514 S.W.3d 247
Tex. App.2016Background
- In 1974 John W. Mecom leased ~8,300 acres; lessee's successor was Westport/Kerr‑McGee. Royalty owners (the Mecoms) sued in 2007 alleging underpaid gas royalties and other claims.
- Lease paragraph 3(b) expressly set gas royalty as 42% of the market value at the well (or 42% of $1.50/MCF, whichever greater).
- Lease paragraph 17 (starting “Notwithstanding any other provision…”) set a formula for the minimum sale price in any future gas purchase agreement (GPA): the average of the highest price paid by three intrastate purchasers in R.R. Comm’n District 4, not less than $1.50/MCF.
- The Mecoms sought a declaration and damages relying on paragraph 17’s GPA pricing formula to calculate the royalty; Kerr‑McGee argued paragraph 3’s market‑value‑at‑the‑well provision controls and that it had paid all owed royalties.
- Trial court construed paragraph 17 to control royalty calculation, the jury awarded the Mecoms $2.3M (plus fees/interests), and Kerr‑McGee appealed.
- The court of appeals held the lease was unambiguous: paragraph 3 governs royalty (42% of market value at the well) and paragraph 17 independently sets a minimum contract sale price for GPAs; it reversed the royalty, declaratory judgment, and attorney’s‑fees awards and rendered a take‑nothing judgment for Kerr‑McGee on those claims.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Proper royalty measure | Paragraph 17’s GPA formula (three‑highest‑prices average) supplies the method to compute “market value at the well” in paragraph 3 | Paragraph 3’s plain language controls: royalty is 42% of market value at the well; paragraph 17 only governs future GPA contract minimums | Held: Paragraph 3 controls; paragraph 17 does not alter the market‑value royalty clause |
| Effect of “Notwithstanding any other provision…” in ¶17 | That clause makes ¶17 supersede ¶3 and thus determines royalty calculation | The clause only operates against lease provisions "to the contrary;" ¶3 is not contrary and both clauses have independent purposes | Held: The notwithstanding clause does not transform ¶17 into the royalty definition |
| Whether evidence supports breach for underpaid royalties | Mecoms claimed underpayments based on ¶17 formula | Kerr‑McGee showed it paid royalties under market‑value measure; Mecoms admitted if ¶3 governs Kerr‑McGee paid in full | Held: No evidence of breach—Mecoms’ judicial admission and court’s construction require directed verdict for Kerr‑McGee |
| Entitlement to attorney’s fees | Mecoms sought fees under Natural Resources Code §91.406, Tex. Civ. Prac. & Rem. Code §§37.009, 38.001 | Kerr‑McGee argued fees unavailable because Mecoms did not prevail on viable statutory or contract claims and declaratory claims duplicated breach issues | Held: Fees reversed—statutory bases did not apply (Mecoms did not prevail on recoverable claims) |
Key Cases Cited
- Tex. Oil & Gas Corp. v. Vela, 429 S.W.2d 866 (Tex. 1968) (royalty measured by lease’s market‑value clause is independent of sale contracts)
- Yzaguirre v. KCS Res., Inc., 53 S.W.3d 368 (Tex. 2001) (market value may be unrelated to GPA proceeds)
- Bowden v. Phillips Petrol. Co., 247 S.W.3d 690 (Tex. 2008) (market‑value royalty clause requires prevailing market price irrespective of actual GPA price)
- Coker v. Coker, 650 S.W.2d 391 (Tex. 1983) (if instrument has definite legal meaning it is not ambiguous)
- Heritage Res., Inc. v. NationsBank, 939 S.W.2d 118 (Tex. 1996) (contract terms given plain, ordinary meaning in lease construction)