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MCG Drilling Investments, LLC v. Double M Ranch, Ltd.

Court of Appeals of Texas, Eleventh District

April 30, 2018


          On Appeal from the 32nd District Court, Nolan County, Texas Trial Court Cause No. 19, 360

          Panel consists of: Willson, J., Bailey, J., and Wright, S.C.J. [8]



         Double M Ranch, Ltd. (Double M) filed suit, including a declaratory judgment action, against MCG Drilling Investments, LLC, and others.[1] MCG Drilling answered, filed counterclaims, and also filed suit as a third-party plaintiff against Double M Ranch Management, LLC and John Mark McLaughlin. Double M asked the trial court to declare that MCG Drilling had no right to claim the right to purchase oil and gas leases and no current or future rights under a 2012 Lease Option Agreement (2012 LOA) because that agreement had expired or, alternatively, any extension of the deadline to pay the bonus payment had expired. After a bench trial, the trial court entered a declaratory judgment in favor of Double M and awarded Double M attorneys' fees and court costs.[2] The trial court also rendered judgment against MCG Drilling on its counterclaims and third-party claims. On appeal, MCG Drilling asserts five issues. We reverse in part and affirm in part.

         I. Background Facts

         Double M Ranch (the Ranch), a 27, 000-acre ranch located in Nolan County, is owned by Double M Ranch, Ltd., a family-owned limited partnership; its general partner is Double M Ranch Management, LLC. John Mark McLaughlin is the managing member of the limited partnership; he is a rancher and has been a practicing lawyer for more than sixty years, with experience in real estate and oil and gas law. In 2005, McLaughlin executed a lease option agreement on the Ranch with Gary McCaslin, a petroleum landman. This first lease option agreement[3]provided McCaslin the right, but not the obligation, to purchase one or more oil and gas leases on the Ranch. The parties entered into two more lease option agreements-one in 2010[4] and another in 2012. McLaughlin always drafted the option agreements and the leases. The 2012 LOA is the subject of the parties' disputes in this case.

         A. The 2012 LOA and Assignments

         Under the 2012 LOA, McCaslin, as the operator, could exercise the option at any time. However, the 2012 LOA expired if the operator did not execute it at least one time on or before January 10, 2013. After the 2012 LOA was executed, McCaslin assigned all of his rights in the 2012 LOA to CraRuth, [5] subject to an Assignment of Overriding Royalty between CraRuth and McCaslin. McCaslin was to receive an overriding royalty in any leases acquired under the 2012 LOA.[6]

         B. The dispute over the extension of the 2012 LOA

         One of the terms of the 2012 LOA outlined that, if the operator paid the option fee and purchased additional leases on or before January 10, 2013, then the 2012 LOA would continue for one year. On January 7, 2013, McCaslin told McLaughlin that he was exercising the option, and that same day, McCaslin sent an e-mail with the selected acreage. McLaughlin prepared two oil and gas leases and forwarded them to McCaslin at the end of the day on January 10, 2013.

         In an e-mail on January 11, 2013, McCaslin told McLaughlin of errors in the leases. McLaughlin corrected the leases and sent them to McCaslin, who noted additional errors. McLaughlin corrected those errors shortly thereafter and then sent copies of the signature pages[7] to McCaslin on January 11, 2013, as an attachment in an e-mail. McLaughlin told McCaslin over the phone on January 10 that the option deadline was January 10 and that he was leaving his office at noon on January 11. However, nothing in McLaughlin's prior e-mail on January 10 referred to a noon deadline. McLaughlin asserted that he had not changed the deadline to noon on January 11, 2013. Rebecca Bell Cash, an employee at Texas State Bank, testified that she notarized one lease for McLaughlin, on Friday, January 11, 2013, around 9:00 or 10:00 a.m. and could not recall, but may have notarized a second lease for him.

         When McLaughlin sent his e-mail with the signature pages, he was aware that a courier from the escrow agent in Ballinger was en route to San Angelo with the certified cashier's check for the bonus payment. When the courier arrived at McLaughlin's office, McLaughlin had already left for the Ranch. Because McLaughlin and his secretary were not present at his San Angelo office when the courier, with the bonus payment check in hand, arrived around 1:00 p.m. on January 11, the courier went across the hall to the bank. The courier spoke to Cash, the notary at the bank where McLaughlin had the documents notarized. Cash called McLaughlin, and McLaughlin told Cash that he was gone for the day and was not coming back to the office. McLaughlin said, "Tell them I will talk to them on Monday." McLaughlin met with Craig the following Monday, January 14, at McLaughlin's office in San Angelo. McLaughlin refused the bonus check.

         II. Procedural History

         MCG Drilling specially excepted to Double M's second amended petition in which Double M sought a declaratory judgment because, MCG Drilling argued, the proper cause of action was a trespass to try title action. The trial court carried MCG Drilling's special exceptions; after trial, the trial court took the case under advisement. Later, the trial court granted a judgment on liability in Double M's favor and ordered that Double M was entitled to recover attorneys' fees and costs. On the same day, the trial court overruled MCG Drilling's special exceptions. The trial court later entered a judgment awarding Double M $230, 910.58 in attorneys' fees and $13, 490.54 in court costs and expenses. MCG Drilling appealed and requested findings of fact and conclusion of law. See Tex. R. Civ. P. 296. MCG Drilling also requested additional findings and conclusions, but no additional findings and conclusions were entered.

         III. Analysis

         MCG Drilling presents five issues for our review. MCG Drilling first argues that Double M's claim cannot be brought as a declaratory judgment action. Second, it argues that the trial court's findings of fact failed to support a judgment on trespass to try title or suit to quiet title. Third, MCG Drilling asserts that the trial court improperly awarded attorneys' fees. In MCG Drilling's final two issues, it asserts that the trial court erred when it entered adverse findings on MCG Drilling's waiver and estoppel defenses because MCG Drilling proved those defenses as a matter of law or that the evidence it adduced demonstrated that the trial court's findings were against the great weight and preponderance of the evidence. We will address MCG Drilling's first issue and third issues, then address its second issue, followed by a collective analysis of its fourth and fifth issues.

         A. Issues One and Three: The trial court erred when it entered a declaratory judgment and awarded attorneys' fees.

         In its first and third issues, MCG Drilling asserts that the trial court erred when it entered declaratory relief and awarded attorneys' fees. MCG argues that "[t]he trial court necessarily resolved a title dispute when it entered its judgment."

         The proper method to determine title to lands, tenements, or other real property is a trespass to try title action. Tex. Prop. Code Ann. § 22.001 (West 2014); see Teon Mgmt., LLC v. Turquoise Bay Corp., 357 S.W.3d 719, 723 (Tex. App.-Eastland 2011, pet. denied). "Any suit that involves a dispute over the title to land is, in effect, an action in trespass to try title, whatever its form." Hawk v. E.K. Arledge, Inc., 107 S.W.3d 79, 84 (Tex. App.-Eastland 2003, pet. denied). "To prevail in a trespass-to-try-title action, a plaintiff must usually (1) prove a regular chain of conveyances from the sovereign, (2) establish superior title out of a common source, (3) prove title by limitations, or (4) prove title by prior possession coupled with proof that possession was not abandoned." Lance v. Robinson, No. 16-0323, 2018 WL 1440476, at *9 (Tex. Mar. 23, 2018) (quoting Martin v. Ammerman, 133 S.W.3d 262, 265 (Tex. 2004) (citing Plumb v. Stuessy, 617 S.W.2d 667, 668 (Tex. 1981))).

         The Texas Supreme Court recently addressed the propriety of bringing a declaratory judgment action in a suit concerned with an interest in real estate. In Lance, the court noted:

Through the years, the issue of whether claimants were required to seek relief through a trespass-to-try-title action has been relevant to such questions as whether this Court had jurisdiction on appeal, whether particular proof was required to prevail, whether res judicata applied when the claimant was involved in multiple suits, and whether the parties could recover their attorney's fees.

Lance, 2018 WL 1440476, at *9 (citing Martin, 133 S.W.3d at 264-67). When a claim for declaratory relief is "merely incidental to . . . title issues, " a declaratory judgment action may not supplant a suit to trespass title and allow the recovery of attorney's fees in those circumstances. Hawk, 107 S.W.3d at 84 (quoting John G. and Marie Stella Kennedy Memorial Foundation v. Dewhurst, 90 S.W.3d 268, 289 (Tex. 2002)). Thus, a trespass to try title action involves a dispute over the claimant's ownership or possessory right in the interest at issue. See Lance, 2018 WL 1440476, at *9.

         Double M argues that since the bonus payment had never been timely paid, no transfer of ownership occurred. MCG Drilling asserts that McLaughlin waived the payment deadline, or is estopped from enforcing it, so the selection and attempted tender of payment, in effect, determined equitable title. Equitable title is the present right to legal title. Carmichael v. Delta Drilling Co., 243 S.W.2d 458, 460 (Tex. Civ. App.-Texarkana 1951, writ ref'd). In its conclusions of law, the trial court held that MCG Drilling had no right to claim oil and gas leases and no current or future rights under the 2012 LOA. In San Antonio Natural Developments, Inc. v. Shield, plaintiffs brought an action in trespass to try title, while San Antonio Natural Developments and Centex, defendants, filed a cross-action in which they alleged that plaintiffs breached a lease option agreement. San Antonio Nat. Devs., Inc. v. Shield, 391 S.W.2d 769 (Tex. Civ. App.-Eastland 1965, writ ref'd n.r.e.) This court resolved the trespass action. See id. at 769.

         Double M argues that, because the bonus payment was not timely received, the leases were ineffective. Double M also cites as additional authority a case that it argues supports its position that a declaratory judgment action is proper. See N. Shore Energy, L.L.C. v. Harkins, 501 S.W.3d 598, 606 (Tex. 2016). In North Shore, the Texas Supreme Court concluded that a lease option agreement by itself does not convey a possessory interest in minerals. Id. Such an agreement has two components: the covenant to hold open the opportunity for the optionee to accept and the underlying contract, which is not binding until accepted. Id. at 606. We note that an oil and gas lease transfers a determinable fee. Cherokee Water Co. v. Forderhause, 641 S.W.2d 522, 525 (Tex. 1982). We also note that the lease "vests the lessee with title to oil and gas in place. . . . It logically follows, and has long been held . . ., that an oil and gas lease is a sale of an interest in land." Id.

         Unlike the facts in North Shore, where the court construed an allegedly ambiguous contract, the essential question in this case revolves around the parties' conduct-evidentiary matters-and whether that conduct transferred title to minerals. See In re Applied Chem. Magnesias Corp., 206 S.W.3d 114, 118 (Tex. 2006) (although a venue case, the Texas Supreme Court noted that it disagreed with the assertion that suit for construction or enforcement of an executory contract for the sale of land is not a suit to recover land or quiet title). In this case, Double M filed suit to assert that it owned the minerals and to quiet title to its interest in the minerals that MCG Drilling claimed it owned as a result of its selection of acreage under the terms of the 2012 LOA and its proffer of the bonus payment, which it alleged was improperly rejected. Because the dispute between MCG Drilling and Double M was over the ownership of minerals that arose from the 2012 LOA- specifically, if the 2012 LOA had expired, the minerals belonged to Double M, whereas if the 2012 LOA was effective, the minerals belonged to MCG Drilling- the dispute was in essence who ...

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