Face Challenges Confidently

150 Ridge Oil Co., Inc. v. Guinn Investments, Inc.

Tuesday, September 1st, 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.
Ridge Oil Co., Inc. v. Guinn Investments, Inc., No. 02-0599, 2004 WL 1966096 (Tex. Sept. 3, 2004), is an important case on the temporary cessation of production (“TCOP”) doctrine, lease surrender and assignment clauses, lease termination by cessation of production and relationships between owners of divided interests in the leasehold. It is probably the most important case decided during the last year since the Pool case (on adverse possession), and it answer some of the questions that were not answered in the Pool case.
The 1937 lease at issue covered two tracts of land. The leasehold in one tract was owned by Guinn, while the other was owned by Ridge. Although there had been no production on the Guinn tract since 1950, the lease stayed in effect during its secondary term by continuous production from the Ridge tract until 1997. In 1997, Ridge offered to purchase the Guinn tract in order to complete secondary recovery efforts by a waterflood. Guinn rejected this offer, leading Ridge to seek the property by other means. Intending to re-lease both tracts from the lessor, Ridge intentionally and voluntarily ceased production on the Ridge tract for ninety days in order to terminate the 1937 lease. During the ninety-day cessation of production, Ridge wrote a letter to the lessor explaining its plan to re-lease the Guinn tract. In addition, Ridge voluntarily continued to pay royalties to the lessor during the stoppage.  Ridge then obtained a new lease.
The issue was whether the 1937 lease remained in effect as to the Guinn tract. It was uncontroverted that production from any one tract will ordinarily continue the entire lease in effect as to all tracts under a single lease. Ridge, however, contended that production ceased and the 1937 lease terminated (1) when production from the Ridge tract ceased, or (2) when Ridge executed new leases with the owners of the possibility of reverter of the mineral interest in the Ridge tract. Guinn countered by contending that the lease was continued in effect by the TCOP doctrine.

The court held:

We agree with the court of appeals in the case before us today that, absent any language in a lease to the contrary, the temporary cessation of production doctrine applies when a lease covering more than one tract or interest is held by production from a well operated by a partial assignee of the lessee’s rights.

The court then turned to the central issue remaining in the case, which was to determine whether there was in fact a temporary cessation of production.
Perhaps the most interesting part of the case in the court of appeals was the court’s discussion of the application of the TCOP doctrine to cessations caused by third parties. There has been considerable uncertainty as to the type or cause of cessation that would trigger the TCOP doctrine. Reviewing the case law generally, the court concluded that the inquiry ought to be focused on the operator’s intent with respect to restoring production, rather than the cause of the stoppage. The court concluded that the doctrine is not limited to involuntary cessations or to physical or mechanical causes. The only fair and just rule is to hold that the lease continues in force unless the period of cessation is for an unreasonable length of time.
The Texas Supreme Court reviewed many of the TCOP cases and then adopted the reasoning of the court of appeals and went out of its way to clarify that the cause of the cessation was not the critical question.  The court held:

Accordingly, although decisions at times have said that the temporary cessation of production doctrine applies when there is “sudden stoppage of the well or some mechanical breakdown of the equipment used in connection therewith, or the like,” or that the doctrine applies when the cause of a cessation of production is “necessarily unforeseen and unavoidable,” the circumstances in which this and other courts have applied the doctrine have not been so limited. The court of appeals in the present case correctlyconcluded that “foreseeability and avoidability are not essential elements of the [temporary cessation of production] doctrine.

The court then ignored Ridge’s first theory (that the 1937 lease terminated when Ridge stopped producing) and found Ridge’s second theory to be dispositive: on the date the new lease became effective for the Ridge tract, there was a permanent cessation of production with respect to the 1937 lease.
The court noted that it was well established that a lease could terminate by surrender, mutual agreement, or by signing a new one. When the owners of the possibility of reverter in the Ridge tract signed a new lease with Ridge, they effectively terminated the 1937 lease as to the Ridge tract. The mineral owners under the two tracts were apparently not the same, so the execution of the 1998 Ridge tract lease could not affect the 1937 lease as to the Guinn tract as between Guinn and his lessors. However, because all production after 1998 was on the 1998 Ridge lease, there was then a permanent cessation of production from the 1937 lease, which terminated.
Guinn contended that Ridge could not “washout” Guinn’s interest in this manner. The court reviewed the series of cases which have sustained washout transactions in the context of overriding royalties and applied the same reasoning to washout Guinn’s interest. The court found that Ridge owed no duty to the mineral owners in the Guinn tract or to Guinn. The opinion is largely based on the surrender clause, release clause and the assignment clause, but it is also based in part on the particular habendum clause in the 1937 lease. The lease provided that production would preserve the lease for so long as there was production “from said land by the lessee, or as long as operations are being carried on.” Ridge ceased to be a lessee under the 1937 lease in 1998, and therefore there was no production by the “lessee,” who was then Guinn.
Guinn also contended that his lease was preserved under that part of the habendum clause reciting that the lease would be preserved “as long as operations are being carried on.” The court held that production ceased on March 3, 1998, when Ridge signed the 1998 lease, and none of Guinn’s lessors repudiated Guinn’s lease until the first of them signed a new lease with Ridge on March 28, 1998. The 1937 lease had no 30- or 60- or 90-day clause, and the court focused its attention the twenty-five day period after production ceased and before the first repudiation. The evidence was that Guinn acquired a drilling permit, negotiated surface damages and perhaps drove a wooden stake into the ground to mark the well site. The court concluded that Guinn did not have to undertake some activity on the lease every day, but this was virtually no activity, and it was not enough to raise a fact question as to whether operations were being carried on under the terms of the lease.
Finally, the court rejected Guinn’s claims for constructive trust, fraud and tortious interference. The court stated that “[t]here is no confidential relationship between partial assignees of leasehold interests under a base lease.” There was no evidence of fraud or misrepresentation, and Ridge and the lessors of the Ridge tract had the right to terminate the 1937 lease as to their interests.
The significance of the case is that it clarifies the application of the TCOP doctrine and focuses the inquiry on the operator’s intent with respect to restoring production and the reasonableness of the length of the cessation. The case is also very important in establishing that there are virtually no duties owed by one lessee to another holding divided interests under the same base lease. In other words, any lessee who is looking to an operator on another tract to hold the lease by production is placing a great deal of trust in an operator who owes him no duty.