The Texas Supreme Court has affirmed a Dallas Court of Appeals decision holding that a broad form release provision in an acreage swap agreement between oil and gas producers.
Finley Resources, Inc., Finley Production Co. L.P. and Petro Canyon Energy, LLC v. Headington Royalty, Inc. and Headington Energy Partners, LLC (No. 21-0509; delivered May 12, 2023), arose from a dispute over 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, breach 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 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.
The Dallas Court of Appeals reversed and remanded to the trial court, holding that the release did not apply to Headington’s claims against Finley because Finley was not Petro Canyon’s “predecessor” 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 an opinion by Justice Devine, SCOTX affirmed. His analysis concentrated on the interpretation of the term “predecessor” in the context of the lease as a whole. Beginning with the general rule that “a release will discharge only those persons ‘named’ or identified ‘with such descriptive particularity’ that their identity or connection to the released claims ‘is not in doubt,’” the Court observed that Finley was not named in the release or the acreage swap agreement. The question then became whether the term “predecessor” was sufficiently broad to bring Finley within its terms. Applying rules of contract construction, the Court noted that the term must be given its plain and ordinary meaning, informed by the contract as a whole. Headington argued the term “predecessor” was defined by its antonym “successor,” which “classically refers to legal succession, such as by merger or consolidation.” It argued further, as the court of appeals held, that the term refers to related entities, not precedent well operators. Finally, in a transaction executed by sophisticated parties with legal representation, if the parties had sought to release Finley, they could have done it explicitly.
In short, Justice Devine opined that the release “describes what is being released” (claims related to the Loving Tract and “who is being released.” While the term “predecessor” could bear the meaning argued by Petro Canyon and Finley, it could only do so out of context. Taking Finley’s view, he wrote, “would have us read ‘predecessors’ as referring to the ‘Loving County Tract’ and, therefore, composed of predecessors in title, interests, or well operations with respect to that property. But ‘predecessors’ grammatically refers back to the entities released—Petro Canyon and its affiliates. The ‘Loving County Tract’ refers back to and limits, the claims released but it does not define the releasees. The syntactic use of ‘predecessors’ thus connotes a prior connection to the corporate entities themselves, not the land.”
The Court’s conclusion was bolstered by the use of the term within a list including officers, directors, shareholders, and employees, each of whom “share the trait of being release, in one way or another, within the corporate structure of the released corporate entities.” Finely vainly argued that the list also included the terms “agents” and “representatives” included precedent well operators, but the Court didn’t go for it. Both terms, Justice Devine wrote, “share the quality of being authorized to act, in some way or another, on behalf of the entities; unrelated predecessors in title, interest, or well operation do not.” An ordinary reader of the release, therefore, “could not reasonably discern from anything in the acreage-swap agreement that Headington intended to release its claims against Finley.” Finally, the Court rejected Finley’s attempt to sneak subjective intent into the discussion in the guise of “objectively determinable facts and circumstances that contextualize the parties’ transaction.” Given that the release was unambiguous, “courts may not rely on evidence of surrounding circumstances to make the language say what it unambiguously does not say.”
Justice Boyd wrote a concurring opinion in which he argued that because Finley’s interpretation of the term “predecessors” was likewise “reasonable,” the release was ambiguous. Consequently, because “the ambiguity places Finley’s identity as a released party in doubt, the release is simply ineffective as to Finley.”
As in other recent decisions involving the construction of contracts, this one will likely have transaction lawyers reviewing the grammatical and syntactic context of their use of the term “predecessors” in current and future agreements. But the “formula” in all of these decisions is the same: plain and ordinary meaning + context within the contested provision as a whole = outcome. The trick for drafters is to be as specific as possible. While industry usage may still be relevant as an “objectively determinable” fact or circumstance that can assist a court in “contextualizing” an agreement, the court will never get to that point in the analysis if the formula resolves the question.
