We have previously reported on two problematic mental anguish damages cases from the Dallas Court of Appeals, in which the Texas Supreme Court granted review on September 2. In this same group of granted petitions, SCOTX has also decided to review a third case, Headington Royalty, Inc. and Headington Energy Partners, LLC v. Finley Resources, Inc., Finley Production Co. L.P. and Petro Canyon Energy, LLC (No. 05-19-00291-CV; 21-0509), a contract interpretation case with potentially significant impact beyond the specific contract language at issue.
The case involves the construction of a release of liability entered into between oil and gas producers, Headington and Petro Canyon, as part of an acreage swap agreement whereby Petro Canyon exchanged its mineral interests in a Loving County tract for Headington’s interests in other tracts. A third producer, Finley, previously held the lease rights to produce the Loving Tract to a depth of 5,000 feet, while Headington had a revenue interest in production at a depth greater than 5,000 feet. Petro Canyon acquired a top lease to the tract and informed Finley that its lease may have terminated by failing to produce in paying qualities from two shallow wells. Finley responded by assigning its interest in the tract to Petro Canyon. Before quitclaiming its interest, Finley notified Headington that it intended to plug and abandon its wells, which terminated Headington’s deep rights.
The acreage swap between Headington and Petro Canyon contained a release whereby Headington released “Petro Canyon and its affiliates and their respective officers, directors, shareholders, employees, agents, predecessors and representatives for any liabilities, claims, demands, causes of action or obligations, of whatever kind or character, including, without limitation, beach of contract, negligence, strict liability, indemnity or contribution that [Headington] has or may have in the future, whether asserted or unasserted, known or unknown, fixed or contingent, related in any way to the Loving County Tract; provided, however, that the foregoing release shall not apply to any obligations arising under this agreement.” The construction of this broad form release provision is now at issue in the case.
The litigation commenced when Headington sued Finley over the termination of its deep rights under the Loving County tract. Petro Canyon intervened, asserting that the broad form release covered Headington’s claims against Finley as its predecessor in interest to the lease. Petro Canyon further sought a declaratory judgment that Finley was a predecessor under the release and that Headington’s claims against Petro Canyon and Finley were barred. The trial court granted Petro Canyon and Finley’s traditional summary judgment motion and issued a declaratory judgment holding that the release barred Headington’s claims. Headington appealed.
Over a strong dissent by Justice Partida-Kipness, the court reversed and remanded to the trial court. The majority opinion, authored by Justice Pederson, III, held that the release did not apply to Headington’s claims against Finley because Finley was not Petro Canyon’s “precedecessor” within the meaning of the lease. The majority relied on the “associated words canon” (noscitur a sociis) of the rules of construction, under which a word’s meaning must be determined in the context of the words around it. With respect to the release, the majority reasoned that the term “predecessor” appeared “in a string of entity-related groups (‘Players’), not in chain of title-related owners of the real property interest (‘Spectators’). Excluding ‘predecessor,’ each of those other terms in the Release relate as ‘birds of a feather’ to the corporate composition of structure of Petro Canyon and its affiliates.” In other words, the release only covered Petro Canyon, its affiliates, and any entity-related parties, including predecessor entities. While Finley might meet the plain language meaning of predecessor in the sense of “predecessor in title,” it was not a related entity.
In her dissent (which undoubtedly SCOTX will study very carefully), an incredulous Justice Partida-Kipness pointed out that the release made no sense if the term “predecessor” referred only to Petro Canyon’s corporate predecessors. In fact, she pointed out, Petro Canyon had no corporate predecessors. Moreover, Headington knew as well as everybody else did that Finley had assigned its interest in the Loving County tract to Petro Canyon and that the release, which referred specifically to the Loving County tract, could only possibly have referred to the prior assignment. Finally, she opined, the plain meaning of “predecessor” encompasses both a corporate predecessor and a predecessor in title, unless the contract specifies otherwise. Here Headington knew what they were doing and took no steps to limit the meaning of “predecessor,” which in fact would have rendered the release meaningless in the context of the transaction.
In anticipation of SCOTX’s review, transaction lawyers might be well advised to take another look at their broad form release language. While we certainly can’t know how SCOTX will decide this case, it’s a good bet that the court wouldn’t have taken it if the majority hadn’t taken such a myopic view of the language of the release.