On October 9, 2015, the Texas Supreme Court denied a Petition for Review filed by Orca Assets G.P., L.L.C., (“Orca”), which asked the Court to overturn a decision rendered by the Court of Appeals in the Thirteenth District of Texas, Corpus Christi – Edinburg. The Opposing parties were Burlington Resources Oil and Gas Company, L.P., (“Burlington”), Petrohawk Properties, L.P., (“Petrohawk”), and GeoSouthern DeWitt Properties, L.L.C. (“GeoSouthern”) (collectively the “Burlington Group”).

The lawsuit centers on the minerals owned in the Eagle Ford Shale by the Red Crest Trust. JPMorgan Chase Bank, N.A. (“Chase”) is the Trustee. In June 2010, Chase leased 1,811 acres to GeoSouthern, which assigned a portion to Petrohawk, which assigned a portion to Burlington. A Memorandum of Lease was executed, but not recorded until December 9, 2010. On December 6, 2010, Chase entered into a Letter of Intent with Orca, in which Chase agreed to lease to Orca several tracts, including some of the tracts previously leased to GeoSouthern.

Orca’s landman searched the records of Karnes and DeWitt counties before Orca executed the Letter of Intent, and, of course, did not find any recorded leases covering the lands. The Letter of Intent was expressly made without warranty of any kind. The Letter of Intent provided Orca with an additional thirty (30) calendar days after execution to re-examine the title work. However, the re-examination did not occur.

Orca and Chase executed the leases in January, 2011. Burlington sued Orca, asserting trespass to try title, suit to quiet title, and seeking a declaratory judgment that announced the property was rightly owned by Burlington. Petrohawk and GeoSouthern intervened with similar claims. As a result of a summary judgment filed by the Burlington Group, the trial court declared that the Burlington Group’s title was superior to Orca’s. Orca appealed.

The Court of Appeals set out the general rule that “earlier title emanating from [a] common source is the better title and is given prevailing effect.”   The Court also set out the exception to that rule, which is claiming bona fide purchaser status, which is the very defense Orca asserted. They noted that “[t]o qualify as a bona fide purchaser, ‘one must acquire property in good faith, for value, and without notice of any third-party claim or interest.’ In Texas, two types of notice are recognized: constructive or actual. “[A]ctual notice rests on personal information or knowledge, whereas constructive notice is notice the law imputes to a person not having personal information or knowledge.”

The interesting twist in this situation is whether the Letter of Intent could be considered an “‘acquisition of property” such that the bona fide purchaser defense would apply.  Orca, of course, claimed that it was an acquisition, whereas the Burlington Group claimed that the Letter of Intent did not convey a property interest, and the very language of the Letter of Intent cut against Orca’s claim that it was a bona fide purchaser.

The Court found that it did not need to decide whether the Letter of Intent conveyed a property interest, because even if it did, the negation of any warranty made the Letter of Intent equivalent to a quitclaim deed. It is well settled in Texas that “a party acquiring property under a quitclaim deed is not eligible to claim bona fide purchaser status because it is charged with notice of title defects as a matter of law.” Therefore, the Court of Appeals affirmed the trial court’s decision. Orca, upon rehearing, asserted that the mere negation of the warranty did not transform the instrument into a quitclaim deed. The Court, however, disagreed, pointing to the obvious intent of the parties as found in the language of the Letter of Intent.

Obviously, title must be examined and re-examined prior to the actual conveyance of the property interest, to ensure that no party with superior title files anything just before the conveyance. But the other lesson learned here is that courts will look to the intent of an instrument, not merely the words used, to determine whether or not an instrument is a quitclaim. “Here, considering the unequivocal language of the entire Letter of Intent, [the Court was] left with no doubt that the parties intended to convey, if anything, ‘merely the grantor's rights’ in the specified properties. […] Accordingly, it [was] equivalent to a quitclaim deed for purposes of [their] analysis.”