* Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not

be published and is not precedent except under the limited circumstances set forth in 5TH CIR.

R. 47.5.4.

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 07-40636

FRANK D. YTURRIA, Trustee of the Frank D. Yturria Mineral Trust, et al.

Plaintiffs-Appellees

v.

KERR-MCGEE OIL & GAS ONSHORE, LLC, KERR-MCGEE OIL & GAS

ONSHORE, LP, doing business as KMOG ONSHORE LP

Defendants-Appellants

Appeal from the United States District Court 

for the Southern District of Texas 

USDC No. M-05-181 

Before PRADO, ELROD, and HAYNES, Circuit Judges.

PER CURIAM:*

This appeal involves the proper interpretation of uniquely worded natural

gas liquid royalty provisions in four oil and gas leases entered into as part of a

settlement agreement following litigation over the meaning of prior lease

language. The provisions require lessees Kerr-McGee Oil & Gas Onshore, LP

and Kerr McGee Oil & Gas Onshore, LLC (collectively Kerr-McGee) to pay

Lessors, as a royalty, a certain percentage of “all plant products, or revenue

United States Court of Appeals

Fifth Circuit

F I L E D

September 8, 2008

Charles R. Fulbruge III

Clerk
No. 07-40636

2

derived therefrom, attributable to gas produced by [Kerr-McGee] from the leased

premises.” Lessors sued Kerr-McGee, alleging that Kerr-McGee improperly paid

royalties due under these provisions based on the revenue that it received for

natural gas liquids from its third-party processor–a sum that includes

deductions for the processor’s transportation and fractionation costs. According

to Lessors, the leases require Kerr-McGee to calculate royalties based on the

total revenue generated by the natural gas liquids, exclusive ofthese third-party

costs. The district court agreed, granting summary judgment that the leases

unambiguously require Lessors’ method of calculating royalties. We agree that

Lessors’ interpretation is the correct one and thus affirm the district court’s

judgment.

I. BACKGROUND

This appeal arises from a dispute over how Kerr-McGee pays royalties for

natural gas liquids, also referred to as plant products, under Lessors’ oil and gas

leases in Starr and Hidalgo Counties, Texas. The Lessors are royalty interest

owners of four oil and gas leases of which Kerr-McGee and its predecessors in

interest are the lessees. The four leases consist of the I.Y. Garcia Lease, the J.A.

Garcia Lease (collectively, the Garcia leases), the Yturria 600-Acre Lease, and

the Yturria 350-Acre Lease (collectively,the Yturria leases). Although the leases

contain slight variations (noted herein when relevant), they are similar in most

pertinent respects.

Since 1983, Kerr-McGee has drilled and put into production a number of

gas wells on the leased premises. In order to sell to consumers the natural gas

liquids produced by these wells, the gas must be processed and fractionated in

a gas plant. To accomplish this, Kerr-McGee uses pipelines to transport the

natural gas liquids to processing plants. The plants are owned by third-party

processors that contracted with Kerr-McGee to transport, process, and

fractionate the gas generated from the leased premises. 
No. 07-40636

3

In 1993, Lessors sued Kerr-McGee in two actions separate from this case.

The Lessors claimed that Kerr-McGee impermissibly deducted transportation

and treating charges from natural gas liquid revenue prior to calculating the

Lessors’ royalties. Kerr-McGee took the position that these deductions were

proper and not barred by the leases. The 1993 lawsuits ended in settlement.

At the time of the 1993 suit, the leases required Kerr-McGee to pay

Lessors a royalty on 100% of the “revenue . . . received by Lessee [Kerr-McGee]”

for the natural gas liquids. As part of the settlement, however, the parties

amended the leases’ natural gas liquid royalty provisions. The amended royalty

clauses are the central provisions at issue in this appeal. Those provisions now

require Kerr-McGee to pay Lessors “a royalty of one-fourth (1/4th) of seventy-five

percent (75%) of all plant products, or revenue derived therefrom, attributable

to gas produced by [Kerr-McGee] from the leased premises.” The Garcia leases

include additional language after “revenue derived therefrom” as follows:

“(whether or not Lessee’s processing agreement entitles it to a greater or lesser

percentage).” Except as amended, the leases remained in full force and effect as

written.

The settlement did not result in amendment to the leases’ separate “no

deduct” provisions. The “no deduct” provisions vary slightly in the Garcia and

Yturria leases. In the Garcia leases, the provision states:

Lessor’s royalty shall never bear, either directly or indirectly, any

part of the costs or expenses of production, gathering, dehydration,

compression, transportation (except transportation by truck),

manufacture, processing, treatment or marketing of the oil or gas

from the leased premises, nor any part of the costs of construction,

operation or depreciation of any plant or other facilities or

equipment for the processing or treating of said oil or gas produced

from the herein leased premises . . . . 

In the Yturria leases, the provision states:

Lessor’s royalties hereunder shall never be subject to any

amortization or interest or investment charge or deduction for
No. 07-40636

4

transporting the same to a pipeline, or for gathering, transporting,

producing, treating, separating, storing, compressing, dehydrating

or marketing the same . . . .

In 1997, Kerr-McGee entered into a new agreement for the processing,

transporting, and fractionating of natural gas liquids with a third-party

processor, Enterprise. Under the Enterprise agreement, natural gas liquids are

transferred from the leased premises to Enterprise’s plants in Delmita and

Gilmore, Texas where Enterprise processes the gas. Once processed, title to the

gas passes to Enterprise. Enterprise then transports the gas to its plant in

Corpus Christi where the gas is fractionated into natural gas liquid components

such as propane, ethane, butane, and pentane. Enterprise then sells the gas.

Under the Enterprise agreement, Kerr-McGee receives 80% of Enterprise’s “Net

Proceeds,” which consist ofthe total value ofthe fractionated natural gas liquids

(based on price averages) minus product marketing, transporting, and

fractionating costs. Because Enterprise does not know its actual transportation

and fractionation costs when Kerr-McGee is compensated, the Enterprise

agreement uses transportation and fractionation costs mutually agreed upon to

calculate the price owed to Kerr-McGee. Thus, the price is calculated on index

prices for the various plant products, not prices specific to the Corpus Christi

plant.

In 2003, Lessors audited Kerr-McGee’s method of paying natural gas

liquid royalties under the leases. The audit revealed that Kerr-McGee was

deducting Enterprise’s transportation and fractionation costs prior to calculating

Lessors’ royalties. In other words, Kerr-McGee was calculating Lessors’

royalties based on the revenue that Kerr-McGee received from Enterprise (which

includes deductions for Enterprise’s transportation and fractionation costs)

rather than on the total revenue generated by the natural gas liquids, exclusive

of costs.
No. 07-40636

5

In May 2005, Lessors filed a complaint against Kerr-McGee, alleging that

this conduct violated the leases. In its answer, Kerr-McGee admitted that it

takes into account transportation and fractionation costs prior to calculating

Lessors’ royalties, but asserted that the leases require this method of calculation.

Kerr-McGee also raised affirmative defenses of waiver, estoppel, and ratification

based on the parties’ 1993 dispute and subsequent settlement.

Lessors moved for partial summary judgment arguing that the

unambiguous language of the leases precluded Kerr-McGee from taking into

account transportation and fractionation costs prior to calculating Lessors’

royalties. Kerr-McGee filed a combined reply and cross-motion for summary

judgment arguing that the unambiguous language of the leases demonstrated

that it had properly calculated and paid royalties, and that Kerr-McGee’s

affirmative defenses of waiver, estoppel, and ratification established, as a matter

of law, that Lessors could not sue to recover alleged underpayments of natural

gas liquid royalties. Lessors filed a cross-motion for summary judgment on KerrMcGee’s affirmative defenses, asserting that they were entitled, as a matter of

law, to sue for alleged royalty underpayments.

The district court granted Lessors’ motion for partial summary judgment

on the contract interpretation issue, denied Kerr-McGee’s cross-motion for

summary judgment, and granted Lessors’ cross-motion for summary judgment

on Kerr-McGee’s affirmative defenses.

The parties thereafter stipulated and agreed to damages and expert

witness fees. After a bench trial on the remaining issue of attorneys’ fees, the

district court entered a final judgment, incorporating the parties’ stipulations

and awarding damages, costs, and fees to Lessors. This appeal followed.

II. DISCUSSION
No. 07-40636

6

Kerr-McGee challenges the district court’s judgment on two grounds.

First, it contends that the district court erred in granting summary judgment

that the unambiguous language of the leases requires Kerr-McGee to calculate

Lessors’ royalty based on the total revenue derived from the natural gas liquids,

exclusive oftransportation and fractionation costs. Second, Kerr-McGee argues

that the district court improperly granted summary judgment for Lessors on

Kerr-McGee’s affirmative defenses of waiver, estoppel, and ratification.

In assessing Kerr-McGee’s challenges, we review the district court’s

summary judgment de novo, viewing the evidence in the light most favorable to

Kerr-McGee, the party opposing the judgment. Crawford v. Formosa Plastics

Corp., 234 F.3d 899, 902 (5th Cir. 2000). Summary judgment is appropriate if

there is no genuine issue of material fact and Lessors are entitled to judgment

as a matter of law. Id.

A. Natural Gas Liquid Royalties

We turn first to the parties’ dispute over the proper method of calculating

Lessors’ royalty under the leases’ natural gas liquid royalty provisions. In

relevant part, the provisions read:

If gas . . . produced from the leased premises is processed in a

hydrocarbon recovery plant for the recovery of liquid and/or

liquefied hydrocarbons therefrom, and if [Kerr-McGee] . . . receives

plant products, or revenue attributable thereto,then Lessor[s] shall

receive as a royalty one-fourth (1/4th) of seventy-five percent (75%)

of all plant products, or revenue derived therefrom, attributable to

gas produced by [Kerr-McGee] from the leased premises.

The parties agree that the phrase “revenue derived therefrom” governs the

proper payment of royalties under these provisions. They further agree that the

term “revenue,” as used in the royalty provisions, refers to the total income

produced by a given source, exclusive of costs. The parties disagree, however,

on what source of revenue Kerr-McGee must use to calculate Lessors’ royalties.

According to Kerr-McGee, the relevant source of revenue is the payment that
No. 07-40636

7

Kerr-McGee receives from Enterprise when title to the natural gas liquids

passes to Enterprise under the Enterprise agreement, i.e., the value of the

fractionated natural gas liquid components at the point of sale minus

Enterprise’s transportation and fractionation costs. In contrast, Lessors contend

that the relevant source of revenue is the gross revenue, i.e., the index price per

gallon of all plant products, before the deduction of any transportation and

fractionation costs.

At the outset, it is important to note that we are construing unique

language in four particular oil and gas leases. The vast majority of oil and gas

leases use judicially defined terms such as “market value atthe well” or “amount

realized” to measure the lessor’s royalty. See generally Heritage Res., Inc. v.

Nationsbank, 939 S.W.2d 118, 124-31 (Tex. 1996) (Owen, J., concurring)

(discussing the meaning of “market value at the well”); Tana Oil & Gas Corp. v.

Cernosek, 188 S.W.3d 354, 360 (Tex. App.—Austin 2006, pet. denied) (discussing

the meaning of “amount realized”). Here, in contrast, the parties have opted to

use the previously unconstrued phrase “revenue derived therefrom” in the

context of a settlement of a previously litigated dispute over this very issue.

Thus, cases construing leases that use judicially defined terms provide little

guidance concerning how the uniquely worded leases here should be construed.

As Texas courts have recognized, the specific language of the lease provisions at

issue determine how the parties must calculate royalties. See Heritage, 939

S.W.2d at 124 (Owen, J., concurring). 

(1) Governing rules of construction
No. 07-40636

1 As all the leases were negotiated and executed in Texas, Texas law governs their

interpretation. See H E Butt Grocery Co. v. Nat'l Union Fire Ins. Co., 150 F.3d 526, 529 (5th

Cir. 1998) (Texas law controls the interpretation of contracts negotiated, drafted, and executed

in Texas).

8

Under Texas law,1 an oil and gas lease is a contract and its terms are

interpreted as such. See 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 by the words oftheir agreement. Id.

In so doing, we consider the wording of the lease in light of the circumstances

surrounding its adoption and apply the rules of construction to determine its

meaning. Sun Oil Co. v. Madeley, 626 S.W.2d 726, 731 (Tex. 1981). We must

give contractual terms their plain and ordinary meaning unless the instrument

shows the parties’ intent to use the terms in a different sense. Heritage, 939

S.W.2d at 121. We “examine and consider the entire writing in an effort to

harmonize and give effect to all the provisions of the contract so that none will

be rendered meaningless.” Coker v. Coker, 650 S.W.2d 391, 393 (Tex. 1983). If,

after applying the pertinent rules of construction, the lease remains subject to

two or more equally reasonable interpretations, Texas cases counsel that we

adopt the interpretation more favorable to the lessor. Zeppa v. Houston Oil Co.,

113 S.W.2d 612, 615 (Tex. App.—Texarkana 1938, writ. ref’d) (“[I]t appears to

be the settled rule in this state that of two or more equally reasonable

constructions of which the language of an oil and gas lease is susceptible the one

more favorable to the lessor will be allowed to prevail.”); see also Champlin

Petroleum Co. v. Ingram, 560 F.2d 994, 998 (10th Cir. 1977) (applying Texas

law); Freeman v. Samedan Oil Corp., 78 S.W.3d 1, 7 (Tex. App.—Tyler 2001, pet.

granted, judgm’t vacated w.r.m.); Sirtex Oil Indus., Inc. v. Erigan, 403 S.W.2d

784, 788 (Tex. 1966) (“[A] lease will be most strongly construed against the

lessor.”). 
No. 07-40636

2 The Yturria leases use the plural “Lessor’s royalties.”

9

(2) The “No Deduct” Provisions

In concluding that Lessors’ royalty under the natural gas liquid royalty

provisions cannot include deductions for Enterprise’s transportation and

fractionation costs, the district court relied heavily on the leases’ separate “no

deduct” provisions. The Lessors do the same in this appeal. Those provisions

provide, respectively, that Lessors’ royalty shall not bear deductions for

“transportation,” “processing,” and “treatment” costs (Garcia leases), and for

“transporting,” “producing,” “treating,” and “separating” costs (Yturria leases).

The language of these clauses is no doubt broad enough to include Enterprise’s

transportation and fractionation costs. But the breadth of the “no deduct”

provisions is only half the issue. First, we must specifically identify that from

which deductions may not be made pursuant to the “no deduct” provisions.

Here,the “no deduct” provisions in both the Garcia and Yturria leases apply only

to “Lessor’s royalty.”2

The Texas Supreme Court explained the significance of this limitation in

Heritage, 939 S.W.2d at 118. Like this case, Heritage involved the question of

how to properly calculate the royalties owed a group of lessors under oil and gas

leases. Id. at 121. The relevant royalty provisions required the lessee to pay the

lessors a certain percentage of the “market value at the well for all gas . . .

produced from the leased premises.” Id. at 120-21. The leases also contained a

“no deduct” provision similar to those at issue here. The provision provided that

“there shall be no deductions from the value of the Lessor’s royalty by reason of

any required processing, cost of dehydration, compression, transportation, or

other matter to market such gas.” Id.

The lessee in Heritage deducted the post-production cost to transport gas

from the wellhead to the point of sale from the sales price before calculating the
No. 07-40636

3 Under Texas law, “market value at the well” is generally determined by comparable

sales. Heritage, 939 S.W.2d at 122. In cases such as Heritage, however, where evidence of

comparable sales is unavailable, market value is determined by subtracting reasonable postproduction marketing costs from the market value at the point of sale. Id.

10

lessors’ royalties. Id. at 120. As in this case, the lessors sued for breach of

contract, arguing that the deductions violated the leases’ “no deduct” provision.

In assessing this claim, the Texas Supreme Court did not directly address the

apparent conflict between the definition of “market value at the well”3(which

required that post-production costs be deducted from lessors’ royalty) and the “no

deduct” provision (which appeared to prohibit deducting such costs). Rather, the

court looked first to the applicability of the “no deduct” provision, which

prevented deductions only from the “value of the Lessor’s royalty.” Id. at 122.

According to the court, the “value of the Lessor’s royalty” was the market value

of the gas at the well–a measure which requires a deduction for post-production

costs. Id. The court thus concluded that the leases’ “no deduct” provision was

“surplusage as a matter of law.” Id. at 123.

Accordingly, under Heritage, to determine whether a lessee has made

improper “deductions” from a lessor’s royalty, one must start with the royalties

that the lease entitles the lessor to. Justice Owen’s Heritage concurrence

succinctly makes this point:

It is clear certain “deductions” are prohibited. The question that

must be answered is from what are deductions prohibited. The

clause says “from the value ofthe Lessor’s royalty.” The value of the

Lessor’s royalty is “market value at the well” for gas sold off the

leased premises.

Id. at 130 (Owen, J., concurring).

Likewise, we must determine the value of Lessors’ royalty before accessing

the impact of the leases’ separate “no deduct” provisions. To do so, we turn to

the leases’ natural gas liquid royalty provisions.

(3) The Natural Gas Liquid Royalty Provisions
No. 07-40636

11

Those provisions require Kerr-McGee to pay Lessors “a royalty of onefourth (1/4th) of seventy-five percent (75%) of all plant products, or revenue

derived therefrom, attributable to gas produced by [Kerr-McGee] from the leased

premises.” The parties initially focus on the word “derive,” citing a host of

dictionary definitions in support of their proposed constructions. These

dictionary definitions are not dispositive of the issue and, regardless, the word

“derive” can be interpreted to support both parties’ constructions. 

a. Kerr-McGee’s Proposed Interpretation

In support of its proposed method of calculating royalties, Kerr-McGee

notes that its obligation to pay royalties arises only after it receives revenue

attributable to extracted natural gas liquids. Because Kerr-McGee receives such

revenue only from Enterprise via the terms of the Enterprise agreement, KerrMcGee argues that the revenue it receives from Enterprise is inextricably

intertwined with the royalties it must pay Lessors. Thus, under Kerr-McGee’s

reading, “if gas . . . produced from the leased premises is processed in a

hydrocarbon recovery plant for the recovery of liquid and/or liquefied

hydrocarbons therefrom, and if [Kerr-McGee] . . . receives plant products, or

revenue attributable thereto,” (emphasis added), then it must pay one-fourth of

seventy-five percent of that revenue to Lessors as a royalty.

Kerr-McGee’s construction of the royalty provisions is consistent with the

general definition of “royalty” under Texas law, which includes deductions for

post-production costs such as treatment and transportation costs. See id. at 122.

Moreover, as Kerr-McGee implicitly argues, it is certainly more reasonable to

assume that a party would agree to pay royalties based on the revenue it

receives for gas, rather than on the gross revenue received for that gas by a third

party at the point of sale. As Kerr-McGee notes, title to the natural gas liquids

passes to Enterprise before the gas is even fractionated. Thus, under Lessors’

proposed construction, they receive the full benefit of Enterprise’s transporting,
No. 07-40636

12

fractionating, and marketing efforts, yet bear none of the costs–costs which KerrMcGee,the party paying the royalty, does bear. Of course, this construction fails

to acknowledge the lawsuit and settlement context in which the language in

question arose.

Kerr-McGee also argues that its construction is supported by Lessors’

option to take their royalty “in kind.” Kerr-McGee argues that the in-kind option

demonstrates the absurdity of Lessors’ proposed construction because, if Lessors’

royalties are based on Enterprise’s gross revenue, then Lessors should be able

to go to Enterprise’s Corpus Christi plant and demand that they be given their

share of natural gas liquid components there. Kerr-McGee, however, fails to

take into account the fact that the value of a royalty taken in-kind does not have

to equal the value of a monetary royalty. See Mesa Operating Ltd. P'ship v. U.S.

Dep't of Interior, 931 F.2d 318, 325 (5th Cir. 1991) (rejecting argument that

royalty taken in kind must always be equalto royalty taken in value). Moreover,

this entire argumentis based on the flawed notion that, under Lessors’ proposed

interpretation, they would receive Enterprise’s actual gross revenue for the

natural gas liquids. But as mentioned, that is not the case. Under the

Enterprise agreement, Kerr-McGee is compensated for extracted natural gas

liquids based on index prices for the various plant products minus agreed-to

transportation and fractionation costs. All that Lessors assert is that KerrMcGee must calculate their royalty based on this total index price, exclusive of

deductions for transportation and fractionation costs. This calculation is not

dependent on the actual price that Enterprise receives for the plant products in

Corpus Christi. 

Finally, the leases contain a number of other gas royalty provisions. Most

of these provisions are based on “gross proceeds,” which the leases define as “the

price received by [Kerr-McGee].” Additionally, several of these provisions

require that certain post-production expenses incurred prior to the tailgate of the
No. 07-40636

13

processing plant, if deducted, must be added back to determine “gross proceeds”

prior to calculating Lessors’ royalties. But none of these “add-back” clauses

require that Kerr-McGee add back Enterprise’s downstream transportation and

fractionation expenses prior to calculating Lessors’ royalties, and indeed, some

of them specifically exclude such add-backs. Although Kerr-McGee relies on

these provisions in support of its proposed interpretation, we find them equally

supportive of both parties’ interpretations. On one hand, the provisions show

that the parties generally intended to base Lessors’ royalties on Kerr-McGee’s

revenue and also intended to deduct Enterprise’s costs from those royalties. But

on the other hand, the provisions show that the parties knew how to specifically

provide for both of these things in a particular gas royalty provision, but chose

not to do so in the leases’ natural gas liquid royalty provisions. 

b. Lessors’ Proposed Interpretation

WhileLessors concede that royalties under Texas law usually include postproduction expenses, they note that parties are free to alter this general rule by

agreement, and argue that is precisely what the parties did here. Lessors note

thatthe leases’ natural gas liquid royalty provisions do not say that Kerr-McGee

must pay royalties based on the “total revenue derived” by Kerr-McGee; rather,

the provisions say that Kerr-McGee must pay royalties based on “all plant

products, or revenue derived therefrom, attributable to gas produced by [KerrMcGee] from the leased premises.” (emphasis added). Indeed, the parties chose

this language to replace the phrase “revenue . . . received by Lessee [KerrMcGee]” when they amended the royalty provision in settling Lessors’ 1993

lawsuit. The amended language was a specific effort by Lessors to prevent KerrMcGee from reducing Lessors’ royalty through alleged “gamesmanship.” In the

1993 lawsuit, Lessors alleged that Kerr-McGee abused the “revenue . . . received

by Lessee [Kerr-McGee]” language by allowing its affiliate processor to retain

more of the natural gas liquids, which reduced the revenue that Kerr-McGee
No. 07-40636

14

received and hence reduced the royalty Kerr-McGee ultimately owed Lessors.

Thus, the language allowed Kerr-McGee, through its affiliate processor, to

receive the full benefit of the natural gas liquids while at the same time

decreasing the amount it owed Lessors as a royalty. The amendments were

designed to address this problem.

Lessors argue thatin order to adopt Kerr-McGee’s proposed interpretation,

we would have to ignore this amended language and simply read the provisions

as if they still referred specifically to Kerr-McGee’s revenue. Based on the

amended language, Lessors argue that Kerr-McGee must pay royalties on “all”

plant products or revenue derived from “all” plant products, attributable to the

natural gas liquids. Lessors note that “revenue,” when not expressly qualified

by “net,” means “[a]ll the income produced by a particular source.” AMERICAN

HERITAGE DICTIONARY OF THE ENGLISH LANGUAGE 1492 (4th ed. 2000). Thus,

they argue that the revenue from “all” plant products is the amount realized

from 100% of the plant products before deductions for post-production expenses.

c. Court’s Interpretation

Based on the forgoing discussion, we conclude that only Lessors’

interpretation gives effect to the specific manner in which the parties amended

the royalty provisions following settlement of their 1993 dispute. The settlement

context of the amendment is properly considered “surrounding circumstances”

evidence under Madeley, 626 S.W.2d at 731. Thus, while we understand KerrMcGee’s concerns with the unusual breadth of Lessors’ proposed interpretation,

that fact is not sufficient to render Lessors’ proposed interpretation

unreasonable in light of the strong circumstantial evidence that “revenue

derived therefrom” must mean something other than revenue obtained by KerrMcGee.

We conclude that Lessors’ interpretation is the correct one. That

conclusion is particularly buttressed in the Garcia leases by the additional
No. 07-40636

15

language “(whether or not Lessee’s processing agreement entitles it to a greater

or lesser percentage),” which makes no sense if Kerr-McGee’s revenue is the sole

measure of Lessors’ royalty, as Kerr-McGee argues.

Even if we were to conclude that both sides proffer reasonable

interpretations of the leases, however, we would still affirm the district court’s

judgment. Kerr-McGee incorrectly asserts that any ambiguity in the leases

makes the question of how to calculate royalties an issue of fact for the jury. For

most contracts, that would be the case, see Geoscan, Inc. of Tex. v. Geotrace

Techs., Inc., 226 F.3d 387, 390 (5th Cir. 2000), but here the two Yturria leases

expressly provide that “[i]n the case of ambiguity, [the] Lease always shall be

construed in favor of Lessor[s] and against [Kerr-McGee].” This contractual

clause simply supplements Texas cases to the effect that if two equally

reasonable interpretations of an oil and gas lease arise, the one more favorable

to the lessors must be adopted. Zeppa, 113 S.W.2d at 615; see also Champlin,

560 F.2d at 998 (applying Texas law); Freeman, 78 S.W.3d at 7; Erigan, 403

S.W.2d at 788 (“[A] lease will be most strongly construed against the lessor.”).

This common law rule of construction also applies to the Garcia leases, which

contain no express rule of construction. 

In order to find for Kerr-McGee, as itimpliedly conceded at oral argument,

we would have to find that Kerr-McGee’s construction is the only reasonable one.

On this record, we cannot do that. Accordingly, we hold that the leases’ natural

gas liquid royalty provisions require Kerr-McGee to calculate Lessors’ royalty

based upon the Kerr-McGee/Enterprise index price per gallon for all plant

products before deductions are made for transportation and fractionation fees,

as the district court concluded.

B. Kerr-McGee’s Affirmative Defenses

Kerr-McGee also challenges the district court’s ruling granting Lessors’

motion for partial summary judgment on Kerr-McGee’s affirmative defenses of
No. 07-40636

4 With respect to quasi-estoppel, the district court ruled that Kerr-McGee could not

prove that Lessors had benefitted from accepting underpayments of royalties. With respect

to waiver, the district court ruled that Kerr-McGee could not prove that Lessors had

intentionally relinquished their right to have royalties calculated based on the total revenue

derived from all natural gas liquids because the release language of the parties’ prior

settlement applied only to claims arising “prior” to the settlement date. Finally, relying on this

circuit’s precedent, the district court ruled that Kerr-McGee could not prove that Lessors

ratified Kerr-McGee’s method of calculating royalties merely by accepting less monies than

they were owed.

16

quasi-estoppel, waiver, and ratification. Initially, Kerr-McGee argues that the

district court failed to apply the proper summary judgment standard. A party

moving for summary judgment on an opponent’s affirmative defense can obtain

judgment as a matter of law by disproving an essential element of that defense.

Fontenot v. Upjohn Co., 780 F.2d 1190, 1194 (5th Cir. 1986). Here, while the

district court may not have restated the proper standard as to each of KerrMcGee’s affirmative defenses, its analysis makes eminently clear that the proper

standard was applied,4 and accordingly the district court did not err. 

We address, in turn, Kerr-McGee’s remaining challenges to the judgment

against its affirmative defenses.

(1) Quasi-Estoppel

The defense of quasi-estoppel precludes a party from asserting, to

another’s disadvantage, a right inconsistent with a position previously taken.

Lopez v. Munoz, Hockema & Reed, L.L.P., 22 S.W.3d 857, 864 (Tex. 2000). The

defense applies when “it would be unconscionable to allow a person to maintain

a position inconsistent with one to which he acquiesced, or from which he

accepted a benefit.” Id. Quasi-estoppel does not require a showing of

misrepresentation or detrimental reliance. Atkinson Gas Co. v. Albrecht, 878

S.W.2d 236, 240 (Tex. App.—Corpus Christi 1994, writ denied).

Kerr-McGee asserts that the district court erred in concluding that

Lessors’ did not receive a benefit for the purposes of quasi-estoppel because, as

part ofthe parties’ prior settlement,“they received an additional royalty of 100%
No. 07-40636

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of Enterprise’s Net Proceeds.” Kerr-McGee asserts that by accepting this

additional royalty, which included a deduction for Enterprise’s transportation

and fractionation costs, Lessors should now be estopped from challenging KerrMcGee’s method of calculating royalties. But even assuming that Lessors knew

how Kerr-McGee calculated the settlement royalty–a fact they adamantly

deny–it is unclear how accepting this additional royalty constitutes a position

inconsistent with their current claims. As part of the settlement, the parties

fundamentally altered the leases’ natural gas liquid royalty provisions, providing

that royalties would be calculated based on the “revenue derived” from natural

gas liquids rather than on the monies that Kerr-McGee received for natural gas

liquids from a processor. Thus, even if Lessors’ position in the prior settlement

constituted an implicit admission that transportation and fractionation expenses

were properly deductible under the old natural gas royalty provisions, there is

nothing unconscionable about allowing Lessors to assert a new position, namely

that transportation and fractionation expenses cannot be deducted under the

new natural gas liquid royalty provisions. Indeed, the parties’ settlement

specifically contemplates that Lessors would retain the right to bring any new

claims based on the underpayment of royalties under the new provisions.

Accordingly, the district court properly granted summary judgment for Lessors

on Kerr-McGee’s quasi-estoppel defense.

(2) Waiver and Ratification

Under Texas law, the elements of wavier include: (1) an existing right,

benefit, or advantage; (2) knowledge, actual or constructive, of its existence, and;

(3) actual intent to relinquish the right, which we can infer from conduct. ASI

Techs., Inc. v. Johnson Equip. Co., 75 S.W.3d 545, 548 (Tex. App.—San Antonio

2002, pet. denied). Ratification requires: “(1) approval by act, word, or conduct;

(2) with full knowledge of the facts of the earlier act; and (3) with the intention

of giving validity to the earlier act.” Motel Enters., Inc. v. Nobani, 784 S.W.2d
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545, 547 (Tex. App.—Houston [1st. Dist.] 1990, no writ.) (unpublished). An

implied ratification of conduct will only be found where there is full knowledge

of the facts surrounding that conduct. Crooks v. M1 Real Estate Partners, Ltd.,

238 S.W.3d 474, 488 (Tex. App.—Dallas 2007, pet. denied). 

As to both defenses, Kerr-McGee argues that a factissue exists concerning

whether Lessors had notice of Kerr-McGee’s practice of deducting Enterprise’s

transporting and fractionating expenses from Lessors’ royalties prior to the audit

that led to this lawsuit. According to Kerr-McGee, Lessors’ decision to accept

alleged underpayments of royalties, knowing Enterprise’s transporting and

fractionating costs were being deducted, constituted both an implied ratification

of Kerr-McGee’s calculation practice and an intentional relinquishment of the

right to assert a different method of calculating royalties.

As part of their cross-motion for summary judgment on these defenses,

Lessors’ attorneys submitted affidavits stating that they only became aware of

Kerr-McGee’s method of calculating royalties through the audit that led to this

lawsuit. To counter this evidence, Kerr-McGee relies on letters and

spreadsheets provided to Lessors in connection with the settlement of the

Lessors’ 1993 claims. Kerr-McGee asserts that these documents provided

Lessors with notice of Kerr-McGee’s method of calculating royalties under the

amended royalty provision. As additional evidence of Lessors’ knowledge, KerrMcGee also points to Lessors’ 1993 pleadings, in which Lessors made similar

allegations that Kerr-McGee impermissibly deducted third-party transporting

and treating charges from natural gas liquids. Initially, as with Kerr-McGee’s

quasi-estoppel defense, we fail to see how knowledge of Kerr-McGee’s method of

calculating royalties under the parties’ prior agreement provided Lessors with

notice of the same under the parties’ amended agreement.

Even assuming that notice under the old agreement could somehow

constitute notice under the amended agreement, we fail to see how the content
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of Kerr-McGee’s letters and spreadsheets put Lessors’ on notice. While the

spreadsheets contain a column showing “Value actually received from Valero”

(presumably Kerr-McGee’s third-party processor at the time), nothing in the

spreadsheets indicate that Kerr-McGee calculated royalties based on that figure,

or that they deducted transportation and fractionation expenses from Lessors’

royalty. In fact, Kerr-McGee’s handwritten notes on the document refer to

“Royalty paid on actual natural gas liquid proceeds,” which is consistent with

Lessors’ understanding of how the leases require Kerr-McGee to calculate

royalties. Further, while the letter states that Kerr-McGee made clear to

Lessors’ attorneys thatit would not agree to a settlementthat made Kerr-McGee

liable for royalties on revenue that Kerr-McGee did not receive, as discussed

above, one reasonable construction of the parties’ settlement amendment

indicates that Kerr-McGee did eventually agree to such an arrangement.

Accordingly, the district court properly granted summary judgment for Lessors’

on Kerr-McGee’s affirmative defenses of waiver and ratification.

The district court’s judgment is AFFIRMED.