January 9, 2018
Petition for Review from the Court of Appeals for the Eighth
District of Texas
case involves a claim by TRO-X, L.P. that it is entitled to a
back-in percentage of the working interest in five mineral
leases under which Anadarko Petroleum Company is lessee. The
trial court agreed with TRO-X, but the court of appeals did
not, and reversed. We affirm.
Factual and Procedural Background
early 2007, TRO-X, as lessee, executed mineral leases with
David E. Cooper; Hill-Cooper, Ltd.; Richard W. Cooper;
Kendall C. Hill; and Shirley Cooper (collectively, the
Coopers). These leases (the 2007 Leases) contained identical
terms, including a clause that required TRO-X to drill an
offset well if an off-lease well was completed within 660
feet of the lease boundaries and produced oil in paying
quantities. The 2007 Leases provided that if TRO-X failed to
drill an offset well as required, then upon demand of the
lessors, TRO-X had to release a specified portion of the
leased premises to the Coopers. TRO-X later entered into a
participation agreement transferring its interest in the 2007
Leases, with the exception of a contingent reversionary
interest, to Eagle Oil & Gas Co. The participation
agreement allowed TRO-X to exercise a "back-in"
option if Eagle Oil produced minerals from the leases and
reached "project payout" as that term was defined
in the participation agreement. The back-in provision required 5%
of the working interest to be transferred to TRO-X, but only
if TRO-X exercised the option. The participation agreement
included an "anti-washout" clause. Such a clause is
designed to protect an interest like TRO-X's back-in
option from being "washed out" by means of the
lessee surrendering the lease or allowing it to lapse and
then reacquiring the lease without the interest's burden.
8 Howard R. Williams & Charles J. Meyers, Oil and Gas
Law: Manual of Oil and Gas Terms 52, 1129 (LexisNexis Matthew
Bender 2017) (defining "washout" as the
"[e]limination of an overriding royalty or other share
of the working interest by the surrender of a lease by a
sublessee or assignee and subsequent reacquisition of lease
on the same land free of such interest"). TRO-X's
anti-washout clause provided that its back-in option
"shall extend to and be binding upon any renewal(s),
extension(s), or top lease(s) taken within one (1) year of
termination of the underlying interest."
Oil eventually assigned its interest in the 2007 Leases to
Anadarko. A year later, Anadarko completed a well on land
adjacent to the tract covered by the 2007 Leases and 550 feet
from the perimeter. No one disputes that Anadarko failed to
drill an offset well within the time frame prescribed by the
offset-well clause in the 2007 Leases. On May 25, 2011,
Richard W. Cooper sent Anadarko a demand letter asserting
that Anadarko had breached the offset well clause by failing
to drill an offset well in response to the well drilled on
adjacent land. The letter demanded that Anadarko surrender
320 acres of the property covered by the 2007 Leases, as was
required by the Leases. After looking into the matter,
Anadarko concluded it had indeed breached the offset well
clause and that its lease on the acreage Cooper demanded to
be surrendered had terminated.
then engaged with the Coopers in negotiations that culminated
in their executing new leases in June 2011 (the 2011 Leases).
The 2011 Leases (1) are between the same parties as the 2007
Leases, (2) cover the same mineral interests that were the
subject of the 2007 Leases, (3) contain several terms that
vary materially from the 2007 Leases, (4) do not mention
either the 2007 Leases or TRO-X's interest under those
leases, and (5) do not include language releasing the 2007
Leases. The 2011 Leases specified an effective date of June
17, 2011. The Hill-Cooper, Ltd. 2011 Lease was executed on
June 15, 2011. The other four leases were executed after June
17, but before June 30, 2011, when Anadarko executed a
written release of all of its interests under the 2007 Leases
(the Release) and recorded the 2011 Leases. When TRO-X later
approached Anadarko to confirm that its back-in interest in
the 2011 Leases was valid, Anadarko denied that it was.
February 2014, TRO-X sued Anadarko, asserting claims for
breach of contract and trespass to try title and seeking a
declaratory judgment that the 2011 Leases were top leases and
therefore subject to TRO-X's back-in interest. The case
was tried non-jury, with the central issue being whether the
2011 Leases were top leases, in which TRO-X retained a
back-in interest, or new leases, which washed out TRO-X's
interest. The trial court determined that TRO-X owned an
undivided 5% working interest pursuant to the participation
agreement because the 2007 Leases remained in effect until
the Release was executed, making the 2011 Leases top leases.
Anadarko appealed, challenging the legal sufficiency of the
evidence to support the judgment.
court of appeals reversed. 511 S.W.3d 778, 786-87 (Tex.
App.--El Paso 2016). It noted that TRO-X could prevail only
if the 2011 Leases were top leases. Id. at 783-84.
The court opined that TRO-X had to prove the Coopers did not
intend for the 2011 Leases to terminate the 2007 Leases in
order for TRO-X to prevail on its claim that the 2011 Leases
were top leases. Id. at 785-86 (citing Sasser v.
Dantex Oil & Gas, Inc., 906 S.W.2d 599, 603 (Tex.
App.--San Antonio 1995, writ denied)). The court concluded
resolution of Anadarko's liability under the
Participation Agreement hinges on what the Coopers intended
to do when they signed the 2011 Leases: Did they intend to
terminate whatever remained of the 2007 Leases at the moment
the new leases were executed, or did they want to keep the
2007 Leases intact as a failsafe until obtaining a release
from Anadarko at the close of the transaction?
Id. (citing Ridge Oil Co. v. Guinn Invs.,
Inc., 148 S.W.3d 143, 153 (Tex. 2004)). The court
reviewed the evidence and determined that "[n]othing in
the interaction between the parties or in the trial testimony
suggests the Coopers intended for the 2011 Leases to be top
leases that would come into effect only upon execution of a
release." Id. at 786.
Court, TRO-X continues to contend that the 2011 Leases are
top leases subject to its back-in interest. It asserts that
without release language in the 2011 Leases, all the Coopers
could convey to Anadarko when the 2011 Leases were executed
was an interest in the Coopers' possibility of reverter.
According to TRO-X, the 2011 Leases are top leases on their
face because they neither make any mention of the 2007 Leases
nor contain any indication that Anadarko and the Coopers
intended the 2011 Leases to terminate the 2007 Leases. TRO-X
argues that it established all it needed to--an existing
lease and a subsequent lease taken on those same
minerals--and to overcome this evidence, Anadarko was
required to establish that the parties intended for the 2011
Leases to terminate the 2007 Leases. TRO-X characterizes
Anadarko's requirement as an affirmative defense on which
Anadarko had the burden of proof because it was an assertion
that, if true, would defeat TRO-X's claim.
however, maintains that for TRO-X to prevail on its
breach-of-contract claim it was required to prove each
element of its claim, including the existence of a valid
contract. That being so, Anadarko argues, the 2011 Leases
were burdened by TRO-X's 5% back-in interest only if
TRO-X proved the 2011 Leases were intended to be top leases.
Anadarko references Ridge Oil for the proposition
that parties to an oil and gas lease terminate an existing
mineral lease between them if they enter into a new lease
with "the intent and understanding that, by doing so,
they would effect a release" of the prior lease. 148
S.W.3d at 153 (quoting Sasser, 906 S.W.2d at 603).
According to Anadarko, the record establishes that both
Anadarko and the Coopers intended to release the 2007 Leases
by entering into the 2011 Leases, which supplanted the 2007
Leases, and the 2011 Leases contain no language evidencing
that either Anadarko or the Coopers intended for the ...