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BP America Production Co. v. Laddex, Ltd.

Supreme Court of Texas

March 3, 2017

BP America Production Company, Petitioner,
Laddex, Ltd., Respondent

          Argued October 11, 2016

         On Petition for Review from the Court of Appeals for the Seventh District of Texas.



         In this oil-and-gas case, we are asked to apply the rule against perpetuities to a top lease and to review the trial court's judgment terminating a bottom lease based on jury findings that the lease failed to produce in paying quantities over a specified period. The court of appeals held that the rule did not invalidate the top lease at issue and that the trial court erroneously charged the jury on the production-in-paying-quantities question, necessitating a new trial. We agree and affirm the court of appeals' judgment.

         I. Background

         BP America Production Company acquired by assignment a 1971 oil-and-gas lease (the BP lease) covering property in Roberts County, Texas. The lease had a primary term of five years and continued "as long thereafter as oil or gas is produced from said land hereunder." During the relevant time period, the BP lease had one producing well, the Mahler D-2. Beginning in August 2005, production from the Mahler D-2 slowed significantly for approximately fifteen months. In November 2006, the well resumed producing in quantities comparable to those before the slowdown.

         During the period of slowed production, an attorney for the lessors, Ron Nickum, believed that there had been a total cessation of production from the well. In April 2006, he sent BP a letter stating, "[i]t appears that [the BP] lease has terminated by reason of failure to produce in paying quantities and cessation of production." The letter went on to warn:

Any farmout or assignment in the terminated lease, or any additional drilling, reworking, or other development under the terminated lease, is taken at your own risk.
. . . Any further payment of royalty will simply be considered a partial payment of all monies due from production and sale of hydrocarbons . . . rather than a ratification or revivor of the terminated lease described above.

         Nickum concluded the letter with a request for a BP agent to contact him to discuss the matter. BP did not respond.

         In March 2007, approximately five months after the well resumed pre-slowdown production levels, the lessors under the BP lease entered into a top lease with Laddex, Ltd. (the Laddex lease) covering the same property as the BP lease.[1] The Laddex lease provided in pertinent part:

It is agreed that this is a top lease and, subject to the other provisions herein contained, the primary term of this lease shall commence [(a)] upon the date that written releases are filed in the official public records of the county in which the land is located by all owners of record of the prior terminated lease, releasing the last recorded prior now-terminated lease (the "base lease"); or (b) upon the date upon which a judgment of a court of competent jurisdiction terminating the base lease and all interests under the base lease becomes final and nonappealable. This Lease is intended to and does include and vest in Lessee any and all remainder and reversionary interest and after-acquired title of Lessor in the Leased Premises upon expiration of any prior oil, gas or mineral lease . . . .

         A month after the Laddex lease was executed, Laddex sued BP, alleging that the BP lease had terminated for failure to produce in paying quantities in 2005 and 2006.[2] BP moved to dismiss the case for lack of subject-matter jurisdiction, arguing that Laddex lacked standing to bring its claims because the purported source of that standing-the Laddex lease-violated the rule against perpetuities and was therefore void. The trial court denied the motion, and the case proceeded to a jury trial on the merits.

         The court's charge to the jury asked whether the Mahler D-2 failed to produce in paying quantities "[f]rom August 1, 2005 to October 31, 2006" and whether, "under all the relevant circumstances, a reasonably prudent operator would not continue, for the purpose of making a profit and not merely for speculation, to operate the Mahler D-2 Well in the manner in which it was operated between August 1, 2005 to [sic] October 31, 2006." The jury answered yes to both questions. The jury also found that Nickum's April 2006 letter did not "repudiate BP's title to the [BP] lease." The trial court rendered judgment on the verdict, decreeing that the BP lease "has lapsed and terminated for failing to produce in paying quantities" and granting Laddex possession of the pertinent mineral estate. BP appealed.

         The court of appeals agreed with the trial court that Laddex had standing, but reversed the judgment based on charge error and remanded for a new trial. 458 S.W.3d 683 (Tex. App.- Amarillo 2015). On the standing issue, the court of appeals held that the Laddex lease was not subject to the rule against perpetuities because it conveyed to Laddex a vested interest in the lessors' possibility of reverter. Id. at 686-87. As to the jury charge, the court of appeals held that the trial court erred in limiting the jury's paying-production inquiry to the specific fifteen-month period in which production slowed. Id. at 688. Noting that the controlling issue was whether the well failed to produce in paying quantities over a reasonable period of time and that the Mahler D-2 had undisputedly resumed paying production by the time the Laddex lease was executed, the court of appeals concluded that the charge "limited the jury's consideration to a period of time that was not reasonable." Id. Finally, the court rejected BP's challenge to the legal sufficiency of the evidence to support the verdict, holding that the record revealed "sufficient evidence to have allowed a reasonable jury to differ as to whether the lease produced in paying quantities when a reasonable period of time is considered." Id. at 689.

         BP and Laddex each filed a petition for review complaining of the court of appeals' judgment. Laddex argues that the jury was properly instructed and the trial court's judgment should have been affirmed, while BP maintains that judgment should be rendered in its favor, either because Laddex lacks standing or because no evidence supports the jury's findings regarding the Mahler D-2's cessation of production in paying quantities. We granted both petitions.

         II. The Rule Against Perpetuities

         BP challenges Laddex's standing to seek termination of the BP lease, arguing that the top lease on which such standing depends is void as a perpetuity. Because lack of standing deprives the court of subject-matter jurisdiction, we address this issue first. Austin Nursing Ctr. v. Lovato, 171 S.W.3d 845, 849 (Tex. 2005).

         The Texas Constitution prohibits perpetuities as "contrary to the genius of a free government." Tex. Const. art. I, § 26. This prohibition is embodied in the common-law rule against perpetuities (Rule), which provides that "no interest is valid unless it must vest, if at all, within twenty-one years after the death of some life or lives in being at the time of the conveyance." Peveto v. Starkey, 645 S.W.2d 770, 772 (Tex. 1982). In applying the Rule, we look at the conveyance instrument as of the date it is executed, "and it is void if by any possible contingency the grant or devise could violate the Rule." Id. However, we also recognize "that where an instrument is equally open to two constructions, the one will be accepted which renders it valid rather than void, it being assumed that a grantor would intend to create a legal instrument rather than one which is illegal." Kelly v. Womack, 268 S.W.2d 903, 906 (Tex. 1954).

         Importantly, the Rule does not apply to present interests or to future interests that vest at their creation. See id. at 905-06 ("The requirement of the rule in this respect is complied with when a future estate or interest becomes vested in interest regardless of when it becomes vested in possession."). Accordingly, we must examine the nature of the interest conveyed under the Laddex lease to guide our determination of whether the Rule applies.

         "In Texas, a typical oil and gas lease actually conveys the mineral estate (less those portions expressly reserved, such as royalty) as a determinable fee." Luckel v. White, 819 S.W.2d 459, 464 (Tex. 1991). "A possibility of reverter is the interest left in a grantor after the grant of a fee simple determinable." Jupiter Oil Co. v. Snow, 819 S.W.2d 466, 468 (Tex. 1991); Luckel, 819 S.W.2d at 464 (explaining that the possibility of reverter is "the grantor's right to fee ownership in the real property reverting to him if the condition terminating the determinable fee occurs"). The possibility of reverter, though not presently possessory, is presently vested at the time the lease is executed. See Snow, 819 S.W.2d at 468.

         Under this well-established framework, the BP (bottom) lease conveyed the lessors' mineral estate to BP's predecessor as a determinable fee, subject to a vested possibility of reverter in the lessors. And we have recognized that a lessor may sell or assign all or part of the possibility of reverter. Id. at 468-69. In turn, Laddex contends that the lessors conveyed their vested reversionary interest in the mineral estate to Laddex via the Laddex (top) lease. See Michael L. Brown, Effect of Top Leases: Obstruction of Title and Related Considerations, 30 Baylor L. Rev. 213, 239 (1978) (noting that a top lease "may be classified as a partial alienation of a possibility of reverter, " in that "a lessee under a top lease acquires the lessor's possibility of reverter to the extent that what he has acquired is capable of ripening into a fee simple determinable interest upon expiration of the bottom lease" (emphasis omitted)). BP responds that, to the extent the Laddex lease conveyed ...

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