Face Challenges Confidently

270 Moore v. Jet Stream Invs., Ltd.

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.
Moore v. Jet Stream Investments, Ltd., 261 S.W.3d 412 (Tex. App.—Texarkana 2008, pet. denied) holds that failure to comply with regulations is not within a lease force majeure clause, but an agreed temporary injunction may change the measure of damages for production by the trespasser prior to final judgment. The Texas Railroad Commission requires operators of oil and gas wells to post financial assurance to ensure wells are plugged when production ceases. When the Commission changed its rules in 2002 to require financial assurance from all operators, many of the very small operators had trouble finding a source for the required bond or letter of credit. Moore was one of those small operators who, though reasonably diligent, failed to find a source. When Moore did not post the required assurance, he was ordered to cease production. After about eleven months with no production, Moore finally obtained a letter of credit, which the Commission accepted, and production resumed. Lessor sued for lease termination.
Moore contended that the lease was preserved by the operation of the force majeure clause, which provided:

All terms and express or implied covenants of this lease shall be subject to all Federal and State Laws, Executive Orders, Rules and Regulations, and this lease shall not be terminated, in whole or in part, nor Lessee held liable for damages, for failure to comply therewith, if compliance is prevented by, or if such failure is the result of, any such Law, Order, Rule or Regulation.

Moore argued the terms of the force majeure clause did not require the event be beyond the lessee’s reasonable control. Although the phrase “beyond the reasonable control of the lessee” was missing, the court found that the lease contemplated such a requirement because the lease required compliance to be prevented by or the result of a regulation. The regulation at issue did not compel production to terminate, but merely imposed conditions for producers to comply with to continue production. Because some forms of financial assurance were available, “the Texas Railroad Commission’s regulation requiring financial assurance did not preclude compliance with the lease…. [T]he regulation was not a force-majeure event.”
The court next rejected a series of arguments by Moore claiming that production on a related tract perpetuated the lease. The lease originally included 1533.27 acres, and those lands included the “Perry Tract.” It was conclusively established that at the time of trial the Perry Tract was held by production, but the Perry Tract was apparently included in a partial release executed in 1952. Moore contended that production from any land described in the original lease (i.e., the Perry Tract) held the lease. The court disagreed, because the original lease had effectively terminated as to the land partially released, which included the well site for the producing well.   The court relied primarily upon Ridge Oil Co. v. Guinn Investments, Inc.
Moore first sought to avoid the effect of Ridge Oil by the terms of the assignment clause in the lease.  The lease included a typical lease assignment provision which provided:

The rights of either party hereunder may be assigned in whole or in part, and the provisions hereof shall extend to the heirs, successors and assigns of the parties hereto, but no change or division in ownership of the land, rental or royalties however accomplished shall operate to enlarge the obligations or diminish the rights of lessee. . . .

Moore also argued that the entirety clause in the lease preserved the lease as an indivisible operating unit and made the release of some acreage irrelevant. Based on the lease’s repeated use of the word “hereunder,” the court held that both concepts only applied to tracts of land still bound by the lease.
The lease also contained a version of a fairly common “notice of default” clause. The clause provided:

In case of cancellation or termination of this lease from any cause, Lessee shall have the right to retain, under the terms hereof, around each well producing, being worked on, or drilling hereunder, the number of acres in the form allocated to each such well under spacing and proration rules issued by Texas Railroad Commission of the State of Texas, or any other State or Federal authority having control of such matters; or, in the absence of such rulings; forty (40) acres around each such well in as near a square form as practicable, and in the event lessor considers that operations are not being conducted in compliance with this contract, lessee shall be notified in writing of the facts relied upon as constituting a breach hereof and lessee shall have sixty (60) days after receipt of such notice to comply with the obligations imposed by virtue of this instrument.

Moore claimed he was entitled to forty acres around each of his two wells, which were producing when he received notice from the lessor. The court held the lease terminated, not on the date when Moore received notice of termination from the lessor, but approximately eleven months earlier when the Commission shut the wells in and the time to restore production lapsed. The fee simple determinable granted by the lease automatically terminated upon the breach of the special limitation – that production continue in paying quantities. Because there is nothing the lessee can do to correct the breach, the notice provision does not apply. Although Moore later restored production to some wells, this was after the lease had already terminated, and thus he was not entitled to any land around the wells.
The trial court prohibited Moore from recovering his equipment and from removing the casing. The court of appeals held that an “operator has an implied right to remove leasehold equipment ‘within a reasonable time of the expiration of the lease, even in the absence of a specific provision authorizing such removal.’” Moreover, this specific lease had express language permitting lessee to remove both equipment and casing after the expiration of the lease. However, the lessee does not have the right to remove the casing if the well is producing or the removal would damage the well.  Under those circumstances, the lessee ordinarily recovers the value of the casing in place, less the cost of removal.
When a producer trespasses and extracts oil, gas, or other minerals, the measure of damages is determined by whether the trespass was in good faith or bad faith. The measure of damages for good faith trespass is the value of the minerals less the cost of production. The measure of damages for bad faith trespass is the value of the minerals without deduction. If entry is with full knowledge of the adverse claim, the trespass is conclusively presumed to be in bad faith. The court of appeals held that lessor was estopped from claiming bad faith trespass in this case because lessor had affirmatively requested that production continue and had agreed to a temporary injunction requiring Moore to continue to produce.
Force majeure clauses will be enforced as written, and the case illustrates the fine distinctions which may be made with the result that the lease is lost or saved. Here, the lease was saved, if subject to a regulation with which the lessee could not comply, but only if compliance was “beyond the reasonable control of lessee,” which was implied into the clause. Once land is released from a lease, whatever happens on the released land is not likely to have any effect on the unreleased lands still under lease. The holdings on the right to remove equipment and casing and the measure of damages for trespass generally follow existing case law. Because temporary injunctions are common in this context, the possible effect on the measure of damages resulting from an agreed temporary injunction is significant.