Let’s begin with a quiz. Armour purchases non-recourse mortgage notes, becoming a lienholder in 99 oil and gas leases and 13 wells; fails to record the transfer documents in the real property records; assigns the leases to Sandel, reserving an overriding royalty interest in 23 of the leases; and can’t show that the liens were ever foreclosed. Litigation arises among Armour, Sandel and the operator CML. What is the result:
A. Armour wins on estoppel by deed.
B. Armour wins against CML on breach of contract.
C. The purported reservation is void; Armour is a stranger to the title.
D. It doesn’t matter. The EPA, after “mostly peaceful” protests by PETA (only three tank batteries, seven F-250’s, and an amine unit destroyed and one toolpusher thrown into the mudpit), shuts down operations because the wells impinge on the ever-shrinking habitat of Jackalopus Westexacanus, a precious but rarely seen denizen of Grimes County, Texas, that is protected by federal law.
In Armour Pipe Line Company et al v. Sandel Energy Inc. et al., “C” was the correct answer.
In the first assignment, Armour reserved the override. In a second assignment, Armour sold the override to Sandel. Sandel farmed out to CML who drilled several successful wells.
CML concluded that the reservation was ineffective and suspended funds. Sandel sued for a declaratory judgment that the first assignment was void, alternatively that Armour’s rights in the override were extinguished such that Armour had no claim to the royalty, and for declaratory judgment based upon Armour’s release of the liens.
Armour counterclaimed for judgment based on the doctrine of estoppel by deed that it was the rightful owner of the override and for breach of contract against CML for not paying revenues from production.
There were motions and cross motions for summary judgment, an appeal, followed by more motions and cross motions.
The holding
Armour was a stranger to the title. An exception or reservation in favor of a purported owner of real property who in fact is a stranger to the title with no interest in the property creates no title in the stranger.
Armour’s claim of estoppel by deed was unsuccessful. Under estoppel by deed, a party claiming through a deed is bound by recitals in a deed in which the party or its predecessor in title was a party. A “recital” is a formal statement or setting forth of a matter of fact in a deed in order to explain the reasons upon which the transaction is found.
The first assignment’s granting clause, the reservation of the override, and excepting the override from the grant were not recitals. Assignment of an assignor’s right, title and interest reflects an intent to convey whatever interest the assignor may have had rather than a statement that it owns the interests. Likewise, a reservation or exception create a right in favor of the grantor. Armour’s purported reservation and exception were not recitals.
Armour’s argument that the second assignment was a basis for estoppel by deed was denied. Sandel did not claim its title based on the second assignment. Because there was no evidence that Armour foreclosed on the lien, its lienholder status did not give it any right, title or interest in the leases.
The court awarded legal fees to CML as interpleader to the tune of $42,000+. See pages 16 – 20 of the opinion for a tutorial on a stakeholder’s right to fees in an interpleader, including when the stakeholder also has an interest in the claim.
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