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Crimson Exploration, Inc. v. Magnum Producing L.P.

Court of Appeals of Texas, Thirteenth District, Corpus Christi-Edinburg

December 28, 2017


         On appeal from the 25th District Court of Lavaca County, Texas.

          Before Chief Justice Valdez and Justices Rodriguez and Benavides


          ROGELIO VALDEZ, Chief Justice

         Appellee Magnum Producing LP. (Magnum) sued appellant Crimson Exploration Inc. et al. (Crimson) claiming a right to mineral interests and back payments consistent with those interests. On competing motions for summary judgment, the trial court entered judgment for Magnum. By five issues, Crimson contends that the trial court erred in granting Magnum's motion for summary judgment. By one cross-issue, Magnum contends that the trial court erred in failing to award prejudgment interest on back payments that Crimson withheld. We affirm as modified.

         I. Background

         Since the 1990s, Magnum has held an interest in an oil and gas lease (the "Simpson Lease") operated by Crimson[1] in Lavaca County, Texas. As early as 1997, a question arose regarding the Simpson Lease's validity. That question was answered a decade later, in 2006, when the trial court entered a judgment declaring that the Simpson Lease terminated as of 1996 (Castle Judgment).

         Magnum was not a party to the Castle Judgment. However, the Castle Judgment's decree that the Simpson Lease terminated in 1996 incidentally brought new litigation involving three top leases (the Zalman Leases) taken by Crimson on the Simpson Lease acreage in 2001, 2003, and 2006, respectively. The central question in this appeal is whether Magnum owns part of the Zalman Leases based on a settlement agreement between Crimson and Magnum before the trial court handed down the Castle Judgment.


         In 2001, Magnum and Crimson resolved then-existing uncertainty about the Simpson Lease's validity by signing a Master Settlement Agreement ("MSA"). Under the MSA, Magnum received a 1% overriding royalty in production under the Simpson Lease. The MSA also gave Magnum the right to convert its 1% overriding royalty to a 26.25% working interest after a well on the Simpson acreage "paid out." A well "pays out" when revenues produced from the well meet the cost of drilling. Under the MSA, Magnum's right to convert its 1% royalty to a 26.25% working interest after payout applied to all strata except 12, 075 to 12, 265 feet (the "Magnum Reserved Zone"), where Magnum's working interest is roughly four times larger than its after-payout working interest in production from other strata.

         Additionally, the MSA ensured that Magnum's interest would continue after the Simpson Lease terminated. Specifically, paragraph 9B of the MSA provided that Magnum had a right to participate in "any extension or renewal of the [Simpson Lease] obtained within one (1) year of the expiration of [the Simpson Lease]." Notably, neither Magnum nor Crimson could have known in 2001 when they signed the MSA that the Simpson Lease had already expired in 1996, according to the 2006 Castle Judgment.

         Unable to predict the future in 2001, Crimson took a "top lease" covering the Simpson Lease acreage ("2001 Zalman Lease").[2] A top lease is a contingency lease covering the same acreage as an underlying lease. A top lease activates if and when the underlying lease terminates. A cloud of uncertainty surrounded the Simpson Lease in 2001, so the 2001 Zalman Lease was intended to preserve Crimson's interest in continuing to explore and operate on the Simpson acreage after the Simpson Lease expired.

         In 2001, Crimson also completed its first well on the Simpson Lease acreage ("Zalman No. 3 well"). The Zalman No. 3 well was initially completed outside the Magnum Reserved Zone. However, in 2006, Crimson recompleted the Zalman No. 3 well in the Magnum Reserved Zone, effectively quadrupling Magnum's pay out as per the MSA. Magnum would not discover payment arrearages until a few years later.


         In 2003, Crimson took a second top lease on the Simpson acreage (the "2003 Zalman Lease").[3]

         Thereafter, Crimson and Magnum executed an agreement (the "Letter Agreement"). At the heart of this appeal lies a disagreement between the parties as to the legal effect of the Letter Agreement on Magnum's interest in the top leases covering the Simpson acreage. The Letter Agreement provides, in relevant part, as follows:

You [Crimson] agree that the following described Oil and Gas Leases (called herein the "Zalman Leases"), to wit:
a. [The 2001 Zalman Lease];
. . .
c. [and] any other top leases taken by you or assigned to you prior to this date or which are taken and/or which become effective within one year of release of all or part of the lands covered by the Simpson Lease
shall each be considered for all purposes (and in particular for the purposes of Paragraph 9B of the [MSA]) as "renewal(s) and extension(s) obtained within one (1) year of the expiration" of the Simpson Lease, so that Magnum shall be entitled to all interests otherwise credited it under the [MSA] relative to the Simpson Lease as to such leases. . . .
The parties agree that this letter agreement is a letter of intent and that the parties shall enter into such further agreements and assignments as are necessary to effectuate the intent expressed herein. It is agreed that the guiding purpose of this agreement is for you to assign to Magnum interests in the Top Leases, so that Magnum can farmout[[4] to you the depths covered by the Top Leases (whether under the Simpson Lease or the Top Lease) and to ensure that Magnum shall continue to be vested, as to the Top Leases and the Zalman Leases, each and every interest as otherwise credited to Magnum under the Simpson Lease in the [MSA] . . . provided however that the obligation of [Crimson] to assign to Magnum certain deep rights under the Simpson Lease, the Top leases and/or the Zalman Leases . . . shall be extended to [July 1, 2005], at which time such obligation shall arise. This agreement shall, in all things, be binding upon the parties hereto and their successors and assigns.

         Crimson interprets this Letter Agreement as not having accomplished an assignment to Magnum of any interest in the 2001 and 2003 Zalman Leases, but instead as having merely expressed an intent to ...

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