Henshaw v. Texas Natural Resources Foundation

• Decision Date: 05 January 1949
• Docket Number: No. A-1840.,A-1840.
• Parties: HENSHAW et al. v. TEXAS NATURAL RESOURCES FOUNDATION et al.
• Court: Texas Supreme Court

216 S.W.2d 566

HENSHAW et al. v. TEXAS NATURAL RESOURCES FOUNDATION et al.

No. A-1840.

Supreme Court of Texas.

January 5, 1949.

Rehearing Denied February 2, 1949.

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

Action by the Texas Natural Resources Foundation and others against Walter A. Henshaw and others to recover an oil and gas leasehold estate. From a judgment in favor of the plaintiffs, the defendants appealed to the Court of Civil Appeals. To review a judgment of the Court of Civil Appeals, 212 S.W.2d 241, the defendants bring error.

Judgments of the trial court and Court of Civil Appeals reversed and cause remanded for further proceedings.

Neel, King & Rachal, of Corpus Christi, Kelso, Locke & King and J. R. Locke, all of San Antonio, for petitioners.

Davenport & Ransome and Herbert Davenport, all of Brownsville, and Charles H. Clark, of Corpus Christi, for respondents.

SHARP, Justice.

Texas Natural Resources Foundation and others brought this action against Henshaw Brothers and Monday Oil Company (which claims under Henshaw Brothers) to recover the oil and gas leasehold estate in 356.35 acres of land located in Jim Wells County. This land consists of a 178-acre tract, referred to as the "Grossman," and a 178.35-acre tract, referred to as the "Boerner." Southern Minerals Corporation had in its possession, as stakeholder, certain monies claimed by the parties, and hence was joined as a party defendant. The trial was to the court without a jury, and judgment was for the plaintiff, the court making a disposition of the money in the hands of the stakeholder and awarding it attorney's fees. This judgment was affirmed by the Court of Civil Appeals. 212 S.W.2d 241.

The suit arises out of a joint venture agreement between Walter A. Henshaw and Paul A. Henshaw on the one side and Code Oil Company, a predecessor in title to respondents, on the other. There are involved a number of very lengthy and detailed contracts and agreements between the parties, and these will be set out in chronological order along with the events leading up to this litigation. The facts are undisputed.

On August 15, 1940, the leases in question were assigned to petitioners and delivered in escrow by certain officers of the Code Oil Company, acting in their individual capacity. The assignments are absolute in form. However, they were made subject to an escrow agreement executed between the parties at the same time. This escrow agreement provided that the leases were not to be delivered from escrow until certain drilling obligations were fulfilled by Henshaw Brothers; and it was provided that when the drilling operations resulted in a commercial producer, the assignors were to be paid $25 per acre.

On August 28, 1940, Henshaw Brothers and Code Oil Company entered into a written contract, which they designated as a "joint venture agreement." Under this agreement, which is too long and involved to be set out in full, Henshaw Brothers, who were designated therein as "Operators," and Code Oil Company, designated as "Company," both assumed certain obligations. Under the heading "Operators' Contributions," on the first page of the contract, appears the following paragraph: "Operators have the right to acquire two certain assignments of oil, gas and mining leases (covering the Grossman and Boerner tracts) under an escrow agreement between C. G. Malott, Trustee, and J. Luther Knies, Trustee, as Parties of the First Part, and themselves as Parties of the Second Part, dated August 15, 1940, a copy of which agreement is attached hereto, marked Exhibit `A', and incorporated herein by reference, and in the event those assignments are delivered to operators from escrow under the provisions of the escrow agreement, they shall be owned, held and handled pursuant to this agreement. Operators further agree that they will, at their sole cost and expense, drill the well hereinafter designated as `First Operation,' and in the event of and upon completion of the well provided for in such `First Operation,' as a commercial oil and/or gas well, Operators agree to assume, discharge and perform the operations hereinafter designated as `Second Operation' and `Third Operation.'"

By the contractual provisions relating to the "First Operation," Henshaw Brothers agreed to begin drilling within thirty days upon a designated location, to a depth which was also designated, or until oil and gas in paying quantities was encountered and produced.

The contract provided three alternatives upon the completion of the well or cessation of drilling:

First. In the event the well should prove to be a dry hole, the operators were to be paid out of money which was deposited with the escrow agent by the Company, at the rate of $1.60 per lineal foot, and the contract would be considered as fully performed and "the venture terminated."

Second. In the event the well should be completed as a commercial producer, the funds deposited in escrow by the Company were to be used to pay, in accordance with the escrow agreement, $25 per acre to the officers of the Company who had placed the leases in escrow after assigning them. It is provided that the operators were then to assign an undivided one-half of their interest in the leases to the Company, and were to expend the sum of $70,000 in drilling operations for the benefit of the joint venture, this to include the cost of drilling the well provided in the "First Operation."

Third. In a subsequent section of the joint venture agreement, entitled "General Provisions," it is provided that, after reaching the contract depth in the well designated as the "First Operation," if the operators did not desire to set casing, they could treat the well as a dry hole and receive payment from escrow as in the first alternative. However, it is also provided that the Company might take over the well and set casing, using the equipment of the operators, in which event the operators would have no interest in the well or the leasehold estates.

It was further provided in the contract that in the event the "First Operation" should prove to be a commercial producer, Henshaw Brothers would drill a second well upon the leased premises, said well being designated as "Second Operation." The "Third Operation" was the drilling of a third well upon the premises. However, it was provided that Henshaw Brothers, in lieu of drilling the second and third wells, could pay over to the Company one-half of $70,000, less the cost of drilling any wells they might have drilled.

In accordance with the contract, Henshaw Brothers entered upon the leased premises and drilled upon the Grossman Lease the well which is referred to as "Grossman No. One." The producing sand encountered was only two and one-half to three feet in thickness, and the well would not have been one which could have been financed by the operators; so they elected to act under the third alternative above, and treat the well as a dry hole. However, the Company elected to set the casing itself, under its option set out in the contract.

On October 1, 1940, instead of considering the venture at an end as provided by the contract, the Code Oil Company and Henshaw Brothers entered into a supplemental agreement. This contract provided that the Company was to pay all the costs of drilling and completion of the Grossman No. One well; and should this prove to be a commercial producer, the Company would secure the leases from escrow. However, this well was not to be considered as the "First Operation" under the joint venture agreement. The contract provided that "all operations as provided for under the said original contract of August 28, 1940, shall be deferred until such time as the said parties may hereafter agree," and pending such time the well being completed was to be operated by Henshaw Brothers under a separate agreement. This separate agreement provided that Henshaw Brothers would charge all expenses against a joint account, all materials and labor being billed at cost.

The supplemental agreement of October 1, 1940, also provided that the Company was to receive all the proceeds from the production of the Grossman No. One well until it received the sum of $35,000. This figure represents the actual cost of drilling and completion of the well, plus twenty per cent. interest for eighteen months. The agreement further provided that, in the event another well was drilled on the leased premises, not offsetting a well off the premises, unless such well was completed as a "bankable well under the financing requirements of operators," Code Oil Company would pay all costs and be entitled to receive all proceeds until it received an additional $23,000; this figure also being the estimated actual cost plus twenty per cent. interest for eighteen months.

In connection with the foregoing supplemental agreement another agreement was executed on the same date, which provided that if the payout of the Grossman No. One well exceeded eighteen months, Code Oil Company would receive thereafter an additional amount equal to twenty per cent. per annum of $27,000, until it was paid in full.

The Grossman No. One well was completed as a commercial producer after the Code Oil Company took over and set the casing. The two assignments covering the Grossman lease and the Boerner lease were paid for out of the escrow deposit in the bank, and the assignments, which were absolute conveyances of those parts of the leases covered by the joint venture contract, subject to oil payments reserved therein, were delivered to Henshaw Brothers. By assignments, Henshaw Brothers conveyed to Code Oil Company an undivided one-half interest in the portions of the leases transferred to them.

On October 16, 1940, Henshaw Brothers and Code Oil Company entered into a written agreement providing for the drilling of the "Boerner No. One" well. This agreement sets out that if the financing of Boerner No. One and Grossman No....