Prize Energy Res. v. Cliff Hoskins Inc

• Decision Date: 23 February 2011
• Docket Number: No. 04-09-00603-CV,04-09-00603-CV
• Parties: PRIZE ENERGY RESOURCES, L.P., et al. Appellants/Cross-Appellees v. CLIFF HOSKINS, INC., et al., Appellees/Cross-Appellants
• Court: Texas Court of Appeals

PRIZE ENERGY RESOURCES, L.P., et al. Appellants/Cross-Appellees

v.CLIFF HOSKINS, INC., et al., Appellees/Cross-Appellants

No. 04-09-00603-CV

Court of Appeals of Texas

Delivered and Filed: February 23, 2011

OPINION

From the 343rd Judicial District Court, McMullen County, Texas

Trial Court No. M05-0002-CV-C

Honorable Michael E. Welborn, Judge Presiding

Opinion by: Phylis J. Speedlin, Justice

Sitting: Karen Angelini, Justice

Phylis J. Speedlin, Justice

Rebecca Simmons, Justice

AFFIRMED IN PART; MODIFIED AND AFFIRMED IN PART; REVERSED AND RENDERED IN PART; AND REVERSED AND REMANDED IN PART

This appeal arises out of a title dispute over oil and gas producing property in McMullen County, Texas. The trial court resolved the issues of title in a summary judgment, rejected the plaintiffs' bad faith trespass claims against the working interest owners, and after a bench trial awarded damages for unpaid net revenues and royalties. The court declined to award attorney's fees to any party. Five parties appeal from the judgment.

Factual and Procedural Background

The underlying lawsuit arises out of a title dispute to mineral interests in a 690.54-acre tract known as the Baker Property, which comprises Section 3, Seale & Morris Survey A-434, in McMullen County, Texas. In 2001, the period of time relevant to this appeal, there were four owners of the mineral estate in the Baker Property:

• Burlington Resources, which owned a 25% mineral interest acquired from El Paso Natural Gas Company which had entered into a written lease with P.R. Rutherford in 1966 known as the "El Paso Lease," which was still in effect in early 2001.

• The Baker Trusts, ¹ represented by Bank of America (the "Bank") as trustee, which owned a 25% mineral interest and through Earl M. Baker had entered into a written lease with P.R. Rutherford in 1965 known as the "Baker Lease," which was still in effect in early 2001.

• Michael G. Rutherford and Patrick R. Rutherford, Jr., and their children, who are the heirs of P.R. Rutherford, and Rutherford Oil Corporation (collectively, "the Rutherfords"), who owned a 25% mineral interest subject to the Baker Lease.

• BP America Production Company ("BP"), successor to Atlantic Richfield Company ("ARCO"), which owned a 25% mineral interest that was not subject to a written lease.

A joint operating agreement ("JOA") covered the Baker Property (the "Unit Area"). The JOA was entered into in 1967 between ARCO, as a 25% mineral interest owner and the operator, and P.R. Rutherford, W. Earl Rowe, T.J. Goad, Patrick Rutherford, Jr., and Michael C. Rutherford (the "P.R. Rutherford Group") as the owners of the leasehold interests. The P.R. Rutherford Group contributed the El Paso and Baker Leases (jointly, the "Leases"), covering 75% of the mineral interests in the Baker Property, to the JOA. ARCO's 25% mineral interest was not subject to a written lease, but was contributed to the JOA so that the Baker Property could be developed as a whole. The mechanism for this was Article 3 of the JOA, which created a "deemed lease"² covering any unleased mineral interest that had been contributed to the Unit Area—i.e., ARCO's unleased 25% mineral interest. Therefore, from 1967 forward, 100% of the mineral interest in the Baker Property was subject to the JOA, with ARCO serving as the operator of all drilling operations and production in the Unit Area. As a mineral owner, ARCO was entitled to receive 25% of the 1/8 royalty under the JOA, and retained a possibility of reverter³ of its mineral interest if the JOA ever terminated. After the JOA was signed, two successful wells were drilled on the Baker Property (Baker Well Nos. 4 and 6).

The El Paso and Baker Leases each contained a "continuous production or operations" clause providing for continuation of the lease after the expiration of its primary term for as long as operations or production was on-going. The clauses were substantially the same, and provided that the lease would "remain in force so long as drilling, mining or reworking operations are prosecuted (whether on the same or different wells) with no cessation of more than sixty (60) consecutive days, and if they result in production, so long thereafter as oil or gas is produced from said land or land pooled therewith." With respect to the term of the JOA, Article 10 provided that the JOA "shall remain in full force and effect for as long as any of the oil and gas leases subjected to this agreement remain or are continued in force as to any part of the Unit Area, whether by production, extension, renewal or otherwise...."

In 1986, ARCO entered into a purchase and sale agreement with Prize Energy ("Prize"), known at that time as Petrus Energy, pursuant to which it sold all its rights under the JOA. Under the terms of the agreement, ARCO retained its royalty interest and its right of reverter to its 25% mineral interest subject to the JOA's "deemed lease," which mineral interest would revert back to ARCO free and clear if the JOA ever terminated. After the 1986 sale, Prize and the P.R. Rutherford Group were the operators under the JOA on the Baker Property from 1986 forward.

During June-August 2001, there was a 71-day period when no well on the Baker Property was operating or producing in paying quantities.⁴ None of the lessors were aware of the cessation of operations, and no one raised any concern at the time. In the following years, Prize (through Cimarex Energy), and then Gruy Petroleum/Rutherford Oil, ⁵ continued developing the Baker Property and drilled and completed seven more wells, the Baker Well Nos. 7-13; four of those wells were producing wells.

In 2004, Cliff Hoskins, who had no previous connection to the Baker Property, conducted some research on leases in the area, and became aware of the possible termination of the Baker Property's Leases and the JOA in August 2001. Hoskins, through his company Cliff Hoskins, Inc. ("Hoskins"), contacted BP (f/k/a ARCO), and offered to buy its 25% mineral interest which Hoskins asserted had reverted to BP in August 2001—when the JOA had purportedly terminated due to the cessation of operations. On June 25, 2004, BP sent a letter to Magnum Hunter Resources, Inc.⁶ questioning whether production on the Baker Property had ceased between June 2001 and April 2002, and requesting documents to confirm production—including meter readings, allocation statements, and check details relating to payments for gas produced. Magnum Hunter responded that, "[t]here has been continuous production, under the terms of the leases and the operating agreement...," and provided none of the requested documents.

Hoskins filed suit to quiet title on January 25, 2005.⁷ One month later, in February 2005, the Rutherfords, the Bank, and Burlington all signed ratifications of the El Paso and Baker Leases (the "Ratifications"), which purported to extend or renew the Leases that made up 75% of the interests subject to the JOA; the other 25% was made up of ARCO/BP's unleased interest which was contributed to the JOA. BP subsequently filed its own suit against Prize and the Rutherfords in October 2005. In 2007, BP deeded its claimed (reverted) 25% mineral interest to Hoskins, making the transfer retroactive to August 16, 2004. In the sale to Hoskins, BP reserved a 6.25% nonparticipating royalty interest in the 25% mineral interest it conveyed to Hoskins.

In their suits against Prize and the Rutherfords, Hoskins and BP asserted claims to quiet title to their interests and for declaratory relief, plus claims for bad faith trespass, theft/conversion, recovery of unpaid proceeds under the Texas Natural Resources Code, breach of contract, and recovery of attorney's fees. The Bank, as trustee for the Baker Trusts, also asserted various claims against Prize and the Rutherfords, including claims for fraud, trespass, and theft, rescission of its Ratification, and to quiet title to the Baker Trusts' mineral interest.

Competing summary judgment motions were filed by all the parties. On February 5, 2009, the trial court signed an "Interlocutory Judgment" in which it:

1. Granted the summary judgment motion by Prize and the Rutherfords on "all Plaintiffs' claims of trespass," and ordered that Plaintiffs "take nothing... on any trespass claim in this cause;"

2. Granted the summary judgment motion by Prize and the Rutherfords on all claims by the Bank, "including claims of fraud and rescission of the Ratification," and ordered that the Bank take nothing;

3. Granted the declaratory relief sought by Hoskins and BP, finding (i) the El Paso and Baker Leases and the JOA all terminated in August 2001, at which time Hoskins/BP's mineral rights and interests reverted free and clear from the JOA, making them unleased co-tenants; (2) from August 2001 through August 15, 2004, BP had an undivided 25% mineral interest, subject only to the non-participating royalty interest; and (3) from August 16, 2004 forward, BP's 25% mineral interest passed to Hoskins, subject to BP's retained royalty interest which burdens Hoskins' mineral interest and "does not burden any interests held by the Defendants;"

4. Made the finding that "the Defendants as mineral owners or invitees of mineral owners were not trespassers, or were alternatively 'good faith trespassers, '" as to Hoskins and BP after termination of the Leases and JOA;

5. Granted summary judgment "against all remaining claims and counterclaims asserted by any party in this case;"

6. Granted summary judgment "against all remaining affirmative defenses asserted by any party to the extent those defenses would be inconsistent with the Court's rulings;"

7. Ordered the parties to work together to stipulate to "the revenues less costs applicable to the Subject Acreage," or a bench trial on "that remaining issue" would be conducted; and

8. Noted the parties "dispute whether the issues of attorney's fees and interest, including such claims under the Texas Natural Resources Code, are still live issues," and stated the

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