HECI Exploration Co. v. Neel

• Decision Date: 04 February 1999
• Docket Number: No. 97-0403,97-0403
• Citation: 982 S.W.2d 881,42 Tex Sup.Ct. J. 93
• Parties: 42 Tex. Sup. Ct. J. 361, 42 Tex. Sup. Ct. J. 93 HECI EXPLORATION COMPANY and Browning Oil Company, Inc., Petitioners, v. Russell H. NEEL, Sr., Russell H. Neel, Jr., LeRoy K. Neel, and Kathleen Neel Insall, Respondents.
• Court: Texas Supreme Court

Page 881

982 S.W.2d 881

42 Tex. Sup. Ct. J. 361, 42 Tex. Sup. Ct. J. 93

HECI EXPLORATION COMPANY and Browning Oil Company, Inc., Petitioners, v. Russell H. NEEL, Sr., Russell H. Neel, Jr., LeRoy K. Neel and Kathleen Neel Insall, Respondents.

No. 97-0403.

Supreme Court of Texas.

Argued Jan. 6, 1998.

Decided Oct. 29, 1998.

Rehearing Overruled Feb. 4, 1999.

Michael E. McElroy, Harlan Hentges, Pamela Stanton Baron, Austin, for petitioners.

Harvey F. Cohen, Austin, for respondents.

OWEN, Justice, delivered the opinion of the Court.

This is a suit by royalty owners against their lessee. The court of appeals reversed in part a summary judgment for the lessee, holding that an oil and gas lease includes an implied covenant that a lessee will notify royalty interest owners (1) of the need to sue an operator on an adjoining lease for damage to the common reservoir, and (2) that the lessee intends to sue. 942 S.W.2d 212. The court of appeals further concluded that the discovery rule applies to causes of action against a lessee who fails to provide these notices.

We do not reach the question of whether a covenant to notify royalty owners of the need to sue should be implied in mineral leases because limitations has barred the claims based on such an implied covenant, if any, and the discovery rule does not apply. However, we hold that there is no implied covenant that requires a lessee to give notice of its intent to sue an adjoining operator because such a duty is not necessary to effectuate the full purpose of the lease and is not so clearly within the contemplation of the parties that they deemed it unnecessary to express it. Accordingly, we reverse the judgment of the court of appeals in part and render judgment that the respondents take nothing.

I

Russell H. Neel, Sr. and members of his family own royalty interests pursuant to the terms of an oil and gas lease that covers property in Fayette County. The lessee was HECI Exploration Company and subsequently its successor in interest under the lease, Browning Oil Company, Inc., to whom we will refer as HECI unless otherwise indicated. The Neels sued HECI in 1993 because it did not notify them that it had sued and obtained a judgment against the operator of an adjoining lease, AOP Operating Corporation.

A common reservoir underlies both the HECI and AOP leases. Since at least 1985, AOP periodically overproduced a well in that reservoir in violation of rules promulgated by the Texas Railroad Commission. HECI took appropriate action at the Commission, and overproduction was halted for a time. But in late 1987, one of HECI's wells, the Allison number 1, began to produce water. HECI thought that this was premature given the well's location in the oil and gas formation, and HECI investigated the cause of the water encroachment. HECI ultimately determined that AOP was again illegally producing. HECI instituted further proceedings at the Railroad Commission, and eventually, AOP was enjoined. However, the illegal production lasted from April 1987 until December 1988 and resulted in the permanent loss of oil and gas reserves that otherwise could have been recovered through HECI's well. Although the decision of the court of appeals in this case at times refers to drainage by AOP, the record reflects that the Neels' injury was not the result of drainage. The reservoir itself was damaged because production by AOP at excessive rates caused oil to migrate into the gas cap overlying the oil reserves, which diminished the amount of oil and gas that can be recovered.

HECI filed suit against AOP in Fayette County in 1988. After a jury trial, the trial court rendered judgment against AOP in May 1989, awarding HECI actual damages in the amount of $1,719,956 and $2,000,000 in punitive damages. The trial court also granted permanent injunctive relief. The suit between HECI and AOP was thereafter settled, and a release of the judgment was filed of record in Fayette County in September 1989.

The Neels did not learn of the suit between HECI and AOP until May 1993. They sued HECI in December 1993, more than four years after the release of judgment against AOP was filed of record and more than four years after the damage to the reservoir occurred. The Neels alleged that the discovery rule should apply to forestall the application of statutes of limitations to their claims. The causes of action alleged by the Neels included: breach of contract, for which they sought a 1/6 royalty based on the amount of the judgment against AOP; negligent misrepresentation because of HECI's failure to disclose information about either the illegal production or the suit; breach of an implied covenant to protect against drainage that was alleged to include an obligation of HECI to sue AOP on behalf of the Neels; and unjust enrichment for retaining compensation from AOP that was attributable to the Neels' interest.

HECI Exploration Company filed a motion for partial summary judgment, which the trial court granted in part, and a subsequent motion for summary judgment, which was granted in its entirety. Although Browning had not filed any motions for summary judgment, the parties stipulated that summary judgment would have been rendered in its favor had it requested that relief. A final judgment disposing of all parties and all claims was rendered after counterclaims were severed from the Neels' claims. The Neels appealed.

The court of appeals handed down and withdrew three successive opinions before issuing the decision and judgment from which HECI now appeals. 942 S.W.2d 212. That court ultimately held that an implied covenant to notify exists but that it is not as broad as the Neels had urged. Id. at 218. The court of appeals held that a lessee such as HECI who lacks authority to sue for all interest owners is obligated to notify other interest owners of the need to sue an adjoining operator and of the lessee's intent to sue. Id. The court of appeals concluded that such a duty is encompassed within the implied covenant to protect the leasehold. Id. It reasoned that, although HECI had no right and thus no obligation to sue on behalf of the Neels, a covenant to notify should be implied because if HECI were to bring suit, the Neels could be collaterally estopped from litigating their claims against AOP. Id. at 217.

The court of appeals further held that the Neels did not have a cause of action under the royalty provisions of their lease for 1/6 of the judgment HECI obtained against AOP because that judgment awarded damages based on the diminution in value of the reserves in place, not the value of production. Id. at 219. However, the court of appeals held that the Neels' other causes of action--which were breach of an implied covenant to notify, negligent misrepresentation, and unjust enrichment--were viable and that the discovery rule applied. Id. at 223. The court of appeals accordingly reversed the trial court's judgment in part and remanded these latter claims for trial, holding that HECI had not conclusively established that the Neels knew or in the exercise of reasonable diligence should have known of their injury. Id. at 222-23. HECI filed an application for writ of error in this Court, which we granted.

II

The implied covenant that the court of appeals found to exist embodies two notice requirements that are triggered once a lessee determines that a suit for damages against an adjoining operator is necessary. 942 S.W.2d at 218. The lessee must give notice (1) of the need for suit, and (2) of the lessee's intent to sue. We first address in Part III whether limitations bars the claim that HECI breached a duty to notify the Neels that they had reason to sue AOP. Because we conclude that the discovery rule does not apply and that the Neels' claims are barred, we do not reach the issue of whether an implied covenant to notify of the need to sue exists under Texas mineral leases. That is a question of first impression for this Court, and we leave it for another day. In Part IV, we consider why the law of Texas regarding implied covenants in mineral leases does not support the creation of a duty that would require a lessee to notify royalty owners of its intent to sue adjoining operators. Finally, in Part V, we consider the unjust enrichment claim.

III

The court of appeals correctly observed, and the Neels concede, that absent application of the discovery rule, a four-year statute of limitations would bar the claims for breach of implied contractual covenants, see Amoco Prod. Co. v. Alexander, 622 S.W.2d 563, 571 (Tex.1981), a two-year statute would bar the claims for negligent misrepresentation, see Milestone Properties, Inc. v. Federated Metals Corp., 867 S.W.2d 113, 118-19 (Tex.App.--Austin 1993, no writ), and a two-year statute would bar the claim for unjust enrichment, see Cherokee Water Co. v. Advance Oil & Gas Co., 843 S.W.2d 132, 135 (Tex.App.--Texarkana 1992, writ denied). Before we examine whether the discovery rule applies to cases of this type, we note that we do not agree with the court of appeals that the contract and negligent misrepresentation causes of action accrued on the date that HECI sued AOP. See 942 S.W.2d at 220. Any causes of action based on a duty to notify the Neels that they had a claim against AOP accrued contemporaneously with the Neels' causes of action against AOP for damage to the reservoir; the alleged duty to notify would arise when the cause of action against AOP arose. AOP's illegal overproduction had ceased by December 1988, and a cause of action against HECI for failure to notify the royalty owners of claims they had against AOP accrued by that date at the latest. (To resolve the issues in this case, we need not decide whether the injury to the Neels was permanent or temporary and the effect, if any, that distinction may have on limitations. Compare Mitchell Energy Corp. v. Bartlett, 958 S.W.2d 430, 436 (Tex.App.--Fort Worth 1997, writ denied) (discussing...