661 BP America Production Company v. Laddex, Ltd., 513 S.W.3d 476 (Tex. 2017)

Richard F. Brown

The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.

BP America Production Company v. Laddex, Ltd., 513 S.W.3d 476 (Tex. 2017), held that the trial court erred in submitting a jury charge question that limited the jury’s consideration to a specific period of time in determining whether a mineral lease had ceased to produce in paying quantities. BP America Production Company (“BP”) was the lessee of a 1971 base lease in Roberts County, Texas. The only well on the lease produced steadily beyond the expiration of its five year primary term, until August 2005, when production slowed significantly for fifteen months. In November 2006, the well returned to pre-slowdown levels. In March 2007, the lessors signed a top lease with Laddex, Ltd. (“Laddex”). The top lease provided that it would vest upon the filing of releases by all existing lease owners or the entry of a final, non-appealable judgment of lease termination. Laddex then sued BP, seeking to terminate BP’s lease on the grounds that it had failed to produce in paying quantities in 2005 and 2006.

In Clifton v. Koontz, the Texas Supreme Court set forth a two-prong test to determine if a well is producing in paying quantities: (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. In Laddex, the jury charge posed 2 questions for each prong of the Clifton v. Koontz test, but the first question limited the jury’s consideration to the fifteen month period of slowed production. The jury found that BP’s well failed to produce in paying quantities during the fifteen month period and that a reasonably prudent operator would not have continued to operate the well as it had been operated before. Based on these findings, the trial court entered judgment for Laddex, declaring BP’s lease terminated. The issues were whether Laddex had stranding to sue and whether the charge was properly submitted.

BP’s standing argument was based on BP’s contention that Laddex’s top lease was void as a perpetuity, which deprived Laddex of standing to bring the lawsuit and the trial court of subject matter jurisdiction. The rule 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,” and “it is void if by any possible contingency the grant or devise could violate the Rule.” The Laddex top lease stated: “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. . . .” BP argued that this language delayed the vesting of a reversionary interest in Laddex until the date the BP lease expired, which could fall beyond the time allowed by the rule against perpetuities. Conversely, Laddex argued that the language presently vested in Laddex the lessor’s possibility of reverter.

Noting that the Laddex top lease “is not a model of clarity,” the Texas Supreme Court concluded that the interpretations of both sides were plausible. Because both interpretations were plausible, the Texas Supreme Court accepted Laddex’s interpretation, invoking the rule of construction 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.”

The court then turned to the production in paying quantities issue and the jury charge’s limitation of time to the fifteen months of slowed production. The court noted that in Clifton, it emphasized that “there can be no limit as to the time, whether it be days, weeks, or months, to be taken into consideration in determining the question of whether paying production from the lease has ceased.” Thus, the Texas Supreme Court held that, while the parties may argue time in relation to production in paying quantities, “the charge may not ask or instruct the jury about a specific period without unduly influencing the jury. . . .” Therefore, the court held that the jury charge did not permit the jury to appropriately discharge its fact-finding duties. Because both BP and Laddex presented evidence about the well’s production and profitability that could have supported a verdict in either BP’s or Laddex’s favor, remand was appropriate.

This case confirms that although the parties are free to present evidence and argue what is a reasonable period of time for determining production in paying quantities, the trial court cannot define that period of time in the charge without unduly influencing the jury.