ACCEPTED 06-17-00116-CV SIXTH COURT OF APPEALS TEXARKANA, TEXAS 5/7/2018 5:16 PM DEBBIE AUTREY CLERK
No. 06-17-00116-CV __________________________________________________________________ FILED IN 6th COURT OF APPEALS IN THE SIXTH COURT OF APPEALS AT TEXARKANA TEXARKANA, TEXAS ________________________________________________ 5/8/2018 10:08:00 AM DEBBIE AUTREY Clerk MJR OIL & GAS 2001, LLC
vs.
ARIESONE, LP, GFP TEXAS, INC., MIKEN OIL, INC., AND SND ENERGY COMPANY, INC.
________________________________________________
Appeal from the County Court at Law No. 2 of Gregg County, Texas, Cause No. 2016-1054-CCL2
APPELLEE'S BRIEF
_________________________________________________________________
Lee S. Gill State Bar No.07921360 gill@jonesgill.com
JONES GILL LLP 6363 Woodway Dr., Ste. 1100 Houston, Texas 77057 Tele: (713) 652-4068 Fax: (713) 651-0716
Attorneys for Appellee AriesOne, LP TABLE OF CONTENTS
INDEX OF AUTHORITIES......................................................................................................................... ii STATEMENT OF FACTS ........................................................................................................................... 1 SUMMARY OF ARGUMENT .................................................................................................................... 8 ARGUMENT ................................................................................................................................................ 8 I. Standard of Review ........................................................................................................................... 8 II. The ROFR is not a covenant running with the land .......................................................................... 9 A. The ROFR must be strictly construed ......................................................................................... 10 B. The Language the parties chose does not create a covenant running with the land. ................... 10 1. Intent to Run ............................................................................................................................... 10 2. Privity of Estate........................................................................................................................... 14 3. The “In Esse” Requirement........................................................................................................ 16 4. The “Touch or Concern” Requirement ....................................................................................... 17 C. The Energy-MJR ORI Assignment did not transform the ROFR into a covenant running with the land ................................................................................................................................................ 18 D. Paragraph 13 of the 2002 Settlement Agreement does not transform Paragraph 3.e. into a covenant running with the land. .......................................................................................................... 19 E. Cases cited by Appellant are readily distinguishable .................................................................. 19 III. The ROFR is an Unreasonable Restraint on Alienation ............................................................. 22 IV. Statute of Frauds ......................................................................................................................... 25 Prayer .......................................................................................................................................................... 25
i INDEX OF AUTHORITIES
Cases
Blasser v. Cass, 158 Tex. 560, 562, 314 S.W.2d 807, 809 (1958) ..........................15 Cherokee Water Co. v. Forderhouse, 641 S.W.2d 522 (Tex. 1982) .......................22 Cincinnati Life Ins. Co. v. Cates, 927 S.W.2d 623, 625 (Tex. 1996) ........................9 Davis v. Skipper, 125 Tex. 364, 370, 83 S.W.2d 318, 321 (1935) ..........................10 FM Properties Operating Co. v. City of Austin, 22 S.W.3d 868, 872–73 (Tex. 2000) .......................................................................................................................8 Gulf, C. & S.F. Ry. Co. v. Smith, 72 Tex. 122, 124, 9 S.W. 865, 866 (1888) .........16 Heritage Res., Inc. v. NationsBank, 939 S.W.2d 118, 123 (Tex. 1996) ..................22 In re El Paso Refinery, LP, 302 F.3d 343, 356-357 ................................................17 Inwood N. Homeowners' Ass'n, Inc. v. Harris, 736 S.W.2d 632, 635 (Tex. 1987) ....................................................................................................... 11, 14 McMillan v. Dooley, 144 S.W.3d 159, 185 (Tex. App.—Eastland 2004, pet. denied)...................................................................................................................20 MPH Production Co., Inc. v. Smith, 2012 WL 1813467 (Tex. App. – Texarkana 2012, no pet.) ...................................................................20 Musgrave v. Brookhaven Lake Prop. Owners Ass’n, 990 S.W.2nd 386 (Tex. App. – Texarkana 1999, pet. denied) ............................................................21 Newco Energy v. Energytec, Inc. (In re Energytec, Inc.), 739 F.3d 215, 223 (5th Cir. 2013) .................................................................................................. 16, 17 Panhandle & S. F. Ry. Co. v. Wiggins, 161 S.W.2d 501, 505 (Tex. Civ. App. – Amarillo 1942, writ ref’d w.o.m.) ...................................... 16, 17 Procter v. Foxmeyer Drug Co., 884 S.W.2d 853, 862 (Tex. App. - Dallas 1994, no pet.) ..........................................................................23 Settegast v. Foley Bros. Dry Goods Co., 114 Tex. 452, 270 S.W. 1014, 1016 (1925) ....................................................................................................................10 Stone v. Tigner, 165 S.W.2d 124, 127 (Tex. Civ. App.—Galveston 1942, writ ref’d) .....................................................................................................................21 TBI Expl. v. Belco Energy Corp., 220 F.3d 586, 2000 WL 960047 at (5th Cir. 2000, unpublished, applying Colorado law) ...........................................19
ii Wasson Interests, Ltd. v. Adams, 405 S.W.3d 971, 973 (Tex. App. – Tyler 2013, no pet.) .................................................................... 14, 15 Westland Oil Dev. Corp. v. Gulf Oil Corp., 637 S.W.2d 903, 910–11 (Tex. 1982) ....................................................................................................... 14, 17 Secondary Authorities
Gary B. Conine, Property Provisions of the Operating Agreement-Interpretation, Validity, and Enforceability, 19 Tex. Tech L. Rev. 1263, 1317 (1988) ...............22 Harry M. Reasoner, Preferential Purchase Rights in Oil and Gas Instruments, 46 Tex. L. Rev. 57, 65 (1967) .................................................................................23
iii STATEMENT OF FACTS
Appellee AriesOne LP (“AriesOne”) submits that a more detailed review of
the provisions of and the transactions following the execution of the 2002
Settlement Agreement than that included in Appellant’s Statement of Facts will
assist in understanding its arguments.
The unrecorded 2002 Settlement Agreement (CR 45-217; App. 5 1) was
between two groups of parties called the “Ryan Parties” and the “Dickerson
Parties:”
“Ryan Parties” RFLP O&G 2001, LLC (“RFLP”), MJR Oil & Gas 2001, LLC (“MJR”), Michael J. Ryan (“Ryan”), Sidney L. Goldstein (“Goldstein”)
“Dickerson RAD 2001 LLC (“RAD”), Richard A. Dickerson Parties” (“Dickerson”), Energy 2000, Inc. (“Energy”), Energy 2000 NGS, Inc. (“NGS”), Sierra Blanca (“Sierra”), Red Earth, Brothers Oil Company, George Burke, Jim Morrisette, and Kristy Farnsworth
Ascend Oil & Gas, LLC (“Ascend”) was also a party. 2
The unrecorded 2002 Settlement Agreement settled an apparently
complicated dispute and a lawsuit then pending in Dallas County among those
sixteen parties by requiring an assignment of, among numerous others, the subject
eighteen oil and gas leases in Gregg and Rusk Counties (the “Leases”) from
Ascend to Energy. Energy then was to assign a 7.5% overriding royalty interest 1 References to “App.” in this brief refer to the Appendix attached to Appellant’s Brief. 2 These parties will be referred to herein as they are in the 2002 Settlement Agreement.
1 (“ORI”), in those same Leases and others, to MJR. The unrecorded 2002
Settlement Agreement contained the following (and numerous other) covenants
between the parties:
• It required the “Dickerson Parties and Ascend” to “comply with the following terms and conditions,” including;
o Authorizing and directing oil and gas purchasers to pay MJR’s ORI directly to MJR. CR 47-49, ¶¶ 3.a., 3.b., 3.c..
o Providing that Dickerson Parties and Ascend shall “not abandon or release a well or lease that is capable of production in paying quantities” CR 49-50 ¶ 3.d.
o Providing that Dickerson Parties and Ascend shall “advise MJR within ten business (10) days of any assignment, farmout, sale or transfer of any property, lease, or well in which MJR has any interest and shall give MJR a right of first refusal to purchase such interest upon the same terms as offered to the Dickerson Parties or Ascend by a bona fide third party. If MJR does not agree to purchase such interest within ten (10) days, the Dickerson Parties shall advise the new operator and/or transferee of MJR’s overriding royalty interest. As a condition precedent to the transfer, any transferee shall be required to agree to be bound by the obligations to MJR contained in this agreement as it pertains to any interest transferred and give MJR evidence of same.” CR 50, ¶ 3.e. (emphasis added).
The “right of first refusal” in paragraph 3.e. is referred to as “ROFR” hereafter.
Ascend-Energy Assignment (2002)
The 2002 Settlement Agreement was never recorded in Gregg or Rusk
County, nor was the 2002 Settlement Agreement mentioned or referred to in the
2 very first assignment of the Leases (“Ascend-Energy Assignment”) from Ascend
to Energy dated effective May 1, 2002, (CR 648-705). The Ascend-Energy
Assignment was executed and recorded prior to the recording of the Energy-MJR
ORI assignment. CR 218-283 (Gregg); CR 284-346 (Rusk). The Ascend-Energy
Assignment was not made “subject to” the 2002 Settlement agreement or anything
else.
Energy’s Deed of Trust to ARI (2002)
On May 20, 2002, before the Ascend-Energy Assignment and Energy-MJR
ORI Assignment were recorded, Energy entered into a loan agreement with
American Realty Investors, Inc. (“ARI”), pursuant to which it executed a $1.3
million Note and Deed of Trust covering the Leases to secure same. CR 706-779.3
The Deed of Trust was recorded along with the Ascend-Energy Assignment and
the Energy-MJR ORI Assignment. The lien of this Deed of Trust attached to
Energy’s interest in the Leases before the recording of the Energy-MJR ORI
Assignment. The Deed of Trust was not made “subject to” the 2002 Settlement
Agreement or anything else.
Energy-Gaywood Assignment (2002)
Later the same year, effective October 1, 2002, Energy assigned the Leases
to Gaywood Oil & Gas, LLC (“Gaywood”). The Energy-Gaywood Assignment
3 The pages of the Deed of Trust are out of order in the clerk’s record. The following CR pages correspond to the page numbers in the footer of the Deed of Trust: 1 – CR 706, 2 – CR 709, 3 – CR 711, 4 – CR 708, 5 – CR 713, 6 – CR 717, 7 – CR 722, 8 – CR 707, 9 – CR 710, 10 – CR 713.
3 was executed pursuant to a Deed in Lieu of Foreclosure Agreement (CR 782–794)
between Dickerson, Energy and ARI, because Energy’s $1,300,000 note to ARI,
its deed of trust securing the same, and Dickerson’s guaranty thereof were in
default. CR 782. Gaywood was ARI’s “nominee” under the Deed in Lieu of
Foreclosure Agreement (CR 782, ¶ F), which provided that Energy’s interest in the
Leases was to be conveyed to Gaywood, “absolutely and free of any right of
redemption . . . or other rights of [Energy] or anyone claiming through or under
[Energy].” CR 783 at § 1. The Energy-Gaywood Assignment provided that
Energy would hold harmless and indemnify Gaywood against “all liabilities,
obligations . . . which may be imposed upon or incurred or paid by [Gaywood] by
reason of or in connection with the failure by [Energy], prior to the date hereof, to
perform or comply with any of the terms, covenants, conditions or agreements to
be performed by [Energy] under the Leases.” CR 440-441, 504-504 ¶ 4. Energy
warranted that its title was good and indefeasible, “free and clear of all liens and
encumbrances of any nature whatsoever.” CR 441, 505 ¶ 6. Under the Energy-
Gaywood Assignment, Gaywood was not “required to agree to be bound by the
obligations to MJR contained in [the 2002 Settlement Agreement] as it pertains to
any interest transferred and give MJR evidence of same,” and the 2002 Settlement
Agreement was not mentioned in the Energy-Gaywood Assignment. The Energy-
4 Gaywood Assignment therefore violated the 2002 Settlement Agreement in 2002.
MJR asserted no claim as a result of this violation.
Gaywood-GFP Assignment (2010)
Eight years later, in 2010, Gaywood assigned the Leases and other properties
to GFP Texas, Inc. (“GFP”). Under this Assignment (“Gaywood-GFP
Assignment,” CR 570-595, 596-622), Gaywood was not “required to agree to be
bound by the obligations to MJR contained in [the 2002 Settlement Agreement] as
it pertains to any interest transferred and give MJR evidence of same” and the 2002
Settlement Agreement was not mentioned in the Gaywood-GFP Assignment. The
Gaywood-GFP Assignment therefore violated the 2002 Settlement Agreement in
2010. MJR asserted no claim as a result of this violation.
GFP-AriesOne Assignment (2013)
More than ten years after the 2002 Settlement Agreement, GFP assigned the
Leases and numerous other properties to AriesOne (“GFP-AriesOne Assignment”)
effective January 1, 2013. CR (Supp) 4-14, 15-26). Under this Assignment,
AriesOne did not, and was not required to “agree to be bound by the obligations to
MJR contained in [the 2002 Settlement Agreement] as it pertains to any interest
transferred” and did not, and was not required to “give MJR evidence of same” nor
was the 2002 Settlement Agreement referred to in the GFP-AriesOne Assignment.
5 Prior to the GFP-AriesOne Assignment, MJR signed an agreement with GFP
waiving any rights under its alleged ROFR. CR (Supp) 56.
AriesOne-QRE (2013) and AriesOne-Miken Assignments (2014)
Later, effective December 1, 2013, AriesOne assigned most of the Leases to
QRE Operating, LLC (“AriesOne-QRE Assignment”). CR 795-807. It is
undisputed that AriesOne did not require QRE to agree to be bound by any
“obligations” to MJR contained in the 2002 Settlement Agreement nor was the
2002 Settlement Agreement referred to in the AriesOne-QRE Assignment.
Later, effective August 1, 2014, AriesOne assigned the remaining Leases to
Miken Oil, Inc. (“AriesOne-Miken Assignment”). CR 808-814. It is undisputed
that AriesOne did not require Miken to agree to be bound by any “obligations” to
MJR contained in the 2002 Settlement Agreement nor was the 2002 Settlement
Agreement referred to in the AriesOne-Miken Assignment.
Energy-MJR ORI Assignment (2002)
The one and only recorded assignment that refers to the any obligations
related to the 2002 Settlement Agreement is the 2002 Energy-MJR ORI
Assignment. CR 218-284, CR 284-346, App. 6. This assignment contains the
following relevant provisions:
• “ASSIGNOR [Energy] further hereby irrevocably consents to, allows and directs any and all current and future purchasers of production from these properties and leases to issue Division Orders to ASSIGNEE [MJR] or ASSIGNEE’s designee covering this overriding royalty interest and to pay
6 ASSIGNEE or ASSIGNEE’s designee directly for its royalty interest.” App. 6, page 1.
• “ASSIGNOR agrees that this obligation [direct payment] is a covenant running with the land and any transfer by ASSIGNOR, its successors or assigns must include this right of direct payment as well as all the accounting obligations set out in the Settlement and Release Agreement executed this date by ASSIGNEE and ASSIGNOR and any assignee or successor in interest must agree to be bound by the terms of the Settlement and Release Agreement as a condition precedent to the transfer of any of the Properties.” App. 6, page 1.
Several things are noteworthy about the Energy-MJR ORI Assignment: (a) it
assigns to MJR only a 7.5% ORI in the relevant Leases; (b) only the “direct
payment” obligation is referred to as a covenant running with the land, not any
other covenant; (c) any transfer must include the “direct payment” right, and “the
accounting obligations of the Settlement and Release Agreement executed this
date” by Energy and MJR; (d) “any assignee or successor in interest must agree to
be bound by the terms of the Settlement and Release Agreement,” not that “any
assignee is bound” by such agreement; and (e) the ROFR is not mentioned in the
assignment.
MJR and AriesOne both filed motions for summary judgment. The trial
court granted AriesOne’s motion and denied MJR’s motion, holding that the
ROFR was not binding on or enforceable against AriesOne. App. 1; App. 2. 4
4 The other defendants moved for and obtained similar summary judgments based on this ruling. All were combined into one final judgment. CR 2189-2191; App 4.
7 SUMMARY OF ARGUMENT
The ROFR contained in the unrecorded 2002 Settlement Agreement was a
covenant personal to the parties thereto, and did not run with the land. The Energy
2000 – MJR ORI assignment in 2002 did not create a new ROFR covenant running
with the land. The trial court correctly so held and its judgment should be
affirmed. In addition, the ROFR is an unreasonable restraint on alienation and
violates the Statute of Frauds, and the judgment may also be affirmed on these
grounds.
ARGUMENT
I. Standard of Review “When both sides move for summary judgment and the trial court grants one
motion and denies the other, the reviewing court should review both sides'
summary judgment evidence and determine all questions presented. The reviewing
court should render the judgment that the trial court should have rendered. When a
trial court's order granting summary judgment does not specify the grounds relied
upon, the reviewing court must affirm summary judgment if any of the summary
judgment grounds are meritorious.” FM Properties Operating Co. v. City of Austin,
22 S.W.3d 868, 872–73 (Tex. 2000) (internal citations omitted).
Here, the trial court did specify the grounds for granting AriesOne’s motion
and denying MJR’s motion: First, “The Court finds, as a matter of law, that the
Assignment [of overriding royalty from Energy 2000, Inc. to MJR, App. 6] does
8 not create a Right of First Refusal in favor of MJR covering the 18 leases in
question.” App. 2 at p. 3; CR 974 (emphasis by the court). Second, “The Court
finds, as a matter of law, that the ROFR was not intended to be a covenant running
with the land, does not meet the remaining requirements of a covenant running
with the land, and is not enforceable against Defendant, AriesOne.” Id. Since the
trial court held that the ROFR “is not enforceable” against AriesOne, this court
may affirm the judgment if any of the grounds on which AriesOne moved for
summary judgment to that affect are valid. Cincinnati Life Ins. Co. v. Cates, 927
S.W.2d 623, 625 (Tex. 1996) (“We conclude that the court of appeals should
consider all grounds that the trial court rules on and may consider grounds that the
trial court does not rule on in the interest of judicial economy.”) Those grounds
were (a) the ROFR covenant is not a covenant which runs with the working
interest in the Leases which AriesOne acquired in 2013; (b) the ROFR was an
unreasonable restraint on alienation; and (c) the ROFR violated the statute of
frauds. CR 631-642; CR 872-873.
II. The ROFR is not a covenant running with the land
The trial court correctly held that “the ROFR was not intended to be a
covenant running with the land, does not meet the remaining requirements of a
covenant running with the land.” App. 2 at p. 3; CR 974. The ROFR instead
created merely a personal covenant between Dickerson Parties/Ascend and MJR.
9 A. The ROFR must be strictly construed
Rights of first refusal are restraints on alienation of land and must be strictly
construed, and any doubts resolved in favor of the grantee and against the grantor.
“Covenants or restrictive clauses in instruments concerning real estate must be
construed strictly, favoring the grantee and against the grantor, and all doubts
should be resolved in favor of the free and unrestricted use of the premises.” Davis
v. Skipper, 125 Tex. 364, 370, 83 S.W.2d 318, 321 (1935), quoting from Settegast
v. Foley Bros. Dry Goods Co., 114 Tex. 452, 270 S.W. 1014, 1016 (1925)
(covenant “will not be enlarged by construction, but will be given effect according
to the plain meaning and intent of the language used”). Thus the clauses of the
2002 Settlement Agreement and the subsequent assignments must be read closely
and applied only so far as the language used will fairly allow. The language used
by the parties to the 2002 Settlement Agreement, as written, indicates only an
intention that the parties to it – and not their successors and assigns – would be
bound with respect to the ROFR covenant.
B. The Language the parties chose does not create a covenant running with the land.
1. Intent to Run
One of the requirements for a covenant to run with the land is that the parties
to it intended it to run. Inwood N. Homeowners' Ass'n, Inc. v. Harris, 736 S.W.2d
10 632, 635 (Tex. 1987). That intent is not present here. Nowhere in the 2002
Settlement Agreement is there any statement that any of its covenants “run with the
land.” Paragraph 3.e. of the 2002 Settlement Agreement (App. 5) provides:
The Dickerson Parties and Ascend shall advise MJR within ten business (10) days of any assignment, farmout, sale or transfer of any property, lease, or well in which MJR has any interest and shall give MJR a right of first refusal to purchase such interest upon the same terms as offered to the Dickerson Parties or Ascend by a bona fide third party. If MJR does not agree to purchase such interest within ten (10) days, the Dickerson Parties shall advise the new operator and/or transferee of MJR’s overriding royalty interest. As a condition precedent to the transfer, any transferee shall be required to agree to be bound by the obligations to MJR contained in this agreement as it pertains to any interest transferred and give MJR evidence of same.”
CR 50; App. 5 at ¶3.e. (Emphasis added.) This is the language the parties chose to
describe one of the “Continuing Obligations to Ryan Parties” (CR 47; App. 5 at ¶
3) that the Dickerson Parties and Ascend assumed under the 2002 Settlement
Agreement. It cannot be reasonably construed to make the ROFR run with the
land.
The other subparagraphs of paragraph 3 of that agreement required
“Dickerson Parties and Ascend” to provide books and records of Ascend relating
to its business activities and assets, development plans, filings with the IRS, SEC
and Texas Railroad Commission (CR 47; App. 5 at ¶3 preamble); required
“Dickerson Parties and Ascend” to facilitate direct payment of the overriding
royalty revenues to MJR, and provide notifications to purchasers regarding
11 division orders (CR 47-48; App. 5 at ¶ 3.a.); required “Dickerson Parties and
Ascend” to cooperate if purchasers refused to pay MJR directly, and to pay MJR’s
overriding royalty revenues within three business days of the receipt by “Dickerson
Parties and Ascend” (CR 48-49; App. 5 at ¶ 3.b.); required notifications to MJR
from “Dickerson Parties and Ascend” upon change of operator or purchaser
regarding direct payment of the overriding royalty to MJR (CR 48; App. 5 at ¶
3.c.); precluded “Dickerson Parties and Ascend” from abandoning wells or
releasing leases capable of production in paying quantities, and required
“Dickerson Parties and Ascend” to give notice to MJR of intent to plug any well
(CR 49-50; App. 5 at ¶ 3.d.); indemnified MJR and other Ryan Parties against
failure of “Dickerson Parties and Ascend” to report or inaccurately reporting
production to the Railroad Commission, and from any liabilities therefor (CR 51;
App. 5 at ¶ 3.f.); required “Dickerson Parties and Ascend” to provide to MJR maps
to well locations, and allow MJR and Ryan parties to enter upon any lease for
inspection of wells (CR 51-52; App. 5 at ¶ 3.g.); required “Dickerson Parties and
Ascend” to provide monthly accounting statements, filings with the Railroad
Commission, and revenue reports (paragraph 3.h.); and required “Dickerson
Parties and Ascend” not to take or fail to take any action in violation of state or
federal law or regulation of the Railroad Commission, SEC, or Texas Securities
Agency (paragraph 3.i.). None of the express “continuing obligations” of
12 “Dickerson Parties and Ascend” to MJR in paragraph 3 of the 2002 Settlement
Agreement contain any reference to “successors and assigns.” Paragraph 3.e.
mentions “transferee” only in connection with “the transfer” by Dickerson
Parties/Ascend.
In addition to the “continuing obligations to the Ryan Parties” in paragraph
3, the 2002 Settlement Agreement contained numerous other provisions requiring
actions by the parties, including extensive indemnification provisions (App. 5 at ¶
4) arising out of ownership or operation of the hundreds of “Properties” covered –
not limited to the eighteen Leases at issue here; mutual releases (App. 5 at ¶ 5);
disclosure (App. 5 at ¶ 6); cooperation in the event of MJR’s sale of the ORI (App.
5 at ¶ 7); and extensive representations and warranties (App. 5 at ¶ 8).
Appellant argues in this case only the ROFR contained in paragraph 3.e. is
binding on successors and assigns, but the logic of its position would be equally
applicable to ALL of the other “continuing obligations to Ryan Parties” to
successors, including providing books and records relating to business activities
and assets, development plans, filings with the IRS, SEC and Texas Railroad
Commission, and ALL of the other remaining paragraphs of the agreement,
including extensive indemnifications relating to other “Properties.” Clearly these
provisions resulted from the complex and contentious relationship that the 2002
13 Settlement Agreement resolved, but equally clearly they were meant to be personal
covenants of the parties to it.
2. Privity of Estate
Another essential required for a covenant to run with the land is “privity of
estate.” Inwood, 736 S.W.2d at 635. Privity of estate means that “there must be a
mutual or successive relationship to the same rights of property.” Westland Oil
Dev. Corp. v. Gulf Oil Corp., 637 S.W.2d 903, 910–11 (Tex. 1982).
For a covenant to run with the land, the covenant must be made between parties who are in privity of estate at the time the covenant was made, and must be contained in a grant of land or in a grant of some property interest in the land. Privity of estate between covenanting parties means a mutual or successive relationship exists to the same rights in property. A restrictive covenant is ordinarily enforceable only by the contracting parties and those in direct privity of estate with the contracting parties.
Wasson Interests, Ltd. v. Adams, 405 S.W.3d 971, 973 (Tex. App. – Tyler 2013, no
pet.)
The parties to the 2002 Settlement Agreement were not in privity of estate
when they entered into it. Ascend owned the Leases; neither Energy nor MJR
owned any interest in them. The subsequent assignment from Ascend to Energy
created privity of estate between them; but the Ascend-Energy Assignment did not
contain any covenants relating to the ROFR, MJR’s ORI, or the requirement that
any transferee “agree to be bound” by the 2002 Settlement Agreement. Nor did
14 any subsequent assignee of the Leases “agree to be bound” by the 2002 Settlement
Agreement.
MJR had no interest in the Leases at the time of the 2002 Settlement
Agreement. An agreement for the benefit of someone having no interest in the
land “will not be enforced against successive owners of real property as a covenant
running with the land. Land is an article of commerce. It should be subject to ready
sale and lease. To burden lands with personal covenants would be to hamper and
impede real estate transactions to the detriment of owners, purchasers and agents.”
Blasser v. Cass, 158 Tex. 560, 562, 314 S.W.2d 807, 809 (1958).
The Energy-MJR ORI Assignment created privity of estate between them;
but subsequent assignees of Energy are not in privity of estate with MJR. Privity
of estate requires more than a common source of title. Wasson, 405 S.W.3d at 974.
The Energy-MJR ORI Assignment was executed on May 5, 2002, effective May 1,
2002, at a time when Energy did not hold any title in the Leases. It was recorded
May 31 and June 3 in Rusk and Gregg Counties, respectively. While the Energy-
MJR ORI Assignment was recorded within minutes after the Ascend-Energy
Assignment, the Energy-MJR ORI Assignment does not contain the ROFR
requirement; it is only the unrecorded 2002 Settlement Agreement which contains
that requirement, and that agreement is not “a grant of the land or some interest
therein.”
15 In Newco Energy v. Energytec, Inc. (In re Energytec, Inc.), 739 F.3d 215,
223 (5th Cir. 2013), the Court held that the “horizontal” privity requirement was
satisfied because the covenant was contained in a conveyance from the covenantee
to the covenantor.5 That is not the case here.
3. The “In Esse” Requirement
A real covenant must relate to a thing in being. “Other necessary elements
of a real covenant, or one that runs with land, are that it must be contained in a
grant of the land or of some interest or estate therein and, where the assigns of the
grantee are not specified, it must be a thing in esse.” Panhandle & S. F. Ry. Co. v.
Wiggins, 161 S.W.2d 501, 505 (Tex. Civ. App. – Amarillo 1942, writ ref’d
w.o.m.). “[W]hen the covenant extends to a thing which is not in being at the time
of the demise made, it cannot be appurtenant or annexed to the thing which has no
being. If the covenant be to erect or set up a new house and the like, it will not
bind the assignees unless they be named in the covenant.” Gulf, C. & S.F. Ry. Co.
v. Smith, 72 Tex. 122, 124, 9 S.W. 865, 866 (1888). At the time of the 2002
Settlement Agreement, the MJR ORI was not then in existence; therefore there was
nothing to which the ROFR could be “appurtenant or annexed” and since the
clause in question named only “Dickerson Parties and Ascend” as obligated, it did
not run to their successors.
5 The Court questioned, but did not decide, whether “horizontal” privity was a requirement of Texas law of real covenants. Id. at 223.
16 While the Leases were in existence at the time of the 2002 Settlement
Agreement, the MJR ORI was not. Thus, Appellant’s reliance on Newco Energy v.
Energytec, Inc. (In re Energytec, Inc.), 739 F.3d 215, 223 (5th Cir. 2013) is
misplaced. MJR was the beneficiary of the ROFR and its only ownership interest
was the ORI.
The 2002 Settlement Agreement also fails the requirement that the covenant
“must be contained in a grant of the land or of some interest or estate therein.”
Panhandle, 161 S.W.2d at 505. The 2002 Settlement Agreement is not a grant of
land or any interest in land.
4. The “Touch or Concern” Requirement
A covenant touches and concerns the land when it affects the “nature,
quality or value of the thing demised, independently of collateral circumstances, or
if it affect[s] the mode of enjoying it.” Westland Oil Dev. Corp. v. Gulf Oil Corp.,
637 S.W.2d 903, 911 (Tex.1982). The ROFR provision affects MJR only and has
no direct impact on the land itself; it does not compel any successor to take any
action on the land or to refrain from doing anything on the land. It does not permit
MJR to enter upon or utilize the land for any purpose. It is therefore a personal
contractual arrangement which does not qualify as a covenant running with the
land. In re El Paso Refinery, LP, 302 F.3d 343, 356-357 (“Moreover, even when a
17 covenant impacts the value of land, it must still affect the owner's interest in the
property or its use in order to be a real covenant.”).
C. The Energy-MJR ORI Assignment did not transform the ROFR into a covenant running with the land
In the Energy-MJR ORI Assignment (App. 6), Energy agreed to cause
purchasers of oil and gas production to pay the proceeds directly to MJR, and
agreed that “this obligation” is a covenant running with the land and that “any
transfer by [Energy], its successors and assigns” must include “this right of direct
payment as well as all the accounting obligations set out in” the 2002 Settlement
Agreement. App. 6, at 1 (emphasis added). However, the final clause of the same
sentence stated that “any assignee or successor in interest must agree to be bound
by the terms of the [2002 Settlement Agreement].” Neither AriesOne nor any
other prior or subsequent transferee of the Leases ever “agreed to be bound” by the
2002 Settlement Agreement. For this reason, the Energy-MJR ORI Assignment
does not transform the ROFR into a covenant running with the land, as the trial
court correctly held.
The Energy-MJR ORI Assignment (App. 6) provides only that the “direct
payment” obligation is a covenant running with the land. Here, it is not the “direct
payment” obligation that is at issue, only the ROFR. The parties clearly knew how
to say that an obligation runs with the land, but did not do so with respect to the
18 ROFR. Instead, they required any assignee or successor to “agree to be bound.” If
the ROFR really was a covenant running with the land, express agreement by any
assignee or successor in interest would be unnecessary.
D. Paragraph 13 of the 2002 Settlement Agreement does not transform Paragraph 3.e. into a covenant running with the land.
Paragraph 13 of the 2002 Settlement Agreement (CR 57; App. 5, ¶ 13)
provides that it will be “binding upon and inure to the benefit of the parties, and all
of their respective assigns, successors, agents, servants, employees, insurers, and
legal representatives.” However, this general “successors and assigns” provisions
cannot be used to bootstrap the ROFR covenant in paragraph 3.e. into a covenant
running with the land. Such “broad and vague” language is not sufficient to make
specific and otherwise personal covenants “run with the land.” TBI Expl. v. Belco
Energy Corp., 220 F.3d 586, 2000 WL 960047 at (5th Cir. 2000, unpublished,
applying Colorado law). Unless the paragraph 3.e. ROFR itself is a covenant
running with the land, paragraph 13 cannot make it so.
E. Cases cited by Appellant are readily distinguishable
Clearly, not every ROFR is a covenant running with the land. The cases
cited by MJR do not so hold. Instead, the particular language used by the parties
always controls. Differences in the language of the particular agreements in those
cases make them readily distinguishable from this case.
19 In McMillan v. Dooley, 144 S.W.3d 159, 185 (Tex. App.—Eastland 2004,
pet. denied), the dispute was between the holder (Johnson) of a preferential right to
purchase contained in a farmout agreement, the other party to that agreement
(McDonald), and the latter’s assignee (McMillan et al). The language creating the
preferential right as quoted in the opinion is as follows:
It is further understood and agreed that we, for ourselves, our successors and assigns, reserve a preferential right to purchase the lease to be assigned herein, including any personal property which may be situated thereon. Before you, or your heirs, successors or assigns, shall (1) sell all or any portion of the lease to be assigned herein, (2) plug and abandon any wells on said lease, or (3) finally plug and abandon said lease, you shall first notify us, or our successors or assigns, in writing by registered mail. Such notification shall include the highest bona fide price offered, and we, or our successors or assigns, shall have ten (10) days after receipt of such written notification to purchase for the price offered and receive an assignment, or to reject such offer and allow same to be sold and/or abandoned. If we, or our successors or assigns, fail to act within ten (10) days after receipt of such written notice, then you, your heirs, successors or assigns, shall be free to sell and/or abandon. The above and foregoing preferential option to purchase shall not apply to hypothecation or mortgage of your assets.
144 S.W.3rd at 164 (emphasis added). The emphasized phrases clearly showed
that, unlike paragraph 3.e., the parties intended to bind their successors and assigns
to the covenant.
In an unpublished opinion of this court, MPH Production Co., Inc. v. Smith,
2012 WL 1813467 (Tex. App. – Texarkana 2012, no pet.) the language of the
“right of first refusal” contained in a recorded deed specifically stated that the right
20 of first refusal “shall be binding upon the Grantors, and their respective heirs and
assigns.” Id at *3. No such language appears in the 2002 Settlement Agreement.
In Musgrave v. Brookhaven Lake Prop. Owners Ass’n, 990 S.W.2nd 386
(Tex. App. – Texarkana 1999, pet. denied), the deed restrictions were recorded in
the deed records and expressly provided that they would be binding on the then
owners and their “heirs, grantees and assigns forever.” Id. at 391. Moreover, all
successive transfers of the property specifically referred to and incorporated the
restrictions. The court found that these provided sufficient evidence of the intent
that the covenants run with the land. Those facts, however, are not present here.
There is no statement of intent that the ROFR extend to and bind successors and
assigns, and none of the subsequent conveyances of the working interest in the
Leases were ever made “subject to” or even referred to the ROFR.
In Stone v. Tigner, 165 S.W.2d 124, 127 (Tex. Civ. App.—Galveston 1942,
writ ref’d), a five-year grazing lease granted the lessee (Tigner) a right of first
refusal or option to purchase if the lessor received an offer to purchase from a third
party during the term of the lease. About 18 months into the term of the lease, the
lessor received an offer to purchase from a third party (Stone), notified Tigner, and
Tigner attempted to exercise his option. The lessor and Stone concluded the sale,
and Tigner sued both of them for violating his option rights. The court,
unsurprisingly, held that the option was not cut off by the sale to Stone (who had
21 actual knowledge of the lease), that Stone was subject to the right of first refusal,
and that Stone was bound to convey the tracts to Tigner. In the present case, the
ROFR, if applicable, is of unlimited duration. Moreover, MJR waited 14 years to
sue to enforce it, allowing several intervening sales to occur without asserting it.
The reason that the 2002 Settlement Agreement requires that “any transferee
. . . agree to be bound by the obligations to MJR contained in this agreement” was
because the original parties knew that their successors would need to expressly
agree to be bound by the ROFR, if it was to be enforceable. Neither AriesOne nor
its predecessors GFP or Gaywood ever “agreed to be bound” by the ROFR
provision of the 2002 Settlement Agreement. The “agree to be bound” language is
mere surplusage if the ROFR is a covenant which runs with the land. See Heritage
Res., Inc. v. NationsBank, 939 S.W.2d 118, 123 (Tex. 1996) (“However, the
commonly accepted meaning of the ‘royalty’ and ‘market value at the well’ terms
renders the post-production clause in each lease surplusage as a matter of law.”)
III. The ROFR is an Unreasonable Restraint on Alienation
The ROFR, if applied to all successors and assigns, forever, is an
unreasonable restraint on alienation. This case is unlike Cherokee Water Co. v.
Forderhouse, 641 S.W.2d 522 (Tex. 1982), where the Grantee’s option to purchase
the Grantor’s reserved minerals, applied only to the parties to the Deed, and was
not unlimited in time. The unlimited duration of the ROFR is a major factor in the
22 consideration of this question. Procter v. Foxmeyer Drug Co., 884 S.W.2d 853,
862 (Tex. App. - Dallas 1994, no pet.)(fixed-price, unlimited-duration purchase
option is “an unreasonable restraint on alienation and is void as a matter of law”).
The ROFR in this case is unlike a preferential right to purchase found in many
model-form oil and gas joint operating agreements. In joint operating agreements,
[T]he preferential right to purchase serves two purposes. First, it assures its holder an opportunity to acquire further interests in the contract area. The holder's evaluation of the area may be greatly enhanced by initial development and may increase his interest in procuring a larger share. Moreover, there is some feeling that if any parties should have an opportunity to acquire an interest in the unit, it ought to be those that have been at risk in exploratory efforts which may have contributed to the development of the property. The second purpose for providing for this pre-emptive right is to ensure the parties retaining their interests in the contract area some degree of control in excluding undesirable participants who may not have the necessary financial ability to bear their share of expenditures or who might frustrate development with management and engineering philosophies which current participants oppose.
Gary B. Conine, Property Provisions of the Operating Agreement-Interpretation,
Validity, and Enforceability, 19 Tex. Tech L. Rev. 1263, 1317 (1988). In this
case, the ROFR serves neither of these purposes.
The application of the ROFR in this case, where AriesOne acquired and sold
numerous oil and gas leases and wells in addition to the eighteen Leases allegedly
subject to it, illustrates why it is an unreasonable restraint on alienation. AriesOne
purchased and sold the Leases as part of a “package sale” where only some of the
properties involved were allegedly subject to the ROFR. In such a situation, if
23 MJR were allowed to exercise its purported ROFR, how would it do so? Could it
elect to purchase only the eighteen Leases, or would it be required to purchase all
oil and gas leases and wells that were part of the package? Could it further elect to
purchase only the best and most profitable Leases (“cherry-picking”), or would it
have to purchase all of them? How would the purchase price be allocated among
the properties offered? Clearly the drafters of the ROFR, assuming they intended
it to apply to successors and assigns, made no provision for such matters. It is
precisely this uncertainty that makes this “a restraint sufficiently obnoxious to the
commercial development of oil and gas interests to be void under the Rule
[Against Restraints on Alienation].” Harry M. Reasoner, Preferential Purchase
Rights in Oil and Gas Instruments, 46 Tex. L. Rev. 57, 65 (1967). 6
Another unreasonable aspect of the ROFR is its capability of division among
a potentially unlimited number of holders. If the MJR ORI – to which Appellant
claims the ROFR is appurtenant – is divided among two, four or a hundred owners,
each of them would have to be located, tracked down and offered the opportunity
to purchase the Leases on the terms offered. The likely insurmountable difficulties
in doing so would make the Leases essentially unmarketable.
6 The author also argues that a preferential right to purchase of unlimited duration probably violates the Rule against Perpetuities, “since it gives its holder a conditional right to specific performance, it creates the possibility of the future vesting of an estate in land, which, if unlimited or merely limited to the duration of an oil and gas lease, could vest well beyond the period permitted by the Rule.” Id. at 66.
24 IV. Statute of Frauds
The same difficulties invoke the Statute of Frauds. The failure of the ROFR
provision “to provide an adequate formula for determining the terms for its
exercise” in a package sale renders it void under the Statute of Frauds. “[S]ound
draftsmanship requires that the manner of its application to a package oil and gas
transaction be specifically articulated in the preferential purchase right.” Id. at 60.
Such draftsmanship was not demonstrated in the case of this ROFR, and the
uncertainty of the language renders the ROFR unenforceable against AriesOne.
Prayer
AriesOne therefore prays that the trial court’s summary judgment rulings be
affirmed, that all costs be taxed against Appellant, and for all other relief to which
it is entitled.
Respectfully submitted,
/s/ Lee S. Gill Lee S. Gill State Bar No.07921360 gill@jonesgill.com
JONES GILL LLP 6363 Woodway Dr., Ste. 1100 Houston, Texas 77057 Tele: (713) 652-4068 Fax: (713) 651-0716
Attorneys for Appellee AriesOne, LP
25 CERTIFICATE OF COMPLIANCE WITH WORD LIMIT
This brief complies with the type-volume limitation of Tex. R. App. P. 9.4(i)(2) because it contains 6,254 words, excluding the parts of the brief that are excepted by Tex. R. App. P. 9.4(i)(l).
/s/ Lee S. Gill
26 CERTIFICATE OF SERVICE
I certify that on May 7, 2018, a copy of this Appellees' Brief was served on the following counsel of record via electronic means:
J. Stephen Barrick Michael E. Starr State Bar No. 00796168 State Bar No.19078400 sbarrick@hicks-thomas.com mstarr@ccfww.com John B. Thomas COGHLAN CROWSON, LLP State Bar No. 19856150 P.O. Box 2665 jthomas@hicks-thomas.com Longview, Texas 75606 HICKS THOMAS LLP 700 Louisiana Street, Suite 2000 Attorneys for Appellees GFP Texas, Houston, Texas 77002 Inc. and Miken Oil, Inc.
Attorneys for Appellant MJR Oil & Gas 2001 LLC
Thomas H. Brown State Bar No. 03175650 tombrown@tombrownlaw.com
LAW OFFICE OF THOMAS H. BROWN, PLLC 116 Kilgore Street Kilgore, Texas75662
Attorneys for Appellee SND Energy Company Inc.