Freeman v. Samedan Oil Corp.

• Decision Date: 18 April 2001
• Docket Number: No. 12-9940334-CV.,12-9940334-CV.
• Parties: Carolyn FREEMAN, Maurice Epley and Ann Freeman, Appellants, v. SAMEDAN OIL CORPORATION and Sklar & Phillips Oil Company, Appellees.
• Court: Texas Court of Appeals

Page 1

78 S.W.3d 1

Carolyn FREEMAN, Maurice Epley and Ann Freeman, Appellants, v. SAMEDAN OIL CORPORATION and Sklar & Phillips Oil Company, Appellees.

No. 12-9940334-CV.

Court of Appeals of Texas, Tyler.

April 18, 2001.

Rehearing Overruled August 1, 2001.

Levon G. Hovnatanian, Feldman & Rogers, LLP., Houston, for appellants.

Lawrence F. Labanowski, Houston, David M. Gunn, Bellaire, for appellees.

Panel consisted of DAVIS, C.J., WORTHEN, J., and GRIFFITH, J.

DAVIS, Justice.

In this oil and gas lease termination case, Appellants, Carolyn Freeman, Maurice Epley, and Ann Freeman (collectively the "Freeman sisters" or "Appellants") are lessors under the subject oil and gas lease, and Appellees, Samedan Oil Corporation ("Samedan") and its predecessor in title, Sklar & Phillips Oil Corporation ("Sklar"), are lessees. On cross motions for partial summary judgment, the trial court granted Appellees' motion and denied Appellants', entering a final declaratory judgment that the oil and gas lease had not terminated and awarding damages. We reverse the judgment of the trial court and remand for further proceedings consistent with this opinion.

BACKGROUND

The Freeman Lease

The oil and gas lease in question ("the Freeman Lease") was executed effective June 28, 1966, between the Freeman sisters,¹ as lessors, and George E. Jenkins, as lessee. The Freeman Lease purported to cover approximately twenty-five acres of land in Cass County, Texas, in which the Freeman sisters owned an undivided one-tenth (1/10th) interest. Jenkins was acting on behalf of Sklar and subsequently assigned the Freeman Lease to Sklar. Sklar pooled 19.83 acres of the Freeman Lease ("The Freeman Tract") with other tracts it had leased to form an 88 acre oil unit ("the Price Oil Unit").

The Price Oil Unit

Sklar drilled a well within the Price Oil Unit and on July 15, 1966, completed an oil well ("the Price Oil Well"),² although the drill site was not on the Freeman Lease acreage. Nevertheless, the Freeman sisters were entitled to their share of production because 19.83 acres of their lease acreage had been included in the 88 acre Price Oil Unit. Less than a year later, Sklar sought to initiate a secondary recovery waterflood project involving several thousand acres in the area, including the Freeman Lease acreage.

The Waterflood Units

In early 1967, Sklar sought to create two secondary recovery waterflood units,³ the Hill Zone Unit containing 1,414 acres, and the Mitchell Zone Unit containing 1,529 acres (collectively "the Waterflood Units"). Sklar asked all of the leasehold (working interest and royalty interest) owners with acreage in the proposed waterflood units to join the waterflood project by signing a Waterflood Unit Agreement setting forth how the Waterflood Units would be operated and how each of the interest owners would share in the production.

Sklar was successful in getting 99.98% of the working interest owners and 99.65% of the royalty interest owners to sign a Waterflood Unit Agreement. The Freeman sisters refused to sign, despite repeated requests by Sklar. Sklar also asked the Freeman sisters to sign an amendment to the Freeman Lease giving Sklar the express right to pool the Freeman Lease "into one or more field-wide production units for the purpose of initiating, maintaining and operating one or more secondary recovery ... programs for the recovery of oil, gas and other minerals from said unit or units ...." The Freeman sisters refused to sign the lease amendment. It is undisputed that the Freeman sisters never signed the Waterflood Unit Agreement or amended their original oil and gas lease agreeing to participate in a waterflood project. Nevertheless, Sklar sought approval from the Texas Railroad Commission to proceed with the waterflood project.

On July 12, 1967, a hearing was held at the Railroad Commission on Sklar's application for approval of the two Waterflood Unit Agreements and for permission to conduct water injection operations in the two affected reservoirs. On July 21, 1967, another hearing was held seeking authorization to use the Price Oil Well as the primary water injection well for the project. The Freeman sisters had notice of both hearings, but did not appear or participate at either. The Railroad Commission approved both unit agreements, but expressly stated the following in both orders:

4. That such agreement does not bind any person who does not execute same, but binds only the persons who execute it, their heirs, successors, assigns and legal representatives.

5. [T]hat the owners of interests not desiring to enter such unit on the yardstick basis provided may refuse to join in the unitized operations and continue to participate in the production from the field on an independent basis governed by the Commission rules and regulations for said field, and by the provisions of the individual lease contract.

6. That the rights of all owners of all interests in the field, whether signers of the unit agreement or not, will be protected under its operation that the rights and interests of nonsigners are not included, involved or interfered with by the action of this agreement so they may continue to own and operate their properties, at their own election, as though said unit agreement had never been established. (Emphasis added).

The Railroad Commission authorized the use of the reservoirs within the waterflood units for water injection, and approved the use of the Price Oil Well as the injection well. (See Railroad Commission Special Order Numbers 6-57,637, 6-57,638, and 6-57,717).

On September 1, 1967, Sklar ceased production of oil from the Price Oil Well, converting it into a water injection well for its secondary recovery project. The waterflood units continued to produce from wells outside the Price Oil Unit, but never again produced any oil from the Price Oil Well or any other well in the Price Oil Unit. The waterflood project was abandoned in 1990. From September 1, 1967 until 1990, the Price Oil Well was used solely for water injection and no oil or gas was produced from it.

The Price Gas Unit

In 1986, Sklar assigned the 25 acre Freeman Lease to TXP Operating Company ("TXP"). TXP joined with several other parties to form a 674.25 acre gas unit which included the Freeman Tract, and subsequently drilled and completed a gas well ("the Price Gas Well")⁴ on the Freeman tract. Thus, the Price Gas Well was drilled after the Price Oil Well had been converted to a water injection well in 1967, but before the waterflood units were abandoned in 1990. On January 1, 1989, TXP assigned the Price Gas Well to Samedan Oil Corporation ("Samedan"). The Price Gas Well has continued to produce gas from the date of first sale, February 21, 1991, until the time of trial.⁵

The Lawsuit

In May of 1998, the Freeman sisters filed this lawsuit and subsequently amended to seek a declaratory judgment that the Freeman Lease terminated in 1967 due to cessation of production. They contended that sixty days after the Price Oil Well was converted to a water injection well on September 1, 1967, the Freeman Lease terminated due to cessation of production. Sklar and Samedan answered, contending that the Freeman Lease did not terminate because it was held by production from the waterflood units in which it had been involuntarily pooled pursuant to pooling provisions of the Freeman Lease. The Freeman sisters also sought an accounting as a co-tenant in the Price Gas Well, claiming a proportionate share of the production from their land, as opposed to royalty. They also alleged fraud and sought attorneys fees. Sklar and Samedan asserted affirmative defenses of laches, estoppel, and waiver.

All parties filed cross motions for partial summary judgement on the legal issue of whether or not the Freeman lease terminated in 1967 when the Price Oil Well was converted to a water injection well. The trial court granted Appellees' motion for partial summary judgment declaring that "the Lease has been maintained in full force and effect by production from the end of its term to the present; and that the Lease is a currently valid and subsisting lease." Conditioned upon this finding, the parties stipulated to the royalties due to each plaintiff ($1,545.75) and the trial court entered a final judgment from which this appeal follows.

THE STANDARD OF REVIEW

Since this is an appeal from a Rule 166a(c) motion for summary judgment, this Court must apply the standards established in Nixon v. Mr. Property Management Co., 690 S.W.2d 546, 548-49 (Tex. 1985), which are:

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.

For a party to prevail on a motion for summary judgment, he must conclusively establish the absence of any genuine question of material fact and that he is entitled to judgment as a matter of law. TEX.R. CIV. P. 166a(c). A movant must either negate at least one essential element of the non-movant's cause of action, or prove all essential elements of an affirmative defense. Randall's Food Markets, Inc. v. Johnson, 891 S.W.2d 640, 644 (Tex. 1995); MMP, Ltd. v. Jones, 710 S.W.2d 59, 60 (Tex.1986). Since the burden of proof is on the movant, and all doubts about the existence of a genuine issue of a material fact are resolved against the movant, we must view the evidence and its reasonable inferences in the light most favorable to the nonmovant. Great Am. Reserve Ins. Co. v. San Antonio Plumbing Supply Co., 391 S.W.2d 41, 47 (Tex.1965). We are not required to ascertain the credibility of affiants or to determine the weight of evidence in the affidavits,...