The Texas Supreme Court recently addressed whether an assignment of overriding royalty interests conveyed the seller’s interest in the only then-existing wellbore, or in any subsequent well on the entire lease. In Piranha Partners v. Neuhoff the court held that the assignment at issue “unambiguously conveyed the assignor’s overriding royalty interest in all production under the lease” as opposed to just production from a single well.[1]
The facts are simple: Neuhoff Oil & Gas sold and assigned its mineral interest in Section 28 but reserved a 3.75% ORRI in all production under the Lease. Only one well—the “Puryear B #1-28”—was completed during the relevant timeframe, in Section 28’s northwest quarter. Later, Neuhoff Oil auctioned off its ORRI to Piranha Partners; to complete the sale, Neuhoff Oil and Piranha executed a written assignment.
The assignment is not as simple. The granting clause provided:
Neuhoff Oil does hereby assign, sell and convey unto Piranha ... without warranty or covenant of title, express or implied, subject to the limitations, conditions, reservations and exceptions hereinafter set forth ... all of Neuhoff Oil’s right, title and interest in and to the properties described in Exhibit “A” (the “Properties”).[2]
Exhibit A provided:
Time passed and the operator completed several other wells on Section 28. The operator paid the ORRI from the Puryear B #1-28 to Piranha and the ORRI from the new wells to the Neuhoffs.[3] Later title opinions, however, concluded that Piranha owned the ORRI on all production under the Lease—not just production from the Puryear B #1-28. As a result, the operator retroactively paid Piranha the ORRI on all Section 28 wells and demanded refunds from the Neuhoffs. And so the Neuhoffs sued, arguing that Neuhoff Oil assigned only its ORRI in the Puryear B #1-28 to Piranha. The trial court agreed with Piranha, the court of appeals disagreed with everyone,[4] and the Texas Supreme Court granted review to determine exactly what the parties intended.
The Texas Supreme Court sided with Piranha: “Neuhoff Oil conveyed its 3.75% overriding royalty interest in all production under the Puryear Lease.”[5] Although the court noted that Exhibit A was ambiguous and potentially unenforceable, it held that other provisions demonstrated the parties’ intent to convey Neuhoff Oil’s ORRI under the entire lease. The first provision followed the assignment’s granting clause and described:
All oil and gas leases, mineral fee properties or other interests, INSOFAR AND ONLY INSOFAR AS set out in Exhibit A . . . whether said interest consists of leasehold interest, overriding royalty interest, or both, which shall include any working interest, leasehold rights, overriding royalty interests and reversionary rights held by Assignor . . . .
The Court held that this paragraph “explain[ed] that the interest described in Exhibit A include[d] any overriding royalty interest Neuhoff Oil then owned.”[6] The court then proceeded to the next paragraph, which stated the conveyance included:
All presently existing contracts to the extent they are assignable and to the extent they affect the Leases, including agreements for the sale or purchase of oil, gas and associated hydrocarbons, division orders, unit agreements, operating agreements, and all other contracts and agreements arising from, connected with, or attributable to the production therefrom.
Because Neuhoff Oil conveyed contracts that affected “the Leases”—as opposed to just the well or the land—the Court explained that this paragraph provided further support for its holding that Neuhoff Oil intended to convey its entire interest under the Lease. Justice Bland dissented—she would have held that the assignment was ambiguous and submitted its interpretation to a jury.
Piranha demonstrates that parties must closely scrutinize the language used in their assignments, as well as any attached exhibits. Buyers and sellers are usually focused on the language of the purchase agreement and the assignment document itself, and rightfully so. But Piranha shows the importance of paying attention to exhibits, which generally describe the exact nature of the assets being bought and sold. For buyers, confirmation of exhibits should be a key aspect of any due diligence examination. And for sellers such as Neuhoff Oil, inattention to exhibits can result in serious, unintended consequences. A simple notation on the exhibit that the conveyance was limited to the wellbore only of the Puryear B #1-28 might have avoided this result for Neuhoff.
[1] ---S.W.3d---, No. 18-0581, 2020 WL 868120, at *1 (Tex. Feb. 21, 2020) (emphasis added).
[2] Id. at *3 (brackets omitted)
[3] By this point Neuhoff Oil had dissolved and assigned its remaining assets to individual members of the Neuhoff family.
[4] The Amarillo Court of Appeals “held that Neuhoff Oil sold the overriding royalty in production not from all of Section 28, and not just from the Puryear B #1-28, but from all of the northwest quarter of Section 28.” Id. at *2.
[5] Id. at *11.
[6] Id. at *10.
Thompson & Knight, LLP
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