Face Challenges Confidently

302 Cambridge Prod., Inc. v. Geodyne Nominee Corp.

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.
In Cambridge Production, Inc. v. Geodyne Nominee Corp., 292 S.W.3d 725 (Tex. App.—Amarillo 2009, pet. denied) a top leasee sought the termination of the base oil and gas leases and a related pooled unit because the unit designation of record was defective. On January 3, 1980, the Prater No. 1 well was completed on Section 39 in the interval between 14,364 feet and 14,372 feet. On May 9, 1980, the Designation of the Prater No. 1 Unit was filed of record, effectively pooling the leases covering Section 39 and Section 33, but only as to the stratigraphic equivalent described as between the depths of 14,634 feet and 14,929 feet. The primary term of the Section 33 leases expired on July 18, 1983, and there was never production of oil, gas, or other minerals from Section 33.
During subsequent years, several amended unit designations were filed of record. An amended unit designation dated May 10, 1990, which purported to amend the Prater Unit No. 1 to include the stratigraphic equivalent of the interval in which the producing perforations were actually located—14,364 and 14,372 feet below the surface—was never filed of record. The top leases in Section 33 were acquired in early 1999. On March 18, 1999, the base lessee filed another amended designation which recited that the original description was a scrivener’s error and that the designations “should have been limited to the correct stratigraphic equivalent of depths between 14,364 and 14,929 below the surface encountered in the Prater No. 1.” It was undisputed that all the unit owners had been paid and accepted payment of their share of unit production as if the unit was in force and effect. The top lessee contended that the base leases terminated as a matter of law.
The court focused on the base lessee’s affirmative defenses that the top lessee was not a bonafide purchaser for value as to the new Section 33 leases, and that the top lessee was estopped from asserting lease termination on a theory of quasi-estoppel. A bonafide purchaser of real property is one who buys property in good faith for valuable consideration and without notice (actual or imputed) of outstanding claims in a third party. Here, the court found that at the time the top lessee obtained its top leases, the base lessee was in possession of the Prater Unit, was operating a producing well on the unit, and was paying and had been paying royalties from production on that unit. The court held that had the top lessee made reasonable inquiry as to the basis upon which the base lessee was “in possession” of the well and was paying royalties from production, the top lessee would have discovered the basis upon which the base lessee claimed in connection with the unit designation and the Section 33 leases. In addition, the top leases recited that in the event there was a presently existing oil and gas lease or unitization, the top lease would be subject thereto, and the top lease would only vest upon the termination of the base lease. The court concluded that the top lessee recognized that it could claim no greater right than its lessors.
Quasi-estoppel precludes a party from accepting the benefits of a transaction and then taking a subsequent inconsistent position to avoid corresponding obligations or effects. The court stated that because the top lessee has no rights in Section 33 as a top lessee except such rights as it might have acquired under the new Section 33 leases, it could not terminate the Prater No. 1 Unit if the Section 33 mineral interest owners had no such right. The court held the evidence was undisputed that the Section 33 mineral interest owners had accepted the benefit of the revenues of production from the Prater No. 1. In addition, because the Prater No. 1 well was not located on Section 33, the Section 33 mineral interest owners would not have received the royalties they had received over the years but for the Designation of the Prater No. 1 Unit.
The court held that the top lessee’s claim to title under the new Section 33 leases must rest upon repudiation by the top lessors of the base lessee’s original Section 33 leases. In doing so, the mineral owners would, of necessity, be asserting a right inconsistent with the benefits that were previously accepted by them. Thus, the court held that the base lessee established quasi- estoppel as a matter of law.
The pooling clause in the leases was silent as to whether the lessee had the right to amend the Designation of Unit once filed, but the Designation of Unit as originally filed recited that the Designation could be amended “at any time and from time to time in order to (1) correct any error herein . . ..” The court did not reach this issue because it found that the quasi-estoppel was dispositive. The court also did not reach the top lessee’s contention that the statute of limitations effectively barred any reformation of the Designation of Unit, and, therefore, the base leases could not have been perpetuated.
The significance of the case is the use of the theory of quasi-estoppel to hold that a defeasible fee simple determinable has not terminated, notwithstanding that the condition of termination has occurred.