Over a dissent, the Amarillo Court of Appeals has ruled that title to a non-operating working interest in a mineral lease may pass by adverse possession.
PBEX II, LLC; PBEX Operations, LLC; PBEX Operating, LTD; Word B. Wilson Investments, LP; Primero Energy, LLC; Chel-Trand Holdings, LLC; WPW Permian LLC; CBS Permian, LLC; and Torch Oil & Gas Company v. Dorchester Minerals, L.P. and Dorchester Minerals Operating, L.P. (No. 07-21-00212-CV; delivered April 28, 2023) arose from a somewhat complex set of facts involving a series of transactions dating back to the early 1980s. Torch’s predecessor-in-interest, Felmont, executed an oil-and-gas lease with the landowner to produce minerals from a Midland County tract and received a 25% working interest. Felmont subsequently entered into a JOA with other working interest owners in the tract, and one of them commenced production by drilling two producing gas wells. Torch acquired Felmont in 1989 and the following year conveyed its interest to Dorchester’s predecessor-in-interest, SASI Minerals and Baytech. Subsequently, the operator at the time, Sante Fe Minerals, issued a division order confirming the reduction of Torch’s interest to 0%.
For the next 26 years, Dorchester and its predecessors “performed all the functions of the Working Interest owner: paying their share of the costs of production; receiving revenues fromn the sale of the Working Interest’s share of gas; paying royalties to the lessors under the [lease]; and making elections required under the JOA.” During this time, Torch took no action to recover title. In 2016, however, Torch assigned other interests to PBEX and shortly thereafter sent a letter to Dorchester “stating Torch ‘mistakenly notified the operator [under the JOA] that TORCH had assigned its leasehold working interest in the [wells] to [Dorchester’s predecessors] in 1990, thereby allowing Dorchester’s predecessors to take ‘possession of Torch’s interest.’” The letter purported to cancel any prior authorization granted to Dorchester to possess the Working Interest, and Torch tried to negotiate a “correction” giving it back. Understandably uninterested in such an arrangement, Dorchester refused. In 2017 Torch filed suit for money had and received, constructive trust, and breach of contract. Dorchester countersued for trespass-to-try title by adverse possession and added PBEX as third-party defendant. It also asserted adverse possession as an affirmative defense to Torch’s claims and PBEX’s third-party counterclaims. The parties filed cross-motions for summary judgment. The trial court granted summary judgment to Dorchester and denied it to the plaintiffs. Torch and PBEX appealed.
In an opinion by Justice Yarbrough, joined by Chief Justice Quinn, the court of appeals affirmed. Dorchester claimed adverse possession under the 25-year statute of limitations. § 16.027, CPRC. The initial question was whether Texas law permits the acquisition of a non-operating Working Interest by adverse possession in the first place. Torch argued that since such an interest is “non-possessory” (e.g., a royalty interest), it cannot be so acquired. There is no question, the court observed, that “a working interest owner as a lessee under an oil and gas lease is granted the right to possess all of the oil, gas, and other minerals underlying the leased estate, subject to the payment of royalties to the lessor” (citation omitted). As the possessor of the mineral estate, therefore, the working interest owner’s interest, whether the owner is an operator or non-operator, is possessory and subject to adverse possession.
Having disposed of the threshold question, the court turned its attention to whether Dorchester established the elements of adverse possession. Torch contended that in order for adverse possession to trigger, there had to be a “hostile act,” in which case “Dorchester and its predecessors had to literally perform the drilling and production activities themselves.” The court rejected this argument on the basis that Dorchester performed every other act associated with ownership of the interest for 26 years, which was sufficient to establish adverse possession. The court relied on BP Am. Prod. Co. v. Marshall, 342 S.W.3d 59 (Tex. 2011) for the proposition that “[t]he test for establishing adverse possession, both between strangers and cotenants, is whether the acts unmistakably assert a claim to ‘exclusive ownership’ by the occupant.” 342 S.W. 3d, at 71. Torch further argued that Dorchester “may not rely on drilling and production by the operator for adverse possession” because the JOA contained a disclaimer of agency between the operator and non-operator working interests. The majority shot this down as well, noting that Dorchester was not a party to the JOA and that the operator and Dorchester could create an agency relationship outside the JOA. Even so, the court held, it didn’t matter anyway since in Texas adverse possession may be established through a tenant, who is not the landlord’s agent. “By ‘attorning to’ (a cool feudal law word connoting the acknowledgement by a tenant of a new landlord of the same property) Dorchester and its predecessors,” the court concluded, “the operator, like a surface tenant on behalf of a landlord claimant, adversely possessed the Working Interest on behalf of Dorchester and its predecessors for over twenty-five years.”
That brought the court to the question of whether Dorchester maintained continuous possession of the working interest for the requisite statutory period. Torch, as well as the dissent, argued that because one of Dorchester’s predecessors was in “non-consent” to actions the operator and other working interest owners had taken under the JOA, Dorchester’s possession was interrupted, which reset the clock. According to the JOA, a non-consenting owner was obligated to temporarily relinquish its share of production to the other interest owners. The court didn’t go for this, either, observing that: “(a) in order to be ‘non-consent,’ one must be recognized by the JOA as a working interest owner under the JOA; (b) the production share that was to be relinquished by contract had to be credited to Dorchester’s predecessor’s account; and (c) the relinquishment of production was not a relinquishment of title to the Working Interest” (citation omitted). In any event, the minerals continued to be depleted despite the temporary state of “non-consent,” as the court noted, “uninterrupted, for the exclusive benefit of Dorchester and its predecessors.” Moreover, Torch’s summary judgment evidence failed to show that the predecessor ever relinquished anything or that the agreement was enforced.
Finally, the court rejected Torch’s argument that temporal gaps in Dorchester’s summary judgment evidence was conclusory and raised a fact issue as to continuous possession. Pointing to an affidavit submitted by Dorchester setting out the hostile acts showing possession, the court held that the facts stated in the affidavit could have been controverted by other evidence (meaning that they were not conclusory statements). Torch did not adduce any such evidence but, rather, submitted an affidavit confirming some of those facts.
Once the court disposed of the adverse possession issue, the money had and received and constructive trust claims fell away. Its breach of contract, in addition, was time-barred and should have been filed by 1994. Consequently, Torch’s claim for attorney’s fees likewise fell by the wayside. In a brief dissenting opinion, Justice Doss argued that in order to acquire a mineral interest by adverse possession, one must “actually drill and produce minerals.” Second, he would have found that the predecessor’s non-consent under the JOA interrupted possession.
The fact of Justice Doss’s dissent puts this case in the realm of SCOTX review. Although we could be (and often are) wrong, however, it’s hard to imagine that these particular facts occur very often. It’s hard to imagine sitting on one’s rights for that long and not doing at least something to figure it out before limitations expires. But, as hard as it may be, that’s what happened, and both the trial court and court of appeals called it out.