Moore v. Jet Stream Investments, Ltd.

• Decision Date: 08 August 2008
• Docket Number: No. 06-07-00106-CV.,06-07-00106-CV.
• Citation: 261 S.W.3d 412
• Parties: Jeff MOORE, d/b/a T & M Production, Appellant v. JET STREAM INVESTMENTS, LTD., Sara P. Rudd, Executrix of the Estate of J.B. Rudd, and Youngblood Properties, L.P., Appellees.
• Court: Texas Court of Appeals

261 S.W.3d 412

Jeff MOORE, d/b/a T & M Production, Appellant v. JET STREAM INVESTMENTS, LTD., Sara P. Rudd, Executrix of the Estate of J.B. Rudd, and Youngblood Properties, L.P., Appellees.

No. 06-07-00106-CV.

Court of Appeals of Texas, Texarkana.

Submitted August 7, 2008.

Decided August 8, 2008.

James P. Finstrom, Jefferson, for appellant.

Dean A. Searle, Marshall, for appellees.

Before MORRISS, C.J., CARTER and MOSELEY, JJ.

OPINION

Opinion by Justice CARTER.

Jeff Moore has filed a motion for rehearing in this case, which is granted. This Court's opinion of June 12, 2008, is hereby withdrawn, and this opinion substituted therefor.

Jeff Moore, d/b/a T & M Production, appeals the final judgment of the trial court declaring that an oil and gas lease had terminated due to nonproduction. Moore had been operating as an assignee of a 1943 lease which contained a five-year primary term and continued thereafter as long as oil or gas was produced. On August 20, 2004, after Moore failed to comply with an order from the Texas Railroad Commission regarding posting financial assurance, the Commission ordered that he cease production. Production did not resume until July 15, 2005. Shortly after Moore resumed production, William L. Rudd, III, acting "[o]n behalf of the mineral owners," sent Moore a letter alleging the lease had terminated. Jet Stream Investments, Ltd., Sara P. Rudd, Executrix of the Estate of J.B. Rudd, and Youngblood Properties, L.P., brought suit seeking a declaratory judgment that the lease had terminated.

Moore filed a motion for summary judgment, and Jet Stream filed a competing motion for partial summary judgment. The trial court granted a partial summary judgment to Jet Stream and denied Moore's motion for summary judgment. The trial court set a trial on the merits, specifically noting the following issues: (a) whether any other wells are located on the lease acreage and holding the lease, (b) the amount of damages for underpayment of royalty, (c) the amount of damages for conversion of oil and gas by Moore, and (d) the amount of attorney's fees. After the bench trial, the trial court rendered judgment in favor of Jet Stream and awarded damages in the amount of $94,752.24, plus attorney's fees. The final judgment incorporates the prior partial summary judgment.

Moore raises eight issues on appeal: 1) whether the force-majeure clause prevented cancellation of the lease despite the lack of production, 2) whether there was a fact issue on due diligence, 3) whether the lease was held by production by other operators, 4) whether the implied temporary cessation doctrine applies, 5) even if the lease terminated, whether Moore is entitled to continue to produce from forty acres around each well, 6) whether the trial court erred in denying Moore's counterclaim seeking recovery of his property and fixtures, 7) whether the trial court erred in awarding Jet Stream damages measured by gross oil sales when Moore continued to produce after notice from Jet Stream that the lease had terminated, and 8) whether the trial court erred in awarding damages to Jet Stream for underpayment of royalties. Although we affirm the majority of the trial court's judgment, we conclude the trial court erred in enjoining Moore from recovering his oilfield equipment, except the well casing, and erred in awarding Jet Stream damages, based on bad faith trespass, measured by gross oil sales. We modify the trial court's judgment, affirm in part the judgment as modified, and reverse and remand in part.

I. The Railroad Commission Order Is Not a Force-Majeure Event

The trial court granted Jet Stream's motion for partial summary judgment, which argued the force-majeure provision does not apply where the cause of production is the result of lessee's failure to comply with the Texas Railroad Commission's regulations. To prevail on a traditional motion for summary judgment, a movant must establish that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law. TEX.R. CIV. P. 166a(c); City of Houston v. Clear Creek Basin Auth., 589 S.W.2d 671 (Tex.1979); Baubles & Beads v. Louis Vuitton, S.A., 766 S.W.2d 377 (Tex.App.-Texarkana 1989, no writ). When reviewing a summary judgment, we take as true all evidence favorable to the nonmovant and indulge every reasonable inference and resolve any doubts in the nonmovant's favor. Limestone Prods. Dist., Inc. v. McNamara, 71 S.W.3d 308, 311 (Tex.2002); Rhone-Poulenc, Inc. v. Steel, 997 S.W.2d 217, 223 (Tex.1999).

An oil and gas lease "is not a `lease' in the traditional sense of a lease of the surface of real property. In a typical oil or gas lease, the lessor is a grantor and grants a fee simple determinable interest to the lessee, who is actually a grantee." Natural Gas Pipeline Co. of Am. v. Pool, 124 S.W.3d 188, 192 (Tex.2003) (footnotes omitted). When a lessee retains only a royalty interest, the lessee acquires title to "all of the oil and gas in place, and the lessor owns only a possibility of reverter and has the right to receive royalties." Id. The oil and gas lessee acquires ownership of all the minerals subject to the possibility of reversion to the lessor. Id. The lease in this case provides, in pertinent part, as follows:

2. Subject to the other provisions herein contained, this lease shall be for a term of Five years, from this date (called "primary term") and as long thereafter as oil, gas or other mineral is produced from said land or land which said land is pooled hereunder.

....

5. If prior to discovery of oil, gas, sulphur or other mineral on said land, lessee should drill a dry hole or holes, thereon, or if after discovery of oil, gas, sulphur or other mineral, the production thereof should cease from any cause, this lease shall not terminate if lessee commences operations for additional drilling or reworking within sixty days thereafter.... If at the expiration of the primary term oil, gas or other mineral is not being produced on said land but Lessee is then engaged in drilling or reworking operations thereon, the lease shall remain in force so long as operations are prosecuted with no cessation of more than thirty (30) consecutive days, and if they result in production of oil, gas or other mineral so long thereafter as oil, gas or other mineral is produced from said land.

Texas Railroad Commission rules require operators of oil and gas wells to post financial assurance for the purpose of making certain that oil and gas wells are properly capped when production from them ceases. Prior to 2002, the Commission permitted small operators, including Moore, to pay a $1,000.00 fine in lieu of providing this additional financial assurance. After the Railroad Commission announced it would require all operators to provide financial assurance, Moore contacted three insurance agencies and coverage was denied.¹ On May 28, 2002, Moore requested a hearing at the Railroad Commission on the issue. Moore's application for a hearing was denied November 14, 2003. While his request for a hearing was pending, Moore learned that a court-ordered temporary injunction had been issued prohibiting the Texas Railroad Commission from enforcing the rule changes. Shortly after Moore learned the litigation had been resolved in favor of the Texas Railroad Commission, the Commission ordered Moore to cease production for failure to post a "P-5 Certificate of Financial Assurance." Moore received the order, dated August 12, 2004, and on August 20, 2004, ceased operations. On August 24, 2004, Moore applied to a bank for an irrevocable letter of credit, which was denied several months later. Moore eventually obtained a letter of credit from another bank May 20, 2005. After rejecting the bank's letter of credit twice for errors of form, the Texas Railroad Commission accepted it as the required financial assurance July 15, 2005, and Moore resumed production. It is uncontested that Moore ceased production between August 20, 2004 and July 15, 2005 — a period of almost eleven months.

Because production was ceased pursuant to an order from the Texas Railroad Commission, Moore argues that the "force-majeure" clause contained in the lease precludes termination of the lease for nonproduction. A "force-majeure clause" is generally defined as a "contractual provision allocating the risk if performance becomes impossible or impracticable, esp. as a result of an event or effect that the parties could not have anticipated or controlled." BLACK'S LAW DICTIONARY 674 (8th ed.2004). In the oil and gas context, the purpose of a force-majeure clause "is to excuse the lessee from non-performance of lease obligations when the non-performance is caused by circumstances beyond the reasonable control of the lessee ... or when non-performance is caused by an event which is unforeseeable at the time the parties entered the contract." Hydrocarbon Mgmt., Inc. v. Tracker Exploration, Inc., 861 S.W.2d 427, 435-36 (Tex. App.-Amarillo 1993, no writ) (citations omitted). When a lessee raises a force-majeure clause as an excuse for nonperformance, the lessee bears the burden of proof to establish that defense. Id.

The force-majeure clause in the lease² provides as follows:

11. All terms and express or implied covenants of this lease shall be subject to all Federal and State Laws, Executive Orders, Rules and Regulations, and this lease shall not be terminated, in whole or in part, nor Lessee held liable for damages, for failure to comply therewith, if compliance is prevented by, or if such failure is the result of, any such Law, Order, Rule or Regulation.

Moore claims the force-majeure clause excused the lack of production because the lease does not require the event must be beyond the control of the lessee. Jet Stream claims the force-majeure clause requires that the event be beyond the control of the lessee.

In Frost National Bank v. Matthews, this Court held that a force-majeure...