i i i i i i



### MEM ORA ND UM OP INION No
. 04 -0 7- 00 77 8- CV TEXAS INDEPENDENT EXP LORATION, LT D. ,

Appellant
v . P EOPLES ENERGY P RODUCTION–TEXAS L.P. n/k/a Coronado Ene rg y

E& P Com pany , L .L .C., Appellee Fr om the 381st J udicial District Court, Starr County , Texas

Trial Court No. DC-03-385 Honora ble J ose L

uis Garza, Judge Pre siding Opinion by : Steven C. Hilbig, Just ice Sitt ing: Sandee B ry an Mar ion, J ustice

Steven C. Hilbig, Just ice Marialy n Ba rnar d, J ustice Deliver ed and F iled: Aug ust 31, 2009 AFF I RMED Pe op le s E ne rgy

Pr od uc tio n– Te xas L .P. n/k

/a Cor on a do En e rgy

E& P Com

pa ny , L .L .C. (“People s Energ y”) sue d T e xa s I n d e p e n d e nt E x ploration, L td. (“Te x as Independe nt”) for decla ratory judgme nt seekinga fa

vorable co nstruction of an a ssignment in an oil and g as lea se. Texas I nd ep en d en tco u n t er cl ai m eds ee k i n g i t s o wn d ec l ar at o ry j u d gm en t
. Bo t hp arties moved for summary judgme nt based on their interpre tations of the assig nment. The trial court g rante d Peoples Ener g y ’s04
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1 ... A “ f arm o ut agreem ent ” i s an ass i gnm ent b y a l ease o wner o f al l o r p art of t he l ease t o ano t her op erat o r who w a n ts to d rill o n the lea se . M engde n v . Peni ns ul a Pr od. Co. , 5 4 4 S .W .2 d 6 4 3 , 6 4 5 n.1 (T e x . 1 9 7 6 ); Exx onM obi l Cor p. v. Val enc e O

per a t i n g Co. , 17 4 S.W
. 3 d 30 3 , 31 3 (T ex. A p p . — H o ust o n [1st D i st
. ] 20 0 5 , pe t
. de ni ed ). T he p ri m ary ch ara cter is tic o f a fa r m o u t ag ree m en t i s t he assigne e’s ob l i ga t i o n to d ril l o ne o r m o re w ell s o n the a ssi gn ed l an d as a p re re q u isite to the c o m p le tio n o f t h e tra n sfe r. Id
.

- 2- motion and denied Te x as I ndepende nt’s motion. On appea l, Texas I ndepende nt contends the trial court e rre d in gr anting Peoples Ener g y ’s motion and denying i t s m o t i o n , arguing the trial court misconstrued the a ssignment. We af firm the trial c ourt’s judg ment. B ACKG ROUND I n 1 93 7, the F ir st N a tio na l B ank of Mis sio n co nv e y e d a 346 .6 7 ac re le a se (“ the L e a se ” ) t o Tom Vessels Jr. Vessels later a ssigne d t h e en t i re L ea se to Sun Oil Com pany . By 1995, Union Pacific O il & Ga s Company owned a n 80-ac re por

tion of the L ea s e, wh i ch beca me known as the Fa rmout L ease . I n 1995, Union Pacific assigne d the Farmout L ease to Texas I ndepende nt pursuant t o a d o cument entitled “F armout Ag ree ment.” 1 T e xa s I n d e p e n d e n t’ s in te r e s t w a s li mi te d to the

“ F arm out L and ,” wh ic h w a s d e fi ne d in se c tio n 1 .1 2 o f t

he F arm out A g re e me nt a s:

. . . t h o s e d ep t h s b el o w 6 , 6 0 0 fe et b el o w t h e s u rf ac e a n d o n e h u n dre d

fe et (1 0 0 ') below the total depth dr illed in the Earning Well . . . but excepts depths below eig ht thousand two hundred a

nd forty four ( 8,244' ) fe et TVD. Texas I ndepende nt, theref ore, w as per

mitted to drill only

below 6,660' and above 8,224' (“the interval” ). The F armout Ag ree ment also contained a n option ag ree ment, section 1.10.A, that re quired Texas I ndepende nt to offer Union Pacific, at cost, up to forty perc ent (40%) of an y i ntere st Texas I nd e pe nd e nt m ig ht s ub se qu e ntl y a c qu ir e in any po rt ion

of the L e a se , p ro po rt ion a te ly re du c e d to Un ion Pa c if ic ’s c ur re nt w or kin g int e re st. (1 CR6 9) : Should Farme e [Texas I ndepende nt] purcha se any royalty , overri d i n g roy alty , net profit or produc tion pa

y ment cover ing any portion of the Fir st Bank of Mission l ease ,04
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2 ... A n “o v e rr id ing ro ya lty inte re st” is a n o n -p a rtic ip a ting inte re st in a n o il a n d g a s l e a se . R i dg e O i l Co

. v. G ui nn I nvs . , I nc ., 1 4 8 S .W .3 d 1 4 3 , 1 5 5 (T e x . 2 0 0 4 ). A n o w n e r o f an o v e rr id ing ro ya lty “h a s n o rig h t an d thu s n o a b ili ty t o go o nt o t he un derl y i ng p r op er t y and dri l l o r o t her wi s e t ake ac t i on t o perpet uat e a l eas e. ” Id
. Rat her , s uch an owner is d e p e n d e n t o n the les se e to p re se rv e the lea se . Id
.

- 3- whether or not part of

the Fa rmout lease . .
. t h en Fa rm ee sha ll offer to Far mor [Union P acif

ic] the opportunity

to purcha se, at c ost, up to 4 0
. 0% of the a cquire d interest, propor

tionately reduc ed to Fa

rmor’s c urre nt working interest. Texas I ndepende nt subsequently lear ned Sun Oil had a r eser

ved intere s t i n the L ease , a 12.5%
ov erridin g ro y a lty

int e re st 2 in a ll th e o il , g a s , an d h y dr o c ar b o n s p r o d

u c e d f r o m a ll d e p ths on the entire 346.67- acr e L ease (“the Sun ORRI ”). On J uly 20, 1995, Texas I ndepende nt purcha sed the Sun ORRIfor $100,000. In acc ordanc e with sec tion 1.10.A of the F armout Ag ree ment, Texas Ind ep en d en to ff

er edUn i o nP ac i fi c t h e o p p o rt u n i t y t o p u rc h as e f

o rt y p er ce n to f t h e S u nOR R I, proportionately

reduc ed to its curre nt working interest. Union Pacif ic acc epted. I t is undisputed that
a tt h e t i m e o f t h e o f

f e r , U n i o n P a c i f

i c h e l d a “ c u r

r e n t w o r k i n g i n t e r e s t ” o f 3 9
. 5 4 3 %
. A c c o r d i n g l y, Union Pacific purcha sed a 1.97715% share of the Sun ORRI (40% x 12.5% x 39.543%), r esulting in a purc hase pr ice of

$15,817.20. B e c a us e Un ion

Pa c if ic ne ve r paid Te xas I

nd e pe nd e nt f

or the po rt ion

of the Sun ORRI it purcha sed, Texas Independe nt did not im m ed i at ely execute the a ssignment. How ever , Texas I nd e pe nd e n t t r e a t e d U n i o n P a c i f i c ’ s i n t e r e s t a s i f i t h a d b e e n a s s i g n e d b y c r e d i t i n g p ay m e nts to reduc e Union Pacif

ic’s unpaid sha

re of the purch as e pric e. De spite the absenc e of a written assig nment at the time of the of fer and ac cepta

nce, Union Pacific c onvey ed its in t er es t i n the Sun ORRIto Sierra by

“Assig nment, Bill of Convey ance ” date d November 15, 1996, and by

“Corre ction As sig nme nt, B ill of Sa le and Conve y anc e ” date d Ma rc h 20 , 19 97 , and e ff

e c tiv e July 1, 19 96 . By the time Texas I ndepende nt had rec eived full pay ment from Union Pacif

ic by deductingmoney

from pay ments d u e U n io nPa c if

ic p u r s u an t t o it s inte r e s t i nth e SunO RR I , U n io nPa c if ic h a d a lr e a dy04
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- 4- assig ned its interest to Sierra . Acc ording ly , on May 7 , 2000, Texas I ndepende nt executed an “Assig nment

of Ove rridingRoy alty

I ntere st” (“the Assignme nt”) dire ctly to Sierra. The Assignme nt is the pr ima

ry do c ume nt a

ro und whi ch the c ur

re nt c on tr ov e rs y

is c e nte re d. Sie rr a

su bs e qu e ntl y assig ned its interest in the S un ORRI to Peoples Energy via an a ssignment a nd bill of sale executed on April 26, 2001. Fr om 1995 to 2 0 0 0 , Texas I ndepende nt completed a numbe r of pr oducingwells in the interval a nd paid the holder

of the Sun ORRI– Union Pacific, S i er ra , o r P eoples Ene rg y – the 1.97715% intere st on all production. I n 2001, production wa s obtained fr om wells drilled below the int e rv a l. F or

tw o y e ars , Peo ple s Ene rgy wa s pai d the 1. 97 71 5% int e re st on this pr od uc tio n a s w e ll, and Te x as I n d epende nt executed division orders ac knowledg ing this. Howe ver, in 2003, Te x as I ndepende nt “discover ed” People s Energ y had been paid the 1.97715% interest fr om depths below the int e rv a l, a

nd se nt P e op le s E ne rgy

a pr op os e d “ Am e ndme nt o f A ssi g nme nt o f Ov e rr idi ngRoya lty I ntere st,” purportingto amend the Assig nment betwee n Texas I ndepende nt and Sierra by including the following restric tion: “I NSOFAR AN D ONLY I

NSOFAR a s to all such production produc ed from the subsurf

ace depths of 6, 600 fe et t o 8, 224 fee t.” In a letter enclose d with the proposed
ame ndme nt, Te xas I nd e pe nd e nt cl a ime d that whe n it so ld t he Sun ORRI to Unio n Pa c if

ic , th e sa le included only

an interes t i n m i n erals produce d in the interval, a nd Peoples Ener g y

had bee n “over paid” whe n it rece ived pay ment from produc tion from wells below the inter val. Texas I ndepende nt reque sted a re troac tive redistribution of pay ment. Peoples Ener g y

declined. I n October 2003, Peoples Energy filed a declar atory judgme nt action see king a decla ration that it owne d the 1.97715% interest in the Sun ORRI as to all production under the L ease without any reg ard to a depth restric tion. Texas I ndepende nt counter claimed and then fil ed par tial traditional04
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- 5- and no e vid e nc e mot ion s fo r summa ry jud g me nt se e kin g a de c lara tio n th a t Pe op le s E ne rgy ’s int e re st in the Sun ORRI was limited to the interval, Te x as I ndepende nt owns the Sun ORRI below the i n t erv al , a n d

T ex as I n d ep en d en ti s en t i t l edt o re co v er m o n i es wr o n gfu l l y

p ai d t o P eo p l es E n er gy fr om p ro du c tio n b e low

the int e rv a l. P e op le s E ne rgy fi le d a c ro ss- mot ion

fo r su mm ary

jud g me nt,
a r g u i n g t h a t a s a m a t t e r o f l aw t h e A s s i g n m e n t w a s u n a mb i g u o u s an d g a v e P e o p l e s E n e r g y a 1.97715% int er es t in the Sun ORRI to all depths, and the statute of fra ud prec luded the Te x as I ndepende nt’s interpre tation of the assig nment. The trial c ourt g rante d Peoples Ener g y ’s motion for
summa ry jud g me nt a

nd de nie d th os e fi le d by Te xas I nd e pe nd e nt. Te xas I nd e pe nd e nt p e rf e c te d th is appea l. S TA N D A R D O F REVIEW A n o e vid e nc e mot ion

fo r s umm ary

jud g me nt sho uld be g ra

nte d if the no n- mov ant f

a ils to prese nt more than a

scintilla of probati v e ev i d en ce to raise a g enuine issue of materia l fac t on the challeng ed ele ment. Tim

pteIn du s. v . G ish , 2 86 S.W. 3d 30 6, 31 0 ( Te x. 20 09 ); Ford Motor Co. v. Ridgway , 135 S.W .3d 598, 600 (Tex. 2004). A traditional motion for summary judgme nt is gra

nted
on ly wh e n th e mov ant e sta

bli sh e s th e re are no g e nu ine iss ue s o f m a te ri a l f a c t and it i s e nti tle d to judgme nt as a matter of la w. Mann Frankfort Stein &Lipp Advisors, Inc. v. Fielding , No. 07-0490, 2009 WL 1028051, at *3 (Te x . Apr. 17, 2009). An appellate court revie ws the g rant or denial of a mot ion fo r s umm ary

jud g me nt de novo
. Id. ; Te xa s Mun. Power Age ncy v . Pub. Util. Comm’n of Texas , 2 53 S.W. 3d

18 4, 19 2 ( Te x. 20 07 ). Th e de nia l of a mot ion fo r s umm ary jud g me nt i s g e ne ra lly not appea lable, but ca

n be re viewed on appea l when both par ties moved for summar

y judgme nt and the t rial cour

t gr anted one motion and denied the other
. Id
. I n such case s the appellate court re views
eac h summary judgme nt, deter mines all questions prese nted, and r ender s the judg ment the trial cour t04
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- 6- should have re ndere d. Id
. When the trial court’s order does not spe cify the g rounds for summary jud g me nt, the a

pp e llate c ourt

mus t a ff ir m th e summa

ry jud g me nt i f a

ny of the the or ie s p re se nte d to the trial cour

t and pre serve d for a

ppellate r eview a

re me ritorious. Pr ov ide nt L ifean d Ac c ide nt I ns . Co. v . Kn ott , 128 S.W .3d 211, 216 (Tex. 2003). I nterpre tation or construc tion of an unambig uous contra ct is a matter of law to be deter mined by the court. Coats v. Farmers Ins. Ex ch ., 230 S.W .3d 215, 217 (Tex. App.—Houston [14t h Dist.] 2006, no pet.). When the c ontroversy can be resolved by

proper construction of a

n unambig uous contra ct, summary

judgme nt is appropriate
. Id .; s ee a l s o Hack berry Cree k Country Club, Inc. v. Hack berry Cree k HomeOwners Ass’n , 205 S.W .3d 46, 56 (Tex. App.—Dallas 2006, pe t. denied) (c i t i n g Reilly v. Range rs Mgmt., Inc. , 727 S.W .2d 527, 529 (Tex. 1987)). Howe ver, if the contra ct is ambiguous, summary

judgme nt is im proper

beca use the intent of the pa

rties is a fa ct issue. Hack berry Cree k, 2 0 5 S
. W
. 3 d

at 5 6 (c i t i n g Coker v. Cok er , 65 0 S.W. 2d 39 1, 39 4 ( Te x. 19 83 ; Ha rri s
v . R owe , 593 S.W .2d 303, 306 (Tex. 1979)). A N A L Y SIS I n construinga wr itten contra ct, we must asc erta in and g ive effec t to the par ties’ intentions as expressed in the f

our cor ners o f t h e d o cument. Frost Nat’l Bank v. L & F Distribs., L td., 165 S.W. 3d 31 0, 31 1- 12 (T e x . 20 05 ) (p e r c ur iam) . We c on sid e r t he e nti re wr iti ngand

a tte mpt to ha rm on ize and

g ive e ff e c t to a ll the pr ov isi on s o f t he c on tr a c t by

ana ly zingthe pr ov isi on s w ith ref ere nce to the whole ag ree ment. Id . at 312. “N o s i n gl e provision taken a lone will be g iven
c on tr oll inge ff

e c t; r a the r, a ll the pr ov isi on s mu st b e c on sider e d w ithre fe re nc e to t he wh ole instrument.” J

.M . D av ids on , I

nc . v . W e bs te r, 128 S.W .3d 223, 229 (Tex. 2003)

. I f af ter the pe rtinent04
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- 7- ru le s o f c on str

uc tio n a re a pp lie d, a c on tr a c t c an b e g ive n a de fi nit e or

c e rt a in legal me anin g , it is unambig uous, and is construed as a matter of law. Frost Nat’l Bank, 165 S.W .3d at 312. Te xas I nd e pe nd e nt a

nd Pe op le s E ne rg

y a gr e e , a s d o w e , th a t th e As sig nme nt i s unambi g uo us . Acc ording ly , we will construe it as a matter of law and rende r the summary judgme nt the trial court should have re ndere d. See id. Texas I n d ep endent c ontends the Assig nment g ave Sier ra, a nd there fore Peoples Ener g y , a 1.97715% inter est in the Sun ORRI , but only from pro d u ct i on in the interval. Peoples c ontends the Assig nment was not re stricted to the interva l, claimin g instead the Assignme nt ga

ve Sierra a 1.99715% inter est in all p ro d u ct i o n under the entire L ease without any depth re striction. Pursuant to the Assignme nt, Texas I ndepende nt assigne d Sierra a 1.97715% over

riding roy alty interest in “100% of all the oil, g as, and other h y d roca rbons produc ed under ” the e ntire 346.67-ac re L ease . Thi s i s an ex tremely broad a nd seeming ly

unambig uous g rantingclause
. Be cause a dee d passes the g reatest estate possible unle ss the re a re c lear and unequivoc al exceptions
or re se r v a t i o n s , t h e A s s i g n m e n t w o u l d a p p e ar t o c o n v e y t o S i e r

r a an i n t e r e s t i n t h e S u n O RRI withou t any

depth re striction. Se e Te mp le ton v . D re iss , 961 S.W .2d 645, 657 (Tex. App.—San Antonio 1998, pet. denied) (holding deed will be construe d to confe r upon g rante e g reatest estate that terms of instrument will permit). This interpre tation is supported by the fa ct that neither

the orig inal 34 6. 67 -a c re L e a se fr om F ir st N a tio na l B ank of Mis sio n to Ve sse ls nor the 80 -a c re F arm out L e a se
ac qu i re d b y Un i o nP ac i fi c c o n t ai n eda d ep t h re s t ri ct i o n re l at i n g t o t h e S u n OR R I
. R at h er , t h e 6 , 6 0 0 '- 8,244' dep th

r e s tr ic ti o na

p p li e d o n ly to T e xa s I n d e p e n d e n t u

n d e r th e F ar mo u t A g r e e me n t f

o r the Fa rmout L ease (the 80-a cre lease from Union Pacif ic to Texas I ndepende nt).04
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- 8- Rely ing in pa

rt on Eland Energy, I

nc. v. R owden Oil & Gas, Inc
. , 9 1 4 S.W .2d 179 (Te x. Ap p. —Sa n A nto nio 19 95 , w ri t de nie d) , T e xas I nd e pe nd e nt c on te nd s the As sig nme nt c on ta ins a depth re stricti o n b eca

use the “ subject to” c lause in the Assig nment ref ere nces the Fa

rmout Ag ree ment, and whe n the documents a re r ead tog ether

the intere st in the Sun ORR Iis lim ited to the int e rv a l. T he “ su

bje c t to ” c la

us e in t he As sig nme nt s tate s, in p e rt ine nt p art : The intere st herein c onvey ed to Assig nee is subjec t to the terms and provis i ons co n t ai n ed in the L ease and all prior c ontrac ts pertainingthere to, including but not lim ite d to , th e fo llo wi ng : 1. That ce rtain F armout Ag ree ment dated Apr il 22, 1995 , betwee n Union Pacific O il and Gas Co m p any , et al[.] , as F armors a nd Texas I ndepende nt Ex ploration, Inc., as F arme e. Th e As sig nme nt is a lso ma de “ su bje c t to ” the a ssi g nme nt o f t he Sun ORRI to T e xas I

nd e pe nd e nt, and the a ssignment of

Union Pacific’ s proportionate sha re in the Sun ORRIto Sierra. Texas I ndependen tar gu es s ec t i o n1
. 1 0 A o f t h e F arm o u tAgr ee m en t , t o which the Assignment is s ub je c t, l imi ts Pe op le s E ne rgy ’s int e re st i n th e Sun ORRI to t he “ c ur re nt w or kin g int e re st” he ld by Union Pacific, which Texas I ndepende n t cl ai m s was limited to 1.97715% in the 6,600' -8,224' interval. Te x as Independe nt contends that to interpre t the Assignme nt in any other wa y ignor es the

“ su bje c t to ” langua g e , w hic h a pp lie d s e c tio n 1 .1 0A of

the F arm out A g re e me nt t o th e As sig nme nt. Ac c or din g to T e xas I

nd e pe nd e nt, but f

or se c tio n 1 .1 0A , n e ith e r Un ion Pa c if ic no r its su c c e sso rs in interest wo u ld h av e h a d an y r igh t to th e Sun O RR I , an d th e r e f o r e b y in s e rti n g th e “ s u

b je c t to” lang uag e in the Assig nment, the par ties inserted the “propor

tionate reduction” and “curr ent working interest” limitations into t he Assig nment. Countering Texas I ndepende nt’s argument, Peoples Ener g y contends reve rsal is not
war rante d beca

use: (1) Te x as I ndepende nt incorre ctly conclude s the “subjec t to’ clause ha s only one04
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- 9- possible construc ti o n , ( 2 ) T e xa s I n d epende nt’s relianc e on this court’s opinion in Eland is mispl ace d, (3) none of t h e following provides for a re levant depth r estriction – sec tion 1.10A of the F armout Ag ree ment, the term “ workinginterest,” or the S un ORRI chain of title, and (4) Texas I ndepende nt’s interpre tation of the Assig nment con fl i cts with ge nera l rules of c ontrac t construction. Peoples Energy conclude s the trial cour

t c orre ctly g rante d its motion for summary judgme nt beca

use a pr oper i nterpre tation of the Assig nment establishes it convey ed to Sierra a 1.97715% inter est, i.e., the “cur rent wor king inter est,” to the minera ls under the 346.67- acr e L ease without reg ard to de pth.

Cons truc tio n of

“Sub je c t T o” Cla use Texas I ndepende nt contends the trial court e rre d in gr anting summary judgme nt in favor of Peoples Ener g y

beca use t o d o so require d the cour t to ignore the “subjec t to” clause , there by rende ring it meaning less in violation of the rules of construction. See J .M. Dav idson, 128 S.W .3d
a t 22 9 ( ho ldi ng th at in asc e rt a ini ngtr ue int e nt o f p art ie s a s e xpre sse d in ins tr ume nt, c ourt

mus t consider e ntire writingin effor t to harmonize and give effe ct to all provisions so that none will be rende red me aning less). We disag ree . The phra se “subjec t to” is a limit ation of a g rant, de fining the nature , extent, and char acte r of the e state conve y ed. Cockrell v. Tex . Gulf Sulphur Co. , 157 Tex. 10, 16, 299 S.W .2d 672, 676 (1 95 6) ; Petro Pro, Ltd. v. Upland Res., Inc

. , 279 S.W. 3d 74 3, 75 0 (T e x. Ap p. —A mari llo 20 07 , p e ts. de nie d) . “ I t ne ith e r c on ve y s an inte re st t o th e a ssi g ne e , n or do e s it re se rv e or

re ta in a n inte res t in favor of the a ssignor .” Pe tro Pr o , 2 79 S.W. 3d a t 75 0; se e W

rig ht v . E .P . O

pe ra tin g Lt

d. P’ sh ip , 978 S.W .2d 684, 688 (Tex. A

pp.—Eastland 1998, pet. denied) (holding conveyance made no r eser vation
even where it was “subjec t to” prior rec orded rese rvation). Rather, it simply limit s the extent of the i n t er es t gr anted. Pe tro Pr o , 2 7 9 S. W. 3 d a t 7 5 0
. A s s u c h , it “ is a te r m o f qu a li f

ic a ti o n an d not of04
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3 ... Se e EOG Re s . , I

nc . v . Ki l l am O i l Co
. , 239 S. W
. 3d 293, 298 ( T ex . App.

— Sa n An t on i o 2007, pe t
. de n i ed) (h o ld ing c o u rt m a y c o n sid e r fa c ts a n d c irc u m sta n c e s su rr o u n d ing e x e c u tio n o f co n tra c t as c o n stru c tio n a id ).

- 10- contra ct[,] ” and “ [t ]here is nothing in the use of t he words ‘subject to,’ in their ordinary use, which would even hint at the c reation of aff irmative rig hts.” Kok

e rn ot v . Ca ldw e ll , 231 S.W .2d 528, 531 (T e x. Civ . App .—Da lla s 1 95 0, wr it r e f’ d) . T he pr inc ipa l f un c tio n o f a

“ su bje c t to ” c lause is t o protec t a g rantor a g ainst a bre ach o f wa rra nty claim. W

alk e r v . F os s , 9 3 0 S. W. 2 d

7 0 1 , 7 0 6 ( T e x. App.—San Antonio 1996, no writ). Conveying land “subjec t to” define d interests is mere ly a mea ns of providingnotice of outstandinginterests that m ay af fe ct a g rante e’s title. PY

R Energy Corp v. Samson Res. Co. , 4 7 0 F. S u p p . 2 d 7 0 9 , 7 1 7 (E
. D. T ex . 2 0 0 7 ) ( ci t i n g W right , 978 S.W .2d at 688). Her e, the summary judgme nt evidenc e esta blishes Texas I ndepende nt offer ed and sold the interest in the Sun ORRI to Union Pac ific by way of letters that never

mentioned a de pth restriction. Te xa s I n d e p e n d e n ts u

b s e qu e n t l y

a s s i g n e d t h e S u nO R R It o S i e r

r a w i t h o u tm e n t i o n i n g a

de pth restric tion. Si err a did not participate in the previous transac tion be tween Union Pacific a nd Texas I nd e pe nd e nt, and

Te xas I nd e pe nd e nt h a d n oth ingto d o w iththe tr ans a c tio n b e tw e e n U nio n Pa c if ic
and Sie rr a . T he re fo re , in

int e rp re tin g the As sig nme nt a nd its “ su bje c t to ” cla us e, the tr ia l c ourt , consideringthe fa cts and c ircumstance s surroundingthe execution of the Assig nment 3 , could have
con c lu d e d th e c la

u s e w a s inte n d e d me r e ly to ( 1 ) d o c u me n t th e c h a in o f ti tl e , ( 2 ) in s u la te Texas I nd e pe nd e nt f

ro m cla ims by Un ion Pa c if ic (o r its s uc c e sso rs ) t

hat T e xas I

nd e pe nd e nt h a d w ro ng fu lly
a ssi g ne d th e de e d to Sie rr a , a nd /or (3 ) i ns ulate Te xas I

nd e pe nd e nt f

ro m c la ims of

br e a c h o f w arr anty by Sierra. See W

right , 9 7 8 S. W. 2 d

at 688; W

alker , 930 S.W .2d at 706. Moreove r, the trial c ourt could have conclude d the “subjec t to” clause did not impos e the depth restric tion a pplicable to the Fa rmout L and, i.e., the 80 a cre s assig ned by Union Pacific to Te x as Independe nt under the F armout Ag ree ment, on other portions of the 346.67- acr e L ease . Finally , the trial cour t knew the “subjec t to”04
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- 11- clause could not be used to de scribe the land to which the Sun OR RIapplied nor to re strict it, and thus the parties must have intende d it to have another meani n g . See A very t v. Grande I nc. , 717 S.W .2d 891, 894-95 (Te x . 1986) (holding “subjec t to” clause does not limit land desc ription). Acc ording ly , g iven that the mea nings a nd eff ects of “subjec t to” clause s can va ry g iven the particula r circ umstances, Te x as Independe nt’s contention that the trial court nece ssarily ignor ed the “subjec t to” clause when it g rante d summary judgme nt in favor of

Peoples Ener g y

is incorre ct. Ela nd En e rg

y , I nc . v . Ro wde n Oi

l & G as , I nc . Texas I ndepende nt also contends the trial court e rre d in gr anting summary judgme nt in favor of Peoples Ene rg y

beca use it fa i led to follow this court’s dec ision in Eland . Acc ording to Texas I ndepende nt, Elan d is dir e c tly on po int and mand a te s th a t w e int e rp re t th e “ su bje c t to ” c la

us e to l imi t Peoples Energy ’s i ntere st in the S un ORRIto the interval. We have car efully revie wed Eland

and must ag ain disag ree with Texas I ndepende nt. First, Eland

is not a contrac t construction ca se. See91 4 S. W.2 d at 18 4- 88 . Rathe r, it d e a ls with issues relating to li mitations, st atute of f rauds, lac hes, estoppel, a

nd a non-a ssigna

bility clause
. Id. Second, re g ardingthe “subjec t to” clause , our discussion in Eland r e v o lv e d ar o u n d E land Energy ’s limitations claim, and we mere ly held the clause could not “ be ignor ed” and it ha d to “be assumed that the parties intended that it have mea ning.” Id
. a t 18 5. We a g re e wi th o ur state me nts in Eland , but its hol ding doe s not mandate the interpre tation of the “ subject to” c lause propose d by Texas I ndepende nt. I n Eland , the parties executed a far mout a g ree ment cover ing what was known a s the Perez L ease . Id
. at 182. Under

the ag ree ment, the fa

rmor agree d to assign the far mee “ 40 acr es in the for

m of a square as near ly as possible” around eac h producingwell completed by the fa rmee . Id . After04
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- 12- the fa rmee completed the first well under the agr eeme nt, he sugg ested to the farmor t hat i t would be easie r if the f

armor a ssigne d the entire Perez L ease to the far mee. Id
. I f t he farmee failed to de velop any portion of the lea se, he w ould later a ssign t h es e p o rt i ons back to the f armor. Id . T his
c on dit ion a l a ssi g nme nt state d it wa s “su bje c t to” the te rm s and

pr ov isi on s o f t

he fa rm out a g re e me nt, wh ic h in c lud e d a

c on tin uo us dr ill ingob lig a tio n a

nd pr ov ide d th e mann e r in whi c h o wn e rs hip c ou ld be ac quired. Id . Su

bs e qu e ntl y , E land

En e rgy , a

su c c e sso r- in- int e re st t o th e farm ee, atte mpt e d to
esca pe the r eassig nment provision, r efusing to r eassig n the undevelope d portions of the lease back to the far mor afte r drilling c ease d. Id. at 183. W hen Eland Ene rgy ref used to rea ssign the undevelope d land as re quired by the fa rmout ag ree ment, the fa

rmor and n u m er o u s succe ssors-ininterest to the fa

rmee filed suit to clear

title, arguing that pursuant to the fa rmout ag ree ment and the
c on dit ion a l a ssi g nme nt, El and En e rgy wa s re qu ir e d to re a ssi g n the un de ve lop e d por tio ns of the le a se back to the f

armor. Id. Eland Ener g y

claimed it did not have to re assig n the land to the fa rmor and
was e ntitled ownership of the unde veloped por ti o n s o f t h e lease bec ause, a mong othe r thing s, the far mor’s suit soug ht spe cific perf ormanc e to c onvey rea l pr operty and was barr ed by limit ations. Id. The trial c ourt found in favor of the f armor a n d t h e succ essors-in-inter est, and this court a ffirme d the judg ment. Id . at 181, 184. I n aff irming the trial court’ s judgme nt, this co u rt reje cted Ela nd Energy ’s statute of limit ations claim. I n our analy sis, we noted the “subject to” clause of the c onditional assignment wa s at the “cr ux ” of Eland Ener g y ’s limitations claim. Id
. at 185. We then held the f armout ag ree ment and the c onditional a ssignment had to be rea d toge ther or the “subjec t to” clause would be re ndere d meaning less. Id . We further held the clause could have but one meaning–that despite the
a ssi g nme nt of the e nti re Pe re z L e a se to the fa rm e e , the fa

rm e e c ou ld o nly

a c qu ir e e qu ita

ble tit le in04
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- 13- the lease by

ear ning it pursua

nt to the farmout ag ree ment, i.e., by d ri l l i n g p ro d u cing wells. Id. B e c a us e El and En e rgy did no t pr od uc e we lls on the pr op e rt

y a t issu e , it did no t a c qu ir e any e qu ita ble int e re st i n th at pro perty . A c c or din g ly , th e fa rm or ’s c la im c ou ld n ot b e c ha ra c te ri zed a s a sp e c if ic perf ormanc e ac tion to convey rea l property , Eland Ener g y had nothing to convey , and the f our-y ear statute of limitation did not apply
. Id . at 186. Our holding in Eland

require s only

that a “subje ct to” cla

u s e n o t b e i gnored or

rende red
me anin g le ss. Th e re is n o e vid e nc e the tr ial cou rt ig no re d th e c la us e sim ply be c a us e it f a ile d to
acc ept Texas I ndepende nt’s interpre tation of it. T h i s case and Eland

sh are c omm on a lit ie s o nly wi th r e g ard

to t he do c ume nts inv olv e d: a min e ra l le a se , a fa

rm out ag re e me nt, and an ass ig nme nt that is “ su bje c t to ” the fa

rm out a g re e me nt. I n a ll o the r r e sp e c ts t

he c a se s are dr a sti c a lly

dif fe re nt:

• Eland involved a conditional assig nment of a lea se made to modify the mecha

nics of a far mout a g ree ment. The prese nt c ase involved an unconditional assig nment of an O RRI in “1 00 % of the oil , g a s and oth e r hy dr oc arb on s” un de r a le a se in o rd e r t o satis fy an o pti on

a g re e me nt t

hat ha pp e ne d to be c on ta ine d in a fa rm out a g re e me nt.

• Eland conce rned a

conveyance of bare leg al title and re servation of equitable title. Her e, ther e wa s no dispute that full tit le passed. •I t was undisputed in Eland t h at t h e o ri gi n al co n t ra ct i n g p ar t i es i n t en d ed t o re as s i gn the undeve loped trac ts back to the far m o r. I n the pre sent ca se Texas I ndepende nt disputed the intent evidenc ed in the A s s i gn m en t to convey the Sun ORRI with no depth re striction. •Most importantly , the fa

rmout ag ree ment in Eland involved the same inter est in land as the assig nment made subject to it. In contra st, the Fa rmout Ag ree ment involved the 80 -ac re F armout L ease , while the Assig nment involved the Sun ORRI , which cover ed the e ntire 346.67-a cre L ease . Unlike Eland , even wh en the F armout Ag ree ment and the Assig nment are rea d toge ther, it does not nec essitate a f inding of a depth r estriction related to the Sun ORRI . The de pth restriction re lated only to the Fa rmout Ag ree ment betwee n Texas I ndepende nt and Union Pacif ic, and limited Te x as In de pe nd e nt’ s interest to the i nterva l. No such limitation is applicable to the Sun ORRI
.04
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- 14- Acc ording ly , our holding in Eland does not mandate a finding that the “subjec t to” clause ’s re fer ence to the Fa rmout Ag ree ment and other assig nments inserted a

depth with reg ard to the Sun ORRI
. Se c tio n 1. 10

A of the Far mout Ag re e ment Texas I ndepende nt places a g reat deal of r eli a

n c e o n s e c tion 1.10A of the F armout Ag ree ment to challeng e the summary judgme nt in favor of

Peoples Ener g y . As noted abov e, s ection 1.10A provides that if Te x as Independe nt purcha sed any roy alty or overriding roy alty interest in any portion of the 34 6. 67 -a c re L e a se (n ot jus t th e 80 -a c re le a se a ssi g ne d to it b y Un ion Pa c if ic ), Un ion

Pa c if ic ha d a n o pti on to p ur c ha se up to f

or ty pe rc e nt of the purc ha se d inte re st, pr op or tio na lly re du c e d to its
c ur re nt w or kin g int e re st. (2 CR5 41 ) T e xas I nd e pe nd e nt c la ims thi s is the so ur c e of the de pth restrict i o n t o which the Sun ORRIis subject. Texas I ndepende nt’s relianc e is misplaced f or two
rea sons: (1) sec tion 1.10A is nothing more than an option a g ree ment, and (2) Texas I ndepende nt’s interpre tation of section 1.10A would r ender meaning less the par

t of section 1.10A that g ives Union Pacific the option to purchase a ny interest Te x as Independe nt might purc hase on “ any portion ” of the 346.67-a cre L ease . Se c tio n 1 .1 0Ais me re ly an op tio n c on tr a c t that ha pp e ns to b e in a

fa rm out a g re e me nt. See Probus Props. v. Kirby , 200 S.W .3d 258, 261 (Tex. App.—Dallas 2006, pe t. denied) ( stating that in option to purchase pr operty , optioner off ers to sell property on stated terms for specific period of tim e , an d opti on e e ha s r ig ht t o a c c e pt o r d e c lin e ); see also R E S TA TE ME NT (S EC OND ) O F C ON TR AC TS § 25 (1981) ( stating option contra ct is promise meetingrequire ment for f ormation of contr act, but tha t li m i t s p r o m i s o r ’ s p o w e r t o r e v o k e o f

f e r )
. S e c t i o n1
. 1 0 A ’ s o n l y f u n c t i o n , b a s e d

o ni ts unambig uous lang uag e, is to obligate Texas I ndepende nt to offer a par t of an y i n t er est it might purcha se in the L ease to Union Pacific for purcha se. Onc e the option was e x erc ised, it no longe r04
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- 15- exis ted, unless and until Texas I ndepende nt purcha sed some other inte re s t in the lease . Rather, a binding, bilater al co n t rac t was for med and the pr evious relationship of Tex as Independe nt as optioner and U nion Pacific as optionee cease d, and a new relationship of gra ntor and gra

ntee a rose, requiringTexas I ndepende nt to ex ecute an instrument to convey the intere st p u rc h as ed t o Union Pacific. See, e.g., Pitman v. Sanditen , 626 S.W. 2d 49 6, 49 8 ( Te x. 19 81 ); Luc c ia v . R os s , 274 S.W .3d 140, 148-49 ( T ex . Ap p.—Houston [1s t Dist.] 2008, pet. denied) . Once the conve ying instrument
was e x ec u ted, in this case the A ssignment, a ll prior transac tions between Te x as Independe nt and Union Pacific a

nd its successors- in-interest to the Sun ORRIwer e mer g ed into the Assig nment, and all of the pa

rties’ rig hts rested solely

in the Assignme nt. See A lvarado v. Bolton , 749 S.W .2d 47, 48 (T e x. 19 88 ) ( ho ldi ngtha t w he re de e d is de live re d a nd a c c e pte d a s p e rf

or manc e of c on tr a c t to
c on ve y , c on tr a c t me rg e s in to d e e d a nd de e d a lon e de te rm ine pa rt ie s’ ri g hts ); GXG, Inc . v. Texac al Oil & Gas , 977 S.W .3d 403, 415 (Tex. A pp.—Corpus Christi 1998, pet. denied) (holding doctrine of “me rg er by

deed” operates to merg e all prior tr ansac tions between pa rties into deed)
. Her e, as a me re option contra ct, once the Assig nment was e x ecute d, the par ties’ rig hts in the S u n O R R I w a s c o n t r o l l e d b y t h e A s s i g n m e n t , an d

n o l o n g e r

h a d a s e p ar a t e e f

f e c t
. A c c o r d i n g l y, Section 1.10A ca

nnot supply

the depth re striction claimed by Texas I ndepende nt. Additionally , i f we we re to acce pt Texas I ndepende nt’s interpre tation that section 1.10A provided a

depth re striction with reg ard to the A ssignment of the Sun ORRI , it would r ender another po rt i o n o f s e c tio n 1 .1 0Ame anin g le ss a nd lim it U nio n Pa c if

ic ’s ri g hts un de r t

he F arm out A g re e me nt. Section 1.10A g ave Union Pacific a n option to purchase if

Texas I nd ep en d ent purchases “ any portion” of the 346.67- acr e L ease . I t is undisputed that but for the de pth restriction plac ed on Te x as I n d e p e n d e n t w it

hr e g ar d to th e F ar

mo u t L an d

( th e 8 0
- a c r e le a s e f

r o m Un io nPa c if

ic to T e xas04
- 07
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- 16- I nd e pe nd e nt) , th e re is no de pth re str ic tio n on the oth e r por tio ns of the L e a se . I f se c tio n 1.1 0Alim its the optionee to only

the interva l, the option to purchase r oy alties obtained by the optioner on “ any portion” of the L ease is render ed mea ningle ss. Such an interpre tation would be contra ry to the rules of construc tion. See J

.M. Dav idson , 128 S.W .3d at 229 (holding that in a scer taining tr ue intent of parties a s expressed i n instrument, court must consider e ntire writingin effor t to harmonize and g ive eff ect to all provisions so that none will be re ndere d meaning less). “W or kin g I nte re st” We al so re

je c t Texa s I nd e pe nd e nt’ s ar g ume nt that the us e of the te rm “ wo rk ingint e re st” in section 1.10A imposed a de pth restriction o n the Sun ORRI obtained by Union Pacific. Te x as I ndepende nt attempts to ascribe a meaningt o “w o rk i n g interest” that conflicts with definitions espoused by

other c ourts, as we ll as the parties’ use of it in this case.

“ [ A ] w o r k i n g i n t e r e s ti s g e n e r a l l y u n d e r s t o o d t o m e ana

m i n e r a l i n t e r e s tc r e a t e d b y a lease hold.” Broeschev. Jac obson , 218 S.W .3d 267, 272 (Tex. A pp.—Houston [14 t h Di s t
. ] 2007, pe t. d e nie d) ; see also Geody ne Energy Income Prod. P’ship I-E v. Newton Corp. , 161 S.W .3d 482, 486 n.10 (Tex. 2005) (describing “g ross working interest” as “pe rce ntag e shar e of a ll ex penses a nd
re ve nu e s . . . plu s any

ro y a lti e s a

ttr ibuta ble to t he wo rk ing int e re st. ” ). I t may a lso be us e d to de no te an intere st in mi nera l rig hts. Broesche , 21 8 S.W. 3d a t 27 3. Te xas I nd e pe nd e nt c ite s n o a

uth or ity fo r t he pr op os iti on that

the us e of

the te rm “ wo rk ingint e re st” in s e c tio n 1 .1 0Asu pp lie d a de pth restric tion to the roy alty

interest purc hased by

Union Pacific. Moreove r, the summary

judgme nt evidence ref

lects the pa

rties in this case use d “wo rking interest” to re fe r t o a perce ntag e of ownership. In section 4.3.5 of the F armout Ag ree ment, the parties a g ree d that if the F armout L ease cover ed less than the entire mineral e state desc ribed ther ein,04
- 07
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- 17- or i f UnionPa c if

ic ’ s “ w o r k in g inte r e s t” w a s le s s th ano n e h u n dr e d p e r c e n t, th e nan y

r e ta in e d or
reve rsionary

interest of U nion Pacific would be proportionat el y reduc ed. “Workinginterest” w as clea rly u s e d to r e f

e r to U n io n Pa c if

ic ’ s p e r c e n ta g e o f o w n e r s h ip
. A d d it io n a ll y , w h e nTexas I ndepende nt offer ed Union Pacif ic the Sun ORRI , as re quired by section 1.10A, Texas I ndepende nt descr ibed Union Pacific ’s workinginterest as 39.543% , n o t as a depth re striction. Also, the Assignme nt convey s a 1.97715% interest in the Sun ORRI , and this pe rce ntag e could only have be en calc ulated using the workinginterest as a perc entag e of ownership: 12.5% (the Sun ORRI purcha sed by Te xas I nd e pe nd e nt) mul tip lie d b y 40 % ( the pe rc e nta g e of int e re st Un ion Pa c if ic wa s e nti tle d to purc ha se ) m

ult ipl ie d b y 39 .5 43 % (Unio n Pa c if ic ’s wo rk ingint e re st) . T e xas I nd e pe nd e nt u se d th is exact calc ulation in its offe r letters to de termine Union P acif ic’s pro rata sha

re of the purc hase pr ice, confirmingthe par

ties use of “wor

king” interest as a perce ntag e of owner ship, not a depth re striction. I f Texas I ndepende nt is co rr ect that “ workinginterest” c onnotes a de pth restriction, the calc ulation set forth above would b e d i ff erent. Texas I ndepende nt paid $100,000 for a 12.5%
overr iding roy alty interest in a ll the mineral produce d from all depths in the entire 346.67- acr e L ease . When Texas I ndepende nt offer ed the Sun ORRI to Union Pacific a s require d, it did not apportion the purc ha se pr ic e to a c c ount fo r a de pth re str ic tio n. As Pe op le s E ne rgy po int s o ut, if

Un ion Pa c if ic purch as ed t h e S un ORRIwith a depth re striction, the purcha se price should have be en re duced; howeve r, Texas Independe nt sought pa y ment based on the $100,000 it paid for the non- restric ted interest. Finally , the summary judgme nt r ecor d includes a division order, date d 2001, which wa s after Texas I ndepende nt executed the Assig nment and tw o we lls had been dr illed to more than 8,244'
. I f T e xas I nd e pe nd e nt’ s in te rp re tatio n o f w o r k ingint e re st w e re c or

re c t, t he 20 01 div isi on

or de r w ou ld04
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- 18- show Texas I ndepende nt as the owner of a 12.5 overr iding roy alty interest in the t wo wells drilled below 8,224'
. Ho wever, the division order r efle cts Texas I ndepende nt owns a 10.522850%
overr iding r oy alty

interest (the orig inal 12.5% purc hased f rom Sun less the 1.97715% purc hased by Union Pacific and later assigne d to Sierra) . (2CR608) Texas I ndepende nt confirmed this division
or de r a nd sig ne d it, sig na lin g its re c og nit ion that “w or kin g int e re st” me an pe rc e nta g e of ow ne rs hip unrelated to depth. Acc ording ly , Texas I ndepende nt’s attempt to impose a depth re s t ri ct ion throug h the term “wor king inter est” i s an i m proper interpre tation of the term a ccor ding to the la w as we ll as the summary judgme nt evidence
. Rul es of Constru ction I n additi o n t o violating ba sic rules of c onstruction by rende ring meaning less a portion of section 1.10A a s discussed above , Texas I ndepende nt’s interpre tation of t he Assig nment – the “subjec t to” clause , section 1.10A, and the term “wor king interest” – violates the rule of construction that g rants are to be liber ally construed in f

avor of the g rante e, and e x ceptions strictly construed ag ainst the gra

ntor. Bake r v. He nderson , 1 37 Te x. 26 6, 27 6, 15 3 S. W.2 d 4 65 , 4 70 (1 94 1) ; Cha mb e rs v. Huggins , 709 S.W .2d 219, 221 (Tex. App.—Houston [14t h Dist.] 1986, no writ). I t also ignor es the basic r

ule that re servations and exceptions in gra nts must be cl ea r an d specific ; courts do not favor rese rvations by

implication. Sharp v. Fowler , 151 Tex. 490, 494, 252 S .W.2d 153, 154 (1952); Derwen Res., LLC

v. Carrizo Oil & Gas, Inc
. , N o . 0 9
- 0 7
- 0 0 5 9 7
- CV , 2 0 0 8 WL 6 1 4 1 5 9 7 , a t * 6 ( T e x. App.—B eaumont May

21, 2009, pet. filed) ( mem. op.). To properl y m ak e a reservation or exception, it shoul d be mentioned in the g rantingclause and fully set out therea fter. Derwen , 2008 WL 6141597, at *6 (c iting 55 T EX . J UR .3 D Oi l an d G as § 65 (2004))
. Her e, Texas I ndepende nt was04
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- 00 77 8- CV

4 ... G i ven o ur di spo si t i o n, we need not ad d res s P eo p l es E nergy ’ s al t ernat e co nt ent i o n that the st at ut e o f f raud p re c lud e s T e x a s In d e p e n d e n t’s i n te rp re ta tio n o f t h e A ssig n m e n t.

- 19- c le arl y c a pa ble of lim iti ngUn ion

Pa c if ic ’s int e re st i n the Sun

ORRI to t he 6, 60 0' -8 ,2 24 ' int e rv a l if that ha d be e n its int e nti on . De pth re str ic tio ns are no t no ve l in the oil and

g a s in du str

y . F ina lly , to adopt Texas I ndepende nt’s interpre tation would be to allow Tex as I ndepende nt’s curr ent, subjective intent to control over the intent a s expressed in the Assig nment, which is impermissible. Se e Fr os t Nat’l Bank , 165 S.W .3d at 311-12 (in c onstruing a written contra ct cour

ts must give ef

fec t to intent as expressed in four

corne rs of doc ument).

C ONCL US I ON We hold the Assi g nment, even when conside red w ith the Far mout Agr eeme nt, is capable of but one interpre tation: that Union Pacific, pursuant to section 1.10A, purcha sed a pe rce ntag e of the Sun ORRI , pro po rt ion a te ly

re du c e d, wi tho ut r e g ard to d e pth . T e xas I

nd e pe nd e nt’ s atte mpt

to transfe r the de pth restriction imposed on it under the F armout Ag ree ment to the subsequent Sun ORRI by wa y of the “ su bje c t to ” c la

us e , s e c tio n 1 .1 0A , o r t he te rm “ wo rk ingint e re st” is incong ruous. The only depth re striction in this case arose in the Fa rmout Ag ree ment betwee n Union Pacific a nd Texas I ndepende nt. That depth restric tion limit ed Tex as I ndepende nt’s interest in t he F arm out L and

to t he 6, 60 0' -8 ,2 24 ' int e rv a l. Th e Sun ORRI , o n th e oth e r h and , e nti tle d it s o wn e r t o
an o v e r r id in g r o y a lt

y inte r e s t in a ll th e mi n e r a ls p r o d u c e d f r o m a ll d e p th s in th e entire L ease . Ac c or din g ly , w e ov e rr

ule Te xas I

nd e pe nd e nt’ s is su e s a

nd a ff ir m th e tr ia l c ourt ’s jud g me nt. 4
Steven C. Hilbig, Just ice