Face Challenges Confidently

145 Natural Gas Pipeline Company of America v. Pool

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.

The Texas Supreme Court issued a very important opinion in Natural Gas Pipeline Co. of America v. Pool.1 After a lease termination by cessation of production, a lessee can reacquire ownership of the lease by adverse possession, simply by continuing operations. This opinion consolidated two separate cases involving three oil and gas leases executed in 1926, 1936 and 1937. The 1926 lease and the 1936 lease were consolidated into one lease called the Pool 1 lease, and the 1937 lease was called the Pool 2 lease.2

Each lease experienced multiple intervals in which no production occurred, but the cessations occurred long before suit was filed. The last interval in which Pool 1 had no production was fourteen years prior to the filing of suit, and the last interval in which Pool 2 had no production was twenty-nine years prior to the filing of suit. The lessors (“Pool”) claimed that the leases had terminated due to cessation of production. Pool brought suit to quiet title, for trespass, conversion, and fraud. The lessees (“NGPL”) responded that there was production in paying quantities at all times, or that during any period of non-production, production was restored within a reasonable time under the temporary cessation of production doctrine. NGPL also claimed that even if the leases had terminated, NGPL obtained a fee simple determinable in the mineral estate by adverse possession.3

The lower courts terminated the leases and awarded damages and attorney’s fees. The Texas Supreme Court did not address the application of the temporary cessation of production doctrine. Rather than address the difficult lease termination issues, the Court simply assumed (without deciding) that the leases terminated. If the leases terminated, the mineral interest then would revert back to Pool, and the critical question would become whether NGPL reacquired some interest by adverse possession. Because NGPL continued operations on the leases long after the leases reverted to the lessors, the Court held that NGPL acquired a fee simple determinable lease of the mineral estate by adverse possession as a matter of law.4

A mineral estate may be adversely possessed. It requires actual possession (severance) of the minerals. To acquire oil and gas by adverse possession requires the drilling and production of oil or gas. Adverse possession requires that all of the elements of either the three, five, ten, or twenty five-year statute of limitations be met. In this case, the Court looked to the ten-year limitations period because both Pool 1 and Pool 2 had been continuously operated by lessees for fourteen years and twenty-nine years respectively since the last cessation of production. Thus, the most recent time the lease could have terminated and reverted to the lessors was more than ten years prior to the date suit was filed.5

The ten-year statute requires “suit to be brought within ten years to recover real property held in peaceable and adverse possession by another who cultivates, uses, or enjoys the property.” “Peaceable possession” is possession not interrupted by an adverse suit to recover the property. “Adverse possession” is the actual, visible, and continuous appropriation of real property under a claim of right that is inconsistent with and is hostile to the claim of another person.6

In Pool, the Court held that NGPL satisfied these requirements as the adverse possessor. The Court assumed (without deciding) that the leases terminated due to non-production, and thus, Pool became fee simple absolute owner of the mineral interests through the reversion of title. NGPL then became the adverse possessor by continuing to produce oil and/or gas from a mineral estate in which NGPL no longer had a legal interest and which was no longer under lease. The production was actual, visible, continuous, and, assuming the leases had terminated, certainly inconsistent and hostile to Pool’s rights in the mineral estate after reversion.7

Perhaps the most critical issue in the case was whether some actual notice of the adverse nature of NGPL’s claim was required. The lower court had held that because NGPL had entered under a valid claim of right (original lease), it could not become an adverse possessor without somehow giving notice of its adverse claim. The Supreme Court held that actual notice of lease termination was not required. Notice can be inferred, or there can be constructive notice. Notice will be presumed where the facts show that the adverse occupancy and claim of title to the land has been “long continued, open, notorious, exclusive and inconsistent with the existence of title”8 in another. The “extended period of possession” that will constitute such notice must have occurred before the applicable statute of limitations begins to run.9 However, that notice occurred as a matter of law “when the lessees continued to operate the leases, produce oil or gas, sell it, and pay only a royalty to the lessors.”10 The Court ruled that it did not matter that both Pool and NGPL thought the lease was still in effect. The intent of the parties does not matter. NGPL’s possession was inconsistent and hostile to Pool’s rights, and thus the time period for adverse possession began to run upon termination of the lease, more than ten years prior to the filing of suit. The Court said:

A record titleholder’s ignorance of what it owns does not affect the running of limitations. The lessees’ [NGPL’s] possession of the mineral estates in the cases before us today was adverse, and all the requirements of the three-, five-, and ten-year statutes of limitations were met.11

The Court’s decision was also very significant in characterizing the interest in the minerals that was adversely possessed by NGPL. The Court ordered that NGPL be awarded a fee simple determinable defined by the terms of the original lease, because this was the interest that NGPL adversely possessed. An adverse possessor acquires no greater interest than that claimed. The Court also expressly stated that NGPL was not entitled to a fee simple absolute in the mineral estate. Thus, NGPL effectively reacquired its terminated leasehold estate by adverse possession, and Pool, by Pool’s failure to act, lost the leasehold estate which had reverted to Pool. Notwithstanding NGPL’s adverse possession, Pool did not lose Pool’s fee mineral interest (subject to the NGPL lease), nor did Pool lose Pool’s interest as a lessor under the NGPL lease. For the parties, the effect of the decision is to place the parties in the same position they would be in, if the cessation of production had never occurred.12

In this opinion, the Texas Supreme Court continues its recent history of demonstrating little patience with stale claims and parties who sit on their rights. The significance of the case is to confirm that lessors may not with impunity simply ignore a cessation of production on their lease. It has generally been accepted that a lease once terminated was almost certainly terminated forever, and that it was very difficult to “revive” a terminated lease by waiver, estoppel, laches, amendment or ratification. There was also considerable doubt that a lessee who entered into possession under a permissive and legitimate right (original lease) could ever become an “adverse” possessor without some clear and demonstrable evidence of notice that the lessee’s possession had become adverse.13 Here the Court sweeps all of that away and holds that title reacquired by reversionary right may be promptly lost when the first statute of limitations runs its course.

Finally, the case is also very significant for what it does not decide. Many cases have been filed (particularly in the Texas Panhandle) for lease termination based on cessations of production which occurred long before suit was filed. There are many unresolved questions about the burden of proof in such cases, the application of defensive issues such as wavier, estoppel, laches, amendment and ratification, and the fundamental nature and scope of the doctrine of temporary cessation of production. The Supreme Court, for now, has avoided resolving any of these questions. The application of the statute of limitations will make many of these old claims moot. The economic shift and the impact on the parties can be quite extraordinary. In Pool, terminated leases with producing wells are found to be still in effect, and millions of dollars awarded for damages and attorney’s fees are reduced to zero.14

1 2003 WL 22038662 (Tex. 2003).
2 Id. at *1.
3 Id. at *2.
4 Id. at *2-3.
5 Id. at *3-4.
6 Id. at *4.
7 Id. at *4-8.
8 Id. at *5.
9 Id. at *11.
10 Id.
11 Id. at *9.
12 Id.
13 See, g. Natural Gas Pipeline Co. of America v. Pool 30 S.W.3d 618, 629 (Tex. App.–Amarillo. 2000) reversed, Natural Gas Pipeline Co. of America v. Pool, 2003 WL 22038662 (Tex. 2003). Natural Gas Pipeline Co. of America, 2003 WL 22038662 at *3 and *11.