Brannon v. Gulf States Energy Corp.

• Decision Date: 30 December 1977
• Docket Number: No. B-6759,B-6759
• Citation: 562 S.W.2d 219
• Parties: M. J. BRANNON, et al., Petitioners, v. GULF STATES ENERGY CORPORATION, et al., Respondents.
• Court: Texas Supreme Court

Page 219

562 S.W.2d 219

M. J. BRANNON, et al., Petitioners, v. GULF STATES ENERGY CORPORATION, et al., Respondents.

No. B-6759.

Supreme Court of Texas.

Dec. 30, 1977.

Rehearing Denied March 15, 1978.

Clark & Tartaglia, W. Scott Clark, Fort Worth, for petitioner.

Levi Old and Willoughby, Brown, Longenecker, Beecham, Koons & Rapier, John E. Rapier, Dallas, for respondents.

DANIEL, Justice.

The question in this case is whether an oil and gas lease terminated for nonpayment of delay rentals where there was a late payment and acceptance by the lessor of a check designated as "lease rental." More specifically, the issue is whether parol evidence was admissible to vary the written designation of the late payment from a "rental" to a bonus for a new lease.

Petitioners, M. J. Brannon, Jr., Otis Thompson, Patricia A. Elliott, and Henry W. Elliott III claim under a lease dated November 20, 1973, from Clara Odessa Martin covering 202 acres in Coleman County. The first delay rental of $202.00 due November 20, 1974, was not timely paid. However, Petitioners allege that on January 17, 1975, Respondent, Gulf States Energy Corporation, while holding an interest in said lease, made a late written tender of the rental to the lessor by letter and check. Both of these designated the payment as "lease rental," and the check was accepted by the lessor. Respondent, Gulf States, countered with the allegation that the check was in fact a bonus paid in advance for a new lease which Mrs. Martin executed and delivered to Gulf States on July 9, 1975. The trial court, over the objection of Petitioners, permitted parol evidence at variance with the "rental" letter and check. Upon jury findings favorable to Gulf States, a take nothing judgment was entered against the Petitioner-plaintiffs. The Court of Civil Appeals affirmed. 548 S.W.2d 790. We reverse and remand for further proceedings in accordance with this opinion.

On November 20, 1973, Mrs. Clara Odessa Martin executed an oil and gas lease to Mary Linn Elliott covering the 202 acres mentioned above. It was a five year lease providing for termination at the end of each anniversary date unless an annual rental of $202.00 was paid or the lease was otherwise perpetuated by drilling operations or production. In the meantime, Mrs. Elliott had also acquired an adjoining 1900 acre lease known as the "Evans lease." Early in 1974, Mrs. Elliott negotiated the terms of a sale of the Martin and Evans leases to Royal Russell, sole owner and stockholder of Gulf States, whereby she would assign the leases for a cash consideration and retain a 1/16th overriding royalty. Prior to Mrs. Elliott's execution of the assignments, Royal Russell negotiated an agreement with Master Drillers, Inc., on February 18, 1974. It referred to the separate tracts as one lease and recited that Master was interested in purchasing said lease and "acting in a capacity of 'Warehousing' said lease for and on behalf" of Gulf States, and that the two companies were interested in jointly developing same. The agreement provided, among other things, that (1) Gulf States "agrees to allow Master to purchase" said lease and to give up any option then held by Gulf States to purchase same; (2) that Master would purchase the lease for $25,000, and give Gulf States an option to purchase no less than one half of the usable oil locations on said lease for a total accumulated price of one-half of Master's purchase price, with lease assignment to Gulf States to be a net 77%; and (3) that Gulf States would be allowed to make its selection of drilling locations prior to any other party, including Master.

At Russell's request, on February 20, 1974, Mrs. Elliott executed assignments on the Martin and Evans leases to Master Drillers, Inc., "effective as of February 18, 1974." The 1/16th overriding royalty reserved by Mrs. Elliott in the Martin lease Russell testified that he had made selections for Gulf States under the agreement with Master, had drilled wells on the Evans portion of the acreage, and that during 1974 Gulf States had paid Master the $12,500 which entitled Gulf States to one-half of all the acreage assigned to it by Mrs. Elliott. The agreement between Gulf States and Master was not recorded and no assignment was made from Master to Gulf States on its interest in the Martin 202 acre lease. On October 22, 1974, the Internal Revenue Service seized the Martin and Evans leases along with other property of Master Drillers to enforce a lien for taxes.

assignment was conveyed by her on March 26, 1975, to her children, Patricia Elliott and Henry Elliott III, who are two of the Petitioners here.

Mrs. Martin's annual lease rental was not paid on November 20, 1974. She so advised Mrs. Elliott after Christmas in December of 1974. Because of this jeopardy to her overriding royalty, Mrs. Elliott testified that she called Royal Russell and asked him to pay the rentals. Russell remembered a call from Mrs. Elliott about the Evans lease but denied any mention of the Martin lease. In any event, by letter dated January 17, 1975, addressed to Mrs. Martin, with a copy mailed to Mrs. Elliott, Royal Russell transmitted a Gulf States check payable to Clara Odessa Martin in the sum of $202.00, on which was typed "Lease Rental." The letter read in part as follows:

"Dear Mrs. Martin:

Enclosed please find check # 6240 in the amount of $202.00 which is for lease rental on the following described lease:

(Description) ¹

(s) Thank you. Sincerely,

GULF STATES ENERGY CORPORATION

(s) Royal Russell

(s) President

RR/mdm

Enclosure

cc: Mrs. Mary Elliott"

The check was received, accepted, endorsed, and deposited in her bank account by Mrs. Martin. On January 24, 1975, Mrs. Elliott wrote Mrs. Martin, "I trust you have received your rental money, since Mr. Russell advised me that he was mailing the check."

On May 27, 1975, at a public sealed-bid sale by the Internal Revenue Service, petitioner Thompson bought all rights and interests of Master Drillers in the Martin and Evans leases. Royal Russell attended the sale and submitted a lower bid on behalf of Gulf States. Thompson conveyed one-half of his purchase to petitioner Brannon by quitclaim deed dated June 9, 1975. Subsequent delay rentals, due November 20, 1975, were tendered by them to Mrs. Martin but were declined by her.

On July 9, 1975, Mrs. Martin executed a new ten-year lease on the 202 acres to Gulf States. It made a first well location on the tract in late July of 1975 and drilled three wells in spite of the recorded conveyances to Thompson and Brannon and written notices from their attorneys protesting any operations on the property by Gulf States. This suit was filed by Petitioners Brannon and Thompson on September 17, 1975, seeking a declaratory judgment that the lease of November 20, 1973, from Clara Odessa Martin to Mary Linn Elliott was in full force and effect; that the subsequent lease from Mrs. Martin to Gulf States be declared void; and that Gulf States be ordered to vacate the premises. Petitioners Patricia and Henry Elliott intervened, seeking similar relief and an accounting and payment for 1/16th of the oil, gas and other minerals produced from the 202 acres. Gulf States filed a general denial, a special claim of development of the tract under a superior lease, and an alternative claim for development expenditures in excess of $210,000.

Gulf States' claim to a superior title rests upon parol testimony of Mrs. Martin and Petitioner-plaintiffs have contended throughout this litigation that the parol evidence rule rendered inadmissible the testimony of Mr. Russell and Mrs. Martin contradicting the written Gulf States rental letter and the $202.00 rental check of January 17, 1975, which was accepted and endorsed by Mrs. Martin. If they are correct, then admission of such parol evidence was erroneous and there was no probative evidence warranting the submission of special issues 1 through 4. The Court of Civil Appeals held that the parol evidence rule did not apply because the letter and check were not contractual, and even if so, that the rule could not be invoked by a stranger to the transaction.

Royal Russell that the $202.00 "lease rental" paid by Gulf States to Mrs. Martin on January 17, 1975, was not in fact a rental due under the Martin-Elliott lease of 1973, but a bonus for a new lease from Mrs. Martin to Gulf States executed by Mrs. Martin on July 9, 1975. In support of this direct contradiction of the written terms of the rental letter and check, there was other parol evidence to the effect that shortly before Christmas of 1974, Mrs. Martin orally agreed to make a new lease to Gulf States in consideration of $202.00 and a promise to drill a well. This evidence is summarized in narrative form by the Court of Civil Appeals. ²

Contractual Nature of the Letter and Check

That a written instrument cannot be varied by parol evidence is a rule of substantive law. Hubacek v. Ennis State Bank, 159 Tex. 166, 317 S.W.2d 30 (1958); South Texas Implement & Machine Co. v. Anahuac Canal Co., 280 S.W. 521, 523 (Tex.Comm.App.1926, judgmt adopted). Yet it is true that the rule applies only to contractual or jural writings evidencing the creation, modification, termination or securing of a particular right or obligation. 9 J. Wigmore, A Treatise on Evidence §§ 2400-01 (3d ed. 1940); 2 C. McCormick and R. Ray, Texas Law of Evidence § 1612 (1956); 4 S. Williston, A Treatise on the Law of Contracts § 631 (3d ed. 1961).

We consider the letter and the check relating to "lease rentals" as contractual in nature because late payment and acceptance of annual rentals provided for in an oil and gas lease has the effect of reviving the lease as though it had never terminated. Mitchell v. Simms, 63 S.W.2d 371 (Tex.Comm.App.1933, holding approved); McCoy v. Texon Royalty Co., 124 S.W.2d 877 (Tex.Civ.App.1939, writ dism'd, judgmt correct). See also Humble Oil and Refining Co. v. Harrison, 146 Tex. 216, 205...