The recent emergence of resource plays, such as the Haynesville and Eagle Ford shales, that overlap mature, producing fields has prompted challenges from lessors as to the continued validity of oil and gas leases that are beyond their primary term, but are held by production from the older fields.

Lessees faced with these challenges will welcome the June 23, 2009, decision by the Amarillo (Texas) Court of Appeals in Cambridge Prod., Inc. v. Geodyne Nominee Corp., holding that the acceptance of royalties by certain lessors established quasi-estoppel as a matter of law. While Texas courts have previously applied the quasi-estoppel doctrine in other oil and gas contexts, this is the first Texas case to apply the doctrine to bar a lease termination claim in the context of acceptance of royalties.

The equitable doctrine of quasi-estoppel precludes a party from accepting the benefits of a transaction and then taking a subsequent inconsistent position to avoid corresponding obligations. Thus, if a lessor accepts royalty payments over a period of time, and subsequently claims that the pertinent oil and gas lease terminated during that period of time, there is now authority in Texas that the lessor may be estopped to claim such lease termination.

In Cambridge, Geodyne Nominee Corp. drilled a well in Section 39, which produced from subsurface depths of 14,364 to 14,372 feet. Geodyne subsequently filed a unit designation erroneously unitizing sections 33 and 39 from subsurface depths of 14,634 to 14,929 feet. The well drilled in Section 39 was the only well within the unit boundaries. The Section 33 lessors accepted their pooled share of royalties from the well for many years even though, in the absence of a valid unit, they would not have been entitled to any share in such production.

Several years later, Cambridge Production Inc. obtained top leases from the Section 33 lessors, and claimed that the previous leases covering Section 33 had terminated because there was no production either from Section 33 or from the applicable depths referenced in the unit designation. Geodyne's dispositive defense centered on the doctrine of quasi-estoppel.

The court applied quasi-estoppel against Cambridge, since its rights were derived from the Section 33 lessors. Because those lessors had accepted the benefit of royalties for several years, and would not otherwise have received any royalty, the court held that they could not assert a right inconsistent with their acceptance of such royalties. The court distinguished quasi-estoppel from equitable estoppel.

"While equitable estoppel requires proof of a false statement or detrimental reliance, quasi estoppel requires no such showing,” the appellate court ruled. “Rather, it precludes a party from accepting the benefits of a transaction and then taking a subsequent position inconsistent with one in which he acquiesced or from which he accepted a benefit."

Notes of caution To date, a petition for review in the Cambridge case has not been filed with the Texas Supreme Court; however, the time for filing has not yet expired.

In 1994, the Corpus Christi Court of Appeals held in Atkinson Gas Co. v. Albrecht that quasi-estoppel was not available to defeat the lessor's claim of lease termination. In that case, the lessor, in a single instance, accepted a royalty payment, a portion to which he was not entitled because it covered a period of nonproduction. A key distinction between that case and Cambridge, however, was that, prior to the acceptance of the royalty payment, the lessor had consistently and continuously maintained the position that he considered the lease to have terminated due to cessation of production.

The court held that quasi-estoppel requires that the position or conduct that is the basis for the estoppel (acceptance of royalty) must occur before the assertion of the position sought to be estopped (claim of lease termination). Because the lessor had claimed lease termination prior to his acceptance of the royalty payments, quasi-estoppel did not apply.

Additionally, in Cambridge, the lessors accepted royalties from production on other lands (albeit pooled with their land) as opposed to production from their leased acreage. While the Cambridge court did not make reference to this distinction, a lessor under a drill-site lease might attempt to distinguish Cambridge on these facts—the theory being that the drill-site lessor would be entitled to all of the production if the lease has terminated, and that the acceptance of a portion of such production is not inconsistent with the position that he is entitled to all of the production.

While there is no Texas authority to support this argument, courts in other emerging-resource-play states, such as Louisiana and Pennsylvania, have held that the mere acceptance of royalties from production on the lessor's acreage will not have the effect of depriving the lessor of the benefit of forfeiture provisions included within an oil and gas lease.

Conclusion The Cambridge case serves as favorable authority for lessees facing a lease-termination claim in Texas, where there has been a long period of acceptance of royalties by the lessor after the alleged lease termination occurred. Cambridge provides lessees with a precedent to assert quasi-estoppel as a defense to the lease-termination claim in such a situation. However, if a lessor first asserts that a lease has terminated and later accepts royalties, a prior Texas case holds that quasi-estoppel will not defeat the claim of lease termination.

As noted above, the time for filing a petition for review of Cambridge with the Texas Supreme Court has not yet expired.

--Michael J. Byrd, Louis J. Davis and Cody R. Carper

About the authors: Michael J. Byrd and Louis J. Davis are partners with law firm Baker & McKenzie LLP in its Houston office, and Cody R. Carper is an associate. Each focuses on oil and gas law. Byrd additionally focuses on acquisition finance. Byrd can be reached at 713-427-5021,; Davis, 713-427-5031,; and Carper, 713-427-5029,