Neel v. HECI Exploration Co.

• Decision Date: 27 March 1997
• Docket Number: No. 03-95-00759-CV,03-95-00759-CV
• Citation: 942 S.W.2d 212
• Parties: Russell H. NEEL, Sr.; Russell H. Neel, Jr.; LeRoy K. Neel; and Kathleen Neel Insall, Appellants v. HECI EXPLORATION COMPANY and Browning Oil Company, Inc., Appellees.
• Court: Texas Court of Appeals

Page 212

942 S.W.2d 212

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

No. 03-95-00759-CV.

Court of Appeals of Texas Austin.

March 27, 1997.

Harvey F. Cohen, Austin, for Appellants.

Michael E. McElroy, McElroy & Sullivan, L.L.P., Austin, for Appellees.

Before CARROLL, C.J., and JONES and B.A. SMITH, JJ.

BEA ANN SMITH, Justice.

We withdraw our previous opinion and judgment issued January 23, 1997 in this cause and substitute the following opinion.

Russell H. Neel, Sr.; Russell H. Neel, Jr.; LeRoy K. Neel; and Kathleen Neel Insall ("the Neels") appeal a take-nothing summary judgment denying their claims against their mineral lessee, HECI Exploration Company, and HECI's successor-in-interest, Browning Oil Company, Inc. The Neels sued HECI to recover a share of HECI's judgment against AOP Operating Corporation for damage to the oil and gas reservoir underlying the Neels' property. We will affirm the summary judgment against the claim for royalty on lost production and will reverse and remand the remainder of the cause.

BACKGROUND

In 1978, Russell H. Neel, Sr. leased his land in the Wilcox Field in Fayette County, conveying the right to explore for and produce oil and reserving a royalty interest of one-sixth of all oil produced from the land. Kathleen Neel Insall, LeRoy K. Neel, and Russell Neel, Jr. inherited their mother's interest in the lease. HECI and Browning are successor lessees. HECI discovered and produced oil on the leased premises and paid royalties.

In 1985, HECI learned that AOP was producing excessively in the Wilcox Field from a well on acreage next to the Neels' land. HECI complained to the Railroad Commission three times and secured regulatory action to curb AOP's wrongful acts. AOP nevertheless continued to overproduce. In 1988, HECI filed Cause No. 88-1045 in district court in Fayette County alleging that AOP's overproduction damaged the reservoir and resulted in lost reserves in HECI's well on the Neel tract. In May 1989, the court granted HECI permanent injunctive relief against AOP, and a jury awarded HECI $1,719,956 actual damages and $2,000,000 punitive damages. HECI executed a release of judgment in September 1989. HECI did not inform the Neels of AOP's overproduction and did not notify them of the legal action before, during, or after the lawsuit. The Neels did not learn of HECI's suit against AOP for lost production until May 1993.

In December 1993, the Neels sued to recover a one-sixth share of HECI's judgment against AOP. They asserted claims for breach of the contract to pay royalty on production, negligent misrepresentation, breach of the implied covenant to protect the leasehold, an accounting, unjust enrichment, and punitive damages.

The trial court granted summary judgment to HECI in two stages. The court first granted partial summary judgment on three specific points: (1) the Neels did not convey to HECI their causes of action against AOP; (2) there was no fiduciary relationship between the Neels and HECI; and (3) the express terms of the lease did not impose on HECI an obligation to give the Neels information affecting their interest in the leasehold. The court later granted a multi-faceted motion for summary judgment, disposing of all the Neels' claims against HECI without stating a specific basis. After the parties stipulated that summary judgment would have been granted in favor of Browning had it presented such a motion at the same time as defendant HECI, the trial court signed the final judgment on August 31, 1995.

The Neels raise eight points of error appealing various issues. They contend that the judgment was erroneous because (1) HECI did not prove as a matter of law that it protected the leasehold estate as a reasonably prudent operator; (2) HECI had the right and duty to sue AOP for the Neels' interest; (3) the Neels are entitled to a royalty share of HECI's judgment for lost production; (4) HECI is unjustly enriched by retaining its full recovery; (5) a fact issue remains on negligent misrepresentation regarding

whether HECI should have advised the Neels about the drainage; and (6) HECI failed to prove the statute-of-limitations bar by negating the discovery rule.

DISCUSSION AND HOLDINGS

In reviewing a summary judgment, this Court must determine whether the movant has shown that no genuine issue of material fact exists and that it is entitled to judgment as a matter of law. Tex.R. Civ. P. 166a(c); Nixon v. Mr. Property Management Co., 690 S.W.2d 546, 548 (Tex.1985). We take as true all evidence favoring the non-movants and indulge every inference and resolve every doubt in their favor. Id. at 548-49. When a court does not specify on which of several possible bases it renders the summary judgment, appellants must show that no ground in the motion supports the summary judgment; we must affirm the summary judgment if any of the theories in the motion has merit. Valles v. Texas Comm'n on Jail Standards, 845 S.W.2d 284, 287 (Tex.App.--Austin 1992, writ denied). The reviewing court can consider only those grounds raised by the summary-judgment motion and response. McConnell v. Southside Indep. Sch. Dist., 858 S.W.2d 337, 343 (Tex.1993).

Relationships of the parties and the oil

To effectively assess the summary judgment, we must understand the relationships under the lease of the parties to the oil. Before the lease, the Neels owned the oil in place underground. See Elliff v. Texon Drilling Co., 146 Tex. 575, 210 S.W.2d 558, 561 (1948). The ownership interest is limited by the law of capture and state regulations. Id. Oil that is legally drained away and "captured" by neighboring producers is lost to the owner. Id. at 562. The mineral owner, however, retains an interest in minerals that are illicitly taken or wasted by illegitimate acts of neighboring producers. Id. at 563. In Elliff, the court held that gas and distillate lost during a blowout of a neighbor's well

[a]t the time of their removal ... belonged to [the owners of the tract adjoining the blown-out well], and [the gas and distillate's] wrongful dissipation deprived these owners of the right and opportunity to produce them. That right is forever lost, the same cannot be restored, and petitioners are without an adequate legal remedy unless we allow a recovery under the same common law which governs other actions for damages and under which the property rights in oil and gas are vested.

Id.

Under the lease, the Neels conveyed their rights in the oil to HECI. See Texas Oil & Gas Corp. v. Ostrom, 638 S.W.2d 231, 234 (Tex.App.--Tyler 1982, writ ref'd n.r.e.). HECI, therefore, retained an interest in the oil overproduced by AOP and the oil in place rendered unproducible by that overproduction.

The Neels' royalty interest accorded them one-sixth of the oil produced by HECI. Production includes only marketable oil and gas physically extracted. Rogers v. Osborn, 152 Tex. 540, 261 S.W.2d 311, 312 (1953); see also Killam Oil Co. v. Bruni, 806 S.W.2d 264, 267-68 (Tex.App.--San Antonio 1991, writ denied). Royalty owners, however, have recovered for reduction in value to the reserves due to the negligence of a mineral producer on an adjoining tract of land. Elliff, 210 S.W.2d at 558; Apache Corp. v. Moore, 891 S.W.2d 671, 678-680 (Tex.App.--Amarillo 1994, writ denied) (royalty owners recovered for gas lost during gas-well blowout on neighboring property). The Neels had a cause of action against AOP.

The lessee's duties

In addition to the duties stated in the lease, HECI had three implied duties: to develop the premises, to protect the leasehold, and to manage and administer the lease. See Amoco Prod. Co. v. Alexander, 622 S.W.2d 563, 567 (Tex.1981). A lessee must perform under the implied covenants as a reasonably prudent operator. Id. The duty to protect the leasehold includes a duty to protect against drainage. Id. at 568. That duty may require a reasonably prudent operator to take a number of actions, including drilling additional wells or seeking administrative relief. Id. The operator need not take any action that does not yield a reasonable expectation of profit. Id.

The parties have starkly different views of the extent of HECI's duties under the implied covenant to protect the leasehold. At one extreme, the Neels contend that HECI had to represent the Neels' interests in the suit against AOP and that HECI's recovery against AOP is production subject to the royalty provisions of the lease. At the other, HECI urges that it sued AOP solely to protect its own interest in the leasehold and that it had no duty, right, or ability to represent the Neels in that suit; it argues that the damage award is not production and, even if it were, none of it belongs to the Neels because HECI did not represent their interests.

The causes of action

The Neels assert several claims against HECI. They seek to recover for breach of the implied covenant to protect the leasehold and for breach of the lease's royalty provision. They want reimbursement for HECI's unjust enrichment. They also seek damages, actual and punitive, for negligent misrepresentation. We will examine whether HECI has shown the causes of action to be meritless before assessing whether they are barred by the statute of limitations.

Breach of Contract and Implied Covenants. The Neels contend that the trial court erred in granting the summary judgment against their claim for breach of the implied covenant to protect the leasehold because HECI did not show that, as a matter of law, it fulfilled its duty to protect the entire leasehold as a reasonably prudent operator (points one and four). Because the Neels urge, in part, that HECI breached its duty by failing to sue AOP on their behalf, our discussion of these points encompasses the assertion that HECI had the right to sue on the Neels' behalf (point three).

HECI contends that...