Let’s proceed directly to the takeaways from Fort Apache Energy, Inc. v. Short OG III, Ltd., et al, a Southern District of Texas bankruptcy court opinion. (Gray Reed partners Jim Ormiston and David Leonard represented Short OG III)
The other guy’s operations will not extend your lease beyond the primary term
Texas law does not allow an oil and gas lessee to rely on a cotenant’s production to extend the term of the lease. Fort Apache and Short et al owned competing leases on 112 acres in Tyler County. The Southern Star lease expired because Fort Apache did not operate on the land during the primary term and could not rely on its lack of operations to extend the lease. Fort Apache testified that it was not economically viable to drill its own well on already developed land and it had no intention to develop the lease. The fact that an operation is uneconomical is not a reason to justify a lack of production. As cotenant Fort Apache had equal rights and access to produce.
If you sue me, I have standing to assert lease expiration
Fort Apache argued without success that Short et al lacked standing to challenge a motion for summary judgment on expiration of the Southern Star lease because they were not third-party beneficiaries or contracting parties. Their standing was derived from their defense against Fort Apache’s trespass claim.
No trespass by a cotenant
A cotenant has the right to possess land to extract minerals and only owes an accounting of the proceeds less reasonable costs in production and marketing. Short et al, as owners of a competing lease, did not trespass because they were cotenants. Fort Apache’s trespass claim failed because it did not offer evidence to show that Short et al dispossessed it from the land.
Reliance on repudiation?
A lessee who never intends to drill a well cannot rely on its lessor’s repudiation of an oil and gas lease.
Background
In this limited space I will try (sub-optimally) to do justice to the maze of facts and events behind this ruling. Let’s just say, generally speaking, the following happened:
Hranivitz, Sr. and McBride each owned half of the land and signed competing leases. People died. Their descendants and successors signed some leases and ratified others, some with authority and some without, some timely and some not. More people died, leading to a legal tug of war over who had legal title to the property and the right to dispose of it: the administrator of the estate or the testamentary trustee?
Fort Apache sued alleging seven assorted causes of action: Short et al counterclaimed.
Working interest owner (with Short et al) Aztec filed for bankruptcy. The working interest owners’ counterclaims and third-party claims are still pending in an adversary proceeding.
The Bankruptcy Court issued an opinion that the Southern Star lease was superior to the Miller lease and ratification of the Miller lease was void, but at the time the prevailing lease might have expired.
Conclusion, for now
Short et al’s claim for expiration of the Southern Star lease prevails. Because Fort Apache never conducted operations on the lease after trying and failing to negotiate a joint development agreement with Short et al., the lease expired. Fort Apache’s partial summary judgment motion on trespass is denied.
Your musical interlude.
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