Natural Gas Pipeline Co. of America v. Pool

• Decision Date: 19 December 2003
• Docket Number: No. 01-0058.,No. 01-0057.,01-0057.,01-0058.
• Citation: 124 S.W.3d 188
• Parties: NATURAL GAS PIPELINE COMPANY OF AMERICA, MidCon Gas Services Corp., and Chesapeake Panhandle Limited Partnership v. Joseph H. POOL, et al. (Two Cases).
• Court: Texas Supreme Court

124 S.W.3d 188

NATURAL GAS PIPELINE COMPANY OF AMERICA, MidCon Gas Services Corp., and Chesapeake Panhandle Limited Partnership v. Joseph H. POOL, et al. (Two Cases).

No. 01-0057.

No. 01-0058.

Supreme Court of Texas.

Argued March 6, 2002.

Decided December 19, 2003.

Dissenting Opinion Originally Filed August 28, 2003, which was not Withdrawn on Denial of Rehearing.

W. Alan Wright, Maston C. Courtney, Hinkle, Hensley, Shanor & Martin, L.L.P., Amarillo, Bruce M. Kramer, Jesse R. Pierce, Clements, O'Neill, Pierce, Wilson & Fulkerson LLP, Houston, for petitioner.

Edward H. Hill, Don M. Dean, Underwood, Wilson, Berry, Stein & Johnson, P.C., Joe L. Lovell, Lovell, Newson & Isem, L.L.P., Amarillo, William C. Boyd, Patterson Boyd & Lowery PC, Houston, J.R. Lovell, Lovell & Lyle, Louis T. Dubuque, Dumas, Anthony Atwell, Burdin Mediation, Dallas, Mullin Hoard & Brown, L.L.P., Lubbock, for respondent.

James W. McCartney, Mark L. Withrow, Pioneer Natural Resources, Midland, Jeffery L. Hart, Cardwell and Bennett, Austin, Everard A. Marseglia, Jr., Burns, Wooley & Marseglia, L.L.P., Houston, for amicus curiae.

Justice OWEN delivered the opinion of the Court, in which Chief Justice PHILLIPS, Justice HECHT, Justice SCHNEIDER, Justice SMITH, and Justice WAINWRIGHT joined.

We deny Respondents' motion for rehearing. We withdraw our opinion of August 28, 2003, and substitute the following in its place.

In these consolidated proceedings, lessors under three oil and gas leases contend that the leases terminated because intermittently over the years there were periods of time ranging from 30 to 153 days when there was no actual production. We do not decide whether the leases terminated because even assuming they did, the lessees thereafter acquired by adverse possession fee simple determinable interests in the mineral estates that are identical to those the lessees held under the leases. Accordingly, we reverse the judgments of the court of appeals and render judgments for petitioners.

I

Two separate suits were brought in the same trial court by the same lessors against the same defendants. The first suit involved two leases; the second suit involved a third lease. The cases were not consolidated in the trial court or the court of appeals, and the court of appeals issued an opinion in each case.¹ We consolidated the cases in this Court. For ease of reference, we will refer to the first-filed suit as Pool 1,² and the second as Pool 2.³

In Pool 1, two leases were executed by J.T. Sneed and his wife in 1926 and 1936, respectively. In a separate agreement, the leases were consolidated as to a portion of the lands they covered for purposes of natural gas exploration and production. The 1926 lease at issue in Pool 1 provided it would remain in effect for a term of ten years and "as long thereafter as oil or gas, or either of them, is produced from said land by the lessee." The 1936 lease similarly provided that it would remain in effect "so long as natural gas is produced."

A well, known as the J.T. Sneed # 1 well, was drilled on the consolidated acreage, and it produced gas until a replacement well was drilled in 1994. The replacement well has produced without interruption. But according to records from the Texas Railroad Commission, there were periods of time when there was no production from the J.T. Sneed # 1. Those periods were in August 1941, June through September 1963, July and August 1964, June 1979, March 1983, and July 1984. There is evidence that the J.T. Sneed # 1 did not produce for 122 consecutive days in the summer of 1963 and for 62 consecutive days in 1964. The other periods of non-production were shorter.

The lease at issue in Pool 2 was executed in 1937. It provided that "[s]ubject to the other provisions herein contained, this lease shall remain in force pending the commencement and continuation of drilling operations on said land as hereinafter provided, and as long thereafter as natural gas is produced and marketed from any well on said land."

Two producing wells were drilled on the acreage covered by the lease at issue in Pool 2. However, there was no actual production from either of these wells in August 1959, July and August 1960, June and July 1961, June through October 1963, July and August 1964, and June 1969. The periods of no actual production ranged from 30 to 153 days. Another well was drilled on the Pool 2 lease in 1996, and it has produced in paying quantities without interruption.

The plaintiffs in the trial court, who are the respondents in this Court, are the successors of the Sneeds' interests in all three leases, and they contend that the leases terminated due to cessation of production. They brought suit to quiet title, for trespass, conversion, and fraud, and for actual and exemplary damages. The defendants in the trial court, who are the petitioners in this Court, are Natural Gas Pipeline Company of America, MidCon Gas Services Corp., and Chesapeake Panhandle Limited Partnership. They are the current owners and operators of the leases. For simplicity, we will refer to them as the lessees. They contend that the leases did not terminate because there has been production in paying quantities at all times, notwithstanding the periods of nonproduction, or that production was restored within a reasonable period of time under the temporary cessation of production doctrine. In the alternative, the lessees contend that the lessors' claims are barred by laches, or that the lessees obtained a fee simple determinable in each of the mineral estates by adverse possession.

In both suits, the trial court granted motions for partial summary judgment in favor of the lessors, declaring in the partial summary judgment that the leases had terminated "due to one or more cessations of production from said land." The trial court then tried the remaining issues in Pool 1 to a jury. In a verdict largely favorable to the lessees, the jury found that the lessees had produced gas in good faith after August 1964 and failed to find that the lessees had produced gas after 1964 as a result of fraud. The jury also found that the lessees' failure to produce gas was excused because the lessors were guilty of laches, and that the lessees had acquired title to the leases by adverse possession under the three-, five-, ten-, and twenty-five-year statutes of limitations. However, the jury found that the lessors had not executed any formal document that expressly recognized the validity of the leases and thus that the leases had not been revived. The trial court rendered judgment notwithstanding the aspects of the verdict that were favorable to the lessees. The trial court declared that the two leases had terminated, and based on stipulated damage calculations, awarded $234,766.20 in actual damages to be paid by Natural Gas Pipeline and MidCon, and $545,416.79 in actual damages to be paid by Chesapeake Panhandle.⁴ The trial court also awarded attorneys' fees and costs to the lessors.

The trial court tried the remaining issues in Pool 2 to a different jury in a trial that began a few days after the conclusion of the Pool 1 trial. Unlike the jury in Pool 1, the jury in Pool 2 rendered a verdict that was entirely favorable to the lessors. The jury found that the lessees had acted in bad faith in producing gas after August 1964, that the lessees produced gas after that date as a result of fraud, that the lessors were not guilty of laches, that the lessees did not acquire title by adverse possession, and that the lessors had not executed any formal document that expressly recognized the validity of the lease and thus that the lease had not been revived. The trial court rendered a judgment declaring that the lease had terminated, that the lessees were jointly and severally liable for $1,522,754.93 in actual damages, that the lessors recover exemplary damages of $1,200,000 from Natural Gas Pipeline Co., $1,200,000 from MidCon and $1,200,000 from Chesapeake Panhandle, and awarded attorneys' fees, costs, and prejudgment interest.

The lessees appealed both judgments. In Pool 1, the court of appeals held that the leases had terminated due to cessation of production, the lessees could not establish adverse possession even if they were trespassers because they had not given notice of repudiation of the lessors' title, laches was not a defense, the lessors were not entitled to attorneys' fees because the suit was essentially a trespass to try title action rather than an action for declaratory judgment, and certain offsets should be applied to reduce damages. The court of appeals accordingly modified and then affirmed the trial court's judgment.⁵

In Pool 2, the court of appeals held that the lease had terminated due to cessation of production, laches was unavailable as a defense, the lessors' execution of division orders did not revive the lease, the lessees did not establish adverse possession because there was no notice to the lessors that the lessees repudiated the lease, the evidence did not support the fraud finding and therefore exemplary damages were not recoverable, the evidence supported the finding that the lessors had produced gas in bad faith, the two-year limitations periods applied to the trespass and conversion claims for recovery of actual damages, and the lessors could not recover attorneys' fees. The court of appeals affirmed the trial court's judgment as modified.⁶

We granted the lessees' petitions for review. Because the lessees established adverse possession as a matter of law, and resolution of that issue is dispositive, we do not reach other issues presented by the lessees' petitions.

II

In Texas it has long been recognized that an oil and gas lease is not a "lease" in the traditional sense of a lease of the surface of real property.⁷ 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.⁸ Consequently, the...