NO. 07-05-0135-CV IN THE COURT OF APPEALS FOR THE SEVENTH DISTRICT OF TE XAS

AT AMARILLO PANEL A MAY 18, 2006

______________________________ FIRST PERMIAN, L.L.C. AND ENERGEN RESOURCES COMPANY, APP ELLANTS V. JAMES P. GRAHAM, APPELLEE

_________________________________ FROM THE 286 TH DISTRICT COURT OF COCHRAN COUNTY ; NO. 02-12 -3789; HO NORABLE HAROLD PHELAN, JUDGE

_______________________________ Before REAVIS and CAMPBELL and H ANCOCK, JJ.
OPINION Appella nts, First Permian, L.L.C., and Energen Resources Company , appeal the trial
c ourt’s entr

y of judgment nothwithstanding the verdict in favor of appelle e, James P. Graham. Wereverse a nd rende r.2 Factual Background
In 1963, J. Frank Grah am, Sr., J. Fra nk Graham, Jr., Robert S. Graham, Betty Jo Graham Finn, and Mary Jane Graham Robertson (Grahams) assigned 100 percent of their interest in certain oil and gas leases located in Cochran County, Tex as to Pan American Pe troleum Corporat ion (Pan American ). The as signment provide d for an i mme diat e payment of $100,000 by P an American to the Grahams, the receipt of which was acknowledged. Additional terms of th e assign ment, whi ch are important to the discussion herein include:

• Paragraph 2-Reserved to the Grahams a production payment of $400,000 plus 51⁄2 percent interest per annum, calculated monthly on the decreasing balance.

• Paragraph 2(f)-Upon full payment of the productio n payment reserved to the Grahams, the interest reserved was to cease and termi nate and , ipso facto, vest in Pan American.

• Paragraph 5-Subject to the rights previously reser ve d in the assignment, the reservation to the Gra hams of a preferent ial righ t to match any bonafide offe r t o purchase the leases accepted by Pan American.

• Paragraph 9-Terms of the assignment bound the heirs, successors or assignees of both the Grahams and Pan American.
In 1967, the leases involved herein were unitized as par t of the Whit eface unit. The Grahams ratified the formation of the unit. The production payment called for in paragraph 2 of the a ssignmen t was pai d out in 1975. Subsequently, there were a series of assignments of the interest initiall y held by Pan American. Ultimately, First Permian, L.L.C. (First Permian), obtained the interests. Notice of each of these assignments was given to the Grahams pursuant to the preferential right3

they retained in Paragraph 5 of the original assignment. First Pe rmi an offere d its ass ets for sale to prospective bidders in 2002. The assets contained the leases o riginallyheld by the Gra ha ms. Notices were sent to all holders of preferential rights in all of the First Permian’s assets, including the Grahams. Appellee, James P. Graham (James), is the son of Robert S. Graham. After receiving First Permian’s notice of proposed sa le of the leases, James sent a letter to First Permian on April 2, 2002, informing First Permian that hewas considering exercising his preferential right, but needed a dditional inf ormation from First Permian. Ultimately, the bid of Energe n Resour ces Compa ny (Energ en) was d etermined to be the winning bid. Energen’s purchase of First Permian’s assets was completed on April 8, 2002. On April 10, 2002, Energen’s title attorney sent a letter to James advising him that he had conc luded th at the pre ferential right he ld by theGrahams , resulting from the assignmentof 1963, had expired with thefinal payout of the production payment in 1975. On this bas is the le tter purpo rted to re voke any notice of preferen tial ri gh t to purchase previous ly sent to

him. Jam es then fi led thislawsuit

.

Procedural Background
James filed suit against bot h First Permian and Energen. As to First Permian, James alleged breach of contract, specifically allegin g thatFirst Permian failed to abide by the terms of the preferential right paragraph of the 1963 assignment. As to Ener gen , James alle ged t hat they tortiously-interfered with James’s preferential right and were, therefore, liable for damages. James requested relief by speci fic p erform ance enforcing4

his preferential right to purchase the leases involved a nd for damages for the oil removed from the l ease properties since the sale to Energen. First Permian and Energen counterclaimed s eeking a decla ratory ju dgment tha t the Graha ms’ prefer ential right exp ire d when the production payment was paid out. First Permian and Ener gen also moved for summary

judgment claiming that the preferential right ceased, as a matter of law, when the producti on paymen t was comp leted. T he trial court den ied the m otion.
The case proceeded to trial. At the close of

James’s case in c hief, thetrial co urt granted Energen’s directed verdict as to James’s tortious-interference claim. At the close of trial, the jury answered all submitted fact questions adverse to James. James filed a moti on for ju dgment notwithstanding the verdict alleging, that as a matter of l aw, First Permian had breached the prefe rential r ight prov ision of the assi gnment. The tria l court granted James’s motion and entered judgment against both First Permian and Energen, ordering that they convey the leas es in qu estion to James. F urther, the court ordered that James rec ove r the profits realized from the property since the sale to Energen, p re and post judgment interest, attorneys fees and cost of court. It is from this judgment that First Permian a nd Energ en appea l.
First Permian and Energen present five issues on appeal. Four of the five dea l with the preferential right contained in paragr aph 5 of t he 1963 assignment. The fifth issue deals with theaward of damages and equitable relief, against Ene rgen, after the directed verdict against James on his tortious-interference claim. The first issue, as presented by First Permian an d Energe n in thei r motionsfor summar y judgmen t and dir

ected ver

dict, claims thatthe preferential right involved herein was a covenant that ran with the land and,5

as such, the right terminated when the Grahams’ interest in the lan d ceased. We agree with First Permian and Energen and, therefore, will reverse.
Preferent ial Rig hts
Al l parties to this appeal agree that the 1963 assi gnment of the Grahams’ lease interest contained a preferential right for the Grahams’ to match any bona fide offer that the assignee, Pan Ameri can, acce pted. Th e assign ment also identifi ed th e notification require d to be given to the Grahams. Likewise, all parties to this appeal agree that the preferential ri ght created by the assignment is in the nature of a coven ant that runs with the land. Additionally, all parties agree that the assignment provided for a production payment to the Grahams until th e sum of $ 400,000 plus interest, at the ra te of fiveand one -half (5 1⁄2 ) percent per annu m on the u npaid ba lance, was fully paid. Finally, there is no disagreement that t he 1963 assignment contained a paragraph making the terms of the assign ment binding upon and inuring to the benefit of the respective heirs, successors, and assigns of both the assi gnor and assigne e. The disagreement is about the proper interpretation to be given th ese respe ctive par agraphs i n the 196 3 assign ment.
James points out that paragraph 5, the preferential right paragraph, does not contain any provision terminating the preferential right upon completion of the production payment. Further James argues that paragraph 2, the production payment paragraph, contains n o clause specifi cally co nnecting the prefe rential r ight and the producti on paymen t. Additionally, James points to the fact that the assignment con tains, in Parag raph 9, a provision that the obligations and rights created by the assignment w ould be binding on and6

inure to the benefit of the heirs, survivor s, and as signees of either party to the as signment

. I nterpret ing these provisions together, James contends that the preferential right is a separateand independent covenant that was not terminated by payout of the production payment.
Our first task is to construe the contract in light of the recor

d before us. An appe llate court reviews a trial court’s co nstructio n of a contract de novo. Security Savings Ass’n v. Clifton , 755 S.W.2d 925, 931 (Tex .App.–Da llas 198 8, no wri t). A cou rt must in terpret a contract based upon the true inte ntions o f the part ies. SAS Institute, Inc. v. Breitenfeld , 167 S.W.3d 840, 841 (Tex. 2005). No single p rovision taken alone will be given co ntr olling effect; rather, a ll provi sions mus t be cons idered w ith reference to the wh ole inst rument. Id

. Applying our rules for

construction of a contract to the facts before us, the following becomes c lear:
1. The total purch ase price of the Grahams’ leases was $500,000, of wh ich $100,000 was paid at the time of the assignment’s execution; 2. The balance of the cost of the leases, $4 00,000 was fin anc ed at therate of five and one-half (5 1⁄2 ) percent per annum on the unpaid balance; 3. The production payment was to pay for the financed portion of the purchase price of the leases; 4. When th e $400,000 plus interest was paid, the interest reserved b y the Grahams would terminate and the same would vest in P an American. Considering the assignment as a whole and givin g effect to all of its p rovisions, the interpretation urged by James must be rejected. Rather than creating an independent preferential right for

the Graha ms’ heirs , success ors , and assig ns to enjoy forever, the7

preferential right was intended to exist only so long as necessary to protect the interest of the Grahams, their heirs, successors, or assigns in the full payment for theleases . This is the onl y construc tion that gives fu ll meani ng to all of the pr ovision s of the a ssignmen t. Id

. Having determined that the preferential right was tied to the production payment, the next issue becomes what effect the completion of the production payment would have on the preferential righ t accordi ng to theassignme nt. To un derstand this the nature of a preferential rightmust be ascertained. All parties agree that the preferential right invol ved in this cas e is a re al coven ant. As such the preferential “right runs with land” i f ittouches and concerns the land; relates to a thing in exi stence or specifically binds the parties and their assigns; is int e nded by the original parties to run with the land; and when the
successor

to the bu rden has notice. Inwood N orth Homeowners Ass’n, Inc. v. Harris , 736 S.W.2d 632, 635 (Tex. 1987). By contrast, personal covenants bind only the actual parties to the c ovenant and those who purchase the land w ith notice of the restrictive coven ant , if the restricti ons conc ern land or its us e. Tarrant A ppraisal Dist. v. Colonia l Country Club , 767 S.W.2 d 230, 23 5 (Tex.A pp.–Fort Worth 198 9, writ de nied).
As a real covenant, the preferential r ight is subject to Texas law governing real covenants. First, a real covenant endures only so lon g as the interest in land to which it is appende d. Talley v. Howsley , 170 S.W.2d 240, 243 (Tex.Civ.App.–Eastland 1943), aff’d , 176 S.W.2d 158 (T ex. 1943). Second, a real covenant can only beenforced by the ow ners of the land the covenan t was intended tobenefit. Davis v. Skipper , 125 Tex. 369, 83 S.W.2d 31 8, 321 (1 935).8

James contends that McMillan v. Dooley , 144 S.W.3 d 159 (Te x.App.–Eastland 2004 , pet. denied), has changed this requirement. However, the facts of the McMillan case are significantlydistinguishable from the present case. The court in McMillan concluded that the covenant was a real covenant. However, upon cl oser examination, the McMil la n covenanthad sig nificant ly more o f the char acteristi cs of a pe rsonal co venant. T he facts of McMillan show that the parties, at the time of execution of the agreement in question, did not intend that Johnson would be required to have an interest in t he la nd to support the enforcement of his preferential right. Rather, the parties intended that John son have a personal right to enforce the covenant. Therefore, the coven ant in McMil lan does not posses s all four of the requirements of a covenant running w ith the land, but rather constituted a personal covenan t. See Inwood , 736 S.W.2d at 635. This is the only Texas case cited by James that supports the proposition that a real co venant that runs with the land can be enf

orced b y a party that does not have an existing interest in the land the
co venantwas created to benefit. James cites the court to Sanchez v. Dickinson , 5 5 1 S.W.2d 481, 485 (Tex.App.–San Antonio 1977, no writ), for the prop osi tion that a preferential right is a covenant running with the lan d. This is a truestatement , as agreed by all part ies to th is liti gati on, however, in Sanchez , the party attempting to enforce the covenantwas the owner of an interest in the land. Dickinson still ow ned the original 791.21
acre tract the covenant was intended to benef it. Likewise, in the caseof Stone v. Tigner , 165 S.W.2d 124, 127 (Tex.Civ.App.–Galveston 1942, writ ref’ d), the holder of a right of first refusal w as allowed to enforce his right of first refusal to purchase the land in ques tio n because he own ed a valid lease in the land. James also cites this court to Westland Oil DevelopmentCorp. v. Gulf Oil Corp. , 637 S.W.2d 903 (Tex. 1982), for the proposition that9

a covenant can run with the land based si mply on a burden on the covenantor’s land that renders the land less valuable. This i s a true statement, but in addi tio n to that, the party seeking to enforce the covenant, Westland, still retained an i nte rest, a 1/1 6 of 8/8 overriding royalty

interest, in lands earned p ursuant to the farmo ut agreem ent. Id . at 905. Accordingly, we do not find the McMillan case controlling in the present fact situation.
When this bod y of law is appli ed to the facts before us, it is apparent that James did not have a current interest in t he estateto which the preferential right would have appended. The rights his predecessors in interest, the Grahams, held were terminated with the payment of the final production payment in 1975. Accordingly, as a matter of law, James had no preferential rights to the property subject to the 1963 assignmentof lease.
Conclusion Having determin ed that Ja mes had n o prefe rentia l right, we reverse the judgment of the trial court and, pursuant to Texas Rule of Ap pellate Procedure 43.3, enter the judgment that the trial court shou ld have rendered. Therefore, we render judgment that James take nothing by his suit. As our resolution of the First Permian’s and Energen’s first issue is all that is necessary to dispose of this appeal, we will not address the other issues raised. See T EX
. R. A PP
. P. 47.1.

Mackey K. Hancock Justice