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San Antonio, Texas – Commercial, Oil & Gas lawyer represented Appellees/Cross-Appellant with a oil & gas lease case.
The parties1 entered into three identical oil and gas leases containing an MFN clause in 2009. 2 These leases are known as the “A leases.” Article II of the A leases required EP Energy to pay $500 in bonuses per net mineral acre for the right to lease MSB’s real property. EP Energy acquired two additional leases—the “First Presbyterian” lease and the “Donaldson Brown” lease— triggering the MFN clause’s requirement to amend the A leases and pay additional bonus per net mineral acre. Once MSB learned EP Energy acquired the triggering leases, it demanded the opportunity to review them. EP Energy eventually provided the leases and tendered an amendment to the A leases reflecting increased bonuses but no increase in delay rentals. 3 The parties disagreed on amounts due for bonuses and delay rentals, and MSB filed suit for breach of the A leases, attorney’s fees, and expert fees. MSB moved for partial traditional summary judgment against EP Energy, arguing it breached the MFN clause by failing to amend the leases and pay higher bonuses and delay rentals. MSB sought damages and specific performance, requiring EP Energy to amend the A leases. EP Energy moved for traditional summary judgment on MSB’s claim, arguing the MFN clause’s plain language and surrounding circumstances established it did not breach the MFN clause because it 1 EP Energy’s predecessor El Paso E&P, Company, L.P. entered into the leases. 2 A most-favored-nations clause typically provides a lessee who pays higher royalties or bonuses per net mineral acre on nearby leases must match the higher royalties or bonuses under the subject lease. See Hooks v. Samson Lone Star, Ltd., 457 S.W.3d 52, 61 (Tex. 2015). 3 Delay rentals are “[a] periodic payment made by an oil-and-gas lessee to postpone exploration during the primary lease term.” See Rental, BLACK’S LAW DICTIONARY (11th ed. 2019), available at Westlaw. 04-19-00534-CV - 3 - tendered an amendment to the A leases and offered to true-up bonus payments. It further argued MSB was not entitled to specific performance. The trial court denied EP Energy’s motion and granted MSB summary judgment requiring EP Energy to amend the A leases and pay bonuses consistent with the difference between the original bonus and the bonus in the Donaldson Brown lease, which had higher bonuses than the First Presbyterian lease. The court also denied MSB’s summary judgment motion on delay rentals, concluding neither triggering lease provided for higher delay rentals. After the parties stipulated MSB’s damages under the court’s final judgment as $41,034,055 for all A leases, the trial court rendered final judgment for MSB, concluding EP Energy breached the MFN clause and ordered it to amend the A leases and pay the $41 million in unpaid bonus damages. EP Energy timely appealed. 4 STANDARD OF REVIEW “We review a summary judgment de novo.” Valores Corporativos, S.A. de C.V. v. McLane Co., 945 S.W.2d 160, 162 (Tex. App.—San Antonio 1997, writ denied). A de novo review means we review the record and determine “‘anew’ all grounds and issues raised by each timely filed motion and response.” TIMOTHY PATTON, SUMMARY JUDGMENTS IN TEXAS § 8.06 (3d ed. 2019). If the parties file competing summary judgment motions, and the trial court grants one motion and denies the other, then we review all the summary judgment evidence, determine all issues presented, and render the judgment the trial court should have rendered. See Trial v. Dragon, 593 S.W.3d 313, 317 (Tex. 2019); Comm’rs Court v. Agan, 940 S.W.2d 77, 81 (Tex. 1997). 4 MSB filed a timely notice of cross-appeal, stating its intent to appeal the trial court’s denial of delay rentals and its decision to grant EP Energy’s objection to and motion to strike/exclude some of MSB’s summary judgment evidence. However, MSB does not raise any issues seeking to alter the trial court’s judgment in its appellees’ brief and did not file a cross-appellants’ brief. We therefore dismiss the cross-appeal. 04-19-00534-CV - 4 - LEASE CONSTRUCTION Here, the parties agree as they did in the trial court that the MFN clause’s language is plain and unambiguous, but they dispute its meaning. We review lease construction questions de novo. Anadarko Petroleum Corp. v. Thompson, 94 S.W.3d 550, 554 (Tex. 2002). “In construing an unambiguous lease, our primary duty is to ascertain the parties’ intent as expressed within the lease’s four corners.” Id.; see, e.g., Piranha Partners v. Neuhoff, 596 S.W.3d 740, 743-44 (Tex. 2020); see also Plains Expl. & Prod. Co. v. Torch Energy Advisors Inc., 473 S.W.3d 296, 305 (Tex. 2015) (“Mere disagreement over the interpretation of an agreement does not necessarily render the contract ambiguous.”). We read all parts of the lease together, ensuring each provision is given effect and no provision is rendered meaningless, and we use the plain, grammatical meaning of the language in the lease unless doing so “would clearly defeat the parties’ intentions.” Anadarko, 94 S.W.3d at 554 (citing Fox v. Thoreson, 398 S.W.2d 88, 92 (Tex. 1966)); BarrowShaver Res. Co. v. Carrizo Oil & Gas, Inc., 590 S.W.3d 471, 479-80 (2019). A. The MFN Clause’s Plain Language The parties dispute the meaning of EP Energy’s obligations under this part of the MFN clause: If at any time during the existence of this lease, the lessee . . . acquires an Oil and Gas Lease on a portion of the leased premises with any . . . entity that owns a mineral interest in the leased premises on such terms that the . . . bonus . . . [is] greater than th[at] provided to be paid to lessor hereunder, lessee expressly stipulates, warrants, and agrees that it will execute an amendment to this lease, effective as of the date of the third party lease on the leased premises, to provide that the lessor hereunder shall receive thereafter the same percentage (per net mineral acre) . . . bonus . . . as any subsequent lessor of the leased premises to the extent that such . . . bonus . . . [is] greater than those provided to be paid herein. To the extent that the . . . bonus . . . in any subsequent lease [is] less than provided herein, lessor hereunder shall continue to receive the . . . bonus . . . as provided in this lease. . . . This Paragraph XXVI shall not apply to any lease or contract with a mineral owner that covers less than twenty (20) net mineral acres. (emphasis added) 04-19-00534-CV - 5 - The parties agree EP Energy: (1) acquired oil and gas leases subject to the MFN clause that provided a bonus “greater than those provided to be paid” to MSB, and (2) was required to “execute an amendment to [the A leases], effective as of the date of the third party lease on the leased premises, to provide that [MSB] shall receive thereafter the same percentage (per net mineral acre)” of bonus on the A leases. However, EP Energy argues it was only obligated to make payments beginning on the acquired lease’s effective date if there were bonuses it decided were payable from that date forward on acreage subject to the A leases. To illustrate, the Donaldson Brown lease had a September 25, 2013 effective date—five days before the end of the A leases’ primary term on September 30, 2013. Under EP Energy’s construction, the MFN clause required it to pay $4,700 per net mineral acre—the difference between $5,200 and the original $500 bonus in Article II—only for acreage it decided to pay bonuses on during those five days. Under MSB’s MFN clause reading, because the Donaldson Brown lease provided $5,200 per net mineral acre—the highest amount of the two triggering leases—MSB would be entitled to the same $4,700 bonus per net mineral acre for all acreage subject to the A leases as of September 25, 2013. The trial court agreed with MSB and construed the MFN clause to provide it was entitled to a $4,700 bonus per net mineral acre along with the amendment to the A leases effective as of September 25, 2013. We apply the plain, ordinary, and generally accepted meaning of the MFN clause’s disputed terms. See Barrow-Shaver, 590 S.W.3d at 480. The parties dispute the meaning of “effective.” Neither the clause nor any other provision in the A leases defines “effective.” Black’s Law Dictionary defines “effective” as “in operation at a given time.” Effective, BLACK’S LAW DICTIONARY (11th ed. 2019) available at Westlaw. The parties also dispute the meaning of “thereafter.” Not defined in the A leases, “thereafter” means “afterward” or “later.” Thereafter, 04-19-00534-CV - 6 - BLACK’S LAW DICTIONARY (11th ed. 2019) available at Westlaw; see, e.g., McMordie v. McMordie, 07-14-00393-CV, 2015 WL 4536614, at *3 (Tex. App.—Amarillo July 24, 2015, pet. denied) (mem. op.) (defining “thereafter” to mean “afterward”). 5 Substituting the definitions for the language, the MFN clause provides EP Energy is required to execute an amendment to the A leases, operative on the date EP Energy enters into a third-party lease, to provide to MSB afterward the same higher bonus per net mineral acre as it provided in a third-party lease. Applying this plain language, we construe the relevant provisions as requiring EP Energy to pay the same higher bonus per net mineral acre it paid in the Donaldson Brown lease. EP Energy’s reading of the MFN clause requires construing it in conflict with Article II, which provides an unqualified $500 bonus per net mineral acre. Once EP Energy acquired a lease subject to the MFN clause, under EP Energy’s reading, the clause divided bonuses into bonuses paid before triggering the clause and bonuses paid after triggering it. Bonuses paid before triggering the clause were entitled to Article II’s $500 bonus. Bonuses paid after triggering the clause were entitled to a higher bonus—equal to the difference between a greater bonus amount in a triggering lease and the original $500—if EP Energy concluded MSB was entitled to a bonus on such acreage. 6 We must harmonize and give effect to all provisions in the lease. See Coker v. Coker, 650 S.W.2d 391, 393 (Tex. 1983). The MFN clause requires EP Energy to amend the A leases to provide that MSB shall receive the same higher bonus per net mineral acre in the triggering lease and provide the same higher bonus per net mineral acre. Because Article II 5 Both parties cite to the definition of bonus in Griffith v. Taylor, providing a bonus is cash consideration paid or payable for the lease’s execution. 156 Tex. 1, 6 (1956); see Bonus, BLACK’S LAW DICTIONARY (11th ed. 2019) available at Westlaw (defining bonus as “payment that is made in addition to royalties and rent as an incentive for a lessor to sign an oil-and-gas lease”). 6 This reading also permits a scenario in which EP Energy could have elected to pay all bonuses prior to acquiring any lease triggering the MFN clause. Then, once it acquired the lease, it would not be obligated to pay any bonuses after acquiring a triggering lease because it had already paid them all. 04-19-00534-CV - 7 - provides for $500 bonuses per net mineral acre, the amendment required by the MFN clause is plainly an amendment of Article II. If the parties had intended to divide bonuses based on the MFN clause, as EP Energy reads it, the clause could have stated that plainly. However, the MFN clause includes no such language, and we cannot imply it. See Tenneco Inc. v. Enterprise Prods. Co., 925 S.W.2d 640, 646 (Tex.1996) (courts will not rewrite agreements to insert provisions parties could have included or to imply restraints for which they have not bargained); Yzaguirre v. KCS Res., Inc., 53 S.W.3d 368, 374 (Tex. 2001) (rejecting use of implied covenant to rewrite plain terms of agreement in order to provide benefit of bargain never made). EP Energy also argues the deferred payment addendum supports its argument the MFN clause should be read to limit higher bonuses to bonuses it elected to pay after the triggering lease’s effective date because the addendum permitted it to defer bonuses as late as 2013 while it cleared title on certain acreage. However, EP Energy concedes the addendum—which the parties signed two years after entering into the A leases—did little more than expressly recognize its practice of deferring bonus payments on certain acreage while it cleared title.7 This course of performance may not be used to alter the plain language of an unambiguous agreement. See Burlington Res. Oil & Gas Co. LP v. Tex. Crude Energy, LLC, 573 S.W.3d 198, 206 (Tex. 2019). Furthermore, EP Energy fails to identify any provision in the addendum amending the language used in the MFN clause or Article II. 8 When EP Energy and MSB intended to alter a provision’s meaning or limit its applicability, they intentionally set out to do so. See Tenneco, 925 S.W.2d at 646. For example, 7 The addendum applied to all of EP Energy’s leases with MSB, not just the A leases. 8 The dissent argues the addendum expressed an intent to amend Article II’s requirement to pay a bonus of $500 per net mineral acre upon execution, and therefore alters the generally accepted meaning of bonuses. Article II simply provides EP Energy will pay MSB “five hundred dollars ($500.00) per net mineral acre.” Moreover, bonuses are paid or payable for the lease’s execution. Griffith v. Taylor, 156 Tex. 1, 6 (1956). 04-19-00534-CV - 8 - the MFN clause plainly does “not apply to any lease or contract with a mineral owner that covers less than twenty (20) net mineral acres.” 1. Whether Effective and Thereafter Support a Prospective Lease Construction EP Energy further argues the terms “effective” and “thereafter” in the lease call for a “prospective” construction of the MFN clause, rather than the “retroactive” construction applied by the trial court. EP Energy contends the term “effective” establishes bonus payments must be prospective because a retroactive construction renders the requirement that the amendment be “effective as of the date of the third party lease” meaningless. In other words, the parties simply would have made the amendment “effective on the effective date” if they had intended to make the amendment retroactive to the A leases’ effective date. Contract terms must be interpreted in context. See URI, 543 S.W.3d at 764; Graham v. Prochaska, 429 S.W.3d 650, 660-61 (Tex. App.—San Antonio 2013, pet. denied). “Effective” is used in the MFN clause to provide that EP Energy “will execute an amendment to this lease, effective as of the date of the third party lease.” “Effective” therefore simply means the executed amendment is operative “as of the date of the third party lease.” EP Energy also argues the term “thereafter” supports its prospective reading of the MFN clause. Read in context, thereafter provides that after EP Energy executes the amendment, the lessor shall receive “the same” bonus “per net mineral acre.” See URI, 543 S.W.3d at 764. EP Energy further argues that if the parties had intended a “retroactive” interpretation, they would have used “theretofore” instead of thereafter because theretofore has a retroactive meaning used elsewhere in the A leases. The term theretofore is used only a couple of times in unrelated provisions, and its absence from the MFN clause hardly establishes the parties intended the entire MFN clause must mean the opposite of what theretofore means without considering the words the parties used in the clause. EP Energy cites Craig Sessions, M.D., P.A. v. TH Healthcare, Ltd. to 04-19-00534-CV - 9 - support its argument, but the Texarkana Court of Appeals was much more measured, explaining the frequent use of a term elsewhere in the agreement “would seem to show an intent to exclude” it from the provision at issue. 412 S.W.3d 738, 745 (Tex. App.—Texarkana 2013, no pet.). The plain language of the MFN clause requires no prospective or retroactive construction. It provides straightforward instructions: if the bonus amount is higher in a triggering lease, (1) execute an amendment to the A leases to provide the same bonus per net mineral acre as the triggering lease and (2) pay the same bonus per net mineral acre as the triggering lease. See URI, Inc. v. Kleberg Cty., 543 S.W.3d 755, 770 (Tex. 2018) (“Kleberg County bargained for a process [in the section at issue] . . . and it got just that.”). 2. Other Caselaw EP Energy argues its construction of the clause is similar to how other courts construed contract clauses prospectively. See Millennium Petrochemicals, Inc. v. Brown & Root Holdings, Inc., 390 F.3d 336, 338 (5th Cir. 2004); Lone Star Gas Co. v. Howard Corp., 556 S.W.2d 372, 374 (Tex. Civ. App.—Texarkana 1977), writ ref’d n.r.e., 568 S.W.2d 129 (Tex. 1978) (per curiam); BASF Corp. v. Lyondell Chem. Co., No. A-1119-07T2, 2010 WL 5288645, at *10 (N.J. Super. Ct. App. Div. Dec. 28, 2010) (per curiam). However, none of the cases required the lessor to amend the lease and provide the same higher bonus per net mineral acre. In Millennium Petrochemicals, the Fifth Circuit considered whether a May 1994 amendment to a contractual indemnity provision, providing it was effective beginning January 1, 1994, applied to a period before that date. 390 F.3d at 342. The “plain contract terms” dictated it did not apply prior to that date. Id.; see Sphere Drake, 121 F.3d 705, 1997 WL 450227, at *6 (5th Cir. 1997) (where parties entered into letter agreement more than one year after original agreement expired, court refused to recognize letter agreement extended original agreement because plain language established it terminated more than one year earlier). In 04-19-00534-CV - 10 - Howard, the parties litigated whether the gas at issue “was of like character and taken under substantially similar conditions” and stipulated to other dispositive facts. 556 S.W.2d at 374. BASF involved a most-favored nations clause for pricing on propylene oxide that included annual pricing adjustments, and the lessee conceded it violated the clause pricing requirements and owed a $22.5 million refund. No. A-1119-07T2, 2010 WL 5288645, at *1-8 (N.J. Super. Ct. App. Div. Dec. 28, 2010). 9 EP Energy cites Potts v. Chesapeake Exploration, L.L.C. as an example of a retroactive most-favored nations clause. 760 F.3d 470 (5th Cir. 2014). In Potts, the parties litigated whether the lease at issue permitted deducting post-production costs in calculating royalty payments; they did not litigate the meaning of the most-favored nations clause, which provided royalties or bonuses would be “retroactive to the effective date of the lease.” 760 F.3d at 472. By contrast, the MFN clause here eschews any prospective or retroactive language, and plainly amends the lease, makes the amendment effective on the date of the triggering lease, and requires the lessee to provide the same higher bonus per net mineral acre. B. Surrounding Circumstances EP Energy also argues any plain language construction allows us to consider the surrounding facts and circumstances, which support its argument that after it entered into triggering leases, it was only required to pay bonuses on acreage that it paid bonuses on from that point forward. Even if a lease is unambiguous as a matter of law, a court may still consider the facts and circumstances surrounding its execution to aid in construing it. Barrow-Shaver, 590 9 In Public Utility Commission of Texas v. General Telephone Co. of the Southwest, the court construed statutory language that the U.S. Supreme Court had already addressed the meaning of in a similarly worded Ohio statute. 777 S.W.2d 827, 830 (Tex. App.—Austin 1989) (emphasis added), writ dismissed (Feb. 21, 1990). The court in In re Sensitive Care, Inc. concluded the claimant waived its right to challenge the trustee’s compliance with certain insurance policy notice requirements. 256 B.R. 585, 588-89 (Bankr. N.D. Tex. 2000). 04-19-00534-CV - 11 - S.W.3d at 483. However, because the lease here is unambiguous, a court may not “delv[e] into the parties’ intent beyond what their agreement plainly yields,” and facts and circumstances cannot be used “to make the language in the agreement say what it unambiguously does not say,” “to show what the parties probably, or could have meant,” or to otherwise “add, alter, or change the contract’s agreed-to terms.” Id. at 485 (quoting URI, 543 S.W.3d at 770) (internal quotation marks omitted) (considering surrounding facts and circumstances that sophisticated oil and gas entities with experienced industry representatives negotiated arm’s-length transaction and provision at issue, which was part of bargained-for exchange); see, e.g., URI, 543 S.W.3d at 767-68. Although facts and circumstances vary from case to case, we may consider only objective facts and circumstances. URI, 543 S.W.3d at 769. These may include: (1) the commercial or other business setting in which the contract negotiation took place; (2) the parties’ sophistication; (3) trade custom and usage, as relevant; (4) facts attending the agreement’s execution if they do not transform the meaning of the unambiguous language; and (5) any other objective facts and circumstances that do not add to, alter, or contradict the agreement’s meaning. Id. at 768-69; see Barrow-Shaver, 590 S.W.3d at 483. The surrounding facts and circumstances show that during the Eagle Ford Shale boom in the late 2000s, the parties—a sophisticated energy company acquiring oil and gas leases and individual landowners owning property in La Salle County negotiated certain leases at arm’slength. See Barrow-Shaver, 590 S.W.3d at 478. The facts further show MSB may not have had clear title as to all acreage subject to the leases at the time the parties executed the leases. Nevertheless, the parties edited drafts of lease terms, including the MFN clause, and the resulting lease terms represented a bargained-for exchange. See Barrow-Shaver, 590 S.W.3d at 484 (unambiguous consent to assignment provision part of bargained-for exchange); URI, 543 S.W.3d at 770 (“Kleberg County bargained for a process in section 11.1(1)(ii), and it got just that.”). The 04-19-00534-CV - 12 - parties amended the leases to add an addendum recognizing EP Energy would pay bonuses on certain acreage later after it cleared title. However, the addendum did not amend bonus amounts in Section II or the MFN clause. EP Energy’s contention that its MFN clause reading is supported by the fact MSB may not have had clear title at the time the parties entered into the A leases would therefore require impermissibly adding to, altering, or contradicting the MFN clause’s unambiguous language. URI, 543 S.W.3d at 768-69; see Barrow-Shaver, 590 S.W.3d at 483. EP Energy argues lease drafts showing changes in redline should be treated as surrounding circumstances. The Texas Supreme Court foreclosed this argument in Barrow-Shaver, explaining “[e]vidence of prior or contemporaneous agreements is inadmissible as parol evidence when the contract is unambiguous.”10 Barrow-Shaver, 590 S.W.3d at 483 (“Here, evidence of the parties’ substantive negotiations directly relates to the creation of the parties’ unambiguous agreement. Therefore, the parol evidence rule bars consideration of evidence of the parties’ substantive negotiations of the consent-to-assign provision.”). Because the MFN clause’s plain language requires EP Energy to amend the A leases and pay the same higher bonuses per net mineral acre in an amount reflecting the higher bonus in the Donaldson Brown lease, the trial court properly granted summary judgment for MSB. C. Specific Performance EP Energy contends the trial court’s order impermissibly granted MSB’s request for specific performance, in addition to damages for its MFN clause breach, when it ordered EP 10 EP Energy also argues Piranha Partners v. Neuhoff supports its contention that the deferred payment addendum shows the parties intended the MFN clause to only pay bonuses to the extent it paid bonuses after a third-party lease’s effective date. 596 S.W.3d 740 (Tex. 2020). Piranha Partners held it was proper to consider documents governing a particular process—not redline drafts—but declined to consider those documents because the documents instructed it to “look solely to the [agreement] to determine” its meaning. Id. at 752. Even if the court had considered such documents, that would not be the same as considering redlined drafts or other evidence to make the plain language in the MFN clause say what it unambiguously does not say. See id. at 749 (explaining parol evidence rule prohibits relying on evidence to make language in agreement say what it unambiguously does not say); see also URI, 543 S.W.3d at 757-58. 04-19-00534-CV - 13 - Energy to provide MSB with a lease amendment. 11 Specific performance is an equitable remedy that may be awarded upon a showing of breach of contract if monetary damages would not be adequate. Maxey v. Maxey, 617 S.W.3d 207, 225–26 (Tex. App.—Houston [1st Dist.] 2020, no pet.). Specific performance may be granted only if there is no adequate remedy at law. See Knight Aerospace Prod., Inc. v. Gittinger, No. 04-07-00525-CV, 2008 WL 1733252, at *1 (Tex. App.— San Antonio Apr. 16, 2008, no pet.) (mem. op.) (citing Stafford v. Southern Vanity Magazine, Inc., 231 S.W.3d 530, 535 (Tex. App.—Dallas 2007, pet. denied)). MSB offered no evidence in support of its motion for summary judgment to establish that the monetary damages it sought, and was awarded, would not be an adequate remedy at law. Accordingly, MSB failed to conclusively establish it was entitled to specific performance, and the trial court erred in granting summary judgment as to that relief and ordering EP Energy to sign the lease amendment.
Outcome: The portion of the trial court’s judgment that orders EP Energy to sign the lease amendment is reversed, and judgment denying MSB’s request for specific performance is rendered. In all other respects the trial court’s judgment is affirmed.