Background and Transaction Structure

This appeal arises from a 1943 oil and gas lease covering approximately 1,440 acres in Reeves County that passed through multiple assignments over seven decades, during which two overriding royalty interests (ORRIs) were carved out. Thomas Craddick acquired his ORRI in 1990 as compensation for services rendered when he reassigned a portion of the lease to NRM Operating Company, L.P., which then reassigned the lease to Staley Gas Co., Inc., which reassigned it to George Staley. Sandra Staley inherited her ORRI from her late husband George Staley, who had reserved it in 2014 when reassigning the lease to a BPX affiliate. By 2016, ownership of the underlying mineral interest subject to the lease had passed to Cimarex Energy Co., while Craddick and Staley owned ORRIs.

The Lease's Precarious Condition

At the time BPX acquired the lease, it was in a tenuous state. Three wells had been drilled—one plugged and abandoned, one shut in, and one producing intermittently. The lease required full development of the leased acreage, contemplating "the full prospecting and developing for oil and gas of the land hereby leased, including the putting down of as many wells as the facts justify." Balanced against that clause, the lease also included a surrender provision stating:

[I]n the event that Lessee or his assigns, by reason of failure to find oil in paying quantities, or for other reasons, desires the cancellation of this lease, or any part thereof, that they will in good faith have made out and delivered promptly to the Lessors ... such release or cancellation paper as that, when placed upon the county records, will remove any cloud or lien upon [Lessor's] title to the land released in the event the recording of lease had placed any such cloud or lien upon same.

The Court's Analysis of Surrender Clause and Bad-Faith Washout

Craddick and Staley argued that the lease's surrender clause required BPX to act "in good faith" when delivering cancellation papers, pointing to the specific language in the provision. The appellate court affirmed the trial court's grant of summary judgment on multiple grounds, holding that the surrender clause authorized BPX to release the lease and that bad-faith washout is not a cognizable tort under Texas law. The court also addressed the operators' cross-appeal regarding the trial court's denial of their motions for summary judgment on limitations as an alternative ground for affirmance.

Implications for ORRI Holders and Lease Surrender Rights

The decision reinforces that ORRIs are subordinate property interests whose validity depends on the terms, conditions, and continued existence of the underlying lease. The El Paso Court of Appeals affirmed summary judgment for Cimarex Energy Company, Prize Energy Resources, Inc., and BPX Properties (N.A.) LP on Craddick and Staley's claims for bad-faith washout of overriding royalty interests, conspiracy, and breach of contract.