Puckett v. First City Nat. Bank of Midland
| Citation | 702 S.W.2d 232 |
| Decision Date | 14 November 1985 |
| Docket Number | No. 11-85-024-CV,11-85-024-CV |
| Parties | Gerald C. PUCKETT et al., Appellants, v. FIRST CITY NATIONAL BANK OF MIDLAND, Trustee et al., Appellees. |
| Court | Court of Appeals of Texas |
Susan Richardson and Julia E. Vaughan, Cotton, Bledsoe, Tighe & Dawson, Midland, James T. Jeffus, Gulf Oil Corp., Houston, William R. Simcock, Walter J. Batla and Mary L. Brennan, Cox & Smith Inc., San Antonio, for appellants.
William B. Browder, Jr., Stubbeman, McRae, Sealy, Laughlin & Browder, Tom C. McCall and Randall Lundy, Lynch, Chappell, Allday & Alsup, Midland, Andrew L. Kerr, Green & McReynolds, San Antonio, for appellees.
The principal issue in this oil and gas case is which method of calculating royalties should be used in a "split stream" sale of gas produced from a voluntarily pooled unit. A split stream sale results when, as in the instant case, there is more than one owner of the working interest, and the individual working interest owners sell the gas allocated to them to different gas purchasers at different prices. Two methods of calculating royalties appear to have evolved: (1) the "weighted average" method whereby the royalty owners are paid on the basis of the sale of all gas produced and sold from the unit by all working interest owners; and (2) the "tract allocation" method whereby royalty owners are paid on the basis of the amount received by their individual lessee from the sale by their lessee of the proportion of gas from the unit allocated to the tract in which the royalty owner owns an interest.
This suit arose from disputes over gas produced from two gas units known as the Fort Stockton Gas Unit No. 3 (FSGU-3) and the Fort Stockton Gas Unit No. 6 (FSGU-6). Midland National Bank, now known as First City National Bank of Midland, acquired an oil and gas lease on certain lands owned by the Pucketts. 1 In 1968, pursuant to the lease, the Bank pooled 130.57 acres of the leased land with other acreage held by the Bank, Gulf Oil Corporation and other leasehold owners to form FSGU-3. The Bank pooled an additional 62.84 acres with other acreage held by the Bank, Gulf and other leasehold owners in 1969. This unit is known as FSGU-6. The Bank has sold its share of the gas produced from the units to Northern Natural Gas Company and LoVaca Gathering Company. Gulf has sold its share of the gas produced to LoVaca Gathering Company.
In 1978, Gulf sued LoVaca and the Bank alleging that LoVaca erroneously paid the Bank for gas that should have been credited to Gulf. The Bank filed a third party action against the Pucketts, the royalty owners, seeking reimbursement for royalties mistakenly paid the Pucketts. The Pucketts counterclaimed against Gulf and the Bank alleging that their 3/16 royalty interest was underpaid. The Bank sought indemnity and, alternatively, contribution from Gulf. The Bank also filed a third party action against Northern seeking indemnity, and Gulf cross-claimed against the Bank seeking indemnity. Before trial, LoVaca settled all claims and was no longer a party to the lawsuit, and Gulf had been fully reimbursed by LoVaca and the Bank on the original claim.
In a nonjury trial, the trial court held that the Bank, the Pucketts' lessee, properly applied the "tract allocation" method in calculating the royalties paid to the Pucketts by the Bank. The trial court held that the Pucketts were entitled to a 3/16 royalty on the proceeds from the gas "allocated" to the Bank on an acreage basis. The trial court found that the Bank was entitled to recover from the Pucketts royalties mistakenly overpaid in the amount of $409,110.63. The trial court, however, found that the Bank had underpaid the Pucketts' royalties in the amount of $67,823.94 on a 5.5904 percent interest in FSGU-3 transferred by the Bank to Gulf. The Bank was awarded contribution from Gulf for $45,493.24 of this underpayment. The Pucketts were credited with the $67,823.94 underpayment and $329,592.62 in royalties due the Pucketts but withheld by the Bank pending the conclusion of the controversy. The trial court's judgment ordered the Pucketts to pay the Bank the remaining $11,694.07 in excess royalties. The Bank recovered nothing against Northern for indemnity. The Pucketts' claims for additional royalties based on the weighted average method and for attorney's fees were denied. The Pucketts and Gulf appeal. 2
Under their lease, the Pucketts receive a 3/16 royalty from the production of three wells: FSGU Well 3-1 and FSGU Well 3-2 on FSGU-3 and FSGU Well 6-1 on FSGU-6. FSGU Well 3-1 and FSGU Well 6-1 were completed in 1969. Originally, the Bank authorized Gulf to sell its share of production. Gulf sold the gas to LoVaca at intrastate prices. Starting on September 1, 1971, the production from FSGU Well 3-1 and FSGU Well 6-1 was sold in a split stream arrangement: the Bank sold its share of production to Northern at interstate prices, while Gulf continued to sell its share of production to LoVaca. When FSGU Well 3-1 was plugged back to the Fusselman formation and recompleted in 1975, the Bank arranged to sell its share of production from the well to LoVaca. The Bank has continued to sell its share of production from FSGU Well 6-1 to Northern. FSGU Well 3-2 was completed in 1974. The Bank has continually sold its share of production from this well to Northern. From August 1973 to the date of trial, the intrastate prices paid by LoVaca exceeded the interstate prices paid by Northern. This led to the Pucketts' claim that their royalties had been underpaid.
The Pucketts first argue that the oil and gas lease and the division orders provide that their royalties should be based upon proceeds received from the sale of "all" gas from the two units involved by all working interest owners. To the extent that Gulf sold gas from the unit, the Pucketts seek to hold Gulf jointly and severally liable.
The Pucketts urge that the tract allocation method, used by the working interest owners and approved by the trial court, is inconsistent with the terms of the lease and the division orders. We disagree.
The oil and gas lease between the Pucketts and the Bank provides in part:
5. Lessee is hereby granted the right to pool or unitize this lease, the land covered by it or any part thereof with any other land, lease, leases, mineral estates or parts thereof for the production of oil, gas or any other minerals.... The entire acreage pooled into a unit shall be treated for all purposes, except the payment of royalties on production from the pooled unit, as if it were included in this lease. In lieu of the royalties herein provided, lessor shall receive on production from a unit so pooled only such portion of the royalty stipulated herein as the amount of his acreage placed in the unit or his royalty interest therein on an acreage basis bears to the total acreage so pooled in the particular unit involved. (Emphasis added)
The royalty clause of the lease provides for payment by the lessee to the Pucketts of "the market value at the mouth of the well of 3/16 of the gas so sold or used." The two division orders each state, in part:
Until further written notice, you are hereby authorized to account to each of the undersigned for his interest in said gas in accordance with the division of interest which is correctly set out herein, subject to the terms and conditions hereinafter set forth:
1. Settlement hereunder shall be made on the basis of the proceeds derived from sales of such production and upon the volume computations made by the purchaser(s) thereof.
The operating agreements, signed by the working interest owners, provide in part:
9. Marketing production
Each party hereto shall have the right to take in kind or separately dispose of its proportionate share of the production from the Unit Area, exclusive of production used in development and producing operations and in preparing and treating oil for marketing purposes and production unavoidably lost. Upon any sale each party shall execute the division order or sales contract applicable to its own interest and shall receive the proceeds of the sale directly from the purchaser thereof. In event any party shall fail to make the arrangements necessary to take in kind or separately dispose of its proportionate share of the production, Operator shall have the right for the time being, subject to revocation at will by the party owning the same, to purchase such production or to sell the same to others at not less than the market price.... (Emphasis added)
The unit designations for FSGU-3 and FSGU-6 expressly provide for the allocation of production to each tract forming a part of the units stating:
The parties further agree that production of gas ... from any portion of the hereinafter described unit shall be allocated between the tracts comprising such unit on the acreage basis hereinafter set forth, and that each of their interests in such production shall be paid on the basis of such allocation. (Emphasis added)
In their division orders with the Bank, the Pucketts ratified, confirmed and adopted the establishment of the units. The division orders state in part:
7. The production which is the subject of this division order is obtained from a unit, and the establishment of such unit is hereby ratified, confirmed and adopted.
The Pucketts specifically ratified and adopted the establishmet of the units. See Exxon Corporation v. Middleton, 613 S.W.2d 240 (Tex.1981).
The oil and gas lease provides that the Pucketts are to be paid royalties by the Bank (their lessee) for the sale of gas marketed by the Bank. We find nothing in the pooling clause that expands the Pucketts' rights or imposes on the Bank any greater obligation regarding the marketing of the gas. The pooling clause specifies that the "lessor shall receive on production from a unit so pooled" its proportionate royalty. It...
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