The Texas Supreme Court has reversed a decision of the Eastland Court of Appeals holding that a Memorandum of Lease with a different expiration date than the lease itself creates a fact issue as to the interpretation of the lease.
Apache Corporation v. Apollo Exploration, LLC; Cogent Exploration, Ltd. Co.; and Sellmoco, LLC (No. 21-0587; delivered April 28, 2023) arose from a dispute over purchase and sale agreements (PSAs) of a percentage of the working interests for 109 oil and gas leases in the Texas Panhandle. Most of the acreage covered by the leases (120,000 acres in all) was included in the Bivins Ranch Lease. Under the PSAs, the sellers Apollo, Cogent, and Sellmoco, obtained two primary rights from the purchaser Apache: (1) for each year of a lease, if Apache decided not to act to perpetuate the lease, it would offer back to the purchasers their original interests; and (2) if Apache received a 2-1 return on the purchase and investment in a particular lease, the sellers could receive back up to a third of the sales price of the lease (the “back in” interest). With respect to the first right, on November 1 of each year Apache provided the purchasers with a plan for the leases for the coming year. If the plan anticipated the loss of a particular lease, Apache had to offer the interest at no cost back to the purchasers (the “affected” lease(s)).
The plaintiff purchasers brought suit against Apache in 2014 alleging that Apache breached the PSAs by not providing either written pay-out statements for purposes of the “back-in” provision or written budgeted drilling commitments, failing to offer the purchasers back assignment of leases not perpetuated, and shorting the purchasers on their share of the proceeds from production of the leases. The purchasers offered testimony from two experts on the calculation of damages based on a Memorandum of Lease that apparently misstated the expiration date of the primary leases as December 31 rather than January 1. This resulted in a valuation methodology that produced nearly $190 million in damages, rather than the $5.8 million (at most) based on the January 1 expiration date. (The reason for this dramatic difference is that using the earlier date allowed the purchasers to value their interests at a much higher per acre rate of 2014 rather than 2015.) A Midland County trial court granted Apache’s motion to exclude the purchasers’ expert based on the unambiguous January 1 expiration date in the lease itself. It also granted Apache’s summary judgment motions related to the interpretation of the “back in” interest provision in the PSA’s (i.e., the meaning of “affected leases”), the purchasers’ breach of trust, breach of fiduciary duty, and misapplication of fiduciary property claims, and an issue involving accounting for the working interests of a purchaser, Gunn Oil, that did not join the lawsuit. The trial court further awarded Apache $4 million in attorney’s fees.
In a long and detailed opinion, the Eastland Court of Appeals affirmed in part and reversed in part. The court of appeals affirmed the trial court’s summary judgment rulings on the interpretation of the term “lease” and “affected leases and the tort claims. But, holding that a collateral document—a Memorandum of Lease—designating the expiration date of the primary lease one day earlier than the lease itself created a fact issue of when the lease expired, the court of appeals reversed with regard, among other things, to the calculation of damages and the attorney’s fee award. Apache sought review.
In an opinion by Justice Young, SCOTX reversed. The central issue in the case involved the interpretation of the expiration date of the primary term of the leases. Reviewing the long history of the Court with computing time periods in legal texts of all varieties, the Court stated that the common law “default” rule “provides that the measuring date—the date ‘from’ or ‘after’ a period is to be measured—is excluded in calculating time periods. For periods of years, therefore, the period ends on the anniversary date of the measuring date, not the day before the anniversary” (citations omitted). Though parties are free to specify the computation of time in a different way, in the absence of an agreement to the contrary, the default rule applies. As Justice Young observed, “[t]the law has no real interest in which method parties select to measure time periods. But it is of exceptional importance that the law provide maximum interpretive clarity to those who enter into agreements, to third parties who may later enter into a contractual relationship governed by an existing contract, and to those who may make important decisions in reliance on such a contract’s meaning… Reliable rules of construction achieve this result by eliminating—or at least greatly reducing—ambiguity. In the aggregate, the clarity of legal rules like this one provide substantial hidden savings by preventing wasteful and costly litigation.”
Here the primary term of the original leases was measured “from December 31.” Applying the common law rule, the leases expired on January 1. The sellers’ argument that the Memorandum of Lease, which stated that the primary term ended on December 31, should control, as it reflected the parties’ intent. SCOTX rejected this argument on the basis that the memorandum explicitly stated that the lease terms themselves controlled. As Justice Young wrote, “[t]he memorandum expressly subjugates itself to the lease, so it does not matter whether we treat the memorandum as extrinsic evidence or as a document to be read with the lease. Both routes lead to the January 1, 2010 end date. If the memorandum is extrinsic evidence, it may only be considered if the lease is ambiguous, but it cannot be used to create ambiguity. (citation omitted). And if the two documents are construed together, as we assume they should be, we must stop when the memorandum’s own text prioritizes the lease’s terms, proclaiming that the lease controls whenever the two are in conflict.”
The Court went on to reject the sellers’ arguments regarding the construction of the PSA’s sell back and “back in” provisions. The plain meaning of the text required Apache to offer back only the interest conveyed by each individualseller, not the interests of all sellers back to only one of them. If it had meant that, Justice Young notes, the lease “would have explained how the process of distributing these interests would work.” Without such a mechanism in black and white, the Court was understandably unwilling to ink one themselves. Likewise, the Court construed the PSA to trigger the “back in” provision when the specified revenues of production doubled the specified expenses, a 2-1 ratio. The Court remanded to the court of appeals for consideration of whether the sellers presented any evidence of damages for their breach of contract and tort claims.
