Court Finds Declaratory Judgment Action, Not Trespass to Try Title

Co-author Trevor Lawhorn

SM Energy Co. v. Union Pac. R.R. Co. considers a question frequently asked in Texas suits affecting title: When is a suit a trespass to try title action and not a declaratory judgment action?

The dispute

SM Energy and Union Pacific are parties to three oil and gas leases covering lands in Howard County. Each lease contains the same forum-selection clause providing for exclusive venue in “… Omaha, Nebraska and no other place.”

Union Pacific demanded that SM pay damages for breaching the leases. SM failed to pay in time but later tendered the damages and identified other leases in violation of a most-favored-nations clause. Union Pacific eventually accepted tender of SM’s offer, but maintained that SM owed $5mm+ in liquidated damages.

SM sued Union Pacific in Howard County asserting SM’s ownership of the leasehold estate and claiming that Union Pacific unlawfully dispossessed SM of its right to possession. Union Pacific responded with a motion to dismiss for improper venue, arguing that Omaha was the proper forum, citing the forum-selection clause and Texas’ “major transactions” venue rule (Civil Practice and Remedies Code §15.020).

The trial court granted Union Pacific’s motion. SM appealed and argued that the trial court erred in enforcing the forum-selection clause and erred by finding that Nebraska was a proper forum to litigate the dispute.

The appeal

The Court of Appeals affirmed.

SM asserted that its trespass-to-try-title action could only be litigated in Texas; therefore a Texas court has exclusive subject-matter jurisdiction.  The Court considered the substance of SM’s petition and saw a claim for declaratory judgment to determine SM’s obligations, not trespass-to-try-title. SM pleaded certain elements of trespass-to-try-title but its claims of dispossession were, in substance, dependent on an initial determination that the liquidated damages provision was unenforceable.

Second, the Court disagreed that SM’s claim was a suit to remove a cloud on title. SM could not show that Union Pacific’s claim was invalid or unenforceable, which is a prerequisite to a suit to remove a cloud on title.

Third, the Court disagreed with SM’s contention that enforcement of the forum selection clause would violate Texas’s public policy against piecemeal litigation. For all intents and purposes, the claimant was Union Pacific because Union Pacific is the party asserting that SM breached the leases.

The trial court also erred by finding that Nebraska was a proper forum to litigate the dispute—The 640-acre lease met the requirements of a “major transaction” as described by the venue rule. This question turned on whether the lease evidenced consideration exceeding $1mm for purposes of the statute. The lease failed to state consideration exceeding $1mm, but related documents could be considered as evidence of a major transaction. One week after execution of the lease, Union Pacific confirmed to SM’s predecessor-in-interest that the original lessee paid Union Pacific a lease bonus of $2.4mm. The court considered confirmation to be a separate instrument that was executed at the same time, for the same purpose, and in the course of the same transaction such that the documents could be analyzed together.

Takeaways

• Courts will look to the substance, not the form, of a party’s pleadings to determine whether a claim is for trespass-to-try title or declaratory judgment.
• When the issue of dispossession of title is secondary to the determination of the breach or enforceability of a contract, courts may find the case to be for declaratory judgment, not trespass-to-try-title action.
• The lease and separate documents reflecting payments that relate to the lease may be construed together for purposes of establishing the value of the lease.

RIP Sonny Corleone and Paulie Walnuts.

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