Garcia v. King

• Decision Date: 15 July 1942
• Docket Number: No. 7905.,7905.
• Citation: 164 S.W.2d 509
• Parties: GARCIA et al. v. KING et al.
• Court: Texas Supreme Court

164 S.W.2d 509

GARCIA et al. v. KING et al.

No. 7905.

Supreme Court of Texas.

July 15, 1942.

Rehearing Denied October 7, 1942.

Error to Court of Civil Appeals of Fourth Supreme Judicial District.

Action by Anastacio Garcia and others against R. A. King and others, to cancel an oil and gas lease and remove it as a cloud from plaintiffs' title to land. Judgment for plaintiffs was reversed by the Court of Civil Appeals, 152 S.W.2d 918, and plaintiffs bring error.

Judgment of the Court of Civil Appeals reversed and judgment of the district court affirmed.

Gordon Gibson, of Laredo, for appellant Anastacio Garcia and others.

Phelps & Phelps, of Laredo, for appellant Amada Garcia.

Mann & Mann and T. C. Mann, all of Laredo, for appellee.

ALEXANDER, Chief Justice.

This suit involves the construction of an oil and gas mining lease. The lease was to run for a period of ten years "and so long thereafter as oil, gas, or other minerals is produced from said land." The material question to be determined is whether sufficient oil was produced from the land after the expiration of the primary period to keep the lease in force.

The lease in question covered 7,500 acres of land. From 1925 to 1929 the land was under a lease that required the payment of an annual rental of $13,284, regardless of the amount of oil produced. Lessees were unable to pay this annual rental. Litigation ensued and a settlement was reached, by the terms of which lessees paid lessors $3,500 in cash and agreed to pay them $2,500 out of 1/8 of production, and the 10-year paid-up lease with a 1/8 royalty now in question was executed. It provided in part as follows:

"Subject to the other provisions herein contained, this lease shall be for a term of 10 years from this day (called primary term) and as long thereafter as oil, gas, and other minerals is produced from said land hereunder."

At the time the lease was executed there were 112 producing wells on the land. The wells yielded large quantities of oil, from which the lessors were paid royalties running into thousands of dollars annually. All production was from a shallow reservoir, less than 200 feet deep. In the spring of 1936 forty-seven wells were still producing. At that time production ceased temporarily because a gas well that was furnishing fuel for pumping played out. Thereupon the lessees abandoned the shallow wells and decided to explore for oil in deeper sands. The money for this exploration was raised by sale of the casings and other equipment in the shallow wells. The deep tests were unsuccessful, and the lessees began drilling shallow wells again. At the expiration of the primary term on February 6, 1939, six shallow wells were being operated. Before that time, on November 15, 1938, the lessees had entered into a contract with one Juarez whereby Juarez was to operate the lease and receive as his compensation the entire seven-eighths working interest belonging to the lessees. This contract continued until July 15, 1939. During this period a total of 195 barrels of oil was produced, averaging about 24 barrels per month. After deducting the lessors' royalty of $19.11, a total of $135.70 was received by Juarez for his seven-eighths of the oil, or $16.96 per month, which was barely adequate to pay for his labor in operating the wells. Out of this compensation, Juarez had to pay about a dollar each month for fuel. During this period of eight months the lessees received nothing at all from the lease, and yet they were paying the annual taxes thereon. In addition they had to make numerous trips at their own expense to the leased premises. The lessors received only about eight cents per day as royalty from the lease. From these undisputed facts it is clear that production was not in paying quantities when the primary term expired. However, there is evidence tending to show that production was increased after the termination of the Juarez contract, and that before the time of the trial production was obtained in paying quantities.

The lessors filed this suit against the lessees to cancel the lease and remove it as a cloud from their title to the land. Trial was to a jury, but upon the jury's failure to agree upon several of the special issues, the trial judge discharged the jury and rendered judgment for plaintiffs on the ground that their motion for peremptory instruction should have been granted. The court found that the undisputed evidence showed that the lease expired by its own terms at the end of the primary term because neither oil nor gas was then being "produced," within the meaning of the lease. Upon appeal the Court of Civil Appeals reversed the judgment of the trial court and rendered judgment for the defendants, holding that the term "produced" did not mean "produced in paying quantities." 152 S.W.2d 918, 920.

It will be noted that the lease provides, in effect, that it shall run for a period of ten years, and as long thereafter as oil is "produced" from the land. It does not provide, as is ordinarily the case, that the production must be "in paying quantities" in order to continue the lease in force after the expiration of the primary term. At the end of the primary period the lease was producing only about 24 barrels of oil per month. This quantity was susceptible of division, but was insufficient to yield a profit over and above operating and marketing expenses. It becomes necessary for us to determine what is meant by the term "produced," as used in the lease. It is the plaintiffs' contention that the term "produced" means the same thing as "produced in paying quantities," while the defendants contend that the terms of the contract are met if enough oil is produced to be susceptible of division. So far as we have been able to determine, the question has not heretofore been passed on in this State.

The question was before the Supreme Court of Illinois in the case of Gillespie v. Ohio Oil Co., 260 Ill. 169, 102 N.E. 1043, 1044. In that case less than a hundred barrels of oil had been recovered over an eighteen-months period. The Supreme Court of Illinois said: "The lease was for a five-year term, and so long thereafter as oil or gas was produced. Oil was produced continuously after the drilling of the well. It is true that the quantity produced was so small as to make the venture unprofitable, but the strict letter of the lease was complied with, and it had not expired by its own terms."

No authorities were cited in support of this ruling. It will be noted that the above case was decided in 1913, before the oil industry had been fully developed.

In the case of Enfield v. Woods, 198 Ky. 328, 248 S.W. 842, 843, the Supreme Court of Kentucky used language which on its face appears to be decisive of the question. It was there said: "It will be observed that the lessee is not required to produce oil in paying quantities, but he is required to produce oil or gas, one or the other, from the premises. This, of course, means a production of oil or gas in such quantities as to be susceptible of division, so as to pay the landowner a royalty, even though small. A mere showing of oil manifestly is not sufficient, even though produced. The production must be tangible and substantial, but it need not be great."

An examination of the case, however, discloses that the well there under consideration produced only a mere scum of oil, and the court held that this was insufficient to keep the contract in force. In view of the facts there involved the statement concerning production in paying...