Prize Energy Resources L.P. (Appellant/Cross-Appellee) v. Cliff Hoskins, Inc., (Appellee/Cross-Appellant) Bank of America, N.A., (Appellee/Cross-Appellant) and BP America Production Co. (Appellee/Cross-Appellant)

• Court: Court of Appeals of Texas
• Decided: February 23, 2011
• Docket: 04-09-00603-CV
• Status: Published

Opinion

OPINION No. 04-09-00603-CV

PRIZE ENERGY RESOURCES, L.P., et al. Appellants/Cross-Appellees

v.

CLIFF HOSKINS, INC., et al., Appellees/Cross-Appellants

From the 343rd Judicial District Court, McMullen County, Texas Trial Court No. M05-0002-CV-C Honorable Michael E. Welborn, Judge Presiding

Opinion by: Phylis J. Speedlin, Justice

Sitting: Karen Angelini, Justice Phylis J. Speedlin, Justice Rebecca Simmons, Justice

Delivered and Filed: February 23, 2011

AFFIRMED IN PART; MODIFIED AND AFFIRMED IN PART; REVERSED AND RENDERED IN PART; AND REVERSED AND REMANDED IN PART

This appeal arises out of a title dispute over oil and gas producing property in McMullen

County, Texas. The trial court resolved the issues of title in a summary judgment, rejected the

plaintiffs’ bad faith trespass claims against the working interest owners, and after a bench trial

awarded damages for unpaid net revenues and royalties. The court declined to award attorney’s

fees to any party. Five parties appeal from the judgment. 04-09-00603-CV

FACTUAL AND PROCEDURAL BACKGROUND

The underlying lawsuit arises out of a title dispute to mineral interests in a 690.54-acre

tract known as the Baker Property, which comprises Section 3, Seale & Morris Survey A-434, in

McMullen County, Texas. In 2001, the period of time relevant to this appeal, there were four

owners of the mineral estate in the Baker Property:

• Burlington Resources, which owned a 25% mineral interest acquired from El Paso

Natural Gas Company which had entered into a written lease with P.R. Rutherford in

1966 known as the “El Paso Lease,” which was still in effect in early 2001.

• The Baker Trusts, 1 represented by Bank of America (the “Bank”) as trustee, which

owned a 25% mineral interest and through Earl M. Baker had entered into a written

lease with P.R. Rutherford in 1965 known as the “Baker Lease,” which was still in

effect in early 2001.

• Michael G. Rutherford and Patrick R. Rutherford, Jr., and their children, who are the

heirs of P.R. Rutherford, and Rutherford Oil Corporation (collectively, “the

Rutherfords”), who owned a 25% mineral interest subject to the Baker Lease.

• BP America Production Company (“BP”), successor to Atlantic Richfield Company

(“ARCO”), which owned a 25% mineral interest that was not subject to a written

lease.

A joint operating agreement (“JOA”) covered the Baker Property (the “Unit Area”). The

JOA was entered into in 1967 between ARCO, as a 25% mineral interest owner and the operator,

and P.R. Rutherford, W. Earl Rowe, T.J. Goad, Patrick Rutherford, Jr., and Michael C.

1 The beneficiaries of the “Baker Trusts” are the heirs of Earl M. Baker. The “Baker Trusts” include the Bettye Baker Brown Trust, u/w, f/b/o William David Deiss, the Bettye Baker Brown Trust, u/w, f/b/o Diane Elizabeth Mysliwiec, the Bettye Baker Brown Trust, u/w, f/b/o Paula Jane Roberts, and the Bettye Baker Brown Trust, u/w, f/b/o Dorothy Baker Shaw 1966 Trust.

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Rutherford (the “P.R. Rutherford Group”) as the owners of the leasehold interests. The P.R.

Rutherford Group contributed the El Paso and Baker Leases (jointly, the “Leases”), covering

75% of the mineral interests in the Baker Property, to the JOA. ARCO’s 25% mineral interest

was not subject to a written lease, but was contributed to the JOA so that the Baker Property

could be developed as a whole. The mechanism for this was Article 3 of the JOA, which created

a “deemed lease” 2 covering any unleased mineral interest that had been contributed to the Unit

Area—i.e., ARCO’s unleased 25% mineral interest. Therefore, from 1967 forward, 100% of the

mineral interest in the Baker Property was subject to the JOA, with ARCO serving as the

operator of all drilling operations and production in the Unit Area. As a mineral owner, ARCO

was entitled to receive 25% of the 1/8 royalty under the JOA, and retained a possibility of

reverter 3 of its mineral interest if the JOA ever terminated. After the JOA was signed, two

successful wells were drilled on the Baker Property (Baker Well Nos. 4 and 6).

The El Paso and Baker Leases each contained a “continuous production or operations”

clause providing for continuation of the lease after the expiration of its primary term for as long

as operations or production was on-going. The clauses were substantially the same, and

provided that the lease would “remain in force so long as drilling, mining or reworking

operations are prosecuted (whether on the same or different wells) with no cessation of more

than sixty (60) consecutive days, and if they result in production, so long thereafter as oil or gas

is produced from said land or land pooled therewith.” With respect to the term of the JOA,

2 Article 3 of the JOA provides in relevant part, “If it develops that any interest owned and contributed by a party hereto is an unleased interest in the oil and gas rights, then such unleased interest shall be treated for all purposes of this agreement as if it were an oil and gas lease covering such unleased interest on a form providing for the usual and customary one-eighth royalty . . . .” The parties refer to this provision as the “deemed lease,” so we will use that term as well. 3 A possibility of reverter is the future interest in a determinable fee grant that the mineral owner retains after executing an oil and gas lease. Luckel v. White, 819 S.W.2d 459, 464 (Tex. 1991); Bagby v. Bredthauer, 627 S.W.2d 190, 197 (Tex. App.—Austin 1981, no writ) (possibility of reverter is a vested non-possessory interest in real estate which can be assigned, transferred or sold in whole or part).

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Article 10 provided that the JOA “shall remain in full force and effect for as long as any of the

oil and gas leases subjected to this agreement remain or are continued in force as to any part of

the Unit Area, whether by production, extension, renewal or otherwise . . . .”

In 1986, ARCO entered into a purchase and sale agreement with Prize Energy (“Prize”),

known at that time as Petrus Energy, pursuant to which it sold all its rights under the JOA.

Under the terms of the agreement, ARCO retained its royalty interest and its right of reverter to

its 25% mineral interest subject to the JOA’s “deemed lease,” which mineral interest would

revert back to ARCO free and clear if the JOA ever terminated. After the 1986 sale, Prize and

the P.R. Rutherford Group were the operators under the JOA on the Baker Property from 1986

forward.

During June–August 2001, there was a 71-day period when no well on the Baker

Property was operating or producing in paying quantities. 4 None of the lessors were aware of

the cessation of operations, and no one raised any concern at the time. In the following years,

Prize (through Cimarex Energy), and then Gruy Petroleum/Rutherford Oil, 5 continued

developing the Baker Property and drilled and completed seven more wells, the Baker Well Nos.

7-13; four of those wells were producing wells.

In 2004, Cliff Hoskins, who had no previous connection to the Baker Property, conducted

some research on leases in the area, and became aware of the possible termination of the Baker

Property’s Leases and the JOA in August 2001. Hoskins, through his company Cliff Hoskins,

Inc. (“Hoskins”), contacted BP (f/k/a ARCO), and offered to buy its 25% mineral interest which

4 At trial, Prize and the Rutherfords argued that flaring on one of the Baker wells conducted in June 2001 was sufficient to constitute “operations,” but the trial court disagreed, and this particular finding has not been appealed; therefore, we must accept as true that there was no production or operations on the Baker Property for 71 continuous days. 5 In April 2002, Gruy Petroleum Management Co. succeeded Prize as the operator on the Baker Property, with Rutherford Oil Corporation acting as the operator for some of the wells, including Baker Well No. 11.

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Hoskins asserted had reverted to BP in August 2001—when the JOA had purportedly terminated

due to the cessation of operations. On June 25, 2004, BP sent a letter to Magnum Hunter

Resources, Inc. 6 questioning whether production on the Baker Property had ceased between June

2001 and April 2002, and requesting documents to confirm production—including meter

readings, allocation statements, and check details relating to payments for gas produced.

Magnum Hunter responded that, “[t]here has been continuous production, under the terms of the

leases and the operating agreement . . .,” and provided none of the requested documents.

Hoskins filed suit to quiet title on January 25, 2005. 7 One month later, in February 2005,

the Rutherfords, the Bank, and Burlington all signed ratifications of the El Paso and Baker

Leases (the “Ratifications”), which purported to extend or renew the Leases that made up 75% of

the interests subject to the JOA; the other 25% was made up of ARCO/BP’s unleased interest

which was contributed to the JOA. BP subsequently filed its own suit against Prize and the

Rutherfords in October 2005. In 2007, BP deeded its claimed (reverted) 25% mineral interest to

Hoskins, making the transfer retroactive to August 16, 2004. In the sale to Hoskins, BP reserved

a 6.25% nonparticipating royalty interest in the 25% mineral interest it conveyed to Hoskins.

In their suits against Prize and the Rutherfords, Hoskins and BP asserted claims to quiet

title to their interests and for declaratory relief, plus claims for bad faith trespass,

theft/conversion, recovery of unpaid proceeds under the Texas Natural Resources Code, breach

of contract, and recovery of attorney’s fees. The Bank, as trustee for the Baker Trusts, also

asserted various claims against Prize and the Rutherfords, including claims for fraud, trespass,

and theft, rescission of its Ratification, and to quiet title to the Baker Trusts’ mineral interest.

6 The June 25, 2004 letter identifies Magnum Hunter Resources, Inc. as a successor operator to Prize under the JOA. 7 Hoskins claimed standing based on a retroactive transfer of BP’s 25% mineral interest to Hoskins.

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Competing summary judgment motions were filed by all the parties. On February 5,

2009, the trial court signed an “Interlocutory Judgment” in which it:

1. Granted the summary judgment motion by Prize and the Rutherfords on “all Plaintiffs’ claims of trespass,” and ordered that Plaintiffs “take nothing . . . on any trespass claim in this cause;”

2. Granted the summary judgment motion by Prize and the Rutherfords on all claims by the Bank, “including claims of fraud and rescission of the Ratification,” and ordered that the Bank take nothing;

3. Granted the declaratory relief sought by Hoskins and BP, finding (i) the El Paso and Baker Leases and the JOA all terminated in August 2001, at which time Hoskins/BP’s mineral rights and interests reverted free and clear from the JOA, making them unleased co-tenants; (2) from August 2001 through August 15, 2004, BP had an undivided 25% mineral interest, subject only to the non- participating royalty interest; and (3) from August 16, 2004 forward, BP’s 25% mineral interest passed to Hoskins, subject to BP’s retained royalty interest which burdens Hoskins’ mineral interest and “does not burden any interests held by the Defendants;”

4. Made the finding that “the Defendants as mineral owners or invitees of mineral owners were not trespassers, or were alternatively ‘good faith trespassers,’” as to Hoskins and BP after termination of the Leases and JOA;

5. Granted summary judgment “against all remaining claims and counterclaims asserted by any party in this case;”

6. Granted summary judgment “against all remaining affirmative defenses asserted by any party to the extent those defenses would be inconsistent with the Court’s rulings;”

7. Ordered the parties to work together to stipulate to “the revenues less costs applicable to the Subject Acreage,” or a bench trial on “that remaining issue” would be conducted; and

8. Noted the parties “dispute whether the issues of attorney’s fees and interest, including such claims under the Texas Natural Resources Code, are still live issues,” and stated the Court would determine those issues by further order or in the final judgment, and that it had indicated it would “decline to award any discretionary attorneys’ fees to any party in this case.”

The parties were unable to stipulate to the net revenues, so a bench trial was held on that

issue. On September 11, 2009, the trial court signed its final judgment which incorporated its

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interlocutory judgment “addressing the liability issues in this case,” and then awarded damages

for net revenues to Hoskins of $1,267,482, plus pre-judgment and post-judgment interest, and

damages for net revenues and royalty revenues to BP of $3,252,827, plus pre-judgment and post-

judgment interest. The court found the “underlying nature of Hoskins’ and BP’s suit was to

obtain a determination of title,” and declined to award attorney’s fees to any party. The court

made an alternative finding, however, that each party had incurred reasonable attorney’s fees of

$900,000 each. All parties appealed from the judgment. 8

In the main appeal, appellants Prize9 and the Rutherfords are aligned, 10 and appellees

Hoskins and BP are aligned. Each aligned party adopts the other party’s brief. In their appeal,

Prize and the Rutherfords present the following arguments: (1) as a matter of law, the JOA did

not terminate and BP’s 25% mineral interest did not revert; (2) alternatively, the net revenues

damages awarded to Hoskins and BP should be reversed because there is no cause of action to

support the damages award; (3) the royalties awarded to BP should be reversed because Prize’s

and the Rutherfords’ interests are not burdened by BP’s royalty interest; (4) the pre-judgment

and post-judgment interest awards to Hoskins and BP should be reversed; (5) the court should

have awarded Prize and the Rutherfords their attorney’s fees because they prevailed on their

summary judgment motions; (6) the court erred in imposing a future duty of accounting on Prize

and the Rutherfords; and (7) as a conditional point in the event of a remand on BP’s contractual

claim for royalties, the affirmative defenses raised by Prize and the Rutherfords are still live.

The Rutherfords also raise two additional damages-related issues in the event this Court sustains

8 Burlington Resources settled and is not involved in the appeal. 9 The “Prize” appellants/defendants are Prize Energy Resources, L.P., Prize Operating Company, Gruy Petroleum Management Company n/k/a Cimarex Energy Co. of Colorado, Magnum Hunter Resources, Inc., Cimarex Energy Co., and Hunter Gas Gathering, Inc. 10 In their appellants’ brief, the Rutherfords state they are fully aligned with Prize on all issues and adopt the arguments presented in the Prize appellants’ brief.

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the damages awards to Hoskins and BP: (1) the court erred in assessing damages against the

“Rutherford Children” who own only leasehold interests and no mineral interests; and (2) the

court erred in making the Rutherfords jointly and severally liable with Prize for the total

damages awarded to Hoskins and BP.

TITLE QUESTION

As noted, supra, the trial court granted declaratory relief to Hoskins and BP on the

question of their title to the 25% unleased mineral interest. Specifically, the court held that, in

August 2001, the El Paso and Baker Leases and the JOA terminated, and BP’s 25% mineral

interest reverted to it free and clear of the JOA; therefore, from August 2001 through August 15,

2004, BP had clear fee simple title to its undivided 25% mineral interest. On August 16, 2004,

Hoskins acquired title to such 25% mineral interest from BP, subject only to BP’s retention of a

6.25% nonparticipating royalty interest. In their appeal, Prize and the Rutherfords assert the

judgment in favor of Hoskins and BP on their title claims should be reversed and rendered

because, as a matter of law, the JOA never terminated; therefore, there was no reversion to BP of

the 25% mineral interest contributed to the JOA, and BP could not sell the 25% mineral interest

to Hoskins. Thus, Hoskins owns no interest in the Baker Property. Under Prize’s and the

Rutherfords’ theory, BP still holds only the reversionary right to the 25% mineral interest plus

the right to receive royalties.

In support of their position, Prize and the Rutherfords make the following arguments: (1)

as an initial matter, BP and Hoskins have no standing to assert that the JOA terminated because

they are not parties to the operating agreement; (2) the JOA never terminated because it was

continued or revived by the Ratifications of the El Paso and Baker Leases signed by Burlington,

the Rutherfords, and the Bank; (3) the JOA never terminated because it was extended by the

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conduct of the parties to the agreement, i.e., Prize and the Rutherfords continued to operate under

the JOA; and (4) even if the Leases and JOA terminated due to the cessation of

production/operations, the “deemed lease” created by Article 3 of the JOA did not terminate

because it contains no “cessation of production” clause.

In response, Hoskins and BP assert that the Baker and El Paso Leases terminated upon

the 71-day cessation of production in August 2001, and, according to its own terms, the JOA

automatically terminated at that time as well. Upon termination of the JOA in August 2001,

BP’s 25% mineral interest contributed to the JOA was released from the “deemed lease,” and

immediately and automatically reverted to BP free and clear of the JOA. Thus, BP had clear title

to its 25% mineral interest which it subsequently sold to Hoskins, retaining only a 6.25%

nonparticipating royalty interest. In responding to the issues raised by Prize and the Rutherfords,

Hoskins and BP argue: (1) they have standing to assert the JOA terminated because its

termination directly affects their ownership interests; (2) Prize and the Rutherfords did not

appeal the trial court’s finding that the Leases terminated in August 2001 due to the cessation of

operations/production, and, based on that finding, the JOA automatically terminated in August

2001 according to its own terms and the reversion to BP occurred; (3) the JOA was not

continued, renewed, or revived by (i) the Ratifications signed in 2005 by the three lessors on the

written Leases, (ii) the conduct of the operators in continuing to drill under the JOA after August

2001, or (iii) the “deemed lease” provision of the JOA. As these issues are intertwined, we will

discuss them together.

(1) Standing. The threshold issue we must resolve is whether BP and Hoskins have

standing to sue to declare the JOA terminated and to clear their title to the 25% mineral interest

which BP sold to Hoskins. As Hoskins’ ownership interest flows from, and is dependent on,

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BP’s ownership interest, we will initially focus on BP. Resolution of the question of standing is

intertwined with the title question of whether BP’s mineral interest reverted back to it in August

2001 so that it could later be sold to Hoskins.

Standing is a component of subject matter jurisdiction and must be resolved first before

the merits of an issue may be addressed. DaimlerChrysler Corp. v. Inman, 252 S.W.3d 299, 304

(Tex. 2008) (noting a court lacks jurisdiction over a claim made by a plaintiff without standing to

assert it). To have standing, a plaintiff must be “personally aggrieved” and his injury must be

“concrete and particularized, actual or imminent, not hypothetical.” Id. at 304-05. Standing

cannot be waived and may be raised for the first time on appeal. Tex. Ass’n of Bus. v. Tex. Air

Control Bd., 852 S.W.2d 440, 445 (Tex. 1993). A party’s standing is determined at the time suit

is filed. Id. at 446 n.9; In re Guardianship of Archer, 203 S.W.3d 16, 23 (Tex. App.—San

Antonio 2006, pet. denied). In determining standing, we look to the facts alleged in the petition,

but may consider other evidence in the record if necessary to resolve the question of standing.

Bland Indep. Sch. Dist. v. Blue, 34 S.W.3d 547, 555 (Tex. 2000).

Prize and the Rutherfords assert that neither BP nor Hoskins has standing to assert the

JOA terminated because (i) neither is a party to the JOA, and (ii) neither is a third party

beneficiary of the JOA. BP and Hoskins respond that they have standing because BP is the

successor to ARCO, an original signing party to the JOA, who retained a contractual interest in

the JOA after the 1986 sale because its unleased 25% mineral interest was “contractually

committed” to the JOA under Article 3; therefore, the reversionary interest retained by

ARCO/BP was directly tied to, and wholly dependent on, the termination of the JOA, giving BP

standing to sue to declare the JOA terminated.

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First, it is undisputed that neither BP nor Hoskins is a signing party to the JOA. The JOA

was executed in 1967 by the P.R. Rutherford Group as the operator and lessee under the Baker

and El Paso Leases, and by ARCO as the operator and a mineral owner contributing its unleased

25% mineral interest to the Unit Area. ARCO retained a reversionary interest pursuant to which

its 25% mineral interest would revert back to ARCO if the JOA ever terminated; in addition, it

contracted for a royalty interest under the JOA, although while it was the operator ARCO never

paid itself any royalties. In 1986, when ARCO sold all of its rights and obligations under the

JOA to Petrus (predecessor of Prize), ARCO retained its right of reverter to its 25% mineral

interest upon termination of the JOA and its royalty interest. Petrus/Prize succeeded to ARCO’s

50% working interest and became co-operator along with the P.R. Rutherford Group from 1986

forward. BP succeeded to the rights ARCO retained in the 1986 sale, i.e., the reversionary

interest and the royalty interest.

Prize and the Rutherfords assert that because ARCO sold all its rights under the JOA in

1986, and BP succeeded only to the royalty and reversionary interests retained by ARCO, BP has

no standing to challenge the JOA because it is not a party to the JOA, and is not a third party

beneficiary of the JOA; alternatively, at most, BP is only an incidental beneficiary who may not

bring an action on the JOA. We agree that, under well-settled contract principles, only the

parties to a contract have the right to complain of a breach of the contract, with the exception that

a nonparty who proves the contract was made for his benefit, and that the contracting parties

intended he benefit from the contract, may bring an action on the contract as a third party

beneficiary. See Grinnell v. Munson, 137 S.W.3d 706, 712 (Tex. App.—San Antonio 2004, no

pet.); Tennessee Gas Pipeline Co. v. Lenape Resources Corp., 870 S.W.2d 286, 295 (Tex.

App.—San Antonio 1993), aff’d in part and rev’d in part on other grounds, 925 S.W.2d 565

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(Tex. 1996); Bruner v. Exxon Co., 752 S.W.2d 679, 682-83 (Tex. App.—Dallas 1988, writ

denied). In contrast to a donee or creditor beneficiary, an “incidental beneficiary” who may

receive only an incidental benefit from the performance of the contract, does not have a right of

action on the contract. MCI Telecomm. Corp. v. Tex. Utilities Elec. Co., 995 S.W.2d 647, 651

(Tex. 1999); see Grinnell, 137 S.W.3d at 712-14 (surface estate owner, who as shareholder of

corporate mineral owner had indirect right to receive share of royalties when paid under oil and

gas leases, was merely an incidental beneficiary who did not have standing to sue to declare

leases terminated; he was not a party to leases and leases were not intended to benefit surface

owner); see also Bruner, 752 S.W.2d at 682-83 (party with assignment of rentals was merely

incidental beneficiary of lease, and had no standing to sue for wrongful termination of oil and

gas lease).

Here, however, the critical factor is that BP is claiming an ownership interest by virtue of

the reversion of its mineral interest. An oil and gas lease generally conveys a fee simple

determinable in the mineral estate with the possibility of reverter. Natural Gas Pipeline Co. v.

Pool, 124 S.W.3d 188, 192 (Tex. 2003) (lessee acquires ownership of all the minerals in place

that lessor owned and leased, subject to possibility of reverter in the lessor); Concord Oil Co. v.

Pennzoil Exploration and Prod. Co., 966 S.W.2d 451, 460 (Tex. 1998) (lessor also receives the

rights bargained for under the lease, typically the payment of royalties, delay rentals and

bonuses). A “‘possibility of reverter’ is the real property term of art for what the grantor owns as

a future interest in a determinable fee grant; it is the grantor’s right to fee ownership in the real

property reverting to him if the condition terminating the determinable fee occurs.” Luckel v.

White, 819 S.W.2d 459, 464 (Tex. 1991); Stephens County v. Mid-Kansas Oil & Gas Co., 113

Tex. 160, 254 S.W. 290, 295 (1923) (typical oil and gas lease actually conveys the mineral estate

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as a determinable fee, less those parts reserved). Here, as successor to ARCO and the rights it

reserved in the 1986 sale, BP held a right of reversion to a 25% interest in the mineral estate; in

other words, BP held a right to fee simple ownership in the minerals which would revert to it

upon occurrence of a specific condition–the termination of the JOA. As the holder of a

reversionary interest, BP had standing to bring a title claim to assert its ownership rights in the

mineral estate. Cf. Coastal Oil & Gas Corp. v. Garza Energy Trust, 268 S.W.3d 1, 10-11 (Tex.

2008) (holding lessor’s non-possessory reversion interest in the leased minerals gave him

standing to sue for trespass based on wrongful drainage, although he was required to prove actual

injury to recover damages for trespass against a non-possessory interest). Once the reversion

was triggered by termination of the JOA in August 2001, as discussed in detail below, BP held a

fee simple 25% interest in the mineral estate and had standing to sue to declare the JOA

terminated, and to clear its title. Hoskins, in turn, has standing because it acquired BP’s mineral

interest after the reversion. Accordingly, we reject Prize’s and the Rutherfords’ contention that

BP and Hoskins lack standing to bring this lawsuit.

(2) Title Determination. Having determined that BP and Hoskins have standing to

bring the underlying lawsuit, we turn to the trial court’s determination of the title question. The

trial court made a finding that operations on the Baker Property ceased for more than sixty

consecutive days in June–August 2001, and that finding is not challenged on appeal; therefore,

we must accept that fact as the starting point for our analysis.

Termination of an oil and gas lease is a contractual matter. Wagner & Brown, Ltd. v.

Sheppard, 282 S.W.3d 419, 424 (Tex. 2008); Tittizer v. Union Gas Corp., 171 S.W.3d 857, 860

(Tex. 2005) (oil and gas lease is a contract and its terms are interpreted as such). In construing

an unambiguous oil and gas lease, we seek to enforce the parties’ intent as expressed within the

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four corners of the lease document. Tittizer, 171 S.W.3d at 860; Anadarko Petroleum Corp. v.

Thompson, 94 S.W.3d 550, 554 (Tex. 2002). We construe the lease as a whole, attempting to

harmonize all its parts, and attribute to the lease’s language its plain, grammatical meaning

unless it would undermine the parties’ intent. Anadarko, 94 S.W.3d at 554. A typical Texas

mineral lease contains an habendum clause that defines the duration of the lease, typically

providing a relatively short fixed term of years as the primary term and then a secondary term for

“as long thereafter as oil, gas or other mineral is produced.” Id.; Grinnell, 137 S.W.3d at 714. A

lease that states its secondary term lasts for “as long as oil or gas is produced” automatically

terminates if actual production ceases other than temporarily. Anadarko, 94 S.W.3d at 554;

Amoco Prod. Co. v. Braslau, 561 S.W.2d 805, 808 (Tex. 1978).

Here, the Baker and El Paso Leases expressly provided for a fixed primary term, and

upon its expiration for a secondary term during which

the lease shall remain in force so long as operations on said well or for drilling or reworking of any additional well are prosecuted with no cessation of more than sixty (60) consecutive days, and if they result in the production of oil, gas or other mineral, so long thereafter as oil, gas or other mineral is produced from said land or acreage pooled therewith. 11

Therefore, the life of the secondary term of the Leases was dependent on the continuation of

operations with no interruption of more than sixty consecutive days. Upon the undisputed

cessation of operations for more than sixty consecutive days in June–August 2001, both the

Baker and El Paso Leases automatically terminated according to their express language, without

the need for any legal action by the lessors. See Anadarko, 94 S.W.3d at 554; Braslau, 561

S.W.2d at 808; W.T. Waggoner Estate v. Sigler Oil Co., 118 Tex. 509, 19 S.W.2d 27, 30 (1929);

see also BP Am. Prod. Co. v. Marshall, 288 S.W.3d 430, 451 (Tex. App.—San Antonio 2008,

pet. granted); Woodson Oil Co. v. Pruett, 281 S.W.2d 159, 164-65 (Tex. Civ. App.—San 11 The quoted language is from the Baker Lease; the El Paso Lease contains substantially the same provision.

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Antonio 1955, writ ref’d n.r.e.) (under terms of particular lease, parties stipulated that a cessation

of production for more than sixty consecutive days was not “temporary,” and if re-working or

additional operations did not begin during the 60-day period the lease would terminate by its

own terms; therefore, lessees were not entitled to reasonable time to remedy problem and resume

production).

Termination of the Leases in August 2001 in turn triggered the automatic termination of

the JOA according to its own contractual language. Article 10 of the JOA expressly provided

that the agreement “shall remain in full force and effect for as long as any of the oil and gas

leases subjected to this agreement remain or are continued in force as to any part of the Unit

Area, whether by production, extension, renewal or otherwise.” The language of Article 10

clearly makes the term of the JOA dependent on the continuation of the “leases subjected to this

agreement;” it is undisputed that the Baker and El Paso Leases were the only leases that were

contributed to the JOA. When the Baker and El Paso Leases terminated due to the more than

sixty-day cessation of operations, the JOA automatically terminated according to the express

language of Article 10. Wagner & Brown, 282 S.W.3d at 424; Anadarko, 94 S.W.3d at 554.

Upon termination of the Leases and JOA, the mineral interests immediately and

automatically reverted back to the mineral owners, without the need for any action; the unleased

25% mineral interest contributed by BP’s predecessor ARCO immediately reverted to BP, free

and clear of the JOA. See Sigler Oil, 19 S.W.2d at 30 (if a lease terminates, the fee interest

reverts to the lessor without the lessor taking any legal action); see also Marshall, 288 S.W.3d at

451 (“If the lease’s primary term expires when there is non-production and the lessee fails to

comply with any savings clause in the lease, the lease and the lessee’s determinable fee interest

‘automatically terminates’ . . . and the fee interest reverts to the lessor without the lessor taking

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any legal action.”). At that point, in August 2001, upon the termination of the JOA and the

concurrent reversion to BP, BP became an unleased co-tenant in the Baker Property. Marshall,

288 S.W.3d at 460; Ladd Petroleum Corp. v. Eagle Oil and Gas Co., 695 S.W.2d 99, 110-11

(Tex. App.—Fort Worth 1985, writ ref’d n.r.e.) (if leases terminated, lessee would be considered

a co-tenant of the leasehold estate with right to enter tract and take into account its costs in

calculating damages owed to lessors) (citing Cox v. Davison, 397 S.W.2d 200, 203 (Tex. 1965)).

Hoskins’ co-tenant rights in the Baker Property likewise hinge on the termination of the JOA,

and the ensuing reversion to BP of its 25% mineral interest contributed to the JOA—which

mineral interest BP then sold to Hoskins.

Prize and the Rutherfords argue that the JOA never terminated because the Ratifications

of the Baker and El Paso Leases signed by the Rutherfords, Burlington, and the Bank in February

2005 either continued or renewed the JOA under Article 10. 12 We disagree. While the

Rutherfords, Burlington, and the Bank 13 may be able to effectively “extend” or “renew” the

written Leases to which they are parties by executing a new lease through a “ratification”

document signed after termination of the Leases, they may not bind a non-party’s interest such as

BP’s interest, or strip away the mineral interest that automatically reverted to BP years before the

Ratifications. See Gasperson v. Christie, Mitchell & Mitchell Co., 418 S.W.2d 345, 350 (Tex.

Civ. App.—Fort Worth 1967, writ ref’d n.r.e.) (“If the former lease had actually expired

according to its terms, any new lease(s) taken would not be ‘in renewal and/or extension’ except

by contract of the parties to the new lease(s) . . . even if the contract so provided it would only be

12 The Ratifications contain language stipulating that the Baker and El Paso Leases have “been continuously perpetuated since [their date of execution] by either (i) the production of oil and/or gas in paying quantities or (ii) operations, or both.” In addition, in the Ratifications the lessor “ratifies and adopts” the Lease and executes a new lease. 13 We note that the Bank is appealing the granting of summary judgment in favor of Prize and the Rutherfords on the issue of whether its Ratification is valid. This argument will be addressed later in the opinion.

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binding upon parties in privity to the new contract.”); see also Willson v. Superior Oil Co., 274

S.W.2d 947, 950 (Tex. Civ. App.—Texarkana 1954, writ ref’d n.r.e.) (“An oil and gas lease

executed by one co-tenant is valid as between the parties, but ineffectual as to the co-tenant of

the grantor.”). Each owner in a co-tenancy acts for himself, and has no authority to bind others

merely because of the co-tenancy relationship. Willson, 274 S.W.2d at 950.

Even the JOA recognizes that any unleased mineral interest must be affirmatively

“contributed” to the Unit Area in order for the “deemed lease” provision of Article 3 to apply. 14

There is no evidence that, at any time after August 2001, BP or Hoskins ever contributed the

reverted 25% mineral interest to the Unit; indeed, both have strongly argued the opposite.

Furthermore, we reject Prize’s and the Rutherfords’ argument that the “deemed lease” provision

in Article 3 of the JOA, by itself, was enough to prevent the JOA from terminating when the

JOA’s duration was expressly made dependent on the continuation and existence of the

underlying written Leases.

We similarly reject the argument made by Prize and the Rutherfords that the JOA was

extended by their conduct in treating the JOA as on-going, or, alternatively, that their conduct in

continuing to develop the Baker Property created an implied joint operating agreement. This is a

species of the same argument we rejected above. The argument ignores the fact that the mineral

interests immediately reverted to the lessors/owners upon the cessation of production, and

termination of the Leases and JOA, in August 2001. Even if Prize and the Rutherfords created

an implied contract between themselves through their actions subsequent to August 2001, their

actions could not recapture the mineral interests that immediately reverted upon termination of

the Leases and JOA. See Sigler Oil, 19 S.W.2d at 30; see also Marshall, 288 S.W.3d at 451.

14 Article 3 applies to “any interest owned and contributed by a party hereto.” (emphasis added).

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In conclusion, according to the written documents’ unambiguous terms, the Leases

automatically terminated upon the more than sixty-day cessation of operations in August 2001,

causing the JOA to simultaneously terminate and BP’s 25% mineral interest contributed to the

JOA to revert back to BP free and clear. Accordingly, we hold the trial court correctly resolved

the question of title, holding in relevant part that, “from August 2001 forward, the interests

owned by Hoskins and BP in and to the Baker Ranch property . . . are as follows: (1) from

August 2001 through August 15, 2004, BP had an undivided 25% mineral interest, subject only

to a 1/64th non-participating royalty interest burden (herein the ‘BP 25% mineral interest’); and

(2) from August 16, 2004 forward, the ‘BP 25% mineral interest’ passed to Hoskins, subject to

BP retaining an undivided .06250 of 8/8ths royalty interest, which burdens the ‘BP 25% mineral

interest’ now owned by Hoskins.” Therefore, we overrule Prize’s and the Rutherfords’ Issue No.

3 concerning title. Having resolved the issues of standing and title, we next address Hoskins’

allegation of bad faith trespass against Prize and the Rutherfords.

TRESPASS

The parties contested whether Prize and the Rutherfords were bad faith trespassers

because they continued to operate on the Baker Property after the cessation of operations in

August 2001, and, in fact, drilled and completed Baker Well Nos. 7 through 13 after termination

of the Leases and the JOA, and over BP’s protest. Hoskins, BP, and the Bank moved for

summary judgment declaring that the Leases and JOA terminated in August 2001 and to clear

title to their respective interests. Prize moved for summary judgment, arguing: (1) that the JOA

had never terminated because of “production, extension, renewal, or otherwise;” (2) that Prize

and the Rutherfords had the right to drill and operate on the Baker Property because they were

co-tenants, or had the consent of a co-tenant; and (3) that Prize and the Rutherfords had

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adversely possessed any interest allegedly reserved by BP or its predecessor. As we have

previously discussed, the trial court granted Hoskins’ and BP’s request for declaratory relief on

the title issues. As part of the declaratory relief granted on summary judgment, and re-stated in

the final judgment, the court made a finding that Prize and the Rutherfords “as mineral owners or

invitees of mineral owners were not trespassers, or alternatively, were ‘good faith trespassers,’

immediately after termination of the Leases and the 1967 JOA in August 2001 and at all times

thereafter.” Furthermore, the court ordered that the plaintiffs “take nothing . . . on any trespass

claim in this cause.”

On cross-appeal, Hoskins and the Bank 15 assert the trial court erred in granting summary

judgment against them on their trespass claims because the record shows that Prize and the

Rutherfords committed bad faith trespass as a matter of law, and that all their affirmative

defenses fail. 16

(1) Standard of Review. We review both a no-evidence and a traditional motion for

summary judgment de novo. Tex. Mun. Power Agency v. Pub. Util. Comm’n of Tex., 253 S.W.3d

184, 192 (Tex. 2007); Joe v. Two Thirty Nine Joint Venture, 145 S.W.3d 150, 156 (Tex. 2004).

We will uphold a traditional summary judgment only if the movant has established that there is

no genuine issue of material fact and that the movant is entitled to judgment as a matter of law

on a ground expressly set forth in the motion. TEX. R. CIV. P. 166a(c); Am. Tobacco Co. v.

Grinnell, 951 S.W.2d 420, 425 (Tex. 1997); Nixon v. Mr. Prop. Mgmt. Co., 690 S.W.2d 546, 548

(Tex. 1985). A traditional motion for summary judgment is properly granted if the defendant

disproves at least one essential element of the plaintiff’s cause of action, or establishes all

15 The Bank adopts Hoskins’ arguments on this issue. 16 BP agrees with the trial court’s finding that Prize and the Rutherfords were, at most, good faith trespassers, and is not appealing this finding.

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essential elements of an affirmative defense. D. Houston, Inc. v. Love, 92 S.W.3d 450, 454 (Tex.

2002); Science Spectrum, Inc. v. Martinez, 941 S.W.2d 910, 911 (Tex. 1997). If the movant is

successful in establishing its right to judgment as a matter of law, the burden then shifts to the

non-movant to produce evidence raising a genuine issue of material fact. City of Houston v.

Clear Creek Basin Auth., 589 S.W.2d 671, 678-79 (Tex. 1979). In deciding whether the

summary judgment record establishes the absence of a disputed material fact, we view as true all

evidence favorable to the non-movant and indulge every reasonable inference in favor of the

non-movant. Nixon, 690 S.W.2d at 548-49.

When reviewing a no-evidence motion for summary judgment, we review the evidence in

the light most favorable to the respondent against whom the no-evidence summary judgment was

rendered, disregarding all contrary evidence and inferences. City of Keller v. Wilson, 168

S.W.3d 802, 823 (Tex. 2005); Reynosa v. Huff, 21 S.W.3d 510, 512 (Tex. App.—San Antonio

2000, no pet.). If the respondent brings forth more than a scintilla of probative evidence to raise

a genuine issue of material fact, a no-evidence summary judgment cannot properly be granted.

TEX. R. CIV. P. 166a(i); Reynosa, 21 S.W.3d at 512. More than a scintilla of evidence exists

when the evidence “rises to a level that would enable reasonable and fair-minded people to differ

in their conclusions,” while less than a scintilla exists when the evidence is “so weak as to do no

more than create mere surmise or suspicion.” Reynosa, 21 S.W.3d at 512 (internal citations

omitted).

Where both parties file competing motions for summary judgment, and one is granted

and one is denied, we review the record and consider all questions presented and render the

decision the trial court should have rendered. Valence Operating Co. v. Dorsett, 164 S.W.3d

656, 661 (Tex. 2005); Holy Cross Church of God in Christ v. Wolf, 44 S.W.3d 562, 566 (Tex.

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2001). If a movant does not establish its entitlement to summary judgment as a matter of law,

we must remand the case to the trial court. Gibbs v. Gen. Motors Corp., 450 S.W.2d 827, 829

(Tex. 1970). When summary judgment is sought on multiple grounds and the trial court’s order

does not indicate the basis for its ruling, we will affirm the summary judgment if any theory

advanced by the movant is meritorious. Carr v. Brasher, 776 S.W.2d 567, 569 (Tex. 1989);

Villanueva v. Gonzalez, 123 S.W.3d 461, 464 (Tex. App.—San Antonio 2003, no pet.).

(2) Analysis. Hoskins argues the summary judgment record establishes bad faith

trespass as a matter of law. See Mayfield v. de Benavides, 693 S.W.2d 500, 504-05 (Tex. App.—

San Antonio 1985, writ ref’d n.r.e.); see also Wilen v. Falkenstein, 191 S.W.3d 791, 798 (Tex.

App.—Fort Worth 2006, pet. denied) (to recover damages for trespass to real property, plaintiff

must prove (1) ownership or lawful right to possess real property, (2) defendant made a physical,

intentional and voluntary entry onto plaintiff’s land, and (3) defendant’s trespass caused injury to

plaintiff). In the circumstances presented by this appeal, a bad faith trespasser is a lessee who

continues to enter under an oil and gas lease after its termination without a good faith belief in

the existence of the lease. Marshall, 288 S.W.3d at 455; Mayfield, 693 S.W.2d at 504-06; see

also Gulf Production Co. v. Spear, 125 Tex. 530, 84 S.W.2d 452, 457 (1935) (“to act in good

faith in developing a tract of land for oil or gas, one must have both an honest and a reasonable

belief in the superiority of his title”). Hoskins points to the summary judgment evidence that: (i)

the Leases and the JOA terminated in August 2001, causing the lessors’ mineral interests to

revert back to them; (ii) after August 2001, Prize and the Rutherfords drilled seven additional

wells on the Baker Property; and (iii) failed to pay Hoskins its share of the net value of the

minerals produced, thereby causing it harm. Hoskins contends, and we agree, that because the

summary judgment record establishes all the elements of trespass, the burden shifted to Prize and

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the Rutherfords to prove justification for their trespass, i.e., a good faith belief in their right to

enter and drill, in order to avoid a finding of bad faith. See Mayfield, 693 S.W.2d at 504-05; see

also Cain v. Rust Indus. Cleaning Serv., Inc., 969 S.W.2d 464, 470 (Tex. App.—Texarkana

1998, pet. denied) (once plaintiff proves right of ownership of real property and unauthorized

entry by defendant, burden of proof shifts to defendant to plead and prove consent or license as

justification for entry).

As one of their affirmative defenses, Prize and the Rutherfords asserted their entry after

August 2001 was justified under the law of co-tenancy which provides that a co-tenant has a

right to explore, drill, and produce minerals from the common estate without consent from any

other cotenant. Byrom v. Pendley, 717 S.W.2d 602, 605 (Tex. 1986); Cox, 397 S.W.2d at 201

(each co-tenant has right to enter common estate and corollary right of possession). It is a well-

established principle in Texas that a co-tenant has the right to extract minerals from common

property without obtaining consent from the other co-tenants, subject only to a duty to account to

them for the value of any minerals taken, less the reasonable costs of production and marketing.

Wagner & Brown, 282 S.W.3d at 426.

We agree with the trial court that Prize and the Rutherfords established that, as a matter

of law, they were co-tenants, or invitees of co-tenants, in the Baker Property after the Leases and

JOA terminated in August 2001. It is undisputed that, at all times relevant to this case, the

Rutherfords held a 25% mineral interest in the Baker Property, in addition to acting as one of the

operators on the property. The Rutherfords, along with the Bank, were lessors under the Baker

Lease. When that Lease terminated in August 2001 due to the lack of operations, the

Rutherfords’ mineral interest subject to the Lease reverted back to them. From August 2001

forward, the Rutherfords were therefore co-tenants in the Baker Property along with the other

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mineral interest owners—the Bank, Burlington, and BP. See Marshall, 288 S.W.3d at 459-60.

Prize operated on the Baker Property as a co-operator with the Rutherfords, who were both

mineral interest owners and co-operators.

We overrule this issue on cross-appeal and affirm the trial court’s summary judgment

ruling that, after the JOA’s termination in August 2001, Prize and the Rutherfords were not

trespassers because they were mineral owners or invitees of mineral owners in the Baker

Property.

AWARD OF DAMAGES

Having determined that the JOA terminated in August 2001, and having affirmed the trial

court’s determination of title, we next turn to the issue of damages. Prize, the Rutherfords,

Hoskins, and BP all raise various challenges to the trial court’s award of damages to Hoskins and

BP. We begin by addressing the arguments raised by Prize and the Rutherfords in the main

appeal, then address the issues raised on cross-appeal by Hoskins and BP, and finally address the

conditional issues raised separately by the Rutherfords.

I. Prize’s and the Rutherfords’ Challenges to Damages Award

As noted, the trial court awarded Hoskins $1,267,482 as its share of the net revenues

from August 16, 2004 to October 31, 2008, and awarded BP $3,252,827 as its share of the net

revenues from August 1, 2001 to August 15, 2004 and its royalties from August 16, 2004 to

October 31, 2008. 17 The trial court defined “net revenues” as the “gross revenues less

reasonable and necessary expenses beneficial to the Subject Acreage and including the Baker

Well Nos. 8, 11 and 13.” In addition, the court assessed pre-judgment and post-judgment

interest on both damages awards, and ordered that Prize and the Rutherfords are jointly and

severally liable for both damages awards. 17 As noted, Hoskins’ acquisition of BP’s 25% mineral interest was made retroactive to August 16, 2004.

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In their appeal, Prize and the Rutherfords argue the damages awarded to Hoskins and BP

must be reversed, and a take-nothing judgment must be rendered, because (i) Hoskins and BP did

not recover under any legal theory that supports an award of damages, and (ii) all of the damages

awarded to BP represent royalties, and Prize and the Rutherfords are not liable to BP for any

royalties after BP sold its mineral interest to Hoskins. In addition, Prize and the Rutherfords

complain the final judgment improperly awards future relief.

(1) No Legal Theory to Support Damages. In their Issue No. 1, Prize and the

Rutherfords assert that Hoskins and BP pled no theory of liability which supports the trial court’s

award of damages consisting of net revenues and royalties. Prize and the Rutherfords argue that

Hoskins and BP are not entitled to an award of damages since they prevailed only on their claims

for declaratory relief. See TEX. CIV. PRAC. & REM. CODE ANN. § 37.004(a) (West 2008). Prize

and the Rutherfords rely on cases holding that a party cannot characterize a suit for money

damages, such as a contract dispute, as a declaratory judgment action in order to circumvent

sovereign immunity or other restrictions. See, e.g., Seals v. City of Dallas, 249 S.W.3d 750, 757

(Tex. App.—Dallas 2008, no pet.). They then conclude, without additional authority or

argument, that because Hoskins and BP were seeking a declaration of their legal rights and status

with respect to the Baker Property, they necessarily had no right to recover any monetary

damages.

Here, both Hoskins’ and BP’s live pleadings included, among others, a claim for

declaratory relief and to quiet title to BP’s 25% mineral interest which was transferred to

Hoskins, and a claim to recover their share of unpaid production proceeds, plus interest, under

sections 91.402-.404 of the Texas Natural Resources Code (“TNRC”). TEX. NAT. RES. CODE

ANN. §§ 91.402-.404 (West 2001 & Supp. 2010). In its interlocutory summary judgment order,

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the court granted the requested declaratory relief quieting the title to the 25% mineral interest

held by BP and transferred to Hoskins, and granted summary judgment against BP and Hoskins

on their claims for trespass. In paragraph five, the court granted summary judgment against “all

remaining claims and counterclaims asserted by any party in this case,” and against all remaining

affirmative defenses asserted by any party. In paragraph seven, the court stated that counsel for

Prize and the Rutherfords and counsel for Hoskins and BP were to “work together to attempt to

stipulate to the revenues less costs applicable to the Subject Acreage,” and if unable to agree, a

bench trial would be held “as to that remaining issue,” after which a final judgment would issue.

The trial court stated its intent to “issue any damage award on a ‘net’ basis (revenues less

reasonable and necessary expenses),” but requested the parties provide information as to the

“gross” basis for the record. Finally, in paragraph 8, the court noted that, “[t]he parties dispute

whether the issues of attorneys’ fees and interest, including such claims under the Texas Natural

Resources Code, are still live issues or have been previously dealt with on summary judgment,”

and stated it would determine those issues in the final judgment. The court further stated, “In the

event that the Court rules that any of the subjects listed in this paragraph 8 are still live and

undecided, then those undecided subjects are not covered by paragraph 5 [granting summary

judgment against all remaining claims] of this order.” Reading the interlocutory judgment as a

whole, the court clearly intended that the issue of damages, and the calculation of the proper

amount of unpaid “revenues less costs,” was still a live issue to be determined by stipulation of

the parties or at a bench trial. If, as Prize and the Rutherfords contend, all claims for monetary

recovery had been denied by summary judgment, there would have been no need for the trial

court to conduct a bench trial to determine the proper amount of damages to be awarded to

Hoskins and BP.

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In its final judgment rendered after the bench trial on damages, the trial court made no

express finding as to the legal theory under which it was awarding the “net revenues” damages to

Hoskins and BP (plus “royalty revenues”), but did explain its method of calculating the damages.

The court’s award of “net revenues” calculated as “gross revenues less reasonable and necessary

expenses beneficial to the Subject Acreage” conforms to the TNRC’s requirement that a payee is

entitled to receive its share of the “proceeds derived from the sale of oil or gas from an oil or gas

well.” See TEX. NAT. RES. CODE ANN. §§ 91.401(1), 91.402(a) (West 2001); see also Concord

Oil, 966 S.W.2d at 461 (while statute was designed to protect royalty interest owners, it also

encompasses working interest owners and operators); Headington Oil Co., L.P. v. White, 287

S.W.3d 204, 209-10 (Tex. App.—Houston [14th Dist.] 2009, no pet.). Moreover, the court’s

assessment of pre-judgment interest on the damages awards is also consistent with recovery

under the TNRC, as section 91.403(a) expressly provides for pre-judgment interest as a penalty

for failure to meet the prompt payment requirements of the statute. See TEX. NAT. RES. CODE

ANN. § 91.403(a). In addition, the record of the bench trial clearly shows that BP’s and Hoskins’

right to recover their share of the proceeds under the TNRC was a contested issue tried before

the court.

Prize and the Rutherfords assert there is “no cause of action” under the TNRC, and

characterize it as merely a “prompt payment statute.” To the contrary, section 91.404 clearly and

expressly provides a payee with a cause of action for nonpayment of its share of mineral

proceeds, and/or interest on those proceeds, under the TNRC. Id. § 91.404(c) (“A payee has a

cause of action for nonpayment of oil or gas proceeds or interest on those proceeds as required in

Section 91.402 or 91.403 of this code . . . .”); see Bright & Co. v. Holbein Family Mineral Trust,

995 S.W.2d 742, 744 (Tex. App.—San Antonio 1999, pet. denied); see also Anadarko E&P Co.,

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LP v. Clear Lake Pines, Inc., No. 03-04-00600-CV, 2005 WL 1583506, at *2 (Tex. App.—

Austin July 7, 2005, no pet.) (mem. op.). As noted, both Hoskins and BP specifically pled for

their share of unpaid production proceeds under the TNRC.

In addition, Prize and the Rutherfords argue they are relieved of any liability under the

TNRC based on the absence of a signed division order by BP and Hoskins. We disagree. First,

the plain language of section 91.402(c) makes the existence of a signed division order only a

precondition for “payment” of a payee’s share of oil and gas proceeds, not a precondition to a

payor’s liability to pay oil and gas proceeds. Section 91.402(c)(1) states, “As a condition for the

payment of proceeds from the sale of oil and gas production to payee, a payor shall be entitled to

receive a signed division order from payee . . . .” TEX. NAT. RES. CODE ANN. § 91.402(c)(1).

The purpose of a division order is to provide the procedure for distributing the oil and gas

proceeds to the payees “by authorizing and directing to whom and in what proportion to

distribute the sale proceeds.” Neel v. Killam Oil Co., 88 S.W.3d 334, 341 (Tex. App.—San

Antonio 2002, pet. denied), disapproved of on other grounds by Hausser v. Cuellar, No. 04-09-

00560-CV, 2011 WL 313757 (Tex. App.—San Antonio Feb. 2, 2011, no pet. h.) (en banc); see

also Gavenda v. Strata Energy, Inc., 705 S.W.2d 690, 691 (Tex. 1986). In other words, the

division order is merely the mechanism for payment to a payee of its share of oil and gas

proceeds. Second, the statute places the burden on the payor to submit a division order to the

payee for its signature; it is not the royalty owner or mineral interest owner’s burden to draft

its own division order, sign it, and submit it to the payor. TEX. NAT. RES. CODE ANN.

§ 91.402(c)(1) (“. . . a payor shall be entitled to receive a signed division order from payee . . .”);

see, e.g., Headington Oil, 287 S.W.3d at 207 (oil company that purchased leases with producing

oil and gas wells submitted division orders to the known interest owners for signature).

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In the absence of express findings in a bench trial, we presume the trial court impliedly

made all findings necessary to support its judgment, and affirm the judgment if it can be upheld

on any basis. Holt Atherton Indus., Inc. v. Heine, 835 S.W.2d 80, 83-84 (Tex. 1992); Point

Lookout West, Inc. v. Whorton, 742 S.W.2d 277, 278 (Tex. 1987) (per curiam). Here, construing

the entire texts of the final judgment and summary judgment order (incorporated by reference in

the final judgment) as a whole, it is clear the trial court (i) reserved from the summary judgment

the recovery by Hoskins and BP of their share of net revenues and royalties attributable to their

respective interests as declared by the court, and (ii) in the final judgment awarded damages to

Hoskins and BP consisting of “net revenues” and “royalty revenues” under section 91.402(a) of

the TNRC after conducting a bench trial to determine the specific amounts. See Whorton, 742

S.W.2d at 278 (when a judgment is vague or contradictory, we resolve the conflict or ambiguity,

if possible, by construing it as a whole with the goal of harmonizing and giving effect to

everything the court has written); Constance v. Constance, 544 S.W.2d 659, 660 (Tex. 1976).

Accordingly, we overrule Prize’s and the Rutherfords’ complaint that no legal theory supports

the award of damages.

(2) No Duty to Pay Royalties to BP. In Issue No. 2, Prize and the Rutherfords argue

they have no duty to pay the royalties awarded to BP; they contend it is Hoskins’ sole obligation

to pay BP its royalties as part of the consideration for Hoskins’ purchase of BP’s 25% mineral

interest. As an initial matter, we note that Prize and the Rutherfords assert that the record

contains no evidence of any revenues from production from August 1, 2001 to August 15, 2004;

therefore, the full $3.2 million awarded to BP represents royalties due on production from

August 16, 2004 to October 31, 2008 which should be paid by Hoskins. In support of their

contention that they are not responsible for paying BP its post-sale royalties, Prize and the

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Rutherfords point to the trial court’s statement in the final judgment that “BP’s royalty does not

burden any interests held by the Defendants [Prize and the Rutherfords].” (emphasis added).

Prize and the Rutherfords interpret that statement to mean they have no obligation as the

operators to pay BP its royalties on production. We find their argument to be somewhat

disingenuous. First, the court’s statement that BP’s royalty does not “burden any interests” held

by Prize and the Rutherfords is part of the declaratory relief section of the judgment resolving the

issues of title among the parties. In the previous sentence describing the interests held by BP, the

court explains, “from August 16, 2004 forward, the ‘BP 25% mineral interest’ passed to Cliff

Hoskins, Inc., subject to BP retaining an undivided .06250 of 8/8ths royalty interest, which

burdens the ‘BP 25% mineral interest’ now owned by Cliff Hoskins, Inc.” The court was simply

clarifying that BP’s retained .06250 of 8/8ths royalty interest is attached to, and thus “burdens,”

the 25% mineral interest now owned by Hoskins. 18 See Clear Lake Pines, 2005 WL 1583506, at

*3 (an encumbrance is an interest in realty that is a burden on its transfer, and the right to future

royalty payments on oil and gas production is an interest in realty) (citing City of Dayton v.

Allred, 123 Tex. 60, 68 S.W.2d 172, 178 (1934), and Clyde v. Hamilton, 414 S.W.2d 434, 438

(Tex. 1967)). The court was not stating that Prize and the Rutherfords have no duty to pay the

royalties owed to BP.

Second, as the entities operating on and producing oil and/or gas from the Baker

Property, Prize and the Rutherfords, and their successor operators, constitute “payors” under the

TNRC, and as such are responsible for distributing the oil and gas proceeds to the “payees,”

defined as “persons legally entitled to payment from the proceeds derived from the sale of oil or

gas,” which includes royalty interest owners. TEX. NAT. RES. CODE ANN. § 91.401(1), (2)

18 In the final judgment, the court also noted that the “BP 25% mineral interest” now owned by Hoskins is still subject to the pre-existing 1/64th non-participating royalty originally owned by ARCO.

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(defining a “payor” as “the party who undertakes to distribute oil and gas proceeds to the payee,

whether as the purchaser of the production of oil or gas . . . or as operator of the well from which

such production was obtained or as lessee under the lease on which royalty is due.”); see

Concord Oil, 966 S.W.2d at 461. Thus, part of Prize’s and the Rutherfords’ obligation as

operators on the Baker Property is to pay the royalty owners their royalties on production. TEX.

NAT. RES. CODE ANN. § 91.402(a). The fact that the trial court ordered Prize and the Rutherfords

to pay the $3.2 million in royalties directly to BP as the royalty owner, rather than to Hoskins as

the mineral interest owner, does not constitute an abuse of discretion; in fact, it is consistent with

the TNRC. Accordingly, we overrule this issue.

(3) Future Relief. In Issue No. 7, Prize and the Rutherfords generally complain that the

last substantive paragraph of the final judgment contains improper provisions addressing “future

relief that is not pleaded, is advisory and is unwarranted.” Texas Rule of Appellate Procedure

38.1 requires an appellant’s brief to “contain a clear and concise argument for the contention

made, with appropriate citations to authorities and to the record.” TEX. R. APP. P. 38.1(i). Prize

and the Rutherfords have waived their future relief argument because their briefs fail to make a

clear and concise argument, and, with one exception, lack citations to supporting legal authority.

The failure by Prize and the Rutherfords to provide a clear argument or supporting authority

waives the claimed error. Nguyen v. Kosnoski, 93 S.W.3d 186, 188 (Tex. App.—Houston [14th

Dist.] 2002, no pet.). Moreover, one of the provisions criticized by Prize and the Rutherfords as

binding “people who are not parties to [the judgment], such as unnamed ‘first purchasers’ or

future operators of the property,” is consistent with the TNRC definition of a “payor” under

section 91.401(2). Prize’s and the Rutherfords’ seventh issue is therefore overruled.

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II. Hoskins’ Challenges to Damages Award

In its third issue on cross-appeal, Hoskins 19 asserts the trial court erred in rejecting his

proposed well by well method of calculating damages, and instead calculating the damages by

“lumping all revenue and expenses together for the seven Baker wells drilled post-termination,

rather than excluding costs for the three admittedly unprofitable wells.” Hoskins also challenges

the court’s inclusion of the COPAS overhead costs.

(1) Well by Well Method. Hoskins contends the court should have calculated the “net

revenues” payable to Hoskins and BP on the “well by well” basis presented by its expert.

Hoskins argues it should have been awarded $4,508,836 in net revenues (which excludes costs of

the three unprofitable wells), rather than the $1,267,482 net revenues actually awarded (which

includes deduction of costs of all seven wells).

The trial court expressly rejected the “well by well” method in its final judgment, stating

“the Court FINDS that Hoskins’ and BP’s argument for damages based on a well-by-well basis

is not meritorious, and the Court rejects that argument.” The court then proceeded to make

additional findings that: (i) there is no applicable limitation to Defendants’ obligation to account

to Hoskins and BP, and therefore no time bar to any of their claims; and (ii) the COPAS

production overhead should be allowed as reasonable and necessary costs. In awarding Hoskins

unpaid “net revenues,” the judgment states the amounts represent “net revenues (i.e., gross

revenues less reasonable and necessary expenses beneficial to the Subject Acreage and including

Baker Well Nos. 8, 11 and 13) . . . .” Baker Well Nos. 8, 11 and 13 are the unprofitable Baker

wells.

To support its well by well approach, Hoskins relies on the court of appeals opinion in

Wagner & Brown, Ltd. v. Sheppard, 198 S.W.3d 369 (Tex. App.—Texarkana 2006), rev’d by 19 BP does not join Hoskins in this point of error.

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282 S.W.3d 419 (Tex. 2008), as “the only case on point found by either party directly

considering how damages should be calculated when an unleased cotenant drills both profitable

and unprofitable wells.” That case turned on, as a question of first impression, how a pool of

producing oil and gas properties is affected if a lease in the pool expires. Wagner & Brown, 282

S.W.3d at 421. Specifically, the case involved an operator seeking to recover reimbursement for

a mineral interest owner/unleased co-tenant’s share of costs for drilling a gas well before and

after the lease on the land had mistakenly expired due to failure to pay the owner’s royalties

within 120 days of the first gas sales. Id. at 421-22. In reversing the Texarkana court, the

Supreme Court held in relevant part that: (i) termination of the lease did not terminate the

owner’s participation in the pooling unit because mineral owners can agree to pool their lands

even if no lease exists; and (ii) an operator who drills a well in good faith is entitled to equitable

reimbursement of costs, even if the operator’s lease is not valid, as long as the operator believed

in good faith the lease was valid. Id. at 422-23, 426-27. Finally, the Supreme Court confirmed

the long-standing rule in Texas that “a cotenant has the right to extract minerals from common

property without first obtaining the consent of his cotenants; however, he must account to them

on the basis of the value of any minerals taken, less the necessary and reasonable costs of

production and marketing.” Id. at 426 (citing Byrom, 717 S.W.2d at 605). As to the reason

Hoskins relies on the Texarkana opinion, its deduction of expenses on a well by well basis, the

Supreme Court expressly noted that it would not reach that issue because it was not raised on

review. See id. at 425 n.24 (noting the court of appeals “held that the defendants could not

deduct expenses incurred on the first well 20 from the revenues for the second well,” but

defendants did not appeal that conclusion).

20 Evidence before the Texarkana Court of Appeals concerning the first well established that the reworking costs totaled $592,000, but generated only $10,000 in revenue over a two-year period. Wagner & Brown, 198 S.W.3d at

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To further support its well by well approach, Hoskins asserts the evidence is

“uncontroverted” that the Baker Well Nos. 8, 11, and 13 were unprofitable, and thus did not

benefit the co-tenancy. Hoskins contends that failure to calculate damages on a well by well

basis, in the absence of a joint operating agreement stating otherwise, is contrary to well-

established Texas law because a co-tenant is not entitled to reimbursement for unsuccessful

operations. See Neeley v. Intercity Mgmt. Corp., 732 S.W.2d 644, 646 (Tex. App.—Corpus

Christi 1987, no writ) (if co-tenant drills a dry hole, he does so at his own risk and without right

to reimbursement for the drilling cost); see also Burnham v. Hardy Oil Co., 147 S.W. 330, 335

(Tex. Civ. App.—San Antonio 1912), aff’d, 195 S.W. 1139 (Tex. 1917) (expenses connected

with nonproducing wells are not chargeable to other co-tenants but should be borne by those who

incurred them).

In response to Hoskins’ argument for the well by well calculation, Prize and the

Rutherfords note the Texarkana opinion in Wagner & Brown cites no authority supporting the

well by well approach. See Wagner & Brown, 198 S.W.3d at 380-81. They further argue that

based on the Supreme Court’s holdings and tenor in its opinion, the Court would have overruled

a well by well approach had that issue been appealed. See Wagner & Brown, 282 S.W.3d at 425-

27. We agree with Prize and the Rutherfords.

We have found no case other than the Texarkana opinion which applies a strict well by

well analysis to a co-tenant’s reimbursement claim. See Wagner & Brown, 198 S.W.3d at 380-

81. We note, however, that as a general rule oil and gas wells are characterized as improvements

to real property; as such, equitable principles apply and dictate that a person who “in good faith

makes improvements upon property owned by another is entitled to compensation therefore.”

Wagner & Brown, 282 S.W.3d at 425-26. Furthermore, “[i]t has long been the rule in Texas that

381 n.7.

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a cotenant has the right to extract minerals from common property without first obtaining the

consent of his cotenants; however, he must account to them on the basis of the value of any

minerals taken, less the necessary and reasonable costs of production and marketing.” Id. at

426 (emphasis in original). The Supreme Court in reversing the court of appeals, although not

addressing the well by well analysis, clearly stressed the equitable nature of a reimbursement-

for-improvements claim. Id. at 428. The Court stated,

Given the equitable nature of a reimbursement-for-improvements claim, we decline to read Texas law as establishing that drilling costs are always or never recoverable when a lease expires. Instead, we believe the equitable nature of such claims must turn on the equities in each case. . . . As with other equitable actions, a jury may have to settle disputed issues about what happened, but ‘the expediency, necessity, or propriety of equitable relief’ is for the trial court, and its ruling is reviewed for an abuse of discretion.

Id. at 428-29 (emphasis in original).

Applying the above principles to the facts in Wagner & Brown, the Supreme Court held

that the trial court and court of appeals abused their discretion in declaring costs unrecoverable,

because there was evidence that those costs benefitted the estate. Id. at 429. The Supreme Court

relied on fairness considerations, as well as past and potential future benefits to the estate from

future wells that may be drilled, when ruling the trial court abused its discretion in refusing

reimbursement of drilling costs. Id. at 424-25, 428-29. Applying the reasoning found in the

Supreme Court’s decision in Wagner & Brown, we decline to apply a strict well by well

approach to the costs at issue in this case, and instead will review the trial court’s determination

of the equities from the evidence presented under an abuse of discretion standard.

Turning to the evidence, Hoskins discounts the argument by Prize and the Rutherfords

that the unprofitable Baker wells nonetheless benefitted the co-tenancy by (i) preventing

drainage from nearby development, (ii) providing beneficial geological “wellbore” information,

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and (iii) permitting re-entry of the unplugged wells in the future. The record confirms that

Prize’s expert, Don Ray George, testified extensively that the expenses from Baker Well Nos. 8,

11, and 13 were reasonable and necessary and benefitted the estate. Specifically, George

testified that Well Nos. 8, 11, and 13 were drilled in “good faith to offset and develop the

reservoirs.” He testified the operator and the other mineral interest owners gained a myriad of

valuable information “beneficial to the overall development of the minerals underlying the Earl

Baker Estate” from the drilling of these wells. George opined, “[I]t’s a continuing benefit to be

able to not only tell what the geology looks like, but the extent of reservoirs, the quantity of the

hydrocarbons that’s there, whether or not there’s an active water drive or what type of reservoir

mechanism each of those individual reservoirs is producing under.” George further testified that

Well Nos. 8 and 11 were not plugged (Well No. 13 is still producing) and could be re-entered in

the future if and when economics improve. Hoskins’ expert, Peter Huddleston, offered no

testimony to controvert George’s testimony that Well Nos. 8, 11, and 13 did benefit the estate or

that the expenses from the three wells were unnecessary or unreasonable. Hoskins does point to

the testimony of several fact witnesses and argues that this testimony contradicts any possible

benefit to the estate (i.e., the wells did not prevent drainage, may never be re-entered for future

operations, and only “potentially” provided useful geological benefits.). Resolution of any

conflicts in the evidence was within the court’s province as the finder of fact. See City of Keller,

168 S.W.3d at 819 (it is the sole province of fact finder to determine credibility of the witnesses

and weight to be given their testimony).

Hoskins also complains that all of the costs of the non-producing wells were incurred

after BP’s June 25, 2004 letter concerning termination of the JOA, and after suit was filed. As

noted earlier, however, the long standing rule is that a co-tenant has the right to extract minerals

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from the common estate without the consent of his cotenants. 21 Wagner & Brown, 282 S.W.3d

at 426. George’s testimony and the record indicate that the expenses from Well Nos. 8, 11, and

13 should be included in any net revenues calculation because Hoskins also sought and obtained

an interest in those wells through its title claims in this suit.

(2) COPAS Overhead. Hoskins further claims the COPAS 22 overhead costs permitted

by the trial court should have been excluded, thereby increasing Hoskins’ damages by $81,085.

As with the well by well determination, it is for the fact finder to determine whether an overhead

charge is properly deductible as a reasonable and necessary expense. Id. at 425 (overhead

expenses on a lapsed lease were properly charged as long as they were reasonable and

necessary). George testified that the COPAS overhead charge was reasonable and necessary and

standard in the industry. He also testified that the co-tenants benefitted from the services

associated with these charges. Hoskins’ expert did not dispute this testimony, stating that he

made no determination as to the reasonableness or necessity of the charges.

In summary, the trial court did not abuse its discretion in rejecting a well by well

approach to calculate Prize’s and the Rutherfords’ reimbursement-for-improvements claim and

in awarding Hoskins unpaid “net revenues” calculated as “gross revenues less reasonable and

necessary expenses beneficial to the Subject Acreage and including Baker Well Nos. 8, 11 and

13.” Furthermore, there is ample evidence supporting the trial court’s implied finding that the

costs associated with Well Nos. 8, 11, and 13 and the COPAS overhead were reasonable,

21 The trial court’s final judgment recognized that because the El Paso and Baker Leases terminated by their terms in August 2001, “Hoskins’s and BP’s mineral rights and interests therefore reverted to them at that time, free and clear from the 1967 JOA and anyone claiming thereunder, making Hoskins and BP co-tenants.” 22 As defined by Hoskins, “COPAS” overhead is a “fixed amount of overhead paid to the operator for their supervision of operations” according to the terms of the operating agreement. Hoskins concedes that Article 8 of the JOA called for payment of COPAS overhead to the operator, Prize and the Rutherfords, but argues the JOA had terminated and the defendants did not prove the COPAS was a reasonable and necessary expense.

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necessary, and beneficial to the estate. We therefore overrule Hoskins’ third issue on cross-

appeal.

III. BP’s Challenge to Damages Award In its third issue on cross-appeal, BP complains the trial court erred in permitting Prize

and the Rutherfords to satisfy their obligation to account to BP for its share of net revenues by

tendering to BP its applicable share of gas in-kind at the wellhead in lieu of payment of its share

of proceeds from the sale of production. The trial court ordered in the last substantive paragraph

of the judgment that, “any party who is a producing co-tenant of oil, gas and/or condensate from

the Subject Acreage shall account to the non-producing parties.” Specifically, the court ordered

that Prize and the Rutherfords, “for so long as they remain as producing co-tenants, shall have

the continuing obligation to account to Hoskins and BP for their respective shares of net

revenues attributable to the Subject Acreage.” The trial court further provided:

As to any revenues which have not previously been distributed by the Defendants, BP and Hoskins shall be entitled to receive their respective shares of production revenues directly from the first purchaser of such production and the operators shall take such actions as are necessary to cause such direct payment. Defendants, at their option, may also satisfy their obligations under this paragraph by tendering Hoskins and BP their applicable share of gas in kind at the wellhead in lieu of payment.

(emphasis added).

BP argues the trial court’s judgment should be modified to remove the take-in-kind

option because no legal authority exists allowing the producing co-tenant to force the non-

producing co-tenant to take a share of gas at the wellhead instead of receiving its share of net

production proceeds after the gas is treated and marketed. In response, Prize and the Rutherfords

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argue the trial court acted within its discretion in allowing them to tender gas in-kind at the

wellhead. 23 We disagree.

Allowing a co-tenant to tender gas in-kind at the wellhead is inconsistent with Texas co-

tenancy law which provides that “a cotenant who produces minerals from common property

without having secured the consent of his cotenants is accountable to them on the basis of the

value of the mineral taken less the necessary and reasonable cost of producing and marketing the

same.” Cox, 397 S.W.2d at 201. Prize and the Rutherfords cite us to no authority showing that a

producing co-tenant can comply with its duty to account to a nonproducing co-tenant by

tendering the applicable share of gas “in kind” at the wellhead. A trial court abuses its discretion

if it acts without regard for any guiding rules or principles. City of Brownsville v. Alvarado, 897

S.W.2d 750, 754 (Tex. 1995). Accordingly, we grant BP’s third issue on cross-appeal and

modify the trial court’s judgment to remove the last sentence of the last substantive paragraph of

the final judgment, quoted above, which permitted Prize and the Rutherfords to satisfy their

obligations to account to Hoskins and BP by tendering “their applicable share of gas in kind at

the wellhead in lieu of payment.”

IV. The Rutherfords’ Challenge to Damages Award

Because we have sustained the damages award to Hoskins and BP, we must address the

issues raised by the Rutherfords with respect to damages. The Rutherfords assert in two issues

that all of the Rutherford Children 24 are not liable for damages because they did not own any fee

23 Prize and the Rutherfords also argue that because BP, not Hoskins, appealed this portion of the judgment, this issue must be rejected since BP’s royalty interest burdens only Hoskins’ interest. Therefore, Prize and the Rutherfords contend BP is not entitled to any revenues or any gas from them, and must look only to Hoskins for payment of its royalty. For the reasons stated supra, we have rejected the argument that Prize and the Rutherfords have no obligation to pay BP its royalties. See TEX. NAT. RES. CODE ANN. §§ 91.401, 91.402. 24 The “Rutherford Children” consist of eight individuals: Stevan D. Rutherford, Patrick R. Rutherford, III, David Traylor Rutherford, John Richard Rutherford, Mary Elizabeth Rutherford, Paul Maroney Rutherford, Michael G. Rutherford, Jr., and Sally Ann Rutherford.

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interests in the mineral estate, but rather owned only leasehold working interests. They further

argue the trial court improperly imposed joint and several liability against all defendants under

the judgment because there was no claim upon which a finding of joint and several liability could

be made.

(1) Rutherford Children. A trial court may not grant relief on a theory of recovery not

sufficiently stated in the party’s live pleadings or tried by consent. See TEX. R. CIV. P. 301

(judgment of the court shall conform to the pleadings); Herrington v. Sandcastle Condominium

Ass’n, 222 S.W.3d 99, 102 (Tex. App.—Houston [14th Dist.] 2006, no pet.). To determine

whether an issue was tried by consent, we examine the record for evidence of whether the parties

actually tried the issue. Johnston v. McKinney Am., Inc., 9 S.W.3d 271, 281 (Tex. App.—

Houston [14th Dist.] 1999, pet. denied) (holding even though trial court found disclaimer was

conspicuous, it erred in finding disclaimer barred plaintiff’s recovery because issue was not tried

by consent and thus not properly before court). Trial by consent is not a general rule of practice

and should not be applied unless clearly warranted. Haas v. Ashford Hollow Cmty. Improvement

Ass’, Inc., 209 S.W.3d 875, 883-84 (Tex. App.—Houston [14th Dist.] 2006, no pet.). A party’s

unpleaded issue may be deemed tried by consent when evidence on the issue is developed under

circumstances indicating both parties understood the issue was in the case, and the other party

failed to make an appropriate complaint. Johnson v. Structured Asset Servs., LLC, 148 S.W.3d

711, 719 (Tex. App.—Dallas 2004, no pet.).

As we have previously held, the court’s damages award to BP and Hoskins was made

pursuant to the TNRC. In its last amended petition regarding its claim under the TNRC, BP did

not include the Rutherford Children, but sought to recover its share of production revenues

“jointly and severally” only from “Prize Energy, Prize Operating, Gruy, Rutherford Oil and/or

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Hunter Gathering” as “payors” under the TNRC. Similarly, Hoskins affirmatively states that the

“only” cause of action it asserts against the Rutherford Children is its suit to remove the cloud on

Hoskins’ title to an undivided 25% mineral interest in the Subject Acreage. In addition, the

record does not reflect that the issue of the Rutherford Children’s liability for any damages was

actually tried by consent. Accordingly, the Rutherford Children’s issue is sustained, and the

judgment will be modified to reflect that the damages award is not assessed against the

Rutherford Children.

(2) Joint and Several Liability Against All Defendants. The Rutherfords also argue

the trial court improperly imposed joint and several liability against all the defendants. BP and

Hoskins respond that the trial court expressly found that “all defendants” committed a good faith

trespass, and, under Texas law, each trespasser may be held jointly liable for the whole amount

of the damages. First, we disagree with BP’s and Hoskins’ characterization of the trial court’s

judgment. In its interlocutory judgment, the trial court’s very first ruling stated:

The court GRANTS Defendants’ Motions for Summary Judgment [defining the defendants to include the Rutherford Children] on all Plaintiffs’ claims of trespass. Plaintiffs shall take nothing from Defendants on any trespass claim in this cause. (emphasis added).

The trial court again in its final judgment repeated that it was granting the defendants’ motion for

summary judgment on all claims of trespass and further “ORDER[ED] that Hoskins, BP and

Bank of America, N.A., as Trustee of the Baker Trusts take nothing on their trespass claims. . . .”

Second, while we have upheld the award of damages under Chapter 91 of the TNRC, the

statute does not address joint and several liability among payors. By analogy, co-tenancy law is

clear that the obligations of co-tenants are based on their proportional share. As the Supreme

Court has noted, when dealing with obligations of co-tenants, “the rule of accountability is the

proportionate market value of the product less the proportionate necessary and reasonable costs

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of producing and marketing.” Cox, 397 S.W.2d at 203. Here, during the time period from

August 2001 to October 2008, the period for which damages were awarded against Prize and the

Rutherfords, all the parties were in a co-tenancy relationship. Since a recovery against co-

tenants is not generally imposed as a joint and several liability, we see no reason why a recovery

of unpaid oil and gas proceeds against co-tenants under the TNRC would be treated any

differently. Accordingly, we sustain the Rutherfords’ issue, and will modify the judgment to

delete the imposition of joint and several liability among all the defendants.

ATTORNEYS’ FEES & INTEREST

We next address the parties’ arguments concerning recovery of attorneys’ fees and

interest. The trial court did not award attorneys’ fees to any party because it found the

underlying nature of the case was a determination of title; the court made an alternative finding

that reasonable and necessary attorneys’ fees were $900,000 for each group of parties. In

awarding damages to Hoskins and BP, the court also awarded pre-judgment interest at 5% per

annum simple interest from December 22, 2004 until the day before the date of the final

judgment, and post-judgment interest at 5% per annum, compounded annually.

On appeal, Prize and the Rutherfords assert they are entitled to recover attorneys’ fees

because they prevailed on summary judgment against the theft claims brought by Hoskins, BP,

and the Bank; they also assert the court’s award of pre-judgment and post-judgment interest

should be reversed. Hoskins and BP argue they should have been awarded attorneys’ fees

because they prevailed in obtaining their share of revenues under the TNRC. 25

25 The Bank’s challenge to the trial court’s assessment of Prize’s and the Rutherfords’ costs is separately addressed under the Bank’s cross-appeal.

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I. Prize’s and the Rutherfords’ Issues

(1) Recovery of Attorneys’ Fees Under Texas Theft Liability Act. In Issue No. 5 of

the main appeal, Prize and the Rutherfords argue they should each have recovered $900,000 in

attorneys’ fees because they prevailed on summary judgment against the civil theft claims

brought by Hoskins, BP, and the Bank under the Texas Theft Liability Act. See TEX. CIV. PRAC.

& REM. CODE ANN. §§ 134.001-.005 (West 2005). Prize and the Rutherfords contend the award

of their attorneys’ fees was mandatory under the statute because they successfully defended

against the plaintiffs’ civil theft claims. See id. § 134.005(b) (providing “[e]ach person who

prevails in a suit under this chapter shall be awarded court costs and reasonable and necessary

attorney’s fees”); see also Air Routing Int’l Corp. (Canada) v. Britannia Airways, Ltd., 150

S.W.3d 682, 686 (Tex. App.—Houston [14th Dist.] 2004, no pet.) (recognizing “unusual” nature

of Texas Theft Act in that it requires the court to award attorney’s fees to a party who

successfully defends against a Theft Act claim without any finding that the theft claim is

groundless, frivolous, or brought in bad faith).

Hoskins, BP, and the Bank offer several responses, one of which is that Prize and the

Rutherfords failed to plead for recovery of their attorneys’ fees under the Theft Liability Act.

We agree. As noted, supra, a trial court may not grant relief on a theory of recovery not

sufficiently stated in the party’s live pleadings or tried by consent. Herrington, 222 S.W.3d at

102. The purpose of pleadings is to give an adversary notice of claims and defenses, as well as

notice of the relief sought. Perez v. Briercroft Serv. Corp., 809 S.W.2d 216, 218 (Tex. 1991).

Here, Prize and the Rutherfords did not place the plaintiffs, or the trial court, on notice that they

were seeking to recover their attorneys’ fees under section 134.005(b) by so stating in their

summary judgment motion or any other pleading before the trial court at the time it rendered

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judgment. 26 On appeal, Prize and the Rutherfords make no attempt to direct us to any place in

the record where they requested section 134.005(b) attorney’s fees in the trial court. To the

contrary, Prize and the Rutherfords argue in their reply brief that because recovery of attorneys’

fees is mandatory under section 134.005(b), they did not need to make the trial court or plaintiffs

aware of their request for attorneys’ fees under that statute. The cases cited by Prize and the

Rutherfords do not support their argument because the parties seeking recovery of attorney’s fees

in those cases made the request in the trial court. See, e.g., Robinson v. Brannon, 313 S.W.3d

860, 868 (Tex. App.—Houston [14th Dist.] 2010, no pet.). In addition, in a case decided under

the Theft Liability Act, the Dallas court of appeals held that prevailing defendants were not

entitled to recover their attorneys’ fees under section 134.005(b) because the defendants failed to

specifically request recovery of attorneys’ fees under section 134.005(b) in any pleading in the

trial court. Cricket Communications, Inc. v. Trillium Indus., Inc., 235 S.W.3d 298, 310 (Tex.

App.—Dallas 2007, no pet.). We agree with the reasoning of the Dallas court.

Because Prize and the Rutherfords failed to specifically request recovery of their

attorneys’ fees under section 134.005(b) in the trial court, and the issue was not tried by consent,

we hold the trial court did not abuse its discretion in failing to award them attorneys’ fees under

the Theft Liability Act. See Bocquet v. Herring, 972 S.W.2d 19, 20 (Tex. 1998) (appellate court

reviews trial court’s decision to award attorney’s fees for abuse of discretion).

(2) Assessment of Pre-Judgment Interest. In their Issue No. 4, Prize and the

Rutherfords assert the court’s award of pre-judgment interest under the TNRC should be

reversed. We agree. Even though the trial court did not expressly state the basis for its award of

pre-judgment interest, as we have previously held, it is clear from the judgment as a whole that

26 In addition, the record does not reflect the issue of recovery of Prize’s and the Rutherfords’ attorneys’ fees under section 134.005(b) was tried by consent. See Johnson, 148 S.W.3d at 719.

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the court based its award of damages on section 91.402(a) of the TNRC. TEX. NAT. RES. CODE

ANN. § 91.402(a). Section 91.403 provides that a payor who fails to comply with the time limits

for making the payments required under section 91.402(a) must pay interest to the payees. Id.

§ 91.403(a). Subsection (b) of section 91.402, however, provides a “safe harbor” which permits

a payor to withhold or suspend payments beyond the time limits without being subject to pre-

judgment interest when there is “a dispute concerning title that would affect distribution of

payments.” Id. §§ 91.402(b)(1), 91.403(b) (recognizing the interest exceptions stated in section

91.402(b)); Headington Oil Co., L.P. v. White, 287 S.W.3d 204, 210 (Tex. App.—Houston [14th

Dist.] 2009, no pet.); Gore Oil Co. v. Roosth, 158 S.W.3d 596, 602 (Tex. App.—Eastland, 2005,

no pet.).

Here, as noted supra, the trial court found the underlying nature of Hoskins’ and BP’s suit

was a title determination of their interest in the Baker Property. We agree. The record is clear

that a legitimate question concerning title to the 25% unleased mineral interest originally owned

by ARCO, to which BP succeeded and sold to Hoskins, was the underlying basis for this case,

and that the title dispute affected the rights of Hoskins and BP to receive payments under section

91.402(a). Therefore, prejudgment interest was not recoverable under the plain language of

section 91.402(b)(1). Concord Oil, 966 S.W.2d at 461. Finally, the award of pre-judgment

interest may not be sustained under equity, or common law, as argued by Hoskins and BP,

because the Supreme Court has stated that the statute controls. Id. at 462-63 (holding that, when

there is a title dispute affecting distributions of oil and gas proceeds, equitable prejudgment

interest may not be awarded under common law because it would be in direct conflict with

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section 91.402(b) of the TNRC). 27 Accordingly, we sustain Prize’s and the Rutherfords’ issue

challenging the award of pre-judgment interest, 28 and will modify the judgment to delete the

award of pre-judgment interest.

II. Hoskins’ and BP’s Issue

On cross-appeal, Hoskins and BP assert in their third and first issues, respectively, that

they are entitled to receive their attorneys’ fees because they obtained relief under the TNRC.

We agree. We have held, supra, that the court’s award of net revenues and royalties to Hoskins

and BP was made pursuant to section 91.402(a) of the TNRC. Section 91.406 provides that, “if a

suit is filed to collect proceeds and interest under this subchapter, the court shall include in any

final judgment in favor of the plaintiff an award of: (1) reasonable attorney’s fees . . . .” TEX.

NAT. RES. CODE ANN. § 91.406 (West 2001). Both Hoskins and BP brought claims to recover

their unpaid share of the oil and gas proceeds, plus interest, under sections 91.402 and 91.403 of

the TNRC, and they received a favorable judgment on those claims in the trial court; in addition,

they expressly requested recovery of their attorneys’ fees under the TNRC. Id. §§ 91.402,

91.403. Since we are affirming the trial court’s award of damages to Hoskins and BP on the

basis of their TNRC claims, BP and Hoskins have obtained a “favorable” result under the plain

language of section 91.406. See Headington, 287 S.W.3d at 215-16 (noting that a judgment is

“favorable” to the plaintiff when he obtains “a measure of relief which leaves him in a better

position that he held before filing suit,” and upholding award of attorneys’ fees under section

91.406 to plaintiff who was awarded unpaid royalties).

27 Hoskins and BP rely on our prior opinion in Marshall as support for the award of pre-judgment interest. However, Marshall is distinguishable because the pre-judgment interest was awarded on fraud claims, not under the TNRC. Marshall, 288 S.W.3d at 455. 28 To the extent Prize and the Rutherfords challenge the award of post-judgment interest on the damages, they make no clear argument explaining the legal basis for their challenge and cite no legal authority. Therefore, the issue is waived. TEX. R. APP. P. 38.1(i).

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Prize and the Rutherfords argue that because recovery of attorney’s fees is barred in a

trespass to try title action, and the trial court found the underlying nature of the case was “to

obtain a declaration of title,” an award of attorneys’ fees to Hoskins and BP under the TNRC

would be improper. See Marshall, 288 S.W.3d at 464 (citing EOG Resources, Inc. v. Killam Oil

Co., 239 S.W.3d 293, 304 (Tex. App.—San Antonio 2007, pet. denied)). Prize and the

Rutherfords cite us to no case under the TNRC holding that attorneys’ fees should not be

awarded in a case involving a title dispute. In fact, the statutory language of TNRC section

91.406 contains no exception prohibiting recovery of attorney’s fees in a title dispute. Since the

legislature excluded pre-judgment interest from a potential recovery in section 91.402(b)’s “safe

harbor” provision, the legislature clearly also could have excluded attorney’s fees from a

potential recovery if that was its intent; the legislature chose not to do so. See Fireman’s Fund

County Mut. Ins. Co. v. Hidi, 13 S.W.3d 767, 769 (Tex. 2000) (when the legislature employs a

term in one section of a statute and excludes it in another, we must presume it had a reason for

excluding the term); see also Columbia Med. Ctr. of Las Colinas, Inc. v. Hogue, 271 S.W.3d

238, 256 (Tex. 2008) (court must not interpret a statute in a manner that renders any part

meaningless or superfluous); Liberty Mut. Ins. Co. v. Garrison Contractors, Inc., 966 S.W.2d

482, 484 (Tex. 1998) (we construe a statute to ascertain and effectuate the legislature’s intent by

first looking to the plain and common meaning of the statute’s language, viewing it in the

context of the statute as a whole and giving it full effect). Accordingly, we conclude the trial

court erred in not awarding Hoskins and BP their attorneys’ fees under section 91.406 of the

TNRC. See Holland v. Wal-Mart Stores, Inc., 1 S.W.3d 91, 94 (Tex. 1999) (availability of

statutory attorney’s fees is a question of law which appellate court reviews de novo).

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Finally, Prize and the Rutherfords assert the $900,000 amount of attorneys’ fees is

excessive because it is “based on a 95% allocation of attorney work to the TNRC cause of action

and only 5% to all other causes of action and defenses.” They contend the majority of the issues

in the case involved trespass and title, not “prompt-payment issues under the TNRC;” therefore,

the $900,000 amount is not supported by the record. First, we have already rejected the

argument that the TNRC is merely a prompt payment statute devoid of a cause of action for

nonpayment of oil and gas proceeds, and have upheld the damages awards under the TNRC

claims. Second, our review of the record confirms that the trial court’s finding that the allocation

of a majority (95%) of the attorneys’ work to the TNRC claims was not unreasonable; further,

the fee amount of $900,000 is a reasonable and necessary amount supported by the record.

The record shows that BP and Hoskins sufficiently proved up their attorneys’ fees at trial,

with attorney Thomas Zabel 29 testifying as to segregation among claims as well as the amount of

fees incurred. Specifically, Zabel testified that, with the exception of the alternative breach of

contract claim brought by BP, all the claims asserted by BP and Hoskins depended on the same

set of facts (i.e., that the JOA had terminated in August 2001), and that resolution of the

declaratory judgment claim clearing title was beneficial to, and a necessary pre-requisite to, the

right as payees to recover production proceeds under the TNRC claims. Zabel stated, “there was

minimal time that can be segregated out that was unique to [claims for which no attorneys’ fees

are provided . . . cloud on title, . . . trespass, conversion], but prosecuting those claims further, it

be[ne]fitted the natural resources claims, the theft act claims, the breach of contract claims, the

declaratory judgment claims, that all have attorneys fees that are provided for.” Zabel also

testified the issues in the case were relatively complex and required sophisticated oil and gas

attorneys, there were multiple hearings, and that efforts had to be devoted to defeating the 29 Attorney Thomas Zabel was designated as the attorneys’ fees expert for Hoskins as well as BP.

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numerous defenses and counterclaims asserted by Prize and the Rutherfords in order to prevail

on the TNRC claims. Zabel stated that attorneys’ fees of $900,000 each would be reasonable,

even though more fees were incurred, based on an allocation of approximately 5% for work

unique to claims for which attorneys’ fees are not recoverable and 95% for work benefitting the

TNRC claims. Prize and the Rutherfords offered no contradictory evidence.

The trial court did not abuse its discretion in accepting the segregation of 5% of the

attorneys’ work as unique to non-fee claims and 95% to the TNRC claims. See Tony Gullo

Motors I, L.P. v. Chapa, 212 S.W.3d 299, 313-14 (Tex. 2006) (requiring segregation of

attorney’s fees that relate solely to a claim for which fees are unrecoverable, but also noting that

in many cases legal fees cannot and need not be precisely allocated to one claim or the other, and

that segregation may be based on percentage estimates). Further, the reasonableness of the

allocation and $900,000 amount of fees is supported by sufficient evidence in the record. Id. at

313-14 (segregation of attorney’s fees among multiple claims is a mixed question of law and

fact).

Accordingly, we hold that Hoskins and BP 30 are both entitled to recover attorneys’ fees

under section 91.406 of the TNRC, and that the trial court’s (alternative) finding that $900,000 is

the amount of reasonable and necessary attorneys’ fees incurred by Hoskins and BP on their

TNRC claims is supported by the record and is not an abuse of discretion. Therefore, we sustain

this issue and we will render judgment awarding $900,000 in attorneys’ fees to both Hoskins and

BP on their TNRC claims. 31

30 Prize and the Rutherfords also state that “BP has not incurred any attorneys’ fees at all” because Hoskins is indemnifying BP. They cite no authority, and engage in no analysis, in support of this contention; therefore, it is waived. TEX. R. APP. P. 38.1(i). 31 Hoskins and BP also ask for conditional attorneys’ fees on appeal; although Zabel testified about the amount of attorneys’ fees on appeal, the trial court made no finding on conditional appellate fees and no objection was raised.

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SANCTIONS AGAINST HOSKINS

Next, Hoskins challenges the trial court’s assessment of $200,000 in sanctions against

him for discovery abuse committed by counsel Bryan Leitch. Specifically, Hoskins asserts: (1)

there was no pleading to support a monetary sanctions award; (2) defendants offered no

competent evidence of monetary harm suffered as a result of the alleged discovery abuse; (3)

there was no direct relationship between the discovery abuse and the sanction imposed; and (4)

the award was unreasonable, excessive, unrelated to the alleged discovery abuse, and constitutes

an impermissible penalty.

(1) Factual Background. Prize and the Rutherfords filed a motion for sanctions against

Hoskins and Leitch alleging that Leitch, counsel for Hoskins and the Baker Trusts, committed

serious misconduct, including witness tampering and obtaining documents under false pretenses.

The motion further alleged that Leitch’s actions were known to and approved, at least in part, by

his clients. Prize and the Rutherfords requested that the trial court strike the pleadings of

Hoskins and the Baker Trusts.

At the sanctions hearing, Prize and the Rutherfords offered 39 exhibits to support their

claim of misconduct by Leitch. Without identifying himself as an attorney, Leitch wrote to

potential witnesses and obtained documents for use in the case. Leitch used false letterhead in

which he claimed to be a businessman for “Oil and Gas Properties” or “Mi Oil.” Katy Brymer,

an assistant to a Prize contract pumper, testified by deposition that Leitch contacted her and told

her that he worked for an oil company and asked to meet with her to discuss a job opportunity.

Leitch set up a meeting with Brymer, and at the meeting falsely told her he was investigating

criminal conduct by Prize; he then offered to pay her in exchange for her assistance in the case.

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Leitch also went to Brymer’s house when she was not home and tried to crawl through her fence.

Brymer was upset when she learned that Leitch had misrepresented himself to her.

Rick Rudolph, president of South Texas Gas Services, a nonparty to this appeal, testified

by deposition that he met with Leitch and Cliff Hoskins. At the meeting, in the presence of

Hoskins, Leitch told Rudolph, who performed the gas-chart integrations, that if he would provide

assistance to them in this case, they could “swing some business” his way. Rudolph stated that

Leitch continually badgered him to produce documents that had already been provided, and also

threatened him and South Texas Gas with criminal penalties for spoliation of evidence. Due to

this harassment, Rudolph hired Thompson & Knight to represent him and South Texas Gas in

this matter. Leitch was then notified by Thompson & Knight that Rudolph and South Texas Gas

were represented and that all communications should be directed to counsel.

Despite this warning, Leitch hired a local attorney, John Miller, to visit the Rudolphs at

their business in Sinton, Texas. Thompson & Knight was not informed that this contact would

take place. Leitch told Miller that Rudolph was not represented by counsel. Miller informed the

Rudolphs that it would be in their best interest to obtain counsel and that Hoskins would pay for

a lawyer. Rudolph also remembered Miller saying that if they agreed to allow Leitch to pay for

their legal representation, Leitch would keep them from being held liable to the other plaintiffs.

At Leitch’s direction, Miller spoke to Rudolph about giving a deposition in the case. Miller was

surprised to learn that the Rudolphs did in fact have retained counsel.

At his deposition on August 12, 2005, Cliff Hoskins admitted that he was aware of some

of Leitch’s misconduct. Hoskins acknowledged that he authorized the letters sent to nonparties

on false letterhead as part of the investigation Leitch was conducting. Additionally, Hoskins

attended the deposition of Katy Brymer on May 17, 2006, and at that time became aware of

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Leitch’s improper conduct as to Brymer. Additionally, Hoskins verified interrogatory answers

which sought information about Leitch’s misconduct. Hoskins’ co-counsel, Timothy Robinson,

was also copied on Prize’s counsel’s communications complaining of Leitch’s improper conduct

which were sent to all counsel of record from November 2005 through June 2006, thereby

putting Hoskins on notice of Leitch’s misconduct. Despite this knowledge, Hoskins continued to

retain Leitch.

Following the presentation of this evidence, the trial court ordered that Leitch be removed

as counsel and disqualified as an attorney for Hoskins. Thereafter, the trial court stated in a letter

to counsel that, “After careful consideration, the court does find that the actions’s [sic]

attributable to Cliff Hoskins (Cliff Hoskins, Inc.) are sanctionable, however, such actions do not

rise to the level that warrants striking all pleadings and resulting in the Death Penalty in this

cause. . . . The Court will continue to examine the appropriate sanctions to deter Mr. Hoskins and

other similarly situated parties of future litigations [sic].”

At a later date, the trial court heard evidence to determine monetary sanctions. Counsel

for Prize testified that, in light of the facts and the goals of deterrence, and taking into account

the lack of acceptance of responsibility by Hoskins or his counsel, a reasonable monetary

sanction against Hoskins would be $300,000. Counsel for the Rutherfords testified that, in his

opinion, an appropriate monetary sanction would be $500,000, due to Hoskins’ affront to the

judicial process and the court’s inherent power to protect the judicial process. The trial court

ordered that “based upon the scale of this litigation and the egregious conduct that abused the

judicial process, the Prize Defendants shall have and recover attorneys’ fees in the sum of

$100,000.00 from Hoskins as monetary sanctions, and that the Rutherford Defendants shall have

and recover attorneys’ fees in the sum of $100,000.00 from Hoskins as monetary sanctions.”

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(2) Standard of Review. We review a trial court’s ruling on a motion for sanctions

under an abuse of discretion standard. Cire v. Cummings, 134 S.W.3d 835, 838 (Tex. 2004);

Vela v. Wagner & Brown, Ltd., 203 S.W.3d 37, 56 (Tex. App.—San Antonio 2006, no pet.).

“The test for an abuse of discretion is not whether, in the opinion of the reviewing court, the facts

present an appropriate case for the trial court’s action, but ‘whether the court acted without

reference to any guiding rules and principles.’” Cire, 134 S.W.3d at 838-39 (quoting Downer v.

Aquamarine Operators, Inc., 701 S.W.2d 238, 241 (Tex. 1985)). Therefore, we will reverse the

trial court’s ruling only if it was arbitrary or unreasonable. Cire, 134 S.W.3d at 839. In

reviewing the imposition of sanctions, the appellate court examines the entire record, including

“evidence” admitted at the hearing, arguments of counsel, the written discovery on file, and the

circumstances surrounding the party’s alleged discovery abuse. U.S. Fidelity & Guar. Co. v.

Rossa, 830 S.W.2d 668, 672 (Tex. App.—Waco 1992, writ denied).

(3) Applicable Law. The trial court has discretion to impose sanctions for discovery

abuse under Rule 215.3. TEX. R. CIV. P. 215.3. There are three legitimate purposes of discovery

sanctions: (1) to secure compliance with discovery rules; (2) to deter other litigants from similar

misconduct; and (3) to punish violators. Chrysler Corp. v. Blackmon, 841 S.W.2d 844, 849

(Tex. 1992) (orig. proceeding); Bodnow Corp. v. City of Hondo, 721 S.W.2d 839, 840 (Tex.

1986). Discovery sanctions must also be “just.” TEX. R. CIV. P. 215.2(b); Spohn Hosp. v.

Mayer, 104 S.W.3d 878, 882 (Tex. 2003); TransAmerican Natural Gas Corp. v. Powell, 811

S.W.2d 913, 917 (Tex. 1991) (orig. proceeding) (“the punishment should fit the crime”). We

apply a two-part test to determine whether non-death penalty sanctions are just: (1) a direct

relationship between the offensive conduct and the sanction imposed must exist; and (2) the

sanction imposed must not be excessive. Spohn Hosp., 104 S.W.3d at 882; TransAmerican, 811

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S.W.2d at 917; Vela, 203 S.W.3d at 58. A “just” sanction must be directed against the abuse and

toward remedying the prejudice caused to the party. Spohn Hosp., 104 S.W.3d at 882. As to the

second prong, the sanction should be no more severe than necessary to satisfy its legitimate

purposes, and the court must first consider whether less stringent sanctions would promote full

compliance and deter future abuse. Id.; Blackmon, 841 S.W.2d at 849.

(4) Analysis. Hoskins first contends monetary sanctions were improper because they

were not pleaded or requested at or prior to the scheduled hearings; rather, Prize and the

Rutherfords sought only death penalty sanctions, not monetary sanctions. Hoskins relies on In re

Estate of Gaines, 262 S.W.3d 50, 60 (Tex. App.—Houston [14th Dist.] 2008, no pet.), which

holds that “jurisdiction to render a judgment for attorney’s fees must be invoked by the

pleadings, and a judgment not supported by pleadings requesting an award of attorney’s fees is a

nullity.” Gaines, however, is distinguishable because the order in that case did not impose

sanctions, and, in fact, there was no notice or a hearing on the possibility of sanctions. Id. at 60-

61. The court held that pleadings were required because the attorney’s fees were awarded

pursuant to a statutory provision. Id. Here, Rule 215.2 permits the imposition of sanctions after

“notice and a hearing,” both of which were provided to Hoskins. TEX. R. CIV. P. 215.2(b).

Further, Prize and the Rutherfords were not required to specifically plead for monetary damages

because “[c]ourts possess inherent powers to discipline attorney behavior through the imposition

of sanctions sua sponte in appropriate cases.” Roberts v. Rose, 37 S.W.3d 31, 33 (Tex. App.—

San Antonio 2000, no pet.); see also In re Bennett, 960 S.W.2d 35, 40 (Tex. 1997) (orig.

proceeding) (holding that even in the absence of an applicable rule or statute, a trial court has the

inherent power to sanction a party for bad faith abuse of the judicial process). Moreover, the

range of sanctions available to the trial court under Rule 215 is quite broad. TransAmerican, 811

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S.W.2d at 918; Clark v. Bres, 217 S.W.3d 501, 512 (Tex. App.—Houston [14th Dist.] 2006, pet.

denied). Accordingly, we cannot conclude monetary sanctions were improper based on the

absence of proper pleadings.

Next, Hoskins complains that Prize and the Rutherfords failed to offer competent

evidence of monetary harm suffered as a result of the alleged discovery abuse. Specifically,

Hoskins contends that because Prize and the Rutherfords did not introduce attorneys’ fees bills,

there was no evidence of the reasonable expenses related to the discovery abuse. When the

judgment is not one for earned attorneys’ fees, but rather a judgment imposing attorneys’ fees as

sanctions, it is not invalid because a party fails to prove attorneys’ fees. Scott Bader, Inc. v.

Sandstone Prods., Inc., 248 S.W.3d 802, 816 (Tex. App.—Houston [1st Dist.] 2008, no pet.).

“When attorney’s fees are assessed as sanctions, no proof of necessity or reasonableness is

required.” Id. at 817 (quoting Miller v. Armogida, 877 S.W.2d 361, 365 (Tex. App.—Houston

[1st Dist.] 1994, writ denied)). Therefore, we cannot conclude the award of sanctions was

improper based on insufficient evidence.

Hoskins also argues the trial court abused its discretion in awarding monetary sanctions

because there was no direct relationship between the discovery abuse and the sanction imposed.

Specifically, Hoskins maintains that its former counsel, Leitch, was solely responsible for the

alleged discovery abuses. Hoskins argues that, of the discovery abuses cited, the only abuse that

Prize and the Rutherfords allege Hoskins should have known about was the meeting between

Leitch, Cliff Hoskins, and Rick Rudolph. The other alleged abuses involve Hoskins’ attendance

at depositions, where he merely obtained knowledge of Leitch’s improprieties that had already

occurred.

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The trial court must at least attempt to determine whether the offensive conduct is

attributable only to counsel, only to the party, or to both. Paradigm Oil, Inc. v. Retamco

Operating, Inc., 161 S.W.3d 531, 537 (Tex. App.—San Antonio 2004, pet. denied) (citing

TransAmerican, 811 S.W.2d at 917). Although a party should not be punished for counsel’s

conduct in which the party is not implicated apart from having entrusted its legal representation

to counsel, a party must bear some responsibility for its counsel’s discovery abuses when it is or

should be aware of counsel’s conduct and the violation of the discovery rules. Paradigm, 161

S.W.3d at 537. Ultimately, the sanction imposed by the trial court must relate directly to the

abuse found. Id.

Here, Prize and the Rutherfords presented some evidence that Hoskins was at least aware

of Leitch’s misconduct. In his own deposition, Hoskins admitted that he authorized the letters

sent by Leitch to nonparties on false letterhead as part of the investigation Leitch was

conducting. Additionally, Hoskins verified interrogatory answers which sought information

about Leitch’s misconduct. Hoskins was also put on notice of Leitch’s improper conduct

because co-counsel was copied on Prize’s counsel’s communications to all counsel of record

complaining of Leitch’s improper conduct. We conclude the record supports the trial court’s

finding that Hoskins, not just Leitch, should be sanctioned. Thus, there was a direct relationship

between Hoskins’ conduct and the resulting sanctions.

Finally, Hoskins maintains that the award of $100,000 to each group of defendants was

unreasonable, excessive, unrelated to the alleged discovery abuse, and constitutes an

impermissible penalty. Reviewing the record as a whole, we conclude the trial court’s order

meets both parts of the test for a “just” sanction based on the discovery abuse by Leitch.

Leitch’s actions violated Texas Disciplinary Rules of Professional Conduct 4.01, 4.03, 4.04, and

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8.04. 32 See TEX. DISCIPLINARY R. PROF’L CONDUCT 4.01(a), 4.03, 4.04, 8.04(a)(3), reprinted in

TEX. GOV’T CODE ANN., tit. 2, subtit. G app. A (West 2005). Such conduct involved an effort to

taint and obstruct the discovery process by way of witness tampering, misrepresentation of

counsel’s identity, securing documents under false pretenses, contacting represented witnesses in

the absence of their counsel, and falsely threatening witnesses with criminal prosecution. As

discussed earlier, these actions were known to Hoskins, who continued to retain Leitch until

Leitch was disqualified by the trial court. Given this egregious conduct, counsel for Prize and

the Rutherfords testified that a reasonable monetary sanction would be in the range of $300,000

to $500,000. The trial court declined to grant death penalty sanctions, and instead awarded

sanctions in the amount of $100,000 to both Prize and the Rutherford. We hold that based on

this record, the trial court did not abuse its discretion in assessing $200,000 in sanctions for

discovery abuse. Accordingly, we affirm the portion of the trial court’s judgment imposing

sanctions against Hoskins.

BANK OF AMERICA’S CROSS-APPEAL

Finally, on cross-appeal, Bank of America challenges the summary judgment granted in

favor of Prize and the Rutherfords “on all claims by Bank of America, N.A., as Trustee of the

Baker Trusts, including claims of fraud and rescission of the Ratification.” The Bank also

32 Rule 4.01 provides: “In the course of representing a client a lawyer shall not knowingly: (a) make a false statement of material fact or law to a third person.” TEX. DISCIPLINARY R. PROF’L CONDUCT 4.01(a).

Rule 4.03 provides: “In dealing on behalf of a client with a person who is not represented by counsel, a lawyer shall not state or imply that the lawyer is disinterested. When the lawyer knows or reasonably should know that the unrepresented person misunderstands the lawyer’s role in the matter, the lawyer shall make reasonable efforts to correct the misunderstanding.” TEX. DISCIPLINARY R. PROF’L CONDUCT 4.03.

Rule 4.04 provides: (a) In representing a client, a lawyer shall not use means that have no substantial purpose other than to embarrass, delay, or burden a third person, or use methods of obtaining evidence that violate the legal rights of such a person. (b) A lawyer shall not . . . threaten to present: (1) criminal or disciplinary charges solely to gain an advantage in a civil matter.” TEX. DISCIPLINARY R. PROF’L CONDUCT 4.04.

Rule 8.04(a)(3) provides: “A lawyer shall not engage in conduct involving dishonesty, fraud, deceit or misrepresentation.” TEX. DISCIPLINARY R. PROF’L CONDUCT 8.04(a)(3).

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challenges the trial court’s assessment of Prize’s and the Rutherfords’ costs of court against the

Bank.

I. Summary Judgment on the Bank’s Claims

(1) Relevant Factual Background. As previously discussed, the Baker Lease

terminated in August 2001 due to cessation of production for more than sixty consecutive days;

the Bank, however, was not aware that the Baker Lease had expired. In 2004, Cliff Hoskins

informed BP that he had information indicating that the Baker Lease, the El Paso Lease, and the

JOA had expired. BP then alerted Prize that it had “received information indicating that . . .

there may have been no production from the [Leased] Property between June 2001 and April

2002 and that reports filed with the Texas Railroad Commission did not properly reflect such

cessation of production.” BP requested specific documents to determine the current status of the

JOA, but Prize refused, maintaining that “there has been continuous production.” Prize advised

BP to check production records filed with the Texas Railroad Commission.

In January 2005, attorneys for Hoskins sent Prize a demand letter claiming that the Baker

Lease, the El Paso Lease, and the JOA had expired in August 2001 because “there has not in fact

been continuous production (or Operations to restore same) either in paying quantities or

otherwise in excess of at least one 60 day continuous period . . . .” Hoskins’ demand letter also

alleges that Prize concealed the expiration of the Leases and the JOA “by

manipulating/fabricating production information and gas and condensate sales, and Revenue and

Royalty information and by misrepresenting production information and gas and condensate

sales information . . . .”

Prize then amended production reports (“P-2s”) it had filed with the Railroad

Commission in 2001. The amended P-2s, filed in 2005, reflect a reduction in the amount of gas

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produced (measured in a thousand cubic feet of natural gas, abbreviated as “Mcf”) on the Baker

Well No. 6 for June 2001 and on the Baker Well No. 4 for July 2001. The differences between

the two reports are summarized below:

P-2s filed in 2001 P-2s amended in 2005

Baker No. 6 Baker No. 4 Baker No. 6 Baker No. 4

June 2001 1050 Mcf 0 Mcf June 2001 80 Mcf 0 Mcf

July 2001 1050 Mcf 1085 Mcf July 2001 1050 Mcf 0 Mcf

The 80 Mcf of gas reported for the Baker Well No. 6 in the amended report was attributed to

field use (70 Mcf) and a venting/flaring operation (10 Mcf).

On January 25, 2005, Hoskins filed suit to quiet title against Prize. As noted, supra, BP

later joined the suit as a plaintiff, also asserting that the Leases and JOA expired in 2001. Also

on January 25, 2005, the Rutherfords, acting for themselves and for Prize, approached the Bank,

and requested that it sign a ratification of the Baker Lease. Rutherford representatives Mike

Rutherford, Dave Lewis, and Jack Chenowith met with Penny Judge, a Bank property manager,

to discuss the proposed ratification. The Rutherford representatives told Judge that Hoskins’

threatened lawsuit was frivolous, but that even the threat of such a suit would cause them to stop

development on the property, putting it at risk of drainage. Judge requested documentation

demonstrating that the Baker Lease had not expired.

In response to her request, Mike Rutherford sent Judge a letter on February 2, 2005

attaching the Hoskins demand letter, a second letter from Hoskins’ attorneys, and production

data, including P-2s and gauge reports for the Baker Well No. 6. 33 In Rutherford’s letter to

33 Mike Rutherford testified he obtained the P-2s and gauge reports from Prize and that Prize knew they would be given to the Bank as part of the ratification negotiation.

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Judge, he asserts that the Baker Lease did not terminate for cessation of production in 2001 for

the following reasons:

(a) the [Hoskins] Demand Letter ignores actual physical production of gas during the period in question, (b) the Demand Letter relies heavily on the lack of reported ‘sales’ of gas during June and July 2001, which we are informed by Prize may be explained by mechanical conditions affecting the gas purchaser’s gas metering equipment that was installed on the Lease at the time, (c) any failure to produce constituted a temporary cessation of production, not a permanent cessation, (d) the Demand Letter misstates the legal effect of a temporary cessation of production under the Lease (and the other leases), even if one assumed that a cessation of production occurred for any duration, and (e) assuming that the Lease did terminate in mid-2001 (which we deny), the owners of the Lessee’s interest under the Lease would have in any event acquired a limitations title to the leasehold estate.

Rutherford’s letter concludes that Hoskins’ demand letter is simply an attempt to extort money

from Prize, and asserts that Hoskins’ allegation could harm the Baker Trusts:

As we discussed with you, a suspension (or abandonment) of our drilling activities caused by the mere existence of the allegation set forth in the Demand Letter would expose [the Baker Property] to substantial drainage by offset operators and thus, any delay in our operations will permanently and adversely affect both the Working Interests Owners and the Baker Trusts.

In the letter, Rutherford also asserts the operators need assurance by way of a ratification that the

Baker Lease remains in effect in order to avoid suspension of drilling activities.

Rutherford’s letter goes on to explain the P-2s and gauge reports. He states that the

Baker Well No. 4 was shut-in for a swabbing operation in early April 2001; the operation was

not successful and the well was shut-in for further evaluation. He also states that the production

volumes from the Baker Well No. 6 were not fully registered by the gas metering equipment

during the relevant time period, and that Prize had confirmed that, “consistent with industry

practice, the ‘sales’ figures reported on the Forms P-2 and HPL’s meter figures and the ‘lease

use’ figures are estimates of the quantities of gas consumed on the Lease for the operation of

equipment and/or quantities lost to venting.” As for the gauge reports, Rutherford states in

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Attachment C, entitled “Production Data,” that “the No. 6 well was ‘shut-in for buildup’ for

much of June, all of July and the first half of August, but produced gas for a 3-day period in

June (June 15th through 17th). [T]hus, there was no cessation of production for more than sixty

consecutive days, as alleged in the Demand Letter.” (emphasis added). Lewis testified that he

and Chenowith went over the P-2s and gauge reports with Judge, and that they highlighted this

3-day period in June.

Judge took the ratification matter to her superior, Jeffrey Anderson, the Bank’s regional

team leader in the oil and gas asset management group. Judge expressed her concern to

Anderson that “if there was no ratification, . . . the operator would not drill wells and the

hydrocarbons couldn’t be drained so there would be no royalties” for the Baker Trusts. She

testified in deposition that the Bank’s chief concern was future development, but that the

possibility of drainage was also a concern. Judge viewed the ratification as the operator’s

“insurance policy” to justify spending a substantial amount of money to drill new wells. Judge

stated the Bank felt the Baker Lease had not terminated because the P-2s and gauge reports did

not show a cessation of production for more than sixty consecutive days and because the Bank

had been consistently receiving revenues. She stated that the Bank decided to sign the

ratification because of concerns over drainage and future development, and to receive $106,000

in consideration. Judge stated that had the Bank known that the Baker Lease had terminated, it

would have renegotiated a lease with a higher royalty. Judge acknowledged that the Hoskins

demand letter alleged that the Baker Lease had expired both because of a cessation of production

exceeding sixty days and because of a failure to produce in paying quantities, but she could not

recall discussing or investigating the paying quantities issue.

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Jeffrey Anderson also explained that the Bank did not pursue an investigation of the

paying quantities issue because it would not have been able to get the necessary expense

information from the operator. The Bank’s national trust oil and gas manager, Dick Sadler,

testified that most operators will not divulge their costs, and that in most cases the Bank would

assume there is production in paying quantities if it is receiving royalty payments. The Bank

confirmed that it had been receiving royalty checks and therefore thought there were sales.

Anderson further stated that the P-2s and gauge reports reflected production and that the Bank

received payments on production during the relevant time period. Anderson testified that the

Bank’s reasoning for signing the ratification included ensuring development of the property and

protecting against drainage.

In his deposition, Mike Rutherford testified he told Judge that the ratification was sought

as insurance to allow Prize and the Rutherfords to continue developing the property. He

acknowledged that he did not tell the Bank the following: that there was no production on the

Baker Wells from June 1, 2001 to August 13, 2001; that the Baker Lease had expired in August

2001; that the claimed venting of the Baker Well No. 6 did not occur; that Prize had paid

royalties on gas that was falsely reported; that Prize had filed false P-2s; or that Prize had filed

false production reports.

On February 14, 2005, the Bank executed the Stipulation and Ratification of Oil and Gas

Lease (“the Ratification”) tendered by the Rutherfords. The Ratification provides, in pertinent

part:

1. Each of the Baker Trusts and each of the Rutherfords (collectively, the “Mineral Owners”) hereby stipulates and agrees that (a) the Lease is currently in full force and effect and (b) the term of the Lease has been continuously perpetuated since April 23, 1971, by either (i) the production of oil and/or gas in paying quantities or (ii) operations, or both.

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2. Without limiting the foregoing, (a) each of the Baker Trusts hereby (i) ratifies and adopts the Lease insofar as it covers or applies to the Leased Premises and (ii) grants and leases the Leased Premises to the Lessees upon the terms and provisions set forth in the Lease, and (b) each of the Rutherfords hereby (i) ratifies and adopts the Lease insofar as it covers or applies to Survey 3 and (iii) grants and leases Survey 3 to the Lessees upon the terms and provisions set forth in the Lease.

3. Each of the Mineral Owners hereby waives and releases any and all claims that the Lease terminated prior to the date of execution of this instrument for any reason whatsoever.

After the Bank signed the Ratification, Hoskins amended its petition and named the Bank

as a defendant. 34 It was during the course of discovery proceedings related to that lawsuit that

the Bank learned that the Leases and the JOA actually had terminated in 2001, that the

representations on which it relied in signing the Ratification were false, and that Prize and the

Rutherfords knew those representations were false. Hoskins nonsuited its claims against the

Bank, and the Bank asserted affirmative claims against Prize and the Rutherfords, including a

request for a declaration that the Baker Lease terminated in August 2001. The Bank also sought

rescission of the Ratification on grounds including fraudulent inducement, mutual mistake, and

failure of consideration.

With respect to the fraudulent inducement claim, the Bank alleged that Prize and the

Rutherfords made the following misrepresentations:

(1) the Baker Lease did not terminate; (2) the Baker No. 6 Well was flared on June 15, 16, and 17, 2001; (3) flaring of the Baker No. 6 Well in June 2001 constituted production for purposes of the 60-day cessation of production clause in the Baker Lease; (4) there was no cessation of production for a period exceeding 60 days; (5) the Leased Property was at risk of substantial drainage if the Bank did not sign the Ratification; and (6) signing the Ratification would protect the Bank from the risk of drainage.

34 Burlington signed a similar ratification document concerning the El Paso Lease.

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The Bank also alleged that Prize and the Rutherfords failed to disclose that:

(1) Prize’s own internal documents show that no venting or flaring of the Baker No. 6 Well occurred in June 2001 and that there was a cessation of production for a period exceeding 60 days in the summer of 2001; (2) royalties paid in December 2001 for June 2001 were not based on actual gas sales but were based on gas that was purportedly vented into the atmosphere; and (3) taxes paid in 2002 for gas allegedly produced in June 2001 were not based on gas sales but were based on the alleged venting operation.

The Bank alleged that these misrepresentations and concealments were material, made with

knowledge of their falsity, or asserted recklessly without knowledge of the truth, were intended

to be relied upon and were relied upon by the Bank to its detriment.

Thereafter, Prize and the Rutherfords jointly filed a traditional and no-evidence motion

for summary judgment as to all causes of action asserted against them by Hoskins, BP, the Bank,

and Burlington. In the motion, they contend the Bank’s claims are precluded by the Ratification.

Further, the Bank’s claim that the Ratification was fraudulently induced fails because the alleged

misrepresentations concerning flaring and production were neither material or justifiably relied

upon by the Bank as a matter of law.

The Bank filed separate responses to the no-evidence and traditional summary judgment

motion, to which Prize and the Rutherfords filed a joint reply. In its interlocutory judgment

dated February 5, 2009, the trial court granted Prize’s and the Rutherfords’ motion for summary

judgment on all claims by the Bank, including its claims of fraud and rescission of the

Ratification. The court ordered that the Bank take nothing on its claims against Prize and the

Rutherfords. The trial court’s final judgment incorporated the interlocutory judgment and taxed

Prize’s and the Rutherfords’ costs against the Bank; the Bank was also ordered to bear its own

costs. The Bank timely filed its notice of cross-appeal.

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(2) Summary of the Bank’s Argument. The Bank asserts the record and the trial

court’s rulings establish that the basis for granting summary judgment against the Bank was the

trial court’s enforcement of the Ratification and its denial, as a matter of law, of the Bank’s claim

that the Ratification was fraudulently induced. On appeal, the Bank contends the trial court erred

in granting a take-nothing summary judgment on all of its affirmative claims because: (1) Prize’s

and the Rutherfords’ motion did not challenge each asserted ground for fraudulent inducement;

(2) Prize and the Rutherfords did not conclusively establish that the entire Ratification was not

vitiated by fraud; (3) Prize and the Rutherfords did not conclusively establish that their

misrepresentations concerning flaring and cessation of production were not material and that the

Bank did not justifiably rely on them; (4) the Bank raised a genuine issue of material fact on each

challenged element of the Bank’s claim for fraudulent inducement; and (5) the Bank raised a

genuine issue of material fact concerning Prize’s and the Rutherfords’ liability for trespass. 35

Additionally, the Bank contends the trial court abused its discretion in allocating all of Prize’s

and the Rutherfords’ court costs to the Bank.

(3) Fraudulent Inducement. On appeal, the Bank complains the trial court erred in

granting the defendants’ motion for summary judgment on the Bank’s claim for fraudulent

inducement. We review the summary judgment under the standard of review previously

articulated. Fraudulent inducement is a type of fraud claim that requires a showing that a false

material misrepresentation was made that (1) was either known to be false when made or was

asserted without knowledge of the truth, (2) was intended to be relied upon, (3) was relied upon,

and (4) caused injury. See Formosa Plastics Corp. USA v. Presidio Eng’rs & Contractors, Inc.,

960 S.W.2d 41, 47 (Tex. 1998); Am. Tobacco Co., Inc. v. Grinnell, 951 S.W.2d 420, 436 (Tex.

35 The Bank adopts the briefing by Hoskins on the issue of trespass and we previously addressed and overruled that issue in the section on trespass.

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1997). “Failing to disclose information is equivalent to a false representation only when

particular circumstances impose a duty on a party to speak, and the party deliberately remains

silent.” In re Int’l Profit Assocs., Inc., 274 S.W.3d 672, 678 (Tex. 2009) (orig. proceeding)

(citing Bradford v. Vento, 48 S.W.3d 749, 755 (Tex. 2001)).

In their traditional motion for summary judgment, Prize and the Rutherfords did not

contest that their representations to the Bank were false, that they were known to be false when

made or were made without knowledge of their truth, that they intended for the Bank to rely

upon them, or that the Bank’s reliance caused it injury, nor did they contend that they did not

have a duty to speak. Thus, for summary judgment purposes, these elements of fraudulent

inducement are not in dispute. Prize and the Rutherfords moved for summary judgment on the

Bank’s claim for fraudulent inducement on the grounds that, as a matter of law: (1) any

misrepresentation concerning flaring is not material and could not have been justifiably relied

upon because the Bank does not believe that flaring constitutes production; (2) any

misrepresentation that the Baker Lease had not expired due to a cessation of production for more

than sixty days is not material and could not have been justifiably relied upon because the Lease

could also have expired for failure to produce in paying quantities; and (3) the Bank not only

ratified the Baker Lease, but also entered into a new lease. We address each ground in turn.

A. Misrepresentations and Omissions Regarding Flaring

The Bank first contends Prize and the Rutherfords did not conclusively establish that

their misrepresentations and omissions concerning flaring were not material or that the Bank did

not justifiably rely on them. We agree.

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Materiality

A representation is “material” if “a reasonable person would attach importance to [it] and

would be induced to act on [it] in determining his choice of actions in the transaction in

question.” Citizens Nat’l Bank v. Allen Rae Invs., Inc., 142 S.W.3d 459, 478-79 (Tex. App.—

Forth Worth 2004, no pet.). Here, before signing the Ratification, Prize and the Rutherfords

represented to the Bank that flaring occurred on the Baker Well No. 6 in June 2001; Prize and

the Rutherfords now concede this statement was false. 36 Prize and the Rutherfords, however,

contend this misrepresentation is immaterial because the Bank did not believe that flaring

constitutes production. In support, Prize and the Rutherfords point to the deposition testimony of

Anthony Gatti, Burlington’s corporate representative, and Peter Huddleston, plaintiffs’ 37 retained

expert, as well as the Bank’s admission number 37. 38 However, the testimony of Burlington’s

corporate representative is no evidence of a belief held by a different entity, the Bank.

Additionally, although Huddleston opined that flaring is not production, there is no evidence that

he conveyed his opinion to the Bank at or before the time the Ratification was signed; in fact, the

record reflects that the Bank did not become his client until it “joined the proceeding,” which

was well after the Ratification was signed.

Finally, admission number 37 merely establishes that it is the Bank’s present belief that

flaring does not constitute production. A party’s knowledge of falsity before or at the time of

reliance is the only relevant inquiry in a fraud claim; knowledge gained after the fact cannot

36 As previously noted, in their motion for summary judgment, the Rutherfords and Prize conceded that “[f]or purposes of summary judgment, the court may assume there was no flaring” on the Baker No. 6 Well from June 2, 2001 through August 11, 2001; thus, it is established for summary judgment purposes that there was a cessation of production for a period exceeding sixty consecutive days; it is also established for summary judgment purposes that the Baker Lease terminated in August 2001. 37 Huddleston stated he was initially hired by BP, but also worked for Hoskins, Burlington, and the Bank. 38 In response to request for admission No. 37, the Bank admitted that flaring does not constitute “production” for purposes of the 60-day cessation of production clause in the Baker Lease.

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vitiate the fraud. Pankow v. Colonial Life Ins. Co. of Tex., 932 S.W.2d 271, 277 n.6 (Tex.

App.—Amarillo 1996, writ denied). The summary judgment record raises a fact issue that at the

time the Bank signed the Ratification, it relied on the written materials provided by Prize and the

Rutherfords which indicated that flaring is considered production sufficient to hold the Baker

Lease. Specifically, Mike Rutherford’s letter to Judge stated that the Baker Well No. 6

“produced gas for a 3-day period in June (June 15th through 17th)” 2001 and again in mid-

August; “thus, there was no cessation of production for more than sixty consecutive days, as

alleged in the Demand Letter.” This assertion is based on the production data, which shows

“flaring to tank” for the three days in question. Thus, Prize and the Rutherfords represented that

flaring constituted production sufficient to hold the Baker Lease. Both Judge and Anderson

testified that the Bank decided to sign the Ratification based on Rutherford’s assurance that the

Lease had not terminated; this assurance was based on the production data showing that there

had been no cessation of production (due to flaring). Hence, the misrepresentation regarding

flaring was material because it induced the Bank to sign the Ratification. See Citizens Nat’l

Bank, 142 S.W.3d at 478-79.

Reliance

Further, we cannot conclude that Prize and the Rutherfords established as a matter of law

that the Bank did not justifiably rely on the misrepresentations and omissions regarding flaring.

The issue of justifiable reliance is generally a question of fact. 1001 McKinney Ltd. v. Credit

Suisse First Boston Mortg. Capital, 192 S.W.3d 20, 30 (Tex. App.—Houston [14th Dist.] 2005,

pet. denied). Judge testified the Bank felt that the Baker Lease had not terminated because the P-

2s and gauge reports provided by Prize and the Rutherfords did not show a cessation of

production for more than sixty consecutive days and because the Bank had been consistently

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receiving revenues. She stated that had the Bank known the Baker Lease had terminated, it

would have renegotiated a lease with a higher royalty. Viewing the facts in the light most

favorable to the Bank, we conclude this evidence raises a fact issue regarding the Bank’s reliance

on the misrepresentations made by Prize and the Rutherfords.

B. Misrepresentations and Omissions Regarding Cessation of Production

Next, the Bank contends Prize and the Rutherfords did not conclusively establish that

their statements and omissions concerning cessation of production were not material or that the

Bank did not justifiably rely upon them.

Materiality is determined by examining whether a reasonable person would attach

importance to and would be induced to act on the information in determining his choice of

actions in the transaction in question. Reservoir Sys., Inc. v. TGS-NOPEC Geophysical Co.,

L.P., No. 14-09-00528-CV, 2010 WL 4467534, at *5 (Tex. App.—Houston [14th Dist.] Nov. 9,

2010, pet. filed); Am. Med. Int’l v. Giurintano, 821 S.W.2d 331, 338 (Tex. App.—Houston [14th

Dist.] 1991, no writ). “In the context of fraudulent inducement, it is well established that a

‘representation is material if it induces a party to enter a contract.’” Reservoir Sys., 2010 WL

4467534, at *5 (quoting Brush v. Reata Oil & Gas Corp., 984 S.W.2d 720, 727 (Tex. App.—

Waco 1998, pet. denied)). “Even if a misrepresentation is not a party’s sole inducement for

entering into the contract, it may still be material so long as the party relied on it.” Reservoir

Sys., 2010 WL 4467534, at *5.

In their motion for summary judgment, Prize and the Rutherfords claimed that their

misrepresentations regarding cessation of production were not material because (1) the Bank was

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aware of a claim that the Baker Lease had expired for failure to produce in paying quantities, and

(2) Prize and the Rutherfords made no misrepresentation concerning the paying quantities issue.

First, although the Bank was aware of the claim regarding paying quantities contained in

Hoskins’ demand letter, it was not the focus of Rutherford’s letter to Judge; rather, cessation of

production in excess of sixty days is the express reason Rutherford cites for Hoskins’ conclusion

that the Baker Lease expired. As previously discussed, however, Prize and the Rutherfords

assured the Bank that there was no validity to the cessation of production allegation, and

therefore induced the Bank to sign the Ratification. Clearly then, the misrepresentation

regarding cessation of production, regardless of the Bank’s knowledge of the paying quantities

claim, was material. See Citizens Nat’l Bank, 142 S.W.3d at 478-79 (representation is material if

a reasonable person would be induced to act on it in determining his choice of actions).

Second, we disagree that the summary judgment evidence establishes that Prize and the

Rutherfords did not make a misrepresentation regarding the paying quantities issue. Jack

Chenowith testified that when the Rutherfords asked the Bank to sign the Ratification, they

represented to the Bank that the Leases had not terminated. Such a blanket statement implicitly

indicates the Baker Lease did not terminate for any reason, including for failure to produce in

paying quantities. Additionally, the record contains evidence that Rutherford did not tell the

Bank that Prize paid royalty and working interest owners for gas that was falsely reported. Thus,

there is summary judgment evidence raising a fact issue that Prize and the Rutherfords concealed

that the Lease had terminated, both for cessation of production and for failure to produce in

paying quantities. Accordingly, we cannot conclude Prize and the Rutherfords established that

their misrepresentations regarding cessation of production were not material as a matter of law.

See Brush, 984 S.W.2d at 727.

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Moreover, we cannot conclude Prize and the Rutherfords conclusively established that

the Bank did not justifiably rely on their misrepresentations and omissions regarding cessation of

production. Although Prize and the Rutherfords contend that the Bank failed to investigate

whether the Baker Lease terminated for failure to produce in paying quantifies, the Bank was

justified in relying on Prize’s and the Rutherfords’ statements that the Lease had not terminated.

Prize and the Rutherfords were the operators and had superior access to the necessary production

and expense information. As Anderson testified, the Bank had no reason to disbelieve the

representation that the Baker Lease produced in paying quantities because the Rutherfords, not

the Bank, were the ones with access to such information. Again, justifiable reliance is generally

a question of fact. 1001 McKinney, 192 S.W.3d at 30. We therefore hold that based on this

record, Prize and the Rutherfords failed to establish that the Bank did not justifiably rely on

Prize’s and the Rutherfords’ misrepresentations and omissions as a matter of law.

(4) Fact versus non-actionable opinion. Prize and the Rutherfords attempt to justify

the summary judgment granted in their favor on the ground that they made only statements of

opinion. They portray the Bank’s fraudulent inducement claim as based on two representations

made by Mike Rutherford, both of which are non-actionable opinions: (1) that Prize and the

Rutherfords would ultimately prevail in litigation by establishing Hoskins’ claims were

meritless, and (2) that abandonment of drilling could expose the property to drainage by others. 39

39 In their briefing, Prize and the Rutherfords also assert there is no evidence they represented that the property subject to the Baker Lease would risk substantial drainage if the Ratification was not signed. Therefore, they argue the trial court properly dismissed this fraud claim. We disagree. The essence of the Bank’s claim regarding the drainage statement is that Prize and the Rutherfords used that statement to wrongly induce the Bank to quickly sign the Ratification. In that regard, the summary judgment evidence raises a fact question as to whether Prize and the Rutherfords made this statement, while concealing the fact that the Baker Lease had terminated due to non- production, in order to avoid the consequences of the terminating old lease and to prevent the Bank from negotiating a new, more favorable lease. Accordingly, the trial court erred in granting summary judgment on the Bank’s fraud

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We disagree with Prize’s and the Rutherfords’ attempt to recast and limit the Bank’s fraud claim

and their characterization of the statements at issue as mere opinion. As their pleadings and

summary judgment evidence reflect, the Bank alleged and presented evidence of more than two

misrepresentations and concealments of material fact. Furthermore, the Bank alleged Prize and

the Rutherfords made numerous discrete statements of fact. For example, the statement that the

Baker Well No. 6 “produced gas for a 3-day period in June” is an affirmative and discrete

statement of fact, not an opinion, which Prize and the Rutherfords now concede was false. See

Marshall, 288 S.W.3d at 444 (statements concerning continuous operations and no cessation of

operations for more than 60 days were factual representations, not mere opinions). Finally, even

statements of opinion are actionable if the opinion is “based on or buttressed with false facts,” if

the speaker knows the statement is false, or if the speaker purports to have special knowledge of

the facts or actually has superior knowledge of the facts. Transport Ins. Co. v. Faircloth, 898

S.W.2d 269, 277 (Tex. 1995). Here, the summary judgment evidence raises a fact question

sufficient to defeat summary judgment that Prize and the Rutherfords, as the working interest

owners of the wells in question, made false statements of fact to the Bank. See id. at 276

(“Whether a statement is an actionable statement of ‘fact’ or merely one of ‘opinion’ often

depends on the circumstances in which a statement is made.”).

(5) New Lease. Prize and the Rutherfords also moved for summary judgment on the

basis that even if the Ratification was procured by fraud, the Bank’s fraudulent inducement claim

must fail because the Ratification revived the Baker Lease. Prize and the Rutherfords contended

that paragraph 2(a)(ii) of the Ratification re-leased the property by providing that each of

Burlington, the Baker Trusts, and the Rutherfords additionally “grants and leases the Leased

claim as it relates to the drainage representation. See Grinnell, 951 S.W.2d at 425 (summary judgment improperly granted when genuine issue of material fact exists).

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Premises to Lessees upon the terms and conditions set forth in the [original] Lease. . . . ” Prize

and the Rutherfords assert that this “granting” language created new or renewal leases with the

same terms and conditions as the original leases, in the event the old leases had expired. We

reject this argument. Fraud as to the Ratification vitiates the entire agreement. “[Texas] courts

have consistently held that fraud vitiates whatever it touches. . . .” Stonecipher’s Estate v. Butts’

Estate, 591 S.W.2d 806, 809 (Tex. 1979). As discussed above, there is evidence in this summary

judgment record showing that the Bank would not have signed the Ratification as a whole but for

the material misrepresentations made by Prize and the Rutherfords and justifiably relied upon by

the Bank. As Judge testified, had the Bank known the Baker Lease had terminated, it would not

have signed the Ratification, but instead would have attempted to renegotiate a higher royalty.

Therefore, we conclude the mere fact that the Ratification contains renewal or revivor language

does not establish as a matter of law that the Bank was not induced to execute the Ratification by

Prize’s and the Rutherfords’ misrepresentations that the Baker Lease had not expired.

(6) Ratification and Waiver. Finally, in their briefing, Prize and the Rutherfords also

argue the Bank performed under the Ratification by signing division orders in 2006 and allowing

Prize and the Rutherfords to drill under the Baker Lease, thereby ratifying the agreement and

waiving any right to assert fraud as a ground to avoid or rescind the Ratification. However, these

contentions were not raised as grounds in the motion for summary judgment. TEX. R. CIV. P.

166a(c) (motion for summary judgment must “state the specific grounds therefor” and the issues

must be “expressly set out in the motion”); Stiles v. Resolution Trust Corp., 867 S.W.2d 24, 26

(Tex. 1993) (summary judgment cannot be affirmed on grounds not expressly presented in the

summary judgment motion, answer, or other response). Accordingly, we decline to consider

these contentions as a basis for affirming the summary judgment.

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Based on the foregoing, we sustain the Bank’s first issue on cross-appeal, and reverse the

granting of summary judgment on its claim for fraudulent inducement. Because enforcement of

the Ratification was central to all of the Bank’s claims for affirmative relief, we also reverse the

summary judgment granted on the Bank’s remaining claims for affirmative relief, and remand

the cause to the trial court for further proceedings. 40

II. Assessment of Costs

We additionally sustain the Bank’s second issue on cross-appeal because we agree that

the trial court erred in allocating all of Prize’s and the Rutherfords’ costs of court to the Bank.

Rule 131 of the Texas Rules of Civil Procedure provides that, “[t]he successful party to a suit

shall recover of his adversary all costs incurred therein, except where otherwise provided.” TEX.

R. CIV. P. 131. Rule 141 further provides that “the [c]ourt may, for good cause, to be stated on

the record, adjudge the costs otherwise than as provided by law or these rules.” TEX. R. CIV. P.

141. A “successful party” is “one who obtains a judgment of a competent court of jurisdiction

vindicating a civil claim of right.” Moore v. Trevino, 94 S.W.3d 723, 729 (Tex. App.—San

Antonio 2002, pet. denied).

While the trial court denied all of the Bank’s claims against Prize and the Rutherfords by

summary judgment based on its enforcement of the Ratification, the court also denied Prize’s

and the Rutherfords’ counterclaims against the Bank. Despite the fact that both parties were

partially successful, the trial court assessed all of Prize’s and the Rutherfords’ costs against the

Bank without stating on the record the reason for doing so. We conclude such an assessment

was contrary to Rules 131 and 141. Because the trial court abused its discretion in assessing all

costs against the Bank, San Antonio Housing Auth. v. Underwood, 782 S.W.2d 25, 27 (Tex.

40 Prize and the Rutherfords argue that the Bank must choose between rescission of the Ratification and damages for fraud. See Foley v. Parlier, 68 S.W.3d 870, 882 (Tex. App.—Fort Worth 2002, no pet.). Such an election, however, is not proper at this time, and will be determined in the trial court.

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App.—San Antonio 1989, no writ) (assessment of court costs is a matter within the sound

discretion of the trial court), we reverse the portion of the judgment assessing costs against the

Bank, and remand the issue of those court costs to the trial court for reconsideration.

CONCLUSION

Based on the foregoing analysis, we conclude the trial court’s judgment should be

affirmed in part, modified and affirmed in part, reversed and rendered in part, and reversed and

remanded in part, as follows:

1. We affirm the portion of the trial court’s judgment rendering declaratory relief on the

question of title;

2. We affirm the trial court’s grant of summary judgment in favor of Prize and the

Rutherfords on the claims of trespass;

3. We affirm the trial court’s calculation and award of damages to Hoskins and BP, with

the following exceptions:

(a) we sustain BP’s issue on cross-appeal challenging the in-kind payment and modify

the judgment to strike the last sentence of the last substantive paragraph of the judgment

permitting Prize and the Rutherfords to satisfy their obligations to account to Hoskins and BP

“by tendering their applicable share of gas in kind at the wellhead in lieu of payment;”

(b) we sustain the Rutherford Children’s issue challenging their liability for damages, and

modify the judgment to reflect that the damages award is not assessed against the Rutherford

Children; and

(c) we sustain the Rutherfords’ issue on joint and several liability, and modify the

judgment to delete the imposition of joint and several liability among all the defendants;

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4. We hold the trial court did not abuse its discretion in denying attorneys’ fees to the

parties, except that we sustain Hoskins’ and BP’s issue on cross-appeal and hold the court erred

in denying their request for attorneys’ fees and judgment is rendered that both Hoskins and BP

each recover $900,000 in attorneys’ fees;

5. We hold the trial court abused its discretion in awarding pre-judgment interest on the

damages award, and modify the judgment to delete the assessment of pre-judgment interest;

6. We affirm the trial court’s imposition of $200,000 in sanctions against Hoskins; and

7. We reverse the trial court’s grant of summary judgment on all the Bank’s claims, and

reverse the assessment of costs against the Bank, and remand to the trial court for further

proceedings on the Bank’s claims. In all other respects, the trial court’s judgment is affirmed.

Phylis J. Speedlin, Justice

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