Clifton v. Koontz

• Decision Date: 24 June 1959
• Docket Number: No. A-6555,A-6555
• Citation: 160 Tex. 82,79 A.L.R.2d 774,325 S.W.2d 684
• Parties: , 79 A.L.R.2d 774 Lillie M. CLIFTON et al., Petitioners, v. R. W. KOONTZ et al., Respondents.
• Court: Texas Supreme Court

Page 684

325 S.W.2d 684

160 Tex. 82, 79 A.L.R.2d 774

Lillie M. CLIFTON et al., Petitioners, v. R. W. KOONTZ et al., Respondents.

No. A-6555.

Supreme Court of Texas.

June 24, 1959.

Rehearing Denied July 29, 1959.

Rogers, Eggers & Sherrill, by Guy Rogers, Wichita Falls, for petitioners.

Nelson, Montgomery, Robertson & Sellers, Robert K. Pace, with above firm, Wichita Falls, Charles b. Wallace, Dallas, for respondent Magnolia Petroleum Co.

Gilbert P. Howard, Dallas, Woodruff & Woodruff, Decatur, for respondent R W. Koontz.

SMITH, Justice.

This suit brought by petitioners, Lillie M. Clifton, individually and as executrix of the estate of her husband, J. H. Clifton, deceased, et al., seeks the cancellation of an oil, gas, and mineral lease on the theory that after the expiration of its ten-year primary term, the lease terminated due to cessation of production.

In the alternative, and only in the event the Court should find that production had not ceased, petitioners sought cancellation of the lease (other than for 40 acres around the existing well) on the theory that the owners of the lease (the working interest) breached an implied covenant to reasonably develop the property and to 'reasonably explore the same for the production of minerals therefrom * * *.' It was their contention that the owners of the working interest, in the event the alternative plea should be sustained, would forfeit all rights under the lease (except as to 40 acres around the producing well) upon failure within a reasonable time, to commence and continue the drilling of wells to a depth sufficient to test all known horizons in the general area. Petitioner also sought damages because of breaches of express and implied covenants of the lease.

The lease was executed in 1940. It covers two tracts of land encompassing 350 acres owned by the Cliftons, in Wise County, Texas. In 1949, during the primary term, a well was drilled which produced both oil and gas but very little oil. The Railroad Commission classified the well as an 'associated' (with oil) gas well. Other than its acidization in 1950, no other drilling or reworking operations were carried on during the intervening years until September 12, 1956, when it was successfully reworked by 'sandfracting'. This date was subsequent to the filing of the present case.

The judgment of the trial court, entered after a trial before the court, without the aid of a jury, contains the court's findings of fact upon the basic questions. The court found that the existing gas well had at all material times continuously produced gas in paying quantities. Accordingly, the oil and gas lease was held to be in full force and effect, thus denying petitioners' prayer for judgment that the lease had terminated. The judgment recites a finding to the effect that petitioners were damaged by the failure of respondents to rework the existing well and to drill, but that such damages were speculative and could not be ascertained with any degree of certainty. Judgment for damages was therefore denied.

The judgment decreed 'that unless on or before the expiration of 60 days after the date this Judgment shall become final, the owners of the working interest shall commence and thereafter drill with reasonable diligence and in a good and workmanlike manner a test well looking to the production of oil and/or gas on said land, the drill site to be selected by said working-interest owners and said well to be drilled to a total depth of 5600 feet below the surface of said land unless production of oil and/or gas in paying quantities be by them found at a lesser depth, this lease shall terminate and re-invest in Plaintiff and her assigns except as to the conglomerate formation found in the stratigraphic interval from 5300 to 5600 feet, from which the present well is now producing, such section being generally known as the Atoka (Morris Field) conglomerate; and as to all of such section, strata, or formation, the lease shall continue in full force and effect, as to appearing parties herein, so long as it continues producing oil, gas or other minerals conformably with the terms of the lease instrument.'

Both petitioners and respondents appealed. The Court of Civil Appeals affirmed the trial court's judgment denying termination of the oil and gas lease and petitioners' claim for damages, but held that respondents were not required to drill a second well. Therefore, the judgment of the trial court requiring such drilling was reversed and rendered. 305 S.W.2d 782.

We have concluded that the judgment of the Court of Civil Appeals must be sustained. We first consider the primary question, which is: Was there any evidence to sustain the finding of the trial court that production in paying quantities had not ceased?

One of the rules in determining this question is the well-settled rule that if there is any evidence reasonably tending to prove, either directly or by permissive inference, the essential facts, the judgment rendered thereon must be sustained. Woodward v. Ortiz, 150 Tex. 75, 237 S.W.2d 286; Benoit v. Wilson, 150 Tex. 273, 239 S.W.2d 792.

We have examined the entire record and in doing so have viewed the evidence in the light most favorable to the respondents; discarding all adverse evidence, and giving credit to all evidence favorable to the findings and judgment of the court, the trier of the facts, and have reached the conclusion that there is evidence of probative force supporting the judgment of the trial court that the gas well had continuously produced in paying quantities.

Petitioners base their contention that the well had ceased to produce in paying quantities upon the showing that for the period of time from June, 1955 through September, 1956, the income from the lease was $3,250 and that the total expense of operations during the same period was $3,466.16-thus, a loss of $216.16 for the sixteen months' period selected by petitioners. During the period of time indicated, some months showed a gain and some a loss. For the months of July, August, and September 1956, the total net loss amounted to $372.37. These were the months immediately following June 1956, the date respondent, Koontz, acquired his 52 per cent interest in the lease. Beginning July 1, 1956 he began making financial arrangements, securing the services of third parties, and commenced saving all oil produced from the lease to be used in reworking the well. The holding from the market of this oil accounts materially for the losses in the operations during the months of July, August, and September 1956. The record shows that for years, in view of the low allowable on gas, the oil poduction had made the difference between operating at a profit and at a loss. The respondent, Koontz, testified that from two to three months were required to accumulate a tank of oil and that after such accumulation a sale would be made. Respondents' evidence reflects that through 1955 and 1956 there was but little variation in gas production. For the same period of time there was a great variation in oil production, resulting in a showing of a profit in months when oil sales were made.

It is undisputed that reworking operations were commenced on September 12, 1956, and that such operations resulted in an 1800 per cent increase of production. Reworking operations having thus been commenced on September 12, 1956, the evidence that there was a small operating loss for the period of time from July, 1956 through September, 1956 is not controlling in determining whether or not there had been a cessation of production in paying quantities through July 12, 1956, a date 60 days prior to the beginning of reworking operations. The question, therefore, is: Was there production in paying quantities from the existing well through July 12, 1956? Evidence, as contended for by the petitioners, as to profit or loss subsequent to July 12, 1956, is immaterial in determining whether or not there was production in paying quantities through that date. If there was production in paying quantities at all times through July 12, 1956, then the clause contained in the lease, which permits reworking within 60 days following cessation of production, if it ever came into operation, was complied with when reworking operations were begun on September 12, 1956, and later successfully completed. Thus, by considering only the evidence relative to production prior to July 12, 1956, we find that the lessee operated at a profit in the sum of $111.25, for the period of time beginning in June 1955 and continuing through July 12, 1956. The record shows a loss during the months of April and May, 1956. The record further shows that for the year 1954, a profit was earned each month, and that the aggregate profit was the sum of $1,575; that in 1955 the operations were profitable during nine months of the year, with a net profit of $894 for the year; and that for the first six months' period of 1956, the lease was operated at a profit of $145. These factual situations, when considered in the light most favorable to the findings of the trial court, support its finding and judgment that there was not a cessation of production in paying quantities through July 12, 1956.

Petitioners argue that it is settled under the Texas law that, after the primary term, the ordinary oil and gas lease absolutely terminates when its income no longer exceeds the cost of its operation, and that since the operations showed a loss for the months of April and May, 1956, the lease terminated. Citing Garcia v. King, 139 Tex. 578, 164 S.W.2d 509, and Holchak v. Clark, Tex.Civ.App., 284 S.W.2d 399, er.ref. Also Freeman v. Magnolia Petroleum Company, 141 Tex. 274, 171 S.W.2d 339; Cox v. Miller, Tex.Civ.App., 184 S.W.2d 323, er.ref. The further argument is made that such established rule applies as well to a lease with a 60-day termination clause, except a period of 60 additional days is allowed in which to begin additional...