Eighth Court Holds Post-Closing Corrective Assignments Unenforceable Against BFP in Reeves County Overriding Royalty Dispute
In a Reeves County dispute involving 24 oil and gas leases, the El Paso Court of Appeals reversed summary judgment for KWF Enterprises, holding that corrected overriding royalty interest assignments executed in November 2017—which increased KWF's interest from 65% to 100% of KEW Drilling's extra up-to-5% interest—were unenforceable against Callon. The corrected assignments, executed after Callon recorded its interest in August 2017, purported to remedy "scrivener's error and inadvertence" by replacing the 65% allocation in the original pre-closing assignments with 100%, directly impacting Callon's net revenue interest under purchase agreements requiring a "Designated NRI" of 75%.
Background and Transaction Structure
This appeal arises from a complex series of oil and gas lease transactions in Reeves County involving hundreds of leases across seven closings between June 2015 and February 2016. KEW Drilling (KEW) sold leases to three buyers—ExL Petroleum Management, LLC (ExL), Silverback Exploration, LLC, and Arris Delaware Basin, LLC—with KEW retaining a 75% interest in most leases but holding an additional up-to-5% interest (totaling up to 80%) in 24 specific leases where lessor royalties ranged from 20-25% rather than the standard 25%. Callon acquired its ownership interest in these 24 leases from ExL in August 2017, recording its interest in the public records.
The Overriding Royalty Assignment Dispute
The sales contracts contained Section 8.1(iii), which provided that KEW "may assign overriding royalty interests in the Leases to certain key personnel of [KEW] (or their Affiliates), provided that after giving effect to such assignments, the Designated NRI is satisfied." The contracts defined "Designated NRI" as "an NRI of 75%." Before closing, KEW executed assignments conveying only 65% of its extra up-to-5% interest to its affiliate KWF Enterprises, meaning KWF received an up-to-3.25% overriding royalty interest while the buyer received 75% plus an additional up to 1.75%. In November 2017—after Callon had acquired and recorded its interest—KEW and KWF executed seven "Amendment to and Correction of Assignment of Overriding Royalty Interest" instruments, stating that "by scrivener's error and inadvertence" the original assignments "incorrectly state[d] the percentage interests" and replacing "65%" with "100%."
The Trial Court's Ruling
KWF sued Callon seeking to quiet title in its royalty interests and recover unpaid royalties, later adding breach of contract and declaratory judgment claims. Both parties filed cross-motions for summary judgment on whether the corrected assignments were enforceable against Callon, who asserted bona fide purchaser status. The trial court ruled in KWF's favor, entering final judgment that the corrected assignments are "valid, binding, and enforceable against Callon."
The Court of Appeals' Analysis and Reversal
The El Paso Court of Appeals reversed, applying de novo review to both the summary judgment and contract construction issues. The court analyzed whether the sales contract language required the assignment of 100% of the up-to-5% overriding royalty interest. The court emphasized that standard rules of contract construction govern oil and gas contracts, and courts must ascertain the parties' intent as expressed in the written agreement. The court concluded that the corrected assignments are not enforceable against Callon.