Duke v. Sun Oil Company

• Decision Date: 25 June 1963
• Docket Number: No. 19975.,19975.
• Parties: C. C. DUKE and C. T. Duke, Appellants, v. SUN OIL COMPANY and Pan American Petroleum Corporation, Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

320 F.2d 853 (1963)

C. C. DUKE and C. T. Duke, Appellants, v. SUN OIL COMPANY and Pan American Petroleum Corporation, Appellees.

No. 19975.

United States Court of Appeals Fifth Circuit.

June 25, 1963.

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Robert D. Lemon, Edward L. Atkinson, Perryton, Tex., B. T. Fitzhugh, Booker, Tex., Lemon, Close & Atkinson, Perryton, Tex., for appellants C. C. Duke and C. T. Duke.

Charles F. Heidrick, E. M. Cage, J. C. Peurifoy, Dallas, Tex., Underwood, Wilson, Sutton, Heare & Berry and H. A. Berry, Amarillo, Tex., for appellee Sun Oil Co.

Carlton R. Winn, George S. Terry, Turner, Rodgers, Winn, Scurlock & Terry, Dallas, Tex., W. W. Heard, Tulsa, Okl., Norton Standeven, Oklahoma City, Okl., of counsel, for appellee Pan American Petroleum Corporation.

Before CAMERON, BROWN and WISDOM, Circuit Judges.

JOHN R. BROWN, Circuit Judge.

On this appeal by the Lessors, we are confronted with the correctness of the Judge's charge as given to the jury, his failure to give certain issues and instructions requested by the Lessors, and whether the Judge erred in granting the Lessees' motion for partial summary judgment. These questions primarily involve a construction of an oil and gas lease to determine if the well involved was "producing gas only" within the meaning of the lease, and if so, whether shut-in gas royalty payments were timely made in the manner authorized by the lease. Although as to much of the case we find no error and to that extent affirm the judgment, we conclude that the case must be reversed and remanded for a partial new trial on the limited issues later discussed.

This is a suit brought by the Lessors¹ to declare an oil and gas lease terminated, to remove it as a cloud on their title, and for damages. Originally brought in the State Courts of Texas in the form of a statutory trespass to try title action, the Lessees² removed it to the United States District Court. 28 U.S.C.A. § 1441. The case was tried and submitted to a jury under special interrogatories. F.R.Civ. P. 49. The jury having answered the interrogatories favorably to the Lessees, judgment was entered in their favor, and the Lessors have appealed.

The lease involved in this case was executed on March 26, 1947, by predecessors of the Lessors. The lease was an ordinary oil and gas lease for a primary term of 10 years, which would expire March 26, 1957. It contained the following habendum clause:

"2. Subject to the other provisions herein contained, this lease shall remain in force for a term of ten years from this date, called primary term, and as long thereafter as oil, gas or other mineral is produced from said land, or as long thereafter as Lessee shall conduct drilling or reworking operations thereon with no cessation of more than sixty consecutive days until production results, and if production results, so long as any such mineral is produced."

No question is here presented of the payment of delay rentals during the primary term, it being undisputed that the lease was in full force and effect on December 20, 1956, when Lessees began drilling operations on the land. These operations continued until the well began to flow gas on April 26, 1957. The Lessees permitted the flowing to continue until 2:00 p. m. on April 30. During this period, the Lessees tested the well, obtained complete records as to tubing and casing pressures and rate of flow, and measured the amount of gas, oil, drilling mud, kerosene and water produced from the well. At 2:00 p. m., the well was shut in so that a 48-hour shut-in pressure test could be run. This test was taken at midnight on May 2, 1957. On May 6, the Lessees displaced the kerosene in the well with water and began removing the tubing and packer which had been inserted previously. Gas was vented for a short time on May 7. The "Christmas tree" and other surface equipment was installed on May 8. The well was swabbed on May 9 and much of the actual drilling equipment was removed. From May 9 at 4:00 p. m. until midnight on May 13, the well was allowed to flow. An employee of Lessees read the gauges, inserted the "Y" tube and made notations on his records every eight hours. These activities continued until midnight on May 13 at which time the well was capped and shut-in because of a lack of an accessible market for gas. The Lessees stipulated that as of that time the well was then capable of producing gas in paying quantities. It remained capped until August 16, 1960, at which time it was connected to a pipeline and gas was produced and marketed. To keep the lease alive, the Lessees paid annual shut-in gas royalties.³ The outcome of the case turns on whether this was permissible and timely done.

At the outset it is good to re-emphasize that under Erie, we are sitting as a Texas court applying Texas law as best we can divine it, conscious all the while that our decision loses authority when the first Texas writing court declares to the contrary. Smoot v. State Farm Mutual Ins. Co., 5 Cir., 1962, 299 F.2d 525. It is thus incumbent upon us to apply the principles, fashioned by the Texas courts, of oil and gas law to the facts of this case.

In Texas, the ordinary oil and gas lease is a transfer and conveyance of real property so that title to the oil and gas in place is vested in the lessee thereunder. Waggoner Estate v. Sigler Oil Co., 1929, 118 Tex. 509, 19 S.W.2d 27; Brown, Oil & Gas Leases § 3.02 (1958). However, unlike the mineral deed, it is not an absolute fee simple. Nor is it an estate on condition subsequent requiring the re-entry of the grantor. It is a determinable fee leaving the lessor a possibility of reverter or of reacquiring the absolute fee simple title, less whatever minerals in the meantime are produced and marketed. Texas Co. v. Davis, 1923, 113 Tex. 321, 254 S.W. 304, 255 S.W. 601; Sullivan, Oil & Gas Law 95 (1959). It is a fee simple title because it may continue forever. And yet it is determinable because it may come to an end upon the happening of certain contingencies. Upon the happening of these contingencies or limitations, there is no forfeiture, since the estate which was granted has merely run its course. It has expired automatically under its own terms. Vernon v. Union Oil Co., 5 Cir., 1959, 270 F.2d 441; Haby v. Stanolind Oil & Gas Co., 5 Cir., 1955, 228 F.2d 298; Stephens County v. Mid-Kansas Oil & Gas Co., 1923, 113 Tex. 160, 254 S.W. 290, 29 A.L.R. 566; Caruthers v. Leonard, Tex.Com.App., 1923, 254 S.W. 779. The terms are ordinarily spelled out in the lease's habendum clause, a clause of special limitation which marks the duration of the estate granted.⁴ The effect of this clause has been summed up in the classic statement of Professor A. W. Walker, Jr.:

"Neither unavoidable delays or accidents, acts of God, unfavorable economic conditions, nor financial difficulties of the lessee will afford an excuse for the failure to comply literally with the provisions of this clause in the absence of an express stipulation otherwise contained in the lease."⁵

In this approach, the presence and the content of, and compliance with, provisions extending the primary term are of critical significance. Thus, if a lessee completes a gas well during the primary term of the lease but the lease form does not contain a shut-in gas royalty clause, the lease will automatically expire and the lessee's interest will terminate and revert to the lessors upon the expiration of the primary term unless oil, gas or other minerals are then actually being produced in paying quantities. Stanolind Oil & Gas Co. v. Barnhill, Tex. Civ.App., 1937, 107 S.W.2d 746, error ref'd. Likewise, under a lease containing a shut-in gas royalty clause, if a lessee were to complete a commercially productive gas well during the primary term but the well is (and remains) shut-in for lack of market, the lease will automatically terminate upon the expiration of the primary term if the lessee fails to tender or pay the shut-in gas royalty prescribed by the lease prior to the expiration of the primary term. Freeman v. Magnolia Petroleum Co., 1943, 141 Tex. 274, 171 S.W.2d 339. However, in the event the lessee completed a gas well after the expiration of the primary term and the well is capped or shut-in immediately for lack of a market, the question of whether the lessee has any additional time within which to tender shut-in gas royalty depends on the provisions of the lease as construed by the Texas courts. Gulf Oil Corp. v. Reid, 1960, 161 Tex. 51, 337 S.W.2d 267; Skelly Oil Co. v. Harris, 1962, Tex., 352 S.W.2d 950.

Since it is undisputed that on neither May 2, nor May 13, 1957, was there actual production of gas in paying quantities, it is clear that the determinable fee in the present lease automatically expired of its own accord at the end of the ten-year primary term (March 26, 1957) unless some provision such as the continuous drilling clause operated to extend the terms of the grant.

The Lessors contend that the trial Judge erred in sustaining Lessees' motion to limit the issues for trial and alternatively for partial summary judgment. In effect the Judge's order did two things. First, it determined as a matter of law that if this well were one "producing gas only," then the manner and time of payment of shut-in gas royalty beginning May 13, 1957, and thereafter in 1958, 1959 and 1960 fully complied with the lease. Second, it specified that the only fact issue for trial was whether the well was one "producing gas only." As to the first we conclude that the District Court was correct and affirm such holding. The second element is tied into the question of whether productivity of gas only relates to the well (a) as actually completed, or (b) as it should have been completed.

It simplifies matters to dispose of the first element even though that assumes the well was a gas producer only. For if the payments were not timely, there is no need for further inquiry or retrial....