Hutchinson v. McCue, 4353

• Decision Date: 09 January 1939
• Docket Number: No. 4353,4365.,4353
• Citation: 101 F.2d 111
• Parties: HUTCHINSON et al. v. McCUE et al. (two cases). In re HAMILTON GAS CO.
• Court: U.S. Court of Appeals — Fourth Circuit

101 F.2d 111 (1939)

HUTCHINSON et al. v. McCUE et al. (two cases). In re HAMILTON GAS CO.

Nos. 4353, 4365.

Circuit Court of Appeals, Fourth Circuit.

January 9, 1939.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Okey P. Keadle, of Huntington, W. Va. (James Damron, of Huntington, W. Va., on the brief), for appellants.

W. E. Miller, Stanley C. Morris, and J. Floyd Harrison, all of Charleston, W. Va., for appellees.

Before PARKER, NORTHCOTT, and SOPER, Circuit Judges.

SOPER, Circuit Judge.

An oil and gas lease, covering 300 acres of land in Cabell County, West Virginia, is the subject matter of this suit and the disputed point is whether the term of the lease has expired or is still current. The appellants, who succeeded to interests in the premises as heirs of the lessor, petitioned the District Court for a decree declaring that the lease had terminated, but were refused. The District Court then had jurisdiction over the affairs of the Hamilton Gas Company as a result of a reorganization proceeding under Section 77B of the National Bankruptcy Act, 11 U.S.C.A. § 207.

The lease was executed on April 9, 1924 by W. W. Hutchinson and wife to E. L. Lusher and his assigns, and was subsequently assigned by him to the Hamilton Gas Company. The lessors granted to the lessee their proportional part in the oil and gas under the land, with the exclusive right to drill for, produce and market the same. The lease ran "for the term of ten years (and so long thereafter as oil or gas shall be produced from the land leased and royalty and rentals paid by the Lessee therefor)"; and the right was granted to the lessee "to have and to hold said premises for and during the term aforesaid". The lessee agreed to deliver to the lessors as royalty one eighth of all the oil produced and saved from the premises, and also agreed to pay to the lessors as rental for each gas well "from the time and while the gas is marketed, the sum of ($50.00) Fifty Dollars each three months." The lessors were declared entitled to gas free of cost for domestic use in three dwellings on the premises from any gas well thereon, so long as the lessee should operate the same. The lessee agreed to drill a well within six months from the date of the lease, or to pay to the lessors as delay rental $1 per acre in quarterly installments of $75 in advance for each three months, until such well should be drilled or the lease should be surrendered; and the lessee was given the right to surrender the lease at any time upon payment to the lessors of all monies for delay then due thereunder.

Delay rentals, amounting to $1244.50, were paid to the lessor as they accrued. Three producing wells were drilled by the Gas Company in July, 1929, December, 1929 and March 1930 at a cost of $13,406.29, $12,682.54 and $11,143.21, respectively. Well rentals at $50 per quarter were paid on the first well until October 15, 1930, and on the second well until September 4, 1930. Production from these two wells was discontinued and the wells were shut in by the lessees from July, 1930 to December, 1934 and the third well was not turned into production until December, 1934. Although the rentals specified by the lease have not been paid since 1930, certain monies have been paid by way of compromise to certain heirs of the lessor (other than appellants), and certain monies were paid into court after the institution of this suit by way of tender on account of rentals, as will hereinafter appear.

The circumstances under which production of gas and payment of rentals ceased in 1930 are for the most part undisputed and constitute the factual basis upon which rests the contention advanced by the appellants that the lease has terminated. The term of the lease, no oil having been found, was for the period of ten years and so long thereafter as gas should be produced and rentals paid therefor by the lessee. The ten year period expired on April 9, 1934. Production ceased in July, 1930 and was not resumed until December, 1934. The controlling question in the case is whether the Hamilton Gas Company, assignee of the lease, was justified in view of its obligation under the contract, in shutting off production in July, 1930 and in discontinuing the payment of rentals shortly thereafter.

During the period from July, 1929, when the first well came into production, until July, 1930, when all production ceased, the Hamilton Gas Company had control of the West Virginia Gas Corporation and sold gas to it from the Hutchinson wells at the prevailing market rate of 12¢ per m. c. f. This course of business could have been continued indefinitely if the Hamilton Gas Company had so desired. The West Virginia Company was delivering gas to manufacturers at Huntington, West Virginia, under two contracts, one with the International Nickel Company and the other with the Owens Illinois Bottle Company. The contract with the Nickel Company called for a price of 25¢ per m. c. f. in 1930 and gas was still being supplied thereunder at the time of the hearing in 1937. Gas was supplied to the Bottle Company at 17¢ per m. c. f. until May 20, 1932 when the price became 18½¢ for the following five years and 25¢ for the next five years. Deliveries were continued thereunder for 1929 and subsequently throughout the year 1934 and perhaps later.

The affairs of the Hamilton Gas Company and its subsidiary, the West Virginia Gas Company, were dominated by William A. Larner, who was president of both companies. On or about July 15, 1930 he voluntarily sold control of the West Virginia Company to the Appalachian Gas Corporation. The next day he cut off the supply of gas from the Hamilton to the West Virginia Company. Market conditions at the time were bad and he had no other customer; and hence it is natural to inquire why he discontinued the sale from the Hutchinson wells. The evidence offers no sufficient explanation. There were some differences in the testimony as to whether the West Virginia Company was willing to enter into a contract for a definite period for the continued supply of the gas, and as to whether it was willing to pay a price in excess of 12¢ per m. c. f.; but it is admitted that it was willing to continue the purchase of the gas after July 15, 1930 on precisely the same terms at which it had been purchased prior to that date, that is to say, at 12¢ without any agreement as to the length of time that the arrangement should endure.

Harry E. Danner, General Manager of the West Virginia corporation after it was acquired by the new owner in 1930, testified that he indicated to Larner that the West Virginia Company was willing to enter into an agreement to purchase the gas from the Hutchinson wells at the increased rate of 15¢ per m. c. f. during the life of the field, but this offer was refused. He also said that the West Virginia Company preferred to continue to purchase the Hutchinson gas for delivery under its contracts, rather than to make the capital outlay in excess of $30,000 which it was required to spend after July, 1930, in order to connect its lines with other affiliated properties.

Larner testified that he could have continued the sale of the Hutchinson gas to the West Virginia corporation at 12¢ per m. c. f., until that company could complete a new pipe line, but he refused to do so at less than 18¢ per m. c. f. because he desired to get a long term lease on a permanent basis. He did in fact begin negotiations with United Fuel Gas Company to this end, but there was a long delay in coming to terms and a contract was not executed until July, 1932, six months after the Hamilton Gas Company had gone into the hands of receivers. Even then the contract did not require the United Fuel Gas Company to take the gas, and in fact no gas was sold to it until eight months after the ten year period had expired, that is, in December, 1934, and then the sale took place under a modified contract.

Upon this evidence, the District Judge concluded that by the time the third well had been drilled, the Hamilton Gas Company was unable to market the gas from any of the Hutchinson wells except on a temporary and unsatisfactory sufferance basis, wherefore it discontinued production. We are constrained to differ with this finding. It is important to bear in mind that the witness Danner had no interest whatever in the pending controversy, and that his company in 1930 had profitable contracts for the sale of gas, which it desired to supply without interruption from the Hutchinson wells; while the witness Larner was called upon to show that his company was entitled to an extension of the ten year term of the lease, and for that purpose was required to explain why he cut off business relations with his only customer in 1930, when he was in full control of the situation. In our opinion, the reasonable conclusion from the evidence is that the Hamilton Company could have kept the Hutchinson wells in production, and could have sold the gas therefrom to the West Virginia company throughout the entire period when the wells were shut down; and that Larner's decision to cut off the supply from the West Virginia Company was based on nothing more tangible than his hope, uncertain at best under the unfavorable market conditions prevailing, that a more desirable customer could be found.

W. W. Hutchinson, the lessor, as we have shown in passing, died during the ten year term of the lease and the property descended to his heirs. There were seven children, each of whom inherited an equal undivided interest in the property. They joined in a deed of partition on February 27, 1932 whereby the property was divided into seven shares to be held by them in severalty. But the shares were conveyed subject to the lease, and it was agreed that any royalty or income arising therefrom should be equally divided among them. Lot No. 1 was allotted to O. K. Hutchinson; lot No. 2, on which is located gas well No. 3, was allotted to G. C. Hutchinson, who...