Circle Ridge Production, Inc. v. Kittrell Family Minerals, LLC

Citation: Not availableDocket: 06-13-00009-CV

Court: Court of Appeals of Texas; July 17, 2013; Texas; State Appellate Court

Original Court Document: View Document

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Kittrell Family Minerals, LLC initiated a declaratory judgment and conversion lawsuit against Circle Ridge Production, Inc., claiming Circle Ridge failed to pay required overriding royalties despite being notified of the nonpayment, which Kittrell argued led to the forfeiture of an oil and gas lease assignment. The trial court granted summary judgment in favor of Kittrell. Circle Ridge contended that the court erred by granting summary judgment on unaddressed grounds, asserting Kittrell did not comply strictly with notice requirements, and claimed the absence of a signed division order justified the nonpayment. Circle Ridge also raised issues regarding the date of forfeiture and entitlement to reimbursement for improvements, as well as contesting the awarding of attorney’s fees.

The appellate court affirmed in part and reversed in part, concluding that: (1) the trial court's judgment was supported by the motions; (2) Kittrell had complied with notice requirements; (3) Circle Ridge's late payment did not excuse its breach; (4) the absence of a division order also did not excuse the breach; (5) the awarding of attorney’s fees was appropriate; (6) genuine disputes remained over the forfeiture date; (7) the court incorrectly ruled that Circle Ridge trespassed; and (8) it failed to acknowledge Kittrell's concession allowing Circle Ridge to recover personal property at the well site. 

Kittrell had assigned the mineral lease to Circle Ridge on May 15, 2009, reserving overriding royalties that required payment within specified timeframes after production commenced, with interest accruing on late payments. Notice of nonpayment could be provided via certified mail, allowing Kittrell to terminate the agreement if payment was not made within 60 days of notification. The assignment was filed on June 11, 2009, and production began in February 2010.

Kittrell, having not received payments for its overriding royalty interest, sent two demand letters to Circle Ridge in 2011, the first on April 27 and the second on July 14, with differing deadlines for payment. Despite an incorrect zip code, the first letter was received, and Circle Ridge responded on August 9. Kittrell refused to sign a division order sent by Circle Ridge, citing unpaid royalties and incorrect ownership interest. On August 30, Kittrell declared the assignment terminated and stated that continued production would constitute trespassing. Circle Ridge later sent a check for $11,241.05, which Kittrell's attorney returned, indicating indecision regarding the unpaid royalties. On November 21, Kittrell reiterated the termination of the assignment and locked the gates to the lease. 

Regarding summary judgment standards, the movant must prove no genuine issue of material fact exists and is entitled to judgment as a matter of law, with the burden of proof resting on the movant. The trial court rendered judgment based on grounds supported by Kittrell’s summary judgment motions, but Circle Ridge contended that Kittrell’s motion inadequately addressed its counterclaims, including mitigation of damages and breach of contract. Kittrell's motion did cover breach of contract and conversion claims, leading to the resolution of Circle Ridge's breach of contract claims under the established forfeiture provision.

The conversion claim pertains to personal property left at the well site. Circle Ridge did not assert a breach of warranty of title as a counterclaim or in its amended answer; it was first mentioned in a motion for new trial. Kittrell objected to this omission, arguing that Circle Ridge's failure to plead the counterclaim meant it was not addressed in the summary judgment. Although Circle Ridge claimed Kittrell failed to mitigate damages, it did not provide supporting facts or assert this affirmative defense in its summary judgment response. Consequently, Circle Ridge did not meet its burden to raise or substantiate the mitigation defense. The summary judgment motions focused on contract and conversion claims, and Circle Ridge's complaint regarding the trial court's ruling on unpleaded grounds is overruled.

Regarding strict compliance with assignment terms, Circle Ridge contended that a notice with an incorrect zip code constituted non-compliance. Kittrell argued that strict compliance was achieved since the notice reached the correct location and suggested that substantial compliance or actual notice without prejudice suffices. Texas law generally requires strict compliance for any termination or forfeiture of mineral estate interests. The court noted that previous cases indicated strict compliance could be established despite missing zip codes if the delivery location was correct. Here, the notice was delivered to the specified physical address, despite the erroneous zip code, thus satisfying compliance requirements.

A zip code serves primarily as a postal aid rather than an essential component of an address, and its designation can change over time. The assignment in question lacks the additional four-digit extension (ZIP+4) that is often used, while the relevant notice does include it. The forfeiture clause in the assignment emphasizes the requirement for actual notice rather than strict adherence to the mailing address, stating that if royalties are not paid within sixty days of receiving notice, termination is permissible. Circle Ridge received actual notice at the specified address, fulfilling the strict compliance required by the forfeiture clause.

Circle Ridge contends that its payment of royalties on September 30, 2011, mitigated any breach of the forfeiture clause, arguing that the lease remained intact. However, since royalties were due within sixty days of the initial notice and not paid until 154 days later, the breach occurred regardless of the subsequent payment. The assignment does not include implied terms altering the termination rights, meaning Kittrell could terminate the lease due to Circle Ridge's failure to comply within the designated timeframe.

Furthermore, Circle Ridge's request for a division order on August 11, 2011, is argued to excuse the breach of the forfeiture clause from June 28, 2011. Kittrell counters that the request was made after the breach occurred and contained incorrect terms. The court agrees that a division order submitted post-breach does not absolve the breach, as it serves merely as a payment mechanism and does not alter the rights established in the assignment.

Division orders, while not replacing lease contracts, remain binding until revoked. In Cabot Corp. v. Brown, the Texas Supreme Court affirmed this principle. In the current case, overriding royalty payments were due by June 28, 2011, but the division order was effective July 1, 2011, and dated August 11, 2011, indicating it was not in effect for the critical period. Circle Ridge provided no justification for its breach of the payment obligation despite the late issuance of the division order. According to the San Antonio Court of Appeals, the burden lies with the payor to submit a division order for signature, not the royalty or mineral interest owner. Because Circle Ridge did not submit a division order to Kittrell before the forfeiture clause was violated, the absence of a division order did not excuse non-payment.

Circle Ridge also contested the award of attorney’s fees to Kittrell on four grounds: (1) lack of an expert designation, (2) absence of hourly time records, (3) failure to segregate fees, and (4) conclusory evidence. The case E. F. Hutton Co. v. Youngblood established that an expert must be designated to claim attorney’s fees; however, affiant testimony from the attorney is also acceptable per Texas Commerce Bank v. New. Circle Ridge did not preserve error regarding the expert designation by failing to secure a ruling on its objection. Additionally, Kittrell filed an amended discovery response to designate its expert, mitigating any claims of surprise or prejudice. Circle Ridge's argument regarding insufficient evidence due to lack of time records was not preserved, and even if it had been, the Texas Supreme Court's discussion in El Apple I, Ltd. v. Olivas does not mandate hourly records in all cases. The Dallas Court of Appeals has affirmed attorney’s fees awards without such records, and Circle Ridge's objection regarding segregation of fees lacked a preserved ruling.

To preserve objections regarding summary judgment evidence, a complainant must obtain a ruling on their objection. Kittrell submitted an amended affidavit asserting that 75% of the attorney’s fees related to the declaratory judgment. Circle Ridge contended that Kittrell’s summary judgment evidence was purely broad and conclusory statements. However, the Texas Supreme Court has ruled that an affidavit is not deemed conclusory simply due to a lack of specifics; if uncontroverted, it may serve as adequate evidence. Following this precedent, Kittrell’s uncontroverted affidavit was deemed sufficient, leading to the overruling of Circle Ridge’s objections regarding attorney’s fees.

Kittrell claimed the Assignment terminated on August 30, 2011, based on a clear intent communicated in a letter. Circle Ridge argued that language in a subsequent letter indicated the Assignment was not terminated until November 21, 2011, suggesting that Kittrell merely had the right to evict later. The analysis requires distinguishing between a condition subsequent, a special limitation, and a covenant, with doubts favoring a covenant. Kittrell failed to prove the lease's termination as a matter of law by August 30, 2011, since no re-entry had occurred at that time. Under Texas law, the burden for summary judgment lies with the moving party to show no material fact issues exist. Kittrell's declaration of termination lacked legal effect without re-entry, which only happened when Kittrell prevented Circle Ridge from producing. Thus, the trial court incorrectly concluded the forfeiture occurred on August 30, 2011; genuine issues about the termination date remain.

Regarding trespass, Circle Ridge argued that the trial court erred in labeling it a bad-faith trespasser and awarding damages. Kittrell claimed that Circle Ridge's continued production after the termination notice constituted bad-faith trespass. However, since no lawsuit was pending during Circle Ridge’s activities on the lease, the court found in favor of Circle Ridge. The Texas Supreme Court has indicated that the determination of bad faith should be evaluated based on equity on a case-by-case basis, affirming that the Assignment concluded upon Kittrell’s re-entry.

Circle Ridge did not engage in any activities on the lease after Kittrell's re-entry, leading the court to find that Kittrell is not entitled to trespass damages. Kittrell is entitled to recover its overriding royalty interest from August 30, 2011, until re-entry but cannot recover for trespass. The trial court erred by denying Circle Ridge the right to remove its personal property from the well site, valued at over $100,000, and also failed to acknowledge Kittrell's concession regarding the well casing. On remand, the court should allow Circle Ridge to retrieve its property and determine damages for the well casing if removal would cause damage. 

The judgment is partially affirmed and partially reversed. The court upholds findings that Circle Ridge breached the forfeiture clause, Kittrell provided proper notice, the lease was forfeited, and Circle Ridge’s non-payment was unjustified, affirming Kittrell's award of $7,576.75 in royalty proceeds and $8,166.00 in attorney’s fees. However, the court corrected the forfeiture date to November 21, 2011, when Kittrell re-entered the property, reversing the award for trespass damages totaling $55,340.62. The case is remanded for a determination of the exact re-entry date and the calculation of the overriding royalty owed to Kittrell, with recognition of Circle Ridge's entitlement to its personal property at the well site.