Bachler v. Rosenthal

• Decision Date: 14 November 1990
• Docket Number: No. 3-89-254-CV,3-89-254-CV
• Citation: 798 S.W.2d 646
• Parties: Ruth Edna BACHLER, Julia Carol Pletcher, Roland E. Busch and Lela Kathryn Busch, Appellants, v. Stanley H. ROSENTHAL, Stephen J. Forman and Maury B. Forman, as Independent Co-Executors of the Estate of Sol Forman, Deceased, and Leon Noack, Appellees.
• Court: Texas Court of Appeals

Page 646

798 S.W.2d 646

Ruth Edna BACHLER, Julia Carol Pletcher, Roland E. Busch and Lela Kathryn Busch, Appellants, v. Stanley H. ROSENTHAL, Stephen J. Forman and Maury B. Forman as Independent Co-Executors of the Estate of Sol Forman, Deceased, and Leon Noack, Appellees.

No. 3-89-254-CV.

Court of Appeals of Texas Austin.

Nov. 14, 1990.

Rehearing Overruled Dec. 12, 1990.

Frank R. Parish, Parish & Ellison, Houston, for appellants.

Aaron L. Jackson, Ford, Ferraro, Fritz & Byrne, Austin, for appellees.

Before POWERS, JONES and EARL W. SMITH ^*, JJ.

ON MOTION FOR REHEARING

JONES, Justice.

The opinion and judgment issued by this Court on August 8, 1990, are withdrawn, and this opinion is filed in place of the earlier one.

The lessors of an oil and gas lease, Ruth Edna Bachler and others ¹ (lessors), brought suit against the lessees, Stanley H. Rosenthal and others ² (lessees), seeking cancellation of the lease as a result of the lessees' alleged cessation of production. The trial court granted the lessees' motion for summary judgment, and the lessors perfected this appeal. We will reverse the judgment.

BACKGROUND

The lessors' predecessors-in-title entered into an oil and gas lease with appellee Leon Noack on December 31, 1968. Noack assigned the lease to appellee Rosenthal, who subsequently assigned an overriding royalty interest to Noack. The provisions of the lease pertinent to this action are as follows:

Paragraph 2:

Subject to other provisions herein contained, this lease shall be for a term of 5 years from this date (called "primary term") and as long thereafter as oil, gas or other mineral is produced from said land or land with which said land is pooled hereunder.

Paragraph 6:

[I]f after discovery and production of oil, gas or other mineral [on said land], the production thereof should cease from any cause, this lease shall not terminate if Lessee commences operations for drilling or reworking within sixty (60) days thereafter....

(Emphasis added.) The lease was operated profitably beyond its primary term, and the lease term was thereby extended. Beginning in August 1986, physical production from the lease decreased (as did the price of oil), and for at least a short time ceased altogether. However, following reworking operations in November 1986 and again in March 1987, consistently profitable production was restored beginning in approximately April 1987.

Notwithstanding the restoration of profitable production, the lessors brought suit to cancel the lease, alleging that production had ceased and that more than sixty days had elapsed before reworking operations began. After filing general denials, the lessees filed motions for summary judgment, along with supporting affidavits, contending that the evidence conclusively established that production had never ceased. The lessors filed a written response. The trial court granted the lessees' motion.

The standards for granting a summary judgment are well established:

(1) The movant for summary judgment has the burden of showing that there is no genuine issue of material fact and that it is entitled to judgment as a matter of law;

(2) In deciding whether there is a disputed material fact issue precluding summary judgment, evidence favorable to the non-movant will be taken as true;

(3) Every reasonable inference must be indulged in favor of the non-movant and any doubts resolved in its favor.

Nixon v. Mr. Property Management Co., 690 S.W.2d 546, 548-49 (Tex.1985). "[T]he non-movant needs no answer or response to the motion to contend on appeal that the grounds expressly presented to the trial court by the movant's motion are insufficient as a matter of law to support summary judgment." City of Houston v. Clear Creek Basin Auth., 589 S.W.2d 671, 678 (Tex.1979) (emphasis in original).

In their second and third points of error, the lessors contend that the lessees failed to show they were entitled to judgment as a matter of law because they failed to prove conclusively that production was continuous, i.e., never ceased.

In our original opinion, we pointed out that the word "production" in the habendum clause of an oil and gas lease impliedly means production "in paying quantities," i.e., profitable production. Garcia v. King, 139 Tex. 578, 164 S.W.2d 509 (1942). "Production," therefore, generally refers to legal production rather than physical production. The traditional legal test to determine whether there is production in paying quantities is two-pronged:

[T]he burden [is] on the [lessors] to prove that [the lessee] was not making a profit from operation of the well. If they fail to produce evidence which establishes that fact as a matter of law or fail to obtain a fact finding, supported by evidence, to that effect, the lease should not be terminated. If, on the other hand, the evidence establishes as a matter of law that [the lessee] was not making a profit from the well or if there is a fact finding, supported by evidence, to that effect, the lease should yet not be terminated unless the evidence establishes as a matter of law or the [lessors] obtain a fact finding, supported by evidence, that a reasonably prudent operator would not have continued to operate the well under the circumstances.

Skelly Oil Co. v. Archer, 163 Tex. 336, 356 S.W.2d 774, 783 (1962). Thus, we concluded that the issues in this case were: (1) whether revenues from production exceeded operating and marketing expenses, when viewed over a reasonable time; and (2) whether "under all the relevant circumstances a reasonably prudent operator would, for purposes of making a profit and not merely for speculation, continue to operate [the lease] in the manner in which [the lease] in question was operated." Clifton v. Koontz, 160 Tex. 82, 325 S.W.2d 684, 690-91 (1959). We concluded further that the affidavit of appellee Rosenthal established conclusively that a reasonably prudent operator would, in the present circumstances, have expected future profits and, therefore, would have continued to operate the lease. Accordingly, we determined that the summary judgment in favor of the lessees should be affirmed.

On motion for rehearing, the lessors assert that: (1) the "reasonably prudent operator" test does not apply in a case where a total physical cessation of production (as distinguished from merely unprofitable production) occurs and continues more than sixty days; and (2) the summary judgment evidence does not show conclusively that physical production did not cease for sixty consecutive days. In response, the lessees argue that: (1) the lessors did not raise the alleged inapplicability of the "reasonably prudent operator" test in their response to the motion for summary judgment and, therefore, waived that issue; and (2) the summary judgment evidence does establish conclusively that no physical cessation of production occurred for sixty consecutive days. We conclude that the lessors are correct.

APPLICABILITY OF THE "REASONABLY PRUDENT OPERATOR" TEST

Skelly Oil Co. v. Archer and Clifton v. Koontz were both cases in which some physical production was present, and the issue was whether the production was "in paying quantities." In discussing the effect of the cessation-of-production clause, the court in Clifton stated:

After cessation of production in paying quantities, the lessee has 60 days of "grace" in which to save his leasehold, however, if production never ceased, as is the case here, the 60-day clause is not definitive of the period over which the trier of the facts must determine whether a lease is producing in paying quantities.

325 S.W.2d at 690 (emphasis added). We read the emphasized portion of the above quotation to mean "if physical production never completely ceased," then the 60-day period is not definitive. The logical corollary to this interpretation is that if physical production does completely cease, the 60-day period is definitive and drilling or reworking operations must commence within that time.

Further, the court in Clifton went on to state:

To apply the 60-day clause as contended by petitioners would mean that the respondents would have been required to immediately commence drilling operations, upon sustaining a slight loss for one month, without regard to whether they believed the next month's production might be profitable for the reason that if they were in error and suffered another slight loss, the lease would terminate.

325 S.W.2d at 690. The court was obviously concerned with the unreasonableness of requiring an operator to determine, based on experience from a relatively short time span, whether a lease is operating "profitably." Given the inconsistent production history of many wells, a slight loss experienced in one month may give virtually no indication whatever that the capacity to produce in paying quantities has permanently ceased. Hence, requiring a showing that the operator failed to respond to such circumstances in a reasonably prudent way before terminating the lease is a reasonable construction of the parties' agreement and...