US Shale v. Laborde and the Death of the Fixed Nonparticipating Royalty Interest?

Differentiating between fixed and floating nonparticipating royalty interests (“NPRI”) has always been a conundrum plaguing examiners who determine mineral ownership. In 2018 the recent Texas Supreme Court opinion in US Shale Energy II, LLC v. Laborde only exacerbated the confusion surrounding this issue.

Defining Fixed and Floating NPRI.

An NPRI can either be classified as fixed, meaning that the interest is a predetermined undivided fraction that will not change with different lease royalty values, or floating, meaning that the undivided interest is a fraction of the lease royalty and will change depending upon the value of the lease royalty.[1]

Problems with Differentiating Fixed and Floating NPRI.

Some instruments, especially those predating the Garrett v. Dils decision in 1957[2], are unclear as to whether a fixed or floating NPRI is intended by the parties to the conveyance. Some early conveyances present the double-fraction dilemma, in which two fractions, which are sometimes inconsistent, are listed as the amount of NPRI conveyed.[3]

The modern jurisprudence for fixed and floating NPRI begins with Luckel v. White in 1992.[4] Prior to Luckel the Texas Supreme Court used the “repugnant to the grant rule” propounded in Alford v. Krum.[5] This rule dictated that the fraction listed in the granting clause of a deed would prevail over inconsistent fractions that lie outside of the granting clause. Luckel overruled Alford, and since then the Texas Supreme Court has abandoned the “repugnant to the grant rule.” The pertinent text in Luckel is as follows:

"I, Mary Etta Mayes, ... [convey to] L.C. Luckel, Jr. an undivided one thirty-second (1/32nd) royalty interest in and to the following described property, ...

["Habendum" and "Warranty" clauses]

TO HAVE AND TO HOLD the above described 1/32nd royalty interest ... unto the said L.C. Luckel, Jr. his heirs and assigns forever ... to warrant and forever defend ... the said 1/32nd royalty interest ...

["Subject-to" clause]

It is understood that said premises are now under lease originally executed to one Coe and that the grantee herein shall receive no part of the rentals as provided for under said lease, but shall receive one-fourth of any and all royalties paid under the terms of said lease.

["Future lease" clause]

It is expressly understood and agreed that the grantor herein reserved [sic] the right upon expiration of the present term of the lease on said premises to make other and additional leases... and the grantee shall be bound by the terms of any such leases... [and] shall be entitled to one-fourth of any and all royalties reserved under said leases.

[Final clause]

It is understood and agreed that Mary Etta Mayes is the owner of one-half of the royalties to be paid under the terms of the present existing lease, the other one-half having been transferred by her to her children and by the execution of this instrument, Mary Etta Mayes conveyed one-half of the one-sixteenth (1/16th) royalty now reserved by her.[6]"

The Texas Supreme Court determined that the deed to Luckel above conveyed a floating royalty interest. The Court determined that at the time the reservation was drafted the usual lease royalty was one-eighth (1/8), and the drafters did not contemplate a greater royalty. As a result, the Supreme Court of Texas determined that one-eighth (1/8) or a fraction of one-eighth (1/8) such as one-sixteenth (1/16), one-thirty-second (1/32) in this case or one-sixty-fourth (1/64) represent fractions of all of the royalty, such that one-eighth (1/8) becomes all of the royalty, one-sixteenth (1/16) becomes one-half (1/2) of the royalty, etc.[7] Deriving the intent of the parties as represented in the plain meaning of words within the instrument reigns as the supreme rule for determining the effect of an instrument, and no single word, phrase or paragraph when uttered can be dispositive of the whole—in isolation to the whole.[8] This rationale has been observed in many Texas court cases.[9]

Hudspeth v. Berry and the Fixed royalty.

In 2010 Hudspeth v. Berry,[10] a decision by the Second District Court of Appeals, Fort Worth, centered around a fixed vs. floating dispute over a certain 1943 deed. The reservation is as follows:

"There is, however, expressly reserved and excepted from this conveyance, for the benefit of J. H. Berry, his heirs and assigns and [sic] undivided 1/40th royalty interest (being 1/5 of 1/8) and for the benefit of R. C. Berry, his heirs or assigns, an undivided 1/40th royalty interest (being 1/5 of 1/8).... But the grantee herein, his heirs and assigns, may, and they are expressly authorized to lease the said land at will for oil, gas and other mineral privileges without our consent or ratification but any such lease or leases, there shall be reserved the usual 1/8 royalty of which 1/8th J. H. Berry Shall be entitled to receive 1/5 and R. C. Berry Shall be entitled to and receive 1/5."[11]

The Court of Appeals for the Second District of Fort Worth determined that the NPRI in question was fixed. The reasoning for this was that the deed did not contain conflicting fractions, and as such did not require using 1/8 as a proxy for all of the royalty.[12] The court in Hysaw illustrates this reasoning by stating “…The historical use of 1/8 as the standard royalty may inform the meaning of fractions stated in multiples of 1/8, but these considerations are not alone dispositive.”[13]

US Shale v. Laborde: A more recent Fixed vs. Floating NPRI case.

In 2018 the Texas Supreme Court’s decision in U.S. Shale Energy II, LLC v. Laborde Properties, L.P. is another addition to fixed vs. floating NPRI jurisprudence. The reservation in question is as follows:

There is reserved and excepted from this conveyance unto the grantors herein, their heirs and assigns, an undivided one half (1/2) interest in and to the Oil Royalty, Gas Royalty and Royalty in other Minerals in and under or that may produced or mined from the above described premises, the same being equal to one (1/16) of the production. This reservation is what is genaerally [sic] termed a nonparticipating Royalty Reservation....[14]

The Texas Supreme Court determined that the reservation was a floating NPRI equal to one-half (1/2) of the royalty interest rather than a fixed one-sixteenth (1/16).

Ramifications of US Shale.

In the wake of US Shale, it may seem that the best course of action when confronted with the double fraction dilemma or when the examiner reads the words “the usual 1/8” is to simply assume the interest is a floating royalty, and note it for your client as a potential problem in the future, which may be subject to overpayment to the interest owner or worse-- litigation. However, such a broad assumption provides less value to the client than a methodical examination of the entire instrument in question, coupled with knowledge of the current jurisprudence of fixed and floating NPRI. With a methodological examination, the examiner provides the client with a clearer understanding of whether the NPRI is fixed or floating, and puts the client in the best position for a discussion with a landowner or presenting its argument in court.

Hudspeth and US Shale.

One of the questions at hand is whether an instrument can ever grant a fixed NPRI or has US Shale killed this possibility? One can contemplate clear language in a modern document that would provide for such a fixed NPRI, but without the knowledge of modern jurisprudence, can any instrument predating US Shale provide for a fixed NPRI?

The question then becomes did the Hudspeth Court come to the right conclusion when it determined that the NPRI in question was fixed? Is there a time when using one-eighth (1/8) as a proxy for all of the landowner’s royalty is not advised? The Hudspeth Court determined there is no need to alter the plain meaning of words when the words are already in harmony.[15] Luckel and other cases like US Shale used one-eighth (1/8) as a proxy for the landowner’s royalty when it was necessary to bring harmony to conflicting fractions.[16] As a result, when there is no need to harmonize, there is no need to manufacture a floating NPRI out of a fixed NPRI.

So does the rule in Hudspeth stand in the wake of US Shale? As a whole, the US Shale decision did nothing more than reiterate the method and rules used in Luckel for harmonizing an instrument and solving the double fraction dilemma. US Shale represented another case of using 1/8 as a proxy for the whole landowner’s royalty to provide harmony to conflicting fractions, not to create a new meaning but to supply consistency in the face of ambiguity.

Conclusion

Only from a close reading of the entire document and harmonizing the terms within the entirety of the instrument, such that each word, phrase, and paragraph is offered its meaning within the context of the entire instrument, can one determine the effect of the instrument.[17] An examiner must read everything and let no word, phrase, or paragraph be isolated and dispositive in and of itself above the others to render the intent of the parties. There will be cases where the “usual 1/8” must be read as a proxy for all the landowner’s royalty in order to resolve conflicting fractions, and these cases will inevitably create a floating NPRI. There will be other cases where reading the “usual 1/8” as all the landowner’s royalty supplies new meaning to an already harmonious instrument, and in these cases doing so will not be advisable. As a result, the fixed royalty remains a living and contemplated possibility even after US Shale.

[1] U.S. Shale Energy II,LLC v. Laborde Properties, L.P., 551 S.W. 3d 148 (Tex. 2018).

[2] See Garrett v. Dils Co., 299 S.W.2d 904 (Tex. 1957).

[3] Hysaw v. Dawkins, 483 S.W.3d 1, 1 (Tex. 2016).

[4] See Luckel v. White, 819 S.W 2d 459 (Tex. 1991).

[5] See Alford v. Krum, 671 S.W. 2d 870 (Tex. 1984).

[6] Luckel 819 S.W. 2d at 461.

[7] Id. at 462.

[8] Garrett, 299 S.W.2d at 906.

[9] See Luckel, Hysaw, US Shale

[10] Hudspeth v. Berry, 071510 TXCA2, 2-09-255-CV (Tex.App.—Fort Worth July 15, 2010, no pet.)(mem. op.)

[11] Id.

[12] Id.

[13] Hysaw, 483 SW 3d at 13

[14] US Shale 551 S.W.3d at 150

[15] Hudspeth 2-09-255-CV.

[16] See Luckel, Hysaw, US Shale.

[17] US Shale, 551 S.W.3d at 151

Published in October 2019 issue of the PBLA Takeoff

#Fixed v. Floating #Conveyancing