Martin v. Glass

• Decision Date: 16 August 1983
• Docket Number: Civ. A. No. 4-79-191-K.
• Citation: 571 F. Supp. 1406
• Parties: Robert Lee MARTIN, Franklin Martin, Minerals, Inc., and Charles E. Brown v. John P. GLASS.
• Court: U.S. District Court — Northern District of Texas

571 F. Supp. 1406

Robert Lee MARTIN, Franklin Martin, Minerals, Inc., and Charles E. Brown v. John P. GLASS.

Civ. A. No. 4-79-191-K.

United States District Court, N.D. Texas, Fort Worth Division.

August 16, 1983.

COPYRIGHT MATERIAL OMITTED

Frank Jennings, Jennings, Montgomery, Dies & Turner, Graham, Tex., for plaintiffs.

Lee D. Vendig, Pickering & Vendig, Don Davis, Payne & Vendig, Dallas, Tex., for defendant.

Ira Butler, Cantey, Hanger, Gooch, Munn & Collins, Fort Worth, Tex., for amicus curiae.

MEMORANDUM OPINION

BELEW, District Judge.

This suit involves the construction of the gas royalty and overriding royalty provisions of an oil and gas lease.

Plaintiffs, Robert Lee Martin and Franklin Martin own royalty and overriding royalty interests, and Minerals, Inc., and Charles E. Brown own overriding royalty interests in an oil and gas lease in Jack County, Texas, designated as the Glass-Martin Lease, which is owned and operated by the Defendant John P. Glass, and located in an area known as the Fort Worth Basin.

Because of insufficient wellhead pressure, the Defendant installed a compressor to move the gas from the two producing wells on the lease into a nearby gathering line for marketing. The Defendant deducted compression charges from the proceeds of production attributable to the Plaintiffs' royalty and overriding interests. Plaintiffs seek monetary damages for the alleged improper charges assessed and a declaratory judgment disallowing such charges from the proceeds of future production.

I.

This Court has jurisdiction pursuant to Title 28 U.S.C. § 1332 since there is diversity of citizenship between the parties and the amount in controversy exceeds $10,000. Suit was originally filed in the District Court of Jack County, Texas, but was removed by the Defendant to Federal Court. Plaintiffs Robert L. Martin, Franklin Martin, and Charles E. Brown are citizens and residents of the State of Texas. Plaintiff Minerals, Inc., is a Texas corporation with its principal place of business and registered office in Young County, Texas. Defendant John P. Glass is a citizen and resident of the State of Pennsylvania.

II.

The facts briefly are as follows:

On August 1, 1972, Ruby Joan Smith, et al, executed an oil and gas lease to Minerals, Inc., as lessee. Said lease, which is designated as the Glass-Martin Lease, reserved to the lessors a one-eighth ( 1/8 ) royalty and a one-thirty-second (1/32) overriding royalty in the seven-eighths ( 7/8 ) working interest of the lessee. Subsequent thereto, Plaintiffs Robert Lee Martin and Franklin Martin became the successors in interest to that of Ruby Joan Smith, et al, the lessors. At all times relevant, Robert Lee Martin and Franklin Martin owned, respectively, five-sixth ( 5/6 ) and one-sixth ( 1/6 ) interests in said lease.

Minerals, Inc., thereafter assigned its interest in the lease to Wes-Mor Drilling, Inc., in October, 1972. By said assignment, Minerals, Inc., reserved a one-thirty-second (1/32) overriding royalty in the seven-eighths ( 7/8 ) working interest.

In November, 1972, Wes-Mor Drilling, Inc., assigned to the Defendant, John P. Glass, the above-described oil and gas lease. Said assignment was made subject to the overriding royalty interest reserved by Minerals, Inc.

By assignment dated March, 1973, Minerals, Inc., assigned to Charles E. Brown one-half (½) of the overriding royalty interest reserved in the assignment of Wes-Mor Drilling, Inc., i.e. a one-sixty-fourth (1/64) overriding royalty in the seven-eighths ( 7/8 ) working interest. At all material times, hereto, Minerals, Inc., and Charles E. Brown have each owned one-half (½) of the one-thirty-second (1/32) overriding royalty in the seven-eighths ( 7/8 ) working interest, which was subsequently assigned to John P. Glass.

Accordingly, the Defendant, John P. Glass, is the owner of the working interest in the first two (2) tracts of the oil and gas lease from Ruby Joan Smith, et al to Minerals, Inc., covering 711.25 acres of land, more or less, in Jack County, Texas. The Defendant drilled two producing gas wells. The parties have stipulated that both wells were producing wells, however, there was insufficient wellhead pressure to cause the gas to flow into the nearby gathering line. It became necessary to install a compressor on the lease. If the gas were not compressed, it could not be marketed, and would either be flared (wasted) or the wells would have to be shut in. Therefore, James McCauley, Vice President of Operations, Trans-Texas Energy, Inc., agent for Defendant, made the decision to rent a compressor from Halliburton Resources Management and place it in use. The Defendant gathered the gas, delivered it into the compressor, transmitted it along the flow-line, through the gas meter, to a pipeline system owned by Southwest Gas Pipeline, Inc., and purchased by Brazos Electric Power Cooperative.

The cost of compression was charged against both royalty and working interests on a pro rata basis. Said charges were based upon the quantity of gas which passed through the compressor during a given period.

III.

The issues presented for the Court's determination are as follows:

1. Under the lease and royalty provisions, may the Defendant/operator, John P. Glass, deduct compression charges from the royalty and overriding royalty proceeds due Plaintiffs.

2. If compression charges are deductible from the royalty and overriding royalty interests, were said charges excessive.

3. Has the conduct of the Plaintiffs, upon receipt of the monthly (or periodic) payments since July, 1976, created an accord and satisfaction.

4. Are the Plaintiffs entitled to recover reasonable attorney's fees from the Defendant.

IV.

1. Are compression charges deductible from nonoperating interests?

The central issue is whether the compression charges are proportionately chargeable against the royalty and overriding royalty interests. Plaintiffs contend that the gas compression charges, which have been deducted upon a pro rata basis from their royalty and overriding royalty interests since production began in 1976, are improper and unauthorized and are in violation of the terms and provisions of the oil and gas lease, and the assignment. The proceeds of production attributable to each of such interests should be paid to the respective owners thereof free and clear of all exploration, drilling, development, completion, operating and marketing costs.

The Defendant, on the other hand contends that the deduction of compression charges is proper and authorized by the terms and provisions of the lease and royalty provisions; that such expenses are a portion of the marketing and/or transportation costs which the lease, assignments and the law specifically authorize to be imposed.

The Court is of the opinion that the Defendant's position should be sustained.

Generally, a royalty is an expense-free interest, paid out of production, over the life of the lease. It is free of all costs of development and production, Alamo National Bank of San Antonio v. Hurd, 485 S.W.2d 335, 338 (Tex.Civ.App. — San Antonio 1972, writ ref'd n.r.e.), but may share in any costs incurred subsequent to production. See 3 Williams Oil & Gas Law (Matthew Bender) § 645 p. 591, et seq. This general rule may be modified by the respective parties, a division order, or gas purchase contract.

An overriding royalty is a royalty, except that it is earned out of the lessee's or operator's interest, and is in addition to the lessor's royalty. Usually it is free from all costs incident to development, production and operation. Id. at 339; Cameron v. Stephenson, 379 F.2d 953, 955 (10th Cir.1967). An overriding royalty is an interest running throughout the life of the lease. See: 43 Tex.Jur.2d Oil and Gas § 383, pp. 25-28.

Royalties, generally, are payable "in cash or in kind." In other words, a royalty owner is entitled to receive either his proportionate share of the actual mineral produced (e.g.) in barrels of oil, or the market value in cash of his proportionate share (e.g.) ten dollars ($10.00) per barrel of oil. However, due to the physical properties of gas, payment "in kind" is usually not feasible. Thus royalties on gas are generally paid "in cash."

In order to determine the amount of royalty to be paid in cash, the lease must be examined to ascertain the point at which the royalty clause fixes the price of the gas.

The pertinent parts of the gas royalty provisions of the lease for the benefit of Plaintiffs Robert Lee Martin and Franklin Martin are as follows:

"3. The royalties to be paid by Lessee are: ... (b) on gas, including casinghead gas or other gaseous substance, produced from said land and sold on or off the premises, one-eighth of the net proceeds at the well received from the sale thereof...."

The clause reserving overriding royalty (Lease, para. 1, typed portion) for the benefit of Plaintiffs Martin:

"... the Lessors ... reserve an overriding royalty in the aggregate amount of 1/32nd of 7/8 ths of all oil, gas and other minerals saved, produced or sold from the premises and the production attributable to said interest is to be delivered to any pipeline for the credit of Lessors, free and clear of all cost of drilling, exploration or operation, SAVE AND EXCEPT said interest shall be subject to its proportionate part of all gross production, ad valorem and severance taxes."

The clause reserving overriding royalty in the lease-hold assignment (Assignment of Oil and Gas Lease, p. 2) for the benefit of Plaintiffs Minerals, Inc., and Brown provides:

"... the interest assigned herein shall be subject to its proportionate part of a 1/32 nd of 7/8 ths overriding royalty ... free and clear of all cost of exploration, development, completion and operation SAVE AND EXCEPT gross production, severance and ad valorem taxes ..."

As this Court's jurisdiction is based upon diversity of citizenship, consideration of the proper construction of the gas...