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Wagner & Brown, Ltd. v. Sheppard

Supreme Court of Texas

December 5, 2007, Argued; November 21, 2008, Opinion Delivered

NO. 06-0845

Opinion

 [*420]  One observer has estimated that 85 percent of the 27,000 wells drilled in the East Texas oil field in the first half of the 20th century were unnecessary -- resulting in a huge waste of money and natural resources. 1 As one means of reducing excessive  [*421]  drilling, the Texas Legislature provided for voluntary pooling in 1949, 2 and compulsory pooling in 1965. 3 

Since then, this Court has never addressed how a pool of producing properties is affected if a lease in the pool expires. In this case, the courts below held that expiration of a lease removes those minerals from the pool and bars recovery of any costs incurred before termination. But the pooling agreement here did not depend on the continuation of underlying leases, nor was the equitable right of reimbursement for improvements necessarily extinguished by termination of the lease. Accordingly, we reverse and remand for further proceedings.

I. Background

Jane Sheppard, a CPA and retired family lawyer, owns 1/8th of the minerals underlying a 62.72-acre tract in Upshur County, Texas. 4 C.W. Resources, Inc. leased her 1/8th interest, and along with Wagner & Brown, Ltd. leased the other 7/8ths of the minerals from other owners. Sheppard's lease had a special addendum providing that if royalties were not paid within 120 days after first gas sales, her lease would terminate the following month. 5 

Sheppard's lease also authorized pooling with adjacent tracts. On September 1, 1996, C.W. Resources, Wagner & Brown, and mineral lessees on adjacent tracts signed a unit agreement pooling the Sheppard tract and eight others to form the W.M. Landers Gas Unit. 6 One month later, a gas well was successfully completed and began producing, and a second well was completed in September 1997. Both wells were physically located on the Sheppard tract, but pursuant to the unit agreement proceeds and costs were split among all the tracts in proportion to acreage.

The original unit agreement designated C.W. Resources as operator of the unit. In September 2000, Wagner & Brown took over that position, and discovered that Sheppard had not been paid royalties within 120 days of the first gas sales. Wagner & Brown offered Sheppard a new lease, but with two producing wells already on her property, she declined. The parties agree that Sheppard's lease terminated on March 1, 1997, and since then she has been an unleased co-tenant, entitled to her share of proceeds from minerals sold less  [*422]  her share of the costs of production and marketing.

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282 S.W.3d 419 *; 2008 Tex. LEXIS 1000 **; 52 Tex. Sup. J. 130; 179 Oil & Gas Rep. 106

WAGNER & BROWN, LTD. ET AL, PETITIONERS v. JANE TURNER SHEPPARD, INDIVIDUALLY AND AS INDEPENDENT EXECUTRIX OF THE ESTATE OF SYBIL TURNER, DECEASED, RESPONDENT

Subsequent History: Rehearing denied by Wagner & Brown, Ltd. v. Sheppard, 2009 Tex. LEXIS 343 (Tex., June 5, 2009)

Prior History:  [**1] ON PETITION FOR REVIEW FROM THE COURT OF APPEALS FOR THE SIXTH DISTRICT OF TEXAS.

Wagner & Brown, Ltd. v. Sheppard, 198 S.W.3d 369, 2006 Tex. App. LEXIS 6112 (Tex. App. Texarkana, 2006)

CORE TERMS

lease, termination, pooling, costs, drilling, tract, mineral, reimbursement, co-tenant, equitable, expenses, expired, royalties, court of appeals, trial court, proceeds, lease termination, leased premises, good faith, Resources, leasehold, oil

Energy & Utilities Law, Pooling & Unitization, General Overview, Leases & Licenses, Contracts Law, Contract Interpretation, Oil, Gas & Mineral Interests, Federal Oil & Gas Leases, Extensions & Terminations, Abandonment & Termination, Absolute & Qualified Ownership, Royalty Interests, Contract Formation, Pooling Clauses, Civil Procedure, Equity, Maxims, Real Property Law, Fixtures & Improvements, Business & Corporate Compliance, Contracts Law, Types of Contracts, Quasi Contracts, Estates, Concurrent Ownership, Tenancies in Common, Vigilance Principle, Standards of Performance, Substantial Performance, Construction Law, Pleadings, Counterclaims, Royalties, Governments, Courts, Judicial Precedent, Preliminary Considerations, Appeals, Standards of Review, Abuse of Discretion, Forfeiture Principle