser for value; (2) estoppel of the trust on said lands to secure two notes of even date,
Burkhardts to assert that the same was their one for $2,152.49, and the other for $1,055.52, both
homestead; (3) **850 improvements in good faith payable to the order of the bank on January 2, 1936,
of the value of $250; (4) and as to 25 acres of the and any future indebtedness Burkhardt might owe
land he sought rescission of sale as holder of a the bank. The second deed of trust was in renewal
vendor's lien note. By way of cross-action he of the first. Both contained a recitation that the
prayed for judgment for taxes levied against the lands covered thereby were no part of Burkhardt's
land and paid by him with foreclosure of the lien to business or residence homestead and were not in
which he claimed he thus became subrogated. any way then occupied, used or enjoyed as such.
Mary Burkhardt did not join in the execution of
Riedel answered by general denial and plea of either of these instruments. On April 6, 1937, W. S.
“not guilty,” disclaimed as to 41.6 acres and spe- Cochran, trustee, reciting default by Burkhardt in
cially pleaded as to the other 30 acres that he was payment of said indebtedness, request by the bank,
an innocent purchaser for value. notice, etc., executed to Lieberman a deed convey-
ing said lands to him for a consideration of $3,360
Trial was to a jury and upon their answers to same being the “best and highest” bid. On February
special issues judgment was rendered that the 15, 1938, Lieberman by general warranty deed con-
Burkhardts take nothing as against Lieberman and veyed 30 acres of said lands, in three 10-acre tracts
Riedel and that Lieberman be quieted in his title to each, to Riedel reciting $10 and other valuable con-
the 25 acres as to which he asserted superior title as siderations paid. Lieberman testified that Riedel
holder of a vendor's lien note. Upon appeal by the paid him 4,200 “some-odd dollars” for this deed.
Burkhardts to the Court of Civil Appeals, at Galve- Riedel said he paid $4,250 cash.
ston, the judgment of the trial court was affirmed.
142 S.W.2d 283. The Burkhardts claimed that the deeds of trust
above described and the trustee's deed to Lieberman
*412 The Burkhardts assign numerous errors in

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159 S.W.2d 847 Page 6
138 Tex. 409, 159 S.W.2d 847
(Cite as: 138 Tex. 409, 159 S.W.2d 847)

and Lieberman's deed to Riedel were void on the established rule that acts or omissions alleged to
ground that on January 28, 1932, on September 24, constitute estoppel must be those of both the hus-
1935, on April 6, 1937, and thereafter until band and the wife. That is, Burkhardt might be held
Burkhardt was ejected by Lieberman, the 71.6 acres so to have acted or failed to act under circum-
of land described was their homestead. Lieberman stances which the law regards as sufficient to estop
and Riedel countered with an assertion of estoppel him to claim the property as homestead, yet unless
against the Burkhardts to assert any homestead equivalent conduct or omission is proved as to
rights, and as a part of their evidence *413 on that Mary Burkhardt she cannot be held to be estopped.
issue they introduced an affidavit purportedly ex- And if she is not estopped, Burkhardt is not. As re-
ecuted by the Burkhardts on March 25, 1932, stat- cently as November 12, 1941, the Supreme Court
ing that 71 acres of the land in controversy was not approved and applied this principle in Lincoln et
then being used as a business or residence ux. v. Bennett, 156 S.W.2d 504, opinion by Justice
homestead and that they had no intention so to use Sharp. See, also, Miller v. Southland Life Ins. Co.,
it. Other evidence relating to this issue will be re- Tex.Civ.App., 68 S.W.2d 558; Kallman v. Lude-
counted by us later. necker et al., 9 Civ.App. 182, 28 S.W 579; *414
Barclay v. Dismuke et al., Tex.Civ.App., 202 S.W.
In response to special issues 1 to 4, inclusive, 364; Andrews v. Security National Bank, 121 Tex.
the jury found that the 71.6 acres of land described 409, 50 S.W.2d 253, 83 A.L.R. 44.
in plaintiffs' petition was a part of the homestead of
the Burkhardts on January 28, 1932 (the date of the [3] We have carefully studied the statement of
first deed of trust above described), and September facts in this case and we find not a single fact or
24, 1935 (the date of the second deed of trust above circumstance that can fairly be considered as proof
described and the one under which the trustee's sale of any element of estoppel against Mary Burkhardt
was made to Lieberman). The testimony conclus- except the alleged homestead affidavit claimed to
ively supports these findings. In fact, that the land have been executed by her as part of the transaction
was so used by the Burkhardts does not seem to terminating in the execution of the first deed of
have been controverted seriously by either Lieber- trust by Otto Burkhardt on January 28, 1932. That
man or Riedel and seems to have been assumed by instrument is appended as an exhibit to the Court of
the Court of Civil Appeals in its opinion. Civil Appeals opinion appearing at page 291, of
142 S.W.2d, supra. We think it discloses nothing
[1] Under the language of the Constitution it- from which it can reasonably be deduced that Mary
self the two deeds of trust, being on a homestead Burkhardt had ever heard of any deed of trust that
and not for one of the three excepted purposes, her husband had executed to the First National
were utter nullities. Art. 16, Sec. 50, Texas Consti- Bank of Houston. In the first place, the instrument
tution, Vernon's Ann. St.; Toler et al. v. Fertitta, seems one originally to have been prepared for exe-
Tex.Com.App., 67 S.W.2d 229. This much **851 cution by Mary Burkhardt alone. This is demon-
seems to have been recognized by Lieberman and strated by continued use of the singular I, me and
Riedel since they seek to avoid its effect by the my after the plural first person pronouns had been
claim that the Burkhardts are estopped to assert stricken. Again, while the instrument is signed by
their homestead interest, and such appears to have both Mary and Otto Burkhardt and certified by the
been the view of the trial court in disregarding the notary on March 25, 1932, the last notarial certific-
jury's findings and it is the basis of the judgment of ate is to the effect that same was “subscribed * * *
the Court of Civil Appeals. by Otto Burkhardt” on August 5, 1933. Again,
Mary Burkhardt is made to say that the affidavit is
[2] Are the Burkhardts estopped? In determin-
made with full knowledge that “the First National
ing this question we are bound by the well-

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159 S.W.2d 847 Page 7
138 Tex. 409, 159 S.W.2d 847
(Cite as: 138 Tex. 409, 159 S.W.2d 847)

Bank of Houston, Houston, Texas, will advance inquiry of her, if she did not know that he intended
certain sums to me ” (italics ours), whereas the truth to buy the land or **852 that it was ever up for sale
was that sums had already been advanced to Otto to anybody, how can Lieberman be heard to urge
Burkhardt prior to January 28, 1932--nearly two that he was misled by her silence? If a married wo-
months before she ever saw the “affidavit.” man is not estopped by passive negligence when
she has partial notice of the facts (as in McLaren v.
This instrument is not referred to with any in- Jones, 89 Tex., 131, 33 S.W. 849), how could Mary
tention to suggest that it alone would constitute an Burkhardt be estopped by failure to act when she
estoppel even if signed by both the Burkhardts on knew nothing of the facts?
January 28, 1932, because all the decisions are to
the contrary. See Lincoln et ux. v. Bennett, supra, [6] For the same reason the argument that she
and the authorities there cited; Nixon v. Hirschi, is estopped because she did not enjoin the deed of
134 Tex. 415, 136 S.W.2d 583. We refer to it be- trust sale and thereby save Lieberman and Riedel
cause, as already stated, it is the only evidence in from harm is wholly fallacious.
the record that might be considered as indicating
that Mary Burkhardt had any knowledge whatever A much stronger case against homestead
of the deeds of trust or any of the subsequent trans- claimants seeking to cancel a renewal deed of trust
actions had thereunder, and we believe, considering in the hands of an innocent purchaser appears in
its date, its form and contents, and the other facts Lincoln v. Bennett, supra, than is presented here
surrounding its execution, that it presents as cogent against the Burkhardts. In that case the wife joined
evidence that she had no such knowledge as that in the original deed of trust and Bennett, who,
she did. This view is further supported by the fact without notice of the homestead claim, advanced
that there is uncontradicted testimony *415 in the the money to renew and extend it and took a renew-
record that Mary Burkhardt did not understand al deed of trust, was held not to have an enforceable
English very well. lien in the face of actual homestead occupancy by
the Lincolns, since it “is not shown that she (Mrs.
[4][5] Since the deeds of trust were void it fol- Lincoln) knew about the statements made by Lin-
lows that the subsequent sale thereunder by the coln to Bennett, or to his attorney, to induce Ben-
trustee to Lieberman and Lieberman's later convey- nett to acquire the Schoellkoff note, or that she ever
ance of 30 acres to Riedel were void. If such were ratified such statement. There is nothing in the re-
not so, the unequivocal provisions of the Constitu- cord, except the homestead designation, executed
tion could be circumvented by a deed of trust ex- five years prior to that time, that would in any way
ecuted by the husband alone (on any consideration affect her rights in *416 the homestead.” No reason
whatever) and a sale thereunder to an alleged inno- is apparent why the principle thus applied to a sub-
cent purchaser for value without the wife ever sequent innocent vendee of a void lien would not
knowing about the deed of trust, much less that any apply with equal force to a subsequent innocent
sale thereunder was ever contemplated. Lieber- vendee in a sale of the land under a void lien and to
man's claim that before buying at the trustee's sale his immediate vendee, the lands being actually oc-
he inquired of Burkhardt whether the property was cupied by the Burkhardts for homestead purposes.
homestead and that the latter said it was not, does
not alter the rule, in face of the fact that the same [7] Nor is this case any different because of the
was then actually being used for homestead pur- fact that the homestead is claimed on six different
poses and Lieberman made no inquiry whatever of contiguous or neighboring tracts with the
Mary Burkhardt. In fact, he testified he did not Burkhardts' residence located on a rented tract a
know her even at the time of the trial. If he made no mile or more distant. Rutland Savings Bank v. Is-
bell et al., Tex.Sup., 154 S.W.2d 442; Higgins v.

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159 S.W.2d 847 Page 8
138 Tex. 409, 159 S.W.2d 847
(Cite as: 138 Tex. 409, 159 S.W.2d 847)

Millsap, Tex.Civ.App., 121 S.W.2d 469. 1937; that said note was outstanding when he,
Lieberman, purchased said 25 acres at the trustee's
[8][9] But Lieberman contends that Burkhardt, sale on April 6, 1937, and was secured by the first
after the lands had been sold to him under the deed and superior lien on the 25 acres; that on May 18,
of trust, surrendered the property. This contention 1937, said note and lien and superior title were
is without merit because, beginning as early as transferred to him, Lieberman, by Holm for the sum
1857, in an opinion by Chief Justice Hemphill in of $1,300; that Burkhardt and wife had not paid or
Gouhenant v. Cockrell, 20 Tex. 96, our courts have offered to pay said note or any part thereof; where-
held that “it must be undeniably clear and beyond fore, Lieberman alleged, he had elected to rescind
almost the shadow, at least [of] all reasonable and cancel the executory sale of said 25 acres by
ground of dispute, that there has been a total aban- Holm to Burkhardt, etc.
donment with an intention not to return and claim
the exemption.” Burkhardt testified that after the In reply to that pleading, the Burkhardts al-
trustee's sale to Lieberman he surrendered the prop- leged that “they are ready and willing to **853 pay
erty because he “had to.” While we do not mean to to the defendant, George Lieberman, the amount
hold that the husband cannot, under proper circum- that he paid to take up the note to E. L. Holm and
stances, abandon the homestead, we do hold that he wife, mentioned in the first amended original an-
cannot do so as part of a plan of action, deliberate swer of the defendant Lieberman, and they tender
or innocent on his part, that begins with a void deed into court whatever amount the court determines to
of trust, executed by him alone for a purpose be necessary to reimburse the said Lieberman for
frowned upon by the Constitution, and ends in a the amount so paid out on said note, and they offer
sale to which the wife is not a party and about to do whatever equity the court requires of them in
which she knows nothing, especially where the hus- connection with this suit.” (Italics ours.)
band surrenders the property reluctantly and in ig-
norance of his rights. Otherwise, the constitutional This note, although originally due in one year,
provision guaranteeing the family homestead would had been renewed from time to time so that the in-
amount to no more than mere verbiage. debtedness it evidenced was about 13 years old
when Lieberman bought it and was almost 15 years
We hold, therefore, that the Burkhardts were old when he filed his pleading seeking rescission of
not estopped to claim the 71.6 acres of land de- sale as holder of the superior title to the 25 acres
scribed in their petition as their homestead and that, against which the lien securing it existed. Lieber-
therefore, the two deeds of trust and the deed there- man alleged that he paid $1,300 for the note, so it
under to Lieberman and Lieberman's deed to Riedel would appear that Burkhardt had kept the interest
were void. paid up thereby winning the indulgences that he
had enjoyed at the hands of Holm as to payment of
Lieberman alleged that Burkhardt purchased the principal. Although he had theretofore bought
the 25-acre tract in controversy from one Holm on the 25 acres, as a tract included in the 71.6 acres
July 15, 1924; that Burkhardt, as part of the consid- conveyed in the trustee's sale on April 6, 1937,
eration, executed a vendor's *417 lien note in the when he paid Holm the $1,300 due on said note on
principal sum of $1,300, due in one year with in- May 18, 1937, Lieberman took a transfer of the
terest at 8 per cent. per annum, the superior title be- note and lien rather than a release. According to
ing retained in the deed from Holm to secure its Riedel, he paid Lieberman $4,250 for 30 acres of
payment; that said note and lien were last renewed this same 71.6 acres on February 15, 1938. There-
and extended by instrument of date December 31, fore, it would seem that the 25 acres was worth
1931, executed by Burkhardt in favor of Holm much more than the $1,300 and interest due on the
providing for maturity on or before January 1,

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159 S.W.2d 847 Page 9
138 Tex. 409, 159 S.W.2d 847
(Cite as: 138 Tex. 409, 159 S.W.2d 847)

note. The record discloses no demand made by amount of $87.25; that these taxes were not paid by
Lieberman after he bought the note and lien and be- him as a volunteer because he was in possession of
fore he *418 filed his cross-action for rescission the land claiming it under a deed, for a valuable
that Burkhardt pay either the interest or the princip- consideration, and therefore he not only had the
al due on the note. Moreover, Lieberman was as- right but was obligated to pay them; that he is en-
serting title to the land under the trustee's deed so titled to recover them of the Burkhardts with in-
the Burkhardts would naturally be expected to terest at 6 per cent. per annum from date of pay-
await the determination of the homestead issue, or ment; that by reason of the premises he is subrog-
at least would want to litigate both matters together ated to the tax liens of the state, county and school
before liquidating the $1,300 note. district and entitled to a foreclosure thereof.

[10][11] With the Burkhardts alleging a tender *419 [12][13][14][15] One who pays taxes due
of whatever amount the court should determine ne- on property of another, without any request by the
cessary to reimburse Lieberman and offering “to do debtor or any contractual right so to do or any joint
whatever equity the court requires of them in con- liability therefor, is a volunteer and is not entitled
nection with this suit,” we believe they made such to reimbursement. So it has been held that one
an offer to do equity as that their pleading amoun- holding a mortgage can recover taxes paid to pro-
ted to a tender. Rescission, as sought in this case, is tect his lien provided he includes the same in the
regarded as a harsh remedy and is not favored. amount for which he forecloses, otherwise he has
Therefore, relative equities will be weighed and un- no right to reimbursement. Stone et al. v. Tilley et
less they clearly favor the party seeking rescission al., 100 Tex. 487, 101 S.W. 201, 10 L.R.A.,N.S.,
the same will be denied and the holder put to his 678, 123 Am.St.Rep. 819, 15 Ann.Cas. 524. One
remedy of foreclosure. We believe the equities here who takes a deed to the homestead knowing it is
are with the Burkhardts. Consequently, that phase only a mortgage and pays taxes due thereon has no
of the case is reversed and remanded to the trial lien. Toler et al. v. Fertitta, supra. Likewise, one
court with instructions to determine the amount of holding**854 the land under a void tax deed is not
principal and interest due on this note and to give subrogated to the lien nor is he entitled to a person-
the Burkhardts reasonable opportunity to perform al judgment for taxes paid by him, because he is a
on their tender. If they then fail so to perform that mere trespasser. Mumme v. McCloskey, 28
court will enter judgment quieting the title in Tex.Civ.App. 83, 66 S.W. 853, error refused. One
Lieberman as to the 25 acres as prayed by him. See buying at a tax sale under foreclosure where the re-
Young et ux. v. Fitts et al., Tex.Com.App., 157 cord owner is not made a party is not entitled to re-
S.W.2d 873, decided January 7, 1942, and the au- imbursement because, having constructive notice
thorities therein cited. that the title is in another, he is not considered as
acting in good faith. American Realty Corporation
Lieberman pleaded that after he bought the v. Tinkler, Tex.Civ.App., 107 S.W.2d 627, error re-
land at trustee's sale he found that state, county and fused. See, also, Young v. Harbin Citrus Growers,
school district taxes duly levied and assessed Tex.Civ.App., 130 S.W.2d 896, error refused.
against it for the years 1931 to 1936, both inclusive, These principles apply to taxes accruing and paid
had been suffered by the Burkhardts to become de- subsequent to the void deed as well as to those re-
linquent; that on April 28, 1937, he paid the same covered by means of the sale. McCormick v. Ed-
and all penalties and interest that had accrued there- wards, 69 Tex. 106, 6 S.W. 32.
on, to the amount of $862; that, as owner of the
land he rendered the same for state, county and [16][17] On authority of these cases, we hold
school taxes for 1937 and paid such taxes to the that Lieberman, claiming title under a void deed

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159 S.W.2d 847 Page 10
138 Tex. 409, 159 S.W.2d 847
(Cite as: 138 Tex. 409, 159 S.W.2d 847)

and charged with notice by their occupancy of the judgments are reversed and remanded in so far as
lands that the same was the homestead of the they quiet the title of Lieberman to the 25 acres,
Burkhardts, was a volunteer when he paid the taxes and for a determination of what part of the $87.25
and is, therefore, not entitled to recover them. taxes for 1937 paid by him was assessed against
However, as to the taxes paid for 1937 on the 25 said 25 acres, with instructions to the trial court as
acres against which he then held a vendor's lien above stated; otherwise, said judgments are in all
note, as above discussed, we think Lieberman was things reversed and rendered for the Burkhardts, as
not a volunteer. Under authority of Stone et al. v. against both Lieberman and Riedel.
Tilley et al., supra, we hold that he is entitled to re-
cover such part of $87.25 as was assessed against Affirmed in part; reversed and remanded in
said 25 acres for the year 1937 along with his re- part, with instructions; reversed and rendered in
covery of principal and interest on the vendor's lien part.
note he bought from Holm. To that extent the judg-
Opinion adopted by the Supreme Court Febru-
ment is reversed and remanded with instructions to
ary 4, 1942.
the trial court to determine what part of the $87.25
taxes paid by Lieberman for 1937 was assessed Tex.Com.App. 1942
against the 25 acres and to allow him recovery Burkhardt v. Lieberman
thereof along with the principal and interest due on 138 Tex. 409, 159 S.W.2d 847
the Holm vendor's lien note as above directed.
END OF DOCUMENT
[18] For the reasons given in discussing the
taxes paid by him, Lieberman cannot recover on his
claim for improvements in *420 good faith. Since
possession by the Burkhardts of the land was notice
to him of their homestead interest, one essential
element in his cause of action for improvements
made-- that of good faith--is wanting. Mumme v.
McCloskey and other authorities cited, supra.

[19] On the Burkhardts' claim for damages the
jury found that the reasonable rental value of the 71
acres of land in suit from May 5, 1937, to the date
of trial was $70. The Burkhardts prayed for $1,000.
Without attempting to set out the testimony relating
thereto, we simply say that we find no competent
evidence in the record that would support a judg-
ment on that issue. Therefore, the judgment of the
trial court in favor of Lieberman and Riedel on that
phase of the case is affirmed.

It follows from what we have said that the
judgments of the trial court and of the Court of
Civil Appeals are affirmed in so far as they deny
the Burkhardts any recovery of rents against
Lieberman and Riedel and in so far as they award
Lieberman recovery of the city lot in Houston. Said

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 Page 1
939 S.W.2d 118, 39 Tex. Sup. Ct. J. 537
(Cite as: 939 S.W.2d 118)

[1] Contracts 95 176(2)

Supreme Court of Texas. 95 Contracts
HERITAGE RESOURCES, INC., Petitioner, 95II Construction and Operation
v. 95II(A) General Rules of Construction
NATIONSBANK, Co–Trustee under the Will of 95k176 Questions for Jury
David B. Trammell, Deceased et al., Respondents. 95k176(2) k. Ambiguity in general.
Most Cited Cases
No. 95–0515. Question of whether contract is ambiguous is
Argued Nov. 29, 1995. one of law for court.
Decided April 25, 1996.
Rehearing Overruled March 21, 1997. [2] Contracts 95 143(2)

Trustee for gas interest royalty owners brought 95 Contracts
action against gas lessee to recover amounts of 95II Construction and Operation
transportation costs which lessee had deducted in 95II(A) General Rules of Construction
calculating royalty payments under leases. The 95k143 Application to Contracts in Gen-
109th District Court, Winkler County, James L. eral
Rex, J., entered partial summary judgment for trust- 95k143(2) k. Existence of ambiguity.
ee, holding that lease language prohibited deduction Most Cited Cases
of transportation costs from royalties, and, after Contract is “ambiguous” when its meaning is
bench trial, entered judgment for trustee. On re- uncertain and doubtful or is reasonably susceptible
view, the El Paso Court of Appeals, Eighth Judicial to more than one interpretation.
District, Susan Larsen, J., 895 S.W.2d 833, af-
firmed. On application for writ of error, the Su- [3] Mines and Minerals 260 73
preme Court, Baker, J., held that: (1) in calculating
260 Mines and Minerals
royalties to be paid to owners under leases, lessee
260II Title, Conveyances, and Contracts
properly deducted costs of transporting gas to point
260II(C) Leases, Licenses, and Contracts
of sale, despite clauses in leases limiting deduction
260II(C)3 Construction and Operation of
from royalty for postproduction costs, and (2) less-
Oil and Gas Leases
ee could not be held liable to trustee for amounts
260k73 k. In general; general rules of
lessee paid to pipeline carrier to transport gas to
construction. Most Cited Cases
point of sale, which amounts lessee deducted in cal-
In construing unambiguous oil and gas lease,
culating owners' royalties, under division order that
Supreme Court's task is to ascertain parties' inten-
allegedly allocated payments among interest own-
tions as expressed in lease.
ers in manner that differed from lease provisions.
[4] Mines and Minerals 260 73
Reversed and rendered.
260 Mines and Minerals
Owen, J., concurred and filed opinion in which
260II Title, Conveyances, and Contracts
Hecht, J., joined. Gonzalez, J., dissented and filed
260II(C) Leases, Licenses, and Contracts
opinion in which Abbott, J., joined.
260II(C)3 Construction and Operation of
West Headnotes Oil and Gas Leases
260k73 k. In general; general rules of

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 Page 2
939 S.W.2d 118, 39 Tex. Sup. Ct. J. 537
(Cite as: 939 S.W.2d 118)

construction. Most Cited Cases 260II(C) Leases, Licenses, and Contracts
In construing unambiguous oil and gas lease, to 260II(C)3 Construction and Operation of
achieve goal of ascertaining parties' intentions as Oil and Gas Leases
expressed in lease, Supreme Court examines entire 260k79 Rent or Royalties
document and considers each part with every other 260k79.1 In General
part so that effect and meaning of one part on any 260k79.1(1) k. Rights and liabil-
other part may be determined. ities. Most Cited Cases
For oil and gas purposes, “royalty” is com-
[5] Contracts 95 143.5 monly defined as landowner's share of production,
free of expenses of production.
95 Contracts
95II Construction and Operation [9] Mines and Minerals 260 79.1(1)
95II(A) General Rules of Construction
95k143.5 k. Construction as a whole. 260 Mines and Minerals
Most Cited Cases 260II Title, Conveyances, and Contracts
Supreme Court presumes that parties to con- 260II(C) Leases, Licenses, and Contracts
tract intend every clause to have some effect. 260II(C)3 Construction and Operation of
Oil and Gas Leases
[6] Contracts 95 152 260k79 Rent or Royalties
260k79.1 In General
95 Contracts
260k79.1(1) k. Rights and liabil-
95II Construction and Operation
ities. Most Cited Cases
95II(A) General Rules of Construction
For oil and gas purposes, although it is not sub-
95k151 Language of Instrument
ject to costs of production, royalty is usually sub-
95k152 k. In general. Most Cited
ject to postproduction costs, including taxes, treat-
Cases
ment costs to render it marketable, and transporta-
In construing contract, Supreme Court gives
tion costs.
terms their plain, ordinary, and generally accepted
meaning unless instrument shows that parties used [10] Mines and Minerals 260 79.1(1)
them in technical or different sense.
260 Mines and Minerals
[7] Contracts 95 143(1) 260II Title, Conveyances, and Contracts
260II(C) Leases, Licenses, and Contracts
95 Contracts
260II(C)3 Construction and Operation of
95II Construction and Operation
Oil and Gas Leases
95II(A) General Rules of Construction
260k79 Rent or Royalties
95k143 Application to Contracts in Gen-
260k79.1 In General
eral
260k79.1(1) k. Rights and liabil-
95k143(1) k. In general. Most Cited
ities. Most Cited Cases
Cases
For oil and gas purposes, parties may by agree-
In construing contract, Supreme Court will en-
ment modify general rule that royalty is subject to
force unambiguous document as written.
postproduction costs.
[8] Mines and Minerals 260 79.1(1)
[11] Mines and Minerals 260 79.3
260 Mines and Minerals
260 Mines and Minerals
260II Title, Conveyances, and Contracts

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 Page 3
939 S.W.2d 118, 39 Tex. Sup. Ct. J. 537
(Cite as: 939 S.W.2d 118)

260II Title, Conveyances, and Contracts 260II(C)3 Construction and Operation of
260II(C) Leases, Licenses, and Contracts Oil and Gas Leases
260II(C)3 Construction and Operation of 260k79 Rent or Royalties
Oil and Gas Leases 260k79.3 k. Amount and time of
260k79 Rent or Royalties payment. Most Cited Cases
260k79.3 k. Amount and time of In determining market value at the well for oil
payment. Most Cited Cases and gas royalty purposes, when information about
In determining market value at the well for oil comparable sales is not readily available, courts use
and gas royalty purposes, “market value” is price method involving subtracting reasonable postpro-
willing seller obtains from willing buyer. duction marketing costs from market value at point
of sale.
[12] Mines and Minerals 260 79.3
[15] Mines and Minerals 260 79.3
260 Mines and Minerals
260II Title, Conveyances, and Contracts 260 Mines and Minerals
260II(C) Leases, Licenses, and Contracts 260II Title, Conveyances, and Contracts
260II(C)3 Construction and Operation of 260II(C) Leases, Licenses, and Contracts
Oil and Gas Leases 260II(C)3 Construction and Operation of
260k79 Rent or Royalties Oil and Gas Leases
260k79.3 k. Amount and time of 260k79 Rent or Royalties
payment. Most Cited Cases 260k79.3 k. Amount and time of
For oil and gas royalty purposes, the most de- payment. Most Cited Cases
sirable method of determining market value at the For purposes of determining market value at
well is to use comparable sales. the well for oil and gas royalty purposes when in-
formation about comparable sales is not readily
[13] Mines and Minerals 260 79.3 available, “postproduction marketing costs” include
transporting gas to market and processing gas to
260 Mines and Minerals
make it marketable.
260II Title, Conveyances, and Contracts
260II(C) Leases, Licenses, and Contracts [16] Mines and Minerals 260 79.7
260II(C)3 Construction and Operation of
Oil and Gas Leases 260 Mines and Minerals
260k79 Rent or Royalties 260II Title, Conveyances, and Contracts
260k79.3 k. Amount and time of 260II(C) Leases, Licenses, and Contracts
payment. Most Cited Cases 260II(C)3 Construction and Operation of
For oil and gas royalty purposes, in determin- Oil and Gas Leases
ing market value at the well by use of comparable 260k79 Rent or Royalties
sales, “comparable sale” is one that is comparable 260k79.7 k. Actions. Most Cited
in time, quality, quantity, and availability of mar- Cases
keting outlets. For oil and gas royalty purposes, plaintiff has
burden to prove market value at the well, under
[14] Mines and Minerals 260 79.3 either comparable sales method or method of sub-
tracting reasonable postproduction marketing costs
260 Mines and Minerals
from market value at point of sale.
260II Title, Conveyances, and Contracts
260II(C) Leases, Licenses, and Contracts [17] Mines and Minerals 260 79.3

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 Page 4
939 S.W.2d 118, 39 Tex. Sup. Ct. J. 537
(Cite as: 939 S.W.2d 118)

260 Mines and Minerals 260k79.1 In General
260II Title, Conveyances, and Contracts 260k79.1(3) k. Persons entitled
260II(C) Leases, Licenses, and Contracts in general; apportionment and division orders. Most
260II(C)3 Construction and Operation of Cited Cases
Oil and Gas Leases When oil and gas operator prepares division or-
260k79 Rent or Royalties der that allocates payments among interest owners
260k79.3 k. Amount and time of in manner that differs from oil and gas lease provi-
payment. Most Cited Cases sions and operator retains benefits, division order is
In calculating royalties to be paid to gas in- not binding, and operator then becomes liable for
terest royalty owners under oil and gas leases, less- part of interest owner's payments the operator re-
ee properly deducted costs of transporting gas to tained; basis of rule is unjust enrichment.
point of sale, despite clauses in leases limiting de-
duction from royalty for postproduction costs; post- [20] Mines and Minerals 260 79.1(3)
production clauses stated that there shall be no de-
260 Mines and Minerals
duction from value of royalty, leases clearly set
260II Title, Conveyances, and Contracts
royalty as fraction of market value at the well, less-
260II(C) Leases, Licenses, and Contracts
ee determined market value at the well by subtract-
260II(C)3 Construction and Operation of
ing postproduction transportation costs from
Oil and Gas Leases
amount received at point of sale, and commonly-ac-
260k79 Rent or Royalties
cepted meaning of “royalty” and “market value at
260k79.1 In General
the well” terms rendered postproduction clauses
260k79.1(3) k. Persons entitled
surplusage.
in general; apportionment and division orders. Most
[18] Mines and Minerals 260 79.1(3) Cited Cases
When oil and gas operator prepares division or-
260 Mines and Minerals der that allocates payments among interest owners
260II Title, Conveyances, and Contracts in manner that differs from oil and gas lease provi-
260II(C) Leases, Licenses, and Contracts sions, operator is not liable to interest owner for
260II(C)3 Construction and Operation of amounts it paid out to other interest owners.
Oil and Gas Leases
260k79 Rent or Royalties [21] Mines and Minerals 260 79.1(3)
260k79.1 In General
260 Mines and Minerals
260k79.1(3) k. Persons entitled
260II Title, Conveyances, and Contracts
in general; apportionment and division orders. Most
260II(C) Leases, Licenses, and Contracts
Cited Cases
260II(C)3 Construction and Operation of
For oil and gas purposes, general rule is that di-
Oil and Gas Leases
vision orders are binding until revoked.
260k79 Rent or Royalties
[19] Mines and Minerals 260 79.1(3) 260k79.1 In General
260k79.1(3) k. Persons entitled
260 Mines and Minerals in general; apportionment and division orders. Most
260II Title, Conveyances, and Contracts Cited Cases
260II(C) Leases, Licenses, and Contracts Gas lessee could not be held liable to trustee
260II(C)3 Construction and Operation of for gas interest royalty owners for amounts lessee
Oil and Gas Leases paid to pipeline carrier to transport gas to point of
260k79 Rent or Royalties sale, which amounts lessee deducted in calculating

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 Page 5
939 S.W.2d 118, 39 Tex. Sup. Ct. J. 537
(Cite as: 939 S.W.2d 118)

owners' royalties, under division order that al- peals incorrectly interpreted the royalty clauses. We
legedly allocated payments among interest owners reverse the court of appeals' judgment. We render
in manner that differed from lease provisions; less- judgment that NationsBank take nothing. Further,
ee would be liable, if at all, only for amount of un- we disapprove of the court of appeals' language
paid royalties it retained. about the liability of an operator who underpays
royalty interest owners.

*120 Appealed from El Paso Court of Appeals, Facts
Eighth Judicial District; Susan Larsen, Justice.John NationsBank is the trustee for owners of in-
R. Woodward, Dallas, for Petitioner. terests in gas, oil, and other minerals inherited un-
der David B. Trammel's will. Heritage is the lessee
Robert Scogin, Kermit, Rick K. Disney, Fort
and operator under a number of leases. Heritage
Worth, Cary L. Jennings, Fort Worth, Ben A.
also owns an undivided working interest in some of
Douglas, Fort Worth, for Respondents.
the leases. Heritage sold gas off the leased
premises. Heritage deducted the cost to transport
Justice BAKER delivered the opinion of the Court, the gas from the wellhead to the point of sale as a
in which Chief Justice PHILLIPS, Justice post-production cost from the sales price before
CORNYN, Justice ENOCH, and Justice SPECTOR calculating royalties.
join.
This case involves construction of royalty In January 1989, NationsBank noticed that
clauses in several oil and gas leases. NationsBank Heritage was deducting severance taxes and trans-
sued Heritage contending that Heritage deducted portation charges from the purchase price. Nations-
transportation costs from the value of Nations- Bank objected to the transportation charge deduc-
Bank's royalty in violation of the leases. tion. NationsBank contended that the leases spe-
cifically prohibited the deduction. Three different
The trial court rendered a partial summary leases are in issue. The relevant parts are:
judgment against Heritage deciding liability and
damages through 1991. NationsBank amended its 3. The royalties to be paid Lessor are ...
pleading to include Heritage's deductions through
(b) on gas, including casinghead gas or other
1993. After a bench trial, the trial court awarded
gaseous substances produced from the land, or
NationsBank and other royalty owners the trans-
land consolidated therewith, and sold or used off
portation costs Heritage deducted plus interest and
the premises or in the manufacture of gasoline or
attorney's fees.
other products therefrom, the market value at the
The court of appeals affirmed the trial court's well of 1/5 of the gas so sold or used, provided
judgment. 895 S.W.2d 833. It held that the royalty that on gas sold at the well the royalty shall be
clauses showed the parties' intent not to deduct the 1/5 of the amount realized from such sale
post-production transportation costs when determ- provided, however, that there shall be no deduc-
ining market value at the well. 895 S.W.2d at tions from the value of the Lessor's royalty by
836–37. The court of appeals also held that the di- reason of any required processing, cost of dehyd-
vision orders Heritage and the royalty owners ex- ration, compression, transportation or other mat-
ecuted did not bind the royalty owners and that ter to market such gas.
Heritage was liable for the full amount deducted.
or:
895 S.W.2d at 839.
3. In consideration of the premises, Lessee cov-
We conclude the trial court and the court of ap- enants and agrees ...

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 Page 6
939 S.W.2d 118, 39 Tex. Sup. Ct. J. 537
(Cite as: 939 S.W.2d 118)

(b) To pay the Lessor 1/4 of the market value at royalty paid less than the required fraction of mar-
the well for all gas (including substances con- ket value at the well. Because NationsBank con-
tained in such gas) produced from the leased cedes Heritage only deducted reasonable transport-
premises; provided, however, that there shall be ation costs from the market value at the point of
no deductions from the value of Lessor's royalty sale, Heritage did not make a deduction from the
by reason of any required processing, cost of de- “value of the Lessor's royalty.”
hydration, compression,*121 transportation, or
other matter to market such gas. The court of appeals rejected Heritage's inter-
pretation of the royalty clause. 895 S.W.2d at 836.
or The court of appeals reasoned that because royalty
3. Lessee shall pay the following royalties subject interests are normally subject to post-production
to the following provisions: ... costs, Heritage's interpretation renders the post-
production clause meaningless. 895 S.W.2d at 837.
(b) Lessee shall pay the Lessor 1/4 of the market Although we do not disagree with the court of ap-
value at the well for all gas (including all sub- peals' reasoning in this respect, we find that apply-
stances contained in such gas) produced from the ing the trade meaning of royalty and market value
leased premises and sold by Lessee or used off at the well renders the post-production clauses sur-
the leased premises, including sulphur produced plusage as a matter of law.
in conjunction therewith; provided, however, that
there shall be no deductions from the value of (a) Applicable Law
Lessor's royalty by reason of any required pro- Oil and Gas Lease Construction
cessing, cost of dehydration, compression, trans- [1][2][3][4][5][6][7] The question of whether a
portation, or other matter to market such gas. contract is ambiguous is one of law for the court. R
& P Enters. v. LaGuarta, Gavrel & Kirk, Inc., 596
Although the court of appeals states that the S.W.2d 517, 518 (Tex.1980). A contract is ambigu-
leases are virtually identical, the first lease is dis- ous when its meaning is uncertain and doubtful or
tinctly different from the others. In the first lease, is reasonably susceptible to more than one inter-
for gas sold on the lease, royalty is on proceeds, pretation. Coker v. Coker, 650 S.W.2d 391, 393
with no deduction for marketing costs, but if sold at (Tex.1983). In construing an unambiguous oil and
a point off the lease, the royalty is the market value gas lease our task is to ascertain the parties' inten-
at the well. However, this difference is irrelevant tions as expressed in the lease. Sun Oil Co. v.
for purposes of this opinion. All three leases require Madeley, 626 S.W.2d 726, 727–28 (Tex.1981);
us to determine if Heritage improperly deducted McMahon v. Christmann, 157 Tex. 403, 303
transportation costs from the royalty payments. The S.W.2d 341, 344 (1957). To achieve this goal, we
critical clause in all three leases is the requirement examine the entire document and consider each part
that Heritage pay the royalty interest owners their with every other part so that the effect and meaning
fractional interest of “the market value at the well” of one part on any other part may be determined.
of the gas produced. Steeger v. Beard Drilling, 371 S.W.2d 684, 688
(Tex.1963). We presume that the parties to a con-
Royalty Clause Construction
tract intend every clause to have some effect. Og-
Heritage contends that the royalty clauses
den v. Dickinson State Bank, 662 S.W.2d 330, 331
define the lessor's royalty as a fraction of the mar-
(Tex.1983). We give terms their plain, ordinary,
ket value at the well. Therefore, the clauses limiting
and generally accepted meaning unless the instru-
deduction from the value of the lessor's royalty
ment shows that the parties used them in a technical
simply means that Heritage cannot deduct an
or different sense. Western Reserve Life Ins. Co. v.
amount from the sales price that would make the

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939 S.W.2d 118, 39 Tex. Sup. Ct. J. 537
(Cite as: 939 S.W.2d 118)

Meadows, 152 Tex. 559, 261 S.W.2d 554, 557 246; Vela, 429 S.W.2d at 872.
(1953), cert. denied, 347 U.S. 928, 74 S.Ct. 531, 98
L.Ed. 1081 (1954). This Court will enforce the un- [14][15][16] Courts use the second method
ambiguous document as written. Sun Oil Co., 626 when information about comparable sales is not
S.W.2d at 728. Both the trial court and the court of readily available. See, e.g., Le Cuno Oil Co. v.
appeals determined that the leases in question were Smith, 306 S.W.2d 190, 193
unambiguous. We agree. (Tex.Civ.App.—Texarkana 1957, writ ref'd n.r.e.),
cert. denied, 356 U.S. 974, 78 S.Ct. 1137, 2
Royalty L.Ed.2d 1147 (1958); Clear Creek Oil & Gas Co. v.
[8][9][10] Royalty is commonly defined as the Bushmiaer, 165 Ark. 303, 264 S.W. 830, 832
landowner's share of production, free of *122 ex- (1924); see also Pierce, Royalty Valuation Prin-
penses of production. See Delta Drilling Co. v. Sim- ciples in a Changing Gas Market, in STATE BAR
mons, 161 Tex. 122, 338 S.W.2d 143, 147 (1960); OF TEXAS PROF. DEV. PROGRAM, 11TH AN-
Alamo Nat'l Bank v. Hurd, 485 S.W.2d 335, 338 NUAL ADVANCED OIL, GAS AND MINERAL
(Tex.Civ.App.—San Antonio 1972, writ ref'd n.r.e.) LAW COURSE E, E–9 (1993). This method in-
; 8 WILLIAMS & MEYERS, OIL & GAS LAW, volves subtracting reasonable post-production mar-
856–57 (1987); 3 KUNTZ, OIL & GAS LAW, § keting costs from the market value at the point of
42.2 (1989). Although it is not subject to the costs sale. Texas Oil & Gas Corp. v. Hagen, 683 S.W.2d
of production, royalty is usually subject to post- 24, 28 (Tex.App.—Texarkana 1984), dism'd as
production costs, including taxes, treatment costs to moot, 760 S.W.2d 960 (Tex.1988). Post-production
render it marketable, and transportation costs. Mar- marketing costs include transporting the gas to the
tin v. Glass, 571 F.Supp. 1406, 1410 market and processing the gas to make it market-
(N.D.Tex.1983), aff'd, 736 F.2d 1524 (5th able. Hagen, 683 S.W.2d at 29. With either method,
Cir.1984); WILLIAMS & MEYERS, supra, p. 857. the plaintiff has the burden to prove market value at
However, the parties may modify this general rule the well. Hagen, 683 S.W.2d at 29.
by agreement. Martin, 571 F.Supp. at 1410.
(b) Application of Law to the Facts
Market Value at the Well The court of appeals disregarded the generally
[11] Market value at the well has a commonly accepted meanings of “market value at the well”
accepted meaning in the oil and gas industry. See and “royalty” to determine that Heritage wrongfully
generally Wakefield, Annotation, Meaning of, and deducted post-production costs. The court of ap-
Proper Method for Determining, Market Value or peals' construction results in a royalty clause that
Market Price in Oil and Gas Lease Requiring Roy- specifies royalty payable as a fraction of the market
alty to be Paid on Standard Measured by Such value at the well, to mean the royalty is payable as
Terms, 10 ALR 4TH 732 (1981). Market value is a fraction of the market value at the point of sale
the price a willing seller obtains from a willing with no deductions for post-production costs.
buyer. See Exxon Corp. v. Middleton, 613 S.W.2d
240, 246 (Tex.1981). There are two methods to de- [17] The terms “royalty” and “market value at
termine market value at the well. the well” have well accepted meanings in the oil
and gas industry. The post-production clauses in is-
[12][13] The most desirable method is to use sue here plainly state that there “shall be no deduc-
comparable sales. Middleton, 613 S.W.2d at 246; tion from the value of the Lessor's Royalty. ” The
Texas Oil & Gas Corp. v. Vela, 429 S.W.2d 866, leases clearly set the lessor's royalty as a fraction (
872 (Tex.1968). A comparable sale is one that is 1/4 or 1/5 ) “of the market value at the well.” Under
comparable in time, quality, quantity, and availabil- the leases, the lessee must determine the value of
ity of marketing outlets. Middleton, 613 S.W.2d at the lessor's royalty. The lessee accomplishes this by

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939 S.W.2d 118, 39 Tex. Sup. Ct. J. 537
(Cite as: 939 S.W.2d 118)

determining market value at the well and multiply- argument that the transportation costs Heritage de-
ing it by the fraction specified in the royalty clause ducted were reasonable.
( 1/4 or 1/5 ). This result is the value of the lessor's
royalty. The post-production clauses then specify Because there is no evidence to support the
that there can be no deduction from this value (the comparable sales method of computing market
value of the lessor's royalty) by reason of any post- value at the well, we use the alternate method. Un-
production costs. der that method, Heritage must pay a royalty based
on the market value at the point of sale less the
Here, the only conclusion we can draw is that reasonable post-production marketing costs. Hagen,
the post-production clauses merely restate existing 683 S.W.2d at 28. Based on the parties' conces-
law. The post-production clauses illustrate that the sions, the amount Heritage paid is the correct
lessee cannot pay the lessor less than his fractional amount in royalties to NationsBank under the
value of the comparable sales price (market value). leases.
This could occur if the amount realized from the
*123 sale of the gas less the post production costs Division Orders
was less than the comparable sales price and the Heritage entered into division orders with the
lessee calculated the lessor's royalty by subtracting royalty owners. The division orders contained the
post production costs from amount realized. At following language:
times the amount realized from the sale of gas has
All proceeds from the sale of gas shall be paid to
varied greatly from the market value of the gas. See
the undersigned or their assigns in the propor-
Vela, 429 S.W.2d at 875–76 (evidence sustained
tions as herein set out less taxes and any costs in-
trial court's finding that market value was 13.047
curred in the handling and transportation to the
cents per mcf even though amount realized by less-
point of sale, treating, compressing boosting, de-
ee under long term gas sales contract was 2.3 cents
hydrating or any other conditioning necessary,
per mcf). Even though the Vela scenario may be un-
subject to the terms of any contract of purchase
likely to reoccur in the future due to changes in the
and sale which affects the above described prop-
market place, see, e.g. Pierce, supra, E–1—E–3, the
erty ...
market value may differ from the amount realized.
The court of appeals held that the division or-
We recognize that our construction of the roy-
ders were of no effect and that Heritage was liable
alty clauses in two of the three leases arguably
for reimbursement to the royalty owners for trans-
renders the post-productions clause unnecessary
portation costs improperly withheld in payment to
where gas sales occur off the lease. However, the
Urantia. The court of appeals' discussion about the
commonly accepted meaning of the “royalty” and
effect of a division order that contradicts the lease
“market value at the well” terms renders the post-
terms conflicts with our earlier opinion in Gavenda
production clause in each lease surplusage as a mat-
v. Strata Energy, Inc., 705 S.W.2d 690 (Tex.1986).
ter of law.
[18][19][20] The general rule is that division
To determine if Heritage correctly paid royal-
orders are binding until revoked. Gavenda, 705
ties under the leases, we must first determine the
S.W.2d at 691; Middleton, 613 S.W.2d at 250.
market value of the gas at the well. NationsBank
When an operator prepares a division order that al-
offered no evidence of comparable sales. However,
locates payments among the interest owners in a
Heritage conceded in its response to NationsBank's
manner that differs from the lease provisions and
motion for partial summary judgment that the price
the operator retains the benefits, the division order
Heritage received for the gas was the market price
is not binding. Gavenda, 705 S.W.2d at 692. The
at the point of sale. NationsBank conceded at oral

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939 S.W.2d 118, 39 Tex. Sup. Ct. J. 537
(Cite as: 939 S.W.2d 118)

basis of this rule is unjust enrichment. Gavenda, I
705 S.W.2d at 692. The operator then becomes li- NationsBank, as trustee, is an owner of royalty
able for the part of the interest owner's payments interests under six leases that are the subject of this
the operator retained. See Gavenda, 705 S.W.2d at suit. Heritage is a working interest owner under
693. The operator is not liable for the amounts it each of the leases and is the operator of the wells
paid out to other interest owners. Gavenda, 705 located on those leases. The specific lease provi-
S.W.2d at 693. sions that have given rise to this dispute are set
forth in the Court's opinion.
[21] The court of appeals decision incorrectly
states that “Heritage was liable for reimbursement The royalty clauses in contention specifically
to the royalty owners for transportation costs im- address marketing costs that may be incurred after
properly withheld in payment to Urantia.” 895 the gas leaves the wellhead, including processing,
S.W.2d at 839. Under Gavenda, Heritage would be dehydration, compression, and transportation costs.
liable, if at all, only for the amount of the unpaid These are sometimes called post-production costs.
royalty it retained. In this case, there were other The only costs at issue in this suit, however, are
working interest owners who were not parties to the transportation charges. Simply put, the issue is how
suit. Absent an agreement *124 otherwise, all the the cost of transporting the gas to market is to be al-
working interest owners would benefit from an im- located under the terms of these leases. This is a
proper deduction of transportation charges from the question of law. There are no factual disputes. Na-
royalties paid to NationsBank. Therefore the trial tionsBank has conceded that the transportation
court could only hold Heritage liable for an amount charges were reasonable and in line with market
of unpaid royalties that Heritage retained. rates. Heritage and NationsBank agree that the
prices at which the gas was sold reflected its market
Summary value at the point of sale. It is undisputed that the
In conclusion, we hold that the court of appeals sales of gas at issue have taken place off of the
erred in holding that the lease required Heritage to leased premises. The trial court, the court of ap-
pay royalties based on the market value at the point peals, and this Court correctly concluded that none
of sale. Further, we specifically disapprove of the of the leases are ambiguous.
court of appeals discussion about an erroneous divi-
sion order's effects. We reverse the court of appeals' II
judgment and render judgment that NationsBank At the outset, it is important to note that we are
take nothing from Heritage. construing specific language in specific oil and gas
leases. Parties to a lease may allocate costs, includ-
Justice OWEN, joined by Justice HECHT, concur- ing post-production or marketing costs, as they
ring. choose. See generally 3 WILLIAMS, OIL & GAS
I concur in the judgment of the Court. The LAW § 645 (1990). Our task is to determine how
meaning of “market value at the well,” upon which those costs were allocated under these particular
the resolution of this case ultimately turns, is not as leases.
clear-cut as the Court's opinion indicates when de-
termining whether post-production costs are to be Each of the royalty provisions begins with the
shared by a royalty owner. I write separately to statement that royalties are to be paid on gas sold
consider the meaning of “market value at the well” off the lease based on the market value of the gas at
more fully and to recognize that the construction the well. The proviso that follows, prohibiting the
we are compelled to give to the leases at issue may deduction of marketing costs from the value of the
not comport with the subjective intent of at least royalty, is virtually identical in all of the leases.
some of the parties to those agreements. Accordingly, any differences among the leases are

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939 S.W.2d 118, 39 Tex. Sup. Ct. J. 537
(Cite as: 939 S.W.2d 118)

immaterial for purposes of determining the royalty expenses incurred in sales off the lease; marketing
FN1
obligation. costs are to be shared proportionately by the work-
ing interest and royalty owners.
FN1. One of the leases differs somewhat
from the others. Because of the way in FN2. For a general discussion of these
which the royalty clause of that lease is competing principles and some of the di-
structured, an argument could be made that vergent decisions, see Wood v. TXO Pro-
the proviso prohibiting the deduction of duction Corp., 854 P.2d 880 (Okl.1992).
marketing costs from the value of the roy- See also 3 WILLIAMS, OIL & GAS LAW
alty applies only when the sale of gas oc- § 645 (1990).
curs at the well and that the proviso does
not apply when determining the market In examining decisions in this area, it must be
value of gas sold off the lease. It is unne- borne in mind that not all royalty clauses were cre-
cessary to decide that issue, however, be- ated equal. Some are based on “proceeds,” some on
cause the parties agree that the proviso “amount realized,” while others are based on
does apply under this lease as well as un- “market value.” Some specify the point at which
der the other leases in determining the the value of the royalty is determined, such as “at
market value of gas at the well when it is the well.” Some do not. Some leases have more
sold off the premises. than one method for valuing royalty depending on
whether the gas is sold or used off the leased
The starting point in construing the leases is premises or is sold at the well. Different courts
the language chosen by the parties. We first must have accorded differing meanings to the same lan-
ascertain the meaning of “market value at the well,” guage.
which the agreements set *125 out as the initial
benchmark for valuing the royalty. “Market value With these distinctions in mind, I consider
at the well” tells us how and where the value of the Texas decisions first.
royalty is measured, subject to any other provisions
A
that bear on valuation.
The concept of “market value” is well-
A number of courts in producing states across established in our jurisprudence. It is what a willing
the country have considered the meaning of various buyer under no compulsion to buy will pay to a
royalty clauses, including “market value at the willing seller under no compulsion to sell. See, e.g.,
well” clauses, in deciding which marketing costs, if Exxon Corp. v. Middleton, 613 S.W.2d 240, 246
any, are to be borne by the royalty owner. The de- (Tex.1981). This would seem to be a straight-for-
cisions, including those under Texas law, are not ward measure, but how market value is determined
uniform. There are two diverse viewpoints, with in the context of an oil and gas lease is a question
some decisions picking and choosing between the that has been before this Court on more than one
two, depending on the specific marketing cost un- occasion. We held in Texas Oil & Gas Corp. v.
FN2 Vela that the price paid under a gas purchase con-
der consideration. At one end of the spectrum
is the view that because the operator has an implied tract between the lessee and the purchaser is not ne-
duty or an implied covenant to market the gas, all cessarily the market price within the meaning of the
costs of marketing must be borne by the operator. lease. 429 S.W.2d 866, 871 (Tex.1968). The parties
Generally speaking, this is the minority view. On in that case agreed that the market price of gas is to
the other end of the spectrum, many decisions re- be determined by sales comparable in time, quality,
cognize that while there is an implied duty or cov- and availability of marketing outlets. Id. at 872. See
enant to market the gas, this duty does not extend to also First Nat'l Bank in Weatherford, Texas v. Ex-

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939 S.W.2d 118, 39 Tex. Sup. Ct. J. 537
(Cite as: 939 S.W.2d 118)

xon Corp., 622 S.W.2d 80, 82 (Tex.1981) Corp. v. Calvert, 451 S.W.2d 889, 892 (Tex.1970).
(intrastate sales of gas not comparable to interstate In Mobil, market value was defined in the tax stat-
sales regulated by the Federal Power Commission). ute as value “at the mouth of the well.” Id. at 891.

In Middleton, we considered when gas is sold But these decisions do not directly answer the
within the meaning of a royalty clause based on question of who bears marketing costs under a
“market value at the well.” Exxon contended that “market value at the well” royalty clause in a lease.
the gas was sold at the time Exxon entered into a Our Court has spoken to this issue only obliquely.
long term contract with the purchaser, and that mar- In Upham v. Ladd, 128 Tex. 14, 95 S.W.2d 365,
ket value should be determined as of then. We dis- 366 (1936), we concluded that a lessor suing for
agreed, holding that market value is determined at underpayment of royalties based on a clause calling
the point in time when the gas is actually produced for payment of “proceeds” had stated a cause of ac-
and delivered. 613 S.W.2d at 245. We also con- tion, but noted that the question of construction of
cluded that “sold at the wells” means sold at the the lease was not yet before the Court.
wells within the lease, not sold at wells within the
field. Id. at 243. Decisions of the courts of appeals and other
courts applying Texas law have confronted the
We had occasion to consider whether an oper- question of whether post-production costs may be
ator owes a duty to a non-participating interest allocated to the royalty interest owners, but the
owner to process gas in Danciger Oil & Refineries, holdings are not entirely consistent and construe
Inc. v. Hamill Drilling Co., 141 Tex. 153, 171 differing provisions.
S.W.2d 321 (1943). We determined that the operat-
or was not obligated to process the gas where the One of the earliest decisions dealing with
agreement provided that an overriding royalty in- Texas law on the subject of marketing costs and
terest would be computed on 1/24 th of the gas payment of royalties was Phillips Petroleum Co. v.
“produced, saved and marketed at the prevailing Bynum, 155 F.2d 196 (5th Cir.1946). In discussing
market price paid by major companies ... free and how to arrive upon the market value of gas, the
clear of operating expenses.” Id., 171 S.W.2d at Fifth Circuit observed that in the absence of avail-
322–23. The only market in the vicinity was for able evidence of market price at the well, it “would
processed *126 gas. There was no market for gas seem appropriate” to look at the market price paid
produced in its raw state at the wellhead. We by the purchasers in the area at the point of sale,
reasoned that the overriding royalty payments were and to then deduct transportation costs. Id. at 198.
to be made out of gas “if, as and when produced,” The Fifth Circuit assumed without discussion that
not out of its value after it had been processed into transportation charges should be deducted in arriv-
a more valuable product, even though the clause ing upon market value. See also Phillips Petroleum
also referred to gas “marketed.” Id. at 322. We fur- Co. v. Johnson, 155 F.2d 185, 189 (5th Cir.), cert.
ther held that “operating costs” meant the expenses denied, 329 U.S. 730, 67 S.Ct. 87, 91 L.Ed. 632
necessary to market the gas, not processing the gas (1946) (decided the same day, holding that royalty
into some other product. Id. at 323. on processed gas is 1/8 th of the sale proceeds less
a credit for transportation, separation, and sales
We have recognized that for occupation tax costs under a royalty clause that called for “ 1/8 th
purposes, the market value of processed gas is of net proceeds derived from the sale of the gas at
measured as to all ownership interests, including the mouth of the well”); Holbein v. Austral Oil Co.,
royalty interests, by the total proceeds of the sale of Inc., 609 F.2d 206, 209 (5th Cir.1980) (dehydration
the component parts of the gas after processing, costs deductible from royalty under clause basing
less transportation and processing costs. Mobil Oil royalty on amount realized from the sale of gas).

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939 S.W.2d 118, 39 Tex. Sup. Ct. J. 537
(Cite as: 939 S.W.2d 118)

At least two decisions from Texas courts of ap- ref'd n.r.e.), cert. denied, 356 U.S. 974, 78 S.Ct.
peals are at odds with the approach taken by the 1137, 2 L.Ed.2d 1147 (1958). The parties agreed
Fifth Circuit. The royalty in Miller v. Speed, 248 that a division order calling for 1/8 th of the price
S.W.2d 250, 256 (Tex.Civ.App.—Eastland 1952, received at the wells governed the royalty, and the
no writ), was held to be free of any marketing costs. court held costs of dehydration, gathering, trans-
The provision under consideration was not ex- porting, and processing could be deducted from the
pressly a market value clause. It simply provided gross sales price received by the operator. Id. at
for a royalty of 1/24 th of all gas produced, saved 193. See also Martin v. Glass, 571 F.Supp. 1406,
and made available for market. The case of Pan 1411–15 (N.D.Tex.1983), aff'd, 736 F.2d 1524 (5th
American Petroleum Corp. v. Southland Royalty Cir.1984) (post-production compression charges
Co., 396 S.W.2d 519, 524–25 (Tex.Civ.App.—El held deductible under a royalty clause based on net
Paso 1965, writ dism'd w.o.j.), relied on Miller and proceeds at the well). The court found that “net pro-
reasoned that a royalty interest is free of the cost of ceeds” contemplated deductions. 571 F.Supp. at
production and marketing costs. The poorly worded 1411. See also Maddox v. Texas Co., 150 F.Supp.
royalty clause in Pan American was based on pro- 175, 180 (E.D.Tex.1957) (“fair value” was the
ceeds and also provided for delivery of the lessor's measure where there was no market and marketing
share of the minerals “free of cost.” See also Sk- costs must be considered where the lease required
aggs v. Heard, 172 F.Supp. 813 (S.D.Tex.1959) the lessor to bear its proportionate cost of rendering
(compression costs could not be charged to the gas merchantable).
lessor where the sale occurred on the lease and the
royalty clause provided for royalties based on pro- To add another point of view on this subject, a
ceeds). Texas court of appeals recently held that a royalty
clause based on “market value at the well” was am-
In contrast, other Texas courts of appeals have biguous. That court upheld a jury finding that the
allowed certain marketing costs to be allocated to parties did not intend to allow the deduction of
the royalty owner. Only one of those cases dealt compression charges from royalties. Judice v. Mew-
with a market value royalty clause, Texas Oil & bourne Oil Co., 890 S.W.2d 180
Gas Corp. v. Hagen, 683 S.W.2d 24 (Tex.App.—Amarillo 1994), reversed today by this
(Tex.App.—Texarkana 1984), writ dism'd as moot, Court in a companion decision, 939 S.W.2d 133.
760 S.W.2d 960 (Tex.1988). Hagen held that mar-
ket value at the well is the market value of the gas While it is fair to say that the greater number of
where sold, less reasonable and necessary transport- courts considering Texas law have permitted alloc-
ation and processing costs. Id. at 28. Similarly, in ation of post-production costs to royalty owners,
*127 Parker v. TXO Prod. Corp., 716 S.W.2d 644 there are decisions reaching the opposite conclu-
(Tex.App.—Corpus Christi 1986, no writ), the roy- sion. It remains for this Court to determine whether
alty owner was required to share in post-production “market value at the well” includes or excludes
compression costs. In dicta, the Parker court indic- post-production costs. Decisions from other juris-
ated that all post-production costs could be charged dictions illuminate the arguments on both sides of
to the royalty owners. Id. at 648. The specific terms the issue and offer a variety of potential resolutions.
of the royalty clause cannot be discerned from the
B
opinion in Parker.
One of the most comprehensive discussions of
Marketing costs were also charged to the roy- “market value at the well” royalty clauses is Judge
alty owners in Le Cuno Oil Co. v. Smith, 306 Wisdom's decision in Piney Woods Country Life
S.W.2d 190 (Tex.Civ.App.—Texarkana 1957, writ Sch. v. Shell Oil Co., 726 F.2d 225 (5th Cir.1984),
cert. denied, 471 U.S. 1005, 105 S.Ct. 1868, 85

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939 S.W.2d 118, 39 Tex. Sup. Ct. J. 537
(Cite as: 939 S.W.2d 118)

L.Ed.2d 161 (1985). Although that decision applies clause. A general question had been certified to the
Mississippi law, the court's review of the law is not court.
restricted to Mississippi jurisprudence. Among oth-
er authorities, the opinion considers at some length The Oklahoma supreme court, after similarly
the meaning attributed to “market value at the well” surveying other states' decisions, concluded that the
by numerous commentators, concluding that the implied duty to market gas is a duty to “get the
purpose in specifying “at the well” is to distinguish product to the place of sale in marketable form.”
between gas sold in the form in which it emerges Wood v. TXO Prod. Corp., 854 P.2d 880, 882
from the wellhead and gas which thereafter has had (Okla.1992). A “market value at the well” clause
value added by transportation or processing. Id. at was at issue. The court held that compression
231, 240. The Fifth Circuit held that royalties under charges necessary for the gas to enter the pur-
a “market value at the well” clause should com- chaser's pipeline could not be deducted from the
pensate only for the value of the gas at the well, be- royalty where the sale occurred on the lease
fore the operator adds value. Id. Accordingly, that premises. Id. In the dissenting opinion, four mem-
court concluded that royalty owners may be bers of the court found this result “harsh and unten-
charged with all expenses subsequent to production able” and would have adopted the “better-reasoned”
including processing, transportation, removal of approach of allowing the deduction of compression
sulfur, and other marketing costs where the royalty costs. Id. at 883.
provision measures value “at the well.” Id. This
The majority in Wood v. TXO distinguished
reasoning is persuasive.
that court's prior decision in Johnson v. Jernigan,
It has not been followed, however, by the 475 P.2d 396 (Okla.1970), which held that the ob-
highest courts of some of our sister states. The im- ligation to market did not require the operator to
plied obligation to market gas was held to be para- absorb the cost of transporting gas ten miles by
mount in Garman v. Conoco, Inc., 886 P.2d 652 pipeline to the point of sale off the lease. Johnson
(Colo.1994). After surveying the law in other juris- extended the duty to market only to the lease
dictions and examining the rationale underpinning boundaries. Id. at 399. The Johnson court reached
the various decisions, the Supreme Court of Color- this conclusion even though the lease called for
ado concluded that the implied covenant to market royalties based on the “gross proceeds at the pre-
gas obligates the lessee to incur post-production vailing market rate for all gas sold off the
costs necessary to place the gas in a condition ac- premises.” Id. at 397. The court reasoned that
ceptable for market. Id. at 659. Examples of costs “gross proceeds” had reference to the value of the
borne solely by the lessee included gathering and gas on the lease property “without deducting any of
compression costs to move the gas from the well- the expenses involved in developing and marketing
head to a processing plant, and dehydration costs. the dry gas to this point of delivery.” Id. at 399.
Id. at 655–56 n. 8. The court did draw a distinction,
Kansas courts have also seemed to draw a dis-
though, between costs necessary to *128 market the
tinction between sales on the lease premises and
gas and those that increased value after the gas had
those off the premises in deciding whether market-
been rendered marketable. Id. at 661. The court im-
ing costs may be passed on to the royalty owner.
posed the burden on the lessee to demonstrate that
Language in the lease specifying that royalty is to
costs enhancing an already marketable product are
be determined “at the well” has not appeared to be
reasonable and that they increase royalty revenues
a factor in the courts' decisions. Compare Schup-
in proportion with those costs. Id. at 661. It should
bach v. Continental Oil Co., 193 Kan. 401, 394
be noted that this case was decided essentially in a
P.2d 1 (1964) (lessee cannot deduct post-production
vacuum, without reference to any specific lease
compression costs where sale occurred on the lease

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939 S.W.2d 118, 39 Tex. Sup. Ct. J. 537
(Cite as: 939 S.W.2d 118)

and royalty clause was based on proceeds at the (Ky.Ct.App.1956) (where lease silent as to place of
mouth of the well; court noted that compression market, royalty is based on market at the well);
was installed without consulting royalty owners as Kretni Dev. Co. v. Consolidated Oil Corp., 74 F.2d
to size, location and number of compressors); and 497, 500 (10th Cir.1934), cert. denied, 295 U.S.
Gilmore v. Superior Oil Co., 192 Kan. 388, 388 750, 55 S.Ct. 829, 79 L.Ed. 1694 (1935),
P.2d 602 (1964) (could not recover compression (obligation to market did not extend to providing
costs under lease based on “proceeds from the sale ninety-mile pipeline for distant market at sole cost
of gas at the mouth of the well”; court emphasized of lessee).
that compression was installed on the lease and re-
cognized duty to market, distinguishing situations California law appears to allow the deduction
where market is distant from the lease) with Matzen of marketing costs under a “market price at the
v. Hugoton Prod. Co., 182 Kan. 456, 321 P.2d 576, well” clause, absent language to the contrary. At-
581–82 (1958) (where gas gathered, processed and lantic Richfield Co. v. State, 214 Cal.App.3d 533,
sold off premises, lessee may deduct these costs 262 Cal.Rptr. 683, 688 (1989, review denied)
from gross proceeds under clause based on pro- (unless there is clear language to the contrary,
ceeds from the sale of gas, even though lease silent lessor bears proportionate share of processing and
as to where market must be found); and Molter v. transportation costs when term “market price at the
Lewis, 156 Kan. 544, 134 P.2d 404, 406 (1943) well” is used).
(implied covenant to market does not require lessee
The North Dakota supreme court took a route
to bear cost of transporting oil by truck to a distant
similar to that of our court of appeals in Judice.
place even though lease provided for delivery by
West v. Alpar Resources, Inc., 298 N.W.2d 484,
lessee to lessor into pipeline “free of cost”). See
490–91 (N.D.1980). The North Dakota court found
also Ashland Oil & Refining Co. v. Staats, Inc., 271
a royalty clause ambiguous where it specified only
F.Supp. 571, 575 (D.Kan.1967) (refusing to enlarge
that the royalty was “one-eighth of the proceeds
lessee's duty to market to require it to bear full cost
from the sale of the gas,” and did not specify
of 153–mile pipeline system).
whether proceeds were to be determined at the well
Arkansas seems to recognize a distinction or at the point of sale. The North Dakota court pro-
between royalty based on “proceeds” versus ceeded to construe the lease against the lessor as a
“market value at the well,” even if the proceeds are matter of law, requiring the lessor to bear all costs.
to be determined “at the well.” Compare Hanna Oil Id. at 491.
& Gas Co. v. Taylor, 297 Ark. 80, 759 S.W.2d 563,
Finally, courts applying Louisiana law have
564–65 (1988) (compression costs necessary to
uniformly held that post-production costs are de-
market gas not deductible under lease providing for
ductible under a “market value at the well” clause,
royalty on proceeds received at the well), with
commencing with the Louisiana supreme court's de-
Clear Creek Oil & Gas Co. v. Bushmiaer, 165 Ark.
cision in Wall v. United Gas Pub. Serv. Co., 178
303, 264 S.W. 830, 832 (1924) (under lease calling
La. 908, 152 So. 561, 564 (1934) (market price
for royalty based on market price at the wells, roy-
means market value in the field and the lessee is not
alty was net price after deducting transportation
required to bear all the expense of carrying gas to a
costs).
market beyond the field). Louisiana has applied a
*129 Kentucky and Wyoming decisions appear “reconstruction” approach to determine market
to permit the deduction of at least transportation value. Value is “reconstructed” by beginning with
charges where the sale occurs off the lease. Reed v. the gross proceeds from the sale of the gas and de-
Hackworth, 287 S.W.2d 912, 913–14 ducting any costs of taking the gas from the well-
head to the market. See Merritt v. Southwestern

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939 S.W.2d 118, 39 Tex. Sup. Ct. J. 537
(Cite as: 939 S.W.2d 118)

Elec. Power Co., 499 So.2d 210, 213 need for predictability and uniformity as to what
(La.Ct.App.1986) (compression charges to market the language used means. Parties entering into
gas, as opposed to produce it, could be deducted). agreements expect that *130 the words they have
For a good discussion of the rationale underpinning used will be given the meaning generally accorded
Louisiana law in this area, see Freeland v. Sun Oil to them. As we have seen, the decisions under
Co., 277 F.2d 154 (5th Cir.1960), cert. denied, 364 Texas law are not entirely consistent, but the
U.S. 826, 81 S.Ct. 64, 5 L.Ed.2d 55 (processing weight of the precedent is that post-production
costs can be deducted). See also Sartor v. United costs are to be shared by the royalty owner under a
Gas Pub. Serv. Co., 84 F.2d 436, 440 (5th lease that values the gas based on “market value at
Cir.1936) (transportation charges deductible under the well.” See Phillips Petroleum Co., 155 F.2d at
“market value at the well” leases). 198; Martin, 571 F.Supp. at 1411–15; Hagen, 683
S.W.2d at 28; and Le Cuno Oil Co., 306 S.W.2d at
Having canvassed the law of other states, it can 193. See also Parker, 716 S.W.2d at 648. These de-
fairly be said that there is no consensus among oth- cisions are not binding, but are persuasive.
er jurisdictions as to when post-production costs are
to be shared by the royalty owner, although the ma- Having concluded that marketing costs are to
jority view appears to be that royalty owners do be shared by the royalty interest owners under a
share in costs, at least where the sale occurs off the “market value at the well” clause, absent language
lease. to the contrary, it must be determined whether there
is language in the leases in this case that re-
C allocates these costs.
In the case before us, the court of appeals con-
cluded that “market value at the well” meant that III
the royalty interests were subject to costs incurred The language of the pertinent clause states:
after production, including taxes, costs of treating
the gas, and costs of transportation to market, un- Lessee shall pay the Lessor ... market value at the
less other language in the lease modified this provi- well for all gas ... sold ... off the leased premises
sion. 895 S.W.2d at 836. This is the better-reasoned ... provided, however, that there shall be no de-
view. ductions from the value of Lessor's royalty by
reason of any required processing, cost of dehyd-
While Texas recognizes that the lessee has an ration, compression, transportation, or other mat-
implied duty to market gas, Cabot Corp. v. Brown, ter to market such gas.
754 S.W.2d 104, 106 (Tex.1987), we have never
determined who bears the cost of marketing gas It is clear certain “deductions” are prohibited.
beyond the wellhead in the absence of an express The question that must be answered is from what
agreement. There is an express agreement in this are deductions prohibited. The clause says “from
case as to how and where royalty will be determ- the value of Lessor's royalty.” The value of Lessor's
ined. The implied duty to market gas cannot over- royalty is “market value at the well” for gas sold off
ride that agreement. The words “at the well” should the leased premises.
be given their straightforward meaning. Market
The court of appeals correctly observed that the
value “at the well” means the value of gas at the
intent of the parties is determined from what they
well, before it is transported, treated, compressed or
actually expressed in the lease as written, not what
otherwise prepared for market.
they may have intended but failed to express. 895
In construing language commonly used in oil S.W.2d at 836. However, the court of appeals did
and gas leases, we must keep in mind that there is a not apply this principle. It reasoned that the parties

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939 S.W.2d 118, 39 Tex. Sup. Ct. J. 537
(Cite as: 939 S.W.2d 118)

“must have intended something by this language,” As long as “market value at the well” is the
and in order to give the language some meaning, benchmark for valuing the gas, a phrase prohibiting
the court construed the proviso to mean that royalty the deduction of post-production costs from that
owners do not share in post-production costs. Id. value does not change the meaning of the royalty
clause. Thus, even if the Court were to hold that a
There is little doubt that at least some of the lessee's duty to market gas includes the obligation
parties to these agreements subjectively intended to absorb all of the marketing costs, the proviso at
the phrase at issue to have meaning. However, the *131 issue would add nothing to the royalty clause.
use of the words “deductions from the value of All costs would already be borne by the lessee. It
Lessor's royalty” is circular in light of this and oth- could not be said under that circumstance that the
er courts' interpretation of “market value at the clause is ambiguous. It could only be said that the
well.” The concept of “deductions” of marketing proviso is surplusage.
costs from the value of the gas is meaningless when
gas is valued at the well. Value at the well is However, the proviso prohibiting the deduction
already net of reasonable marketing costs. The of marketing costs would not be surplusage if we
value of gas “at the well” represents its value in the interpreted “market value at the well” to obligate
marketplace at any given point of sale, less the the lessee to pay some, but not all, marketing costs.
reasonable cost to get the gas to that point of sale, For example, it has been argued that at least some
including compression, transportation, and pro- post-production costs, such as compression, should
cessing costs. Evidence of market value is often be borne solely by the lessee as part of its duty to
comparable sales, as the Court indicates, or value market the gas, but that other costs, such as pro-
can be proven by the so-called net-back approach, cessing, should be shared by the lessor. See, e.g.,
which determines the prevailing market price at a Garman v. Conoco, Inc., 886 P.2d at 654. Such an
given point and backs out the necessary, reasonable interpretation of a royalty clause would mean that
costs between that point and the wellhead. But, re- value is determined on a basis other than value “at
gardless of how value is proven in a court of law, the well.” If “value” were not referable to “market
logic and economics tell us that there are no mar- value at the well,” but encompassed other consider-
keting costs to “deduct” from value at the wellhead. ations, then the proviso could be construed to pro-
See Piney Woods Country Life Sch., 726 F.2d at hibit the deduction of any costs “required ... to mar-
231. ket such gas.” But such an approach injects uncer-
tainty into the meaning of “market value at the
Further, prohibiting deductions “from the value well” leases, and could lead to a fact-finding in-
of Lessor's royalty” is not the equivalent of direct- quiry in virtually every case as to what was and was
ing that value be based on anything other than not a cost “required to market the gas.” This weighs
“market value at the well.” The Court is not presen- heavily against adopting the approach apparently
ted with a clause similar to one at issue in Judice v. taken in Colorado where the lessee has a duty to
Mewbourne Oil Co., 939 S.W.2d 133, 136 “create a marketable product,” and a fact question
(Tex.1996), where a division order directed royal- exists as to what costs are required to make the gas
ties to be based on “gross proceeds realized at the marketable. Id. at n. 3. Our Court has correctly con-
well.” There is an inherent, irreconcilable conflict cluded that “market value at the well” means just
between “gross proceeds” and “at the well” in ar- that, what a willing buyer would pay at the well, re-
riving at the value of the gas. That conflict renders cognizing there would be costs to get the gas from
the phrase ambiguous. The proviso in the Heritage the wellhead to a market.
leases does not create an ambiguity. It is simply in-
effective. There are any number of ways the parties could

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939 S.W.2d 118, 39 Tex. Sup. Ct. J. 537
(Cite as: 939 S.W.2d 118)

have provided that the lessee was to bear all costs differences are immaterial to resolving the
of marketing the gas. If they had intended that the issue presented.
royalty owners would receive royalty based on the
market value at the point of delivery or sale, they What could be more clear? This provision ex-
could have said so. If they had intended that in ad- presses the parties' intent in plain English, and I am
dition to the payment of market value at the well, puzzled by the Court's decision to ignore the un-
the lessee would pay all post-production costs, they equivocal intent of sophisticated parties who nego-
could have said so. They did not. There is no direct tiated contractual terms at arm's length. See M/S
statement in the leases that the royalty owners are Bremen v. Zapata Off–Shore Co., 407 U.S. 1, 12,
to receive anything in addition to the value of their 92 S.Ct. 1907, 1914, 32 L.Ed.2d 513 (1972) (noting
royalty, which is based on value at the well. To the that, absent compelling reason, contracts “made in
contrary, the leases only prohibit any deduction an arm's-length negotiation by experienced *132
from value at the well. This distinction may be a and sophisticated businessmen ... should be
fine one, but the language used is not ambiguous honored by the parties and enforced by the courts”);
and must be given its ordinary meaning. accord Prudential Ins. Co. v. Jefferson Assoc., 896
S.W.2d 156, 161 (Tex.1995). In my opinion, both
We cannot re-write the agreement for the the trial court and the court of appeals correctly
parties. See, e.g., Exxon v. Middleton, 613 S.W.2d held that this language clearly forbids Heritage
at 245 (quoting Vela, 429 S.W.2d at 871) from deducting transportation costs to arrive at the
(explaining that if Exxon had intended its royalty market value of the gas on which the royalty pay-
obligation to be based on the prices it actually re- ment is based.
ceived under long term sales contracts, it could
have agreed in the lease that royalty would be based Fundamental principles of Texas law hold that
on the “amount realized” from the sale, rather than competent parties enjoy the utmost freedom of con-
“market value at the well”). tract and that courts will enforce a contract freely
and voluntarily made for a lawful purpose. Crutch-
****** field v. Associates Inv. Co., 376 S.W.2d 957, 959
(Tex.Civ.App.—Dallas 1964, writ ref'd). Under ba-
For the foregoing reasons, I concur in the judg- sic rules of contract interpretation, this Court must
ment of the Court. give effect to the written expression of the parties'
intent. See Forbau v. Aetna Life Ins. Co., 876
Justice GONZALEZ, joined by Justice ABBOTT,
S.W.2d 132, 133 (Tex.1994). To do so involves
dissenting.
reading all parts of the contract together, giving ef-
The simple question presented in this case is
fect to each individual part. Id. In this case,
whether Heritage can deduct transportation costs
however, the Court unnecessarily looks to the trade
from the value of NationsBank's royalties under
meaning of the words used to conclude that the
these leases. The language at issue, which is com-
post-production clause is surplusage as a matter of
mon to each contract, reads as follows:
law. 939 S.W.2d 118. Similarly, the concurrence
[T]here shall be no deductions from the value of needlessly considers other judicial constructions of
Lessor's royalty by reason of any required pro- “market value at the well,” including several non-
cessing, cost of dehydration, compression, trans- Texas cases, without analyzing whether those con-
FN1 tracts bear any similarity to the ones at issue here.
portation, or other matter to market such gas.
Id. at 124 (Owen, J., concurring). Neither the ma-
jority nor the concurrence give proper legal effect
FN1. The royalty clause in one lease dif- to specific language in these contracts which
fers slightly from the others. However, any

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939 S.W.2d 118, 39 Tex. Sup. Ct. J. 537
(Cite as: 939 S.W.2d 118)

clearly denotes the parties' intent that “there shall of the surrounding circumstances, and apply the ap-
be no deductions from the value of Lessor's royalty propriate rules of construction to settle their mean-
by reason of any ... cost of ... transportation.” See ing. Harris v. Rowe, 593 S.W.2d 303, 306
Forbau, 876 S.W.2d at 133–34. (Tex.1979). Assuming for the sake of argument that
these contracts are ambiguous, we must apply two
Heritage was free to bargain over whether Na- of the most basic rules governing interpretation of
tionsBank would have the right to participate in oil and gas leases: (1) contracts are to be construed
post-production business activities and receive roy- against the scrivener; and (2) leases are to be con-
alties derived from those activities. The lease provi- strued against the lessee. The “construe against the
sion incorporates all four of the distinct business scrivener” canon flows from basic contract law. See
activities into which most gas production opera- Kramer, The Sisyphean Task of Interpreting Miner-
tions can be divided: production, gathering, market- al Deeds and Leases: An Encyclopedia of Canons
ing, and processing. It clearly excludes deductions of Construction, 24 TEX.TECH L.REV. 1, 103
for “any required processing, cost of dehydration, (1993). This canon allocates the burden of uncer-
compression, transportation, or other matter to mar- tainty caused by the use of inappropriate or vague
ket such gas.” The drafters of this clause could have language in a written instrument. To the extent the
allowed for deductions of the cost of any of the dis- court can identify the party who either drafted the
tinct business activities that occur after the produc- instrument *133 or provided the form used, the can-
tion of gas, but chose not to include language to on requires that the uncertainty be resolved against
that effect. The language in the lease provision is that party. The “construe against the lessee” canon
clear, and in the absence of fraud or misrepresenta- functions similarly. When an oil and gas lease is
tion, a party is charged with knowing the legal ef- subject to two or more equally reasonable construc-
fect of a contract voluntarily made. Barfield v. tions, “the one more favorable to the lessor will be
Howard M. Smith Co., 426 S.W.2d 834, 838 allowed to prevail.” Zeppa v. Houston Oil Co., 113
(Tex.1968). Because the provision at issue is unam- S.W.2d 612, 615 (Tex.Civ.App.—Texarkana 1938,
biguous, the Court errs by ignoring the clear intent writ ref'd); see also Stanolind Oil & Gas Co. v.
of the parties. Newman Bros. Drilling Co., 157 Tex. 489, 305
S.W.2d 169, 176 (1957). In the present case, Herit-
The majority and the concurrence both state
age indisputably wrote the lease contracts and occu-
that they agree with the trial court and the court of
pied the position of lessee. Thus, even if the provi-
appeals that the leases in question are unambigu-
sion is ambiguous, application of the basic rules of
ous. 939 S.W.2d 118; id. at 124 (Owen, J., concur-
interpreting oil and gas leases would result in a
ring). I find their agreement odd and amusing given
construction against Heritage and in favor of Na-
that, interpreting the same contracts, both opinions
tionsBank.
reach a completely opposite result than the lower
courts. By definition, if a contract is reasonably I have one final concern about today's decision.
susceptible to more than one meaning, it is ambigu- By attributing an unequivocal, precise meaning to
ous. Coker v. Coker, 650 S.W.2d 391, 393 “market value at the well” in oil and gas leases, the
(Tex.1983); Skelly Oil Co. v. Archer, 163 Tex. 336, Court announces a new rule that should be applied
356 S.W.2d 774, 778 (1961). By supplying a mean- only prospectively. See generally Carroll-
ing not found in the leases for “market value at the ton–Farmers Branch Indep. Sch. Dist. v. Edgewood
well,” both the majority and the concurrence create Indep. Sch. Dist., 826 S.W.2d 489, 515–521
an ambiguity where none exists. (Tex.1992) (discussing factors for deciding
between retroactive and prospective operation). We
When a contract contains an ambiguity, we
have limited the effect of our decisions in this man-
consider the words used in the instrument, in light

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939 S.W.2d 118, 39 Tex. Sup. Ct. J. 537
(Cite as: 939 S.W.2d 118)

ner when considerations of fairness and policy pre-
clude full retroactivity. See, e.g., Moser v. United
States Steel Corp., 676 S.W.2d 99, 103 (Tex.1984)
(limiting new rule concerning phrase “other miner-
als” in deeds to prospective application). This result
is appropriate in the present case because, before
now, the meaning of “market value at the well” was
subject to specific negotiation by the parties. In-
deed, as the concurring opinion notes, this Court
has never decided previously whether “ ‘market
value at the well’ includes or excludes post-
production costs,” 939 S.W.2d at 127 (Owen, J.,
concurring), and lower courts have not reached
agreement on the issue. See id. at 126. Compare
Texas Oil & Gas Corp. v. Hagen, 683 S.W.2d 24,
28 (Tex.App.—Texarkana 1984) (concluding that
“market value at the well” includes deduction for
“the reasonable cost of transporting the gas to the
market”), writ dism'd as moot, 760 S.W.2d 960
(Tex.1988) with Heritage Resources, Inc. v. Na-
tionsbank, 895 S.W.2d 833, 836–37 (Tex.App.—El
Paso 1995) (determining that market-value royalty
clause did not allow deduction for transportation
costs), rev'd, 939 S.W.2d 118 (Tex.1996). Today,
the Court decides that question, but substitutes its
own interpretation of the phrase for the meaning the
parties intended. The Court blindsides NationsBank
and other lessors by mandating that this decision
apply retroactively.

This decision wrongfully denies parties such as
NationsBank the right to collect royalty payments
for which they clearly bargained. For the foregoing
reasons, I dissent.

Tex.,1996.
Heritage Resources, Inc. v. NationsBank
939 S.W.2d 118, 39 Tex. Sup. Ct. J. 537

END OF DOCUMENT

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156 S.W.2d 504 Page 1
138 Tex. 56, 156 S.W.2d 504
(Cite as: 138 Tex. 56, 156 S.W.2d 504)

provided in constitutional provision that no mort-
gage, trust deed, or other lien on homestead shall
Supreme Court of Texas. ever be valid, except for purchase money therefor
LINCOLN et ux. or improvements made thereon. Vernon's
v. Ann.St.Const. art. 16, § 50.
BENNETT.
[2] Homestead 202 122
No. 7704.
Nov. 12, 1941. 202 Homestead
Motion for Rehearing Overruled Dec. 10, 1941. 202II Transfer or Incumbrance
202k122 k. Estoppel to Assert Invalidity.
Error to Court of Civil Appeals of Fifth Su- Most Cited Cases
preme Judicial District. “Estoppel” cannot arise in favor of a lender
who has attempted to secure a lien on a homestead
Suit by James A. Lincoln and wife against Dale
in actual use and possession of a family, based on
E. Bennett of cancel a trust deed. From an adverse
declarations of the husband and wife, made orally
judgment, the plaintiffs appealed to the Court of
or in writing contrary to the facts, and the husband
Civil Appeals. To review a judgment of the Court
and wife will not be precluded from relying on con-
of Civil Appeals, 135 S.W.2d 632, affirming the
stitutional provision that no mortgage, trust deed or
judgment, the plaintiffs bring error.
other lien on homestead shall ever be valid, except
Judgments of trial court and Court of Civil Ap- for purchase money therefor or improvements made
peals reversed in part, and affirmed in part, and thereon, since to hold otherwise would practically
judgment rendered. abrogate the Constitution. Vernon's Ann.St.Const.
art. 16, § 50.
West Headnotes
[3] Homestead 202 122
[1] Homestead 202 122
202 Homestead
202 Homestead 202II Transfer or Incumbrance
202II Transfer or Incumbrance 202k122 k. Estoppel to Assert Invalidity.
202k122 k. Estoppel to Assert Invalidity. Most Cited Cases
Most Cited Cases Where husband and wife occupied realty en-
Where owners not actually occupying realty, or cumbered by trust deed as their homestead at time
so using it that its status is dubious at time mort- of purchase and extension of note, wife was not
gage is executed, represent that it is not their “estopped” to rely on constitutional provision de-
homestead, or they create a lien by entering into a claring that no mortgage, trust deed or other lien on
simulated transaction which has all the outward ap- homestead shall ever be valid, except for purchase
pearance of a valid, unconditional sale, but which is money therefor, or improvements made thereon, be-
in fact a mortgage, or they represent that existing cause of the fact that husband and wife at time of
notes are valid mechanic's lien notes for improve- making of original note and deed of trust represen-
ments, secured by a mechanic's lien contract prop- ted in designation of homestead that other realty
erly executed, liens are enforced against the was their homestead. Vernon's Ann.St.Const. art.
homestead, though created neither for purchase 16, § 50.
money nor improvements contracted for as

© 2015 Thomson Reuters. No Claim to Orig. US Gov. Works.
156 S.W.2d 504 Page 2
138 Tex. 56, 156 S.W.2d 504
(Cite as: 138 Tex. 56, 156 S.W.2d 504)

*57 **504 Goggans & Ritchie, Nathaniel Jacks, Harwood Street property was the homestead of
and John B. Stigall, Jr., all of Dallas, for plaintiffs plaintiffs in error in 1922, and did not know that the
in error. statement contained in the designation of
homestead was untrue; that James A. Lincoln con-
Liveley, Dougherty & Alexander, of Dallas, for de- cealed the true facts respecting the homestead
fendant in error. status in May, 1922, with the intention of inducing
him to purchase the Schoellkopf note and deed of
SHARP, Justice. trust; and, therefore, that plaintiffs in error are es-
This suit was filed by plaintiffs in error, James topped to assert that the original deed of trust made
A. Lincoln and wife, to cancel a deed of trust, dated to Schoellkopf is invalid.
May 31, 1927, given to secure a loan of $7,000, ad-
The case was submitted to the jury on special
vanced by defendant in error, Dale E. Bennett, for
issues, and the trial court entered judgment in favor
the purpose of renewing and extending a deed of
of Dale E. Bennett, foreclosing the deed of trust
trust dated May 25, 1922, executed by plaintiffs in
held by him. The Court of Civil Appeals, by a ma-
error to secure one G. H. Schoellkopf in the pay-
jority opinion, Chief Justice Bond dissenting, af-
ment of a note for $7,000. Plaintiffs in error sought
firmed the judgment of the trial court. 135 S.W.2d
cancellation of the lien and deed of trust on the
632, 634. This court granted the application for writ
ground that the property encumbered, a lot situated
of error on the importance of the homestead ques-
on Harwood Street in the City of *58 Dallas, is
tion involved and because of the dissenting opinion.
their homestead, and has been openly and uninter-
ruptedly used and occupied by them as their Defendant in error contends that Lincoln and
homestead since 1907, down to and inclusive of the wife are estopped from asserting that the deed of
date of trial, and that the lien is invalid and unen- trust lien held by him is invalid, because the prop-
forcible under the provisions of Section 50 of Art- erty upon which such deed of trust was given con-
icle XVI of the State Constitution, Vernon's Ann.St. stitutes their homestead, on two grounds: (a) Be-
cause of the representations made by Lincoln and
Defendant in error alleged that the Schoellkopf
wife in the designation of homestead that such
note was taken up and renewed and extended at the
property was not their homestead; and (b) because
special instance and request of James A. Lincoln,
Lincoln represented to the attorney*59 for Bennett
who represented to Hiram F. Lively, the acting rep-
that the lien held by Schoellkopf was a valid one.
resentative and attorney of defendant in error, that
the Schoellkopf note was secured by a valid **505 It is undisputed that the note held by
lien on the Harwood Street property, and that the Schoellkopf and Bennett was not made for purchase
lot was not his homestead when executed; that at money or any part thereof, or for taxes due on such
the time of the Schoellkopf executed; that at the property, or for work and material used in con-
time of the Shoellkopf transation, and as a part structing improvements thereon. It is also undis-
thereof, plaintiffs in error executed and acknow- puted that Lincoln and wife never occupied the
ledged, and caused to be filed for record in the deed property on Lindsley Avenue, which they desig-
records of Dallas County, a designation of nated as their homestead, nor did they make any
homestead, in which they designated property on pretense to occupy same. We quote from the opin-
Lindsley Avenue, in Dallas, then owned by them, ion of the Court of Civil Appeals the following
as their homestead. It was further alleged that at the statement: ‘It is not disputed that, at the time the
time of the purchase and extension of the Schoellkopf loan was consummated in May, 1922,
Schoellkopf note and deed of trust, neither Bennett the Harwood Street property was the homestead of
nor his attorney knew or had any notice that the appellants, and that, the statements contained in

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138 Tex. 56, 156 S.W.2d 504
(Cite as: 138 Tex. 56, 156 S.W.2d 504)

their homestead designation to the contrary were 415, 136 S.W.2d 583; **506Nat'l Bond & Mort-
untrue, and that all other statements or implications gage Corp. v. Davis et al., Tex.Com.App., 60
contradictory of the idea of its being their S.W.2d 429, 434.
homestead at the time were untrue.’
It is undisputed that the debt in controversy
Article XVI, Section 50, of the Constitution de- does not fall within the provisions of the Constitu-
clares that ‘No mortgage, trust deed, or other lien tion above quoted. Here we have the owners of the
on the homestead shall ever be valid, except for the homestead executing a deed of trust on the property
purchase money therefor, or improvements made occupied and used by them as a homestead, in viol-
thereon, as hereinbefore provided, whether such ation of the provisions of the Constitution. The pos-
mortgage, or trust deed, or other lien, shall have session and occupancy of the property on Harwood
been created by the husband alone, or together with Street by Lincoln and his wife was open, certain,
his wife; * * *.’ and unambiguous, and unbroken for a period of
time beginning long before the execution of the
[1] Our courts have in certain cases enforced deed of trust and the designation of homestead; and
against the homestead certain liens which were cre- such use and occupancy continued down to the trial
ated neither for purchase money nor for improve- of this case. The homestead designation executed
ments contracted for as provided for in the provi- by Lincoln and wife was made five years prior to
sion of the Constitution just quoted. Those cases the time Bennett acquired said note from
are generally classified as follows: ‘(1) When the Schoellkopf, and during all that time they occupied
owners, not actually occupying the property, or so said property openly and exclusively as their
using it that its status is dubious at the time the homestead; and such occupancy continued for a
mortgage is executed, represent that it is not their period of twenty years.
homestead; (2) when the owners create a lien by en-
tering into a simulated transaction which has all the The jury found: (1) That Lincoln and wife oc-
outward appearance of a valid, unconditional sale, cupied and used the property situated on Harwood
but which is in fact a mortgage; (3) when the own- Street as their homestead, and that they never did
ers represent that existing notes are valid mechan- occupy the premises on Lindsley Avenue as a
ic's lien notes for improvements, secured by a homestead; (2) that Lincoln requested Hiram F.
mechanic's lien contract properly executed.’ Lively, as attorney for Bennett, to take up and ex-
tend the Schoellkopf note and deed of trust; (3) that
This case does not fall within any of the three Lively did not know that the property situated on
classes above mentioned. Consequently, a discus- Harwood Street was used and occupied by Lincoln
sion of the decisions falling within those three and wife as a homestead; (4) that Lincoln did not
classes would be immaterial to a decision of this represent to Lively that the property on Harwood
case. Also, to do so would unnecessarily prolong Street was not used and occupied by himself and
this opinion. We shall merely cite some of the lead- wife as a homestead at the time of the execution of
ing cases falling within*60 those classes: First said Schoellkopf note and the deed of trust securing
Texas Joint Stock Land Bank v. Chapman, same; (5) that at the time Hiram F. Lively pur-
Tex.Civ.App., 48 S.W.2d 651; McMullan v. San chased the Schoellkopf note secured by deed of
Antonio Joint Stock Land Bank of San Antonio, trust for Bennett, he did not rely upon the represent-
Tex.Civ.App., 78 S.W.2d 669; Carstens v. ations made by Lincoln that the Schoellkopf note
Landrum, Tex.Com.App., 17 S.W.2d 803; Parrish was secured by a valid lien on the Harwood Street
v. Hawes, 95 Tex. 185, 66 S.W. 209; Garrett v. property. No issue of estoppel on the part of Mrs.
Katz, Tex.Civ.App., 23 S.W.2d 436, judgment cor- Lincoln was submitted to the jury, nor is any com-
rected 27 S.W.2d 373; Nixon v. Hirschi, 134 Tex.

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138 Tex. 56, 156 S.W.2d 504
(Cite as: 138 Tex. 56, 156 S.W.2d 504)

plaint made regarding that matter. See, also, Schulz v. L. E. Whitham & Co., 119
Tex. 211, 27 S.W.2d 1093; Rutland Savings Bank
*61 [2] The case of Texas Land & Loan Co. v. v. Isbell, Tex.Civ.App., State Bank, Tex.Civ.App.,
Blalock, 76 Tex. 85, 13 S.W. 12, 13, is one of the 75 S.W.2d 167, writ refused; Nixon v. Hirschi, 2d
outstanding cases bearing upon this question. That 167, writ refused; Nixon v. Hirschi, 134 Tex. 415,
case involved the validity of a lien described in a 136 S.W.2d 583.
deed of trust containing strong statements that the
property upon which a lien was undertaken to be [3] In 22 Tex.Jur., p. 184, s 128, the rule is
given did not constitute the homestead; and it was stated in the following language: ‘The homestead
sought there, as here, to show that the maker of the claimant being shown to have been using and oc-
note and deed of trust was estopped from asserting cupying the premises, the lien or encumbrance is
that the lien was invalid on account of such prop- not sustainable as against the claim of homestead
erty constituting a homestead. In that case Blalock by reason of the *62 fact that the claimant accom-
and wife alleged that the land was their homestead panied his disclaimer by a designation of another
before and at the time the deed of trust was ex- parcel as being the property**507 in which his
ecuted, and that, therefore, same was void. In that homestead right existed.’ Also see cases cited in
case it appeared indisputably that Blalock and his footnotes.
family occupied the land as their homestead con-
tinuously, before and at the time said deed of trust No contention is made that Mrs. Lincoln made
and note were executed, and that it was the any representations to Bennett, or his attorney, to
homestead of the family. After reciting the facts in induce Bennett to take up the note held by
that case, this court announced the following rule: Schoellkopf, Reliance for estoppel is based upon
the representations contained in the designation of
‘The constitution forbidding the fixing on the homestead executed by Lincoln and wife at the time
homestead of liens other than such as are thereby of the making of the Schoellkopf note and deed of
expressly permitted, no estoppel can arise in favor trust, and upon the statements made by Lincoln that
of a lender, who has attempted to secure a lien on the lien held by Schoellkopf was valid. If it should
homestead in actual use and possession of the fam- be assumed, without deciding, that Lincoln is es-
ily, based on declarations of the husband and wife topped to question the lien held by Bennett, that
made orally or in writing, contrary to the fact. To would not prevent his wife, under the facts of this
hold otherwise would practically abrogate the con- case, from contesting the validity of the lien. She
stitution. was occupying the homestead on Harwood Street,
as the wife of Lincoln, during the years above men-
‘If property be homestead in fact and law, tioned, and was using and enjoying such property
lenders must understand that liens can not be fixed as her homestead during all that time. She, as well
upon it, and that declarations of husband and wife as Lincoln, had homestead rights in such prop-
to the contrary, however made, must not be relied erty. It is not shown that she knew about the state-
upon. They must further understand that no desig- ments made by Lincoln to Bennett, or to his attor-
nation of homestead, contrary to the fact, will en- ney, to induce Bennett to acquire the Schoellkopf
able parties to evade the law, and incumber note, or that she ever ratified such state-
homesteads with liens forbidden by the constitu- ments. There is nothing in this record, except the
tion. ( Equitable) Mortgage Co. v. Norton, 71 Tex. homestead designation, executed five years prior to
683, 10 S.W. 301; Pellat v. Decker, 72 Tex. (578), that time, that would in any way affect her rights in
581, 10 S.W. 696; Kempner v. Comer, 73 Tex. the homestead. The testimony contained in this re-
(196), 203, 11 S.W. 194.’ cord, as we view it, is not sufficient to raise the is-

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138 Tex. 56, 156 S.W.2d 504
(Cite as: 138 Tex. 56, 156 S.W.2d 504)

sue of estoppel on the part of Mrs. Lincoln, and
prevent her from asserting her homestead rights in
this property and questioning the validity of the lien
held by Bennett. Martin v. Astin, Tex.Com.App.,
295 S.W. 584, 585; Miller v. Southland Life Ins.
Co., Tex.Civ.App., 68 S.W.2d 558; Bell v.
Schwarz, 56 Tex. 353; McLaren v. Jones, 89 Tex.
131, 33 S.W. 849; Parker et al. v. Schrimsher,
Tex.Civ.App., 172 S.W. 165; Speer's Law of Marit-
al Rights, 3d Ed., p. 351, s 280.

The judgments of the trial court and Court of
Civil Appeals, foreclosing the deed of trust lien
held by Bennett on part of Block No. 132, situated
on Harwood Street, according to the official map of
the City of Dallas, which property is fully described
in the deed of trust dated May 31, 1927, executed
by Lincoln and wife to Hiram F. Lively, trustee,
and which is recorded in Volume 739, page 213, of
the Deed of Trust Records of Dallas County, Texas,
to which reference is hereby made for a description
of the property therein described, are hereby re-
versed, and judgment is rendered herein denying
defendant in error a lien on said property; but said
judgments of the trial *63 court and Court of Civil
Appeals in all other respects are affirmed.

TEX. 1941.
Lincoln v. Bennett
138 Tex. 56, 156 S.W.2d 504

END OF DOCUMENT

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358 S.W.2d 580 Page 1
163 Tex. 552, 358 S.W.2d 580
(Cite as: 163 Tex. 552, 358 S.W.2d 580)

grantor's conveyance of land by which grantor re-
served one-half royalty in mineral lease rights as-
Supreme Court of Texas. sumed payment of grantor's notes secured by deed
Mary E. McGEORGE, Petitioner, of trust, and grantee gave second deed of trust to
v. secure extension of grantor's note and an additional
Ruth VAN METER et al., Respondents. loan, and second deed of trust provided that holder
of note was subrogated to all rights, powers and
No. A-8797.
equities of original owners of note, exercise of
June 20, 1962
power of sale under second deed of trust foreclosed
Rehearing Denied July 18, 1962.
original grantor's mineral interest. Vernon's
Action in trespass to try title to recover title Ann.Civ.St. art. 5522.
and possession of undivided one-half of all oil, gas
*552 **580 Hardwicke, Haddaway & Pope, Fort
and other minerals in or under a 95-acre tract of
Worth (Claude D. Brown, Fort Worth, with above
land. The District Court, Wise County, W. A.
firm), for petitioner.
Hughes, Jr., J., rendered a judgment for the
plaintiffs and the defendant appealed. The Fort Sewell & Forbis, Decatur, for respondents.
Worth Court of Civil Appeals of the Second Su-
preme Judicial Court, 351 S.W.2d 623, affirmed
and the defendant brought error. The Supreme *553 NORVELL, Justice.
Court, Norvell, J., held that where grantee as part of This is an action in trespass to try title brought
consideration for grantor's conveyance of land, by by Ruth Van Meter and others against Mary E.
which grantor reserved one-half royalty in mineral McGeorge for the recovery of title and possession
lease rights, assumed payment of grantor's notes se- of an undivided one-half of all the oil, gas and other
cured by deed of trust, and grantee gave second minerals in, on and under a 95.34 acre tract of land
deed of trust to secure extension of grantor's note situated in Wise County, Texas. Judgment for the
and an additional loan, and second deed of trust plaintiffs was rendered by the District Court and af-
provided that holder of note was subrogated to all firmed by the Court of Civil Appeals.
rights, powers and equities of original owners of
The case turns upon the question of whether or
note, exercise of power of sale under second deed
not a deed of trust foreclosure sale held on January
of trust foreclosed original grantor's mineral in-
5, 1937 effectively passed the Stokes (Van Meter et
terest.
al.) interest to Arthur McGeorge, the purchaser at
Judgment of lower courts reversed and judg- said sale. The petitoner, Mary E. McGeorge, claims
ment rendered. under Arthur McGeorge.

West Headnotes It was agreed that the common source of title
was M. A. Small and wife, Laura C. Small.
Mortgages 266 378
On June 3, 1916, M. A. Small and Laura A.
266 Mortgages Small conveyed the 95.34 acre tract to Walter
266IX Foreclosure by Exercise of Power of Sale Stokes for a cash consideration.
266k378 k. Operation and Effect. Most Cited
Cases On June 10, 1916, Walter Stokes and wife,
Where grantee as part of consideration for Corine Stokes, executed a deed of trust to W. A.

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Bonner, Trustee, conveying among other lands, the In the briefs this 1923 deed of trust is generally
95.34 acre tract here involved. This deed of trust referred to as the second deed of trust.
was given to secure four promissory notes includ-
ing one for $1450.00 due December 1, 1922 and On March 14, 1923, Percy McGeorge received
payable to The Bonner Loan & Investment Com- a written assignment of the Stokes $1450.00 note
pany. In the briefs this **581 instrument is gener- from J. A. Simmons who held the same under
ally referred to as the first deed of trust. mesne assignments from Bonner Loan & Invest-
ment Company.
On November 10, 1919 at a time when all of
the notes above mentioned, except the $1450.00 Griffith defaulted in the payment of the
note, had been paid, Walter Stokes and wife con- $3,000.00 note secured by the second deed of trust
veyed the 95.34 acre tract to G. W. Griffith for a and on January 5, 1937 the 95.34 acre tract was
cash consideration of $6500.00 and the assumption sold at trustee's sale to Arthur McGeorge for
of the $1450.00 note above mentioned. In this deed $500.00.
the grantor reserved the mineral interest which is
Deed of trust sales are largely controlled by
the subject matter of this action. The wording of the
statute in this state, Article 3810, Vernon's
reservation was that, ‘Grantor reserves one-half of
Ann.Tex.Stats., and the provisions of the deed of
the royalty and one-half of the mineral lease rights
trust given by Stokes to W. A. Bonner, trustee, on
on the hereinafter described tract.’
June 10, 1916, were substantially the same as those
On March 1, 1923 G. W. Griffith and the heirs contained in the later deed of trust of March 1,
of his deceased wife executed a deed of trust to se- 1923, insofar as the procedures relating to an extra-
cure a promissory note for $3,000.00 due February judicial foreclosure in case of default in the pay-
1, 1933 and payable to Percy McGeorge. This deed ment of indebtedness were concerned. The Court of
of trust contained the following provision: Civil Appeals held in effect that Griffith could have
agreed with McGeorge that the power of sale con-
*554 ‘The holder of the indebtedness secured tained in the second deed of trust would be effect-
hereby is expressly subrogated to any and all liens ive to foreclose the Stokes reserved mineral interest
paid by the proceeds of this mortgage. insofar as the indebtedness originally represented
by the $1450.00 note was concerned, but that the
‘The note secured hereby is given in renewal *555 language selected by them in their wording of
and in extension of a note for $1,450.00 dated Oc- the second deed of trust did not disclose such inten-
tober 10, 1916, and due December 1, 1922, ex- tion.[FN1]
ecuted by Walter Stokes and wife to the Bonner
Loan and Investment Company, and secured by a FN1. Tex.Civ.App., 351 S.W.2d 623, 1.
deed of trust recorded in Book 32, Page 133, of the c. 626.
trust deed records of Wise County, Texas, and the
holder hereof is subrogated to all the rights, powers, We are unable to agree with this latter conclu-
and equities of the original owners and holders of sion.
said note.
The Stokes $1450.00 indebtedness was origin-
‘The money loaned by the said third party is ally secured by a deed of trust lien covering the en-
borrowed for the purpose of providing funds neces- tire 95.34 acre tract. Griffith had assumed payment
sary for the payment of debts owing by the estate of of this indebtedness and was authorized to extend
Addie E. Griffith, deceased, and constituting valid the payment thereof without the joinder of Stokes.
claims against said estate.’ (Italics supplied.) He could not however subject the Stokes retained

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163 Tex. 552, 358 S.W.2d 580
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mineral interest to any additional indebtedness. The entatives of the Baldwin estate. Allison-Richey
second deed of trust was, however, effective to ex- Gulf Coast Home Co. v. Welder, Tex.Civ.App., 220
tend **582 the $1450.00 note and preserve the lien S.W. 392; Templeman & Son v. Kempner,
securing the payment thereof. Article 5522, Ver- Tex.Civ.App., 223 S.W. 293; Richmond v. Nowlin,
non's Ann.Tex.Stats. As pointed out by the Court of Tex.Civ.App., 135 S.W.2d 521.
Civil Appeals, the controlling question presented is
whether the exercise of the power of sale under the ‘Appellees could have protected their royalty
second deed of trust effectively foreclosed the interest by paying off the indebtedness secured by
Stokes mineral interest. the 1919 deed of trust prior to either one of the
trustee sales. Hampshire v. Greeves, 104 Tex. 620,
We think that it did. While the second deed of 143 S.W. 147; Texas Company v. Tucker, supra
trust does not contain the words ‘merged’ and (Tex.Civ.App., 129 S.W.2d 762).
‘incorporated’, it did expressly provide that the note
secured by the second deed of trust was given in re- ‘After the trustee's sale of February 5, 1935,
newal and extension of the Stokes $1450.00 note appellees were possessed, at most, with a mere
and that the holder thereof was ‘subrogated to all equity of redemption, as distinguished from title,
the rights, powers, and equities of the original own- legal or equitable, and such equity if any, was
ers and holders of said $1450.00 note.’ This is the barred by the four-year statute of limitation, Art.
usual and customary language employed in instru- 5529, Vernon's Ann.Civ.St., and lost to appellees
ments which have for their object the carrying for- under the doctrine of laches and stale demand.
ward of an indebtedness and its securing lien for Parks v. Worthington, 39 Tex.Civ.App. 421, 87
the purpose of incorporating the same into a new S.W. 720; Pierce v. Moreman, 84 Tex. 596, 20
form of security. S.W. 821; Groesbeeck v. Crow, 85 Tex. 200, 20
S.W. 49; Jasper State Bank v. Braswell, 130 Tex.
The facts disclosed by the opinion in Countiss 549, 111 S.W.2d 1079, 115 A.L.R. 329; Richmond
v. Baldwin, Tex.Civ.App., 151 S.W.2d 235, dism., v. Nowlin, supra (Tex.Civ.App., 135 S.W.2d 521);
judg. cor., are similar to those shown by the record Texas Company v. Tucker, supra.’
before us. In Countiss, it appears that in 1919 one
Kirk executed a deed of trust to secure an indebted- The Court of Civil Appeals in this case points
ness due the Federal Land Bank. In 1920 he con- out that the opinion in Countiss v. Baldwin does not
veyed a mineral interest to Baldwin. In 1925 the set out the language contained in the 1925 deed of
Federal Land Bank advanced further monies to trust relating to the prior deed of trust executed by
Kirk, extended the time of payment of the 1919 Kirk in 1919. It is inferred that the language of the
loan, and took a new deed of trust from Kirk. In second deed of trust may have been entirely suffi-
commenting upon the effect that a foreclosure un- cient to have vested the trustee in the second deed
der this deed of trust had on the Baldwin interest, of trust with full power to sell the property covered
the Court of Civil Appeals said: by the 1919 deed of trust in order to discharge the
indebtedness secured by said mortgage which had
‘Appellees (the holders of the Baldwin mineral been extended by the execution of the second deed
interest) contend that their royalty interest was not of trust. This seems to be the only possible legal
foreclosed by the trustee's sale made under the 1925 distinction between**583 Countiss and this case.
deed of trust, because they did not join in the exe- We believe the propositions of law discussed in the
cution of this deed of trust. Appellees *556 took excerpt from the Countiss opinion above set out
their mineral deed burdened by the deed of trust li- were correctly decided, and consequently we are
en of 1919, and Kirk could renew and extend this again met by the recurring question: Was the sub-
lien without the necessity of a joinder of the repres- rogation language contained in the Griffith-

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163 Tex. 552, 358 S.W.2d 580
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McGeorge deed of trust of 1923 sufficient in law to deed of trust liens.
vest in the trustee in said deed of trust the power to
sell the property and thus foreclose the lien as it ex- It was also pointed out in Winters that the por-
isted in 1916 at the time the Stokes-Bonner deed of tion of the second deed of trust relating to an exten-
trust was executed. We hold the language used in sion of notes and liens referred only to vendor's li-
the 1923 deed of trust was sufficient and this hold- ens. This Court held that such provision showed ‘no
ing settles the case as it appears that the indebted- intention to incorporate the prior deeds of trust, but
ness evidenced*557 by the original note for shows only an intention to extend the express
$1450.00 had not been discharged at the time of the vendor's liens, and perpetuate the superior legal
1937 deed of trust foreclosure sale. title in the mortgagee to all surface and all mineral
rights. This Chilton had a right to do, both under an
This does not mean that any second deed of authorization by statute, Articles 5520, 5522 and
trust given upon property automatically carries for- their predecessors, Tex.Civ.Stats., 1925, Vernon's
ward the power to sell such property under the Ann.Civ.St. arts. 5520, 5522; Texas Land & Mort-
second deed of trust in order to pay an indebtedness gage Co., Ltd. v. Cohen, Tex.Com.App., 138 Tex.
secured by a first deed of trust even though the time 464, 159 S.W.2d 859. Under the authority of that
for the payment of such indebtedness be extended case, Chilton and Hancock Mutual also would *558
by a valid agreement. One of the cases cited by the have had the right to renew and extend the former
Court of Civil Appeals is illustrative of this situ- deed of trust covering the entire surface and miner-
ation. In Winters v. Slover, 151 Tex. 485, 251 als without T. J. Slover's consent. The absence of a
S.W.2d 726, this Court considered an unusual deed provision to such effect shows that this was not
of trust provision reading as follows: done. The renewal of the express vendor's liens was
merely to negative any intention on the part of the
‘It is especially understood and agreed by all mortgagee to waive his rights to judicial foreclos-
parties hereto that this (second) deed of Trust may ure or trespass to try title under the same.’ (Italics
be declared void * * * in case the interest which added.)
matures on the 1st of November, 1925, secured by a
(prior) Deed of trust, * * * and in case the interest In the second deed of trust involved in this
which matures on the 1st of October, 1925, secured case, the first deed of trust lien is mentioned spe-
by (another prior) deed of trust * * * shall not have cifically, the indebtedness secured thereby is car-
been paid at maturity and any action taken by the ried forward and incorporated in the note secured
beneficiary under said former deeds of trust and ex- by the second deed of trust and the holder of such
tension agreement shall be evidence of the fact that note acquired all the rights, powers and equities of
such payment and interest has not been made.’ the original owner of the note secured **584 by the
first deed of trust. The point of difference between
In view of this provision a subsequent clause the Court of Civil Appeals and this Court is com-
relating to an extension of time for the payment of paratively narrow and turns upon the wording of
notes and the liens securing the same could not op- the second deed of trust. The language of this in-
erate to vest a power of sale in the trustee under the strument, in our opinion, places the case within the
subsequent deed of trust which would foreclose all rule of Countiss v. Baldwin as above stated.
the liens mentioned in the prior deeds of trust. Ob-
viously, if a failure to pay interest under the prior The judgments of the lower courts are reversed
deeds of trust could result in a valid sale under the and judgment here rendered that petitioner do have
prior deeds of trust and could render the subsequent and recover of and from the respondents the title
deed of trust void, it could not be said that the and possession of the real property which is the
parties intended an ‘incorporation’ or a ‘merger’ of subject matter of this action, namely, an undivided

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163 Tex. 552, 358 S.W.2d 580
(Cite as: 163 Tex. 552, 358 S.W.2d 580)

one-half of all the oil, gas and other minerals in, on
and under the 95.34 acre tract here involved.

TEX. 1962.
McGeorge v. Van Meter
163 Tex. 552, 358 S.W.2d 580

END OF DOCUMENT

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 Page 1
440 S.W.3d 10, 57 Tex. Sup. Ct. J. 588
(Cite as: 440 S.W.3d 10)

266 Mortgages
266VII Payment or Performance of Condition, Re-
Supreme Court of Texas. lease, and Satisfaction
Frankie SIMS, on Behalf of Himself and all Others 266k306 k. Change in time or mode of payment.
Similarly Situated; and Patsy Sims, on Behalf of Herself Most Cited Cases
and all Others Similarly Situated, Appellants, The restructuring of a home equity loan that in-
v. volved capitalization of past-due amounts owed under
CARRINGTON MORTGAGE SERVICES, L.L.C., Ap- the terms of the initial loan and a lowering of the in-
pellee. terest rate and the amount of installment payments, but
did not involve the satisfaction or replacement of the
No. 13–0638.
original note, an advancement of new funds, or an in-
Argued Dec. 4, 2013.
crease in the obligations created by the original note,
Decided May 16, 2014.
was not a new extension of credit that was required to
Rehearing Denied Oct. 3, 2014.
meet the constitutional requirements for a new loan;
Background: Borrowers brought putative class action capitalization of past-due amounts was simply a mech-
against loan servicer for their home equity loans, al- anism for deferring payments of obligations already
leging that parties' post-loan transactions violated Texas owed in a way that allowed borrowers to retain their
Constitution. The United States District Court for the homes. Vernon's Ann.Texas Const. Art. 16, § 50.
Northern District of Texas, John McBryde, J., 889
*11 David M. Gottfried, Law Office of David Gottfried,
F.Supp.2d 883, granted servicer's motion to dismiss.
P.C., Austin, Earl Berry Jr., Hurt & Berry, LLP, Edom,
Borrowers appealed. The United States Court of Ap-
James Patrick Sutton, The Law Office of J. Patrick Sut-
peals for the Fifth Circuit, 538 Fed.Appx. 537, affirmed
ton, Austin, Jeffrey W. Hurt, Hurt & Berry LLP, Dallas,
in part and certified questions to the Texas Supreme
TX, for Appellant.
Court.
Amanda Schaeffer, Benjamin David Lee Foster, Daron
Holding: The Supreme Court, Hecht, C.J., held that re-
L. Janis, Robert T. Mowrey, Thomas G. Yoxall, Willi-
structuring of home equity loan was not extension of
am Scott Hastings, Locke Lord LLP, Austin, TX, for
new credit required to comply with constitutional re-
Appellee.
quirements for new loan.
Questions answered. Ken Carroll, Carrington Coleman Sloman & Blumenth-
al, Dallas, TX, for Amicus Curiae Federal National
West Headnotes
Mortgage Association.
Homestead 202 99
Karen M. Neeley, Cox Smith Matthews, Inc., Austin,
202 Homestead TX, for Amicus Curiae Independent Bankers Associ-
202I Nature, Acquisition, and Extent ation of Texas.
202I(E) Liabilities Enforceable Against
B. Scott Daugherty, for Amicus Curiae, Texas Bankers
Homestead
Association.
202k99 k. Loans and advances. Most Cited
Cases John C. Fleming, Law Office of John C. Fleming, Aus-
tin, TX, for Amicus Curiae Texas Bankers Association.
Mortgages 266 306

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 Page 2
440 S.W.3d 10, 57 Tex. Sup. Ct. J. 588
(Cite as: 440 S.W.3d 10)

Chief Justice HECHT delivered the opinion of the I
Court. Frankie and Patsy Sims obtained a 30–year home equity
To avoid foreclosure, homeowners and lenders often try loan in 2003. In 2009, the Simses, behind on their pay-
to restructure underwater home mortgage loans that are ments, reached what was entitled a “Loan Modification
in default by capitalizing past-due amounts as principal, Agreement” with Carrington Mortgage Services, L.L.C.
lowering the interest rate, and reducing monthly pay- The agreements involved capitalizing past-due interest
ments, thereby easing the burden on the homeowners. and other charges, including fees and unpaid taxes and
But home equity loans are subject to the requirements insurance premiums, and reducing the interest rate and
of Article XVI, Section 50 of the Texas Constitution. monthly payments. Two years later, the Simses were
The United States Court of Appeals for the Fifth Circuit again behind, and this time CMS sought foreclosure.
has asked whether those requirements apply to such The Simses resisted, asserting that the 2009 restructur-
FN1
loan restructuring. We answer that as long as the ing violated constitutional requirements for home equity
original note is not satisfied and replaced, and there is loans. The parties then reached a second “Loan Modi-
no additional extension of credit, as we define it, the re- fication Agreement”, further reducing the interest rate
structuring is valid and need not *12 meet the constitu- and payments. The following chart summarizes the loan
tional requirements for a new loan. data at the outset and after the two restructurings:

FN1. 538 Fed.Appx. 537 (5th Cir.2013) (per
curiam); see TEX. CONST. art. V, § 3–c(a)
(“The supreme court [has] jurisdiction to an-
swer questions of state law certified from a fed-
eral appellate court.”).

Principal Amt. Cap'd New Prin. Rate Payment Appraisal
2003 Loan $76,000.00 — — 9% $611.51 $96,000
2009 Mod. $72,145.50 $2,200.00 $74,345.50 6.5% $511.16 $72,300
2011 Mod. $72,655.61 $7,368.44 $80,023.95 4.75% $492.34 $73,000
return for a loan that I have received, I promise
The original note required the Simses to pay prin- to pay U.S. $76,000.00 (this amount is called
FN2
cipal, interest, and late charges. The security agree- ‘principal’), plus interest, to the order of the
ment echoed that requirement and added an obligation Lender.” The note also provided for a 5% late
for the Simses to make payments for “Escrow Items”, charge on overdue principal and interest.
such as taxes, assessments, and insurance premiums.
FN3
The security agreement also authorized the lender FN3. The security instrument stated:
to “do and pay for whatever is reasonable or appropri- “Borrower shall pay to Lender on the day Peri-
ate” to protect its interest in the property and its rights odic Payments are due under the Note, until the
under the agreement and provided that any amount the Note is paid in full, a sum (the ‘Funds') to
lender disbursed to that end “shall become additional provide for payment of amounts due for: (a)
debt of Borrower secured by this Security Instrument.” taxes and assessments and other items which
The 2009 and 2011 “Loan Modification Agreements” can attain priority over this Security Instrument
provided that all the Simses' obligations and all the loan as a lien or encumbrance on the Property; ...
FN4
documents remained unchanged. and (c) premiums for any and all insurance re-
quired by Lender under Section 5. These items
FN2. The note signed by the Simses stated: “In are called ‘Escrow Items.’ ”

© 2015 Thomson Reuters. No Claim to Orig. US Gov. Works.
 Page 3
440 S.W.3d 10, 57 Tex. Sup. Ct. J. 588
(Cite as: 440 S.W.3d 10)

FN4. The 2009 agreement stated: “All coven- If the transaction is a modification rather than a re-
ants, agreements, stipulations, and conditions finance, the following questions also arise:
in your Note and Mortgage will remain in full
force and effect, except as modified herein, and 2. Does the capitalization of past-due interest, fees,
none of your obligations or liabilities under property taxes, or insurance premiums constitute an
your Note and Mortgage will be diminished or impermissible “advance of additional funds” under
released by any provisions hereof, nor will this Section 153.14(2)(B) of the Texas Administrative
Agreement in any way impair, diminish, or af- Code?
fect [the] rights under or remedies on your
3. Must such a modification comply with the re-
Note and Mortgage.”
quirements of Section 50(a)(6), including subsection
Similarly, the 2011 Agreement stated: “[A]ll (B), which mandates that a home equity loan have a
terms and provisions of the Loan Documents, maximum loan-to-value ratio of 80%?
except as expressly modified by this Agree-
4. Do repeated modifications like those in this case
ment, remain in full force and effect; nothing
convert a home equity loan into an open-end account
in this Agreement shall be understood or
that must comply with Section 50(t)?
construed to be a satisfaction or release in
whole or in part of the obligations contained II
in the Loan Documents; and [ ] except as As we have more fully explained in prior decisions,
otherwise specifically provided in, and ex- because of Texas' strong, historic protection of the
pressly modified by, this Agreement, the homestead, home equity loans are regulated, not by stat-
Lender and you will be bound by, and will ute as one might suppose, but by the “elaborate, detailed
comply with, all of the terms and conditions provisions” of Article XVI, Section 50 of the Texas
of the Loan Documents.” FN6
Constitution. To provide guidance to lenders, the
Finance Commission and the Credit Union Commission
Two months after the 2011 agreement, the Simses
have been authorized by the Constitution and by statute
brought this class action *13 against CMS in the United
to interpret these provisions, subject to judicial review,
States District Court, alleging that CMS's loan modific- FN7
and the Commissions have done so in Chapter 153
ations for them and other similarly situated borrowers FN8
of the Texas Administrative Code. “A lender's com-
violated Article XVI, Section 50 of the Texas Constitu-
pliance with an agency interpretation of Section 50,
tion. Before considering certification, the court dis-
even a wrong interpretation, is compliance with Section
missed the case under Federal Rule of Civil Procedure FN9
FN5 50 itself.” Thus, in answering the certified ques-
12(b)(6) for failure to state a cause of action, and
tions, we look to the constitutional text and the Com-
the Simses appealed. After oral argument, the Fifth Cir-
missions' interpretations. However, those interpretations
cuit certified the following four questions to us:
“can do no more than interpret the constitutional text,
FN10
FN5. 889 F.Supp.2d 883, 884 (N.D.Tex.2012). just as a court would.” The issue is not whether a
lending practice or policy is advisable, something the
1. After an initial extension of credit, if a home Commissions would decide in exercising their regulat-
equity lender enters into a new agreement with the ory functions; the issue is what the Constitution re-
FN11
borrower that capitalizes past-due interest, fees, prop- quires.
erty taxes, or insurance premiums into the principal of
the loan but neither satisfies nor replaces the original FN6. Fin. Comm'n of Tex. v. Norwood, 418
note, is the transaction a modification or a refinance S.W.3d 566, 571 (Tex.2013); see also LaSalle
for purposes of Section 50 of Article XVI of the Bank Nat'l Ass'n v. White, 246 S.W.3d 616, 618
Texas Constitution? (Tex.2007) (per curiam) (“Texas became the

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 Page 4
440 S.W.3d 10, 57 Tex. Sup. Ct. J. 588
(Cite as: 440 S.W.3d 10)

last state in the nation to permit home-equity new disclosures” that “occurs when an existing
loans when constitutional amendments voted obligation that was subject to [federal ‘closed
on by referendum took effect in 1997.”). end credit’ disclosure requirements] is satisfied
and replaced by a new obligation”. 12 C.F.R. §
FN7. Norwood, 418 S.W.3d at 573; TEX. 226.20(a); 12 C.F.R. pt. 226, supp. 1, cmt.
CONST. art. XVI, § 50(u). 20(a) (Official Staff Interpretations). Some
transactions, however, will not be treated as a
FN8. 7 TEX. ADMIN. CODE §§ 153.1–.96
refinancing under this section, including “[a]
FN9. Norwood, 418 S.W.3d at 573. change in the payment schedule or a change in
collateral requirements as a result of the con-
FN10. Id. at 585. sumer's default or delinquency, unless the rate
is increased, or the new amount financed ex-
FN11. Id. ceeds the unpaid balance plus earned finance
charge and premiums for continuation insur-
A
ance....” Id. § 226.20(a)(4). The Federal Na-
The certified questions assume a distinction
tional Mortgage Association, in an amicus
between a loan modification and a refinancing that, if
FN12 brief, references the same regulation but does
understood in financial *14 circles, is not clear in
not otherwise attempt to define a distinction
the text of Section 50. Neither concept is defined in
between refinancings and modifications. An
Section 50. The word “refinance” is used eleven times
FN13 amicus brief by the Independent Bankers Asso-
in Section 50, and “refinancing” once. In each in-
ciation of Texas, the Texas Bankers Associ-
stance, the reference seems to be to a redone transac-
ation, and the Texas Mortgage Bankers Associ-
tion. A form of the word “modify” is used in three
ation refers to the distinction but does not at-
places in Section 50. In one, lenders are authorized to
tempt to define it. Other federal entities, like
“modify” previously provided documentation at closing
FN14 HUD and FDIC, have their own glossaries re-
in exigent circumstances. In the other two, lenders
ferring to and defining general terms like
can correct noncompliance with Section 50 by sending a
“modification,” “mortgage modification,”
borrower “notice modifying any ... amount, percentage,
“refinancing,” and “debt restructuring,” but
term, or other provision prohibited by this section”,
FN15 these agencies, to fulfill their specific missions,
or, if noncompliance cannot be cured under the
also define and apply more specific classifica-
other provisions, by offering the borrower a $1,000
tions or limitations.
credit and “the right to refinance the extension of cred-
it” for the remaining term at no cost “with any modific- FN13. TEX. CONST. art. XVI, § 50(a)(4),
ations necessary to comply” or that the parties agree (a)(6)(M)(iii), (a)(6)(Q)(vii), (a)(6)(Q)(x)(f),
FN16
will comply. In these two instances, if not also in (a)(8); § 50(e) and (f).
the first, a modification could substantially alter the
loan; indeed, in the last situation, modifications can FN14. Id. § 50(a)(6)(M)(ii).
FN17
shape the refinancing.
FN15. Id. § 50(a)(6)(Q)(x)(c).
FN12. CMS points to the Federal Reserve
Board's definition of a “refinancing” requiring FN16. Id. § 50(a)(6)(Q)(x)(f).
new Truth In Lending Act disclosures under
FN17. Section 153.96(b) of the Commissions'
Regulation Z when refinancing is undertaken
interpretations contemplates that in order to
by the original creditor, or a holder or servicer
comply with constitutional requirements, “the
of the original obligation. Under this definition,
lender ... and borrower may ... modify the
a refinancing is “a new transaction requiring

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 Page 5
440 S.W.3d 10, 57 Tex. Sup. Ct. J. 588
(Cite as: 440 S.W.3d 10)

equity loan without completing the require- and replaced. A home equity loan and a sub-
ments of a refinance”. 7 TEX. ADMIN. sequent modification will be considered a
CODEE § 153.96(b)(2)(A). single transaction. The home equity require-
ments of Section 50(a)(6) will be applied to
The modification-refinancing distinction is one the original loan and the subsequent modific-
drawn by the Commissions in interpreting Section ation as a single transaction.
50(a)(6)(M)(iii). The effect of that provision is to pro-
hibit a second home equity loan within a year of the “(A) A modification of an equity loan must
first, with certain exceptions. As interpreted by the be agreed to in writing by the borrower and
Commissions, the provision prohibits a “refinancing” lender, unless otherwise required by law. An
FN18
like a “new equity loan” but not a “modification”. example of a modification that is not re-
According to the *15 Commissions, a modification does quired to be in writing is the modification re-
not involve satisfaction or replacement of the original quired under the Soldiers' and Sailors' Civil
note, an “advance of additional funds”, or new terms Relief Act.
that would not have been permitted for the original
FN19 “(B) The advance of additional funds to a
“extension of credit”. Further, the original loan
and a subsequent modification are treated as a single borrower is not permitted by modification of
transaction, including for purposes of the 3% fee cap. an equity loan.
FN20
“(C) A modification of an equity loan may
FN18. “ § 153.14. One Year Prohibition: Sec- not provide for new terms that would not
tion 50(a)(6)(M)(iii) have been permitted by applicable law at the
date of closing of the extension of credit.
“An equity loan may not be closed before the
first anniversary of the closing date of any “(D) The 3% fee cap required by Section
other equity loan secured by the same 50(a)(6)(E) applies to the original home
homestead property. equity loan and any subsequent modification
as a single transaction.”
“(1) Section 50(a)(6)(M)(iii) prohibits an
owner who has obtained an equity loan from: 7. TEX. ADMIN. CODE § 153.14 (emphasis
added).
“(A) refinancing the equity loan before one
year has elapsed since the loan's closing date; FN19. Id. § 153.14(2).
or
FN20. Id. § 153.14(2)(D).
“(B) obtaining a new equity loan on the same
But Section 50(a)(6)(M)(iii) of the Constitution
homestead property before one year has
does not mention refinancing or modification. It states:
elapsed since the previous equity loan's clos-
ing date, regardless of whether the previous (a) The homestead ... is ... protected from forced
equity loan has been paid in full. sale[ ] for the payment of all debts except for: ...
“(2) Section 50(a)(6)(M)(iii) does not prohib- (6) an extension of credit that: ...
it modification of an equity loan before one
year has elapsed since the loan's closing date. (M) is closed not before: ...
A modification of a home equity loan occurs
when one or more terms of an existing equity (iii) the first anniversary of the closing date of
loan is modified, but the note is not satisfied any other extension of credit described by Subsec-

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 Page 6
440 S.W.3d 10, 57 Tex. Sup. Ct. J. 588
(Cite as: 440 S.W.3d 10)

tion (a)(6) of this section secured by the same sions of credit” for purposes of TEX.
homestead property [with certain exceptions].... FIN.CODE § 34.201 as including various trans-
FN21
actions involving an advance of funds to be re-
paid over time).

FN21. TEX. CONST. art. XVI, § 50 The Simses argue that any increase in the principal
(a)(6)(M)(iii) (emphasis added). amount of a loan is a new extension of credit within the
meaning of Section 50(a)(6), in effect equating the loan
The applicability of this particular provision, as
principal with an extension of credit. The Constitution
well as all of Section 50(a)(6), which governs home
contradicts the Simses' argument. Section 50(a)(6)(E)
equity loans, depends not on whether the transaction is
refers to principal as a component of an extension of
a modification or a refinance but on whether it is an
credit, capping fees at “three percent of the original
“extension of credit”. If the restructuring of a home FN23
principal amount of the extension of credit”. The
equity loan does not involve a new extension of credit,
extension of credit for purposes of Section 50(a)(6) con-
the requirements of Section 50(a)(6) do not apply. Thus,
sists not merely of the creation of a principal debt but
we restate the first certified question as follows:
includes all the terms of the loan transaction. Terms re-
1. After an initial extension of credit, if a home quiring the borrower to pay taxes, insurance premiums,
equity lender enters into a new agreement with the and other such expenses when due protect the lender's
borrower that capitalizes past-due interest, fees, prop- security and are as much a part of the extension of cred-
erty taxes, or insurance premiums into the principal of it as terms requiring timely payments of principal and
the loan but neither satisfies nor replaces the original interest. The Simses argue that in restructuring a loan to
note, is the transaction a new extension of credit for capitalize past-due amounts, the lender is actually ad-
purposes of section 50 of Article XVI of the Texas vancing additional funds to itself (past-due interest) or
Constitution? others (past-due taxes and insurance) to pay those
amounts for the borrower, and that this constitutes a
B new extension of credit. But the borrower's obligation
Neither the Constitution nor the Commissions' in- for such amounts, and the lender's right to pay them to
terpretations define an “extension of credit”, but its protect its security, were all terms of the original exten-
meaning is clear. Credit is simply the ability to assume sion of credit. The Simses argue that requiring interest
a debt repayable over time, and an extension of credit on capitalized, past-due amounts is really a new loan,
affords the right to do so in a *16 particular situation. but it is simply a mechanism for deferring payment of
FN22
obligations already owed in a way that allows the bor-
rower to retain his home.
FN22. See, e.g., TEX. FIN.CODE §
31.002(a)(34) (“ ‘Loans and extensions of cred- FN23. TEX. CONST. art. XVI, § 50(a)(6)(E)
it’ means direct or indirect advances of money (emphasis added).
... to a person that are conditioned on the oblig-
ation of the person to repay....”); id. § The Simses argue that a loan that can be restruc-
181.002(a)(28) (same); id. § 350.001(a) tured to change the amount of the periodic payments
(“credit means the right granted to a debtor to does not meet the requirement of Section 50(a)(6)(L)(i)
defer payment of debt or to incur debt and de- that loans be “scheduled to be repaid ... in substantially
FN24
fer its payment”); id. § 393.001(4) (“ equal successive period installments”. But the re-
‘extension of consumer credit’ means the right quired schedule is not one that, when initially set, can
to defer payment”); see also 7 TEX. ADMIN. never be altered. After all, whenever a payment is
CODE § 12.3(a)(2) (defining “[l]oans or exten- missed, the schedule is altered. Further, Section 50(g)
FN25
gives the borrower the right to prepay the loan,

© 2015 Thomson Reuters. No Claim to Orig. US Gov. Works.
 Page 7
440 S.W.3d 10, 57 Tex. Sup. Ct. J. 588
(Cite as: 440 S.W.3d 10)

which would alter the initial schedule. Section 50(a)(6) ment of new funds, or an increase in the obligations cre-
does not forbid a revision of the initial repayment ated by the original note, is not a new extension of cred-
schedule that merely adjusts the regular installment it that must meet the requirements of Section 50.
amount.
C
FN24. Id. § 50(a)(6)(L)(i). Our reasons for answering the first question as we
have largely dictate our answers to the other three certi-
FN25. TEX. CONST. art. XVI, § 50(g). fied questions.

CMS argues that restructuring a loan does not in- Is the capitalization of past-due interest, taxes, in-
volve a new extension of credit so long as the borrow- surance premiums, and fees an “advance of additional
er's note is not satisfied or replaced and no new money funds” under the Commissions' interpretations of Sec-
is extended. We agree that these two conditions are ne- FN26
tion 50? No, if those amounts were among the ob-
cessary, but we cannot say with assurance that they are ligations assumed by the borrower under the terms of
sufficient. For example, a restructuring to make the the original loan. And more importantly, such capitaliz-
homestead lien security for another indebtedness, such ation is not a new extension of credit under Section 50
as the borrower's consumer or credit card debt, would (a)(6).
certainly be a new extension of credit. The test should
be whether the secured obligations are those incurred FN26. 7 TEX. ADMIN. CODE § 153.14.
under the terms of the original loan.
Must a restructuring like the Simses' comply with
*17 The Simses object that this test provides no ef- Section 50(a)(6)? No, because it does not involve a new
fective limit on the size or frequency of additions to extension of credit, for the reasons we have explained.
principal. But the terms of the original loan supply the The Simses argue that any restructuring must satisfy
limit. The Simses' argument is that any change in prin- Section 50(a)(6)(B), which requires a home equity loan
cipal is a new extension of credit, but as we have to be
shown, their position is inconsistent with Section 50.
of a principal amount that when added to the aggreg-
The Simses argue that it matters not that, as in their ate total of the outstanding principal balances of all
own situation, restructuring lowers the interest rate and other indebtedness secured by valid encumbrances of
the amount of installment payments, and makes it pos- record against the homestead does not exceed 80 per-
sible for borrowers to keep their homes and meet their cent of the fair market value of the homestead on the
FN27
obligations. Lenders have two options other than fore- date the extension of credit is made....
closing on loans in default: further forbearance and for-
giveness. Nevertheless, the Simses' argument encour-
FN27. TEX. CONST. art. XVI, § 50(a)(6)(B)
ages lenders to foreclose, which is certainly at odds
(emphasis added).
with the fundamental purpose of Section 50: to protect
the homestead. The Simses' argument incorrectly assumes that the
FN28
restructuring is a new extension of credit.
To the first certified question, we answer: the re-
structuring of a home equity loan that, as in the context FN28. The Circuit noted that if the highlighted
from which the question arises, involves capitalization phrase modified the word “value” and not the
of past-due amounts owed under the terms of the initial word “exceed”, the provision would never al-
loan and a lowering of the interest rate and the amount low the loan principal, during the life of the
of installment payments, but does not involve the satis- loan, to exceed the amount that was the value
faction or replacement of the original note, an advance- of the property when the loan was closed. 538

© 2015 Thomson Reuters. No Claim to Orig. US Gov. Works.
 Page 8
440 S.W.3d 10, 57 Tex. Sup. Ct. J. 588
(Cite as: 440 S.W.3d 10)

Fed.Appx. 537, 545–546 (5th Cir.2013) (per closure while maintaining the terms of the original ex-
curiam). This could happen if the loan-to-value tension of credit. We answer the certified questions ac-
ratio was very close to the limit at the time the cordingly.
loan closed, and when the loan was restruc-
tured, the amount capitalized caused the total Tex.,2014.
principal indebtedness to exceed the limit. But Sims v. Carrington Mortg. Services, L.L.C.
nothing in Section 50 suggests that a loan's 440 S.W.3d 10, 57 Tex. Sup. Ct. J. 588
compliance is to be determined at any time oth-
END OF DOCUMENT
er than when it is made.

Finally, would repeated restructuring convert a
home equity loan into an open-*18 end account subject
to Section 50(t)? Section 50(t) applies to a home equity
line of credit—“a form of an open-end account that may
be debited from time to time, under which credit may be
extended from time to time and under which ... the own-
er requests advances, repays money, and reborrows
money”. The repeat transactions are clearly contem-
FN29
plated from the outset. This description does not
remotely resemble a loan with a stated principal that is
to be repaid as scheduled from the outset but must be
restructured to avoid foreclosure.

FN29. See also TEX. FIN.CODE §
301.002(a)(14)(A) (“In this subtitle ...
‘Open-end account’ ... means an account under
a written contract between a creditor and an ob-
ligor in connection with which: (i) the creditor
reasonably contemplates repeated transactions
and the obligor is authorized to make purchases
or borrow money; (ii) an interest or time price
differential may be charged from time to time
on an outstanding unpaid balance; and (iii) the
amount of credit that may be extended during
the term of the account is generally made avail-
able to the extent that any outstanding balance
is repaid....”).

******

Fundamentally, the requirements of Article XIV,
Section 50 of the Texas Constitution for extensions of
credit secured by the homestead are designed to protect
the homestead, not endanger it. The Constitution does
not prohibit the restructuring of a home equity loan that
already meets its requirements in order to avoid fore-

© 2015 Thomson Reuters. No Claim to Orig. US Gov. Works.
 Page 1
907 S.W.2d 430, 38 Tex. Sup. Ct. J. 947
(Cite as: 907 S.W.2d 430)

[1] Insurance 217 2028

Supreme Court of Texas. 217 Insurance
STATE FARM LIFE INSURANCE COMPANY 217XIV Premiums
and Ted H. Heaton, III, Petitioners, 217XIV(E) Payment
v. 217k2025 Method of Payment; Tender
Terri BEASTON, Respondent. 217k2028 k. Application of dividends
or credits. Most Cited Cases
No. D–4454. (Formerly 217k360.2)
Argued May 5, 1994. Dividend-at-death provision of lapsed life in-
Delivered June 29, 1995. surance policy, stating that dividend for period
Rehearing Overruled Oct. 27, 1995. from start of policy year to insured's death would
be “part of the proceeds,” did not entitle beneficiary
Beneficiary of life insurance policy brought ac-
to receive dividend upon insured's death, and thus
tion against insurer and its agent, seeking benefits
did not constitute accumulated dividend which
under policy and damages under unfair insurance
would provide basis for revival of policy under ac-
practices statute. After jury trial, the 201st District
cumulations-to-avoid-lapse provision, where policy
Court, Travis County, Joseph H. Hart, J., rendered
had lapsed for nonpayment of premium three days
judgment for beneficiary on coverage, but did not
before insured's death, and thus no proceeds were
award damages for mental anguish, and both parties
payable at all under policy.
brought limited appeals. The Austin Court of Ap-
peals, Third District, 861 S.W.2d 268,Mack Kidd, [2] Insurance 217 1806
J., affirmed as modified, and insurer applied for
writ of error. The Supreme Court, Owen, J., held 217 Insurance
that: (1) as matter of first impression, express find- 217XIII Contracts and Policies
ing of knowing conduct is prerequisite to recovery 217XIII(G) Rules of Construction
of mental anguish damages as “actual damages” 217k1806 k. Application of rules of con-
available under unfair insurance practices statute; tract construction. Most Cited Cases
(2) to obtain award of attorney's fees under fee- (Formerly 217k146)
shifting provisions of same statute, party must pre- Interpretation of insurance contracts is gov-
vail on cause of action for which such fees are re- erned by same rules of construction applicable to
coverable and recover damages; and (3) policy other contracts.
lapsed three days prior to insured's death, and was
not revived by policy's dividend-at-death provision. [3] Contracts 95 147(3)

Judgment of Court of Appeals reversed; judg- 95 Contracts
ment rendered. 95II Construction and Operation
95II(A) General Rules of Construction
Phillips, C.J., filed opinion concurring in part 95k147 Intention of Parties
and dissenting in part, in which Spector, J., joined. 95k147(3) k. Construing whole con-
tract together. Most Cited Cases
Gammage, J., dissented and filed opinion, in When construing contract, courts must strive to
which Hightower, J., joined. give effect to written expression of parties' intent,
by reading all parts of contract together, and while
West Headnotes

© 2015 Thomson Reuters. No Claim to Orig. US Gov. Works.
 Page 2
907 S.W.2d 430, 38 Tex. Sup. Ct. J. 947
(Cite as: 907 S.W.2d 430)

being particularly wary of isolating single phrase, Prospective Consequences or Losses
sentence or section of contract from its surround- 115III(A)2 Mental Suffering and Emo-
ings or considering it apart from other provisions. tional Distress
115k57.44 Insurance Practices
[4] Insurance 217 1832(2) 115k57.45 k. In general. Most Cited
Cases
217 Insurance
(Formerly 115k56.10)
217XIII Contracts and Policies
Prerequisites for recovery of mental anguish
217XIII(G) Rules of Construction
damages under common law are also prerequisites
217k1830 Favoring Insureds or Benefi-
for recovery of such damages as “actual damages”
ciaries; Disfavoring Insurers
under unfair insurance practices statute. V.A.T.S.
217k1832 Ambiguity, Uncertainty or
Insurance Code, art. 21.21, § 16(b)(1).
Conflict
217k1832(2) k. Necessity of ambi- [7] Appeal and Error 30 215(1)
guity. Most Cited Cases
(Formerly 217k146.7(8)) 30 Appeal and Error
Courts should construe language of insurance 30V Presentation and Reservation in Lower
policy against insurer in manner that favors cover- Court of Grounds of Review
age only if policy remains ambiguous despite ap- 30V(B) Objections and Motions, and Rulings
plication of canons of construction. Thereon
30k214 Instructions
[5] Damages 115 57.45 30k215 Objections in General
30k215(1) k. Necessity of objection
115 Damages
in general. Most Cited Cases
115III Grounds and Subjects of Compensatory
Life insurer did not waive error as to jury ques-
Damages
tion that erroneously failed to condition availability
115III(A) Direct or Remote, Contingent, or
of mental anguish damages upon express finding of
Prospective Consequences or Losses
knowing conduct, in action under unfair insurance
115III(A)2 Mental Suffering and Emo-
practices statute, even though insurer failed to ob-
tional Distress
ject on that ground at trial, where judgment entered
115k57.44 Insurance Practices
by trial court expressly excluded mental anguish
115k57.45 k. In general. Most Cited
damages, and thus trial court could not be deemed
Cases
to have found the omitted element of knowing con-
(Formerly 115k56.10)
duct. Vernon's Ann.Texas Rules Civ.Proc., Rule
Express finding of knowing conduct is pre-
279.
requisite to recovery of mental anguish damages as
“actual damages” available under unfair insurance [8] Insurance 217 3342
practices statute. V.A.T.S. Insurance Code, art.
21.21, § 16(b)(1). 217 Insurance
217XXVII Claims and Settlement Practices
[6] Damages 115 57.45 217XXVII(C) Settlement Duties; Bad Faith
217k3341 Prerequisites for Claim of
115 Damages
Breach or Bad Faith
115III Grounds and Subjects of Compensatory
217k3342 k. In general. Most Cited
Damages
Cases
115III(A) Direct or Remote, Contingent, or
(Formerly 217k3345, 217k602.7)

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 Page 3
907 S.W.2d 430, 38 Tex. Sup. Ct. J. 947
(Cite as: 907 S.W.2d 430)

To obtain award of attorney's fees under fee- As the sole beneficiary of her husband's graded
shifting provisions of unfair insurance practices premium whole life policy, Terri brought suit
statute, party must (1) prevail on cause of action for against both State Farm and Heaton, asserting,
which such fees are recoverable, and (2) recover among other claims, that they had violated Article
damages. V.A.T.S. Insurance Code, art. 21.21, § 21.21. She also contended that the terms of the
16(b)(1). policy guaranteed payment of a dividend at death
which should have been used to pay a part of the
*431 Larry G. Black and Ranelle M. Meroney, premium that was in arrears and thereby “cure” the
Austin, for petitioners. policy's lapse.

Mark L. Kincaid, Joe K. Longley and Philip K. The case was tried to a jury. At the close of the
Maxwell, Austin, for respondent. evidence, the trial court granted an instructed ver-
dict in Terri's favor on the issue of coverage, find-
OWEN, Justice, delivered the opinion of the Court ing that the policy was ambiguous and construing it
in which GONZALEZ, HECHT, CORNYN, and to provide for dividends that “would have been suf-
ENOCH, Justices, join. ficient to avoid the asserted lapse.” (The basis of
the trial court's ruling is set forth in its judgment.)
PHILLIPS, Chief Justice, and SPECTOR, Justice,
join in Parts III, IV, and V. Issues were submitted to the jury on Terri Bea-
ston's other claims. The jury found that the defend-
ants had engaged in unfair or deceptive acts and
We are called upon to interpret the terms of a that such conduct was a producing cause of dam-
life insurance policy and to decide whether a ages to Terri Beaston. The jury failed to find,
plaintiff can recover mental anguish damages from however, that State Farm or Heaton (1) had en-
an insurance company for a violation of Article gaged in any false, misleading, or deceptive act or
21.21 of the Texas Insurance Code absent a finding practice, (2) had engaged in any unconscionable ac-
that the defendant acted knowingly. Because we tion or course of action, (3) was negligent, or (4)
hold that the plaintiff is not entitled to benefits un- was grossly negligent. There was a finding that
der her husband's policy and that a finding of State Farm had not waived any lapse under the
knowing conduct is required to recover mental an- policy. An issue as to whether State Farm or
guish damages under Article 21.21, we reverse the Heaton had knowingly engaged in any unconscion-
judgment of the court of appeals, 861 S.W.2d 268, able *432 conduct was conditioned on an affirmat-
and render judgment that the plaintiff take nothing. ive response to the question that asked whether
either defendant had engaged “in any unconscion-
I
able action or course of action that was a producing
In 1982, Terri and David Beaston bought life
cause of damages to Terri Beaston.” Because the
insurance policies from Ted Heaton, a State Farm
jury responded negatively, it did not reach the ques-
Life Insurance Company agent. The Beastons failed
tion asking whether the defendants had engaged in
to pay the premium on David's policy due on
knowing conduct. No objection was made to the
December 28, 1983. His policy lapsed as of Decem-
conditional submission.
ber 28, 1983, and the thirty-one day grace period
expired on January 28, 1984. Three days after the In response to the damage issue, the jury awar-
expiration of the grace period, David died in an ded no policy benefits, but awarded $200,000 for
automobile accident. State Farm refused to pay the mental anguish in the past. The jury was asked to
benefits under his life insurance policy, claiming and did award attorney's fees as a percentage of
that coverage had expired before his death. Terri Beaston's recovery, finding that forty percent

© 2015 Thomson Reuters. No Claim to Orig. US Gov. Works.
 Page 4
907 S.W.2d 430, 38 Tex. Sup. Ct. J. 947
(Cite as: 907 S.W.2d 430)

was a reasonable fee, with increased percentages if method in favor of the method proffered by Bea-
the case were appealed to the court of appeals and ston. The court of appeals held that “the contin-
to this Court. gency fee percentage should be calculated on the
total recovery and not on the total damages. ” 861
The trial court rendered judgment in Terri Bea- S.W.2d at 279 (emphasis in original).
ston's favor, awarding the face amount of the policy
benefits ($250,000), and prejudgment interest FN1. Section 16 of the former Article
($147,171). A statutory delay penalty in the amount 21.21 provided that “any plaintiff who pre-
of twelve percent ($30,000) was added pursuant to vails may obtain ... three times the amount
Article 3.62 of the Texas Insurance Code, for a of actual damages....” Act of May 21,
total of $427,171, and forty percent of that total 1973, 63rd Leg., R.S., ch. 143, § 2(c),
($170,868.40) was included in the judgment as at- 1973 Tex.Gen.Laws 322, 338, amended by
torney's fees. The trial court stated in its judgment Act of April 4, 1985, 69th Leg., R.S., ch.
that it “finds no cases that would allow the award of 22, § 3, 1985 Tex.Gen.Laws 395, 395. Art-
mental anguish damages absent a finding that the icle 21.21 presently provides, however,
conduct of the Defendants was committed know- that a prevailing plaintiff can recover
ingly, and therefore ... mental anguish damages will treble damages only if the “trier of fact
not be awarded, and the jury's answer to Question finds that the defendant knowingly com-
8(b) [concerning mental anguish damages] will be mitted the acts” of which the plaintiff com-
disregarded.” The trial court additionally refused to plains. TEX.INS.CODE art. 21.21, §
treble the actual damages and refused to award at- 16(b)(1).
torney's fees based on a calculation that Terri Bea-
ston contended was equal to forty percent of the FN2. Prior to September 1, 1991, Article
“recovery” (which would result in attorney's fees of 3.62 of the Texas Insurance Code provided
$284,780.87 as calculated by Beaston) as opposed in relevant part:
to only forty percent of the damages, including pen-
In all cases where a loss occurs and the
alty and interest.
life insurance company ... liable therefor
The court of appeals reversed the judgment of shall fail to pay the same within thirty
the trial court, holding that Terri Beaston was not days after demand therefor, such com-
required to obtain a jury finding that State Farm or pany shall be liable to pay the holder of
its agent had knowingly violated Article 21.21 as a such policy, in addition to the amount of
prerequisite for the recovery of mental anguish the loss, twelve percent damages on the
damages. 861 S.W.2d at 275. The court of appeals amount of such loss....
reinstated the jury's award of $200,000 in mental
Act of April 27, 1931, 42nd Leg., R.S.,
anguish damages and concluded that the trebling of
ch. 91, § 1, 1931 Tex.Gen.Laws 135,
those damages was mandatory under former Article
FN1 135, repealed by Act of June 6, 1991,
21.21, which governed this case. The court af-
72nd Leg., R.S., ch. 242, § 12.01(2),
firmed the award of policy benefits, prejudgment
FN2 1991 Tex.Gen.Laws 939, 1133.
interest, and a twelve-percent delay penalty,
but increased the amount of the judgment to include State Farm brings forth several points of error,
prejudgment interest and attorney's fees based on including challenges to the finding of coverage un-
Terri Beaston's increased recovery. The court of ap- der the policy, the award of mental anguish dam-
peals also modified the manner in which attorney's ages, and the calculation of attorney's fees.
fees were calculated, rejecting the trial court's

© 2015 Thomson Reuters. No Claim to Orig. US Gov. Works.
 Page 5
907 S.W.2d 430, 38 Tex. Sup. Ct. J. 947
(Cite as: 907 S.W.2d 430)

II Since David had not paid the last premium on his
[1] Although it is undisputed that her husband's policy prior to the expiration of its grace period, he
policy would have otherwise lapsed on December was entitled to no dividend that could be used to
28, 1983, Terri claims that the *433 policy re- cure his unpaid premium. The trial court held,
mained in force because of its dividend-at-death however, that the terms of the policy were ambigu-
provision. The policy provides, in relevant part: ous because they could reasonably be taken to mean
that State Farm would pay David a dividend at his
Nonpayment of Premium. If a premium has not death, regardless of his arrearages. The court of ap-
been paid by the end of its grace period, the Ac- peals affirmed. 861 S.W.2d at 276–77.
cumulations to Avoid Lapse and, if chosen, the
Automatic Premium Loan provisions will apply. [2][3][4] We disagree. As we explained in For-
If neither of these provisions apply, this policy bau v. Aetna Life Insurance Co., 876 S.W.2d 132
will lapse as of the due date of any amount of un- (Tex.1994), the interpretation of insurance con-
paid premium. With such lapse, all coverage tracts is governed by the same rules of construction
ceases.... applicable to other contracts. Id. at 133 (citations
omitted). When construing a contract, courts must
Accumulations to Avoid Lapse. If a premium strive to give effect to the written expression of the
has not been paid by the end of its grace period, parties' intent. Id. (citations omitted). To do so, they
any available dividend accumulations will be must read all parts of a contract together. Id.
used to pay all or part of that premium.... (citations omitted). Indeed, courts must be particu-
larly wary of isolating from its surroundings or con-
Premium Adjustment When Insured Dies. If
sidering apart from other provisions a single phrase,
the Insured dies during a grace period, any part of
sentence, or section of a contract. See id. at 133–34
a premium due will be paid from the proceeds....
(citations omitted). Only if an insurance policy re-
Annual Dividends. State Farm Life may appor- mains ambiguous despite these canons of interpret-
tion and pay dividends each year. Any such di- ation should courts construe its language against
vidends will be paid at the end of the policy year the insurer in a manner that favors coverage. See,
if all premiums due have been paid.... e.g., National Union Fire Ins. Co. v. Hudson En-
ergy Co., 811 S.W.2d 552, 555 (Tex.1991); Blay-
Dividend Options. The Owner may choose one lock v. American Guar. Bank Liab. Ins. Co., 632
of the options listed below.... S.W.2d 719, 721 (Tex.1982); Ramsay v. Maryland
Am. Gen. Ins. Co., 533 S.W.2d 344, 349 (Tex.1976)
3. Dividend Accumulation. Left to accumu- .
late.... Accumulations plus interest to the In-
sured's death will be part of the proceeds. Terri Beaston interprets David's policy to mean
that State Farm would pay a pro-rated dividend at
Dividend at Death. A dividend for the period his death, regardless of how many premium pay-
from the start of the policy year to the Insured's ments had been missed or whether the policy was
death will be part of the proceeds. inside or outside its grace period following the non-
payment of a premium. However, as we recognized
It is undisputed that David had not accumulated
in Forbau:
any dividend following the first year of the policy
or that he died before its second anniversary. State [N]ot every difference in the interpretation of a
Farm argues that the terms of David's policy make contract or an insurance policy amounts to an am-
clear that the payment of any dividend is contingent biguity. Both the insured and the insurer are
on the insured's payment of all premiums due. likely to take conflicting views of coverage, but

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 Page 6
907 S.W.2d 430, 38 Tex. Sup. Ct. J. 947
(Cite as: 907 S.W.2d 430)

neither conflicting expectations nor disputation is and pay dividends each year.” (Emphasis
sufficient to create an ambiguity. added.) Because no dividend was paid dur-
ing the first year of David's policy, there
Forbau, 876 S.W.2d at 134 (citations omitted) was no dividend left to accumulate.
(emphasis in original).
The policy's dividend-at-death provision is ir-
Despite Terri's contrary interpretation, the relevant under these circumstances. Contrary to
policy, viewed in its entirety, unambiguously Terri Beaston's assertion that the policy's dividend-
provides that David would not receive any dividend at-death clause states unconditionally that State
that could be used to cure his policy's lapse under Farm will pay a pro-rated dividend to David upon
the circumstances presented here. The policy states his demise, the provision states only that “[a] di-
that if, as in this *434 case, a premium has not been vidend for the period from the start of the policy
paid by the end of its grace period, the accumula- year to the Insured's death will be part of the pro-
tions-to-avoid-lapse provision will apply. Under ceeds.” (Emphasis added). But the payment of pro-
that provision, State Farm agrees to use “any avail- ceeds under the policy is contingent upon the in-
able dividend accumulations” to pay all or part of sured's timely payment of premiums. Under the
the unpaid premium. Dividend accumulations are policy's nonpayment-of-premium provision, if a
those dividends, if any, paid to the insured on the premium has not been paid by the end of the grace
anniversary of the policy and “left to accumulate,” period, the “policy will lapse as of the due date of
as allowed by one of the policy's “dividend op- any amount of unpaid premium,” unless the accu-
FN3
tions.” The annual-dividends provision con- mulations-to-avoid-lapse provision or the automatic
firms this. Terri acknowledges that her husband's premium loan provision applies. (Emphasis added).
policy had not accumulated any dividends on its FN5
FN4 Neither of those provisions applies here. When
first anniversary and that the policy lapsed be- the policy lapses due to nonpayment, “all coverage
fore its second anniversary. Because the policy ceases,” and consequently there are no proceeds
lapsed before its second anniversary, any dividends with which the dividend could be included. Con-
that might have been paid on that date had not yet strued together, the dividend-at-death and nonpay-
“accumulated.” As a result, there simply were no ment-of-premium provisions leave no doubt that the
dividend accumulations available to cure the lapse. insured is not entitled to a dividend at death unless
the policy is in force when the insured dies. Under
FN3. When State Farm pays a dividend at
this policy, therefore, a dividend at death is not
the end of a policy year, the policy FN6
available to cure an unpaid premium. The grace
provides the insured with four options. He
period for the payment of David's December 28,
or she can (1) use the dividend toward the
1983 premium expired on January 28, 1984, three
payment of a premium; (2) use the di-
days before David's death. Since coverage ceased
vidend to purchase a paid-up life insurance
before David's death, he was not entitled to a pro-
addition; (3) leave the dividend to accumu-
rated dividend upon his death that could revive his
late (in which case, the dividend accumula-
coverage under the lapsed policy. Thus, we reverse
tions earn interest at the minimum rate of 4
the judgment of the court of appeals in awarding
1/2 % each year); or (4) be paid the di-
Terri Beaston the benefits of her husband's life in-
vidend in cash.
surance policy.
FN4. The terms of the policy do not guar-
FN5. As discussed above, the accumula-
antee payment of dividends, as evidenced
tions-to-avoid-lapse provision does not ap-
by the annual-dividends provision which
ply because there were no dividend accu-
provided that State Farm “ may apportion

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 Page 7
907 S.W.2d 430, 38 Tex. Sup. Ct. J. 947
(Cite as: 907 S.W.2d 430)

mulations. The automatic premium loan cover mental anguish damages in the absence of a
provision does not apply because David's finding that it acted knowingly. Whether such a
policy had not yet built up any cash value, finding is a prerequisite for recovering mental an-
and thus the policy did not have adequate guish damages under Article 21.21 is a question of
“loan value,” as required by that provision. first impression for this Court.

FN6. If the insured dies while the policy is Like the DTPA, Article 21.21 provides that
within the thirty-one day grace period fol- parties may recover their actual damages against a
lowing the nonpayment of a premium, any defendant who has violated the statute's provisions.
premium due is paid from the proceeds. TEX.INS.CODE art. 21.21, § 16(b)(1). Neither the
DTPA nor Article 21.21 defines “actual damages.”
III In construing this term, our courts have concluded
[5] State Farm also complains that the court of that the “actual damages” available under Article
appeals erred in awarding Terri Beaston damages 21.21 or the DTPA are those damages recoverable
for mental anguish under Article 21.21. State Farm at common law. Brown v. American Transfer &
argues in the alternative that (1) there is no evid- Storage Co., 601 S.W.2d 931, 939 (Tex.), cert.
ence to support the jury's finding that it violated denied, 449 U.S. 1015, 101 S.Ct. 575, 66 L.Ed.2d
Article 21.21; (2) there is no evidence to support 474 (1980); see also Frank B. Hall & Co. v. Beach,
the jury's finding regarding mental anguish dam- Inc., 733 S.W.2d 251, 265 (Tex.App.—Corpus
ages; or (3) damages for emotional distress are not Christi 1987, writ ref'd n.r.e.); St. Paul Ins. Co. v.
recoverable because Terri failed to secure a jury McPeak, 641 S.W.2d 284, 287
finding that State Farm acted knowingly. (Tex.App.—Houston [14th Dist.] 1982, writ ref'd
n.r.e.).
Article 21.21 provides a remedy for those in-
jured by (1) any “unfair methods of competition Courts traditionally have been reluctant to al-
*435 and unfair and deceptive acts or practices in low recovery of damages for emotional distress
the business of insurance” specifically defined in without some additional threshold showing, for ex-
Section 4 of Article 21.21, (2) practices declared in ample, that the mental anguish was accompanied by
the rules or regulations of the Board of Insurance to a physical injury “resulting from a physical impact
be unfair methods of competition and unfair and or was produced by a particularly upsetting or dis-
deceptive acts or practices in the business of insur- turbing event.” The Parkway Co. v. Woodruff, 901
ance, or (3) violations of Section 17.46 of the Texas S.W.2d 434, 442 (Tex.1995). See generally, LAY-
Business and Commerce Code, otherwise known as COCK, MODERN AMERICAN REMEDIES
the Deceptive Trade Practices—Consumer Protec- 189–90 (2d ed. 1994) (discussing restrictions on re-
FN7
tion Act (“DTPA”). See TEX.INS.CODE art. covery for emotional distress).
21.21, § 16(a). The jury found that one or both of
the defendants engaged in an unfair or deceptive act We have held in a DTPA case that mental an-
or practice. guish damages are not recoverable where there was
no willful conduct and no resulting physical injury.
FN7. TEX.BUS. & COM.CODE §§ 17.41– Brown, 601 S.W.2d at 939. We similarly held in
17.63. Duncan v. Luke Johnson Ford, Inc., 603 S.W.2d
777, 779 (Tex.1980), that damages cannot be re-
State Farm contends that there is no evidence
covered for mental anguish alone and that there
to support this finding. Because the only damages
must be proof of a willful tort, gross negligence, or
found by the jury were for mental anguish, we turn
willful disregard. See also Luna v. North Star
first to State Farm's argument that Terri cannot re-
Dodge Sales, Inc., 667 S.W.2d 115, 117–18

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 Page 8
907 S.W.2d 430, 38 Tex. Sup. Ct. J. 947
(Cite as: 907 S.W.2d 430)

(Tex.1984), where we held that a finding that the similar culpable mental state under Article 21.21.
unconscionable actions were committed
“knowingly” would support mental anguish dam- [6] Having decided that some culpability is re-
ages, but we remanded for a determination of the quired, we must determine the appropriate standard.
factual sufficiency of the evidence to support the We conclude that a finding of knowing conduct is a
mental anguish award, and Boyles v. Kerr, 855 prerequisite to the recovery of mental anguish dam-
S.W.2d 593, 598 (Tex.1993), where we observed in ages under Article 21.21. “Knowingly” is the only
dicta that mental anguish damages may not be re- culpable mental state to which the statute currently
covered under the DTPA absent proof of a willful refers. See TEX.INS.CODE art. 21.21, § 16(b)(1).
FN8
or grossly negligent violation. We therefore hold that mental anguish dam-
ages are not recoverable under Article 21.21 as an
We see no reason that a culpable mental state element of actual damages without an express find-
should not also be required to recover mental an- ing of knowing conduct. The other prerequisites for
guish damages under Article 21.21. As the court of recovery of mental anguish damages under the
appeals recognized, the DTPA and Article 21.21 common law must also be present. As there was no
are interrelated. 861 S.W.2d at 274. The Legislature finding here of knowing conduct, the judgment of
enacted both remedies in 1973 as “part of a reform the court of appeals is reversed to the extent that it
package of consumer legislation.” State Farm Fire awards any damages for mental anguish. Accord-
& Cas. Co. v. Gros, 818 S.W.2d 908, 916 ingly, we do not address State Farm's further argu-
(Tex.App.—Austin 1991, no writ); see also Frank ment that the record contains no evidence that State
B. Hall, 733 S.W.2d at 265 (noting that the pur- Farm or Heaton committed a violation of Article
poses of the statutes are similar). The DTPA was 21.21 of the Insurance Code or the argument that
designed to protect consumers against “false, mis- the record contains no evidence of Terri's mental
leading, and deceptive business practices, uncon- anguish. Nor are we called upon to consider wheth-
scionable actions, and breaches of warranty....” er Terri has satisfied any other requirements for a
TEX.BUS. & COM.CODE § 17.44. Similarly, Art- recovery of mental anguish damages in this case.
icle 21.21 was enacted to regulate practices in the
insurance industry by prohibiting “unfair methods FN8. The Insurance Code defines
of competition or unfair or deceptive acts or prac- “knowingly” as “actual awareness of the
tices.” TEX.INS.CODE art. 21.21, § 1(a). Section falsity, unfairness, or deception of the act
17.50(a)(4) of the DTPA incorporates Section 16 of or practice made the basis for a claim for
Article 21.21, and Section 16 of Article 21.21 pro- damages under Section 16 of this Article.
hibits an insurer*436 from engaging in any practice ‘Actual awareness' may be inferred where
proscribed by Section 17.46 of the DTPA. objective manifestations indicate that a
TEX.BUS. & COM.CODE § 17.50(a)(4); person acted with actual awareness.”
TEX.INS.CODE art. 21.21, § 16(a); see also Trans- TEX.INS.CODE § 21.21(2)(c).
port Ins. Co. v. Faircloth, 898 S.W.2d 269, 273
IV
(Tex.1995).
[7] Terri Beaston counters that even if a finding
In DTPA cases that do not involve personal in- of knowing conduct is required to recover mental
jury, we have required a threshold finding of a anguish damages under Article 21.21 in this case,
culpable mental state as one of the prerequisites for she nevertheless is entitled to prevail because State
mental anguish damages. See, e.g., Luna, 667 Farm failed to preserve its complaint regarding this
S.W.2d at 117–18; Duncan, 603 S.W.2d at 779; issue. We hold that State Farm did not waive error
Brown, 601 S.W.2d at 939. It is logical to require a on this point.

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 Page 9
907 S.W.2d 430, 38 Tex. Sup. Ct. J. 947
(Cite as: 907 S.W.2d 430)

Tracking the language of Article 21.21, ques- *437 Had the trial court rendered judgment in
tion one to the jury asked whether “State Farm or favor of Terri for mental anguish damages, her ar-
Ted Heaton engage[d] in any unfair or deceptive gument would be correct. Where, as here, a jury
act or practice that was a producing cause of dam- awards damages based on a charge that omits an
ages to Terri Beaston.” The jury responded affirm- element necessary to sustain a ground of recovery,
atively. The jury further found in response to ques- the trial court can either file a written finding re-
tion eight that $200,000 would fairly and reason- garding the missing element or render judgment
FN10
ably compensate Terri for her mental anguish. The without one. See TEX.R.CIV.P. 279. If the
jury charge did not condition question eight on an trial court does not file a written finding, the omit-
affirmative response to any issue concerning know- ted element is deemed found in support of the judg-
ing conduct. State Farm objected to question eight ment as long as no objection was made and the
on the grounds that there was no evidence to sup- evidence supports such a finding. See id.; Ramos v.
port a finding of mental anguish damages, but it Frito–Lay, Inc., 784 S.W.2d 667, 668 (Tex.1990).
never objected that the charge failed to condition
question eight on a finding that State Farm had ac- FN10. Rule 279 governs omissions from
ted knowingly. the jury charge and provides in relevant
part:
Terri contends that because State Farm did not
point out to the trial court that question eight re- When a ground of recovery or defense
garding mental anguish damages should have been consists of more than one element, if one
conditioned on a finding of knowing conduct, State or more of such elements necessary to
Farm cannot now complain that the court of appeals sustain such ground of recovery or de-
erred in awarding mental anguish damages without fense, and necessarily referable thereto,
such a finding. She argues that if a party makes no are submitted to and found by the jury,
objection to a defective submission of a controlling and one or more of such elements are
issue constituting an element of a ground of recov- omitted from the charge, without request
ery and a judgment is rendered thereon, the party's or objection.... the trial court ... may ...
failure to object waives the defective submission of make and file written findings on such
that issue. See, e.g., Allen v. American Nat'l Ins. omitted element or elements in support
FN9 of the judgment. If no such written find-
Co., 380 S.W.2d 604, 609 (Tex.1964).
ings are made, such omitted element or
FN9. In Allen, we wrote: elements shall be deemed found by the
court in such manner as to support the
It seems well settled in this State that judgment.
where no objection is made to a defect-
ive submission of a controlling issue TEX.R.CIV.P. 279 (emphasis added).
constituting a component element of a
ground of recovery or a defense and a But in this case, the trial court did not file a
judgment is rendered thereon, such judg- written finding as to whether State Farm or Heaton
ment will not be reversed because the acted knowingly. To the contrary, the judgment that
failure to object is considered a waiver the trial court rendered expressly excluded mental
of the defective submission of such is- anguish damages. By denying Terri any damages
sue. for emotional distress, the trial court cannot be
deemed to have found that either defendant acted
Allen, 380 S.W.2d at 609 (citations omit- knowingly. See TEX.R.CIV.P. 279. Accordingly,
ted). State Farm's failure to object to the form of ques-

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907 S.W.2d 430, 38 Tex. Sup. Ct. J. 947
(Cite as: 907 S.W.2d 430)

tion eight did not waive error regarding this issue. satisfy the same two requirements to recover attor-
FN11
ney's fees under Article 21.21. While we assume
without deciding that Terri prevailed under Article
FN11. We do not necessarily disagree with 21.21, she cannot recover attorney's fees because
the principles of law articulated by the dis- she has recovered no damages. We therefore re-
sent, but they are inapplicable under these verse the judgment of the court of appeals concern-
circumstances since the trial court did not ing the award of attorney's fees under Article 21.21.
render judgment for Terri with respect to
damages for emotional distress. FN13. Section 38.001 provides:

V A person may recover reasonable attor-
[8] Having rendered judgment that Terri Bea- ney's fees from an individual or corpora-
ston take nothing with respect to her claim under tion, in addition to the amount of a valid
Article 21.21, we also reverse her award of attor- claim and costs, if the claim is for: (1)
ney's fees. Section 16 of the applicable version of rendered services; (2) performed labor;
Article 21.21 provides that “any plaintiff who pre- (3) furnished material; (4) freight or ex-
vails may obtain ... actual damages plus ... attor- press overcharges; (5) lost or damaged
neys' fees reasonable in relation to the amount of freight or express; (6) killed or injured
FN12
work expended....” Act of May 21, 1973, stock; (7) a sworn account; or (8) an oral
63rd Leg., R.S., ch. 143, § 2(c), 1973 or written contract.
Tex.Gen.Laws 322, 338, amended by Act of April
4, 1985, 69th Leg., R.S., ch. 22, § 3, 1985 TEX.CIV.PRAC. & REM.CODE §
Tex.Gen.Laws 395, 395. 38.001.
***
FN12. The fee-shifting language of the
current version of Article 21.21 is essen- For the foregoing reasons, we reverse the judg-
tially the same. It provides that “any ment of the court of appeals and render *438 judg-
FN14
plaintiff who prevails may obtain ... the ment that Terri Beaston take nothing.
amount of actual damages plus court costs
FN14. Consequently, we do not reach the
and reasonable and necessary attorneys'
question of whether the attorney's fees
fees.” TEX.INS.CODE art. 21.21, §
were properly calculated, but note that in
16(b)(1).
Great American Insurance Company v.
To obtain an award of attorney's fees under the North Austin Municipal Utility District No.
DTPA or Section 38.001 of the Civil Practice and 1, ––– S.W.2d –––– (Tex.1995), we ex-
FN13 pressly disapproved of the method of cal-
Remedies Code, a party must (1) prevail on a
cause of a cause of action for which attorney's fees culation used by the court of appeals in
are recoverable, and (2) recover damages. See this case. Nor do we reach Terri's point of
McKinley v. Drozd, 685 S.W.2d 7, 9 (Tex.1985) error regarding the court of appeals' refusal
(construing the DTPA); Rodgers v. RAB Invest- to treble the award of policy benefits or
ments, Ltd., 816 S.W.2d 543, 551 State Farm's point of error regarding the
(Tex.App.—Dallas 1991, no writ) (construing the court of appeals' trebling of prejudgment
Civil Practice and Remedies Code). Since the fee- interest.
shifting provision of Article 21.21 echoes the words
PHILLIPS, Chief Justice, delivered a concurring
of the DTPA and Section 38.001 which provide for
and dissenting opinion, joined by SPECTOR,
awarding attorney's fees, we hold that a party must

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 Page 11
907 S.W.2d 430, 38 Tex. Sup. Ct. J. 947
(Cite as: 907 S.W.2d 430)

Justice. mental anguish damages are recoverable if they
I agree with the Court in most respects. But for would be part of common law actual damages, and
many of the same reasons as the dissent, I believe Beaston's injury of delay and anguish over policy
that the insurance policy was ambiguous and, con- coverage for the death of her husband is most ana-
sequently, that the court of appeals was correct in logous to common law actions allowing mental an-
affirming the trial court's judgment that State Farm guish recovery. The majority misapplies its own
owed Terri the proceeds of the policy as a matter of test. Because I believe the majority is wrong on
law. each issue, I dissent.

Therefore, I note my dissent to Part II of the I.
Court's opinion concerning the policy, while join- First consider whether Mrs. Beaston is entitled
ing in Parts III, IV, and V of the Court's opinion to recover any proceeds from her husband's life in-
concerning mental anguish damages, preservation surance policy. Although it is undisputed, based
of error, and attorney's fees. I would render judg- upon the issue date shown on its face, that her hus-
ment that Terri recover only the policy benefits, band's policy had expired for nonpayment of premi-
statutory attorney's fees, and costs. um when he died, Mrs. Beaston argues a construc-
tion of the policy that keeps it in force because of
GAMMAGE, Justice, joined by HIGHTOWER, its dividend-at-death provision. The policy
Justice, dissenting. provides, in relevant part:
The majority overlooks procedural waiver by
defendants in order to reach statutory construction Accumulations to Avoid Lapse. If a premium
issues, rewrites DTPA and Insurance Code article has not been paid by the end of its grace period,
21.21 law in ways never conceived before, then any available dividend will be used to pay all or
misapplies its own new rule. The jury found she part of that premium....
had suffered damages from unfair insurance prac-
tices. The trial court and court of appeals struggled Annual Dividends. State Farm Life may appor-
with the question of how much she should recover. tion and pay dividends each year. Any such di-
The policy at issue is ambiguous, as we have histor- vidends will be paid at the end of the policy year
ically used the term “ambiguity” for insurance if all premiums due have been paid....
policies. The trial court correctly rendered judg-
Dividend at Death. A dividend for the period
ment on an instructed verdict for Beaston for the
from the start of the policy year to the insured's
policy amount based on the undisputed facts. And,
death will be part of the proceeds.
as to unfair insurance practice recovery, defendants
failed to object to the jury charge, which neither se- (Emphasis added.)
gregated nor conditioned the mental anguish dam-
ages issue on an additional finding of “knowing” The parties do not dispute that Mr. Beaston had
conduct. Defendants were required to object to an not accumulated any dividend following the first
improperly conditioned damages issue to preserve year of the policy or that he died *439 before its
error, and their failure waived their complaints second anniversary. The court accepts State Farm's
about mental anguish as an element of damages ab- argument that the terms of Mr. Beaston's policy
sent “knowing” conduct. Even if one reaches the make clear that the payment of any dividend is con-
“knowing” issue, however, the version of article tingent on the insured's payment of all premiums
21.21 applicable when the incident occurred did not due. Since Mr. Beaston had not paid the last premi-
require “knowing” conduct for mental anguish um on his policy prior to the expiration of its grace
damages. Even under the majority's test, however, period, State Farm contends, the terms of the policy

© 2015 Thomson Reuters. No Claim to Orig. US Gov. Works.
 Page 12
907 S.W.2d 430, 38 Tex. Sup. Ct. J. 947
(Cite as: 907 S.W.2d 430)

are unambiguous that he would not receive any di- through its new-found device to avoid ambiguity,
vidend that could be used to cure his unpaid premi- applying “rules of construction” as in Forbau v.
um. The court thus accepts a reading of the contract Aetna Life Ins. Co., 876 S.W.2d 132 (Tex.1994).
favorable to the insurance company, which drafted Unlike the insurance policy in Forbau, however,
it. This is not proper. the policy at issue here does not contain any provi-
sion that, with reference to an external event, re-
The trial court held that these policy provisions solves its ambiguity. It appears that the majority
could reasonably be taken to mean that State Farm now interprets Forbau as overruling all our insur-
would pay Mr. Beaston a dividend at his death, re- ance ambiguity precedents, although in Forbau the
gardless of his arrearages, and the court of appeals majority claimed otherwise. The gymnastics util-
agreed with that analysis. 861 S.W.2d at 277. The ized to conclude ambiguity is not ambiguous, at
dividend-at-death clause states unconditionally that bottom amount to reading a provision into the con-
State Farm will pay a pro-rated dividend to Mr. tract that is not there to provide that all dividends
Beaston upon his demise. The accumulations- and accumulations are not payable after a lapse,
to-avoid-lapse provision states with equal certainty even upon death, at which occurrence the policy
that State Farm will use any such dividend to pay states expressly they are payable. Therefore, no am-
all or part of the insured's unpaid premiums. State biguity!
Farm was aware of the difference between discre-
tionary or contingent clauses and mandatory provi- II.
sions. The annual-dividend clause, for example, Assuming our traditional rules dealing with
says State Farm “may” pay dividends each year. ambiguities in insurance contracts were applied and
State Farm's choice to not make the payment of a the policy were construed in Beaston's favor, State
dividend at death expressly contingent on the in- Farm and Heaton waived their complaint that
sured's timely payment of premiums created an am- “mental anguish” damages required a “knowingly”
biguity that leaves the policy susceptible to two finding. The jury's affirmative finding to question
reasonable interpretations. That makes the language one, a general article 21.21 violation, was one of
“ambiguous” and the court should construe it five conditions which if the jury answered “Yes” to
against the insurer in a manner that favors cover- any one, required the jury to answer the damages
age. See Balderama v. Western Casualty Life Ins. question. State Farm made no objection that the
Co., 825 S.W.2d 432, 434 (Tex.1991); National damages issue was improperly conditioned because
Union Fire Ins. Co. v. Hudson Energy Co., 811 the general article 21.21 liability question, and pos-
S.W.2d 552, 555 (Tex.1991); Barnett v. Aetna Life sibly some of the other four questions requiring the
Ins. Co., 723 S.W.2d 663, 666 (Tex.1987); Blaylock jury to answer on damages, would also require a
v. American Guarantee Bank Liab. Ins. Co., 632 “knowing” finding. Neither did State Farm object
S.W.2d 719, 722 (Tex.1982); Ramsay v. Maryland that the damages question used the wrong measure
Am. Gen. Ins. Co., 533 S.W.2d 344, 349 (Tex.1976) of damages because the mental anguish element
. Construed against State Farm, Mr. Beaston's was improper absent an express “knowing” finding.
policy provides that State Farm would pay him a And State Farm did not object to the damages ques-
pro-rata dividend at death and would apply that di- tion because it contained an element of dam-
vidend pro-rata to his unpaid premium. Under this ages—mental anguish—not supported by some of
construction, as State Farm concedes, the amount of the liability theories presented*440 (no “knowing”
such a pro-rated dividend would have been suffi- violation). No objection appears in the record which
cient to prevent the policy from lapsing. would give the trial court or opposing counsel no-
tice of the complaint about mental anguish as an
The majority reaches its contrary conclusion element of damages.

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 Page 13
907 S.W.2d 430, 38 Tex. Sup. Ct. J. 947
(Cite as: 907 S.W.2d 430)

Rule 272 expressly provides that all parties damages issue includes improper elements or is
must have adequate opportunity to review and ob- based on the wrong measure of damages waives er-
ject to any defects in the charge, and “[a]ll objec- ror as to the form and substance of the damages is-
tions not so presented shall be considered as sue. See Tom Benson Chevrolet, Inc. v. Alvarado,
waived.” TEX.R.CIV.P. 272. Rule 274 contains ad- 636 S.W.2d 815, 822–23 (Tex.App.—San Antonio
ditional waiver provisions. This court has long held 1982, writ ref'd n.r.e.); Traylor v. Gray, 547 S.W.2d
that Rule 272, with or independent of Rule 274, is a 644, 658 (Tex.Civ.App.—Corpus Christi 1977, writ
broad waiver provision defeating complaints about ref'd n.r.e.); McCreless Properties, Ltd. v. F.W.
what the jury found or the form or substance of the Woolworth Co., 533 S.W.2d 863, 867
jury questions. Cogburn v. Harbour, 657 S.W.2d (Tex.Civ.App.—San Antonio 1976, writ ref'd n.r.e.)
432, 432 (Tex.1983); Edwards v. Strong, 213 .
S.W.2d 979, 981 (Tex.1948); Wilson v. King, 311
S.W.2d 957, 958–59 (Tex.Civ.App.—Austin 1958, The majority errs in even reaching the
writ ref'd). In particular, we have expressly ap- “knowingly” issue because State Farm failed to ob-
proved the statement of the reason for the rule giv- ject and thereby waived any complaint that the
en in Wilson: mental anguish element of damages had to be con-
ditioned upon or required a finding of knowing
The purpose of the Rules requiring a party to conduct.
except to the charge is to give the Trial Court an
opportunity to correct any errors, to the end that III.
the case may be fairly submitted, and all defects The majority asserts that “[i]n DTPA cases that
in the manner of submission of special issues do not involve personal injury, we have required a
were waived by failing to except thereto. threshold finding of a culpable mental state as one
[Citations omitted.] of the prerequisites for mental anguish damages.”
907 S.W.2d at 436. This misses the point of those
Id. at 959. Here neither the trial court nor Bea- cases, that mental anguish damages are recoverable
ston's counsel had the opportunity to change the only if the DTPA violation proved is analogous to a
conditional submission structure of the court's common law action allowing recovery of such men-
charge, because State Farm made no objection be- tal anguish damages. This court has held that men-
fore the verdict. This is precisely what Rules 272 tal anguish is a common law element of damages in
and 274 are intended to prevent. a large variety of circumstances not limited to phys-
ical injury or culpable mental state. Here the Insur-
The failure to object to the conditional submis- ance Code violation found by the jury is closely
sion of the damages issue waives error as to form analogous to instances where the common law al-
and substance of the submission. Wilgus v. Bond, lows mental anguish recovery, because a central
730 S.W.2d 670, 672 (Tex.1987); Matthews v. Can- purpose of the interest protected by the Code is to
dlewood Builders, Inc., 685 S.W.2d 649, 650 avoid mental harm to the beneficiary.
(Tex.1985); Strauss v. LaMark, 366 S.W.2d 555,
557 (Tex.1963); AAA Air Conditioning & Mfg. Under the DTPA, the term “actual damages”
Corp. of Tex. v. Barr, 186 S.W.2d 825, 826–27 means those damages that are recoverable under the
(Tex.Civ.App.—Dallas 1945, writ ref'd); Republic common law. Brown v. American Transfer & Stor-
Bankers Life Ins. Co. v. Coffey, 490 S.W.2d 231, age Co., 601 S.W.2d 931, 939 (Tex.1980). Article
233 (Tex.Civ.App.—Amarillo 1973, writ ref'd 21.21 likewise provides for the recovery of “actual
n.r.e.); Bell v. Aetna Cas. & Sur. Co., 394 S.W.2d damages.” The threshold question is whether men-
830, 833–34 (Tex.Civ.App.—Houston [1st Dist.] tal anguish damages are appropriate under the com-
1965, writ ref'd n.r.e.). The failure to object that the mon law for the actionable conduct found by the

© 2015 Thomson Reuters. No Claim to Orig. US Gov. Works.
 Page 14
907 S.W.2d 430, 38 Tex. Sup. Ct. J. 947
(Cite as: 907 S.W.2d 430)

jury. Only if mental anguish is not a common law ated fear of being unable to pay creditors in the
element of *441 damages must we look to excep- event of David's death. The young couple had a life
tions allowing mental anguish damages, such as insurance policy before but let it lapse because of
proof of willful or grossly negligent conduct. See, financial problems, which caused Terri great dis-
e.g., Luna v. North Star Dodge Sales, Inc., 667 tress. She insisted that David obtain new life insur-
S.W.2d 115 (Tex.1984); Duncan v. Luke Johnson ance coverage.
Ford, Inc., 603 S.W.2d 777 (Tex.1980).
Ted Heaton was the agent who promised to
The jury found State Farm engaged in unfair take care of the Beastons' insurance needs. The
and deceptive acts prohibited by article 21.21. The Beastons did not have a clear understanding of the
jury further found mental anguish damages from difference between term and whole life; they did
the unfair and deceptive acts. The “unfair and de- not realize that term was much less expensive for
ceptive acts” question was a broad submission. If the same coverage. Heaton could have suggested
there is any evidence that some specific conduct for they exchange their whole life policies for the more
which mental anguish damages are recoverable sup- affordable term, but he admitted he never even sug-
FN1
ported that broad finding, the court of appeals' gested the possibility to them. Heaton knew the
rendition of judgment on the jury verdict must be Beastons' financial problems began in June 1983.
affirmed. Prudential Ins. Co. v. Jefferson Assocs., He was in frequent contact with them about their
896 S.W.2d 156, 160 (Tex.1995); Brown v. Americ- late premium payments. He knew that Terri Bea-
an Transfer & Storage Co., 601 S.W.2d 931, ston was “adamant” about keeping the policies in
937–38 (Tex.1980). force. Terri was the one who made payments on
both policies whenever she could, and Heaton knew
FN1. Consistent, of course, with the other she was doing everything she could to pay the
express jury findings. premiums.

The evidence considered favorably to Terri There was evidence that Heaton's failure to
Beaston, for whom the jury answered the broad suggest the term option was an unfair practice un-
question affirmatively, supports the conclusion that der article 21.21. State Farm's own training manual
Heaton, as State Farm's agent acting with the capa- informed Heaton that term was suitable for young
city to deceive the average consumer, failed to sug- couples who lacked the means to purchase whole
gest changing from whole life to term insurance. life. The manual states that term insurance provides
The circumstances known to Heaton would object- good protection until the policyholder can afford
ively make one realize that his failure to make whole life. The testimony was that from mid–1983
known the term life option would cause emotional up to the day David died, the Beastons fit the de-
distress to Terri Beaston while the couple struggled scription of people for whom term insurance was
to pay the higher whole life premiums. Moreover, well suited, and Heaton knew it. Heaton admitted
in the event of David Beaston's death, the purported that he would normally advise someone of this
lapse in coverage because of nonpayment of the choice between term and whole life, but did not do
higher premium would cause emotional distress as- so in this case. Terri Beaston testified that given a
sociated with his death. Heaton was informed Terri choice, she would have switched. If the Beastons
would suffer heightened emotional distress associ- had switched to any of the three term conversion
ated with his death because of the financial strain of policies State Farm offered, the premiums they ac-
losing his income, something she abnormally tually paid for the whole life would have been more
feared. than sufficient to pay for term coverage through the
date of David's death.
There was evidence that Terri had an exagger-

© 2015 Thomson Reuters. No Claim to Orig. US Gov. Works.
 Page 15
907 S.W.2d 430, 38 Tex. Sup. Ct. J. 947
(Cite as: 907 S.W.2d 430)

The failure to offer the term option, given the jdgmt correct). The court expressly cited these two
surrounding circumstances, is most analogous to holdings with approval, and has held expressly that
torts which recognize emotional harm as an element emotional distress damages are allowed for wrong-
of common law damages, because emotional harm ful death, because it is the “natural result” of this
is the natural result of such wrongful conduct asso- class of torts where the “nature of the torts assures
ciated with the death of a spouse or family member. that the claimants will suffer mental injury.” See
This court early recognized this principle in *442 Moore v. Lillebo, 722 S.W.2d 683, 685 (Tex.1986).
Stuart v. Western Union Telegram Co., 18 S.W.
351, 353 (Tex.1885), in which the court refused to State Farm does argue that all these cases are
limit the recovery to the fifty cents paid for the tele- distinguishable and not properly analogous because
gram sent but not delivered to inform that a family they all involve “knowing” conduct, which the jury
member was dying. The court instead allowed the here expressly was not asked and did not find. The
$2,500 emotional injury damages found by the jury, argument is incorrect. In Stuart the wrongful failure
stating that “[t]he wrongdoer knows he is doing this to deliver the telegram was committed negligently,
damage when he afflicts the mind by withholding not knowingly. What was “knowing” was that the
the message of mortal illness ... injury to the feel- emotional harm would follow if the act was not
ings is actual damage ... the natural result of the done, whether the omission itself was negligent or
FN2 knowing. Likewise, in Classen the reinterment of
wrongful act.”
the bodies into the new cemetery was performed
FN2. In those jurisdictions recognizing a negligently, resulting in the loss of a body. What
“wrongful conception” or “wrongful preg- was “knowing” was that emotional damages would
nancy” cause of action, emotional distress surely result if one negligently lost the remains of a
is a principal element of damages precisely family member. In Moore v. Lillebo, the wrongful
because it is the natural result of the death was the result of negligence. What was
wrongful conduct. See, e.g., Boone v. Mul- “knowing” was that emotional harm would result
lendore, 416 So.2d 718 (Ala.1982); Cus- from such negligence. We said that emotional reac-
todio v. Bauer, 251 Cal.App.2d 303, 59 tion is the natural by-product of wrongful death,
Cal Rptr. 463 (1st Dist.1967); Bushman v. that it “destroys any pre-existing family relation-
Burns Clinic Med. Ctr., 83 Mich.App. 453, ship,” and that for wrongful death emotional harm
268 N.W.2d 683 (1978); Weintraub v. is usually the “principal element” of damages for
Brown, 98 App.Div.2d 339, 470 N.Y.S.2d surviving relatives. Moore v. Lillebo, 722 S.W.2d at
FN3
634 (2d Dept.1983); Jean–Charles v. 685.
Planned Parenthood Asso., 99 App.Div.2d
542, 471 N.Y.S.2d 622 (2d Dept.1984); FN3. These cases cannot properly be
Smith v. Gore, 728 S.W.2d 738 called “culpable mental state” cases, but
(Tenn.1987); C.S. v. Nielson, 767 P.2d 504 the majority does not tell us how they fall
(Utah 1988); James G. v. Caserta, 175 into its newly-defined limitations. Are
W.Va. 406, 332 S.E.2d 872 (1985). these precedents also overruled?

The court also has reviewed judgments for The evidence here is equally strong that Terri
emotional injury for mishandling of a corpse. See, Beaston had communicated her “adamant” concern,
e.g., Clark v. Smith, 494 S.W.2d 192 in Heaton's own words, to keep the insurance
(Tex.Civ.App.—Dallas 1973, writ ref'd n.r.e.); policies in effect because of her expressed great
Classen v. Benfer, 144 S.W.2d 633, 635 fear of financial hardship in the event of David's
(Tex.Civ.App.—San Antonio 1940, writ dism'd death. State Farm's mere claim that the policy had
lapsed caused additional psychic trauma to Beaston

© 2015 Thomson Reuters. No Claim to Orig. US Gov. Works.
 Page 16
907 S.W.2d 430, 38 Tex. Sup. Ct. J. 947
(Cite as: 907 S.W.2d 430)

following David's death. That this would occur dur-
ing Beaston's grief over her husband's death was
clearly “known” to Heaton and State Farm, and it
was the natural result of their negligent failure to
offer the term option to the Beastons. I would hold
that under the evidence and jury findings of this
case, emotional harm is an element of common law
damages and recoverable regardless of whether the
wrongful conduct was knowing.

For the foregoing reasons, I dissent.

Tex.,1995.
State Farm Life Ins. Co. v. Beaston
907 S.W.2d 430, 38 Tex. Sup. Ct. J. 947

END OF DOCUMENT

© 2015 Thomson Reuters. No Claim to Orig. US Gov. Works.
13 S.W. 12 Page 1
76 Tex. 85, 13 S.W. 12
(Cite as: 76 Tex. 85, 13 S.W. 12)

202k116 k. Creation of Lien. Most Cited
Cases
Supreme Court of Texas. Where property tendered as security for a loan
TEXAS LAND & LOAN CO. is in fact the homestead of husband and wife, no
v. designation or representation contrary to the fact
BLALOCK et al. will enable the parties to evade the law forbidding
the incumbrance of homesteads with liens.
Feb. 11, 1890.
Homestead 202 122
Appeal from district court, Galveston county.
202 Homestead
West Headnotes
202II Transfer or Incumbrance
Acknowledgment 12 56 202k122 k. Estoppel to Assert Invalidity.
Most Cited Cases
12 Acknowledgment Under Const. art. 16, § 50, providing that “no
12III Operation and Effect mortgage, trust deed, or other lien on the homestead
12k56 k. Grounds of Impeaching or Contra- shall ever be valid, except for the purchase money
dicting Certificate. Most Cited Cases therefor, or improvements made thereon,” a trust
An officer's certificate of acknowledgment by a deed for borrowed money given on land actually
married woman reciting her privy acknowledgment, occupied by the borrower and his family as a
etc., cannot be contradicted, where it is not shown homestead is invalid, though the borrower states in
that plaintiff who advanced money on the faith of his sworn application for the loan that the land was
the conveyance to which the acknowledgment was not his homestead, and that he owned another tract
attached had no knowledge or reason to believe that therein described, which he and his family occupied
any of the recitals in the certificate were untrue. as a homestead, and he is not estopped by such
statement to deny the validity of the deed.
Appeal and Error 30 1054(1)
Subrogation 366 23(6)
30 Appeal and Error
30XVI Review 366 Subrogation
30XVI(J) Harmless Error 366k23 Persons Making Advances for Discharge
30XVI(J)10 Admission of Evidence of Debt or Incumbrance
30k1054 On Trial Without a Jury 366k23(6) k. Advances for Discharge of
30k1054(1) k. In General. Most Vendor's Lien. Most Cited Cases
Cited Cases Where a person loans money on a homestead,
The admission of improper evidence on a trial such loan being invalid, but, before paying over the
to the court without a jury is harmless where there money, he has part of it applied to discharge a
is sufficient proper evidence on which to base the vendor's lien on the land, he is entitled to subroga-
decision. tion to all the rights of the vendor.

Homestead 202 116 Subrogation 366 23(6)

202 Homestead 366 Subrogation
202II Transfer or Incumbrance 366k23 Persons Making Advances for Discharge
of Debt or Incumbrance

© 2015 Thomson Reuters. No Claim to Orig. US Gov. Works.
13 S.W. 12 Page 2
76 Tex. 85, 13 S.W. 12
(Cite as: 76 Tex. 85, 13 S.W. 12)

366k23(6) k. Advances for Discharge of son, until after the loan applied for has been paid in
Vendor's Lien. Most Cited Cases full; that I am in actual possession of said lands; * *
Where a note secured by a deed of trust on a * that M. J. Blalock is my lawful wife; and that I
homestead was void in so far as it attempted to fix a was married to her on the 18th day of March, 1875.
lien on the homestead, and the money borrowed on * * * The above lands do not form any part of my
the security of the deed was used to satisfy a homestead. The following described property is the
vendor's lien on the land, the lender under his right homestead of myself and family, and we are living
to subrogation to the rights of such vendor was not on it and using and occupying the same as such,
entitled thereunder to recover attorneys' fees and I will further add that the same has been fully
provided for in the note secured by the deed of paid for, and is free from every lien, except as fol-
trust. lows: Due the state, $320, two years hence; and our
homestead is described as follows: Bastrop section
Vendor and Purchaser 400 265(2) school land No. 14, in Burnett county, Texas.’ This
application was made on a blank form furnished by
400 Vendor and Purchaser
appellant, and there is conflict in the evidence as to
400VI Remedies of Vendor
whether the persons who conducted the negoti-
400VI(A) Lien and Recovery of Land
ations were the agents of appellant or appellee. The
400k262 Transfer of Property by Pur-
trust-deed contains the following declaration: ‘The
chaser
parties of the first part hereby declare that the prop-
400k265 Rights and Liabilities of Sub-
erty hereinbefore mentioned and conveyed to the
sequent Purchasers
party of the second part forms no part of any prop-
400k265(2) k. Bona Fide Pur-
erty by them owned, used, or claimed as exempted
chasers. Most Cited Cases
from forced sale under the laws of the state of
A purchaser of land, with notice of former
Texas, and disclaim and renounce all and every
vendor's lien for the purchase money of the land,
claim thereto under any such law or laws, and
takes it subject to that lien.
hereby designate the following described property,
*85 **12 R. Waverly Smith and Davidson & Minor, to-wit: Bastrop section school land No. 14, in Bur-
for appellant. nett county, Texas, on which in good faith they
reside, as their homestead, and as constituting all
*86 McLemore & Campbell, for appellees. the property (of nature similar to that herein con-
veyed) used or claimed by them as exempt under
said laws; and *88 we declare that we have never
*87 STAYTON, C. J.
used the property herein conveyed, and are not now
On March 1, 1887, and for a long time prior
so using it; and the aforesaid designation is made
thereto, James A. Blalock was the head of a family,
for the purpose of securing a loan on the property
consisting of himself, wife, and children, and had
conveyed, with the occupancy of which the party of
and at that date was with his family residing on a
the second and third parts are wholly unacquain-
tract of land containing less than 200 acres. On day
ted.’ The property above designated as homestead
named, Blalock and wife executed a deed of trust
at no time was ever occupied by **13 Blalock as a
on that land to secure to appellant aloan of $800,
home. The borrowed money not having been paid,
then made. Application for the loan was made by
this suit was brought to enforce its payment through
Blalock on February 24, 1887, was sworn to by
foreclosure of the lien claimed through a trust-deed.
him, and contained the statement ‘that no portion of
Blalock and wife, the trustee, and John Markward,
the above-described property is now or can become
who had bought the property, were made defend-
our homestead, or the homestead of any other per-
ants. In defense, Blalock and wife alleged that the

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13 S.W. 12 Page 3
76 Tex. 85, 13 S.W. 12
(Cite as: 76 Tex. 85, 13 S.W. 12)

land was their homestead before and at the time the clarations in the trust-*89 deed that the property
trust-deed was executed, and that for this reason the was not homestead were placed there without the
lien claimed was void. Markward adopted their an- knowledge or consent of its makers, and after its
swer, and further alleged that on November 9, execution,-which, in view of all the evidence,
1888, he bought the land in ignorance of any lien or seems to us incredible,-how does the matter stand?
claim set up by appellant. The undeniable facts are that Blalock had such in-
terest in the land as homestead rights would attach
The cause was tried without a jury, and the to, as against every person other than his vendor, to
court admitted evidence of Mrs. Blalock, and of the whom balance of purchase money was due; that,
officer who took her acknowledgment, tending to with his family, he was occupying the land as his
show that she may not have known that recitals in sole home when the trust-deed was executed and
reference to homestead, before copied, were con- money loaned, and so had been for a long time pri-
tained in trust-deed. If that was true, there is no or to that date; and that the land designated as
evidence tending to show that the agents or officers homestead was not, and had not been, so occupied.
of appellant had any knowledge or reason to be-
lieve that she did not know the contents of the pa- The fact of actual possession and use, as the
per she executed when they received it and ad- home of the family, was one against which the
vanced money on it, and, in the absence of some lender could not shut its eyes; and this fact, coupled
such fact, the evidence of the witness should have with the interest held by the borrower in the land,
been excluded. The uncontroverted fact, however, made the property homestead in fact and in law, on
remains that Blalock and his family were occupying which the constitution declares no lien, such as
the land as their home, continuously, from a period claimed in this case, can exist. Every person deal-
long before until after all the facts transpired on ing with land must take notice of an actual, open,
which the rights of the parties depend. It was the and exclusive possession; and when this, concur-
homestead of the family. The constitution declares ring with interest in the possessor, makes it
that ‘no mortgage, trust-deed, or other lien on the homestead, the lender stands charged with notice of
homestead shall ever be valid, except for the pur- that fact, it matters not what declarations to the
chase money therefor, or improvements made contrary the borrower may make. It has been held
thereon, as hereinbefore provided, whether such that one remaining in possession of land, after hav-
mortgage or trust-deed or other lien shall have been ing executed and permitted to be placed on record
created by the husband alone, or together with his an absolute conveyance, could not rely upon his
wife.’ Article 16, § 50. There is no doubt that the possession as notice of a secret agreement that the
application for the loan, and the recitals and declar- absolute conveyance, as between the parties to it,
ations in the trust-deed, that the property was not was only intended as a mortgage, and thus defeat
homestead, went as far as words could go to assure the right of a subsequent innocent purchaser. That,
the lender that it might safely lend its money however, is not this case. Here nothing was hid-
without fear that lien would be defeated by the ex- den. Possession was open, certain, and in character
istence of homestead rights; and, after the many in no respect ambiguous. It was such as gave
protestations made, the wonder is that the borrow- homestead right, and the lender cannot be heard to
ers were not required to make, and did not make, a say that it did not know it. The constitution forbid-
further statement that no agent or officer of appel- ding the fixing on the homestead of liens other than
lant had capacity to know that land owned and oc- such as are thereby expressly permitted, no estoppel
cupied by a husband with his wife and children, as can arise in favor of a lender, who has attempted to
their sole place of residence, was their homestead. secure a lien on homestead in actual use and pos-
Discarding all evidence tending to show that the de- session of the family, based on declarations of the

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13 S.W. 12 Page 4
76 Tex. 85, 13 S.W. 12
(Cite as: 76 Tex. 85, 13 S.W. 12)

husband and wife, made orally or in writing, con- the purchase price he was to pay to Blalock, in
trary to the fact. To hold otherwise would practic- value more than sufficient to discharge the judg-
ally abrogate the constitution. If property be ment for which the property in his hands is made li-
homestead in fact and law, lenders must understand able. If there be any matter of error as to him, he
that liens cannot be fixed upon it, and that declara- has not presented it.
tions of husband and wife to the contrary, however
made, must not be relied upon. They must further The improper admission of evidence, espe-
understand that no designation of homestead, con- cially in a cause tried before the court, is no ground
trary to the fact, will enable parties to evade the for reversal when, on the uncontroverted and vital
law, and incumber homesteads with liens forbidden facts, no other judgment could have been rendered
by the constitution. Mortgage Co. v. Norton, 71 than that entered. The judgment will be affirmed.
Tex. 683, 10 S. W. Rep. 301, Pellat v. Decker, 72
Tex. 1890
Tex. 581, 10 S. W. Rep. 696; Kempner v. Comer,
Texas Land & Loan Co. v. Blalock
73 Tex. 203, 11 S. W. Rep. 194.
76 Tex. 85, 13 S.W. 12
At the time the deed of trust was executed and
END OF DOCUMENT
the money loaned there *90 was a vendor's lien on
the land to secure $475 and accrued interest, and,
although application for loan stated that the land
was free from incumbrance, the lender knew better,
and before paying the money to Blalock had so
much as was necessary applied to discharge the li-
en. Under this state of facts, the court did not err in
subrogating appellant to all the rights held by the
holder of the note given for purchase money, and in
foreclosing **14 the lien. Hicks v. Morris, 57 Tex.
658. It is insisted, however, as the note sued on
provided for the payment of 10 per cent. as attor-
ney's fees in case suit became necessary, that the
court ought to have at least allowed 10 per cent. on
the principal and interest due on purchase money.
The court did not err in refusing this; for all appel-
lant was entitled to recover, through enforcement of
lien, was by reason of its right to subrogation,
which could not extend to any sum the vendor of
the land would not have been entitled to receive had
he sued. The note given for purchase money had no
provision for payment of attorney's fees.

Defendant Markward bought after the trust-
deed was executed, and with knowledge of the
facts, and cannot complain that the land was subjec-
ted in his hands to the payment of purchase money,
or some equivalent thereto. Moreover, it seems that
he has in his hands property intended as a part of

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 Page 1
164 S.W.3d 656, 162 Oil & Gas Rep. 511, 48 Tex. Sup. Ct. J. 671
(Cite as: 164 S.W.3d 656)

30XVI(F) Trial De Novo
30k892 Trial De Novo
Supreme Court of Texas. 30k893 Cases Triable in Appellate
VALENCE OPERATING COMPANY, Petitioner, Court
v. 30k893(1) k. In General. Most
Elmagene W. DORSETT, Respondent. Cited Cases
Summary judgment is reviewed de novo.
No. 03–0836.
Argued Sept. 29, 2004. [2] Appeal and Error 30 934(1)
Decided May 20, 2005.
30 Appeal and Error
Background: Nonoperator owner of working in- 30XVI Review
terest in oil wells brought action against operator to 30XVI(G) Presumptions
recover for breach of contract by failing to allow 30k934 Judgment
thirty-day notice period to elapse before com- 30k934(1) k. In General. Most Cited
mencement of work and by enforcing nonconsent Cases
penalty against owner. The 71st Judicial District When reviewing a summary judgment, the Su-
Court, Harrison County, Bonnie Leggat, J., entered preme Court takes as true all evidence favorable to
partial summary judgment in favor of operator. the nonmovant and indulges every reasonable infer-
Owner appealed. The Texarkana Court of Appeals, ence and resolves any doubts in the nonmovant's fa-
Morriss, C.J., 111 S.W.3d 224, reversed and re- vor.
manded. Review was granted.
[3] Appeal and Error 30 1175(1)
Holdings: The Supreme Court, Wainwright, J.,
held that: 30 Appeal and Error
(1) the model form operating agreement permitted 30XVII Determination and Disposition of Cause
operator to begin work before expiration of thirty- 30XVII(D) Reversal
day period for nonoperator to notify other parties of 30k1175 Rendering Final Judgment
decision whether to elect to participate in the cost 30k1175(1) k. In General. Most Cited
of the proposed operation, and Cases
(2) the penalty for the nonoperator's lack of consent When both parties move for partial summary
was not liquidated damages, disapproving Hamilton judgment on the same issues and the trial court
v. Tex. Oil & Gas Corp., 648 S.W.2d 316. grants one motion and denies the other, as here, the
reviewing court considers the summary judgment
Reversed and rendered. evidence presented by both sides, determines all
questions presented, and, if the reviewing court de-
Brister, J., concurred and filed opinion. termines that the trial court erred, renders the judg-
ment the trial court should have rendered.
West Headnotes
[4] Contracts 95 147(2)
[1] Appeal and Error 30 893(1)
95 Contracts
30 Appeal and Error 95II Construction and Operation
30XVI Review 95II(A) General Rules of Construction
95k147 Intention of Parties

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 Page 2
164 S.W.3d 656, 162 Oil & Gas Rep. 511, 48 Tex. Sup. Ct. J. 671
(Cite as: 164 S.W.3d 656)

95k147(2) k. Language of Contract. therefore, permitted operator to begin work before
Most Cited Cases expiration of thirty-day period for nonoperator to
The primary concern of a court in construing a notify other parties of decision whether to elect to
written contract is to ascertain the true intentions of participate in the cost of the proposed operation; the
the parties as expressed in the instrument. agreement required nonoperators to notify other
parties of election within thirty days after receipt of
[5] Contracts 95 147(3) notice and required the operator to commence work
no later than ninety days after formally proposing
95 Contracts
the operation to the interest owners.
95II Construction and Operation
95II(A) General Rules of Construction [8] Damages 115 83
95k147 Intention of Parties
95k147(3) k. Construing Whole Con- 115 Damages
tract Together. Most Cited Cases 115IV Liquidated Damages and Penalties
To achieve the objective of ascertaining the 115k83 k. Questions for Jury. Most Cited
true intentions of the parties as expressed in the in- Cases
strument, courts should examine and consider the Whether a contract term is a liquidated dam-
entire writing in an effort to harmonize and give ef- ages provision is a question of law for the court to
fect to all contract provisions so that none will be decide.
rendered meaningless.
[9] Damages 115 78(6)
[6] Contracts 95 152
115 Damages
95 Contracts 115IV Liquidated Damages and Penalties
95II Construction and Operation 115k75 Construction of Stipulations
95II(A) General Rules of Construction 115k78 Form and Language of Instrument
95k151 Language of Instrument 115k78(6) k. Breach of Contract of
95k152 k. In General. Most Cited Sale or Lease. Most Cited Cases
Cases Penalty stated in model form agreement for
Contract terms are given their plain, ordinary, nonoperator interest owner's failure to consent to
and generally accepted meanings unless the con- drilling oil wells was not liquidated damages and
tract itself shows them to be used in a technical or was enforceable; the non-consent penalty allowed
different sense. consenting parties to recoup costs before the non-
consenting party could share production revenues
[7] Mines and Minerals 260 101 in proportion to ownership interest, it rewarded
consenting parties for undertaking a defined risk,
260 Mines and Minerals
and the non-consenting party did not breach the
260III Operation of Mines, Quarries, and Wells
contract and was not being punished; disapproving
260III(B) Mining Partnerships and Compan-
Hamilton v. Tex. Oil & Gas Corp., 648 S.W.2d 316.
ies
260k101 k. Associations, Joint-Stock [10] Damages 115 78(6)
Companies, and Other Joint Enterprises. Most Cited
Cases 115 Damages
Model form operating agreement placed no 115IV Liquidated Damages and Penalties
temporal limitation on operator's ability to com- 115k75 Construction of Stipulations
mence work on proposed oil drilling projects and, 115k78 Form and Language of Instrument

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 Page 3
164 S.W.3d 656, 162 Oil & Gas Rep. 511, 48 Tex. Sup. Ct. J. 671
(Cite as: 164 S.W.3d 656)

115k78(6) k. Breach of Contract of the Court.
Sale or Lease. Most Cited Cases In this case we construe the meaning of certain
Liquidated damages clauses fix in advance the notice provisions of a commonly used oil and gas
compensation to a party accruing from the failure to operating agreement. Working interest owner El-
perform specified contractual obligations, whereas magene Dorsett sued Valence Operating Company
non-consent penalties reward consenting parties for in a dispute arising from a joint operating agree-
undertaking a defined risk. ment. The trial court granted partial summary judg-
ment against Dorsett on her breach of contract
[11] Damages 115 78(6) claims, finding that Dorsett failed to consent to par-
ticipate in the wells at issue, and that a contractual
115 Damages
non-consent penalty for that failure was enforceable
115IV Liquidated Damages and Penalties
against her. The court of appeals reversed and
115k75 Construction of Stipulations
rendered judgment in favor of Dorsett, holding that
115k78 Form and Language of Instrument
Valence breached contract provisions that required
115k78(6) k. Breach of Contract of
Valence to give notice to Dorsett before commen-
Sale or Lease. Most Cited Cases
cing drilling operations. 111 S.W.3d 224. The de-
Damages 115 80(3) terminative issue before us is whether the agree-
ment requires a thirty-day notice period to expire
115 Damages before the operator can commence work on the pro-
115IV Liquidated Damages and Penalties posed operations. Because the non-consent penalty
115k75 Construction of Stipulations is enforceable and because we find nothing in the
115k80 Proportion of Sum Stipulated to agreement prohibiting Valence from commencing
Actual Debt or Damage work on the proposed operations before the expira-
115k80(3) k. Breach of Contract of tion of the notice period, we reverse the court of ap-
Sale or Lease. Most Cited Cases peals and render judgment in favor of Valence.
A working interest owner's election not to par-
ticipate in proposed operations is not a breach, and, I. Factual and Procedural Background
thus, non-consent penalty of model form operating Elmagene Dorsett is a 4.05391 percent working
agreement does not involve liquidated damages or interest owner in 677.04666 acres in the Mobley
an unenforceable penalty. Gas Unit in Harrison County, Texas. In 1981, Dor-
sett, with three other minority working interest
*658 Michael E. Warwick, Abney & Warwick, owners, and TXO Production Corporation, as oper-
Marshall, Thomas A. Zabel, Burns Wooley ator and majority working interest owner, executed
Marseglia & Zabel, L.L.P., Houston, for petitioner. a modified 1977 American Association*659 of Pet-
roleum Landmen Form 610 Model Form Operating
Edwin E. Buckner, Law Offices of Edwin E. Buck- FN1
Agreement. The Model Form Agreement is a
ner, Jr., Marshall, for respondent. contract between oil and gas lease owners and in-
terest holders for the exploration and development
Everard A. Marseglia Jr., Burns Wooley Marseglia
of designated oil and gas within the geographical
& Zabel, L.L.P., Morgan L. Copeland Jr., Catherine
area described in the Agreement. A.A.P.L. Form
B. Smith, Ara L. Ayles, Vinson & Elkins L.L.P.,
610–1977, preamble (1977). The Model Form
Gary C. Johnson, Senior Vice President & General
Agreement designates a single party as “operator”
Counsel, Houston, for amicus curiae.
who is responsible for the management and control
of drilling, development, and production activities.
Justice WAINWRIGHT delivered the opinion of Id. preamble, art. V., VI.A., C. All other parties are

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 Page 4
164 S.W.3d 656, 162 Oil & Gas Rep. 511, 48 Tex. Sup. Ct. J. 671
(Cite as: 164 S.W.3d 656)

designated “non-operators.” Id. preamble. The participate in the cost of the proposed operation.
parties to the Agreement have the option on each Any notice or response given by telephone shall
project to share operating costs and liabilities, to be promptly confirmed in writing.
own equipment, and, if exercised, to then benefit by
sharing in production revenues in proportion to 2. Operations by Less than All Parties: If any
their respective percentages of ownership. In such party receiving such notice as provided in Article
cases, these participants are called “consenting VI.B.1. or VI.E.1. elects not to participate in the
parties.” Id. art. I.G., VI.B. Parties who elect not to proposed operation, then, in order to be entitled
participate in a proposed operation, called to the benefits of this article, the party or parties
“non-consenting parties,” are subject to a giving the notice and such other parties as shall
“non-consent penalty” which operates as a tempor- elect to participate in the operation shall, within
ary relinquishment of the interest owner's share of sixty (60) days after the expiration of the notice
production revenue from the project to the consent- period of thirty (30) days ... actually commence
FN2 work on the proposed operation and complete it
ing parties. Id. art. I.H., VI.B. After the con-
senting parties recoup their investment costs and re- with due diligence....
ceive a limited return on their investments, the non-
....
consenting parties share in production revenues in
proportion to their ownership interests. Id. ... Upon commencement of operations for the
drilling, completing, reworking, deepening or
FN1. The parties modified several provi-
plugging back of any such well by Consenting
sions of the Model Form Agreement, but
Parties in accordance with the provisions of this
none of the changes affect the outcome of
Article, each Non–Consenting Party shall be
this case.
deemed to have relinquished to Consenting
FN2. We do not agree that this non- Parties, and the Consenting *660 Parties shall
consent penalty is, as its name suggests, a own and be entitled to receive, in proportion to
forfeiture or punitive provision, but we their respective interests, all of such
will use the industry's nomenclature. Non–Consenting Party's interest in the well and
share of production therefrom until the proceeds
The relevant portion of the Model Form Agree- of the sale of such share, calculated at the well, or
ment is Article VI.B. on Subsequent Operations: market value thereof if such share is not sold
(after deducting production taxes, royalty, over-
1. Proposed Operations: Should any party riding royalty and other interests existing on the
hereto desire to drill any well on the Contract effective date hereof, payable out of or measured
Area ..., the party desiring to drill ... shall give by the production from such well accruing with
the other parties written notice of the proposed respect to such interest until it reverts) shall equal
operation, specifying the work to be performed, the total of the following:
the location, proposed depth, objective formation
and the estimated cost of the operation. The (a) 100% of each such Non–Consenting Party's
parties receiving such a notice shall have thirty share of the cost of any newly acquired surface
(30) days after receipt of the notice within which equipment beyond the wellhead connections
to notify the parties wishing to do the work (including, but not limited to, stock tanks, separ-
whether they elect to participate in the cost of the ators, treaters, pumping equipment and piping),
proposed operation.... Failure of a party receiving plus 100% of each such Non–Consenting Party's
such notice to reply within the period above fixed share of the cost of operation of the well com-
shall constitute an election by that party not to mencing with first production and continuing un-

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164 S.W.3d 656, 162 Oil & Gas Rep. 511, 48 Tex. Sup. Ct. J. 671
(Cite as: 164 S.W.3d 656)

til each such Non–Consenting Party's relin- TXO) and became unit operator. From 1996 to
quished interest shall revert to it under other pro- 2001, Valence drilled eight more gas wells in the
visions of this Article, it being agreed that each unit. Valence provided Dorsett with written notice
Non–Consenting Party's share of such costs and of its intent to drill each of the eight wells, as re-
equipment will be that interest which would have quired by the Model Form Agreement, but in each
been chargeable to each Non–Consenting Party case began preparatory work, and in some cases
had it participated in the well from the beginning drilling, before thirty days had elapsed after Dor-
of the operation; and sett's receipt of the notice. Dorsett received the no-
tices but did not consent to and did not contribute to
(b) 300% of that portion of the costs and ex- any of the costs incurred in drilling the wells.
penses of drilling reworking, deepening, or plug- Valence then imposed on Dorsett the non-consent
ging back, testing and completing, after deduct- penalty described in the Model Form Agreement.
ing any cash contributions received under Article
VIII.C., and 300% of that portion of the cost of Dorsett disputed the imposition of the non-
newly acquired equipment in the well (to and in- consent penalty. Specifically, Dorsett contended
cluding the wellhead connections), which would that the Model Form Agreement*661 required
have been chargeable to such Non–Consenting Valence to allow the thirty-day notice period to
Party if it had participated therein. elapse before commencing work on proposed oper-
ations. She argued that Valence's failure to do so
.... constituted a breach of contract, thereby preventing
enforcement of the non-consent penalty. She also
If and when the Consenting Parties recover
contended that the non-consent penalty was an un-
from a Non–Consenting Party's relinquished in-
enforceable liquidated damages provision. In 2000,
terest the amounts provided for above, the relin-
Dorsett sued Valence for breach of contract, specif-
quished interests of such Non–Consenting Party
ic performance, and conversion. She asserted
shall automatically revert to it, and, from and
causes of action for damage to the surface of her
after such reversion, such Non–Consenting Party
land stemming from Valence's failure to accom-
shall own the same interest in such well, the ma-
modate surface use and negligence; she also reques-
terial and equipment in or pertaining thereto, and
ted a declaratory judgment of her rights under the
the production therefrom as such
Agreement and a full accounting.
Non–Consenting Party would have been entitled
to had it participated in the drilling, completing The parties filed cross-motions for partial sum-
reworking, deepening or plugging back of said mary judgment. Dorsett moved for partial summary
well. Thereafter, such Non–Consenting Party judgment on the breach of contract, accounting, and
shall be charged with and shall pay its propor- declaratory judgment claims and requested sever-
tionate part of the further costs of the operation ance of her surface damage claims. Valence moved
of said well in accordance with the terms of this for partial summary judgment on the contract
agreement and the Accounting Procedure, at- claims as well. The trial court granted Valence's
tached hereto. motion for partial summary judgment on the breach
of contract claims, finding that Dorsett failed to
A.A.P.L. Form 610–1977, art. VI.B. (1977).
elect to participate in the eight wells and that the
In 1981, TXO drilled the initial test well, Mob- non-consent penalty was enforceable against her.
ley Well No. 1. In 1994, Valence acquired owner- The trial court then severed the contract claims.
ship of 94.28446 percent of the working interest in The court of appeals reversed and rendered judg-
the unit from Marathon Oil Company (successor to ment in favor of Dorsett, holding that Valence

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164 S.W.3d 656, 162 Oil & Gas Rep. 511, 48 Tex. Sup. Ct. J. 671
(Cite as: 164 S.W.3d 656)

failed to comply with the Model Form Agreement work on the proposed operation and complete it
provisions for notice of proposed operations, thus with due diligence” illustrates that the provision's
making the non-consent penalty inapplicable to purpose is not to prohibit the early commencement
Dorsett. 111 S.W.3d at 235. of work, but to ensure that work is not unreason-
ably delayed after the *662 consent deadline.
II. Standard of Review A.A.P.L. Form 610–1977, art. VI.B.2. (1977).
[1][2][3] We review the trial court's summary
judgment de novo. Provident Life & Accident Ins. [4][5][6] In construing a written contract, the
Co. v. Knott, 128 S.W.3d 211, 215 (Tex.2003). primary concern of the court is to ascertain the true
When reviewing a summary judgment, we take as intentions of the parties as expressed in the instru-
true all evidence favorable to the nonmovant, and ment. J.M. Davidson, Inc. v. Webster, 128 S.W.3d
we indulge every reasonable inference and resolve 223, 229 (Tex.2003); Gulf Ins. Co. v. Burns Mo-
any doubts in the nonmovant's favor. Knott, 128 tors, Inc., 22 S.W.3d 417, 423 (Tex.2000); Coker v.
S.W.3d at 215; Sci. Spectrum, Inc. v. Martinez, 941 Coker, 650 S.W.2d 391, 393 (Tex.1983). To
S.W.2d 910, 911 (Tex.1997). When both parties achieve this objective, courts should examine and
move for partial summary judgment on the same is- consider the entire writing in an effort to harmonize
sues and the trial court grants one motion and and give effect to all the provisions of the contract
denies the other, as here, the reviewing court con- so that none will be rendered meaningless. J.M.
siders the summary judgment evidence presented Davidson, Inc., 128 S.W.3d at 229; Coker, 650
by both sides, determines all questions presented, S.W.2d at 393. Contract terms are given their plain,
and if the reviewing court determines that the trial ordinary, and generally accepted meanings unless
court erred, renders the judgment the trial court the contract itself shows them to be used in a tech-
should have rendered. See FM Props. Operating nical or different sense. Heritage Res., Inc. v. Na-
Co. v. City of Austin, 22 S.W.3d 868, 872 tionsBank, 939 S.W.2d 118, 121 (Tex.1996); W.
(Tex.2000). Reserve Life Ins. Co. v. Meadows, 152 Tex. 559,
261 S.W.2d 554, 557 (1953); see also Knott, 128
III. Notice Period S.W.3d at 219.
Dorsett argues that because Valence did not
satisfy the Agreement's notice requirements, her [7] The notice provision of the Model Form
share of new production could not be reduced pur- Agreement provides:
suant to the penalty. Dorsett interprets the Model
Form Agreement to require Valence to deliver no- [T]he party desiring to drill, complete, rework,
tice at least thirty days before the commencement deepen or plug back such a well shall give the
of proposed operations. Valence argues that the other parties written notice of the proposed oper-
Agreement requires notice of proposed subsequent ation, specifying the work to be performed, the
operations to be given to working interest owners, location, proposed depth, objective formation and
who then have thirty days to elect to participate in the estimated cost of the operation. The parties
the drilling of the well. Under Valence's construc- receiving such a notice shall have thirty (30) days
tion, the operator may commence work on the pro- after receipt of the notice within which to notify
posed operations during the thirty-day notice period the parties wishing to do the work whether they
or even before the thirty-day notice period begins. elect to participate in the cost of the proposed op-
To support this interpretation, Valence argues that eration.... Failure of a party receiving such notice
the phrase stating that the operator “shall, within to reply within the period above fixed shall con-
sixty (60) days after the expiration of the notice stitute an election by that party not to participate
period of thirty (30) days ... actually commence in the cost of the proposed operation....

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164 S.W.3d 656, 162 Oil & Gas Rep. 511, 48 Tex. Sup. Ct. J. 671
(Cite as: 164 S.W.3d 656)

.... work. The Agreement requires the operator to com-
mence work no later than sixty days after the expir-
... [I]n order to be entitled to [impose the non- ation of the thirty-day notice period. A.A.P.L. Form
consent penalty], the party or parties giving the 610–1977, art. VI.B.2. (1977). The distinction
notice and such other parties as shall elect to par- between the two notice periods in the Agreement
ticipate in the operation shall, within sixty (60) retains the working interest owner's right to thirty
days after the expiration of the notice period of days notice before being required to make a de-
thirty (30) days ... actually commence work on cision, while also requiring the operator to com-
the proposed operation and complete it with due mence work no later than ninety days after formally
diligence. FN3
proposing the operation to the interest owners.

A.A.P.L. Form 610–1977, art. VI.B.1.–2. FN3. The resolution of this case does not
(1977). require us to determine whether the phrase
“actually commence work,” as used in the
We agree with Valence that this provision
Model Form Agreement, requires the com-
places no temporal limitation on Valence's ability
mencement of drilling or the commence-
to commence work on the proposed projects. The
ment of other preparatory work no later
Agreement clearly states that “[t]he parties receiv-
than ninety days after formally proposing
ing such a notice shall have thirty (30) days after
the operation. Therefore, we express no
receipt of the notice within which to notify the
opinion on this issue.
parties wishing to do the work whether they elect to
participate in the cost of the proposed operation.” This interpretation effectuates the written
Id. art. VI.1. This plain language in the Agreement agreement of the parties. We recognize that this in-
describes Dorsett's right to receive notice of pro- terpretation allows an operator to commence a new
posed operations and to elect to participate in those operation before the thirty-day notice period has
operations. It places no restrictions on when expired; however, potential benefits may accrue to
Valence may commence drilling or preparations for the owners for an operator's “early” commence-
drilling. Dorsett does not dispute that she received ment. For example, an early start may avoid detri-
notice of all of the proposed operations, nor does mental occurrences such as the draining of an oil
she contend that she elected to participate in the field by a neighboring operator or the expiration of
drilling of Mobley Wells 2 through 9. Her undis- an oil and gas lease. Moreover, the risk of early
puted failure to consent to the proposed operations commencement of such operations falls entirely on
within thirty days was a “[f]ailure ... to reply within the operator because if none of the working interest
the period above fixed” and “constitute[d] an elec- owners consent to participation within thirty days,
tion by that party not to participate in the cost of the the operator bears the full cost of operations. The
proposed operation,” thus making the non-consent parties do not identify any negative consequences
penalty applicable to Dorsett. Id. to the working interest owners that arise from com-
mencement of operations within the thirty-day no-
In short, the thirty-day notice period sets a
tice period.
deadline for Dorsett to decide whether to particip-
ate in proposed operations. Nothing in the language IV. Non–Consent Penalty
of the Agreement forbids the operator from com- Dorsett received notice of each of the proposed
mencing*663 work before the end of the notice subsequent operations. She acknowledges that she
period. However, there is a temporal limit in the did not consent to any of the proposed operations
Agreement on Valence that sets a deadline, not a within thirty days of receiving notice. She therefore
required start date, on Valence's commencement of is a non-consenting party under Article VI.B.1. of

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164 S.W.3d 656, 162 Oil & Gas Rep. 511, 48 Tex. Sup. Ct. J. 671
(Cite as: 164 S.W.3d 656)

the Model Form Agreement, and the non-consent non-consenting party's share of the costs and ex-
penalty applies to her. penses of drilling and new equipment in the well,
subject to deductions. After the consenting parties
The relevant portion of the Model Form Agree- have recouped these costs, then the non-consenting
ment provides: party returns to sharing in production revenues in
proportion to his or her ownership interest. Id.; see
“Upon commencement of operations for the
also Nearburg v. Yates Petroleum Corp., 123 N.M.
drilling, completing, reworking, deepening or
526, 943 P.2d 560, 565 (App.1997) (explaining op-
plugging back of any such well by Consenting
eration of the Model Form Agreement's non-
Parties in accordance with the provisions of this
consent penalty provision).
Article, each Non–Consenting Party shall be
deemed to have relinquished to Consenting [8][9][10] Whether a contract term is a liquid-
Parties, and the Consenting Parties shall own and ated damages provision is a question of law for the
be entitled to receive, in proportion to their re- court to decide. Phillips v. Phillips, 820 S.W.2d
spective interests, all of such Non–Consenting 785, 788 (Tex.1991) (citing Farrar v. Beeman, 63
Party's interest in the well and share of produc- Tex. 175, 181 (1885)). Dorsett contends that the
tion therefrom until the proceeds of the sale of non-consent penalty is an unenforceable liquidated
such share, calculated at the well, or market value damages provision. We disagree. This clause is dif-
thereof if such share is not sold ... shall equal the ferent from a liquidated damages clause. Liquidated
total of the following: damages clauses fix in advance the compensation to
a party accruing from the failure to perform spe-
(a) 100% of each such Non–Consenting Party's
cified contractual obligations, whereas non-consent
share of the cost of any newly acquired surface
penalties reward consenting parties for undertaking
equipment ... plus 100% of each such
a defined risk. See Nearburg, 943 P.2d at 567
Non–Consenting Party's share of the cost of oper-
(“[T]he non-consent penalty is the agreed-upon re-
ation of the well commencing with first produc-
ward to [a consenting party] for taking the risk....
tion and continuing until each such
As a contractual arrangement, the carried interest is
Non–Consenting Party's relinquished interest
subject to negotiation and modification, and the
shall revert to it under other provisions of this
parties' rights and obligations depend upon their
Article ...; and
contract.”); Restatement (Second) of Contracts §
(b) 300% of that portion of the costs and ex- 356 (1981) (“Damages for breach by either party
penses of drilling reworking, deepening, or plug- may be liquidated in the agreement but only at an
ging back, testing and completing, after deduct- amount that is reasonable in the light of the anticip-
ing any cash contributions received under Article ated or actual loss caused by the breach and the dif-
VIII.C., and 300% of that portion of the *664 ficulties of proof of loss.”). The non-consent pen-
cost of newly acquired equipment in the well ..., alty provision in this oil and gas operating agree-
which would have been chargeable to such ment is the mechanism utilized to allow the con-
Non–Consenting Party if it had participated senting parties the opportunity to recover their in-
therein.” vestments and receive defined returns from future
operations. For such operations, they undertake a
A.A.P.L. Form 610–1977, art. VI.B.2. (1977). financial risk that the non-consenting parties do not.
This clause allows consenting parties to recoup up Here, the non-consenting party is not being pun-
to 100 percent of the non-consenting party's share ished for breaching a contract; she simply agreed
of the costs of any new surface equipment and op- not to participate in a return on an investment she
eration of the well and up to 300 percent of the did not make. Indeed, after the provision's require-

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164 S.W.3d 656, 162 Oil & Gas Rep. 511, 48 Tex. Sup. Ct. J. 671
(Cite as: 164 S.W.3d 656)

ments are met, she receives additional revenues consent penalty is designed to allow reasonable
from new wells for which she paid nothing. One compensation for working interest owners who un-
Texas court of appeals, in its consideration of dertake the risk of developing new wells. See Phil-
whether a non-consent penalty was enforceable, lips, 820 S.W.2d at 788. Other terms sometimes
characterized the penalty as a liquidated damages used to describe the non-consent penalty—“sole
clause and decided that it was enforceable against risk clause” and “risk charges”—more accurately
the non-consenting working interest owner. convey this rationale. See 111 S.W.3d at 226 n. 1.
Hamilton v. Tex. Oil & Gas Corp., 648 S.W.2d 316,
321 (Tex.App.El Paso 1982, writ ref'd n.r.e.). While V. Conclusion
Hamilton reached the correct result, we disapprove We conclude that Valence provided timely no-
of its treatment of the non-consent penalty as a li- tice to Dorsett of its proposed subsequent opera-
quidated damages provision. tions; consequently, Valence did not breach the
Agreement. The non-consent penalty is not an un-
[11] There is a second reason why Dorsett's as- enforceable liquidated damages provision and is en-
sertion is unpersuasive. Assuming, arguendo, that forceable against Dorsett. Therefore, we reverse the
Dorsett was correct in claiming that the non- court of appeals' judgment and render judgment that
consent penalty is a liquidated damages clause, her Dorsett take nothing.
argument still fails because, traditionally, liquidated
damages are recoverable only where there has been Justice BRISTER delivered a concurring opinion.
a failure to perform contractual obligations. Phil- Justice JOHNSON did not participate in the de-
lips, 820 S.W.2d at 788; Rio Grande Valley Sugar cision.
Growers, Inc. v. Campesi, 592 S.W.2d 340, 342 n. Justice BRISTER, concurring.
2 (Tex.1979). As the court in Nearburg noted, “a Casual readers may not understand how a court
non-consent election cannot convincingly be char- could possibly hold that a “non-consent penalty” is
acterized as a *665 breach.... Therefore, we do not not a “penalty.” Although fully joining the Court's
regard the non-consent penalty provision as in- opinion and judgment, I write briefly to explain.
volving liquidated damages or an unenforceable
The Court discloses in a footnote that
penalty.” Nearburg, 943 P.2d at 566. We have held
“non-consent penalty” is industry vernacular. 164
that Valence complied with the terms of the Agree-
S.W.3d at 659 n. 2. The term does not appear in the
ment by properly sending notices to Dorsett. Dor-
Operating Agreement, and interpretation of that
sett failed to consent to the proposed operations.
contract is a question of law for the Court. Lee
Neither party breached the contract.
Lewis Const., Inc. v. Harrison, 70 S.W.3d 778, 783
To interpret the provision as Dorsett suggests (Tex.2001). What the parties call a clause is parol
would not only contradict its plain language, but evidence, and thus inadmissible unless a contract is
would vanquish the incentive for parties to consent ambiguous. Friendswood Development Co. v.
and incur costs and liabilities for new projects. If McDade + Co., 926 S.W.2d 280, 283 (Tex.1996)
all working interest owners shared equally in pro- (per curiam). This one is not.
duction revenues from subsequent projects, whether
Generally, a liquidated damages provision
they consented or not, none would consent because
providing for a multiple of actual damages is an un-
there would be no incentive to do so. In fact, the in-
enforceable penalty. Phillips v. Phillips, 820
centives would strongly favor not consenting be-
S.W.2d 785, 789 (Tex.1991). But while the clause
cause, under Dorsett's approach, a non-consenting FN1
here is certainly liquidated, it is not a liquid-
party would be able to reap the rewards of new op- FN2
ated-damages clause.
erations without incurring any expense. The non-

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164 S.W.3d 656, 162 Oil & Gas Rep. 511, 48 Tex. Sup. Ct. J. 671
(Cite as: 164 S.W.3d 656)

FN1. See Black's Law Dictionary 494 (8th thew Thompson, The Development of the Model
ed.2004) (“liquidated, adj. 1. (Of an Form Operating Agreement: An Interpretive Ac-
amount or debt) settled or determined, esp. counting, 54 Okla. L.R. 211, 254–55 (2001). Dor-
by agreement.”). sett provides precedent in neither law nor logic sug-
gesting that liquidated bonus clauses should be un-
FN2. See id. (“liquidated-damages clause. enforceable, nor why she should get a bonus for a
A contractual provision that determines in risk she never took. Accordingly, this is not a
advance the measure of damages if a party “non-consent penalty.”
breaches the agreement.”).
Tex.,2005.
The parties' contract provides unambiguously Valence Operating Co. v. Dorsett
that Dorsett is not required to contribute to sub- 164 S.W.3d 656, 162 Oil & Gas Rep. 511, 48 Tex.
sequent operations. Thus, there is no breach of con- Sup. Ct. J. 671
tract if she opts out.
END OF DOCUMENT
*666 The contract also provides unambigu-
ously that those who do not consent nevertheless
get additional revenues (after recoupment by those
who do), for which they pay nothing. This is not a
FN3
penalty but a bonus.

FN3. See id. at 134 (“bonus. 1. A premium
paid in addition to what is due or expected
.”).

The contract also provides unambiguously that
those who do consent get 300% recoupment of cer-
tain costs, for which nonconsenting parties again
FN4
pay nothing. These are not damages.

FN4. See id. at 416 (“damages, n. pl.
Money claimed by, or ordered to be paid
to, a person as compensation for loss or in-
jury .”).

I recognize that in some situations receiving
less is the economic equivalent of paying more. But
bonuses for a star athlete or salesman are not inten-
ded to penalize their employers, but to increase re-
turns for all concerned. Unless an oilfield can be
completely emptied from existing wells, further de-
velopment is not a zero-sum game.

Those in the oil industry widely use and rely on
clauses like the one here, and certainly consider
them enforceable. See John R. Reeves & J. Mat-

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