Heritage Resources, Inc. v. NationsBank

• Decision Date: 21 March 1997
• Docket Number: No. 95-0515,95-0515
• Citation: 939 S.W.2d 118
• Parties: 39 Tex. Sup. Ct. J. 537 HERITAGE RESOURCES, INC., Petitioner, v. NATIONSBANK, Co-Trustee under the Will of David B. Trammell, Deceased et al., Respondents.
• Court: Texas Supreme Court

Page 118

939 S.W.2d 118

39 Tex. Sup. Ct. J. 537

HERITAGE RESOURCES, INC., Petitioner, v.NATIONSBANK, Co-Trusteeunder the Will of David B. TrammellDeceased et al., Respondents.

No. 95-0515.

Supreme Court of Texas.

Argued Nov. 29, 1995.

Decided April 25, 1996.

Rehearing Overruled March 21, 1997.

Appealed from El Paso Court of Appeals, Eighth Judicial District; Susan Larsen, Justice.

John R. Woodward, Dallas, for Petitioner.

Robert Scogin, Kermit, Rick K. Disney, Fort Worth, Cary L. Jennings, Fort Worth, Ben A. Douglas, Fort Worth, for Respondents.

Justice BAKERdelivered the opinion of the Court, in which Chief Justice PHILLIPS, Justice CORNYN, Justice ENOCH, and Justice SPECTOR join.

This case involves construction of royalty clauses in several oil and gas leases.NationsBank sued Heritage contending that Heritage deducted transportation costs from the value of NationsBank's royalty in violation of the leases.

The trial court rendered a partial summary judgment against Heritage deciding liability and damages through 1991.NationsBank amended its pleading to include Heritage's deductions through 1993.After a bench trial, the trial court awarded NationsBank and other royalty owners the transportation costs Heritage deducted plus interest and attorney's fees.

The court of appeals affirmed the trial court's judgment.895 S.W.2d 833.It held that the royalty clauses showed the parties' intent not to deduct the post-production transportation costs when determining market value at the well.895 S.W.2d at 836-37.The court of appeals also held that the division orders Heritage and the royalty owners executed did not bind the royalty owners and that Heritage was liable for the full amount deducted.895 S.W.2d at 839.

We conclude the trial court and the court of appeals incorrectly interpreted the royalty clauses.We reverse the court of appeals' judgment.We render judgment that NationsBank take nothing.Further, we disapprove of the court of appeals' language about the liability of an operator who underpays royalty interest owners.

Facts

NationsBank is the trustee for owners of interests in gas, oil, and other minerals inherited under David B. Trammel's will.Heritage is the lessee and operator under a number of leases.Heritage also owns an undivided working interest in some of the leases.Heritage sold gas off the leased premises.Heritage deducted the cost to transport the gas from the wellhead to the point of sale as a post-production cost from the sales price before calculating royalties.

In January 1989, NationsBank noticed that Heritage was deducting severance taxes and transportation charges from the purchase price.NationsBank objected to the transportation charge deduction.NationsBank contended that the leases specifically prohibited the deduction.Three different leases are in issue.The relevant parts are:

3.The royalties to be paid Lessor are ...

(b) on gas, including casinghead gas or other gaseous substances produced from the land, or land consolidated therewith, and sold or used off the premises or in the manufacture of gasoline or other products therefrom, the market value at the well of 1/5 of the gas so sold or used, provided that on gas sold at the well the royalty shall be 1/5 of the amount realized from such sale provided, however, that there shall be no deductions from the value of the Lessor's royalty by reason of any required processing, cost of dehydration, compression, transportation or other matter to market such gas.

or:

3.In consideration of the premises, Lessee covenants and agrees ...

(b) To pay the Lessor 1/4 of the market value at the well for all gas (including substances contained in such gas) produced from the leased premises; provided, however, that there shall be no deductions from the value of Lessor's royalty by reason of any required processing, cost of dehydration, compression transportation, or other matter to market such gas.

or

3.Lessee shall pay the following royalties subject to the following provisions: ...

(b) Lessee shall pay the Lessor 1/4 of the market value at the well for all gas (including all substances contained in such gas) produced from the leased premises and sold by Lessee or used off the leased premises, including sulphur produced in conjunction therewith; provided, however, that there shall be no deductions from the value of Lessor's royalty by reason of any required processing, cost of dehydration, compression, transportation, or other matter to market such gas.

Although the court of appeals states that the leases are virtually identical, the first lease is distinctly different from the others.In the first lease, for gas sold on the lease, royalty is on proceeds, with no deduction for marketing costs, but if sold at a point off the lease, the royalty is the market value at the well.However, this difference is irrelevant for purposes of this opinion.All three leases require us to determine if Heritage improperly deducted transportation costs from the royalty payments.The critical clause in all three leases is the requirement that Heritage pay the royalty interest owners their fractional interest of "the market value at the well" of the gas produced.

Royalty Clause Construction

Heritage contends that the royalty clauses define the lessor's royalty as a fraction of the market value at the well.Therefore, the clauses limiting deduction from the value of the lessor's royalty simply means that Heritage cannot deduct an amount from the sales price that would make the royalty paid less than the required fraction of market value at the well.Because NationsBank concedes Heritage only deducted reasonable transportation costs from the market value at the point of sale, Heritage did not make a deduction from the "value of the Lessor's royalty."

The court of appeals rejected Heritage's interpretation of the royalty clause.895 S.W.2d at 836.The court of appeals reasoned that because royalty interests are normally subject to post-production costs, Heritage's interpretation renders the post-production clause meaningless.895 S.W.2d at 837.Although we do not disagree with the court of appeals' reasoning in this respect, we find that applying the trade meaning of royalty and market value at the well renders the post-production clauses surplusage as a matter of law.

(a) Applicable Law

Oil and Gas Lease Construction

The question of whether a contract is ambiguous is one of law for the court.R & P Enters. v. LaGuarta, Gavrel & Kirk, Inc., 596 S.W.2d 517, 518(Tex.1980).A contract is ambiguous when its meaning is uncertain and doubtful or is reasonably susceptible to more than one interpretation.Coker v. Coker, 650 S.W.2d 391, 393(Tex.1983).In construing an unambiguous oil and gas lease our task is to ascertain the parties' intentions as expressed in the lease.Sun Oil Co. v. Madeley, 626 S.W.2d 726, 727-28(Tex.1981);McMahon v. Christmann, 157 Tex. 403, 303 S.W.2d 341, 344(1957).To achieve this goal, we examine the entire document and consider each part with every other part so that the effect and meaning of one part on any other part may be determined.Steeger v. Beard Drilling, 371 S.W.2d 684, 688(Tex.1963).We presume that the parties to a contract intend every clause to have some effect.Ogden v. Dickinson State Bank, 662 S.W.2d 330, 331(Tex.1983).We give terms their plain, ordinary, and generally accepted meaning unless the instrument shows that the parties used them in a technical or different sense.Western Reserve Life Ins. Co. v. Meadows, 152 Tex. 559, 261 S.W.2d 554, 557(1953), cert. denied, 347 U.S. 928, 74 S.Ct. 531, 98 L.Ed. 1081(1954).This Court will enforce the unambiguous document as written.Sun Oil Co., 626 S.W.2d at 728.Both the trial court and the court of appeals determined that the leases in question were unambiguous.We agree.

Royalty

Royalty is commonly defined as the landowner's share of production, free of expenses of production.SeeDelta Drilling Co. v. Simmons, 161 Tex. 122, 338 S.W.2d 143, 147(1960);Alamo Nat'l Bank v. Hurd, 485 S.W.2d 335, 338(Tex.Civ.App.--San Antonio1972, writ ref'd n.r.e.);8 WILLIAMS & MEYERS, OIL & GAS LAW, 856-57 (1987);3 KUNTZ, OIL & GAS LAW, § 42.2(1989).Although it is not subject to the costs of production, royalty is usually subject to post-production costs, including taxes, treatment costs to render it marketable, and transportation costs.Martin v. Glass, 571 F.Supp. 1406, 1410(N.D.Tex.1983), aff'd, 736 F.2d 1524(5th Cir.1984);WILLIAMS & MEYERS, supra, p. 857.However, the parties may modify this general rule by agreement.Martin, 571 F.Supp. at 1410.

Market Value at the Well

Market value at the well has a commonly accepted meaning in the oil and gas industry.See generally Wakefield, Annotation, Meaning of, and Proper Method for Determining, Market Value or Market Price in Oil and Gas Lease Requiring Royalty to be Paid on Standard Measured by Such Terms, 10 ALR 4 TH 732(1981).Market value is the price a willing seller obtains from a willing buyer.SeeExxon Corp. v. Middleton, 613 S.W.2d 240, 246(Tex.1981).There are two methods to determine market value at the well.

The most desirable method is to use comparable sales.Middleton, 613 S.W.2d at 246;Texas Oil & Gas Corp. v. Vela, 429 S.W.2d 866, 872(Tex.1968).A comparable sale is one that is comparable in time, quality, quantity, and availability of marketing outlets.Middleton, 613 S.W.2d at 246;Vela, 429 S.W.2d at 872.

Courts use the second method when information about comparable sales is not readily available.See, e.g., Le Cuno Oil Co. v. Smith, 306 S.W.2d 190, 193(Tex.Civ.App.--Texarkana1957, writ ref'd n.r.e.), cert. denied, 356 U.S. 974, 78 S.Ct. 1137, 2 L.Ed.2d 1147(1958);Clear Creek Oil & Gas Co. v. Bushmiaer, 165 Ark. 303, 264 S.W. 830, 832(1924); see also Pierce, Royalty Valuation Principles in a Changing Gas Market, in STATE BAR OF TEXAS PROF. DEV. PROGRAM, 11TH...