Thistle Creek Ranch, LLC v. Ironroc Energy Partners, LLC
| Decision Date | 03 May 2022 |
| Docket Number | 14-20-00347-CV |
| Parties | THISTLE CREEK RANCH, LLC, Appellant v. IRONROC ENERGY PARTNERS, LLC, Appellee |
| Court | Texas Court of Appeals |
On Appeal from the 21st District Court Washington County, Texas Trial Court Cause No. 36602
Panel consists of Justices Wise, Spain, and Hassan.
Appellant Thistle Creek Ranch LLC, as the lessor of two mineral leases and appellee Ironroc Energy Partners, LLC, as the lessee sued each other for various claims related to the leases. The primary dispute involved whether the leases had terminated and whether Ironroc owed Thistle Creek unpaid proceeds. After the trial court rendered a partial summary judgment in Ironroc's favor that one of the leases was not terminated and ruled at trial that Thistle Creek could not recover certain statutory damages and attorney's fees, the parties nonsuited or settled their remaining claims without Thistle Creek waiving its right to appeal the two adverse rulings. The trial court signed a final judgment accordingly. Thistle Creek appeals, contending that the trial court erred by granting Ironroc's motion for summary judgment and denying Thistle Creek statutory damages and attorney's fees. We affirm.
In its first issue, Thistle Creek challenges the trial court's summary judgment ruling that one of the leases-the Kettler Lease-was valid and not terminated due to a lack of production. Thistle Creek contends that Ironroc was required to show, and failed to conclusively establish for purposes of summary judgment, that there was "production in paying quantities."
The general principles that govern the construction of contracts apply to the construction of mineral leases. Sundown Energy LP v. HJSA No. 3, L.P., 622 S.W.3d 884, 888 (Tex. 2021). Summary judgments and the construction of contracts present questions of law that we review de novo. Id. When construing a contract, our primary concern is to give effect to the written expression of the parties' intent as expressed within the four corners of the contract. See id; Endeavor Energy Res., L.P. v. Discovery Operating Inc., 554 S.W.3d 586, 595 (Tex. 2018); see also Andarko Petroleum Corp. v. Thompson, 94 S.W.3d 550, 554 (Tex. 2002) . Words must be construed in the context in which they are used, but courts cannot interpret a contract to ignore clearly defined terms. Sundown, 622 S.W.3d at 888. We avoid construing contracts in a way that renders contract language meaningless. Id. Parties are free to decide their contract's terms, and the law's strong public policy favoring freedom of contract compels courts to respect and enforce the terms on which the parties have agreed. Endeavor, 554 S.W.3d at 595.
The dispute in this case focuses on the habendum clause, which defines the duration of a mineral-lease estate. See id. at 597. This clause typically divides the lease's duration into a primary term for a fixed period of time and a secondary term that continues after the primary term expires for "as long thereafter as oil, gas or other mineral is produced." Id. (quoting Andarko, 94 S.W.3d at 554). Under this type of habendum clause, a lease may continue indefinitely as long as oil or gas is produced, but the lease will automatically terminate if actual production permanently ceases during the secondary term. Id. This type of habendum clause requires "actual production in paying quantities." Andarko, 94 S.W.3d at 554.
In 1989, the parties' predecessors entered into the Kettler Lease, whereby Thistle Creek as the current lessor agrees to lease property to Ironroc as the current lessee for the "purposes and with the exclusive right of exploring, drilling, mining and operating for, producing and owning oil, gas, sulphur and all other minerals." Ironroc agrees "to use reasonable diligence to produce, utilize, or market the minerals capable of being produced" from the property.
Ironroc attached evidence to its motion for summary judgment, and Thistle Creek does not dispute, that gas has been produced under the lease with no cessation greater than ninety consecutive days. Ironroc conceded that production has not been profitable or in "paying quantities" since at least March 2018.
Thistle Creek contends that the trial court "erred in granting summary judgment in favor of Ironroc on the grounds that production in any amount, no matter how small or unprofitable, was sufficient to maintain the Kettler Lease." Thistle Creek relies on well-settled case law interpreting the word "produced" or "production" in a mineral-lease habendum clause to mean production "in paying quantities." See Clifton v. Koontz, 325 S.W.2d 684, 690 (Tex. 1959) (citing Garcia v. King, 164 S.W.2d 509, 511 (Tex. 1942)). Whether a well is producing in paying quantities depends on a two-pronged analysis: (1) whether the well pays a profit, even small, over operating expenses; and (2) if not, whether, under all the relevant circumstances a reasonably prudent operator would, for the purpose of making a profit and not merely for speculation, continue to operate the well as it had been operated. BP Am. Prod. Co. v. Laddex, Ltd., 513 S.W.3d 476, 482-83 (Tex. 2017).
The habendum clause here, however, does not use the word "produced." It allows the lease to continue past the primary term "as long thereafter as operations, as hereinafter defined, are conducted." And "operations" include "production of oil, gas, sulphur or other mineral, whether or not in paying quantities." Under the plain terms of the lease and undisputed evidence in this case, the lease has not terminated because the well has produced gas "whether or not in paying quantities." See Ladd Petroleum Corp. v. Eagle Oil & Gas Co., 695 S.W.2d 99, 107 (Tex. App.-Fort Worth 1985, writ ref d n.r.e.) (); cf. Ice Bros., Inc. v. Bannowky, 840 S.W.2d 57, 60 (Tex. App.-El Paso 1992, no pet.) (regarding lease with similar habendum clause and definition of "operations," noting that the parties agreed that "the amount of production was irrelevant since under the definition of operations in the lease, production was not required to be in paying quantities").
Thistle Creek relies on other clauses in the lease, such as the reasonable-diligence covenant and the clause regarding the purpose of the lease to be for "producing" minerals. Thistle Creek contends that these clauses show the parties' intent for production to be in paying quantities. But a court must give meaning to all words in a contract, and a court cannot rewrite the contract to ignore the definition of "operations" that expressly states production need not be in paying quantities. See Andarko, 94 S.W.3d at 554-57 (). This habendum clause, which does not require production "in paying quantities," may be read in harmony with a reasonable diligence covenant that gives rise to a claim for damages for breach of the covenant. See id. at 560 ( that breach of an implied covenant, such as reasonable diligence, "does not automatically terminate the estate, but instead subjects the breaching party to liability for monetary damages, or in extraordinary circumstances, the remedy of a conditional decree of cancellation" (quoting Rogers v. Ricane Enters., Inc., 772 S.W.2d 76, 79 (Tex. 1989))). Thistle Creek's reliance on any other case that included a similar purpose or diligence clause is unpersuasive because the habendum clause did not extend the leases based on production "whether or not in paying quantities." See Hydrocarbon Mgmt., Inc. v. Tracker Expl, Inc., 861 S.W.2d 427, 432 (Tex. App.-Amarillo 1993, no writ).
Finally, Thistle Creek contends that, even if production need not be in paying quantities to extend the lease, Ironroc had to conclusively establish that a "reasonably prudent operator would, for the purpose of making a profit and not merely for speculation, continue to operate the well as it had been operated." See Laddex, 513 S.W.3d at 483. This test, however, is part of the "two-pronged analysis to answer this question" of "[w]hether a well is producing in paying quantities." Id. at 482-83. Because the habendum clause here does not require production in paying quantities, the reasonably-prudent-operator test is inapposite.
The trial court did not err by ruling that the Kettler Lease had not terminated and granting summary judgment to Ironroc. Thistle Creek's first issue is overruled.
In its second issue, Thistle Creek contends that ...
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