State v. Reagan County Purchasing Co.

• Decision Date: 01 June 1944
• Docket Number: No. 4200.,4200.
• Parties: STATE et al. v. REAGAN COUNTY PURCHASING CO. et al.
• Court: Texas Court of Appeals

Page 128

186 S.W.2d 128

STATE et al. v. REAGAN COUNTY PURCHASING CO. et al.

No. 4200.

Court of Civil Appeals of Texas. El Paso.

June 1, 1944.

Rehearing Denied July 13, 1944.

Appeal from District Court, Travis County; J. D. Moore, Judge.

Action by the State against Reagan County Purchasing Company and others to recover royalties for oil produced on University lands, wherein various defendants filed cross-actions. From an adverse judgment, the State and others appeal.

Affirmed.

Gerald C. Mann, Atty. Gen., Peter Maniscalco, Geo. W. Barcus, and Glenn R. Lewis, Asst. Attys. Gen., Robert E. Kepke, former Asst. Atty. Gen., of Tulsa, Okl., and Scott Gaines, of Austin, for appellant.

J. C. Adams, of Tulsa, Okl., William Pannill, of Ft. Worth, R. F. Burges and Burges, Burges, Scott, Rasberry & Hulse, all of El Paso, and Black, Graves & Stayton, of Austin, for Big Lake Oil Co.

Tom Scurry, Brady Cole, and Baker, Botts, Andrews & Wharton, all of Houston, for Group No. 1 Oil Corporation and others.

D. A. Richardson, of Oklahoma City, Okl. (James J. Cosgrove, of Ponca City, Okl., and Richardson, Shartel, Cochran, Chilson & Pruet, of Oklahoma City, Okl., of counsel), for Reagan County Purchasing Co.

John C. Townes, E. E. Townes, R. E. Seagler, and R. F. Higgins, all of Houston, and Henry H. Brooks, A. J. Wirtz, and Powell, Wirtz, Rauhut & Gideon, all of Austin, for Humble Oil & Refining Co.

PRICE, Chief Justice.

The majority of the Court has come to the conclusion that there was error in the original disposition of this case, the error consisting in reversing and remanding the case for trial. It is therefore ordered that appellees' motion for rehearing be in all things granted, the original opinion be withdrawn, and the following substituted therefor:

This is an appeal from a judgment of the District Court of Travis County, Ninety-eighth Judicial District. This judgment denied the State all relief sought and all relief sought by the other parties by the way of cross-actions. The State instituted the action against Reagan County Purchasing Company, Inc., Humble Oil & Refining Company, Big Lake Oil Company, and Group No. 1 Oil Corporation.

Plaintiff will be herein designated as "The State," the respective defendants as "Reagan," "Humble," and the other two defendants collectively as "Producers."

The State sought to recover royalties for oil produced on University lands from wells on leases held by the Producers. The petition averred that the Producers had failed to pay the State its full one-eighth royalty, if Reagan had failed to pay the Producers the price provided for in purchasing contract existing between Producers and Reagan. Privity between the State and Reagan and Humble was alleged by virtue of a contract between Humble and Reagan for the purchase and sale of the oil sold by Producers to Reagan under a contract between them and by the effect and provisions of a judgment dated the 12th day of October, 1928 by the District Court of Travis County in a case wherein the State was plaintiff and the defendants here were defendants.

Producers answered by general denial and a conditional cross-action against Reagan and Humble seeking, in the event that the State was entitled to recover additional royalty against them, to recover additional purchase money for the oil sold by them to Reagan under the contract between Producers and Reagan. The prayer of the Producers was that they recover the full value of the unpaid purchase price of the oil delivered under the contract to Reagan, in the event the State recovered against them. The effect and provisions of the judgment pled by the State were relied upon to create privity between the State on the one hand and the Producers, Reagan and Humble on the other.

Reagan replied by several dilatory pleas, general denial, plea of payment in accordance with the contract; an additional cross-action against Humble in the event the State or Producers recovered anything against it. This additional cross-action was based on the contract between Reagan and Humble and on the provisions of the judgment. Further, an additional cross-action was asserted against Producers.

Humble replied by dilatory pleas, general denial and cross-action against Reagan.

The foregoing is not an attempt to state fully even the substance of the pleadings. The transcript alone consists of over seven hundred and fifty single-spaced pages. It is thought that the statement made will be a sufficient basis for a discussion of the issues involved, rather meager though it be.

The rights asserted by all parties herein are contractual. The basis of such rights are evidenced by documents. These documents are as follows:

1. Various leases from the State to the Producers;

2. Contract between Producers and Reagan dated November 24, 1924;

3. Contract between Humble and Reagan dated December 15, 1924;

4. The judgment in Cause No. 42752, District Court of Travis County, entered October 12, 1928.

These leases were issued under the Act of 1917, Chapter 83, Vernon's Ann. Civ.St. art. 5338 et seq. The legal effect and obligations of leases of this character have many times been determined by the Supreme Court. By the lease the lessee is vested with full title to all of the oil underlying the land included in the lease. The one-eighth royalty provided for in favor of the State represents purchase money. Theisen v. Robison, 117 Tex. 489, 8 S.W.2d 646, 652. In that case it was said: "In Sawyer v. Robison, 114 Tex. 437, 268 S.W. 151, it was determined that —An oil lease under the 1917 act `occupies exactly the same legal status as a grant from the state to land. It concedes to the lessee and his assigns all the right and title of the state to the estate dealt with, under the conditions stated therein, the same as a patent conveys the title of the state to land.'"

From the fact of the title of the oil in place, it follows that the lessee has the full legal title to the oil when captured or produced. "Full legal title" implies the right and power to sell and convey to others. Stephens County v. Mid-Kansas Oil & Gas Co., 113 Tex. 160, 254 S.W. 290, 292, 29 A.L.R. 566.

In short, the right of the State as to the oil when same was produced was not an undivided one-eighth interest therein. Her right was to be paid by the lessee monthly an amount equaling one-eighth of the full value of the oil produced by the lessee. This is the provision of the leases. Such provision is provided for and enjoined by the statute authorizing the lease. Acts 1917, Chapter 83, Vernon's Ann.Civ. St. art. 5338 et seq.

Prior to November 24, 1924, the Producers drilled a large number of oil wells on some of the leases in question here, securing large production. This contract was preceded by another contract in which the creation of Reagan was one of the provisions thereof. It is not thought necessary to state the terms of this preliminary contract. A large quantity of oil was sold thereunder on the same terms as provided for in the contract of November 24, 1924. It is not deemed necessary to further state the terms of the preliminary contract, a general statement thereof is made in the opinion of the Austin Court of Civil Appeals on the appeal from the order overruling Reagan's plea of privilege herein. Reagan County Purchasing Company et al. v. State, Tex.Civ.App., 65 S.W.2d 353.

The contract of November 24th between Producers and Reagan provided for the sale by Producers to Reagan of ten thousand barrels of oil per day between March 1st and December 1, 1925, and thereafter up to twenty thousand barrels per day; further provided that all covenants should run with Producers' leasehold estates.

Much of the controversy here arises over the proper construction of the price clause of the purchasing contract. The provisions thereof are as follows: "The Purchasing Company agrees to pay and the Producers shall receive for the petroleum oil sold and delivered by the Producers to the Purchasing Company under this agreement the fair market price of such oil on the date same is delivered by the Producers into the pipe line and gathering system of the Purchasing Company. The fair market price of such oil on the date it is delivered shall be ascertained and determined as follows: The Purchasing Company shall, at the time of remitting payment for any such oil received by it, ascertain the average posted price in the Mid-Continent Field for oil of similar gravity on the date such oil was delivered to the Purchasing Company, by such of said general Purchasing Companies hereinafter named, not less than two in number, as shall on said respective delivery dates be purchasing oil of similar gravity in the Mid-Continent Field at their respective posted prices. The general Purchasing Companies whose posted price shall be taken and considered for the purpose of determining the aforesaid average posted price, shall be the Prairie Oil and Gas Company, The Texas Company, the Gulf Oil Corporation, the Humble Oil and Refining Company, and the Magnolia Petroleum Company. Any price posted by any subsidiary company and/or purchasing agency of any of the aforesaid companies shall be treated and considered as a posted price of the principal or parent company of any such subsidiary company or agency. The term `Average Posted Price' as used in this agreement, shall be construed to mean the price or quotient obtained by dividing the sum of all the posted prices on any given date of all the aforesaid purchasing companies whose price or prices, under this agreement are authorized to be considered, by the number of said posted prices. At the time of remitting the purchase price of any such oil to the Producers, selling and delivering the same to the Purchasing Company, the Purchasing Company shall remit to such Producer a summary of the computations used and made by the Purchasing Company in ascertaining the average posted price as herein authorized. The average posted price, as...