Cline v. Angle

• Decision Date: 01 March 1975
• Docket Number: No. 47419,47419
• Citation: 532 P.2d 1093,216 Kan. 328
• Parties: Wilford L. CLINE and R. Leona Cline, Appellees, v. George A. ANGLE, Appellant.
• Court: Kansas Supreme Court

Page 1093

532 P.2d 1093

216 Kan. 328

Wilford L. CLINE and R. Leona Cline, Appellees, v. George A. ANGLE, Appellant.

No. 47419.

Supreme Court of Kansas.

March 1, 1975.

Syllabus by the Court

1. The true nature and character of a grant or reservation of oil and gas rights is not determined solely by the name or label attached thereto by the parties. It is determined by the intent of the parties as reflected by the terms or contents thereof.

2. Where, however, an interest in oil and gas is labeled an 'overriding royalty', the wording of the reservation of the interest must make it clear that it is something other than what the label indicates or the label will be considered as expressing the true intent of the parties.

3. An overriding royalty is a royalty interest carved out of the working interest created by an oil and gas lease. It is an interest in oil and gas produced at the surface free of the expense of production and its outstanding characteristic is that its duration is limited by the duration of the lease under which it is created. (Following Campbell v. Nako Corporation, 195 Kan. 66, Syl. 2, 402 P.2d 771.)

4. Words cannot be read into an agreement which impart an intent wholly unexpressed when the agreement was executed.

5. If a written contract is ambiguous concerning a specific matter in the agreement, facts and circumstances existing prior to and contemporaneously with its execution are relevant to clarify the intent and purpose of the contract in that regard, but not for the purpose of varying and nullifying its clear and positive provisions.

6. Subsequent conduct of parties to a contract may aid interpretation of controversial provisions. If parties to a contract, subsequent to its execution, have shown by their conduct that they have placed a common interpretation on the contract, this interpretation will be given great weight in determining the meaning to be attributed to the provisions in question.

7. Instruments which are executed in the course of the same transaction concerning the same subject matter will be construed together by the court to determine the intent of the parties to the contract.

8. It is generally held that the purchase payments received by the lessee-producer from the pipeline purchaser constitute payment for the entire natural gas stream measured and delivered under the contract including all constituents of the natural gas, including helium.

9. In an action brought to recover royalties allegedly due from helium produced, processed and sold in a pure state the record on appeal is examined and it is held the reservation of interest in helium was an overriding royalty restricted to amounts received from a separate price and a separate sale of the helium content of the natural gas at the wellhead, it did not extend to processed helium.

Gerald Sawatzky, of Foulston, Siefkin, Powers & Eberhardt, Wichita, argued the cause, and John J. Stang, LaCrosse, was with him on the brief for the appellant.

Robert J. O'Connor, of Hershberger, Patterson & Jones, Wichita, argued the cause, and Richard Jones, Wichita, was with him on the brief for the appellees.

FROMME, Justice:

This action was brought to recover royalties allegedly due from the production, extraction and sale of helium gas. The plaintiffs, Wilford L. Cline and R. Leona Cline, assigned certain oil and gas leases in Rush County, Kansas, to the defendant, George A. Angle, and reserved a royalty in any helium gas produced from the leases. The trial court after construing certain written instruments and considering stipulated facts entered a partial summary judgment in favor of plaintiffs. Defendant was ordered to account for royalty due. He applied for and received permission to perfect the instant interlocutory appeal.

We will summarize the essential facts. The original oil and gas leases were acquired by Morrison Producing Company (Morrison). Morrison acquired a large block of leases in Rush County, Kansas. A few small gas wells were drilled on some of the leases. The wells were located in an area which became know as the Reichel gas field. Morrison sold all present and future gas production from its block of leases to Kansas-Nebraska Natural Gas Company (Kansas-Nebraska). By 1960, gas development in the area appeared to be uneconomical. Morrison dropped much of the undeveloped acreage and granted Wilford L. Cline the right to farm out the balance of the undeveloped acreage.

On February 22, 1961, Cline assigned the leases on this undeveloped acreage to the defendant, George A. Angle, in return for overriding royalties and a commitment to develop the acreage. The helium content of the gas being produced in this area was around two percent (2%) of the total volume of gas produced. The assignors of the leases, Wilford L. and R. Leona Cline, reserved two different royalty interests under all the leases assigned.

The first overriding royalty interest reserved was 1/16th of 7/8ths of all of the oil, gas and casinghead gas produced, saved and marketed from said leases. This was a standard overriding royalty consisting of a share of production free of expense delivered at the wellhead.

The second royalty interest was not a standard overriding royalty reservation. It called for a royalty of 1/8th of 8/8ths of the helium gas separately marketed. This reservation was set out in paragraph 9 of the lease assignment agreement and it reads as follows:

'9. The parties are aware that the natural gas encountered in reservoirs similar to those expected to underly the leases in question contain small percentages of helium gas and, at present, because of the small percentage of helium and the extraordinary costs of extracting it, the gas is sold by producers in the area at the wellhead to a pipeline company without a separate purchaser or payment for the helium. If, during the life of the leases covered by this contract, the producers in the field should, in the future, be able to sell, advantageously, the helium gas by a separate sale, separately accounted for, and for a separate price stated and paid, then and in that event only the overriding royalty interest of Cline, insofar and only insofar as it applies to the helium separately marketed and paid for, shall be increased to 1/8th of all (8/8) of the helium produced, saved and so separately marketed and paid for; otherwise there shall be no obligation on Angle's part to separately account to Cline any gas constitutent, including helium, regardless of the extent to which it may influence the price of gas at the wellhead.'

It is undisputed that neither Kansas-Nebraska nor any other purchaser in this gas field has ever paid a separate price for the helium content of the gas produced.

George A. Angle, doing business as Frontier Oil Company, commenced developing the leases by drilling wells. Ultimately 12 gas producing wells were obtained. In February, 1962, the plaintiffs signed division orders which stated the gas was being sold to Kansas-Nebraska under the terms of a gas purchase contract dated October 5, 1961. The division order specified that the Clines were to receive their overriding royalty of 1/16th of 7/8ths in accordance with the lease assignment contract dated February 22, 1961.

This division order required a separate helium division order be obtained in event Kansas-Nebraska, the pipeline purchaser, in the future might agree to account for a separate purchase of the helium content at the separate price.

The above division order was intended to facilitate payment of royalty on the helium content of the natural gas at such time in the future as a separate sale and separate accounting could be negotiated for the helium content of the gas at the wellhead.

In February, 1961, when the Clines assigned their leases to Angle and reserved the helium royalty, Angle had drilled no gas wells in Rush County and at that time had no proven reserves of helium bearing gas. Sometime later Angle commenced to acquire other leasehold acreages in Rush County not dedicated to any particular gas purchaser. Plaintiffs were not involved in this acreage. Angle drilled numerous gas wells thereon. By 1963, Angle had developed gas reserves containing considerable helium. He then began plans to construct a processing plant near Otis, Kansas, to extract the helium from the natural gas.

In the spring of 1966, Angle borrowed $7,000,000.00 and constructed a helium plant. At first he commenced to extract helium from the gas produced in his own gas wells. His helium extraction business was operated under the trade name of Kansas Refined Helium Company, a sole proprietorship. Kansas-Nebraska continued purchasing the gas from the wells here involved and at least part of it was resold to the Bureau of Mines to be processed in the United States' helium plant at Otis, Kansas.

In 1968, the Bureau of Mines closed its helium plant at Otis. Kansas Refined Helium Company entered into a gas processing contract with Kansas-Nebraska which provided for the purchase of gas from Kansas-Nebraska for helium extraction purposes. There was no provision in the gas processing contract for a separate payment for the helium content of the natural gas. The gas was purchased by Kansas Refined Helium Company at the normal industrial rate for industrial gas as provided in the Kansas-Nebraska filings with the Kansas Corporation Commission. Of the gas gathered and piped to the plant only a small portion originated from leases in which plaintiffs held royalties. Likewise, only a small portion of the helium extracted and sold was traceable to leases in which the Clines held a royalty.

In 1969, the Clines filed this suit claiming that since George A. Angle, under the trade name of Kansas Refined Helium Company, extracted and sold the helium that this constituted a separate sale of helium as contemplated in paragraph 9 of the contract which entitled the Clines to the increased royalty on the helium.

The trial court accep...