Victory Energy Corporation, Smart Gas, LLC, and HCP Investments, LLC v. Oz Gas Corporation

461 S.W.3d 159, 2014 Tex. App. LEXIS 10348, 2014 WL 8045237
CourtCourt of Appeals of Texas
DecidedSeptember 17, 2014
Docket08-12-00248-CV
StatusPublished
Cited by21 cases

This text of 461 S.W.3d 159 (Victory Energy Corporation, Smart Gas, LLC, and HCP Investments, LLC v. Oz Gas Corporation) is published on Counsel Stack Legal Research, covering Court of Appeals of Texas primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Victory Energy Corporation, Smart Gas, LLC, and HCP Investments, LLC v. Oz Gas Corporation, 461 S.W.3d 159, 2014 Tex. App. LEXIS 10348, 2014 WL 8045237 (Tex. Ct. App. 2014).

Opinion

OPINION

YVONNE T. RODRIGUEZ, Justice

Appellants — three business associations that were purportedly assigned oil and gas leases on certain land in Crockett County — appeal the trial court’s partial grant of summary judgment and merits verdict naming Appellee Oz Gas Corporation as the true leaseholder of the disputed land and assessing damages against Appellants for bad faith trespass. We affirm.

BACKGROUND

Factual History

The Adams-Baggetl Ranch Leases

In 1974, Emma Lou Phillips Adams, Camille Adams Jones, and Jane Adams Gar-litz (collectively, “the Adams Family”) executed five oil and gas leases (“the 1974 Leases”) conveying mineral interests in certain tracts of land on the Adams-Bag-gett Ranch near Ozona to Chesapeake Bay Gas Gathering Company, an entity owned by Jane’s husband, C. Gary Garlitz. One such lease (“the Third Lease”) covered a 320-acre parcel of land known as the Eastern Half of Section 155 (“E/2 of Sec. 155” or “the Third Lease Estate”). 1 The lease agreement permitted drilling to a depth of 5,500 feet and set out a two-year primary term, with the lease continuing indefinitely “so long thereafter as oil, gas, casinghead gas, casinghead gasoline, or any of them is produced from said land.” Under the lease, either party was free to assign their lease rights at will, provided that in the event that the lessee assigns part of the lease to a third party that subsequently defaults on the agreement, “such default shall not affect this lease insofar as it covers a part of said lands upon which lessee or any assignee thereof shall make payment of said rentals.” Neither party in their briefs complains that Chesapeake in any way failed to drill wells and place those wells into production within the primary term as required by the Third Lease.

Relevant to this appeal is a 160-acre tract of land located on the southern half of the Third Lease Estate referred to by the parties as the Southeast Quarter of Section 155 (“SE/4 of Sec. 155” or “the Tract”). 2 Texas Railroad Commission records show that in February 1975, a well known as Adams 1-1155 — located on the Tract within the Third Lease Estate— began producing in paying quantities. At the time the parties executed the Third Lease, the Railroad Commission’s special field rules for oil and gas developments on the Adams-Baggett Ranch provided that *164 each proration unit 3 surrounding a single oil well was set at 320 acres. See Tex. R.R.Comm’n, In re: Adams-Baggett Ranch (Canyon Sand) Field, Crockett County, Texas, Docket No. 7C-60,233 (Sept. 8, 1970)(interim order). Later, in 1981, a second well known as Adams-14— located on the northern half of the Third Lease Estate (“the NE/4 of Sec. 155”) outside the Tract — also began producing in paying quantities. 4

The Commission later modified the Adams-Baggett field rules on August 30, 1982, by reducing the size of individual proration units around wells to 160 acres. See Tex.R.R.Comm’n, Final Order Amending Rule 2 of the Field Rules Adopted in Special Order No. 7-60,233 Issued Effective November 1, 1970, As Amended for the Adams-Baggett Ranch (Canyon Sand) Field, Crockett County, Texas, Docket No. 70-78,467 (Oil & Gas Div. Aug, 30, 1982). The modifications also allowed a well operator, at its discretion, to further subdivide a 160-acre pro-ration unit into two 80-acre “fractional” proration units. Id. Apparently pursuant to the special field rules, the Tract was sub-divided into two jigsaw-shaped, equal-sized eighty-acre units, with a well drilled on each unit respectively. Argee Oil Company operated an oil well (“Argee # 1-155” or “the Argee Well”) on the eastern eighty acres of the Tract (“the East Unit”) at the behest of Chesapeake. Crockett Gas, Ltd. — a company of which Gary Garlitz was the managing partner — operated another well (“Crockett 1-155,” “Adams 155-1,” or “the Crockett Well”) on the western eighty acres of the Tract (“the West Unit”). Both Crockett and Argee Oil filed forms with the Railroad Commission informing it of their respective claimed acreage within the Tract.

The Crockett Well on the West Unit was not seen as very productive, and from January 31, 1998, to September 2000, the well was shut-in with a bridge plug to prevent further production. As of April 28, 2011, the Argee 1-155 well has continued to produce hydrocarbons, save for a brief cessation of production in February 1992.

Mortgage of Chesapeake Leasing Interests and Default on Deed of Trust

In July 1986, almost twelve years after it signed the Third Lease, Chesapeake, acting through Garlitz, executed a $2.5 million promissory note to Abbott Laboratories that was personally guaranteed by Garlitz and secured by a deed of trust (“the- Deed of Trust”) on portions of the original 1974 Leases as listed in an attached exhibit, including Chesapeake’s interest in the the Tract (i.e. the SE/4 of Sec. 155, the southern half of the Third Lease Estate). In essence, Chesapeake mortgaged the Tract and other quarter-unit portions of the 1974 Leases to Abbott, agreeing to repay the advance in kind with *165 deliveries of natural gas. As part of the transaction, Abbott had attorney David Childress prepare a title opinion (“the 1986 Childress Title Opinion”), which confirmed Chesapeake’s interests in the Tract. In their briefs before this Court, neither party disputes that prior to the foreclosure sale, the original and entire leasehold estate created by the Third Lease was held open and in existence by production in paying quantities from the two wells located on the E/2 of Sec. 155, i.e. the Argee Well and the Adams-14 well located outside the Tract but still within the Third Lease Estate. 5

Chesapeake later defaulted on the agreement, although the specifics of how or when are unclear. In any event, Abbott assigned the promissory note and deed of trust to Detroit-Texas Gas Gathering Company. A flurry of litigation ensued against both Chesapeake and Garlitz in his personal capacity before Chesapeake filed for bankruptcy. Oz Gas Company later assumed Detroit-Texas’ interest in the leasehold estates while foreclosure had been stayed by the bankruptcy proceedings.

The Bankruptcy Settlement

On November 1, 1997, the bankruptcy trustee abandoned the Chesapeake properties subject to the Deed of Trust, placing them outside the aegis of the bankruptcy stay. Oz then began foreclosing on the Deed of Trust Property. Before Oz could complete foreclosure, however, Oz, Chesapeake, Garlitz, and certain members of the Adams Family then entered into a Settlement Agreement relating to the disposition of the rest of the mortgaged leases. As part of the settlement, the parties agreed, inter alia, to relinquish any claims they had to leases upon which Oz Gas had already foreclosed. The parties also agreed that Oz Gas would foreclose on the leaseholds listed in an appended Exhibit B in the future, including the Argee Well located on the “W/2 SE/4 § 155.” 6

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Cite This Page — Counsel Stack

Bluebook (online)
461 S.W.3d 159, 2014 Tex. App. LEXIS 10348, 2014 WL 8045237, Counsel Stack Legal Research, https://law.counselstack.com/opinion/victory-energy-corporation-smart-gas-llc-and-hcp-investments-llc-v-oz-texapp-2014.