445 Cabot Oil & Gas Corp. v. Healey, L.P.

Wednesday, September 2nd, 2015

Richard F. Brown

 
The following is not a legal opinion.  You should consult your attorney if the case may be of significance to you.
 
Cabot Oil & Gas Corp. v. Healey, L.P., No. 12-11-00236-CV, 2013 WL 1282007 (Tex. App.—Tyler Mar. 28, 2013, pet. denied) (mem. op.),  held that an oil and gas lease terminated for breach of covenant.  Cabot Oil & Gas Corporation (“Cabot”) was the lessee and operator of three oil and gas leases and Healey, L.P. (“Healey”) was lessor.  There were multiple production units and at least twenty-one wells were drilled.  The leases each contained the following provisions:
 
Lessee shall, during the drilling of any wells on the leased premises, furnish Lessor daily drilling reports, copies of all logs runs, monthly production reports for the life of said well(s), copies of all reports and forms filed with the State regulatory bodies in connection with such wells, well locations, dates of completion and abandonment.  Lessee shall also furnish Lessor copies of any title opinions or title reports which Lessee may obtain on the leased premises.
 
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Any breach by Lessee of any term, provision[,] or covenant in this lease shall be grounds for cancellation of this lease (together with any other remedies available to Lessor).
 
Healey alleged that Cabot and Cabot’s predecessor had failed to furnish the information as required by the leases, suggested that the leases had terminated, and requested to be treated as a working interest owner in the pooled units.  Cabot responded by attempting to provide the missing data.  Healey filed suit asserting claims for breach of contract, seeking a declaratory judgment that the leases had terminated and that Healey was an unleased cotenant, and for an accounting.  That these leases could terminate for breach of covenant was apparently uncontroverted, and the issues in the case were generally procedural and matters of proof.
 
The case was tried as a declaratory judgment action rather than in trespass to try title.  The court reviewed various Texas cases that were illustrative of the difference between the two causes of action, and concluded that, “with an exception not applicable here, a trespass to try title claim is the exclusive method in Texas for adjudicating disputed claims of title to real property.”  Because the case should have been in trespass to try title, Cabot contended that the declaratory judgment should be reversed, that attorney’s fees could not be awarded, and that Healey had failed to meet the strict evidentiary burdens required in trespass to try title.  The court held that Cabot failed to preserve error on all of those points by not submitting an exception in writing to the trial court prior to the submission of the charge under Texas Rule of Civil Procedure 90.
 
Much of the proof required to establish drilling costs on each well was dependent upon a business records affidavit with multiple records attached as provided by Cabot’s predecessor.  Cabot’s well-by-well payout methodology was apparently unchallenged, but the underlying evidence was contested on the basis of Healey’s objections that the exhibit was hearsay, constituted an impermissible summary, and failed to demonstrate that the costs set forth therein were reasonable and necessary.  The trial court sustained Healey’s objections and excluded the evidence; this decision was reversed on appeal.  Of particular note, the court held that evidence that the costs were reasonable and necessary was not required to secure admissibility of the business records, but only as an element of proof of the defense of offset.
 
Having held that the exhibit was improperly excluded, the court next weighed the gravity of the harm to Cabot as a result of the exclusion.  The court recited the rule that an error causes harm if it is dispositive of a material issue.  Here, although Cabot was precluded from introducing the exhibit into evidence, it would still have been required to show that the expenses outlined in the exhibit were reasonable and necessary.  Surprisingly, after reviewing and analyzing the evidence and the relationship between Cabot and its predecessor, the court held that Cabot did not and could not demonstrate that the costs outlined in the exhibit were reasonable and necessary.  Thus, the exclusion of the exhibit was not harmful.
 
Perhaps Cabot’s best chance to preserve its leases on the merits was the affirmative defense of substantial performance, but the trial court refused Cabot’s requested issue.  The court noted that jury instructions are reviewed under an abuse of discretion standard and if any part of the question, instruction, or definition fails, then the court can deny the entire request.  Instructions should not have the effect of, “advis[ing] the jury of the effect of its answers.”  Here, the proposed instructions would have advised the jury that if they answered in the affirmative, Healey would not be able to terminate the leases.  Cabot stretched too far for this court.  Accordingly, the court held that the trial court did not err by refusing to submit the proposed question.  The trial court’s rejection of proposed questions on waiver and quasi-estoppel was also affirmed on appeal.
 
Finally, the court considered whether the trial court erred by not allowing the recovery of costs from a dry hole that produced data that aided in the development of the unit as a whole.  The court avoided that issue because, regardless of the benefit to the land, Cabot had produced no evidence that the expenses associated with the dry hole were reasonable and necessary.
 
The significance of the case is that it confirms conventional wisdom that a lease provision making the lease determinable upon breach of covenant is simply unacceptable to any lessee.  How to resolve cases tried as declaratory judgments that should have been tried in trespass to try title is now a common problem.  It is perhaps a new approach to hold that the party who happens to lose the trial is stuck on appeal because neither party objected to the failure of both parties to use the exclusive method in Texas for adjudicating disputed claims of title to real property.