                                Fourth Court of Appeals
                                        San Antonio, Texas

                                   MEMORANDUM OPINION
                                            No. 04-11-00838-CV

        COATES ENERGY TRUST, Coates Energy Interests, Ltd. and Hager Oil & Gas,
                                 Appellants

                                                        v.

    FROST NATIONAL BANK as Trustee and as Guardian of the Estate of Peter Atchison, and
                      Falcon International Bank as Trustee, 1
                                    Appellees

                     From the 229th Judicial District Court, Duval County, Texas
                                     Trial Court No. DC-08-79
                              Honorable Alex Gabert, Judge Presiding

Opinion by:       Marialyn Barnard, Justice

Sitting:          Catherine Stone, Chief Justice
                  Karen Angelini, Justice
                  Marialyn Barnard, Justice

Delivered and Filed: November 28, 2012

REVERSED AND RENDERED

           This case involves a dispute over the type and fraction of interest currently owned by

appellants Coates Energy Trust and Coates Energy Interest, Ltd. (collectively “Coates”) and

Hager Oil (“Hager”) in minerals underlying several tracts of land in Duval County. At issue is

whether the Peters, trustors of assets now managed by appellees Frost National Bank and Falcon


1
 Falcon International Bank serves as trustee of a testamentary trust created by one of the Peters’s children, which
has an interest in the minerals through the Peters family trust managed by Frost National Bank.
                                                                                                04-11-00838-CV


International Bank (collectively “Frost”), conveyed a 1/16 fixed royalty interest or a 1/2

nonparticipating mineral interest to George Coates, predecessor in interest to Coates. 2 The trial

court held Coates and Hager were entitled only to a fixed royalty interest and ordered Coates to

pay attorneys’ fees to Frost. Because we hold the Peters conveyed a 1/2 nonparticipating mineral

interest to Coates, we reverse the trial court’s judgment and render judgment in favor of Coates

and Hager.

                                               BACKGROUND

        On May 3, 1932, W.R. Peters and his wife, Leila Peters, conveyed to George Coates

mineral interests in three 680-acre sections of land covered by three surveys, Surveys 36, 39, and

40. 3 The parties utilized a commercial preprinted multi-clause deed commonly used at the time, 4

containing a granting clause, a “subject-to” clause (related to any existing lease), and a future

lease clause. The parties filled in numbers, land descriptions, and other information.

                            May 3, 1932 Peters-Coates “Royalty Contract”

The “granting clause” conveyed Coates:

        . . . an undivided one-half interest in and to all of the oil, gas, and other minerals
        in and under the following described tract of land, situated in Duval County,
        Texas, to wit: [Surveys 36, 39, and 40] together with the rights of ingress and
        egress at all times for purposes of taking said minerals.

The subject-to, or existing lease clause provides:

        It is distinctly understood and herein stipulated that if [sic] said land is under an
        Oil and Gas Lease by grantor providing for a royalty of 1/8th of the oil and certain
        royalties for gas and other minerals, and that Grantee shall receive one-half of the
        royalties and rentals provided for in said lease; but he shall have no part of the
        annual rentals paid to keep said lease in force until drilling is begun.
2
  Coates subsequently conveyed 1/8 interest to Hager.
3
  A few months later, Coates reconveyed his interest in Survey 36 to the Peters.
4
  This conveyance, as well as the Coates-Hager conveyance, were made on identical pre-printed, multi-clause forms
entitled “Royalty Contracts.” These forms were commonly used at the time and contain language this court has
previously construed. See generally Hausser v. Cuellar, 345 S.W.3d 462 (Tex. App.—San Antonio 2011, pet.
denied); Hamilton v. Morris Res., Ltd., 225 S.W.3d 336 (Tex. App.—San Antonio 2007, pet. denied); Garza v.
Prolithic Energy Co., L.P., 195 S.W.3d 137 (Tex. App.—San Antonio 2006, pet. denied).

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The future lease clause provides:

           It is further agreed that Grantee shall have no interest in any bonus money
           received by the Grantor in any future lease or leases given on said land, and that it
           shall not be necessary for the Grantee to join in any such lease or leases so made;
           That Grantee shall receive under such lease or leases 1/16th part of all oil, gas and
           other minerals taken and saved under any such lease or leases, and he shall
           receive the same out of the royalty provided for in such lease or leases, but
           Grantee shall have no part in the annual rentals paid to keep such lease or leases
           in force until drilling is begun.

           On the same day, the Peters granted additional mineral interests to George Coates,

utilizing another pre-printed commercial form, this one bearing the printed title “Mineral Deed

and Royalty Transfer.” The deed describes seven tracts of land in seven surveys. Aside from an

additional interest conveyed in Survey 40, the other six tracts in the Mineral Deed are completely

distinct from the lands described in the Peters-Coates Royalty Contract.

                               May 6, 1932 Coates-Hager “Royalty Contract”

           Three days after the Peters-to-Coates conveyances, George Coates conveyed 1/8 interest

in Surveys 36, 39, and 40 under the Peters-Coates Royalty Contract to Dilworth Hager. 5 The

parties utilized the same form used in the Peters-Coates Royalty Contract. The preprinted

clauses of the Coates-Hager Royalty Contract, as filled in by the parties, provide as follows:

           The granting clause grants to Dilworth Hager “an undivided 1/8 interest in and to
           all of the oil, gas and other minerals in and under [Surveys 36, 39, and 40].”

           The subject-to clause provides that Hager will receive 1/8th of the 1/8th royalty
           under the existing lease, but no annual rentals.

           The future lease clause provides that Hager will neither receive any bonus from
           nor be required to join in any such lease, but will receive “1/64th of all oil, gas
           and other minerals taken and saved under any such lease or leases.”




5
    In 1933, Hager conveyed 1/4 of his interest in Survey 39 to W.W. Kelly.

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                         Historical Treatment of the Interest by the Parties

       For decades following the 1932 conveyances, the interests obtained by Coates and Hager

under the Royalty Contracts were recognized as a collective 1/2 nonparticipating mineral interest

(that is, 3/8th to Coates and 1/8th to Hager). A number of leases covering the subject properties

were executed providing for a royalty greater than 1/8, and numerous division orders were

generated and executed recognizing the right of Coates and Hager to participate in a collective

1/2 of such larger lease royalty. For many years, Frost and its predecessors signed off on

multiple division orders crediting Coates and Hager proportionately with their respective 3/8 and

1/8 mineral interests.

                                 January 1992 Coates Stipulation

       In 1987, Frost Bank, managing assets owned by the Peters, executed a lease to the Hawn

Brothers covering Survey 40 and providing for a 1/4 royalty. In 1989, division orders were

issued by the lease operator reflecting Coates’s royalty interest as 3/64. Coates disputed the

interest, claiming it was entitled to participate in the full 1/4 royalty under the lease,

proportionate to its retained share of the 1/2 mineral interest received from the Peters.

       On January 6, 1992, Black Gold, the Hawn Brothers’ lease operator, wrote to Coates

stating it was retaining the disputed revenues and would initiate an interpleader action if the

dispute was not resolved within thirty days. On January 29, 1992, Coates responded with a letter

(“the 1992 Stipulation”), withdrawing its claim for additional royalties and stipulating that the

royalty owned by Coates was a “3/64th royalty interest.” Although Coates argues this letter

related only to the Hawn Brothers lease, Frost argues the 1992 Stipulation interpreted the 1932

conveyance and applied to future leases as well.




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                                                                                  04-11-00838-CV


                      Sanchez Oil and Gas Leases and Underlying Lawsuit

       In 2003 and 2004, Frost Bank signed two oil and gas leases with Sanchez Oil & Gas

Corporation, one covering Survey 39 and one covering all of Survey 40 except the southeast

quarter, providing for a 1/4 royalty interest. When Sanchez began producing from the leases in

2006, it issued division orders crediting Coates and Hager with interests based on a 1/16 fixed

royalty, rather than on an aggregate 1/2 interest of the 1/4 royalty provided for in the leases.

Coates disputed the lesser interest.

       Frost claimed the deed should be construed to grant only a fixed 1/16 royalty interest in

any future leases, and that Coates was bound by the 1992 Stipulation limiting its claim under the

1932 Peters-Coates Royalty Contract to a fixed 1/16 royalty (less any interest conveyed to

Hager).

       Failing to resolve the issue, Coates sued Frost Bank to affirm its 1/2 mineral ownership

interest in the subject lands and to recover unpaid royalties. Frost Bank brought counterclaims,

seeking declaratory judgment to construe the parties’ rights under the Peters-Coates Royalty

Contract and the 1992 Stipulation, and for breach of contract under the 1992 Stipulation. Hager

and Falcon intervened. Sanchez retained the disputed royalties, now totaling approximately $2.5

million, pending the outcome of this litigation.

       The trial court denied the parties’ competing motions for summary judgment, and the

case proceeded to a one day bench trial. The trial court allowed the introduction of extrinsic

evidence, such as the “1932 Mineral Deed” and the “1992 Stipulation.” The trial court held that,

as a result of the 1932 Peters-Coates Royalty Contract and the 1992 Stipulation, Coates and

Hager collectively own a 1/16th fixed royalty, rather than a collective 1/2 nonparticipating fee

mineral interest, and that Coates waived its rights to claim, and is estopped from claiming, any



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greater interest due to the 1992 Stipulation. Alternatively, the trial court concluded that if the

1932 conveyances did not reserve the greater interests claimed by Frost, Frost had adversely

possessed the disputed interest. Finally, the trial court awarded Frost attorneys’ fees against

Coates. Coates and Hager timely appealed.

                                             ANALYSIS

       Coates argues the trial court erred in holding the 1932 Peters-Coates Royalty Contract

conveyed only a 1/16 fixed royalty interest, as opposed to a 1/2 nonparticipating mineral interest.

It also claims the trial court erred in using the 1992 Stipulation to construe the original deed.

                                        Standard of Review

                                         Deed Construction

       A deed is unambiguous when it is so worded that it can be given “a certain or definite

legal meaning or interpretation.” Coker v. Coker, 650 S.W.2d 391, 393 (Tex. 1983). The

interpretation of an unambiguous deed is a question of law, and this court conducts a de novo

review of the trial court’s construction. See Altman v. Blake, 712 S.W.2d 117, 118 (Tex. 1986);

Hausser v. Cuellar, 345 S.W.3d 462, 467 (Tex. App.—San Antonio, 2011, pet. denied) (en

banc). When conducting a de novo review, we exercise our own judgment and redetermine each

issue, according no deference to the trial court’s decision. Quick v. City of Austin, 7 S.W.3d 109,

116 (Tex. 1998). In construing the meaning of a deed, the primary duty of the court is to

ascertain the intent of the parties as provided in the four corners of the document. Hausser, 345

S.W.3d at 467 (citing Luckel v. White, 819 S.W.2d 459, 461 (Tex. 1991)). To determine intent,

the court must harmonize all portions of the deed, even if parts of the deed appear inconsistent or

contradictory. Hausser, 345 S.W.3d at 466 (citing Luckel, 819 S.W.2d at 462). The court “must

assume the parties to the instrument intended every clause to have some effect; therefore the



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language of the deed should be interpreted so that no provision is rendered meaningless.”

Hausser, 345 S.W.3d at 467 (citing Luckel, 819 S.W.2d at 461).

                                Admission of Extrinsic Evidence

       In reviewing a cause tried before the court, the court of appeals generally assumes the

trial court disregarded any incompetent evidence. Gillespie v. Gillespie, 644 S.W.2d 449, 450

(Tex. 1982); Tagle v. Galvan, 155 S.W.3d 510 (Tex. App.—San Antonio, 2004, no pet.). Thus,

the admission of such evidence will generally not require reversal of the judgment when there is

competent evidence supporting the trial court’s decision.        Gillespie, 644 S.W.2d at 450.

However, this rule does not apply when it is affirmatively shown that the judgment of the trial

court was based in whole or in part on inadmissible evidence. Sparks v. Gandy, 213 S.W.2d 559,

560 (Tex. App.—Beaumont 1948); see Dodeka, L.L.C. v. Campos, No. 04-11-00339-CV, 2012

WL 1522179, at *5 (Tex. App.—San Antonio May 2, 2012) (noting trial court’s error in

deeming evidence inadmissible caused rendition of improper judgment); see TEX. R. APP. P.

44.1(a) (stating trial court judgment may be reversed if trial court error caused the rendition of

improper judgment).

       To admit and consider extrinsic evidence when construing a deed, a trial court must make

a determination that the deed contains an ambiguity. Rutherford v. Randal, 593 S.W.2d 949

(Tex. 1980) (noting that absence of ambiguity in mineral deed negates justification for

consideration of extrinsic evidence concerning original intent of grantor). This determination is

a question of law. Hausser, 345 S.W.3d at 466 (citing Friendswood Dev. Co. v. McDade & Co.,

926 S.W.2d 280, 282 (Tex. 1996). To make this determination, the trial court must examine the

deed as a whole in light of the circumstances present at the time of its execution. Columbia Gas

Transmission Corp. v. New Ulm Gas, Ltd., 940 S.W.2d 587, 589 (Tex. 1996).



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                                             Application

       This court has recently grappled with the two issues of mineral conveyances presented in

this case: (1) whether the interests conveyed are mineral ownership interests or royalty interests,

and (2) reconciliation of deeds containing different fractional interests in the granting, existing,

and future lease clauses. See Hausser, 345 S.W.3d at 467; Garza, 195 S.W.3d at 141.

                              Mineral Ownership or Royalty Interest?

       In Garza, this court interpreted two separate deeds, a form “Royalty Contract” in favor of

J.B. Claypool and a “Mineral Deed” in favor of Homer P. Lee, to determine whether the interests

conveyed were mineral or royalty interests. As a threshold matter, the court first recognized that

the “Royalty Contract” name appearing in the Claypool form conveyance should not be given

controlling effect. Garza, 195 S.W.3d at 139 n.1 (citing Etter v. Texaco, Inc., 371 S.W.2d 702,

705 (Tex. Civ. App.—Waco 1963, writ ref’d n.r.e.)). The court next set out the five essential

attributes of a severed mineral estate: (1) the right to develop (the right of ingress and egress); (2)

the right to lease (the executive right); (3) the right to receive bonus payments; (4) the right to

receive delay rentals; and (5) the right to receive royalty payments. Id. (citing Altman v. Blake,

712 S.W.2d 117, 118 (Tex. 1986)). The court noted the Texas Supreme Court’s holding that “a

mineral interest shorn of the executive right and the right to receive delay rentals remains an

interest in the mineral fee.’” Id. (quoting Altman, 712 S.W.2d at 118-19).

       The deeds at issue in Garza, and the Royalty Contracts in this case, reserved to the

grantors at least the second, third, and fourth Altman rights—and perhaps, in part, the first. The

1932 Royalty Contracts in this case reserved for the grantors (Peters and Coates, respectively)

the right to lease, to receive bonus payments and to receive delay rentals. Following the Texas

Supreme Court’s holding in French v. Chevron U.S.A., Inc., 896 S.W.2d 795 (Tex. 1995), the



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court in Garza held that the grantor’s reservation of these various attributes would have been

redundant if the deeds intended to convey a royalty interest, which would not have carried such

rights in the first instance. 195 S.W.3d at 137; see also Bank One, Tex., Nat’l Assoc. v.

Alexander, 910 S.W.2d 530, 535 (Tex. App.—Austin 1995, writ denied) (finding deed reserved

mineral interest because express reservation of first four Altman rights would be redundant if

deed reserved only a royalty interest, since such rights are not appurtenant to a royalty interest).

       The court also recognized that the phrase “in and under”—contained in the granting

clause of the Garza deeds just as in the Peters-Coates and Coates-Hager Royalty Contracts

here—refers to a mineral interest. See Garza, 195 S.W.3d at 143 (citing Laura H. Burney,

Interpreting Mineral and Royalty Deeds: The Legacy of the One-Eighth Royalty and Other

Stories, 33 ST. MARY’S L.J. 1, 30-31 (2001)). Thus, the court found the Garza deeds conveyed a

mineral interest, not a royalty interest. Garza, 195 S.W.3d at 142.

       Then, in Hamilton v. Morris Resources, Ltd., this court again considered nearly identical

form language as in the Royalty Contracts at issue in Garza and the instant case, and again found

the instruments conveyed a fractional nonparticipating mineral fee interest, not a fixed royalty.

225 S.W.3d 336 (Tex. App.—San Antonio 2007). Referencing the “in and under” language in

the granting clause, and citing the opinion in Garza, this court construed the original deeds and a

correction deed to convey an undivided 1/4 mineral interest. Id. at 344. Consistent with the

holding in Garza, the court rejected the argument that stripping the grantee of delay rentals and

bonuses converted the mineral interest into a nonparticipating royalty interest. Id. at 345 (“A

mineral interest shorn of certain attributes nevertheless remains a mineral interest.”) (citing

Altman, 712 S.W.2d at 118-19); French, 896 S.W.2d at 798.




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       The trial court in the instant case held the Peters-Coates Royalty Contract conveyed to

Coates only a 1/16 fixed royalty interest under any future leases. Yet, both the Peters-Coates and

Coates-Hager Royalty Contracts bear the mineral ownership hallmarks this court recognized in

Garza and Hamilton: a grant containing the traditional “in, on, and under” language used to

create a mineral fee, followed by express reservation of certain mineral attributes (here, rights to

lease and receive delay or rental payments). Thus, we hold the 1932 Royalty Contracts in this

case conveyed an undivided mineral ownership interest, not a fixed royalty interest.

         Reconciliation of Conflicting Fractions in Granting and Future Lease Clauses

       In Garza, we examined a variety of decisions addressing the use of different fractions in

the granting and future-lease clauses, but noted that none of them had directly addressed the

“problematic conflict between the granting of a mineral interest and a future lease provision

appearing to convey a smaller royalty interest.” 195 S.W.3d at 144–45 (discussing Concord Oil

Co. v. Pennzoil Exploration & Prod. Co., 966 S.W.2d 451 (Tex. 1998); Luckel v. White, 819

S.W.2d 459, 461–63 (Tex. 1991); Garrett v. Dils Co., 157 Tex. 92, 299 S.W.2d 904 (1957)).

       Acknowledging the reason for the development of the three-grant or multiclause lease

form and the typical 1/8th royalty provided in leases at the time the Garza conveyances were

executed, we reasoned that neither the royalty contract nor the mineral deed contained any

language that made it evident that two differing estates were to be conveyed by the use of

different fractions in the grant and existing lease clauses. Id. at 146. We rejected the grantor’s

proposed construction that the mineral interests conveyed to grantees in the granting clause were

reduced by operation of the future lease clause to the smaller fraction therein when the current

lease was executed. Id. at 145.




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       The court harmonized the provisions in a way that the interests set out in the granting

clauses entitled the grantees to consistently receive an interest in whatever amount of royalty was

paid under the future lease clause. See id. at 145. The court concluded that the smaller fraction

stated in the modified future lease clause was nothing more than a recognition of what the

royalty would be under a future lease providing for the “usual” 1/8th royalty. See id. at 146.

       Based on this reasoning, we hold the provision in the future lease clause of the Peters-

Coates Royalty Contract—providing that Coates shall receive “1/16th part of all oil, gas and

other minerals taken and saved under any such lease”—does not limit Coates’s granted right to

1/16th of whatever amount of royalty is paid under a future lease. Rather, the 1/16th fraction is

simply a recognition of what the royalty would be under a future lease clause providing for the

“usual” 1/8th royalty (that is, Coates’s 1/2 interest multiplied by a 1/8 royalty). Thus, we hold

the Peters-Coates 1932 Royalty Contract conveyed to Coates a 1/2 share in whatever royalty is

reserved under future leases (subject to the subsequent conveyance/reduction attributable to

Hager).

       In Hausser v. Cuellar, this court faced a similar problem with conflicting fractions. In

Hausser, the granting clause of the 1936 deed in question conveyed an undivided 1/2 interest “in

and to all of the oil royalty . . .” 345 S.W.3d at 467–68. The existing lease clause stated that the

deed conveyed “one-half (1/2) of all the oil [and other] royalty.” Id. at 468. However, the

pertinent part of the future lease clause of the 1936 deed read:

       In the event a future lease or leases are executed . . . then the Grantees shall
       receive under such future lease or leases one-sixteenth (1/16) part of all oil, gas
       and other minerals taken and saved . . . under such lease or leases, and shall
       receive the same out of the royalty therein provided for . . .

Id. at 468. The existing lease provided for a 1/8th royalty, and it was undisputed that grantees

had received 1/16th of production (1/2 of 1/8th) under the existing lease for years. Id. at 465. In

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2006, a new lease was executed with a 1/4 royalty. Id. Grantors’ successors asserted that,

pursuant to the terms of the future lease clause, the grantees’ royalty should be limited to a fixed

1/16 royalty interest (1/16th of production). Id. Grantees’ successors argued that pursuant to the

granting clause, grantees were entitled to an undivided 1/2 royalty received under the 2006 lease

(1/2 of 1/4th, or 1/8th of production). Id.

       This court, en banc, rejected the grantors’ argument that the future lease clause should

control the amount of royalty reservation because the 2006 lease was executed after the deed. Id.

at 469–70. Instead, we held that under a proper analysis, the 1936 deed must be harmonized to

give effect to all its provisions by ascertaining the parties’ intent from the four corners of the

instrument and to determine whether the granting clause or future lease clause controlled the

amount of royalty reservation. Hausser, 345 S.W.3d at 470 (citing Garza, 195 S.W.3d at 146).

       After harmonizing all the provisions of the deed, we held the deed conveyed an

undivided 1/2 (the grant clause fraction) of the 1/4th royalty (the new lease royalty), or 1/8th of

production. Hausser, 345 S.W.3d at 470. We reasoned that the 1936 deed involved a single

conveyance with fixed rights because the deed did not contain any language suggesting two

different estates were conveyed. Id.

       Thus, as the court noted in Garza and Hausser, smaller fractions referencing royalties in

the future lease clause that are multiples of 1/8 (here, 1/16th in the Peters-Coates Royalty

Contract and 1/64th in the Coates-Hager Royalty Contract) do not create a fixed royalty of that

size, but simply recognize what the royalty would be under a future lease providing for the

typical 1/8th royalty. Based on this court’s precedent in reconciling fractions in the granting and

future lease clauses, we hold Coates is entitled to an undivided 1/2 nonparticipating mineral




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interest “in whatever amount of royalty is paid under the future lease clause,” subject to the

subsequent conveyance of 1/8 interest attributable to Hager. See Garza, 195 S.W.3d at 145.

                                       Admission of Extrinsic Evidence

         Coates also argues the court erred in admitting extrinsic evidence to construe the Royalty

Contract, including the 1992 Stipulation which allegedly limits Coates’s interest to a 1/16 fixed

royalty interest.

         Here, neither party contends the 1932 Royalty Contracts are ambiguous; in fact, both

parties agree the Royalty Contracts are unambiguous, even though they advance conflicting

interpretations of the conveyance language. See Columbia Gas Transmission Corp., 940 S.W.2d

at 589 (“An ambiguity does not arise simply because the parties advance conflicting

interpretations of the contract.”). 6

         After reviewing the 1932 Royalty Contracts, applying the rules of statutory construction

mentioned previously, and using the deed construction this court followed in Garza, we hold the

1932 Royalty Contracts are unambiguous, and unequivocally confer a 1/2 mineral ownership

interest to Coates, subject to the subsequent conveyance of 1/8 mineral ownership interest to

Hager. No extrinsic evidence should have been admitted to construe the Royalty Contracts as

such admission violated the Four Corners Rule. See Hausser, 345 S.W.3d at 467; Luckel, 819

S.W.2d at 461.

                                              Waiver and Estoppel

         The trial court also found Coates waived, and was estopped in equity, from claiming a

greater interest under the 1932 Royalty Contract than was stipulated in the 1992 Stipulation.


6
  We recognize Frost introduced the 1992 Stipulation not only for purposes of construing the 1932 Peters-Coates
Royalty Contract, but also alleging a breach of contract claim based on the 1992 Stipulation. The breach of contract
claim is not contested in this appeal; therefore, we consider the propriety of admitting the 1992 Stipulation only as it
relates to the construction of the 1932 Peters-Coates Royalty Contract.

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Because we hold the 1992 Stipulation should not have been used to construe the 1932 deed, we

need not reach these issues.

                                       Title by Limitations

                                       Standard of Review

       When the trial court has filed findings of fact and a reporter’s record has been filed, a

court of appeals reviews the findings for legal and factual insufficiency of the evidence using the

same standards applied to jury findings. Catalina v. Blasdel, 881 S.W.2d 295, 297 (Tex. 1994);

Monroe v. Monroe, 358 S.W.3d 711,716 (Tex. App.—San Antonio 2011, pet. denied). The trial

court’s legal conclusions are reviewed de novo. BMC Software Belgium, N.V. v. Marchand, 83

S.W.3d 789, 794 (Tex. 2002).

                                           Application

       The trial court alternatively concluded that Frost Bank is entitled to title by limitations to

the disputed fractional mineral interest claimed by Coates and Hager. Although this court holds

the 1992 Stipulation should not have been used to construe the 1932 Royalty Contracts, we must

now determine if the 1992 Stipulation allowed Frost to adversely possess the mineral interest

claimed by Coates and Hager and obtain title by limitations.

       As a threshold matter, during oral argument, counsel for Frost conceded the 1992

Stipulation did not apply to Hager. Because Frost based its title by limitations claim on this

document, we hold the trial court erred in finding Frost was entitled to Hager’s fractional mineral

interest through title by limitations. We must now analyze whether Frost adversely possessed

Coates’s mineral interest.

       Under sections 16.024 through 16.026 of the Texas Civil Practices & Remedies Code, a

party must bring suit to recover real property held by another in peaceable and adverse



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possession under title or color of title within three, five, or ten years of the date the cause of

action accrues. See TEX. CIV. PRAC. & REM. CODE §§ 16.024 (three years), 16.025 (five years),

16.026 (ten years) (West 2002). To establish adverse possession, a party must show “an actual

and visible appropriation of real property, commenced and continued under a claim of right that

is inconsistent with and is hostile to the claim of another person.” Id. § 16.021(1). “Peaceable

possession” is defined as “possession of real property that is continuous and is not interrupted by

an adverse suit to recover the property.” Id. § 16.021(3).

       The starting point for adverse possession analysis is an examination of the relationship

between Coates and Frost, so that one can determine whether one party’s possession was adverse

to the other. See Nat. Gas Pipeline Co. of Am. v. Pool, 124 S.W.3d 188, 194 (Tex. 2003). Under

the 1932 Royalty Contracts, Frost, as trustee of the Peters, and Coates were co-tenants. See

Pagel v. Pumphrey, 204 S.W.2d 58, 65 (Tex. Civ. App.—San Antonio 1947, writ ref’d n.r.e.)

(characterizing owners of undivided mineral interests as co-tenants).          To prove adverse

possession against a co-tenant, one must prove “ouster”—“unequivocal, unmistakable, and

hostile acts the possessor took to disseize other cotenants.” BP Am. Prod. Co. v. Marshall, 342

S.W.3d 59, 70 (Tex. 2011) (“[T]he ouster standard that applies to co-tenants differs from the

adverse possession requirement courts impose between strangers because cotenants have rights

to ownership and use of the property a stranger would not have.”).

       In concluding the adverse possession statutes applied in this case, the trial court made the

following finding of fact:

       From the 1992 Stipulation until the time that Plaintiffs disputed their interest with
       Sanchez in December of 2006, Frost Bank held the disputed mineral interest in
       peaceable and adverse possession under title or color of title. That possession has
       lasted for a period of more than three years, five years, and ten years.




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(emphasis added). The trial court clearly relied on the 1992 Stipulation as evidence of the

“hostile” act required to put Coates on notice of Frost’s attempt to oust Coates from its interest.

However, Coates contends the 1992 Stipulation was limited to the property and term covered by

the Hawn Brothers lease and cannot be globally applied to the other lands and subsequent leases

at issue in this lawsuit.

        Even if this court finds the 1992 Stipulation put Coates on notice of Frost’s attempt to

oust Coates from its interest, the evidence is legally and factually insufficient to support the

court’s finding that Frost held the disputed interests in peaceable adverse possession for the

requisite statutory period. The record contains examples of division orders, signed by Frost

Bank before and after 1992, recognizing the greater interest that Coates claims in this lawsuit.

For example, Frost paid Coates its alleged 3/8 mineral interest under the J&P lease in 1995,

which was executed after the 1992 Stipulation. The evidence in the record does not support a

finding that from 1992 to 2006 Frost Bank held the disputed mineral interest in peaceable and

adverse possession.         See, e.g., TEX. CIV. PRAC. & REM. CODE § 16.021(3) (“peaceable

possession” requires possession that is “continuous and not interrupted . . .”). We hold adverse

possession by Frost could not be continuous if Frost recognized different mineral interests for

Hager and Coates from time to time.

        Furthermore, upon entering into the Sanchez leases, Frost’s interest changed. Under

Texas law, a mineral lessor retains only “a royalty interest and the possibility of reverter” and

“the lessee acquires title to all of the oil and gas in place.” Pool, 124 S.W.3d at 188. Thus, as

the lessor of the Sanchez leases, Frost retained only a royalty interest. A royalty interest, as

distinguished from a mineral interest, is a non-possessory interest. Id. In order to prove adverse

possession, Frost must demonstrate that it was adverse to Coates’s undivided mineral interest.



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See id. 195. As the holder of only a right of reversion and a royalty interest under the Sanchez

leases, Frost had no possessory interest of the mineral fee; it therefore could not have asserted

the required possession, and certainly not open and hostile possession, over Coates’s mineral

interest. There is no evidence that Frost took actual possession of the minerals by drilling and

producing oil and gas. Id. at 193. Instead, it conveyed the minerals, by an oil and gas lease, to

third party oil and gas companies, holding only a non-possessory royalty interest.

        Therefore, we hold Frost did not adversely possess Coates’s mineral rights in dispute, and

therefore was not entitled to title by limitations.

                                           Attorneys’ Fees

                                         Standard of Review

        The Declaratory Judgments Act entrusts attorneys’ fee awards to the trial court’s sound

discretion, subject to the requirements that any fees awarded be reasonable and necessary, which

are matters of fact, and to the additional requirements that fees be equitable and just, which are

matters of law. Bocquet v. Herring, 972 S.W.2d 19, 21 (Tex. 1998). It is an abuse of discretion

for a trial court to rule arbitrarily, unreasonably, or without regard to guiding legal principles,

e.g., Goode v. Shoukfeh, 943 S.W.2d 441, 446 (Tex. 1997), or to rule without supporting

evidence, e.g. Beaumont Bank v. Buller, 806 S.W.2d 223, 226 (Tex. 1991). Bocquet, 972

S.W.2d at 21. Therefore, in reviewing an attorneys’ fee award under the Act, this court must

determine whether the trial court abused its discretion by awarding fees when there was

insufficient evidence that the fees were reasonable and necessary, or when the award was

inequitable or unjust. Id.




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                                                  Application

        The trial court awarded Frost Bank attorneys’ fees totaling $625,138.29 and Falcon Bank

attorneys’ fees totaling $99,876.25. Coates challenges the trial court’s award on three grounds:

(1) Frost and Falcon were required to segregate their fee, as mandated by Gullo Motors; 7 (2)

attorney’s fees are not recoverable in a title dispute: and (3) Frost and Falcon were not permitted

to seek attorneys’ fees for a declaratory judgment where the dispute was already pending before

the court.

        All of Frost Bank’s arguments regarding attorneys’ fees would require the 1992

Stipulation be used to construe the original 1932 deed. For example, Frost argues they did not

have to segregate recoverable and non-recoverable claims because all of the claims and defenses

in this action were inextricably intertwined because the 1992 Stipulation was necessary to

construe the 1932 Royalty Contract. Given that this court now holds the 1992 Stipulation was

not necessary to interpret the deed, we reverse the trial court’s judgment on attorneys’ fees and

render Frost Bank and Falcon Bank take nothing.

                                                CONCLUSION

        Based on the foregoing, we reverse the trial court’s judgment. We render judgment that

the 1932 Peters-Coates Royalty Contract entitled appellants Coates Energy Trust and Coates

Energy Interests, Ltd. (“Coates”) to 1/2 nonparticipating mineral interest in the 680 acres in

Surveys 36, 39 and 40 in Duval County, Texas, subject to any subsequent conveyances, and that

the 1932 Coates-Hager Royalty Contract entitled appellant Hager Oil & Gas to 1/8

nonparticipating mineral interest in the 680 acres in Surveys 36, 39 and 40, subject to any

subsequent conveyances. We also hold Frost did not adversely possess the disputed fractional


7
  See Tony Gullo Motors I, L.P. v. Chapa, 212 S.W.3d 299, 311 (Tex. 2006) (requiring party seeking attorneys’ fees
to segregate fees between recoverable and unrecoverable claims).

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nonparticipating mineral rights, and therefore is not entitled to title by limitations. Finally, we

reverse the trial court’s judgment as to attorneys’ fees and render judgment that Frost National

Bank and Falcon International Bank take nothing.




                                                  Marialyn Barnard, Justice




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