Court Opinion

ID: 9683419
Source: CourtListenerOpinion
Date Created: 2023-08-24 13:28:18.028578+00
Date Added: 2024-06-11T18:17:47.730448
License: Public Domain

Justice JEFFERSON,
dissenting.
Because the Court evades a pressing issue in this case, I write separately. The Court characterizes the issue as whether the lessees acquired a fee simple determinable interest in the mineral estate by adverse possession and concludes that the court of appeals “erred in failing to hold that the lessees acquired leasehold interests by adverse possession.” This characterization bypasses the real issue — whether the leases terminated due to cessation of production. The parties have clearly presented and fully briefed this question, which is undoubtedly important to the jurisprudence of the State. Although the Court has devised an elegant solution in this particular case, the overarching legal question will surely recur in circumstances where adverse possession is not a viable defense.
The Court repeatedly disavows any intent to decide whether the leases in these cases terminated when production ceased. Instead, it concludes that the lessees acquired, by adverse possession, the same interest they held under the leases. Resolving the case in this way is premature. By deciding that the lessees acquired a leasehold interest by adverse possession without first resolving whether the leases actually terminated, the Court puts the cart before the horse. I suspect that future lessors will cite this case as implicit authority that a lease — whose profitable production is not in question-terminates on the sole ground that the lessee suspended operations temporarily to advance the lease’s profitability for all concerned.
The Court’s resolution of the case introduces a new twist on adverse possession that, at least on its face, divests a prior owner of property without the sort of notorious ouster we have previously mandated. Traditionally, adverse possession requires hostility. Killough v. Hinds, 161 Tex. 178, 338 S.W.2d 707, 711 (1960). In the cases the Court decides today, however, the lessees had permission to market and produce oil and gas on the lessors’ property. As a predicate to adverse possession, we have required the ostensible new owner to have given notice of its repudiation of the prior owner’s title. Id; Sweeten v. Park, 154 Tex. 266, 276 S.W.2d 794, 797 (1955). That the lessees resumed production after periods of temporary nonproduction, drilled a replacement well, erected signs on the property, and paid ad valorem taxes is not inconsistent with the rights they enjoyed under the lease. Both the lessees and lessors proceeded as though the leases were still in effect. Thus, the lessees’ possession was arguably permissive and not hostile.1 The Court concludes that the *203lessors here were on constructive notice of termination of their leases for the following reasons: (1) the former lessee remained on the property for a statutory period of time; (2) the former lessor did not receive the full portion of royalties it would be due if the lease were terminated; and (3) the former lessee continued to deplete the mineral resources of the property. But each of the factors would be status quo for the lessor/lessee relationship. Nothing in the Court’s reasoning indicates how the lessor should know that these activities differ from those undertaken while the lease was in effect. Without actual notice of cessation, and thus no notice of termination, the lessor would not be aware that the adverse possession period had begun. Such a rule would be difficult for any lessor, and particularly impossible where a royalty interest is split among multiple parties. I raise these concerns not to answer them here but to emphasize that we need not disturb our law on adverse possession to resolve the question squarely presented-whether the leases terminated upon a temporary cessation of production.
The record in these consolidated cases suggests that production ceased for short periods of time so that the lessees (and lessors) could benefit from higher winter prices. We should remand this cause to permit the trier of fact to determine whether a temporary cessation that furthers the economic interest of both lessors and lessees was reasonable under the circumstances.
I
The typical habendum clause in Texas mineral leases grants a lessee mineral rights to the leased land for a fixed primary term and, if the lessee begins production by the end of the primary term, for a secondary term that lasts “as long thereafter as oil and gas is produced.” The durational language in the habendum clause conveys a fee simple determinable estate in the secondary term, leaving the lessor with a possibility of reverter. W.T. Waggoner Estate v. Sigler Oil Co., 118 Tex. 509, 19 S.W.2d 27, 28-29 (1929); Stephens County v. Mid-Kansas Oil & Gas Co., 113 Tex. 160, 254 S.W. 290, 295 (1923). When, as here, there is no savings clause, we have held that periods of nonproduction during the secondary term automatically terminate the lease. Watson v. Rochmill, 137 Tex. 565, 155 S.W.2d 783, 784 (1941).
The primary object of an oil and gas lease is to “secure development of the property for the mutual benefit of the parties.” Garcia v. King, 139 Tex. 578, 164 S.W.2d 509, 512 (1942). But under the automatic termination rule, without a savings clause, cessation of production in the secondary term automatically terminates the lease, even if profitable production is later restored. Amoco Prod. Co. v. Braslau, 561 S.W.2d 805, 808 (Tex.1978); Watson v. Rochmill, 137 Tex. 565, 155 S.W.2d 783, 784 (1941). To mitigate the harshness of this automatic termination rule, courts “necessarily impl[y]” a “temporary cessation of production” (TCOP) doctrine. Midwest Oil Corp. v. Winsauer, 159 Tex. 560, 323 S.W.2d 944, 946 (1959); Watson, 155 S.W.2d at 784. The TCOP doctrine presumes that the parties understood that mechanical problems, reworking operations, or other similar events would inevitably interrupt production from time to *204time. 1 Smith & Weavee, Texas Law of Oil and Gas § 4.4(b) (1994). It also presupposes that the parties did not intend for such occurrences, which are incidental to normal oil and gas operations, to terminate the lease. Winsauer, 323 S.W.2d at 946; Sunray DX Oil Co. v. Texaco, Inc., 417 S.W.2d 424, 428 (Tex.Civ.App.-El Paso 1967, writ ref'd n.r.e.); 3 Williams & Mey-ees, Oil & Gas Law § 604.4 (2001). The doctrine gives lessees a reasonable period of time in which to remedy the defect and resume production. Winsauer, 323 S.W.2d at 946.
This Court recognized the TCOP doctrine in Watson v. Rochmill:
The strictness of the [automatic termination] rule has been modified where there is only a temporary cessation of production due to sudden stoppage of the well or some mechanical breakdown of the equipment used in connection therewith, or the like. Under such circumstances there are authorities which hold that the lessee is entitled to a reasonable time in which to remedy the defect and resume production.
155 S.W.2d at 784. Under this doctrine, the lessor must prove an actual cessation of production. The burden then shifts to the lessee to prove that the cessation was excused by the TCOP doctrine. Cobb v. Natural Gas Pipeline Co. of Am., 897 F.2d 1307, 1310-11 (5th Cir.1990); Bradley v. Avery, 746 S.W.2d 341, 343 (Tex.App.-Austin 1988, no writ); 1 Smith & WeaveR, Texas Law of Oil and Gas § 4.4(b) (1994).
We have applied a two-pronged test for determining whether a cessation of production falls under the TCOP doctrine and thus is legally excused from the automatic termination rule. Watson, 155 S.W.2d at 784; Cobb, 897 F.2d at 1309. The first prong focuses solely on the cause of the cessation. Watson, 155 S.W.2d at 784. Historically, under this prong, the lessee is required to prove that the cessation was due to a “sudden stoppage of the well or some mechanical breakdown of the equipment used in connection therewith, or the like.” Watson, 155 S.W.2d at 784. The second prong focuses on whether, under the circumstances,' the lessee exercised diligence to remedy the defect and resumed production within a reasonable period of time. Id; Cobb, 897 F.2d at 1309.
The court of appeals in this case applied the traditional interpretation of this doctrine. It first explained that because the lessors had established that there was a cessation of production and that the leases contained no applicable savings clauses, the lessees were required to prove that the cessation fell within the TCOP doctrine. Pool 1, 30 S.W.3d at 647; Pool 2, 30 S.W.3d at 626. The court then conducted its TCOP inquiry and stated that, “for a cessation to be temporary, not only must it be due to some mechanical breakdown or something similar, but production must resume within a reasonable time.” Pool 1, 30 S.W.3d at 648; Pool 2, 30 S.W.3d at 626. The court of appeals did not decide whether the lessees established that the reason for the stoppage was a mechanical breakdown or something similar, but instead “assumed” that to be the case. Pool 1, 30 S.W.3d at 648; Pool 2, 30 S.W.3d at 626. It then held, however, that the lessees failed to meet their burden to show that production was restored within a reasonable time. Pool 1, 30 S.W.3d at 648; Pool 2, 30 S.W.3d at 626. On that basis, the court of appeals affirmed the trial courts’ judgments regarding cessation of production. Pool 1, 30 S.W.3d at 648; Pool 2, 30 S.W.3d at 628.
The court of appeals, employing the traditional TCOP rule, did not consider factors other than a “mechanical breakdown or something similar” that could have caused the cessation; consequently, it did *205not review the extent to which economic factors may have excused a temporary cessation of production, or the relationship between those factors and the lessees’ diligence in restoring production. Thus, the court of appeals’ opinion, while it reflected a correct application of the current Texas TCOP doctrine, nonetheless disregarded evidence that the leases remained commercially profitable despite brief periods of nonproduction. As such, this case highlights the necessity for modification of the Texas TCOP doctrine to better reflect the fundamental purpose behind oil and gas leases.
II
It is true, of course, that any proposed modification of the TCOP doctrine will draw into sharp relief the divergence in economic interests that underscore oil and gas leases. Lessors generally urge strict construction of the doctrine because it affords either immediate financial benefits in the form of royalty payments or permits renegotiation of their lease on terms superior to the bargain initially struck. If, for example, an existing lease terminated due to cessation of production, the lessor would be free to renegotiate the lease and obtain significant monetary benefits including higher bonuses and increased delay-rental payments. See Nancy J. Forbis, The Shut-In Royalty Clause: Balancing the Interests of Lessors and Lessees, 67 Tex.L.Rev. 1129, 1135 (1989). Allowing a lease to continue despite a cessation of production, on the other hand, deprives lessors of the immediate and expected benefits of production and subjects the lease to potential drainage of oil and gas from beneath the land by producing wells on neighboring tracts. Id.
While lessors prefer a strict construction of the TCOP doctrine, lessees favor minimizing the circumstances under which their rights to production and marketing terminate. When a lease is terminated for non-production, the lessee forfeits not only its capital investment in the well, but also any profits that would have been realized over the course of the lease. In contrast to lessors, lessees are more willing to tolerate non-production in the short term to increase the well’s profitability over time. Lessees have argued in many jurisdictions that the temporary loss of a market for their product, or cyclical periods during which production is economically disadvantageous, justifies a TCOP that does not threaten the continued vitality of the lease. When determining the scope of the TCOP doctrine, we must consider these conflicting interests.
The TCOP doctrine recognizes that lessors and lessees have a mutual interest in maintaining a lease that produces in paying quantities. Under current Texas law, however, if there is nonproduction for a valid economic reason, the lease will nevertheless terminate and revert back to the lessor. See, e.g., Bachler v. Rosenthal, 798 S.W.2d 646, 650 (Tex.App.-Austin 1990, writ denied). This is so even though we judicially imply a right to continue the lease after a mechanical breakdown because the parties intended that the well be profitable. Such a narrow application of the TCOP doctrine is contrary to the primary function of oil and gas leases and the TCOP doctrine’s purpose. Our decisions limiting application of the doctrine have been described as narrow, disproportionately favorable to the lessor, arbitrary, inequitable, and harsh. See, e.g., Somont Oil Co. v. A & G Drilling, Inc., 310 Mont. 221, 49 P.3d 598 (2002) (Treiweiler, J. dissenting); Cotner v. Warren, 330 P.2d 217, 219 (Okla.1958).
This case provides an opportunity to adopt a more balanced approach, one that promotes the parties’ shared economic in*206terest while maintaining strong incentives for the lessees to avoid speculative interruptions in the production and marketing of oil and gas. Under the traditional TCOP doctrine, lessees would be required to produce even if it would be more beneficial to both parties to cease production for a short period while prices were depressed. Such a construction disregards the primary goal of oil and gas leases, whereas a more liberal construction effectuates the purpose of the lease. Construing the TCOP doctrine to apply to market-based interruptions in production — and not simply when there is a mechanical breakdown — comports with both parties’ financial interests and avoids an unnecessarily harsh result. The TCOP doctrine developed because courts recognized that breakdowns in equipment and reworking operations are bound to occur and cause a temporary cessation of production. Sunray DX Oil Co., 417 S.W.2d at 428. Courts also recognized that it would be patently unfair to terminate a lease when these events resulted in no actual production. Just as it is illogical to terminate a lease because of a mechanical breakdown, it is illogical to force a lessee to produce when the market penalizes production. Market fluctuations are as much a reality in oil and gas leases as broken equipment.
Here, there was some evidence that the lessees shut in their wells during the summer months when demand was slow in order to produce the maximum possible amount of gas in the winter, when prices were high. In these circumstances, deferred marketing of oil or gas could actually benefit the lessors as long as there is no drainage to other wells, no oil or gas is lost by ceasing production, and production is delayed only until the earliest possible point at which conditions for production are favorable. This approach permits both parties to realize greater profits and accomplishes the lease’s primary function— development of minerals for the parties’ mutual benefit. Garcia, 164 S.W.2d at 512-13. Thus, I would hold that the TCOP doctrine should be equally applicable to market-induced interruptions as it is to stoppages caused by mechanical or other physical events. •
In Watson v. Rochmill, this Court applied the TCOP doctrine to a two year and seven-month cessation. 155 S.W.2d at 784. Despite the fact that it was physically possible to extract oil, economic realities caused by the Depression were disincentives to production. Id. After stating the general TCOP rule, this Court concluded that the lease terminated because (1) the cessation of production, which lasted for two years and seven months, was not “temporary,” and (2) “[t]he cessation of production for this long period of time was not brought about nor induced by any mechanical breakdown or other condition in connection with the well or the equipment used in connection therewith.” Id. We noted that the “demoralized condition of the oil market ... in no wise prevented the operation of the well by the lessee for whatever oil it would produce.” 155 S.W.2d at 784. We also noted, however, that “[t]hese conditions may have rendered it unprofitable to operate the well” and could have been contracted against. Id. Thus, even though market conditions may have penalized production, we nonetheless required production to maintain the lease because the parties did not explicitly state in the lease that profits are preferable to losses. This was true even though we “necessarily implied” the TCOP doctrine into oil and gas leases to begin with. But the same rationale for implying the TCOP doctrine into oil and gas leases generally should apply here as well. Because the TCOP doctrine has proved workable in saving otherwise profitable leases from unwise termination, I would overrule Watson *207to the extent it precludes application of the TCOP doctrine to situations in which production is deferred temporarily due to lack of a market or to enhance the lease’s profitability for both the lessor and the lessee.
Other courts have adopted this reasoning and held that a temporary cessation of production caused by a lack of market does not terminate a lease. Stimson v. Tarrant, 132 F.2d 363 (9th Cir.1942); Hoff v. Girdler Corp., 104 Colo. 56, 88 P.2d 100 (1939). In Stimson, the lessee produced oil into the fifth year of the secondary term, when pumping ceased for lack of a market. 132 F.2d at 363. After the market became nonexistent, the lessee produced 900 barrels of oil. Thereafter, however, the wells were shut down for fourteen months when existing storage space was filled, and no other storage facilities were available. Id. The Ninth Circuit held that lack of production for fourteen months did not terminate the lease. Id. In reaching this determination, the court observed that there was no loss from drainage, there was no intention to abandon the lease, and the temporary cessation was “in the mutual interest of the parties.” Id.
A similar result was reached by the Colorado Supreme Court in Hoff v. Girdler Corp. In that case, the lessee produced helium gas during the primary term, but ceased production when the government, its primary customer, cancelled its contract. Hoff 88 P.2d at 101. The court noted that after the government cancelled the contract and production ceased, there was no commercial market for helium gas and that the lack of such a market was the cause of the cessation of production. Id. at 102. In analyzing whether the cessation of production was temporary, the court considered: (1) the lessee’s efforts to create a market for helium gas, (2) the fact that the lessee maintained its pipelines, and (3) absence of drainage by other wells in the vicinity. Id. The court held that when a producing well is developed during its primary term but the product is not marketed due to lack of a commercial outlet, that alone is not enough to conclude that the lessee abandoned the lease. Instead, the failure to market must continue for an unreasonably long period of time. Id.
At least one commentator suggests that “the concept of temporary cessation should be equally applicable to market-induced interruptions as it is to stoppages caused by ... mechanical ... events.” Thomas P. Battle, Lease Maintenance in the Face of Curtailed/Depressed Markets, 32 Rocky Mtn. Min. L. Institute § 14.06[2] (1986). Battle’s argument is based on the observation that “market fluctuations are as much a reality in the life of a lease as are physical upsets.” Id. While Texas case law has remained stubbornly hostile to that approach, Battle cites examples in which Texas courts have relaxed the doctrine in other contexts. He then suggests that “it is reasonable to believe that a Texas court might take a more liberal approach when a lessee is faced with market fluctuations.” Id. Like Battle, I believe that because our courts have already laid the groundwork for modifying the cessation doctrine, we should examine whether to add economic necessity to other existing chinks in the “automatic termination” armor.
In the past, this Court has implicitly applied the TCOP doctrine in a more liberal manner. Midwest Oil Corp., 323 S.W.2d at 945. In that case, gas production ceased for 174 days due to a combination of litigation between the lessor and lessee and mechanical breakdowns. 323 S.W.2d at 945. Despite the fact that causes other than mechanical difficulties or sudden stoppages contributed to the *208cessation of production, this Court concluded that the royalty interest had not terminated. Id. at 948. Had we narrowly construed the TCOP doctrine, the term royalty interest would certainly have terminated. Although the gas obstruction would have qualified as a permissible mechanical difficulty, litigation would not have been an acceptable excuse for cessation under a strict approach to the TCOP doctrine, especially when litigation was the initial cause of the cessation. See also Krabbe v. Anadarko Petroleum Corp., 46 S.W.3d 308, 315 (Tex.App.-Amarillo 2001, pet. denied)(applying TCOP doctrine to preserve lease in which production ceased temporarily due to litigation with buyer). Another example of the liberalization of the TCOP doctrine in Texas is H.R. Casey v. Western Oil and Gas, Inc., 611 S.W.2d 676 (Tex.Civ.App.-Eastland 1980, writ ref'd n.r.e.). In Casey, the lessee ceased production for two months, explaining the cessation on three grounds: (1) it was negotiating a new sales agreement with the gas company, (2) the gas company had disconnected its gas well and a gas compressor unit was required for reconnection, and (3) three electric pump motors had been stolen. Id. at 679. Quoting Watson, but apparently unconfined :by its language, the court of appeals concluded that the evidence regarding the causes of cessation, none of which could be classified as a mechanical breakdown or sudden stoppage, “support[ed] the trial court’s conclusion that [the lessee held] a valid oil and gas lease on [lessor’s] land.” Id. On that basis, the court of appeals held that the cessation of production was “temporary” and “did not result in automatic termination of the lease as a matter of law.” Id. at 680.
Courts are more likely to render judgments that are consistent with the'rationale for implying the TCOP doctrine in the first place-preservation of productive leases for the mutual benefit of both parties— if they are permitted to consider, among other things, whether production is wise under the prevailing economic circumstances.- Such consideration is inherent in the doctrine’s underpinnings. Garcia, 164 S.W.2d at 512-13. When evaluating whether a cessation is temporary, courts should first consider the cause of the cessation, which may include evidence of mechanical breakdown, litigation, or economic feasibility. The court should then consider other factors to determine the lessee’s diligence in resuming production, such as the length of the cessation and the lessee’s good faith. I note, however, that as there can be no set time period for determine whether there is production in paying quantities, there is no set time frame for judging when a cessation is “temporary.” See Clifton v. Koontz, 160 Tex. 82, 325 S.W.2d 684, 690 (1959) (“There can be no arbitrary period for determining the question of whether or not a lease terminated for the additional reason that there are various causes for ... a temporary cessation of production ”).
To protect lessors, we should place restrictions on what constitutes a valid excuse for temporary non-production. These protections already exist as implied covenants in existing leases and include the implied covenants to: (1) develop the premises, (2) protect the leasehold, and (3) manage and administer the lease. See Amoco Production Co. v. Alexander, 622 S.W.2d 563, 567 (Tex.1981). The implied covenants to market and prevent drainage, the requirement of production in paying quantities, and the policy against holding leases for speculation are included as part of these covenants. Forbis, 67 Tex. L.Rev. at 1146. Thus, a court should ensure that the lessee acts as a reasonably prudent *209operator in marketing the oil and gas,2 protecting against drainage,3 producing in paying quantities,4 and not retaining the lease merely for speculation purposes.5 Similarly, lessees “should not be able to claim a TCOP where they could have avoided any cessation by taking remedial actions at an earlier date.” Bruce M. Kramer, The Temporary Cessation Doctrine: A Practical Response to an Ideological Dilemma, 43 BayloR L.Rev. 519, 550 (1991). These requirements will help ensure that the lessee does not take unfair advantage of the lessor when production ceases. This approach not only furthers the purpose of oil and gas leases, it is also more consistent with the parties’ intent than the rigid application of the TCOP doctrine that Texas courts currently apply.
Ill
Due to the inequitable results that often ensue from application of a strict approach to the Texas TCOP doctrine, I would reject the Watson v. Rochmill formulation to the extent it forces the automatic termination of leases, in which profitable production is not in dispute, when there is a temporary cessation of production that furthers the economic interests of both lessors and lessees. Cessations of production should no longer be accorded temporary status only when they are caused by sudden stoppage or mechanical breakdown, but should permit the factfinder to weigh whether temporary nonproduction furthered the core function of the lease. This approach would ensure that Texas courts advance the policy behind implication of the TCOP doctrine in the first place — preservation of productive leases for the mutual benefit of both parties— while respecting that Texas oil and gas leases are determinable fees.
Today’s opinion threatens to disturb the delicate lessorfiessee relationship in oil and gas leases. By evading the TCOP issue, the Court opens the trial courts to novel litigation. Lessees will bring claims relating to old cessation issues and argue that they now adversely possess the entire mineral rights they once held only as lessee. While the Court purports to grant by adverse possession the same interest that was leased, it is unclear why a lessee who now owns the mineral rights, through adverse possession, would still be required to make royalty payments to a person who no longer owns the minerals that underscores the commercial lease relationship. The result is that rather than shut the door on new claims by avoiding the termination issue, the Court invites litigation over once-settled adverse possession jurisprudence. In the end, the Court’s stated goal of judicial economy is not met.
The Court suggests that it has no option to defer a decision on adverse possession because the lessees seek rendition on that issue. It cites Bradleys’ Electric, Inc. v. Cigna Lloyds Insurance Co., 995 S.W.2d 675, 677 (Tex.1999), but that case requires only the courts of appeals to resolve dis-positive issues, not the Supreme Court. While I agree that this Court should strive to render judgment when feasible, I do not agree that rendition is mandated when resolving the rendition point potentially causes more harm than good, and an opinion resulting in remand would settle an area of law that is in disrepair.
*210Accordingly, I would reverse both courts of appeals’ judgments and remand the cases to their respective trial courts for further proceedings consistent with this approach. For these reasons, I respectfully dissent.

. This view is consistent with that of other states. See Smith v. Graf, 259 Ky. 456, 82 *203S.W.2d 461 (1935); Lehmann v. Keller, 454 Pa.Super. 42, 684 A.2d 618 (1996)(possession under an oil and gas lease does not give rise to an adverse possession claim because the lessors consented to the lessee’s possession); see also 1 Kuntz, A Treatise on the Law of Oil and Gas § 10.5 ("The working of minerals by a lessee who also claims under a lease from the mineral owner is not adverse possession.”).

. Anadarko Petroleum Corp. v. Thompson, 94 S.W.3d 550, 559 (Tex.2003).

. Amoco Production Co. v. Alexander, 622 S.W.2d 563, 568 (Tex.1981).

. Gulf Oil Corp. v. Reid, 161 Tex. 51, 337 S.W.2d 267, 269 (1960).

. Garcia v. King, 164 S.W.2d at 513 (Tex.1942).