Mandell v. Hamman Oil and Refining Co.
| Decision Date | 27 November 1991 |
| Docket Number | No. 01-90-00950-CV,01-90-00950-CV |
| Citation | 822 S.W.2d 153 |
| Parties | David M. MANDELL, William M. Mandell, and Sam Field, Appellants, v. HAMMAN OIL AND REFINING COMPANY; Tennessee Gas Pipeline Company; Henry R. Hamman; Robert L. Baker; William V. Conover II; John Jennings; C.S. Wallace, Sr.; Arthur R. Stark, Jr.; John Wallace; Frank C. Nelms; John Sutton Allison; Lon Slaughter; Mrs. Wheeler Nazro; Frank C. Nelms, Independent Executor of the Estate of H.G. Nelms; Tenneco, Inc., Appellees. (1st Dist.) |
| Court | Texas Court of Appeals |
Brantly Harris, Houston and James D. Smullen, Wimberley, for appellants.
Bertrand C. Moser, Jim Flegle, Laura B. Herring, Houston, and Marty A. Morris, Dallas, for appellees.
Before SAM BASS, DUNN and HUGHES, JJ.
This appeal stems from a royalty suit to recover on a take or pay contract. The issue in this case is whether royalty owners are entitled to take or pay proceeds from a gas purchase contract. We hold that royalty owners are entitled to royalties for take or pay provisions, only if the parties expressly so provide in the lease.
In 1978, appellants and Hamman Oil and Refining Company ("Hamman") executed three leases for 260 acres of land for oil and gas exploration. Paragraph 3(a) of the leases provided for royalties, as follows:
(2) On gas, including casinghead gas or other gaseous substance, 1/4 of 8/8ths (one-fourth of eight-eighths) of all produced, excepting that used for routine lease operations or unavoidably lost in conducting such operations.
In paragraph 3(b) of the leases, the lessor had:
the right to take his royalty share of any production either in kind or value, at Lessor's election. Said royalty, whether in kind or value, shall be delivered free of cost to Lessor or Lessor's credit at the same delivery point at which Lessee disposes of its share of the same product.
Paragraph 3(c) obligated the producer, once production was obtained, to "immediately exercise its best efforts to obtain the most favorable market outlet for such production." The lessee was also required to use reasonable diligence to market all production under the best possible terms and conditions then obtainable and to endeavor to include in such contract a "favored nations" provision, a provision for the sale of gas on a per million British Thermal Unit ("MMBtu") basis, and annual price redetermination. The lessee was obligated to:
promptly furnish Lessor with copies all proposals made to or received by Lessee from third parties for the purchase of any of such production.
Under paragraph 3(d), once the producer negotiated a contract for the sale of gas and provided a copy to the lessors, then, within 30 days after receipt of the contract:
Lessor shall notify Lessee in writing as to whether Lessor elects to either (i) approve such contract or (ii) take in kind and separately dispose of Lessor's royalty share of such production.
Failure to give written notice of election "shall be conclusively deemed an election to approve the contract proposed by Lessee." If the Lessor:
approves the contract proposed by Lessee, then Lessee shall account to Lessor for his royalty share of the production covered by such approved contract on the basis of the same price received by Lessee for the sale made under such contract.
In 1979, Hamman drilled successful gas wells on the property. Hamman signed a long term contract ("gas purchase contract" or "Hamman-Tennessee contract") with Tennessee Gas Pipeline Company ("Tennessee") to market gas production from one of the leases. The 1979 contract contained a take or pay provision requiring Tennessee either to take a certain percentage of the wells' deliverability or to pay Hamman for any gas not taken. Tennessee promised to take 85 percent of the gas available from Hamman or to pay for that amount, if not taken. Hamman had the right to collect this payment for gas not taken at the end of each contract year.
Henry Hamman, president of Hamman Oil, neglected to send a copy of the contract to the lessors. On request of William Mandell, in April of 1980, Mr. Hamman provided copies to William Mandell and Milton Mandell. In August of 1980, Mr. Hamman provided a copy to Sam Field.
In 1983, problems arose between Hamman and Tennessee. Faced with declining markets and reduced prices for its gas, Tennessee announced an "Emergency Gas Purchase Policy" on April 29, 1983. Tennessee determined that it would take no more than half of the gas that Hamman could produce and would reduce the contract price to the minimum lawful rate for interstate gas. Tennessee refused to recognize any take or pay obligations for those producers who refused to amend their contracts as Tennessee demanded.
In 1986, Hamman sued Tennessee for breach of the 1979 contract. Hamman also asserted claims for Tennessee's unauthorized price reductions for gas that was taken and for drainage caused by Tennessee's violation of the ratable take provision. Tennessee paid Hamman $8,000,000 to settle. In return, Hamman dismissed all claims against Tennessee, and Hamman assigned all its interest in appellants' leases to Tennessee.
Hamman valued the sale of the working interest share of the reservoir at $6,508,000 and determined that the royalty owners were not entitled to share that portion of the settlement. Hamman further concluded that the recovery for take or pay claims was $626,000 and that the royalty owners should not share in this amount either. Hamman determined that the royalty owners were entitled to a portion of the recovery for price reduction and drainage claims and tendered checks totalling approximately $10,000 to appellants for their shares.
Appellants refused the money and sued both Hamman and Tennessee, asserting they were entitled to share in the take or pay portion of the settlement. In addition, appellants claimed they were entitled to sue Tennessee, or alternatively Hamman, for take or pay deficiencies.
The trial court granted Hamman's motion for partial summary judgment, ordering that, as a matter of law, Hamman owed the plaintiffs no royalty payments for take or pay payments Hamman received or might have received from Tennessee for gas not produced. The order was entered without prejudice to the claim of plaintiffs to collect take or pay payments from Hamman on any basis other than as royalty payments.
At trial, plaintiffs (now appellants) maintained that, pursuant to the "in kind" royalty provision in the lease, Hamman acquired title to only 75 percent of the gas. Thus, 25 percent still belonged to plaintiffs. Under this theory, plaintiffs retained one-fourth of the gas in kind, and Hamman sold the royalty gas as agent for the owners of that gas. Therefore, according to plaintiffs, any contract Hamman signed with Tennessee was for the sale of the one-fourth of the gas belonging to plaintiffs and for the three-fourths of the gas belonging to Hamman. When Hamman signed the gas purchase contract with Tennessee in 1979, Hamman was selling plaintiffs' gas to Tennessee on the same terms that Hamman did, or, alternatively, plaintiffs sold their gas to Hamman on the same terms that Hamman sold to Tennessee. Plaintiffs also claimed they did not "acquiesce" in the gas purchase contract by failing to elect to take their share in kind; rather, they intended to be in the same position as if they had been signatory-sellers to the Hamman-Tennessee contract. Further, since Hamman was selling only 75 percent of the gas to Tennessee, Hamman had no right to settle plaintiffs' claims against Tennessee for anything attributable to plaintiffs' 25 percent of the gas.
Hamman's position was that the relationship of the parties was determined by provisions of the lease and by the plaintiffs' undisputed conduct of accepting royalties without making any effort to take gas in kind. Plaintiffs were ordinary in value royalty owners, who were not entitled to take or pay and were not entitled to any part of the Tennessee settlement that Hamman received for take or pay deficiencies accrued by Tennessee. Plaintiffs were entitled to recover from Hamman the portion of the Hamman-Tennessee settlement that was properly allocable to Hamman's recovery for Tennessee's improper pricing and for drainage caused by Tennessee's failure to take ratably.
Tennessee asserted that, prior to January 1, 1987, it had no contract with the plaintiffs, either express or implied, and that plaintiffs were not intended third party beneficiaries of the Hamman-Tennessee contract. Further, Tennessee assumed no obligations, contractual or otherwise, toward plaintiffs prior to that date.
The case was tried to a jury, and the trial court entered judgment on the verdict; awarded appellants $18,982 for the royalty share of the Hamman-Tennessee settlement attributable to the recovery for drainage and pricing claims; denied all causes of action asserted by appellants against Tennessee; and granted declaratory relief sought by Tennessee to the effect that Tennessee had no privity of contract with or liability to appellants. Appellants were awarded nothing for any share of the settlement attributable to the sale of the leases or to recovery for take or pay claims. Appellants were given a judgment for $18,982 for their royalty share of the settlement pertinent to pricing and drainage claims asserted by Hamman against Tennessee, $6,238.26 for Hamman's failure to make a timely filing with the Federal Energy Regulatory Commission, and $2,058.63 for attorney's fees. This appeal followed.
In 16 points of error, appellants assert that the trial court erred in overruling appellants' motion for judgment on the verdict and notwithstanding the verdict and in overruling appellants' amended motion for new trial. This Court notes that appellants' points of error are structured in such a global fashion that, in many instances, it is...
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