Morriss v. First Nat. Bank of Mission

• Decision Date: 26 March 1952
• Docket Number: No. 12352,12352
• Citation: 249 S.W.2d 269
• Parties: MORRISS et al. v. FIRST NAT. BANK OF MISSION et al.
• Court: Texas Court of Appeals

Page 269

249 S.W.2d 269

MORRISS et al. v. FIRST NAT. BANK OF MISSION et al.

No. 12352.

Court of Civil Appeals of Texas, San Antonio.

March 26, 1952.

Rehearing Denied May 28, 1952.

Tarlton Morrow, Vinson, Elkins & Weems, Houston, Sawnie B. Smith, Edinburg, Robertson, Jackson, Payne, Lancaster

& Walker, A. W. Walker, Jr., Dallas, for appellants.

Gauis G. Gannon, Houston, Earl A. Brown, Sam H. Field, Dallas, for appellees.

POPE, Justice.

This is an interpleader suit brought by the First National Bank of Mission, Texas, as depository for certain funds payable under an oil and gas lease, to determine whether the funds in dispute are royalties that belong to the non-participating royalty owners as a 'minimum royalty,' or rents or bonus payable to the lessor who owned the leasing or executive rights. The suit is also for a declaratory judgment. The trial court without deciding that the funds were rents or bonus, decided that they were not royalties.

On March 15, 1944, Santa Cruz Farms Company executed an oil and gas lease to Magnolia Petroleum Company on a large tract of land. A resolution of the board of directors of the lessor, Santa Cruz Farms Company, was attached to and recorded with the lease, and it empowered the corporate officers to make the lease 'for an agreed consideration of Five Dollars ($5.00) per acre, said lease to be a primary term of ten (10) years and as long thereafter as oil, gas or other minerals is produced therefrom, and to provide (sic) for a delary rental of Two Dollars ($2.00) per acre during the primary term, and for a minimum royalty of Two Dollars ($2.00) per acre during the primary term and thereafter of One Dollar ($1.00) per acre * * *.'

Paragraph 2 of the lease provides that it is for a primary term of ten years 'and as long thereafter as oil, gas or other mineral is produced from said land * * *.' The other pertinent portions of the lease are:

'3. The royalties to be paid by Lessee are: (a) on oil, one-eighth of that produced and saved from said land, same to be delivered at the wells or to the credit of Lessor in the pipe line to which the wells may be connected; (b) on gas, one-eighth of the proceeds from the sale of the gas, as such at the well for gas from wells where gas only is found, and where not sold shall pay Fifty ($50.00) Dollars per annum as royalty from each such well, and while such royalty is so paid, such well shall be held to be a producing well under paragraph two hereof. The Lessee shall pay to Lessor for gas produced from oil well and used by the Lessee for the manufacture of gasoline or any other product, one-eighth of the market value of such gas, or if said gas is sold by the Lessee, one-eighth of the proceeds of the sale thereof; * * *

'4. If oil, gas or other mineral is not being produced from said land or land pooled therewith on or before March 15, 1945, this lease shall terminate as to both parties unless on or before that date Lessee shall pay or tender to Lessor the sum of Fifteen Thousand Nine Hundred Forty-two and no/100 Dollars ($15,942.00), as a rental. The payment or tender so made shall have the effect of maintaining Lessee's rights in the land for a period of 12 months from said date without further payments or operations of any kind for the production of oil, gas or other minerals from said lands for one or more successive periods of 12 months each, not to exceed, however, 10 years from the date of this lease. Such payments or tenders may be made to the Lessor or to the First National Bank of Mission, Texas, which bank, or any successor thereof, shall continue to be the agent for the Lessor and Lessor's successor's and assigns. * * *

'9. The covenants of Lessee mentioned in this lease, as well as implied covenants, are not to be understood as conditions, and the breach of one or all of same will not work a forfeiture, abandonment or termination of this lease except the failure to drill, or pay or tender rentals provided for in paragraph four (4) hereof.'

Paragraph 12 of the lease permits lessee to surrender the lease in whole or in part, but provides further: 'thereupon Lessee shall be relieved from all obligations, expressed or implied, of this agreement as to the acreage so surrendered, but such release shall in no wise affect or diminish the amount of minimum royalty and delay rental payable hereunder as provided in Paragraphs 4 and 14 hereof.'

'14. During the primary term of this lease if the royalty paid under the provisions of Paragraph 3 hereof for any given year, commencing on the 15th day of March and ending on the 14th day of March of the succeeding year, does not amount to as much as Fifteen Thousand Nine Hundred Forty-two and no/100 ($15,942.00) Dollars, then the difference between the amount so paid and the said sum of Fifteen Thousand Nine Hundred Forty-two and no/100 ($15,942.00) Dollars shall be paid to Lessor. After the expiration of the primary term of this lease if the royalties paid under the provisions of Paragraphs 3 hereof for any given year, commencing on the 15th day of March and ending on the 14th day of March of the succeeding year, do not amount to as much as Seven Thousand Nine Hundred Seventh-one and no/100 ($7,971.00) Dollars, then the difference between the amount so paid and the said sum of Seven Thousand Nine Hunred Seventy-one and no/100 ($7,971.00) Dollars shall be paid to Lessor. Such amounts shall be paid within ninety (90) days from the expiration of said year. Payment or tender may be made to Lessor or to the depository bank named above by the check or draft of Lessee mailed or delivered to Lessor or to said depository bank.'

The lease was executed for a cash bonus of approximately $40,000 and delay rentals were paid for three years. On May 9, 1947, a gas well was completed that had a potential of 11,500,000 cubic feet of gas a day. Although it was a well producing gas in paying quantities, it was shut-in and has been shut-in continuously since that date. Since that time the lessee, Magnolia Petroleum Company, has paid annually the sums required of it by the lease. Since May 9, 1947, the total sum of $63,818 has been paid under the terms of the lease.

Some of the appellants are owners of royalty reservations or grants made prior to the date of the lease to Magnolia Petroleum Company, and others hold their interests by conveyances after the execution of the lease. We think the questions in the case may be decided without regard to the time the royalty interests were acquired.

When Santa Cruz Farm Company executed the lease to Magnolia Petroleum Company, it undoubtedly possessed the power to do so, and it was the owner of the exclusive leasing privileges or executive rights. At the time of the trial, Hidalgo-Willacy Oil Company had succeeded to those rights. That company at no time owned the surface to the lands in question.

The controversy in this case is whether, under the terms of the lease, the funds paid by Magnolia Petroleum Company as lessee, after May 9, 1947, the day the producing gas well was completed, are royalty or something else. Hidalgo-Willacy Oil Company, as the owner of the rentals and bonus, contends that the payments are not royalty. Appellants contend that the payments by the lessee, under the provisions of paragraphs 3 and 14 of the lease, are 'minimum royalties,' in which they as royalty owners should share.

Whatever the revenues may be determined to be, Magnolia Petroleum Company paid the exact amount required by the lease, and its rights under the lease are not here brought in question. No one by proper point complains about the method of payment, nor that payments were made to the depository bank rather than distributed among the royalty owners. That the lessor or depository bank were made the payee by the lease is important only insofar as it may indicate the intention of the parties as to the nature of the payment.

Our attention will first be directed at the lease itself to see if it reveals the intention of the parties. Paragraph 3(b) provides for a gas royalty and states: 'and where not sold shall pay Fifty ($50.00) Dollars per annum as royalty from each such well, and while such royalty is so paid, such well shall be held to be a producing well under paragraph two hereof.' The trial court held that the sum of $50, paid for the shut-in gas well on the leased land, was royalty and that the royalty owners would share in those payments. No appeal was made and no point is before us challenging that holding. When the gas well was brought in as a producer and then shut in, certain provisions of the lease came into operation for the first time. Prior to that occurrence, there was no question that the lessor was entitled to the funds paid as delay rentals under the provisions of paragraph 4 of the lease. To determine the nature of payments made after that occurrence, and to decide who should receive them, it is necessary to determine whether there was in fact production as contemplated by the lease. Paragraph 2 of the lease provides that the lease is for a ten-year primary term and 'as long thereafter as oil, gas or other mineral is produced from said land.' Paragraph 3 expressly provides that in the instance of a well where the gas is not sold, that $50 shall be paid annually as royalty, and while such royalty is paid, 'such well shall be held to be a producing well,' insofar as paragraph 2 is concerned. That paragraph states precisely that the situation that here exists constitutes a producing well. Since the royalty has been paid on the well, that is equivalent to production and sufficient to hold the entire acreage covered by the lease. We therefore have a producing well such as may hold the lease indefinitely, and that production or substituted production has never ceased. Freeman v. Magnolia Petroleum Co., 141 Tex. 274, 171 S.W.2d 339.

The fact of production worked a change of the relations theretofore existing between the parties to the lease....