Duncan Land & Exploration, Inc. v. Littlepage

• Decision Date: 17 December 1998
• Docket Number: No. 2-97-172-CV,2-97-172-CV
• Citation: 984 S.W.2d 318
• Parties: DUNCAN LAND & EXPLORATION, INC., Appellant, v. Tommy LITTLEPAGE, Appellee.
• Court: Texas Court of Appeals

Page 318

984 S.W.2d 318

DUNCAN LAND & EXPLORATION, INC., Appellant, v. Tommy LITTLEPAGE, Appellee.

No. 2-97-172-CV.

Court of Appeals of Texas Fort Worth.

Dec. 17, 1998.

Rehearing Overruled Feb. 11, 1999.

Pat Long, Kevin D. Green, Dallas, for Appellant.

Shannon, Gracey, Ratliff & Miller, Anne Gardner, Fort Worth, Donald L. Sweatt, P.C., Donald Sweatt, Graham, for Appellee.

Before CAYCE, C.J., and LIVINGSTON and BRIGHAM, JJ.

OPINION

LIVINGSTON, Judge.

I. INTRODUCTION

Appellant Duncan Land & Exploration, Inc. (Duncan) appeals from the trial court's order setting aside the jury's verdict in Duncan's suit against Tommy Littlepage (Littlepage) for removal of a cloud on title and for slander of title relating to Duncan's interest in an oil and gas lease. In three points, Duncan claims the trial court erred in setting aside the verdict because there was sufficient evidence to support the jury's findings that: (1) Duncan did not cease producing gas in commercial quantities for a period of 90 days; (2) Littlepage slandered Duncan's title; and (3) Duncan was entitled to attorney's fees. Littlepage raises five cross-points in the event this court sustains Duncan's points: the jury's finding concerning cessation of production in commercial quantities is against the great weight and preponderance of the evidence; and there is factually insufficient evidence to support the jury's findings concerning a reasonably prudent operator, slander of title, damages, and attorney's fees. We sustain Duncan's points, reverse the trial court's judgment, overrule Littlepage's cross-points, and render judgment on the jury's findings.

II. FACTUAL BACKGROUND

In 1979, Littlepage acquired an interest in an oil and gas lease on a 40-acre tract in Young County, Texas. On August 4, 1986, Littlepage entered into a farmout agreement with Tierra Energy, Inc. (Tierra). Littlepage and Tierra executed an assignment of the oil and gas lease on December 1, 1986. Tierra drilled a well and then assigned its interest in the farmout agreement, lease, and well to Duncan in 1987. The farmout agreement contained the following provision:

X. TERMINATION AND REVERSION

In the event that any 20 or 40 acre tract assigned to Tierra hereunder shall fail to produce oil or gas in commercial quantities from a well situated thereon for a period of ninety (90) days, the interest of Tierra in said tract shall terminate and all interest of Tierra in and to said tract shall revert to Owner. Each assignment executed and delivered to Tierra hereunder shall contain provisions concerning such termination and reversion, and providing that such termination and reversion shall be effective upon the filing of an affidavit by Owner in the Deed Records of Young County, Texas that no commercial production of oil or gas has been obtained from such tract for a period in excess of ninety (90) days.

The lease did not contain any savings clauses. Thus, Duncan's lease terminated if: (1) there was no production in commercial quantities in excess of 90 days; and (2) Littlepage filed an affidavit asserting the lack of production in the Young County deed records.

Duncan is a small oil and gas exploration company owned by Brian and Diane Duncan. During the period relevant to this case, the Duncans ran the company from their home and utilized their personal possessions (telephone, computer, and so on) to run the business. Diane was in charge of any filings that were required by the Texas Railroad Commission (Railroad Commission). As such, Diane filed monthly P-1 reports that showed the amount of production from the well and any amount sold.

Duncan operated the well and produced in commercial quantities for several years despite intermittent salt water problems. Much of the oil was sold to Taylor Gas Company. Diane continued to file the P-1 reports, but sometimes estimated the amounts instead of getting the precise measurements from the well pumper. In 1992, Duncan discovered a downhole tubing problem that hindered production. The well also began producing "sour gas."

Then, in May 1992, a neighbor complained to the Railroad Commission about the smell of hydrogen sulfide in the area. On May 21, 1992, the Railroad Commission ordered the well "shut-in" for testing until the well complied with Statewide Rule 36, that prohibits a well from producing more than 100 parts hydrogen sulfide per million. See 16 TEX. ADMIN. CODE § 3.36 (effective Jan. 1, 1976),< http://www.sos.state.tx.us/tac/16/1/3/3.36.html >. The Railroad Commission first tested the well in May 1992. This test revealed 92 parts hydrogen sulfide per million, which was within the parameters of Statewide Rule 36. The Railroad Commission then ordered another test, conducted in July 1992, that again revealed about 92/93 parts hydrogen sulfide per million. Thus, neither test showed results in excess of Rule 36.

However, the method used for the second test did not meet the Railroad Commission's requirements, so it ordered a third test. This third test, done October 29, 1992, again showed about 94 parts hydrogen sulfide per million. The Railroad Commission received the results of the third test on November 12, 1992, and lifted the shut-in order immediately. Duncan received notice that the shut-in order had been removed on December 2, 1992.

Despite the existence of the Railroad Commission's shut-in order, Duncan periodically operated the well during the shut-in period (May 21, 1992 to November 12, 1992) in order to produce in commercial quantities and keep the lease in effect. Duncan was able to open the well and let the oil flow for short periods because it was capable of flowing naturally without the necessity of pumping it out of the ground. At trial, both Brian and Diane testified that, if someone had looked up either the original or the amended P-1s, ¹ the reports would have shown that there was production from the well throughout 1992. Both testified that there was never a 90-day period from May to October 1992 in which the well did not produce oil. Brian also testified that the lease, with a cloud on its title, could only be sold for $2,000, but that the well itself was worth $400,000 if it was reworked and producing about 50 barrels of oil a day.

After the shut-in order was lifted in November 1992, Brian Duncan renewed efforts to court investors to drill a new well on the lease property. Duncan believed the well could be more profitable if he reworked the well and/or drilled a new well a couple of yards away. In this regard, Duncan installed two gas sweeteners on the existing well to solve the sour gas problem. Duncan also arranged for three friends to invest $20,000 each in exchange for a 1/8 interest in the well.

Meanwhile, in early 1992, Littlepage learned of the well's tubing and sour gas problems and asked his pumper, Hugh Ford, to keep an eye on the well and apprize him of any changes because his own well was tied to the production on Duncan's well. Littlepage learned of the shut-in order in May or June 1992 and asked his operations manager, Hugh Bedingfield, to make some inquires into the well's production. Bedingfield testified he looked up the production numbers on the computer and found that the well was producing in minimal quantities. Bedingfield related this information to Littlepage.

Some time later, apparently concluding that the well had not been producing in commercial quantities, Littlepage consulted with his attorney and then filed his affidavit of lease termination and reversion on December 23, 1992. Duncan filed a controverting affidavit on January 6, 1993. Soon thereafter, Duncan's investors pulled out, and he filed suit against Littlepage for slander of title, removal of a cloud on his title, breach of contract, and for a declaratory judgment that there had been no reversion of the leasehold. Before he was served with the lawsuit, Littlepage, through his attorney, offered to withdraw the affidavit if Duncan could get the well up and running in 60 days. Duncan declined the offer. Littlepage then counterclaimed for lost profits stemming from Duncan's failure to use Littlepage's well services as required by their contract.

At trial, Littlepage acknowledged he did not: (1) speak to Duncan before filing the affidavit; (2) personally endeavor to check the amount of gas being produced by the well; or (3) inquire as to Duncan's expenses in producing the gas. Bedingfield even acknowledged that Littlepage received a royalty check in November 1992 for gas produced from the well. Bedingfield testified that the check would have come from an October 1992 sale of gas that would have been extracted from the well during the preceding months.

Littlepage also altered the position he took during his deposition--that no production existed during the period from May to December 1992--to say that, in his mind, the minimal quantities being produced amounted to no production. Littlepage testified that, whether there was no production or minimal production, he believed that the well was not producing in commercial quantity, and that a reasonably prudent operator would not have produced the well in light of the shut-in order. Littlepage's opinions were echoed by his expert witness, Larry Hulsey, who contended Duncan failed to take into consideration several expenses when making his commercial quantities calculations and opined that, in any event, a reasonably prudent operator would not have produced the well in light of the shut-in order.

Relevant to this appeal, the jury answered the following questions (certain pertinent instructions are included):

Question No.1:

Do you find that the Duncan Land & Exploration--McCluskey No. 1 Well ceased to produce in commercial quantities for any ninety (90) day period between June 1, 1992 and December 1, 1992?

....

An oil and gas well has "ceased to produce oil or gas in commercial quantities" if it ceases to produce at a profit. If an oil and gas well produces a profit, even...