Howell v. Union Producing Company

• Decision Date: 12 March 1968
• Docket Number: No. 24242.,24242.
• Parties: Ralph F. HOWELL et al., Appellants, v. UNION PRODUCING COMPANY et al., Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

392 F.2d 95 (1968)

Ralph F. HOWELL et al., Appellants, v. UNION PRODUCING COMPANY et al., Appellees.

No. 24242.

United States Court of Appeals Fifth Circuit.

January 22, 1968.

Rehearing Denied March 12, 1968.

Will A. Knight, Tyler, Tex., W. Scott Clark, Fort Worth, Tex., for appellants.

B. J. Wynne, Wills Point, Tex., Spencer C. Relyea, III, Dallas, Tex., Thomas Fletcher, Lynn R. Coleman, Robert Bruce LaBoon, Houston, Tex., for appellees.

Before RIVES, WISDOM and GOLDBERG, Circuit Judges.

GOLDBERG, Circuit Judge.

This interpleader action has origins many conveyances and documents ago with the execution of a conventional oil and gas lease. The lease was signed jointly in 1951 by several lessors who owned interests in three tracts of land. The act of executing a joint lease arguably created a "community" wherein royalties from production referable to any one tract would be apportioned to the owners of all land covered by the lease.¹ The court below found a birth of community interests in 1951 and survival through 1966; thus, the judge allocated proceeds accordingly. We find contractual lethality in the 1963 agreement and reverse.

Stated as briefly and objectively as possible, the facts and cast of characters are as follows. Union Producing Company (Union) is the assignee-lessee of an oil, gas, and mineral lease executed on May 16, 1951, by a widow, Mrs. Mattie W. McKain, and her children. Through this lease (hereinafter referred to as the McKain lease) the lessee obtained operating rights on three tracts of land containing, respectively, 285.35 acres, 52.5 acres, and 49.39 acres (the latter having been originally surveyed as 46.41 acres but corrected on re-survey). The 49.39 acre tract — which is the focal point of this suit — and the 52.5 acre tract are contiguous, but neither adjoins the 285.35 acre tract. In 1951 all lessors owned undivided fee interests in each of the three lands, which interests combined to constitute 100% ownership.

On June 12, 1958, following the death of Mrs. Mattie McKain, the surviving children partitioned the three tracts among themselves by means of partition deeds. Subsequent conveyances of lessors' interests by means of mineral and royalty deeds occurred frequently, thus accounting for the sparsity of McKains in the present suit.

No production was obtained during the ten-year period specified in the lease. In August of 1960, one year before the lease was to expire, all lessors who then owned executive interests in any part of the three tracts executed an extension agreement for another ten-year period.

On September 11, 1962, under the pooling and unitization authority granted in the lease, Union pooled the 49.39 acre tract with other lands to create the 702 acre Lay Gas Unit. Neither the 52.5 acre tract nor the 238.5 acre tract was included in this unit. A producing gas well was completed on the Lay Gas Unit on December 16, 1962, but no well was or is located on the 49.39 acre tract included in the unit. Subsequent to the declaration of the Lay Gas Unit, Union circulated ratification instruments to the nonparticipating royalty owners of only the 49.39 acre tract. These instruments, hereinafter referred to as the 1963 ratification agreement, expressed ratification of Union's authority to pool the 49.39 acre tract and specified that royalties would be allocated only to lands which were productive.

Production of gas on the Lay Gas Unit precipitated this controversy. The owners of royalty interests in the 49.39 acre tract filed suit in state court to recover all royalties due from the Lay Gas Unit to the 49.39 acre tract. Objections by owners of interests in the other two tracts caused Union to join all interest holders as defendants in this interpleader suit. Federal jurisdiction is granted under 28 U.S.C. § 1335.

The parties to this suit can be divided into four categories. The first is a group of appellants which the trial court labeled the "Howell Group." Each member of this group owns a mineral or royalty interest in the 49.39 acre tract or part thereof and either executed or holds in privity with a signer or a ratifier of the 1960 lease extension agreement. Likewise, each member either signed or holds in privity with a signer of the 1963 ratification agreement. The second category is occupied by a single appellant, Midwest Oil Corporation. Midwest signed the 1963 agreement but holds a royalty interest in 10 acres in the 49.39 acre tract, which interest was not covered by the 1960 extension agreement. The third category, composed of owners of interests in the 52.5 acre and 285.35 acre tracts, and the fourth category, composed solely of Union, here join in defending the district court's finding of community survival; but their coalition may prove to be vulnerable in the event that Union must pay full royalties from the Lay Gas Unit to the 49.39 acre owners.

The vulnerability of the appellee coalition warns us that we cannot take the easy route of decision in this case. A reversal solely on the basis of the 1963 ratification agreement would leave unsettled Union's liability to the third category of owners. It would violate the very essence of an interpleader action, which requires that a court attack the legal hydra and cauterize each relevant issue. We are fated to accept this Herculean task even though, as we shall point out, many issues which will confront us have not as yet been solved by Texas courts. We are wary of jurisprudential paternalism in our federalism, and our discussion must not be deemed a preemption of the prerogative vouchsafed to state courts. If we be in error, courts of Texas can indulge in retrocession. However, if we trespass into the state's domain, our trespass is a forced one. In Meredith v. City of Winter Haven, 1943, 320 U.S. 228, 234-235, 64 S.Ct. 7, 11, 88 L.Ed. 9, 13, the Supreme Court stated:

"In the absence of some recognized public policy or defined principle guiding the exercise of the jurisdiction conferred, which would in exceptional cases warrant its non-exercise, it has from the first been deemed to be the duty of the federal courts, if their jurisdiction is properly invoked, to decide questions of state law whenever necessary to the rendition of a judgment. * * * cases cited When such exceptional circumstances are not present, denial of that opportunity by the federal courts merely because the answers to the questions of state law are difficult or uncertain or have not yet been given by the highest court of the state, would thwart the purpose of the jurisdictional act."

See also Fulton National Bank v. Tate, 5 Cir. 1966, 363 F.2d 562, 575-576 (see fn. 24); Texas and New Orleans Railroad Co. v. Cadoree, 5 Cir. 1964, 333 F.2d 682; Duke v. Sun Oil Co., 5 Cir. 1963, 320 F.2d 853, 858; Smoot v. State Farm Mut. Auto. Ins. Co., 5 Cir. 1962, 299 F.2d 525, 529.

We will approach the present saga of communitization through a background of controlling oil and gas principles in Texas law. The Texas Supreme Court has described the basic property rights peculiar to oil and gas as follows:

"The rule in Texas recognizes the ownership of oil and gas in place, and gives to the lessee a determinable fee therein. (Citing cases.

Owing to the peculiar characteristics of oil and gas, the foregoing rule of ownership of oil and gas in place should be considered in connection with the law of capture. This rule gives the right to produce all of the oil and gas that will flow out of the well on one\'s land; and this is a property right. And it is limited only by the physical possibility of the adjoining landowner diminishing the oil and gas under one\'s land by exercise of the same right of capture. Citing cases." Brown v. Humble Oil & Refining Co., 1935, 126 Tex. 296, 83 S.W.2d 935, 940, 99 A.L.R. 1107, quoted, among others, in Halbouty v. Railroad Commission, 1962, 163 Tex. 417, 357 S.W.2d 364, 374, cert. denied, 1962, 371 U.S. 888, 83 S.Ct. 185, 9 L.Ed.2d 122 and Campbell v. Fields, 5 Cir. 1956, 229 F.2d 197, 201.

Obviously, defensive tactics caused by the rule of capture could lead, and have led, to wasteful drilling² with the result that landowners have developed methods of "pooling" or "unitizing" their holdings to make wells more profitable.³ Although the term "pooling" frequently refers to one-well units and the term "unitization" usually refers to larger or more comprehensive units, these terms will be treated herein as synonymous.⁴

Inherent in a desire to pool is the desire to increase net income from one's acreage. A pooling party gives up valuable rights when he allows a lessee to select from the entire unit well sites which may or may not be on his own land, and, ultruism aside, he expects to receive benefits. Thus, pooling agreements often include specific clauses directing the allocation of royalties and other payments among the parties regardless of the actual well site. In at least one form of pooling the allocation of royalties is presumed even if no mention is made of it in the pooling agreement. This is the community lease, which is the primary subject of this litigation. A lease is potentially a "community lease" when multiple lessors owning interests in separate tracts execute it in favor of a single lessee. The intent presumed by such execution is that each lessor allows the lessee to treat the tracts as a unit. From this intent is inferred an intent to apportion proceeds from operations according to the amount of land each lessor contributes to the unit. In Texas royalties are apportioned as a matter of law unless the lease states otherwise. Parker v. Parker, Tex.Civ.App. 1940, 144 S.W.2d 303, error ref.; French v. George, Tex.Civ.App.1942, 159 S.W.2d 566 error ref.; Southland Royalty Co. v. Humble Oil & Refining Co., 1952, 151 Tex. 324, 249 S.W.2d 914; Ward v. Gohlke, Tex.Civ.App.1955, 279 S.W.2d 422, error ref.

Apportionment of proceeds by acreage in community leases can be justified through a conservation policy of...