Maralex Resources, Inc. v. Gilbreath

• Decision Date: 19 August 2003
• Docket Number: No. 27,366.,27,366.
• Parties: MARALEX RESOURCES, INC., Plaintiff-Counter Defendant-Respondent, v. Norman L. GILBREATH, Loretta E. Gilbreath and Caprock Energy Company, Inc., Defendants-Counter Plaintiffs-Petitioners, and Norman L. Gilbreath, Loretta E. Gilbreath and Caprock Energy Company, Inc., Third Party Plaintiffs-Petitioners, v. A.M. "Mickey" O'Hare, Third Party Defendant-Respondent.
• Court: New Mexico Supreme Court

76 P.3d 626

134 N.M. 308

2003 NMSC 23

MARALEX RESOURCES, INC., Plaintiff-Counter Defendant-Respondent, v. Norman L. GILBREATH, Loretta E. Gilbreath and Caprock Energy Company, Inc., Defendants-Counter Plaintiffs-Petitioners, and Norman L. Gilbreath, Loretta E. Gilbreath and Caprock Energy Company, Inc., Third Party Plaintiffs-Petitioners, v. A.M. "Mickey" O'Hare, Third Party Defendant-Respondent.

No. 27,366.

Supreme Court of New Mexico.

August 19, 2003.

Tully & Jolley Law Offices, Richard T.C. Tully, Farmington, NM, for Petitioners.

Gallegos Law Firm, P.C., J.E. Gallegos, Michael J. Condon, Santa Fe, NM, for Respondents.

OPINION

MAES, Chief Justice.

{1} This is an action to terminate an oil and gas lease in San Juan County, New Mexico. The lessee's gas well stopped producing between December 1990 and March 1991. The lessors asserted the lease had terminated for lack of production because the lessees failed to tender shut-in royalty payments during that time and failed to resume operations within 60 days after the well stopped producing. The district court agreed and concluded that the lease terminated. The Court of Appeals affirmed in a memorandum opinion. We also agree, though for different reasons, and we therefore affirm the judgment of the district court and the Court of Appeals.

BACKGROUND

Facts

{2} The lease in question, signed in 1959, covers two sections of land in San Juan County: Section 24 of Township 30 North, Range 12 West and Section 19 of Township 30 North, Range 11 West. Petitioners, Norman and Loretta Gilbreath, are successors in interest to the original lessee. The lease contains a standard habendum clause, providing that "[t]his lease remains in force for a term of five years and as long thereafter as oil, gas, casinghead gas, or other mineral or any of them is or can be produced." During the five-year primary term, the original lessees successfully drilled one gas-producing well, Blancett Well # 1, in Section 24. Neither they nor the Gilbreaths drilled any other wells on the property. Blancett Well # 1 produced gas without interruption for several years until it stopped suddenly in December 1990. The Gilbreaths believed that production stopped because the pressure inside the well was insufficient to force the gas to flow into the pipeline operated by the gas purchaser, El Paso Natural Gas. In early January 1991, Norman Gilbreath closed off the valve to the pipeline in order to build up enough pressure in the well to overcome the pressure in the El Paso line. Because that step proved insufficient, on February 4, 1991, the Gilbreaths treated the well with foam to remove excess liquids, another step that can increase pressure within the well. The well resumed production in March 1991.

{3} Around this same time, the Gilbreaths were negotiating to enter a farmout agreement with Plaintiff Maralex Resources, an oil and gas development company that was seeking to acquire new leaseholds in the San Juan County area. The farmout agreement would have allowed Maralex, rather than the Gilbreaths, to operate the well. While negotiating this agreement, Maralex hired a law firm to conduct a title search on the Gilbreaths' mineral interest. The firm issued a title opinion concluding that the lease terminated under the terms of the habendum clause because the well stopped producing between December 1990 and March 1991. The author of the title opinion concluded that, if the Gilbreaths wanted to prevent the lease from terminating during that period, they were required to make payments to the Blancetts under the terms of the "shut-in royalty clause," which in some situations allows the lessee to make predetermined payments instead of producing gas. Maralex provided this information to the Blancetts. In July 1991, the Gilbreaths mailed a royalty payment to the Blancetts. The royalty check represented payment for October 1989 to December 1990 the period prior to the time the well stopped producing. It is undisputed that the Blancetts were entitled to royalty payments for that time period. The Blancetts refused payment, asserting that the lease had already terminated because production ceased between December 1990 and March 1991.

{4} In October 1991, after asserting that the Gilbreaths' interest under the 1959 lease had terminated, the Blancetts executed two leases for Maralex covering the Section 24 lands. The Gilbreaths, however, through their development company Caprock Energy, retained rights to Section 19 under a separate lease, signed in January 1991, that gave them the right to build a new well within three years. The Gilbreaths did not build a new well, so the Caprock lease expired under its own terms in 1994. In May 1994, the Blancetts executed two additional leases for Maralex covering the Section 19 lands. Maralex then brought this suit seeking a declaratory judgment that (1) the 1959 lease expired under its own terms when the Gilbreaths failed to tender shut-in royalties in early 1991 and (2) the subsequent leases between Maralex and the Blancetts were therefore valid and in effect. The Gilbreaths brought numerous counterclaims alleging that Maralex interfered with their contractual relationship with the Blancetts.

Proceedings

{5} Maralex moved for partial summary judgment, asserting that the 1959 lease expired when production stopped during the early months of 1991. Maralex argued that, under the terms of the 1959 lease, if the Gilbreaths wanted to prevent the lease from terminating, they were required to pay shutin royalties during the period of non-production. Because the Gilbreaths never tendered shut-in royalty payments, Maralex argued, the lease terminated under the terms of the habendum clause when the well stopped producing gas. The Gilbreaths raised several arguments in response. First, they argued that shut-in royalty payments were not required so long as they satisfied the "continuous operations clause" by taking steps to repair the well after it stopped producing. Second, while they argued that they could pay shut-in royalties to preserve the lease, they argued that the royalty payments were not yet due, so the lease had not yet terminated.¹ The district court rejected these arguments and granted Maralex's motion for summary judgment.

{6} The Gilbreaths filed two separate motions for reconsideration. In the second motion, they raised two new arguments, based on lease clauses that they claimed were previously illegible. First, they argued that the high pressure in the El Paso Natural Gas pipeline constituted an event beyond their control, and therefore they were protected by the force majeure clause, which prevents a lease from terminating when operations shut down due to a "cause beyond the control of the Lessee." They also argued that, because there was a legitimate dispute as to when the shut-in royalties were due, they should be protected by the judicial ascertainment clause, which allows a lessee a reasonable time to comply with an implied covenant after a court has determined the lessee's obligations. The court held that neither the force majeure clause nor the judicial ascertainment clause were applicable. It also reaffirmed its ruling as to the shut-in royalty clause and the continuous operations clause. The court explained that, within 60 days after the well stopped producing, the Gilbreaths had the option of either (1) resuming operations or (2) tendering shut-in royalties. Because the Gilbreaths did neither, the district court held that the lease had expired under its own terms.

{7} Later, Maralex filed a full motion for summary judgment covering issues not raised in this appeal. Once that motion was granted, the Gilbreaths appealed to the Court of Appeals, which affirmed the judgment in an unpublished opinion. We granted certiorari.

DISCUSSION

{8} This Court reviews a district court's decision to grant summary judgment de novo. Mitchell-Carr v. McLendon, 1999-NMSC-025, ¶ 30, 127 N.M. 282, 980 P.2d 65. Summary judgment is appropriate only where there are no genuine issues of material fact and the movant is entitled to judgment as a matter of law. Self v. United Parcel Serv., 1998-NMSC-046, ¶ 6, 126 N.M. 396, 970 P.2d 582. On appeal, this Court considers the facts in the light most favorable to support a trial on the issues, because summary judgment is improper if a triable issue of fact exists. Madsen v. Scott, 1999-NMSC-042, ¶ 7, 128 N.M. 255, 992 P.2d 268.

{9} The typical oil and gas lease grants the lessee a fee simple determinable interest in the subsurface minerals within a designated area. See Anadarko Petroleum Corp. v. Thompson, 94 S.W.3d 550, 554 (Tex. 2002). It is the habendum clause of the lease that establishes the duration of the estate. Id. The typical habendum clause designates a primary term, during which the lessee must successfully drill a producing well, and then provides that the lease remains in effect so long as oil or gas is produced from the land. To satisfy the habendum clause production must be in "paying quantities," such that the income generated from oil and gas production exceeds the operating costs. See Clifton v. Koontz, 160 Tex. 82, 325 S.W.2d 684, 689 (1959); cf. Greer v. Salmon, 82 N.M. 245, 246, 479 P.2d 294, 295 (1970) (describing well as capable of producing in "commercial quantities"); Town of Tome Land Grant, Inc. v. Ringle Dev. Co., 56 N.M. 101, 104-05, 240 P.2d 850, 852-53 (1952) (discussing rule that production may be in paying quantities). Under most leases, if the lessee fails to produce oil or gas in paying quantities before the end of the primary term, or if production ceases after the primary term, the lease will automatically terminate. See Greer, 82 N.M. at 248, 479 P.2d at 297.

{10} Most leases, however, contain savings clauses, which allow the lessee to avoid the consequences of automatic lease termination when production ceases. See id. at 247, 479 P.2d at 296. The issue in this case is whether the 1959...