MCZ, Inc. v. Smith, 01-85-0190-CV

Citation707 S.W.2d 672
Decision Date27 February 1986
Docket NumberNo. 01-85-0190-CV,01-85-0190-CV
PartiesMCZ, INC., Appellant, v. Arthur E. SMITH, Jr., Julie Marie Beasley Armstrong, and Ernest Etheridge Beasley, Jr., Appellees. (1st Dist.)
CourtCourt of Appeals of Texas

Steve Underwood, Caldwell & Hurst, Houston, for appellant.

Don M. Kennedy, Mark D. Wilson, Ladin, Engel & Kennedy, Houston, for appellees.



DUGGAN, Justice.

This is an appeal from a declaratory judgment that: (1) adjudged and declared the validity of an oil, gas, and mineral lease; (2) established the amount due as production proceeds and prejudgment interest to the lessee from the operator of a producing well on the subject property; and (3) denied relief on the appellant's counterclaim.

Nick Philipello, Sr. and wife, Nora Philipello, owned as community property 107 acres of land ("the tract") in Brazos County at the time of Nick, Sr.'s death in December 1970. Nick, Sr.'s will, duly admitted to probate, devised a life estate in his community one-half of the tract to Nora, with the remainder one-half to his and Nora's son, Nick, Jr., and one-half to their grandchildren, Julie Beasley Armstrong and Ernest Beasley, share and share alike. At the time of Nick, Sr.'s death, there were no producing oil and gas wells on the tract, and no drilling operations had commenced.

Nora Philipello executed an oil, gas, and mineral lease ("the Philipello lease") on the tract to Amalgamated Bonanza Petroleum Ltd. ("Bonanza"), which lease was recorded September 23, 1976. Nick, Jr.'s signature also appears in the lease as a lessor, but the capacity in which he signed is disputed in a severed portion of this suit. Bonanza assigned the Philipello lease to Gulf Oil Corporation ("Gulf") and Prodeco Oil & Gas Co., Ltd. ("Prodeco"). Gulf and Prodeco thereafter assigned the lease by an unrecorded letter agreement dated June 2, 1981, to appellant, MCZ, Inc. ("MCZ"), to drill a well on the tract. A formal assignment by Gulf and Prodeco to MCZ reserved a 25% royalty interest, and was recorded on June 25, 1982. In turn, MCZ assigned 90% of its interest to Andrus Resources Corporation, Bill Andrus, Charles R. Robinson, Milton M. Cook, Milton M. Cook, Jr., Troy P. Wakefield, Jean B. Wakefield, and the Parten Wakefield 1978 Trust (collectively "MCZ's assignees").

On or about August 15, 1981, MCZ commenced to drill on the tract. A producing oil well was completed in December 1981, and has produced continuously to time of trial.

On or about September 1, 1981, before completion of the well, MCZ entered into a pooling agreement whereby 57.60 acres of the 107 acre tract was combined with two other owners' tracts to form the 160 acre "Philipello Unit." The Philipello tract therefore constituted 36% of the Philipello Unit's total acreage.

Appellees Beasley and Armstrong, the Philipello grandchildren, did not execute the Philipello lease or any other lease in favor of MCZ, and MCZ makes no claim that it has ever obtained their interest.

On August 19, 1982, appellees Beasley and Armstrong, together with Nora Philipello, each purportedly signing as "Lessor," executed an oil, gas, and mineral lease in favor of appellee, Arthur E. Smith, Jr., as lessee. An addendum to the printed lease form recited that the lease was retroactive to the date of first production from the well then producing on the property, that it was understood and agreed that Smith was leasing an "unleased undivided interest in the land described herein, and that the balance of the undivided interest is currently leased to another parties [sic] and there currently exists a producing oil and gas well on such property...."

Both before and after execution of the Smith lease, demands were exchanged between MCZ and the other parties for stipulations of royalty interest and proposals of division orders.

Nora, Nick, Jr., Beasley, Armstrong, and Smith initially filed a joint action against MCZ seeking royalties, accounting, waste, interest at 10%, and costs. MCZ answered and filed its cross-claim alleging usury against all plaintiffs because of their demands for 10% interest, and further alleging a tort claim against Smith for his malicious interference in MCZ's contractual relationship with Nora and Nick, Jr. The parties' pleadings disputed whether MCZ had repeatedly attempted to pay accrued royalty interests, whether the plaintiffs had repeatedly refused bona fide tender offers, whether the plaintiffs asserted mutually conflicting royalty claims, and whether the 1982 Smith lease was valid.

MCZ's plea in abatement alleged that all of MCZ's working interest partners had "record undivided interests," and were "necessary and indispensable parties." These included Gulf and Prodeco, who retained a 25% royalty interest when they assigned the Philipello lease to MCZ, and MCZ's assignees, to whom it had assigned 90% of the Philipello lease.

Following a pre-trial hearing, the court denied MCZ's plea in abatement and granted a motion filed by Beasley, Armstrong, and Smith to sever their remaindermen-related action against MCZ from Nora's and Nick, Jr.'s contract-related action.

The trial court entered judgment adjudging and declaring: (1) that Smith held a valid oil, gas, and mineral lease dated August 19, 1982, from Beasley, Armstrong, and Nora, vesting title in Smith to 25% of the mineral interest in the tract; (2) that Smith was entitled to 25% of all oil, gas, or other minerals produced from the tract, less 25% of the reasonable costs of production and marketing, subject to payment of royalties as set forth in the 1982 lease; (3) that Smith recover from MCZ $663,304.26 for such production proceeds less costs through July 31, 1984; that Smith recover future production proceeds on the same basis; (4) that Smith recover $56,254.41 in prejudgment interest through July 31, 1984, interest at 6% per annum thereafter until date of judgment, and interest on the judgment at 10.32%; and (5) that MCZ take nothing by its counterclaim against Smith, Beasley, and Armstrong. MCZ asserts 41 points of error.

MCZ's first sixteen points of error allege errors both in the trial court's overruling of MCZ's plea in abatement and in its rendering judgment because of omission of necessary parties.

Tex.R.Civ.P. 39, the applicable joinder rule, states, in part:

(a) Persons to be Joined if Feasible. A person who is subject to service of process shall be joined as a party in the action if (1) in his absence complete relief cannot be accorded among those already parties, or (2) he claims an interest relating to the subject of the action and is so situated that the disposition of the action in his absence may (i) as a practical matter impair or impede his ability to protect that interest or (ii) leave any of the persons already parties subject to a substantial risk of incurring double, multiple, or otherwise inconsistent obligations by reason of his claimed interest. If he has not been so joined, the court shall order that he be made a party. If he should join as a plaintiff but refuses to do so, he may be made a defendant, or, in a proper case, an involuntary plaintiff.

The suit seeks and obtains declaratory judgment relief; therefore, the Uniform Declaratory Judgments Act, former Tex.Rev.Civ.Stat.Ann. art. 2524-1 (Vernon 1965), now Tex.Civ.Prac. & Rem.Code sec. 37.006(a) (Vernon Supp.1986), must also be considered. Section 11 of the Act in effect at time of trial states:

When declaratory relief is sought, all persons shall be made parties who have or claim any interest which would be affected by the declaration, and no declaration shall prejudice the rights of persons not parties to the proceedings. (Emphasis added.)

Although art. 2524-1 is mandatory, the trial court is vested with discretion in determining joinder of parties, and the court's findings will not be set aside except for an abuse of discretion. Williamson v. Tucker, 615 S.W.2d 881, 886-87 (Tex.Civ.App.--Dallas, 1981, writ ref'd n.r.e.).

MCZ argues that because it not only obtained the lease by assignment but also made assignments of its own to other working interest partners, it now retains only 10% of the interest claimed by the appellees; that complete relief cannot be granted without the presence of those "necessary and indispensable parties" who own the balance of the working interest and that it is placed in the position of incurring multiple and inconsistent obligations because of the substantial reduction by the court's judgment of the interest owned by the parties it sought to have joined.

We disagree. No interest conveyed by lease has been altered. Neither Armstrong and Bailey nor their assignee, Smith, was ever a party to the 1976 lease, or to the Philipello Unit formed under its provisions. All of the parties whom MCZ urges should be brought into the suit have their relationship to the tract solely through the 1976 Philipello lease, either as MCZ's assignors or its assignees.

The Armstrong-Bailey remainder interest was never a part of the estate conveyed by the lease. MCZ's relationship with and liability to Armstrong and Bailey arises from the law of cotenancy, not from a contractual relationship. A co-tenant, such as MCZ, who produces oil and gas from commonly owned property without first having secured the consent of its co-tenants, is liable to the non-producing co-tenants for minerals produced, less reasonable costs of production and marketing. Cox v. Davison, 397 S.W.2d 200, 201 (Tex.1965). As the operator of the Philipello well, MCZ became the producing co-tenant to the Armstrong-Beasley remainder interest, and MCZ's production triggered its duty under Texas law to account to remainder interests for minerals produced, less proportionate reasonable costs. As operator, MCZ alone was responsible under the law of co-tenancy to account to its co-tenant remaindermen, just as it was responsible under the lease to...

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