Texas Supreme Court Upends Traditional Rules of Construction for Mineral Deeds

On Friday, a deeply divided Texas Supreme Court—in a surprising turn of events—disturbed long-standing rules for interpreting mineral conveyances in its 5-4 decision in Wenske v. Ealy. There, when the Wenskes bought property in Lavaca County in 1998, the sellers kept for themselves a 1/4th non-participating royalty interest (the “NPRI”). Five years later, the Wenske family sold the land to the Ealys, by way of a deed expressly providing that the sale was “subject to” the following reservations and exceptions:

• the Wenskes’ reservation of 3/8ths of the minerals; and, more critically,
• the NPRI.

Fast forward to 2013, shortly after the Wenske and Ealy families had signed mineral leases. It was then that this question arose: who’s responsible for shouldering the NPRI? One would think the answer is self-evident—the Ealys, naturally, since they explicitly assumed the burden of the NPRI when, eyes wide open, they bought the land “subject to” this royalty.

Case closed, notch up another pre-ordained victory for the plain-language rule, right?

Wrong.

At the risk of oversimplifying the rationale for its decision, the Texas Supreme Court held that there was no clear expression by the parties of an intent that the “Ealys’ interest ... be the sole interest subject to the NPRI.” (Emphasis in original.) Accordingly, the Court determined that the Wenske and Ealy families should share the burden of the NPRI, proportionately to their respective interests in the underlying mineral estate: thus, the Wenskes would pay 3/8ths of the 25% NPRI, and the Ealys would pay the remaining 5/8ths.

As a practical matter, what the Court seems to be saying is that, if one wants the buyer to absorb the full brunt of an NPRI or another existing burden, it’s not enough to state that the purchaser is taking the property “subject to” the NPRI. Rather, now, it appears that one would have to take the further step of enunciating that the buyer—and the buyer alone—is “subject to” the NPRI.

This additional gloss will come as a surprise to many, and it has the potential to open the floodgates to a large volume of new litigation challenging the allocations of royalty burdens among mineral lessors. On this score, Justice Jeff Boyd (in a dissent joined by Justices Willett, Lehrmann, and Devine) observed that the deed “expressly says that the interest granted to the Ealys is the only interest that is ‘subject to’ the exception” for the prior owners’ NPRI. Justice Boyd then pointed to the chaos that could result from the majority’s opinion marginalizing this obvious fact:

When this court adopts a rule of interpretation, parties who draft agreements will reasonably rely on that rule when deciding how to express their intent. Our decisions can imbue words with “magic,” and drafters rely on that talismanic power to create certainty in their instruments. We should therefore be loathe to change long-standing rules in the oil and gas field when doing so would alter the ownership of minerals conveyed in deeds which rely on the law established by this court and followed by lower courts, commentators and especially lawyers advising their clients.

The Wenske Court did hedge its bets, noting that “we do not hold that all conveyances of a fractional mineral interest subject to an outstanding NPRI will, by default, result in the various fractional-interest owners being proportionately responsible for satisfying the NPRI.”  This is small solace, however. Indeed, the decision in Wenske will inject plenty of uncertainty into the mix, without providing the clarity of a bright-line rule of construction that would allow oil-and-gas companies to organize their affairs with confidence. If faced with similar circumstances, an operator in Texas might be wise to obtain stipulations of interest from all involved parties or, otherwise, to place in suspense the appropriate amounts until a court can decide which of the operator’s lessors is responsible for the outstanding royalty interest.