the$“double$frac/on”$issue$ - emlfthe$“double$frac/on”$issue$ kellid.smith!...

The “Double Frac/on” Issue

Kelli D. Smith Steptoe & Johnson PLLC

(281) 203-‐5736 kelli.smith@steptoe-‐johnson.com

•  This presentaEon was co-‐wriGen by ChrisEna Denmark. Special thanks to Ryan Bundy, David Calabria, MaG Schlensker, Deana Stephens, Melissa Stewart and Sarah Trainer.

•  Disclaimer: Many Texas sources were used in the preparaEon of this presentaEon. PracEEoners should ensure consistency of applicaEon in their jurisdicEons.

What is the “Double FracEon” Issue?

•  Historical significance of 1/8 royalty – 1/8 the usual landowner’s royalty in leases – Estate misconcepEon: landowner retaining only 1/8 of minerals in place aaer execuEng lease

•  With the 1/8 royalty no longer the standard, issues have arisen over the interpretaEon of double-‐fracEon language.

“Words must be given the meaning they had when the text was adopted.”

Antonin Scalia & Bryan A. Garner, READING LAW: THE INTERPRETATION OF LEGAL TEXTS 78 (2012)


•  Devise in a 1947 will: •  “That each of my children shall have and hold an undivided one-‐third (1/3) of an undivided one-‐eighth (1/8) of all oil, gas or other minerals in or under of that may be produced from any said lands, the same being a non-‐parEcipaEng royalty interest”


•  an undivided one-‐third (1/3) of an undivided one-‐eighth (1/8) – A fixed 1/3 of 1/8 interest, being a 1/24 interest – A floaEng interest, parEes each receive 1/3 of the royalty in the lease •  Royalty in lease = 25% or 1/4 •  Interest devised = 1/12

Fixed Royalty

•  an undivided one-‐third (1/3) of an undivided one-‐eighth (1/8)

•  A set fracEon or fracEonal royalty – 1/3 of 1/8 will always equal 1/24

FloaEng Royalty

•  an undivided one-‐third (1/3) of an undivided one-‐eighth (1/8)

•  A fracEon of royalty, which varies based on the size of the royalty negoEated in the lease – 1/3 of [royalty] – Changes each Eme there is a new lease with a different royalty

Rules of InterpretaEon

•  JurisdicEons vary, but usually 3-‐step process: –  Intent is examined by four corners –  If unclear, canons of construcEon –  If remains unclear, document deemed ambiguous and extrinsic evidence allowed

•  ParEes in double fracEon cases typically agree document is unambiguous

Luckel v. White, 819 S.W.2d 459 (Tex. 1991)

•  Issue –  ConstrucEon of a 1935 royalty deed

•  Facts –  Land subject to a lease with 1/8 royalty – Grantor owned 1/2 of interest paid under lease – GranEng, habendum and warranty clauses: a 1/32 interest is being conveyed

–  Subject to and future lease clauses: Grantee shall be enEtled to receive 1/4 of any and all royalEes

•  How did the Court rule?

Luckel, cont.

•  Holding – Alford v. Krum overruled. So-‐called “future lease” clause was effecEve to convey 1/4 in all royalEes as to future leases

•  Reasoning – Harmonized the provisions under the Four Corners Rule

– The express 1/32 graEng clause only meant to convey a 1/4 of all future royalEes

Concord Oil Co. v. Pennzoil Explora>on, 966 S.W.2d 451 (Tex. 1998)

•  Issue – 1937 Mineral deed interpretaEon with differing fracEons

•  Facts – GranEng clause: conveys a 1/96 interest in minerals

– Subsequent clause: conveyance covers and includes 1/12 of all rentals and royalty

– Lease providing for 1/8 royalty at Eme of deed

Concord, cont.

•  Holding – “[T]he conveyance at issue, when considered in its enErety, consEtuted a grant of a 1/12 interest in any rights or benefits under the lease in existence at the Eme of the grant and the possibility of reverter of a 1/12 interest in the mineral estate.”

•  Did not adopt firm or bright-‐line rules for construing mineral and royalty conveyances that contain differing fracEons

Graham v. Prochaska, 429 S.W.3d 650 (Tex. App—San Antonio 2013, pet denied)

•  Issue – 1950 warranty deed royalty reservaEon

•  Save and except clause: – “there is reserved ... one-‐half (1/2) of the one-‐eighth (1/8) royalty to be provided in any and all leases ... same being equal to one-‐sixteenth (1/16th) of all oil, gas and other minerals of any nature, free and clear of all costs of producEon, except taxes”

Prochaska, cont. •  And provided:

–  “this reservaEon is burdened with paying the two outstanding mineral royalty reservaEons, each of One–Fourth (1/4) of one-‐eighth (1/8) royalty, .... And this reservaEon shall only be effecEve to the extent that one or both of said outstanding reservaEons become terminated.”

–  “It being the intent of the parEes hereto that [grantees] shall be vested with and enEtled to one-‐half (1/2) of the usual one-‐eighth (1/8) royalty in and to all oil, gas and other minerals in on and/or under the property herein conveyed, and the reservaEon herein above recited in favor of the grantor herein, shall relate to and cover only the one-‐half (1/2) of one-‐eighth (1/8) royalty interest previously reserved ..., if, as and when said interest in favor of said parEes terminate.”

Prochaska, cont.

•  Holding – The royalty interest reserved was a floaEng one-‐half (1/2) royalty interest

Other decisions •  Butler v. Horton, 447 S.W.3d 514, 516–17, 519 (Tex.App.–Eastland

2014, no pet.) (“one-‐half of the usual 1/8th royalty” and “one-‐half of the royalty” reserved a floaEng fracEon of royalty)

•  Coghill v. Griffith, 358 S.W.3d 834, 835–36, 840 (Tex.App.–Tyler 2012, pet. denied) (coming to the same conclusion when deed reserved “one-‐eighth (1/8) interest in and to all of the [royalty],” subject to a “one-‐eighth (1/8) of all royalEes payable under the terms of [an exisEng lease],” and further reserved “one-‐eighth (1/8) of the usual one-‐eighth (1/8) royalEes provided for [in future leases],” on the condiEon that such lease “shall provide for at least a royalty on oil of the usual one-‐eighth (1/8)” and further reserving “an undivided one-‐sixty fourth (1/64)” of producEon in the event of development by the mineral fee owner)

Other decisions, cont. •  Coates Energy, 2012 WL 5984693, at *1, *6 (holding mulE-‐clause deed conveyed a floaEng 1/2 nonparEcipaEng mineral interest, when deed granted “one-‐half interest” in the minerals, “one-‐half” of the 1/8 royalEes under an exisEng lease and “1/16th” of producEon payable out of the royalty provided in future leases)

•  Sundance Minerals, L.P. v. Moore, 354 S.W.3d 507, 510, 512 (Tex.App.–Fort Worth 2011, pet. denied) (deed reserving “one-‐half interest in the [minerals]” and describing the reservaEon as “one half of the usual one eighth royalty [sic]” reserved 1/2 of royalEes, not fixed 1/16 royalty)

Other decisions, cont.

•  Moore v. Noble Energy, 374 S.W.3d 644, 645, 651 (Tex.App.–Amarillo 2012, no pet.) (deed reserving “a one-‐half non-‐parEcipaEng royalty interest (one-‐half of one-‐eighth of producEon)” reserved a fixed fracEonal royalty, not fracEon of royalty)

•  Wynne/Jackson Dev., L.P. v. PAC Capital Holdings, Ltd., No. 13–12–00449–CV, 2013 WL 2470898, at *1, *5 (Tex.App.–Corpus ChrisE June 6, 2013, pet. denied) (mem.op.) (deed reserving “one-‐half (1/2) of the usual one-‐eighth (1/8) royalty” reserved fixed “fracEonal royalty, not fracEon of royalty”)

Hysaw v. Dawkins, No. 14-‐0984, 2016 WL 352229 (Tex. 2016)

•  Will interpretaEon dispute •  Ethel Hysaw had three children and divided her lands in Karnes County, Texas via her will.

•  She gave one tract (each differing in size) to each child in fee-‐simple Etle, however the devise of interest in royalty produced from the land differed

“Blood may be thicker than water, but oil is thicker than both.”

Dallas: The Changing of the Guard (TNT television broadcast June 13, 2012) (J. R. Ewing, perf. By Larry Hagman), as quoted in Hysaw v. Dawkins.

Hysaw, cont.

•  “an undivided one-‐third (1/3) of an undivided one-‐eighth (1/8) of all oil, gas or other minerals in or under or that may be produced from any of said lands”

•  each child “shall receive one-‐third of one-‐eighth royalty,” unless there has been an inter vivos sale or conveyance of royalty on land willed to that child, in which case the children “shall each receive one-‐third of the remainder of the unsold royalty”

Hysaw, cont.

•  Holding – The Supreme Court found that Ethel intended to treat her children equally and therefore her intent was to equally divide the royalEes among the children.

– The four corners rule applies to both wills, as well as other non-‐testamentary instruments conveying mineral interests.

– HolisEc approach

Colorado

•  No case law specifically dealing with double fracEons.

•  Courts have adopted the four corners approach, viewing the document in its enErety to determine the parEes’ intent.

Kansas

•  Applies four corners rule •  PracEEoner should use the four corners rule and carefully examine the instrument language and the intent of the parEes.

Kentucky

•  No recent decisions involving the issue of interpretaEon of double fracEons.

•  PracEEoner should carefully examine the four corners of the instrument to determine intent.

Ohio

•  No Supreme Court decisions on the issue of interpretaEon of double fracEons.

•  Quiet Etle case: Virgil Webb v. Sylvia Stevens, No. 603, 1985 Ohio App. LEXIS 8276 (Ohio Ct. App. 1985).

•  PracEEoner should use the four corners rule and carefully examine the instrument language.

Oklahoma

•  Oklahoma courts look at the four corners of an instrument to determine the parEes’ intent, and they usually read these instruments very literally.

North Dakota

•  Title Standard 6-‐01: ConstrucEon of FracEonal Interests – DisEncEon of fixed “fracEonal royalty” and the floaEng “fracEon of” royalty

– Does not address approach for interpretaEon – Analysis focused on the language

Pennsylvania

•  There are no controlling Supreme Court decisions in Pennsylvania on the issue of interpretaEon of double fracEons.

West Virginia

•  There is no Supreme Court decision in West Virginia on the issue of interpretaEon of double fracEons.

the$“double$frac/on”$issue$ - emlfthe$“double$frac/on”$issue$ kellid.smith!...

Documents