Fontenot v. Sunray Mid-Continent Oil Co.

• Decision Date: 21 March 1967
• Docket Number: MID-CONTINENT,No. 1906,1906
• Citation: 197 So.2d 715
• Court: Court of Appeal of Louisiana — District of US
• Parties: Wallace FONTENOT, Plaintiff-Appellee, v. SUNRAYOIL COMPANY et al., Defendants-Appellants.

Page 715

197 So.2d 715

Wallace FONTENOT, Plaintiff-Appellee, v. SUNRAY MID-CONTINENT OIL COMPANY et al., Defendants-Appellants.

No. 1906.

Court of Appeal of Louisiana, Third Circuit.

March 21, 1967.

Rehearing Denied April 12, 1967.

On Motion to Amend Decree April 12, 1967.

Writ Refused June 6, 1967.

Liskow & Lewis, by Austin W. Lewis, New Orleans, Charles C. Gremillion, New Orleans, Aaron & Aaron, by J. Donald Aaron, Crowley, for defendants-appellants.

Petitjean & Petitjean, by Martin Petitjean, II, Rayne, Huey Henry Breaux, Lafayette, for plaintiff-appellee.

EN BANC.

TATE, Judge.

The defendant mineral lessee(s) Sunray appeal from a judgment cancelling two mineral leases insofar as the leases affect the undivided 1/14th mineral interest of the plaintiff Wallace Fontenot in four tracts of land in Acadia Parish. Sunray obtained these leases from Fontenot's ancestors in title.

Sunray principally contends: (1) The cancellation of the mineral leases was erroneous, since Sunray had substantially performed its lessee obligations, and because its failure to pay royalties on two producing units was justified by the custom of the parties to initiate royalty payments only after the mineral owner had signed division orders. (2) Alternatively, partial instead of entire cancellation should be ordered, since Sunray had completely performed its obligations as to a portion of the leased interests. (3) Attorney's fees were incorrectly allowed to the plaintiff-lessor . The plaintiff answers the appeal to request an increase in the amount of awarded attorney's fees.

Facts.

The plaintiff Fontenot's parents owned about 400 acres of land. By donation and inheritance the plaintiff has acquired a one-fourteen (1/14th) mineral interest affecting this acreage (less a small outstanding royalty). In 1950 and 1952 the plaintiff's parents granted two mineral leases of this land to Sunray's predecessors in title. Sunray brought in producing wells under the leases in 1952 and 1953, and there has been continuous production since then.

In 1955 almost¹ the entire acreage was included within the Northwest Branch Field Unit formed² to develop two sands³ underlying the surface area. Sunray has paid Fontenot all royalties due for production from this unit, and the plaintiff accepted them up until the plaintiff formally demanded cancellation of the lease on April 9, 1963⁴.

The plaintiff contends, however, that the lease should be cancelled in its entirety because Sunray had failed to pay All royalties due for production from the leased tracts. He bases his claim that Sunray breached its obligation to pay royalties upon its failure to send the plaintiff Fontenot the royalties due him for production from two much smaller units created, which included some of the leased acreage. These smaller units were created to obtain production from sands other than those unitized in the large Northwest Branch Field Unit, which overlapped with and included most of the surface acreage of the two smaller units.

These two smaller units were formed on March 1, 1960, to secure production from the MT--1 and MT--4 sands respectively⁵. Orders No. 242--F and No. 242--G. One well was to service both units. Production from the MT--1 and MT--4 units began on September 9, 1960 and January 16, 1962 respectively. No royalty was tendered the plaintiff on his share of the production from these units until April 22, 1963, which was 13 days after he had formally demanded cancellation of the leases because of the nonpayment of the royalties due to him.

Cancellation Remedy.

The trial court granted the plaintiff's demand for cancellation of the entire lease as to his entire interest⁶. In so doing, the trial court relied upon the jurisprudence to the following effect:

The failure to pay production royalties under a mineral lease for any appreciable time, without justification, amounts to an active breach of such lease which entitles the lessor to cancellation without first placing the lessee in formal default. Sellers v. Continental Oil Co., La.App. 3 Cir., 168 So.2d 435; Pierce v. Atlantic Refining Co., La.App. 3 Cir., 140 So.2d 19, certiorari denied; Bailey v. Meadows, La.App. 2 Cir., 130 So.2d 501, certiorari denied. See also: Bollinger v. Texas Co., 232 La. 637, 95 So.2d 132; Melancon v. Texas Co., 230 La. 593, 89 So.2d 135. (Under this jurisprudence, however, the mineral-owner lessor is not entitled to cancellation when adequate reason for the delay is shown by the mineral lessee. Broadhead v. Pan American Petroleum Corp., La.App. 3 Cir., 166 So.2d 329; Fawvor v. United States Oil of Louisiana, Inc ., La.App. 3 Cir., 162 So.2d 602.)

We agree with the trial court that Sunray has failed to give any satisfactory explanation for its failure to pay the plaintiff the royalties due him for some thirty months. We further agree that Sunray's unjustified failure in this respect constitutes an active breach entitling the owner-lessor to a cancellation of the mineral lease. (For the reasons to be stated below, however, we are holding that the cancellation will not affect the portion of the leased mineral interest on which Sunray did not breach its lease obligations.)

In urging trial court error, Sunray principally contends that the lease obligations had been mutually modified by the parties through custom and usage by the employment of division orders in connection with the payment of royalties due for production from unitized areas. Between 1952 (the date of the first lease production) and 1960 (the date of the first MT--1 and MT--4 production), as Sunray points out, on all (except one) of the occasions when new units had come into production or when there was a general revision of ownership (as after the death of each of the plaintiff's parents), Sunray had circulated multiple division orders to establish proportions of ownership of the co-owners. With rare exceptions, the co-owners had not demanded or received any royalties until after they had executed their division order. Sunray further points out that the plaintiff Fontenot himself had executed on some 7 or 8 occasions a total of 33 division orders during this 8-year period, all dealing with division of the Northwest Branch Field Unit production.

Our answer to this contention is that, in the first place, a lessee cannot establish a lease custom binding upon the lessor interests by requiring lessors to sign division orders before the lessee will pay royalties indisputably due them. Sellers v. Continental Oil Co., La.App. 3 Cir., 168 So.2d 435. In the second place--pretermitting whether 'custom' ever could excuse indefinite noncompliance with lease terms--, the evidence does not in our opinion prove any customary course of conduct on the part of the plaintiff Fontenot which would entitle Sunray to suppose that Fontenot must either sign the MT--1 and MT--4 orders or else first notify them that he would not do so before he could demand cancellation of the lease:

Multiple division orders had been circulated on some seven or eight occasions, but in at least three instances (including the initial production on the Northwest Branch Field Unit) an agent of Sunray had hand-carried these division orders to the mineral owners and explained their purpose to them before their signature was obtained. On one major revision of ownership proportions, no division orders whatsoever were circulated or signed before Sunray paid royalties on a new basis. The record also indicates that in several other minor particular instances royalty had been paid without division order signings.

As contrasted with the prior occasions, Sunray sent to the plaintiff on January 12, 1961, a communication consisting of 95 pages of division orders and duplicates with regard to the nonpayment of MT-1 and MT--4 royalties with a request that he sign the originals and return them to Sunray. The letter concluded: 'Upon your prompt execution of these division orders we shall proceed towards placing your interest in line for payment.' Tr. 1269.

The materials enclosed included twelve sets of division orders and duplicates concerning the MT--1 and MT--4 units. Included on the division orders were certain stipulations to which the mineral owner would agree by signing the documents. Some of these stipulations were arguably modifications of lease obligations; all of them were favorable to the lessee. We do not feel that the transmission by mail of the bulky set of these numerous and somewhat complex documents was comparable to the comparatively minor instances where division orders had previously been transmitted and returned by mail .

The transmission by mail of this bulky series of division orders, confusing as to description of interests covered and containing stipulations which, if enforceable, would unfavorably modify some of Fontenot's rights as lessor, could not in our opinion justify Sunray withholding payment of royalties to Fontenot until he either signed the division orders or else informed them that he did not intend to do so. Sunray could not withhold payment of royalties which it undoubtedly owed because of such a unilaterally imposed condition. E.g., Sellers v. Continental Oil Co., La.App . 3 Cir., 168 So.2d 435.

Sunray's failure to pay royalties due is not explained by any question as to Fontenot's right to receive them. On receiving no reply to its letter of January 12, 1961, enclosing the 94 pages of division orders, Sunray on March 8, 1961, again wrote Fontenot, stating that it had not received those orders and would appreciate his furnishing them 'so that we may clear our records of proceeds creditable to your interest.' Tr. 1343. Again, on February 21, 1962, Sunray transmitted Fontenot another complete set of division orders and requested that he execute them. Instead of sending the royalties due to Fontenot or at least investigating why he did not (obviously) wish to execute the division orders, Sunray simply retained the royalties due...