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Language of an Assignment of Overriding Royalty Can Be Critical

The Texas Supreme Court decided a case recently involving an assignment of an overriding royalty interest (ORRI) in minerals located in Wheeler County, Texas. That case is Piranha Partners et al v. Joe Neuhoff et al.

In 1975, Neuhoff Oil & Gas purchased an undivided two-thirds interest in a mineral lease known as the Puryear Lease. The lease was between the Puryears (and others) as lessors and Marie Lister as the lessee. The lease covered all of the minerals under a tract of land referred to as Section 28. A few years later, Neuhoff Oil sold and assigned its two-thirds interest, but reserved for itself a 3.75% ORRI on all production under the Puryear Lease. An ORRI is an interest that is created out of the working interest (the oil company’s or operator’s interest) in the lease. It is a fractional, undivided interest with the right to participate or receive proceeds from the sale of oil and/or gas. It is not an interest in the minerals, but an interest in the proceeds or revenue from the oil & gas minerals sold. The interest is limited to a specific tract of land and is bound by the term of the existing lease. If the underlying lease expires, the ORRI expires.

Only one well was completed on the property, the Puryear B #1-28. At some point, Neuhoff Oil & Gas sold its ORRI to Piranha Partners. A bit later, Neuhoff Oil & Gas went out of business and assigned its assets to individual members of the Neuhoff family.

Subsequently, additional producing wells were drilled on Section 28. The operator paid all ORRI payments to Piranha Partners. The Neuhoffs filed suit because they believed the ORRI on all the new wells should be paid to them. In other words, they claimed that they only sold the ORRI on the original well, the Puryear B #1-28, to Piranha.

The written assignment provided as follows:

[Neuhoff Oil] does hereby assign, sell and convey unto [Piranha] . . . without warranty or covenant of title, express or implied, subject to the limitations, conditions, reservations and exceptions hereinafter Set forth . . . all of [Neuhoff Oil’s] right, title and interest in and to the properties described in Exhibit “A” (the “Properties”).

Exhibit A defines the Properties as:

               Lands and Associated Well(s): Puryear #1-28, Wheeler County, Texas, NW/4, Section 28, Block A-3, HG&N Ry Co. Survey

              Oil & Gas Lease(s)

              Lessor: [the Puryears]

             Lessee: Marie Lister

             Recorded: Volume 297, Page 818

The Supreme Court determined that the issue was “whether the Assignment conveys Neuhoff Oil’s overriding royalty interest in minerals produced by the well, from the land, or under the lease.” Piranha claimed the exhibit covered all of  the land, i.e., Section 28. The Neuhoffs claimed the exhibit describes only the original Puryear B #1-28 well.

The Court described numerous rules of construction that one or the other of the parties claimed applied. The Court determined that the exhibit was ambiguous and possibly even unenforceable. In the end, the Court determined that the assignment conveyed all of the Neuhoffs interest in Section 28 to Piranha and that all royalties from minerals in that section should be paid to Piranha.

This is yet another case which illustrates how critically important language in a written contract is, whether it be an oil and gas lease, an assignment of mineral interests or a sale of mineral interests. In this case, it’s possible that both parties used attorneys in drafting the assignment, but it appears that not enough attention was paid to the language of the exhibit. If the seller of the ORRI was going to retain all the ORRI on the property other than the original well, they should have explicitly said just that.