Bp America Production Co. v. Marshall

• Decision Date: 10 December 2008
• Docket Number: No. 04-06-00478-CV.,04-06-00478-CV.
• Citation: 288 S.W.3d 430
• Parties: BP AMERICA PRODUCTION COMPANY, Atlantic Richfield Company, and Vastar Resources, Inc., Appellants, v. Stanley G. MARSHALL Jr., Robert Ray Marshall, Catherine Irene Marshall f/k/a Catherine I.M. Hashmi, and Margaret Ann Marshall f/k/a Margaret A.M. Jeffus, by and through David Jeffus, as Independent Executor of the Estate of Margaret Marshall, Appellees. and Vaquillas Ranch Co., Ltd., Vaquillas Unproven Minerals, Ltd., and Vaquillas Proven Minerals, Ltd., Appellants, v. Wagner Oil Company f/k/a Duer Wagner & Co., Jacque Oil & Gas Limited, Duer Wagner, Jr., Duer Wagner III, Bryan C. Wagner, James D. Finley, Dennis D. Corkran, David J. Andrews, H.E. Patterson, Brent Talbot, Scott Briggs, and Gysle R. Shellum, Appellees.
• Court: Texas Court of Appeals

288 S.W.3d 430

BP AMERICA PRODUCTION COMPANY, Atlantic Richfield Company, and Vastar Resources, Inc., Appellants, v. Stanley G. MARSHALL Jr., Robert Ray Marshall, Catherine Irene Marshall f/k/a Catherine I.M. Hashmi, and Margaret Ann Marshall f/k/a Margaret A.M. Jeffus, by and through David Jeffus, as Independent Executor of the Estate of Margaret Marshall, Appellees. and Vaquillas Ranch Co., Ltd., Vaquillas Unproven Minerals, Ltd., and Vaquillas Proven Minerals, Ltd., Appellants, v. Wagner Oil Company f/k/a Duer Wagner & Co., Jacque Oil & Gas Limited, Duer Wagner, Jr., Duer Wagner III, Bryan C. Wagner, James D. Finley, Dennis D. Corkran, David J. Andrews, H.E. Patterson, Brent Talbot, Scott Briggs, and Gysle R. Shellum, Appellees.

No. 04-06-00478-CV.

Court of Appeals of Texas, San Antonio.

December 10, 2008.

Rehearing Overruled April 30, 2009.

Charles G. King, James P. Pennington, King & Pennington, L.L.P., Houston, TX, for Appellant.

Timothy Patton, Timothy Patton, P.C., San Antonio, James K. Jones, Jr., Jones & Gonzalez, P.C., Marisela Rangel, Ricardo E. Morales, Richard G. Morales, Jr., Person, Whitworth, Borchers & Morales, L.L.P., Laredo, David M. Gunn, Beck, Redden & Secrest, L.L.P., Houston, Michael E. McElroy, McElroy, Sullivan & Miller, L.L.P., Pamela Stanton Baron, Austin, TX, for Appellees.

Sitting: KAREN ANGELINI, Justice, REBECCA SIMMONS, Justice, STEVEN C. HILBIG, Justice.

OPINION ON REHEARING

Opinion by: STEVEN C. HILBIG, Justice.

This matter involves two appeals from a single judgment. While the appeals are from the same judgment, we recognized in our opinion and judgment issued July 23, 2008, that they are independent of one another with regard to the issues presented, the analysis required, and the disposition. Accordingly, we addressed each appeal separately, affirming in part and reversing and remanding in part. Appellants, Stanley G. Marshall Jr., Robert Ray Marshall, Catherine Irene Marshall, and Margaret Ann Marshall, filed a motion for rehearing, which we grant in part and deny in part. Appellees, Wagner Oil Company f/k/a Duer Wagner & Co., Jacque Oil & Gas Limited, also filed a motion for rehearing, which we deny. We withdraw our July 23, 2008 opinion and judgment and issue this opinion and judgment in its place.

BP AMERICA/MARSHALL APPEAL

INTRODUCTION

This appeal concerns the portion of the judgment rendered in favor of Stanley G Marshall Jr., Robert Ray Marshall, Catherine Irene Marshall, and Margaret Ann Marshall (the "Marshalls"). The Marshalls, grantors of an oil and gas lease, brought suit claiming the lease had terminated pursuant to its terms, but the termination was fraudulently concealed. The jury found in favor of the Marshalls and the trial court entered judgment on the verdict. BP America Production Company, Atlantic Richfield Company, and Vastar Resources, Inc. ("BP America")¹ raise numerous issues contesting the portion of the judgment in favor of the Marshalls. We reverse the trial court's award of a future accounting without imposition of costs and the award of attorney's fees to the Marshalls, but affirm the trial court's judgment as to the remainder of the Marshalls' claims.

FACTUAL AND PROCEDURAL BACKGROUND

The Slator Ranch ("the Ranch") is a 17,712 acre tract of land located in Webb and Zapata counties. The surface of the Ranch is owned by Vaquillas Ranch Co., Ltd. Fifty percent of the undivided minerals underlying the Ranch were owned by Tenneco; the other fifty percent were owned by a number of individuals and entities, including the Marshalls and the Vaquillas entities. The Marshalls collectively owned 1/16th or 6.25% of the undivided minerals under the fifty-percent of the Ranch not owned by Tenneco.

Between 1973 and 1975, BP America obtained fifteen oil and gas leases on the fifty percent of the Ranch not owned by Tenneco. One of those leases was with the Marshalls ("the Marshall Lease"). The primary term of the Marshall Lease was five years and it expired on July 11, 1980. The lease had a standard "sixty-day clause," which provided the lease would not expire so long as the lessee was engaged in drilling or reworking operations designed to produce paying quantities of oil or gas with no cessation of such work for more than sixty days.

By May of 1980, BP America was concerned about the expiration of its leasehold interests, including the Marshall Lease, because no production had resulted from its efforts. Evidence established that if BP America was forced to renew the leases, it would cost as much as $800,000.00 and result in a doubling of the royalties due the lessors, presuming the lessors agreed to renew. In an apparent attempt to perpetuate its leases under the savings clause, BP America began working on a well designated J.O. Walker No. 1. Drilling or "spudding"² began on June 26, 1980, less than two weeks before the leases were to expire. There was evidence presented showing that the focus of the J.O. Walker No. 1 was the portion of the strata identified as the Lower Wilcox because it was believed profitable production might be obtained from there. The Middle Wilcox was a secondary objective. BP America never identified the Upper Wilcox as an objective of the J.O. Walker No. 1. When BP America reached the Lower Wilcox and its final drilling depth of 12,267 feet on September 22, 1980, it found nothing. To use BP America's term, the Lower Wilcox was "faulted out." BP America then went back up the well to see if the Middle Wilcox might contain producible gas. BP America claims the work on the Middle Wilcox continued through January of 1981; however, its own file characterized completion efforts in the Middle Wilcox as "unsuccessful" as early as December 22, 1980. According to the Marshalls, BP America's efforts with regard to the Middle Wilcox from mid-October to late January consisted of merely sending someone out to the well on occasion to open a valve and wait around while the well quickly "blew down to zero" pressure and streamed water. The Marshalls' experts testified this was a classic sign the well was not going to produce and BP America should have known this by December 4, 1980. According to the Marshalls, any actions taken by BP America after that date were taken with the knowledge there was no chance the Middle Wilcox would produce gas in paying quantities. BP America contended it was properly working to obtain production and all its efforts were undertaken in good faith.

With no production from the Lower or Middle Wilcox, BP America needed to decide its future course of action. There was evidence BP America did not want to spend money drilling additional wells on its own, but it needed to continue operations to avoid expiration of the leases. A proposed farmout was considered. On January 16, 1981, BP America approved a memo stating:

We have no plans to participate in any further development of this acreage ... It is the Land Department's recommendation that we grant the farmout since this will probably be the only way we can hold on to this acreage without incurring expensive reacquisition costs.

The evidence showed there was a delay in finalizing a farmout agreement so BP America needed to take some action to prevent the loss of the leases through operation of the sixty-day clauses. Despite the fact that it had apparently never identified the Upper Wilcox as an objective of J.O. Walker No. 1, BP America took steps to test the Upper Wilcox. According to BP America, work on the Upper Wilcox began on February 2, 1981, and continued through March 5, 1981. This portion of the well was also found to be unproductive. BP America contended its work on the Middle and Upper Wilcox was a good faith effort to obtain commercial production thereby extending the leases, including the Marshall Lease. The Marshalls claim BP America had known since August 1980 that the Upper Wilcox was incapable of generating commercial production and thus its activities on this portion of the well could not be counted when calculating whether BP America had ceased operations for a consecutive sixty-day period on the Marshall Lease.

On March 25, 1981, BP America finalized a farmout agreement with Sanchez-O'Brien. On that very same day, BP America determined the J.O. Walker No. 1 well should be plugged and abandoned. Sanchez-O'Brien spudded a new well on April 13, 1981, which ultimately produced gas in paying quantities. BP America asserted this action, along with its previous actions, allowed the Marshall Lease to continue in effect and the sixty-day clause was never implicated. The Marshalls' experts opined that BP America ceased operations on J.O. Walker No. 1 on December 4, 1980, because BP America did not thereafter engage in good faith efforts to produce paying quantities of oil or gas from the well. In essence, the Marshalls claimed BP America conducted make-work operations on the well simply to give the appearance of continuing operations to avoid application of the sixty-day clause.

On June 25, 1981, Stanley Marshall called BP America because he had not heard anything from BP America regarding completion of any well on the Marshall Lease. Stanley testified he intended to ask "for a release" so he could try to lease to someone else. He was transferred to a man named H.F. Young. According to Stanley, Young responded that there had been continuous operations and the lease was still in effect. Young promised to look at the file and send Stanley Marshall a written report.

By letter dated June 29, 1981, Young sent Stanley Marshall a report allegedly summarizing the activities undertaken by BP America on the lease. Young provided information with regard to the only well it drilled during the lease term, J.O. Walker No. 1, and also advised that Sanchez-O'Brien had spudded a second well. According to Stanley Marshall, he relied on this letter and concluded the lease with BP America was still in effect. However, according to the Marshalls, they later...