Samson Lone Star Limited Partnership, N/K/A Samson Lone Star, L.L.C. v. Charles G. Hooks, III, Individually and as Independent of the Estate of Charles G. Hooks, Jr., as Trustee of the Scott Ira McKeever Trust and the David Wayne McKeever Trust, and on Behalf of Chas. G. Hooks & Son, a General Partnership

• Court: Court of Appeals of Texas
• Decided: August 25, 2011
• Docket: 01-09-00328-CV
• Status: Published

Opinion

Opinion issued August 25, 2011.

In The

Court of Appeals

For The

First District of Texas

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NO. 01-09-00328-CV

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Samson Lone Star, Limited Partnership n/k/a Samson Lone Star L.L.C., Appellant

V.

Charles G. Hooks III, Individually and as Independent Executor of the State of Charles G. Hooks, Jr., as Trustee of the Scott IRA McKeever Trust and the David Wayne McKeever Trust, and on behalf of Chas. G. Hooks & Son, a General Partnership;McKeever Partnership, LTD; Charles G. Hooks III and Sue Ann Hooks, as Co-Trustees under the Will of Charles G. Hooks, Sr., Appellees

On Appeal from the 60th District Court

Jefferson County, Texas

Trial Court Case No. B173008-B

DISSENTING AND CONCURRING OPINION

It is undisputed that Samson drilled a directional well bottomed within the “buffer zone” established in the Hooks’ Jefferson County Lease (the “Lease”) and failed to elect between the three alternatives outlined in the Lease, thus exposing itself to liability for breach of contract.  If the Lease had allowed pooling, Samson could have solved the problem by pooling the lands covered by the Lease with the adjacent lands.  The Lease, however, did not allow pooling. 

Samson’s solution to this problem was to begin misrepresenting various “facts” to escape the consequences of its actions.  Its landman, Lanoue, filed papers with the Railroad Commission falsely certifying that Samson had pooling authority from the Hooks.  He later filed paperwork in the county’s real property records falsely indicating that the Hooks had already agreed to pool.  Lanoue then sent a letter to the Hooks asking them to agree to pool the westernmost 50 acres of the Hooks’ acreage in the Lease into the BSM 1 Unit.  When Charles Hooks called Lanoue and asked for more information about the well’s location, Lanoue represented to Hooks that the well was located approximately 1500 feet from the lease line, a location outside the buffer zone.  When Charles Hooks asked for a plat, Lanoue faxed him one that represented a bottom-hole location that was +/- 1400 feet from the lease line, the accuracy of which he, Lanoue, had certified with no reference to an actual bottom-hole location, although it was ascertainable from a prior directional survey.  Instead, when asked the origin of those measurements, he answered: “I got them from myself.”  On this basis the Hooks agreed to the formation of the unit.

Thus it is clear that Samson, through its representative, took action to cover up its own error by both oral and written misrepresentations to its lessor, born of “assuming” and “hoping.”  It is further clear that the Hooks, after asking for and receiving verification of Lanoue’s oral representation in the form of a plat, believed its lessee’s representations and made no attempt to go beyond them to discover the truth or falsity thereof.  On these facts, the majority has found that the discovery rule does not apply to the Hooks’ fraud, fraudulent inducement, and statutory fraud claims and that they are barred by limitations as a matter of law.

I reluctantly concur, based on the Texas Supreme Court’s holding in BP America Production Co. v. Marshall, 342 S.W.3d 59 (Tex. 2011).  In that case, the Texas Supreme Court makes clear that no lies on the part of a lessee, however self-serving and egregious, are sufficient to toll limitations, as long as it is technically possible for the lessor to have discovered the lie by resort to the Railroad Commission records.  This burden the Court imposes upon lessors is severe.  It is now a lessor’s duty to presume that any statement made by its lessee is false and to ransack the esoteric and oft-changing records at the Railroad Commission to discover the truth or falsity of its lessee’s statements.  If, as is often the case, these records are technical in nature and require expert review to ferret out the truth, it is the lessor’s job to hire experts out of its own pocket to perform such a review.  If a lessor fails to take these steps, then it will have failed in exercising reasonable diligence to protect its mineral interests and, if the lessee’s fraud is successful for longer than the limitations period, the lessor’s claims will be barred by limitations.

Such is the case here. Had the Hooks presumed that Samson’s oral representations, followed by written representations, about the bottom-hole location of the well were false, and had they hired an expert to resort to Railroad Commission records to trace the various filings (some of which were also false), that expert could have hit upon the directional survey and, by virtue of his expertise, interpreted it to prove the falsity of the representations.  Instead they merely relied on the oral and written representations of their lessee, without undergoing what doubtless seemed to them the useless expense of hiring an expert to rake through the Railroad Commission records with an eye towards exposing a potential falsehood. 

I believe the Texas Supreme Court has placed an unnecessary and very heavy burden on lessors by its ruling in BP America, one that will result either in much money being spent unnecessarily on prophylactic forensic review of Railroad Commission records or in many viable claims being lost to limitations.  As we are, however, bound to follow the Court’s rulings, I reluctantly concur in that part of the opinion that finds the Hooks’ fraud, fraudulent inducement, and statutory fraud claims barred by limitations as a matter of law.

I dissent, however, to that part of the majority’s opinion that sustains Samson’s challenge to the trial court’s findings concerning “unpooling” by amending a unit. 

Early in 2001, Samson drilled the Black Stone Minerals No. A-1 well (“BSM A-1 Well”) on a separate Samson lease. The mineral interests underlying this lease were owned 87.5% by Black Stone Minerals and 12.5% by FirnBank.

Because Samson was without contractual authority to pool pursuant to its leases with either Black Stone or FirnBank, it sought to negotiate with them for such a right.  Before such agreement, if any, was reached, however, Samson unilaterally concluded that both of the lessors were in agreement.  Pursuant to this unilateral conclusion, in March 2001, Samson filed a unit designation for a 704-acre unit called the Black Stone Minerals “A” No. 1 Gas Unit (the “BSM A-1 Unit”), which unitized the above-described leases as well as the Hooks’ Hardin County leases (the “Hardin County Leases”).  The designation recited that it was effective as of the date of first production.  Firnbank consented to the pooling in May 2001. Written consent to pool was also obtained from the Hooks.  The 87.5% interest owner, Black Stone Minerals, however, declined to consent. 

Samson drilled and completed the BSM A-1 Well and it began producing in June 2001 from the depth range of the BSM A-1 Unit as designated by Samson.  In December 2001, Samson finished another gas well (“Joyce DuJay No. 1 Well”) from the surface of the BSM A-1 Unit that was completed within the area and depth limits of the BSM A-1 Unit. In February 2002, Samson executed and recorded a designation for a Joyce DuJay No. 1 Gas Unit (“DuJay 1 Unit”) that recited an effective date as of first production of the DuJay No. 1 Well.  Although termed an “Amendment” of the BSM A-1 Unit, it designated a new, smaller, 570-acre unit with a different name, different leases, different depths and different boundaries than the BSM A-1 Unit.  The DuJay 1 Unit included some of the deeper strata of the BSM A-1 Unit, but excluded the horizon from which the BSM A-1 Well was producing.  Thereafter, the BSM A-1 Well was produced as a lease well, not included in any unit.  Subsequently, Samson drilled another DuJay well (“DuJay A-1”) and created a separate unit for that well (the “DuJay A-1 Unit”).  The DuJay A-1 Unit differed from the DuJay 1 Unit by depth limitation and acreage.  The Hooks’ Hardin County Leases were listed in all three unit designations:  the BSM A-1, the DuJay 1, and the DuJay A-1. 

Samson claimed that the DuJay 1 Unit was an “amendment” of the BSM A-1 and thus that the BSM A-1 Unit no longer existed.  In other words, it took the position that, because it failed to sign up all the other leaseholders in the BSM A-1 Unit, it could “de-designate” the earlier-designated BSM A-1 Unit.  If Samson was correct, it did not need to pay the Hooks for their proportionate share of the BSM A-1 Well; if not, it did.

The Hooks moved for summary judgment claiming that Samson had no authority to terminate or invalidate the BSM A-1 Unit and therefore had breached its lease contract by failing to pay the Hooks royalties on the BSM A-1 Well.  The trial court granted this motion.  Samson, in its sixth point, contends that the trial court erred in granting this motion (and in denying its own cross-motion). 

The majority opinion holds that, by accepting royalties from the DuJay 1 and DuJay A-1 Units, the Hooks “accepted” those units and thus, “[t]heir interest in the BSM A-1 unit was, therefore, terminated, and they are estopped to deny the validity of the unitization agreements for the DuJay 1 and DuJay A-1 as to their interest therein.”  The majority bases this decision on its conclusion that “a previously designated unit necessarily terminates upon the agreement of all the parties to the agreement to participate in a unit that is incompatible with the prior unit; and the parties who have consented to a new unitization of the same interests are estopped to deny termination of the prior inconsistent unit designation.”  The majority posits that accepting royalties from a unit the depth or acreage of which overlaps at all with any other unit amounts to a de facto agreement to terminate any earlier unit containing any part of the same depth or acreage.

The Hardin County Leases, however, contain no such limitations.  Instead, the Hardin County Leases give Samson the right to exercise pooling authority multiple times, “at any time and from time to time.”  The language of the leases neither limits this pooling authority to certain depths, nor states or implies that pooling is only valid when the multiple pools do not overlap at any depth.  To hold instead that the right to pool multiple times is limited to units that have no overlap is to imply a term in the contract that does not exist.  A court is not free to make contracts for parties, nor must it imply terms in a contract without exercising extreme caution.  See Universal Health Servs., Inc. RCW v. Renaissance Women’s Group, P.A., 121 S.W.3d 742, 747 (Tex. 2003).  The Texas Supreme Court has held that “terms are to be implied in contract, not because they are reasonable, but because they are necessarily involved in the contractual relationship, such that the parties must have intended them and must have failed to express them only because of sheer inadvertence or because they are too obvious to need expression.”  Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding, 289 SW.3d 844, 850 (Tex. 2009) (citing 11 Richard A. Lord, Williston on Contracts § 31:7 (4th ed. 1999)).  The rule set up by the majority is not one that is “necessarily involved” in the contractual relationship between a lessor and lessee and we ought not imply it.

If such a limitation to the right to accept royalties from multiple pools exists, then, it must exist as a matter of law.  The majority, however, cites no law for the proposition that accepting royalties from more than one unit covering some of the same depths and lands (termed “conflicting” units in the majority opinion) serves to terminate an earlier-designated unit.    

Instead, it is black-letter law that a lessee cannot unilaterally terminate a unit, once formed.  Good-faith pooling can be exercised multiple times.  Expando Prod., Co. v. Marshall, 407 S.W.2d 254, 259–60 (Tex. Civ. App.—Fort Worth  1966, writ ref’d n.r.e.) (citing Texaco, Inc. v. Letterman, 343 S.W.2d 726, 731 (Tex. Civ. App.—Amarillo 1961, writ ref’d n.r.e.).  The right to pool leases, however, does not mean the lessee can unilaterally terminate a unit that has a producing pooled well.  See Ladd Petroleum Corp. v. Eagle Oil & Gas Co., 695 S.W.2d 99, 106–07 (Tex. App.—Fort Worth 1985, writ ref’d n.r.e.).  When a lease provides that a lessee may dissolve a unit, once formed, when there is no “unitized substance” being produced from the unit, the lessee may not dissolve a unit as long as a well is still producing on it.  See Williamson v. Mobil Producing Tex. & N.M., Inc., 737 S.W.2d 917, 921 (Tex. App.—Beaumont 1987, writ denied) (“So, clearly, the lessee, if it is ‘after the discovery of the same,’ can change the pooling unit only subsequent to the cessation of production.”).

Here, no party argues that there was a cessation of production from the BSM A-1 Unit.  The only basis for finding that the BSM A-1 Unit was no longer valid is the majority’s holding that, by accepting royalty on “conflicting” pooled units, the Hooks accepted those units and thus their interest in the BSM A-1 Unit terminated and they are estopped to deny the validity of the unitization agreements for the DuJay 1 and DuJay A-1 as to their interests.  The majority cites three cases in support of this proposition.  See Cambridge Prod., Inc. v. Geodyne Nominee Corp., 292 S.W.3d 725, 732 (Tex. App.—Amarillo 2009, pet. denied); Ladd, 695 S.W.2d at 107; Whelan v. Placid Oil Co., 274 S.W.2d 125, 128 (Tex. Civ. App.—Texarkana 1954, writ ref’d n.r.e.).  None, however, actually supports the majority’s position.  Cambridge holds that a top-lessee, the rights of which derive from its underlying lessors, is estopped from taking the position that a unit is terminated when its underlying lessors had taken an inconsistent position by accepting royalties from the unit.  Cambridge, 292 S.W.3d at 732.  Ladd holds that “an unpooling could only come about through an agreement of the lessors, or through a cessation of production as provided for in the habendum clauses.”  Ladd, 695 S.W.2d at 107.  In Whelan, the Texarkana court found that parties that have accepted royalty pursuant to a unitization agreement are estopped from denying the validity of the unitization agreement.  Whelan, 274 S.W.2d at 128.     

All of these cases are distinguishable from the case at bar and none set up the rule that the majority asserts.  The Hooks do not deny that they have “consented” to the DuJay 1 Unit.  Instead, their position is that each of the units (the BSM A-1 Unit, the DuJay 1 Unit and the DuJay A-1 Unit) is independent of the other, and all could and did exist at the same time.  Samson did not exhaust its right to pool by designating the BSM A-1 Unit, so its later DuJay 1 and DuJay A-1 Units were also valid.  This position is consistent with the language of the pooling clause itself, which states that “[t]he above right and power to pool may be exercised at any time and from time to time.” 

The majority’s ruling creates a new limitation on pooling, one found neither in the language of the Hardin County Leases nor in case law, and one which has serious ramifications for the oil and gas industry.  I believe that this limitation is legally unsupported, unnecessary, and detrimental to the legitimate interests of both lessors and lessees. 

For the reasons set forth above, I dissent to the portion of the majority’s opinion sustaining Samson’s sixth issue.

                                                                   Jim Sharp

                                                                   Justice

Panel consists of Justices Keyes, Sharp, and Massengale.

Justice Sharp, concurring in part and dissenting in part.