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Hardin-Simmons University v. Hunt Cimarron Limited Partnership

Court of Appeals of Texas, Seventh District, Amarillo

July 25, 2017

HARDIN-SIMMONS UNIVERSITY, WEST TEXAS REHABILITATION CENTER, CYRUS S. FROST, CHRISTOPHER FROST WHIDDON, NANCY SEABERRY FROST ARTS ENDOWMENT, BULLOCK MANAGEMENT PARTNERSHIP, LTD., JAMES S. FROST, INDIVIDUALLY AND AS INDEPENDENT EXECUTOR OF THE ESTATE OF MARY LOU FROST PERKINS, DECEASED, CAROLYN FROST HIZA, JULIE FROST COCHRAN, LYNN ETHERIDGE MORRIS, GAIL ETHERIDGE BRAY, BEVIN SPRING ETHERIDGE, ALLEN LESLIE, AND ELENE D. WILSON, TRUSTEE OF THE RALPH W. AND ELENE D. WILSON REVOCABLE TRUST, APPELLANTS
v.
HUNT CIMARRON LIMITED PARTNERSHIP D/B/A CIMARRON EXPLORATION COMPANY, APPELLEE

         On Appeal from the 286th District Court Cochran County, Texas Trial Court No. 12-04-4268; Honorable Pat Phelan, Presiding

          Before QUINN, C.J., and HANCOCK and PIRTLE, JJ. [1]

          MEMORANDUM OPINION

          Patrick A. Pirtle Justice

         By this appeal, we are asked to construe certain provisions of an oil and gas lease in order to determine whether, and to what extent, it remained in effect after expiration of its primary term due to a lack of production in paying quantities. Appellants, Hardin-Simmons University, West Texas Rehabilitation Center, Cyrus S. Frost, Christopher Frost Whiddon, Nancy Seaberry Frost Arts Endowment, Bullock Management Partnership, Ltd., James S. Frost, Individually and as Independent Executor of the Estate of Mary Lou Frost Perkins, Deceased, Carolyn Frost Hiza, Julie Frost Cochran, Lynn Etheridge Morris, Gail Etheridge Bray, Bevin Spring Etheridge, Allen Leslie, and Elene D. Wilson, Trustee of the Ralph W. and Elene D. Wilson Revocable Trust (collectively "Hardin-Simmons") are the lessors, or successors-in-interest to a lessor, in an oil and gas lease (the "subject lease") covering seven and three-quarter sections of land (approximately 4, 960 acres) in Cochran County, Texas. Appellee, Hunt Cimarron Limited Partnership, d/b/a Cimarron Exploration Company, is the lessee. Hardin-Simmons sued Hunt for (1) breach of the express covenant to explore and develop the leased premises for oil and gas and (2) breach of the implied covenant to (a) drill initial wells, (b) develop the premises, (c) protect the premises from drainage, and/or (d) market the oil or gas produced. Hardin-Simmons also sought a declaratory judgment concerning Hunt's failure to file a written release describing the mineral interests no longer held by production.

         The claims being asserted by Hardin-Simmons were presented to a Cochran County jury in April of 2015. Upon return of a verdict in favor of Hunt, the trial court entered a take-nothing judgment as to those claims. By four issues, Hardin-Simmons asserts the trial court erred in (1) denying its motion for judgment because, as a matter of law, the subject lease expired at the end of the primary term as to all non-productive acreage, (2) denying its motion for new trial because the jury's failure to find that Hunt breached certain lease covenants is against the great weight and preponderance of the evidence, (3) denying its motion for new trial because the jury's failure to find that Hunt breached the subject lease by not executing a release was against the great weight and preponderance of the evidence, and (4) denying its motion for new trial because the jury's finding that certain wells at issue were producing in paying quantities was against the great weight and preponderance of the evidence. We reverse the judgment of the trial court and render judgment declaring the subject lease has terminated, in part; and, we remand the cause to the trial court for further proceedings consistent with this opinion.

         Background

         As stated above, the Hardin-Simmons parties are the lessors, or successors-in-interest to a lessor, in the subject lease, executed August 1, 2006, covering approximately 4, 960 acres in Cochran County, Texas (the "Frost property"). In the late 1950s, several producing wells were drilled on the Frost property in the San Andres formation; however, production had significantly dropped-off by the mid-1960s. In 1967, the Buckshot Unit was created and operated as a "waterflood" project.[2] The Buckshot Unit consisted of approximately 13, 000 acres comprised of the Frost property and adjacent property to both the east and west. In the late 1990s, the original operator of the lease on the Frost property, Santa Fe Exploration, ceased production altogether and the Frost property fell out of the Buckshot Unit. The owners of the Frost property then entered into a new lease with Moriah Energy Corporation which was later assigned to United Oil and Gas. After United's primary term expired, it released most of the original acreage, leaving approximately 700 acres under that lease. Eventually, Hunt became the sole owner of United's remaining interest. At the time, Hunt also held the leases on the adjacent properties that previously comprised the Buckshot Unit.

         Hunt then entered into negotiations for a new lease covering the entire Frost property (including the acreage already held by production). Following those negotiations, the necessary parties executed the subject lease on August 1, 2006. The lease provided for a primary term of five years, ending on July 31, 2011, and it was vertically limited from the surface to 100 feet below the base of the San Andres oil and gas formation. The new lease also contained a "Pugh clause"[3] and a "retained acreage clause"[4] such that, unless otherwise provided, at the end of the primary term, the lease expired as to non-productive acreage. The Pugh clause, found at paragraph 12.a., provided as follows:

12.a. At the end of the primary term and subject to the other terms hereof, this lease shall continue as to, and only as to, land included in a "production unit", as said term is hereinafter defined in paragraph 12.b. This lease shall terminate as to all other acreage. Lessee shall have the option, but not the obligation to continue this lease in force as to all acreage covered hereby by commencing a well within 150 days prior to the end of said primary term and drilling and completing said well in a workmanlike manner to a depth sufficient to penetrate and test the San Andres formation. Thereafter, Lessee shall have the option of maintaining this lease in effect as to all acreage then covered by the commencement of drilling operations on successive wells each of which shall be commenced within 150 days after the completion of the prior well. Such drilling shall constitute a "continuous development program" by which Lessee may keep this lease in force and effect as to all lands and depths then covered hereby and thereby postpone the partial termination date provided below in paragraph 12.b. until the expiration of 150 days after the completion of a well without there being the commencement of another well. Upon the expiration of such time without the commencement of another well, there shall be a "cessation of the continuous development program" at which time the provisions of paragraph 12.b. shall become operative.

         This clause gave Hunt the right to maintain the entire lease by engaging in a "continuous development program" prior to the end of the primary term.

         The retained acreage clause, found at paragraph 12.b., provided as follows:

12.b. At the later of the end of the primary term or the cessation of the continuous development program for which provision is above made (herein called the "partial termination date") this lease shall terminate as to all lands and depths covered hereby, save and except as to the acreage and depths included in a production unit which said unit is defined as being: (i) a Unitized Tract formed under the Unitization Statute (which Unitized Tract shall be subject to the Agreement as referenced and described above in paragraph 5); (ii) 40 acres around each producing oil well which is not in a Unitized Tract; (iii) 40 acres around each well from which make-up water for secondary recovery operations is being taken for use on a Unitized Tract; (iv) 40 acres around any disposal well used for the disposal of water from, and only from, the land covered by this lease; (v) 80 acres around each producing or shut-in gas well.
As to any acreage which is not included in a Unitized Tract, this lease shall continue down to and not below the shallower of the total depth covered by this lease or 100 feet below the deepest depth theretofore drilled on the respective production units. The area of production units is subject to adjustment as provided in paragraph 12.c. hereof.
After the partial termination date, the acreage and depths assigned to each production unit, including that within a Unitized Tract, shall be deemed to be covered by a separate lease containing the terms and: provisions hereof as to, and only as to, the acreage and depths of that unit, to the end that thereafter there shall be a separate lease as to each production unit that can be kept in force and effect only by actual or constructive production from, or operations upon, that particular production unit without regard to production or operations upon the other production units retained under the terms hereof.
As an appurtenance to the land which remains covered by this lease after the partial termination date, Lessee shall continue to have necessary rights and easements for the purposes hereof in, on and across the acreage as to which this Lease has terminated. Such rights shall include the right to use any injection well or a well from which make-up water is obtained for so long as such wells are used for said purpose. Lessee shall designate of record the production units for which provision is herein made. Such designation shall be made in regular rectangular tracts as fractions of quarter sections so as not to impede the future development for oil and gas. The acreage allocated to each production unit in accordance with the terms of this paragraph shall be described in a written designation and partial release executed by Lessee and recorded in the official real property records of Cochran County, Texas a copy of each such filing, as recorded, shall be furnished to Lessor within 30 days after the partial termination date. lf such designation is not received by Lessor within 30 days after Lessor has given Lessee notice of Lessee's failure to file and furnish the designation and partial release, Lessor may file an affidavit designating production units for existing producing wells defining the acreages and depths as to which the lease continues to be operative and that as to which it has terminated. Acreage which is then in a Unitized Tract previously shown of record in Cochran County, Texas may be designated by reference to such previously recorded document.

         This clause gave Hunt the right to maintain the lease as to certain acreage and depths included in a "production unit, " as defined therein, by exempting that acreage from the automatic termination provisions of paragraph 12.b.

         Relevant to the dispute in this case, the lease further provided a means of avoiding partial termination through a "reworking clause" contained in paragraph 6. The reworking clause provided, in part, as follows:

[i]f at the expiration of the primary term, oil or gas is not being produced from the land and depths subject to this lease but Lessee is then engaged in . . . the reworking of any well on said land, this lease shall remain in force in accordance with its terms so long as . . . reworking operations are prosecuted (whether on the same or different wells) with no cessation of more than one hundred twenty (120) consecutive days . . . .

         Similar to the "continuous development clause, " this clause permitted Hunt to maintain the lease, "in accordance with its terms, " past the primary term by engaging in "reworking operations" prior to that date. Construction of this clause is at issue in this case.

         Finally, the subject lease provided that Hunt was required to file a written document releasing all non-productive acreage within thirty days following the end of the primary term. Specifically, paragraph 12.h. provided as follows:

[u]pon the partial or total termination of this lease, either as to depth or area, the Lessee shall within thirty (30) days after any such termination file a written release in the public records of the county in which the land is located describing the area or depth no longer subject to this lease. A copy thereof shall be furnished to Lessor.

         Accordingly, absent a savings provision such as the "continuous development clause" or the "reworking clause, " the lease required Hunt to file a written document releasing all non-productive acreage within thirty days following the end of the primary term.

         At the same time they executed the subject lease, the parties entered into a side agreement regarding unitization, the purpose of which was to facilitate the reconstitution of the Buckshot Unit. Despite this side agreement, Hunt did not file a unitization application with the Texas Railroad Commission during the primary term of the lease.

         Evidence presented at trial showed that, during the primary term of the subject lease, Hunt did not commence drilling on any new wells, [5] convert any of the legacy wells (wells that were in existence prior to execution of the subject lease) into injection wells, nor recomplete any of those legacy wells in a new production zone. Evidence further showed that, in July 2011, shortly before the end of the primary term, Hunt did commence reworking operations on ten legacy wells.

         On October 21, 2011, Hunt received a letter from counsel for Hardin-Simmons stating that the lease had terminated due to non-production. In that letter, Hardin-Simmons's counsel enclosed a Release of Oil and Gas Lease form that covered the entire acreage as to both horizontal area and vertical depth, and he requested that Hunt execute and return that release no later than November 14, 2011.

         Hunt did not sign the release and instead claimed that the entire lease remained in effect pursuant to the "reworking clause" found in paragraph 6. Hunt reasoned that because it had commenced reworking operations prior to the expiration of the primary term and there had never been a period of more than 120 days when they were not engaged in those reworking operations, the lease remained in full force and effect as to all acreage and all depths. In its response to Hardin-Simmons's request, Hunt noted that "considerable effort and resources towards" re-unitization had already been committed, that it was "engaged in a continuing program of reworking wells and returning abandoned wells to production" and that "the Frost lease [had been] fully maintained under the terms of paragraph 6 of our lease." Unsatisfied with Hunt's position, Hardin-Simmons filed suit in April 2012 and the case ...


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