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Tro-X, L.P. v. Anadarko Petroleum Corp.

Supreme Court of Texas

May 25, 2018

TRO-X, L.P., Petitioner,
Anadarko Petroleum Corporation, Respondent

          Argued January 9, 2018

          On Petition for Review from the Court of Appeals for the Eighth District of Texas



         This 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.

         I. Factual and Procedural Background

         In 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.[1] 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."

         Eagle 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.

         Anadarko 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.

         In 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.

         The 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 that the

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.

         In this 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.

         Anadarko, 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 ...

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