Hull v. Magnolia Petroleum Co.

• Decision Date: 10 May 1941
• Docket Number: No. 9501.,9501.
• Citation: 119 F.2d 123
• Parties: HULL et al. v. MAGNOLIA PETROLEUM CO. et al.
• Court: U.S. Court of Appeals — Fifth Circuit

119 F.2d 123 (1941)

HULL et al. v. MAGNOLIA PETROLEUM CO. et al.

No. 9501.

Circuit Court of Appeals, Fifth Circuit.

April 17, 1941.

Rehearing Denied May 10, 1941.

T. P. Hull, of San Antonio, Tex., for appellants.

Thomas Fletcher, of Houston, Tex., Hugh Carney, of Atlanta, Tex., Walace Hawkins, of Dallas, Tex., and J. G. Strong, of Carthage, Tex., for appellees.

Before FOSTER, HUTCHESON, and McCORD, Circuit Judges.

HUTCHESON, Circuit Judge.

The suit was, by the heirs of the lessor, for cancellation, and damages for nondevelopment, of an oil and gas lease, or in the alternative, for equitable relief against the failure of lessee to develop. The claim was that upon a lease of approximately 6,000 acres requiring reasonable development for oil and gas, defendants had in total breach of their obligation to develop, completed only two producing wells, whereas, defendants were reasonably obligated to develop the property on a basis of at least one well to each 50 acres.

The defenses on which appellees prevailed below were two-fold. One of these was that a provision of Paragraph (3),¹ of the lease contract, expressly fixes and defines the drilling obligations, and the obligations so fixed are entirely inconsistent with and completely exclude implied covenants for diligent development. The other was, that by Paragraph (6),² lessor had agreed with lessees that none of the covenants, expressed or implied were to be understood as conditions; that their breach would not work a forfeiture, abandonment or termination of the lease, and grantee should not be liable in damages for breach of any implied obligation or covenant; and that because of such agreement, appellants were without standing in equity to obtain relief from lessee's holding the property beyond the ten year term without developing it.

Appellants are here insisting: That the first defense completely loses sight of and nullifies the principal apparent purpose of the parties, that the lease be developed for oil and gas, and that under the influence of that view, it wholly misinterprets the paragraph on which it relies and the contract as a whole.

Of the second defense, that the lease validly provides that breaches of its covenants will neither work a forfeiture nor give rise to an action for damages, appellants say that if these provisions are valid, they do not make against, they give emphasis to their claim for equitable relief.

We agree with appellants. Notwithstanding the statements in Paragraph (6) that "title to the minerals vested in grantee under the grant shall not end or revert to grantor until there is a complete, absolute and intentional abandonment by grantee", it is quite clear from the lease³ as a whole, and it must be read and interpreted as a whole and not in fragments, Humphrys v. Skelly Oil Co., 5 Cir., 83 F. 2d 989, that its principal apparent purpose after the expiration of the ten year term, was the development of the leased premises for oil and gas.

It is equally clear that under the rule, that the "principal apparent purpose of the parties should be given the greatest weight in determining the meaning to be given the words they used", Contract, Re-Statement, Sec. 236; Cocke v. Vacuum Oil Co., 5 Cir., 63 F.2d 406, appellee's construction of the word "term" in the third paragraph, as applying not only to the ten year term, but any extension thereof, must be rejected and the word must be construed as referring to the fixed or ten year term, and not at all to an extension of it by development. Any other meaning would be absolutely self-contradictory and would completely nullify the provision of the "habendum" clause for an extension of the ten year term by drilling, for it would have the lease say in Paragraph (3) that drilling was not required during either the term or its extension and in the second paragraph that diligent drilling was essential to the extension of the term. That the parties understood that the lease and the obligations of the parties under it, were clearly divided into two periods, one, the ten year term and thereafter until oil found, the period of express obligation, the other, the extension of the term after oil found, the period of implied obligation, was made abundantly clear by the provision of the sixth paragraph expressly recognizing the existence of implied covenants and making provision for limiting their effect. We therefore hold; that the lease is without express provisions, fixing and defining drilling obligations after oil is found; that drilling thereafter is governed by the covenants implied in the lease; that the cases appellees rely on, such as Cowden v. Broderick, 131 Tex. 434, 114 S. W.2d 1166, 117 A.L.R. 61; Gulf Production Co. v. Kishi, 129 Tex. 487, 103 S.W.2d 965, are wholly without application; and that the cases controlling here are Waggoner Estate v. Sigler Oil Co., 118 Tex. 509, 19 S.W.2d 27; Cosden Oil Co. v. Scarborough, 5 Cir., 55 F.2d 634; Amerada Petroleum Co. v. Doering, 5 Cir., 93 F.2d 540, 114 A.L.R. 1385; Brewster v. Lanyon Co., 8 Cir., 140 F. 801; Sauder v. Mid-Continent Petroleum Corp., 292 U.S. 272, 54 S.Ct. 671, 78 L.Ed. 1255, 93 A.L.R. 454.⁴

We think it quite plain therefore, that whether the provision in Paragraph (6), that grantee should not be liable in damages for breach of any implied covenant in view of settled Texas law that such breaches give rise to damage claims, Waggoner Estate v. Sigler Oil Co., supra, is or is not valid,⁵ the case, presented, of two wells on the 6,000 acre lease, on a record showing, as this does, that the whole property was proven or at least that there was reasonable grounds to believe that it was oil bearing, presents a clear case for equitable relief directly within Amerada Petroleum v. Doering, and Sauder v. Mid-Continent Petroleum Corp., supra.

The judgment is therefore reversed and the cause is remanded with directions to the district judge to frame a decree that the lease shall be terminated, cancelled and held for naught except as to 20 acres around each well already drilled, unless defendants lessees, shall, within a reasonable time to be fixed by the court, commence and thereafter diligently prosecute drilling operations for the development of the lease for oil and gas.

Reversed and remanded.

1 "It is expressly understood and agreed that grantee is not under obligation to nor compelled to commence or drill any well or wells or conduct any character of operations on the land herein described during the term of this grant, save and except such as may be reasonably necessary to protect said land from drainage from producing wells on adjoining lands."

2 "The covenants mentioned in this lease, as well as all implied covenants, are not to be understood as conditions, and the breach of one or all of same will not work a forfeiture, abandonment or...