Background and Lease History
In this lease termination case (Pruett v. River Land Holdings, LLC, No. 03-22-00478-CV, 2024 WL 1745652, at *1 [Tex. App.—Austin Apr. 24, 2024, no pet.]), the Austin Court of Appeals was tasked with examining a cessation of production clause. Specifically, on May 27, 1976, the original lessors executed an oil and gas lease (“1976 Lease”) covering a 550-acre tract in Milam County, Texas, with a primary term of three years and a secondary term contingent on production or operations continuing without a cessation of more than sixty consecutive days. In 2001, Stephen Pruett (“Pruett”) and his company Jet-Tex Oil and Gas, LLC (“Jet-Tex”) purchased a 323-acre tract of the leased property, while his parents purchased an adjacent 194-acre tract. Shortly thereafter, Pruett began operating certain wells identified as the “RRC #02894 Wells” on his tract. In March 2021, River Land Holdings (“River Land”) purchased the 194-acre tract from Pruett’s mother, with the deed expressly reserving rights under the 1976 Lease only to the extent the lease remained viable. Following this purchase, River Land sought a declaratory judgment that the 1976 Lease had terminated, arguing that production ceased between 2006 and 2012 and alternatively that production had not occurred in paying quantities. Pruett responded that he self-produced oil from the wells during this period using portable equipment. River Land also argued that Pruett was judicially estopped from claiming the lease was valid due to inconsistent positions taken in a 2008 lawsuit involving another operator.
Cessation of Production and Paying Quantities
Regarding the cessation of production argument, the appellate court noted that a party claiming that a lease has terminated under a cessation-of-production clause is required to prove “that (1) there has been a total cessation of physical production for a period longer than that permitted in the lease’s cessation-of-production savings clause (here, sixty days), and (2) no other savings provision sustains the lease.” Notably, there was no dispute that there was no physical production between 2006 and 2012 as to most of the wells under the 1976 Lease and that the Railroad Commission’s (RRC) production records accurately reflect that fact. Pruett instead argued that he self-operated and produced oil from the RRC #02894 Wells during this period using portable generators and stored the oil in tanks, providing an affidavit and supporting evidence, including a deed showing he acquired rights to the wells in 2001, gauge reports of production, and theft reports explaining missing stored oil. River Land challenged the credibility of Pruett’s evidence, asserting that he was not the operator of record during this time and therefore any production was illegal and could not sustain the lease. However, the court rejected this argument, holding that the RRC’s operator records are not dispositive of property rights or leasehold interests and do not preclude Pruett’s claims of production. Thus, the court found genuine issues of material fact regarding whether there was a total cessation of production under the lease.
As for the cessation of production in paying quantities argument, the court noted that River Land had the burden of establishing that “(1) that the well fails to pay a profit, even a small one, over operating expenses, and (2) that under all the relevant circumstances, a reasonably prudent operator would not have continued to operate the well in the manner in which it was being operated for the purpose of making a profit and not merely for speculation.” River Land argued that the RRC’s records show that the 1976 Lease terminated under the habendum clause due to a failure of production in paying quantities. River Land argued that Pruett was not the operator of record during the relevant period and that any self-production by Pruett could not qualify as “production in paying quantities” because the oil was not marketable under RRC regulations. Pruett claimed that he acted as a reasonably prudent operator by determining that the well could be profitable if reworked and by producing oil as soon as it was feasible. He also advocated for a definition of profitability that accounted for operations after Jet-Tex became the operator of record in 2012. The court held that River Land failed to provide evidence defining a reasonable timeframe for measuring profitability or showing that the wells were unprofitable during that period. Additionally, River Land presented no evidence that a reasonably prudent operator would not have continued operations under similar circumstances. Thus, the court found genuine issues of material fact regarding whether production ceased in paying quantities.
Judicial Estoppel and Court Ruling
Finally, as to judicial estoppel, River Land argued that Pruett was judicially estopped from asserting that the 1976 Lease remained valid because, in a 2008 lawsuit, he had sought a declaration that the lease had terminated and that another party, L.C. Smith, held no rights to the wells. The appellate court noted that judicial estoppel prevents a party from taking inconsistent positions in judicial proceedings to gain an unfair advantage only if the party successfully maintained the prior position. Because there was no evidence that Pruett prevailed in that lawsuit or that a final judgment was issued declaring the lease terminated, the court concluded that River Land had failed to conclusively prove judicial estoppel.
For these reasons, the appellate court concluded that the trial court erred in granting summary judgment.
