Can limitations contained in an exhibit to an assignment of oil and gas interests, such as depth references, take precedence over the conveyance language in the body of the agreement? The Eighth District Court of Appeals’ recent opinion in Citation 2002 Inv. LLC, & Endeavor Energy Res., L.P. v. Occidental Permian, 662 S.W.3d 550 (Tex. App.—El Paso 2022, pet. granted) suggests that in certain instances they can.
The dispute concerned two competing asset transfer agreements: (1) a 1987 sale of large acreage oil and gas properties (the “1987 Assignment”), and (2) a 1997 assignment by the same assignor of certain interests that overlapped with the 1987 sale, but for deeper interests (the “1997 Assignment”). Attached to the 1987 Assignment was an exhibit containing over 50 pages of spreadsheet entries describing the properties being conveyed, including in some instances references to specific depths (i.e., a tract of land “down to 8,393 feet”). The 1997 Assignment purported to assign some of the same interests, but for deeper depths. A title dispute arose based on competing claims of ownership, raising the issue of whether the 1987 Assignment was depth-limited regarding the properties at issue, or was it an unlimited grant of all the assignor’s interest in those properties.
The parties stipulated that the 1987 Assignment was unambiguous. The Court of Appeals agreed, and thus applied a four corners analysis to ascertain the parties’ intent. The Court of Appeals’ analysis centered on the interpretation of two seemingly contradictory precedents found in Piranha Partners v. Neuhoff, 596 S.W.3d 740 (Tex.2020) and Posse Energy, Ltd. v. Parsley Energy, LP, 632 S.W.3d 677, 693 (Tex.App.—El Paso 2021, pet. denied).
In Piranha Partners, the Texas Supreme Court found that the exhibit at issue did not control the granting language in the body of the document, since the exhibit did not contain any specific limiting language, and thus served merely to more clearly identify the lease at issue. In Posse Energy, however, the Eighth District Court of Appeals determined that the limiting language in the exhibit at issue did control, since the language in the granting instrument was “extremely broad” and the exhibit included the critical limiting language of “insofar and only insofar as”. 632 S.W.3d at 693-94. The different results arose by applying the same standard, articulated by the Texas Supreme Court in Piranha Partners: when an instrument of conveyance refers to an exhibit to provide property descriptions, the court must harmonize that exhibit with the body of the agreement to determine the parties’ intent. 596 S.W.3d at 752-55.
Applying that same principle, the Citation 2002 Court found that, unlike in Posse Energy, the 1987 Assignment did not contain any specific limiting language. Further, the granting language in the body of the 1987 Assignment stated that it transferred “all rights and interests now owned by [Assignor] . . . regardless of whether same may be incorrectly described or omitted from Exhibit A” and specifically referred to “rights above or below certain footage depths or geological formations, affecting the property described in Exhibit A.” Citation 2002 Inv. LLC, 662 S.W.3d 550, 558.
The Court concluded that while the exhibit provided information relevant to the agreement – namely to describe depths that were subject to other agreements – it “was not intended to preclude a transfer of all of [Assignor]’s interest in the leases and other rights described therein” Id. at 558-59. The Court thus held that the 1987 Assignment conveyed all interests in the properties at issue without depth limitation of any kind. Id. at 552. The Texas Supreme Court granted review (Case 23-0037), however, and on March 21, 2024 heard oral arguments.
As we await the Supreme Court’s decision, the immediate practical takeaway is to draft carefully. As is often the case with contract interpretation, clarity and specificity rule the day. If you intend to attach an exhibit to any instrument that transfers title, take care to harmonize any text or property descriptions with the operative language in the body of the document, or at a minimum include a clause clearly spelling out whether the document or the exhibit controls.