Laguna Royalty Company v. Marsh, 21704.

• Citation: 350 F.2d 817
• Decision Date: 08 October 1965
• Docket Number: No. 21704.,21704.
• Parties: LAGUNA ROYALTY COMPANY et al., Appellant, v. Clarence L. MARSH et ux., Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

350 F.2d 817 (1965)

LAGUNA ROYALTY COMPANY et al., Appellant, v. Clarence L. MARSH et ux., Appellee.

No. 21704.

United States Court of Appeals Fifth Circuit.

September 3, 1965.

Rehearing Denied October 8, 1965.

Orrin W. Johnson, Joel William Ellis, Harlingen, Tex., for appellant.

Albert E. Coneway, Coneway & Forrester, Harlingen, Tex., for appellees.

Before BROWN and GEWIN, Circuit Judges, and KILKENNY,^* District Judge.

JOHN R. BROWN, Circuit Judge.

This appeal is by the working interest owners and holders of overriding royalties¹ of an oil and gas lease who lost² their lawsuit below against the landowner-lessor Marsh³ who, as a matter of law,⁴ unlawfully expelled the operator from the lease, and allegedly damaged their well beyond repair by having a bridge plug inserted above both producing sands. However, the jury by its "No" answer to interrogatory No. 1, in the light of the Court's instruction, evidently believed either (a) that Rex Kelso, the operator of the well had by his own acts previously destroyed the well or (b) that the well was so depleted as to be no longer commercially productive regardless of who destroyed it. As to this judgment, a variety of errors are asserted. Also very much involved is the Trial Judge's refusal to grant plaintiffs' motion to vacate under F.R.Civ.P. 60(b) on the ground of newly discovered evidence.⁵ We affirm on the main appeal and remand for further 60(b) proceedings.

Much of the history of the lease and the well is revealed by the facts found by the Texas State Court in an earlier proceeding between the same parties to determine the validity of the lease.

Landowner Marsh granted a lease on 340 acres in 1946. In 1948 a portion of it along with other acreage was unitized into the 320-acre "Marsh #1 unit" — the subject lease. Also in 1948, the "Marsh #1 well" was drilled and completed, and this well continued to produce gas, condensate and distillate in commercial quantities up to the time it was shut-in on April 1, 1961 on orders of the then operator, William A. Parker, a Bostonian who operated the well by mail and employing a local manager.

The well was then in need of repairs and reworking. Parker, on April 1, 1961, for about $17,000 sold the well equipment in place to plaintiff Western Oil Corp. along with an option to buy the leases, which option was subsequently exercised on or about May 8, 1961. Western Oil thereby became the owner of the working interest and hence the operator of the well (and lease).

Not before the State Court apparently were the facts that Kelso was retained by Western to look over the well in anticipation either of salvaging the equipment or reworking and operating the well. The well was a dual completion gas well producing in what were known as the "A" sand at approximately 7170-80 feet and the "D" sand at approximately 7490-7500 feet. The A sand was a closed reservoir which produced by decreasing pressure, whereas the D sand was a field-wide blanket sand produced by water drive. The dual completion was accomplished by inserting tubing inside the casing. The A sand was tapped by perforating only the casing and allowing the gas to flow up the annulus (circular open space between the tubing and the casing). Then the D sand was produced by perforating both the casing and the tubing. And with a "packer" set to seal off the annulus between the A and D sands, the D sand gas would flow up the tubing to the well head.

Production had declined to the point where Parker no longer considered it profitable to operate the well. Kelso then acting for Western Oil thought the well could be operated more cheaply — particularly since he could do much of the work himself, and also that a rework might restore the well to substantial productivity. Thus on about April 18, Kelso removed the packer separating the sands and also the tubing from the well to examine it. To prevent the higher pressure A sand gas from migrating down the casing and communicating with the D sand, which would destroy the A sand's productivity, he filled the casing with a column of water. He apparently thought that salt water was used, but the Federal Court testimony of the well service people who did the work showed that actually fresh water from a canal was used. The well stood in this condition for about two months.

Shortly after this, Kelso acquired Western's interest and became the operator. Former operator Parker had been plagued by unusually large overriding royalties, so that the working interest represented only 61% of production. Worse, some of these overrides had a conversion feature so that after a certain amount was paid, they would convert to working interest, thus further reducing Parker or his assigns' interest to around 40%. Kelso, however, was successful in obtaining assignments of enough overrides to make further operation profitable in his opinion.

On May 30 Kelso was ready to begin reworking operations. Under the lease he had 60 days after cessation of production to redrill, or begin reworking. Otherwise, the lease would be forfeited unless he paid the appropriate shut-in royalty.

In the meantime, however, Marsh had decided to try to take over the well and operate it himself. Pursuant to this plan, he had entered a lease agreement with another company for the deeper sands ostensibly reserving to himself the A and D sands thereby avoiding an apparent slander of the Parker-Kelso lease title. The agreement also provided that he was to file suit to cancel the Parker-Kelso lease, which he subsequently did. The result, however, was adverse to Marsh since it culminated finally in the previously mentioned State Court judgment expressly declaring that Kelso's lease was valid and subsisting.⁶

While preparing to commence reworking operations on May 30, Kelso learned that a canal had been constructed between the access road and the well site, and that the field had been watered so as to make the way impassable to heavy machinery. This was no act of God. A remarkable piece of self-help, it was the act of Marsh. But Kelso was tending his own fences for on May 31 he paid a shut-in royalty payment. On June 3 he received a letter from Marsh's attorney asserting that the lease had terminated (June 1 apparently) and notifying him:

"* * * that Mr. Marsh does and will consider you a trespasser in and upon his property * * * for all purposes excepting the removal of certain salvage equipment, and that you will be held accountable for any and all damages resulting to the property of Mr. Marsh, including the minerals underlying same by reason of any trespass * * *."

On June 6 Kelso, reserving all rights and bowing only to this modern confrontation of force, replied that he was complying with the Marsh demand. He spelled out the details of his planned, but now frustrated, rework and the payment of the shut-in royalty. He sounded this note of caution:

"The rights of the overriding royalty owners should not be overlooked in this situation. If because of delay in recompletion of the well, they lose a certain amount of production therefrom, I do not wish to personally absorb any responsibility on account of this loss."

At the end of June, Marsh went to the well-site and heard the hissing of gas in an amount which to him seemed dangerous. It was Marsh's action to this situation which formed the principal basis for the instant Federal Court suit. Marsh hired J & M Well Service to fix this. Mr. McGuffin who did this work for the company, had also done the job for Kelso in April. He explained to Marsh three ways to remedy the escape of gas, and Marsh chose the least expensive. McGuffin first bled off the gas which had come up through the water (now down 1800 feet) left by Kelso, and then set a bridge plug above both sands at 5000 feet and capped the well. This meant that unless possibly inhibited from the weight of the remaining column of water, gas from higher pressure A sand could be forced out into the D sand at the lower horizon. McGuffin testified that he would not have recommended this had he known that it was a dual completion well and any hopes remained for future production. Neither Kelso nor any of the other interested individuals were given any notice of these acts by Marsh. According to the plaintiffs' theory, supported by expert testimony, doing this to the well meant that as the water receded into the formations (primarily the low pressure D sand), the A sand with far greater pressure would migrate down into the D sand and be dissipated throughout the field, forever unrecoverable to the lease. It was Kelso's view that the A sand was by far the more valuable, having yet several years of 1000 mcf-day production potential.

The well remained like this for about 15 months until September 1962 when the Receiver appointed in conjunction with the State Court proceeding (note 6, supra) had the bridge plug drilled out, the plug replaced with one below the A sand, the tubing inserted with packer above the A sand, and the well swabbed and tested. There was no pressure, and gas sufficient to ignite came only when the well was being swabbed. Apparently everyone at this point believed the well was ruined. At any rate, no further efforts were made to restore it.

A dead well then came to be the subject of a very lively lawsuit.

Trial began on November 12, 1963. Marsh began putting on evidence on November 14, and from his cross examination of plaintiffs' witnesses and his own early evidence, it seemed clear that the main line of defense was that the well was so depleted by April 1961 that it could no longer produce commercially. Hence, no damages no matter how improper his June acts might have been. This was supported by extensive expert and other testimony on the status of the reserves accompanied by testimony from the former operator Parker's bookkeeper-manager on operating expenses. On November 15, the trial was recessed to reconvene November 25, but due to the assassination of...