Eland Energy, Inc. v. Rowden Oil & Gas, Inc.

Citations: 914 S.W.2d 179; 1995 WL 752680Docket: 04-93-00550-CV

Court: Court of Appeals of Texas; January 11, 1996; Texas; State Appellate Court

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Eland Energy, Inc. (Eland) appealed a summary judgment granted by the trial court in favor of Rowden Oil, Gas, Inc. (Rowden) and other appellees concerning the title to an oil and gas lease known as the Perez Lease, encompassing approximately 770 acres in Webb County. Rowden initiated the lawsuit for declaratory judgment to clear its title, while Eland claimed a one-third interest in the lease and its associated wells. The trial court's decision favored the appellees, leading Eland to raise ten points of error regarding the ruling.

Key elements of the case include a September 15, 1971, letter farmout agreement (the Cox Farmout) between Ralph Rowden and Edwin L. Cox, Sr., which allowed Cox to drill under certain conditions and included provisions for the assignment of land around producing wells. The agreement granted Rowden the right to take over wells upon Cox’s notice to plug and abandon, with specific terms regarding salvage value and potential reassignment of interests.

Following the completion of the first well, Cox suggested simplifying the assignment process by assigning the entire Perez Lease to Rowden, with undeveloped portions reverting back to Rowden once drilling ceased. This modification was formalized in a November 1, 1971, Lease Assignment, which was recorded and explicitly stated that it was subject to the terms of the original Cox Farmout, including Cox's continuous drilling obligation.

The case ultimately reaffirmed the binding nature of the agreements and the rights and obligations established therein. The appellate court upheld the trial court's summary judgment, confirming that the Lease Assignment was meant to streamline the process of transferring interests while remaining bound by the original farmout agreement.

In 1979, Cox quitclaimed an undivided one-third interest in the Perez Lease to each of his three children. In 1987, one son assigned his interest to Lakeview Partners, L.P., while the other two assigned theirs to Prudential-Bache, which then entered into an operating agreement with Graham Royalty, Ltd. In 1989, Eland acquired Lakeview Partners' interest and retroactively joined Prudential-Bache in the operating agreement. That same year, Graham Royalty quitclaimed Prudential-Bache's remaining interest back to Rowden, Inc., except for designated forty-acre tracts around four producing wells. Eland did not relinquish its interest in undeveloped areas and claims an undivided one-third interest in both the designated tracts and the entire Perez Lease. Rowden, Inc. subsequently farmed out part of the lease to Tri-C Resources, which drilled a producing well and assigned rights to American Cometra, Inc., which then transferred its rights to Cometra Oil, Gas, Inc. Rowden, later joined by Cometra, filed suit against Eland to clarify title to the Perez Lease.

Rowden's motion for summary judgment argued that Eland had constructive notice of the Cox Farmout terms, was estopped from claiming any interest outside the designated forty-acre units, ratified the relinquishment of abandoned wells, and that the original assignment to Cox was limited to completed wells and their surrounding units. The remaining appellees also moved for summary judgment based on constructive notice and the adequacy of the Cox Farmout description. Eland countered with claims of limitations, laches, and the Statute of Frauds. The trial court concluded that the Cox Farmout only conferred rights to the forty-acre tracts around completed wells, affirmed that Rowden assigned the entire Perez Lease subject to the Cox Farmout, and confirmed that Eland's interest was subject to the Farmout's terms.

Prudential-Bache assigned its interest in the Perez Lease outside of four specific tracts to Rowden, Inc., limiting Eland's interest to those designated forty-acre tracts. The court also found that Rowden, Inc. had farmed out the northwest quarter of the lease to Tri-C and Cometra Oil, Gas, Inc., concluding that Eland had no interest in the well drilled by Tri-C on the Perez Lease. The trial court did not provide reasons for granting the appellees' motions for summary judgment, placing the burden on the appellant to demonstrate that all independent grounds in the motions were insufficient. To obtain a reversal, the appellant must show that it has established its defense as a matter of law. A party seeking summary judgment must show no genuine issue of material fact and entitlement to judgment as a matter of law, while the non-movant must raise a fact issue to avoid summary judgment. The defendant must conclusively prove all elements of an affirmative defense, and if successful, the burden shifts to the plaintiff to present evidence of a genuine issue of material fact. The reviewing court will favor the non-movant in its evaluation of disputed facts. Eland argues that summary judgment was improper on five grounds, including the assertion that the appellees' claims were barred by a four-year statute of limitations concerning contracts to convey land.

Eland contends that the lawsuit is intended to enforce a contractual obligation regarding the conveyance of real property, disguised as a declaratory judgment action aimed at clearing title. Eland asserts that the Lease Assignment from Rowden to Cox constitutes a conditional transfer of Rowden's full interest in the Perez Lease, where title was transferred to Cox with an obligation to reassign undeveloped areas back to Rowden upon any breach of drilling commitments. Eland claims that since drilling ceased over four years ago, the appellees are barred from seeking specific performance of the reassignment obligation. Conversely, Rowden argues that the lawsuit concerns title clearance, not specific performance, and is therefore not subject to any statute of limitations.

Rowden maintains that the Lease Assignment conveys only bare legal title, as it is subordinate to the Cox Farmout due to a 'subject to' clause, which leaves equitable title with Rowden. Rowden explains that Cox must drill commercially productive wells to earn equitable title, merging legal and equitable titles only within designated forty-acre tracts surrounding those wells. Eland's theory relies on the assumption of having equitable title to the Perez Lease; however, Eland's rights derive from the Cox Farmout and cannot exceed those of Cox. The 'subject to' clause plays a crucial role, suggesting that Cox could only earn equitable title under the terms of the Cox Farmout. Thus, the combined interpretation of the Cox Farmout and Lease Assignment reserves equitable title to Rowden for areas not impacted by producing wells. In 1989, forty-acre tracts were designated, merging equitable title with legal title for those areas. Eland has no claim to interests outside the four designated forty-acre tracts, as Cox did not acquire equitable rights to undeveloped acreage through the agreements.

Eland lacks an equitable interest in the property related to Rowden's title settlement claim, preventing characterization of Rowden's action as one for specific performance, which means the four-year statute of limitations does not apply. Eland's argument that the statute of frauds renders Eland's obligation to reassign unearned acreage in the Perez Lease unenforceable due to vague land descriptions is rejected. A contract that does not meet the statute of frauds requirements is voidable, not void. Eland contends the Cox Farmout's terms do not clearly identify the forty-acre tracts Rowden was to assign, thus asserting the Cox Farmout is unenforceable and independent of the Lease Assignment. However, Rowden's obligations under the Cox Farmout were fulfilled when the Lease Assignment was executed, as it involved assigning legal title to the entire Perez Lease. Therefore, the statute of frauds cannot be used as a defense against the Cox Farmout. Regarding the Lease Assignment, Eland argues the obligation to reassign undeveloped portions is also unenforceable under the statute of frauds due to uncertainty about well locations and corresponding tracts. The sufficiency of the land description must be evaluated based on the contract's terms at the time of agreement, and the Lease Assignment's incorporation of the Cox Farmout provides an adequate description of the Perez Lease. The critical issue is whether the title documents sufficiently identify the boundaries of the forty-acre tracts earned from drilling. If identifiable, the title instruments can be deemed enforceable.

The Cox Farmout stipulates that if Cox successfully drills a producing well on the Perez Lease, Rowden must allocate a square tract of 40 acres around the well to him. Eland argues that this language is too vague to satisfy the statute of frauds, making the reassignment obligation unenforceable. However, the agreement grants Cox the right to locate his wells anywhere on the lease and an equitable right to delineate boundaries for the earned 40-acre tracts. While the designation right could be lost through delay, it is Cox's obligation to define these tracts once a well is completed. Despite Cox's failure to promptly designate the tracts, the completion of a well and subsequent survey by Graham Royalty in 1989 effectively clarified the interests of all parties involved, satisfying the statute of frauds, and the trial court did not err in its ruling.

Eland's eighth point of error challenges the non-assignability clause in the Cox Farmout, which restricts contract assignment without the owner's consent. For this clause to prevent assignment, it must be shown that reliance on the personal attributes of the other party was a factor, which was not established in this case. The trial court's ruling indicated Eland had an interest in the lease, derived solely from Cox, thus rejecting Eland's argument regarding the non-assignability clause. Eland also joined an operating agreement with Prudential-Bache, suggesting that this constituted ratification of Prudential-Bache's earlier assignment of its interest in the undeveloped portions of the lease.

Eland argued that it was estopped from claiming an interest in the assigned lease, contesting the trial court's conclusion that it ratified or was estopped from denying the appellees' title. The assignment from Prudential-Bache to Rowden, Inc. conveyed all rights to the Perez Lease, except for the forty-acre tracts described in an exhibit. Prudential-Bache's quitclaim transferred only the interest it owned, which came from two of Cox's three children, meaning it did not confer a greater title. Eland, by joining the operating agreement, did not ratify or forfeit its claim to the remaining one-third legal title of the Perez Lease but did acquire a beneficial interest in the portions of the forty-acre tracts with producing wells. Eland could only benefit from those tracts if they aligned with its equitable interest. By accepting benefits from the operating agreement, Eland ratified the designation of the forty-acre tracts, leading to the trial court's correct determination that Eland had no interest outside those designated tracts.

On laches, Eland claimed a genuine issue of material fact regarding the appellees' delay in enforcing reassignment rights, asserting detrimental reliance on that delay. However, laches is not a valid defense in a title dispute, as established by precedents, and the court reaffirmed that this case was a title suit rather than a contract enforcement action. Consequently, Eland's tenth point of error was overruled.

Eland's overarching complaint regarding the trial court's summary judgment favoring the appellees was also overruled, leading to the affirmation of the trial court's judgment. The document notes the nature of farmout agreements, differentiating between agreements to transfer and conditional assignments, with specifics about the agreements involved in this case.

Cox distributed ownership interests in a property as follows: 33% to Edwin L. Cox, Jr., 33% to another son, and 34% to his daughter. Two partnerships under Prudential-Bache hold interests, with Graham Royalty, Ltd. representing both. A commentator suggested the use of 'subject to' language in agreements to reduce conflicts with subsequent assignments, referencing the Mississippi Supreme Court's ruling that an assignment does not override a prior farmout agreement (Phillips Petroleum Co. v. Stack). The case Energy Reserves Group, Inc. v. Tarina Oil Co. is deemed not controlling, as it concerned a suit for specific performance rather than the land recovery exception to the venue statute. The trial court determined that Eland acquired its interest in the Lease under the terms of the Cox Farmout; however, findings of fact should not be considered in summary judgments (Samaniego v. El Paso Towing, Inc.).