Shelton v. Exxon Corp.
| Decision Date | 11 August 1989 |
| Docket Number | Civ. A. No. H-83-1575. |
| Parties | Robert R. SHELTON, et al., Plaintiffs, v. EXXON CORPORATION, Defendant. |
| Court | U.S. District Court — Southern District of Texas |
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Joseph D. Jamail, Gus Kolius, Frank M. Staggs, Jr., Joseph H. Reynolds, Joe H. Foy, and Mary Katherine Kennedy, Houston, Tex., for plaintiffs.
Frank G. Harmon, Michael P. Graham, Paula M. Desel, Barry L. Wertz, and W.N. Blanton, III, Houston, Tex., for defendant.
This Memorandum Opinion supersedes the Court's previous Memorandum Opinions.
Robert Shelton and various related corporate entities (Shelton Ranch Corporation, Shelton Ranches, Inc., and Shelton Land and Cattle company) (collectively, "Shelton") filed their Original Petition in the Texas state courts in 1979. Shelton made his claims against essentially two defendants: Exxon Corporation ("Exxon"), and King Ranch, Inc., and King Ranch Oil and Gas, Inc. (collectively, "King Ranch"). The claims arise from gas leases executed between the King Ranch and Exxon's predecessor, Humble Oil and Refining Company. Shelton alleged claims against Exxon for underpayment of royalties and for imprudent marketing of the King Ranch Gas. Only Exxon remains as a defendant. Trial was to the bench.
This portion of the Memorandum Opinion resolves the first claim, which concerns whether royalty payments were made pursuant to a proper interpretation of the parties' contractual definition of market value. Shelton makes this claim directly against Exxon, although most of his rights to receive or benefit from royalty payments originate in transactions that reserved to the King Ranch a mineral interest and the exclusive executive rights over the leases, including the exclusive right to enforce the obligations of the leases.1
The King Ranch refused to pursue the claim for underpayment of royalties in a manner satisfactory to Shelton. On June 5, 1980, the King Ranch and Exxon settled between themselves those claims for additional royalties which accrued before September 1, 1980. As executive, the King Ranch also purported to act for and bind all other mineral interest owners, including Shelton. The King Ranch contested Shelton's right to participate in the negotiation of those claims, and a settlement between the King Ranch and Exxon was made without the participation and over the protest of Shelton. Shelton now pursues against Exxon claims that the King Ranch purported to settle. This Memorandum Opinion partially sustains the settlement against Shelton's challenge and disposes of all Shelton's claims made the subject of that settlement.
The particular interests owned by Shelton and the manners in which he came by them are complex, but they need not be fully set out for the purpose of this Memorandum Opinion. The following language appears in a 1957 transfer and is typical2 of the language accompanying all the grants of mineral interests to Shelton and his predecessors:
King Ranch, its successors, and assigns shall have the exclusive right to enforce the obligations of such leases, contracts and other instruments and to contract and negotiate with the lessee or lessees Exxon's predecessors thereunder with respect to such obligations. The rights and powers herein conveyed to King Ranch shall be considered and construed as rights and powers coupled with an interest and shall not be revocable by grantor herein Shelton's predecessor, or his successors and assigns. (emphasis added)
All of Shelton's non-executive mineral interests were subject to like restrictions.
In a later transaction not dealing with mineral interests, the language used to grant or reserve similar rights to the King Ranch was broader. As part of that transaction, the King Ranch conveyed to Shelton Land and Cattle Company 11.22% of the King Ranch's own claim against Exxon for underpayment of royalties (as that claim existed on December 31, 1977). Thus, Shelton Land and Cattle became a creditor of the King Ranch in an unliquidated amount. The grant of the 11.22% was made subject to the executive rights of the King Ranch. The King Ranch also expressly reserved very broad powers to compromise or even forego its remedies against Exxon without liability to Shelton Land and Cattle. However, we concern ourselves first with the less well-defined of the King Ranch's powers, the executive right to enforce the obligations of the lease.
Shelton's first claim rests on four basic legal arguments. First, Shelton argues that the making of past due royalty payments is not an obligation of the lease. Thus, the King Ranch's power to enforce the obligations of the lease did not include an exclusive right to litigate unpaid accrued royalties. Second, Shelton argues that the King Ranch's powers, if any, to prosecute and settle Shelton's claim were revoked. Third, Shelton argues that the exercise of the King Ranch's powers amounted to the unauthorized practice of law. Fourth, Shelton argues that the settlement is void or voidable because the King Ranch acted despite a conflict of interest with Shelton and without Shelton's informed consent. These four issues are legal only and are ripe for decision.
Shelton urges that the making of proper royalty payments is not an obligation of the lease, arguing that "royalty" has at least two meanings in Texas oil and gas law. Shelton maintains that a "royalty interest" is realty, citing Phillips Petroleum v. Adams, 513 F.2d 355 (5th Cir.1975), cert. denied, 423 U.S. 930, 96 S.Ct. 281, 46 L.Ed.2d 259. On the other hand, Shelton argues, the accrued liability to make a "royalty payment" is personalty. Id. That distinction, of course, means that a mineral deed, while transferring the royalty interest and the right to future royalties, does not usually transfer a claim for past due royalty. Id. at 363. It does not follow, however, that a mineral interest deed can not affect the right to litigate the computation of royalties, especially when at the time of the transfer the royalties in question are not yet accrued. Furthermore, even if Shelton's claim is personal property, the issue is whether Exxon's duty to pay is an obligation of the lease.
In Texas the royalty due and to be paid is determined from the provisions of the oil and gas lease. See, e.g., Texas Oil & Gas Corp. v. Vela, 429 S.W.2d 866, 870 (Tex.1968). The agreement to pay royalties is a contractual obligation arising from the lease. Shell Oil Co. v. State, 442 S.W.2d 457, 459 (Tex.Civ.App. — Houston 14th Dist. 1969, writ ref'd n.r.e.). Shelton argues that the obligation to pay royalties results simply from the extraction of minerals from the land. Shelton's theory, then, is one of conversion or trespass, which occurs when oil or gas is taken without right. See generally 1 Williams & Myers, Oil and Gas Law §§ 225-226.2 (1988). However, when minerals are converted in this manner the resulting liability is tortious, not contractual. The converting party can be made to pay the value of the minerals converted, although the place of valuation and credit for costs of production may vary. See id. Under a theory of conversion the obligation is to pay compensation for a tort. It is not a royalty. Compare Shell Oil Co. v. State, 442 S.W.2d at 459 (). Furthermore, the oil and gas lease passes title to the minerals to the lessee. Read v. Britain, 414 S.W.2d 483, 487 (Tex. Civ.App. — Amarillo), aff'd, 422 S.W.2d 902 (Tex.1967). The lessee can not convert minerals to which it has title.
By contrast, "the agreement to pay gas royalties provided for in the lease is a personal obligation on the part of the lessee to pay a specific fractional part of the gas conveyed to the lessees." Id. (emphasis added) Therefore, the King Ranch's reservation of the power to enforce the obligations of the lease included the power to enforce royalty payments. There is no reason for that power to end with the severance of gas from the land. Since on its face the lease unambiguously reserved or granted to the King Ranch the exclusive power to enforce royalty payments, the King Ranch's settlement with Exxon on behalf of Shelton was valid and binding unless (i) the grant or reservation was void or ineffective, or (ii) that power was revoked, or (iii) the power could not be invoked by the King Ranch without breaching some duty to Shelton.
Shelton argues that the powers the King Ranch reserved were void because they amounted to the unauthorized practice of law. The cases cited by Shelton to support his proposition are inapposite. Each of the cases cited by Shelton addresses the actions of an agent who had no connection to the business of the principal other than the resolution of a dispute in which the agent had no interest. See Touchy v. Houston Legal Foundation, 432 S.W.2d 690 (Tex.1968); Hexter Title & Abstract Co. v. Grievance Committee, 142 Tex. 506, 179 S.W.2d 946 (1944); Brown v. Unauthorized Practice of Law Committee, 742 S.W.2d 34 (Tex.App. — Dallas 1987, no writ). Clearly, that is not the case here. Shelton's dealings with the King Ranch have been long and complex and their common interests can be traced back to transfers that they or their predecessors made. They own undivided interests in the same minerals. As discussed below, what they have in common, whether it is called the King Ranch's interest or desire for security, is recognized by the law of Texas. Furthermore, the King Ranch's right to settle the other mineral interest owners' claims as it settled its own seems appropriate, especially in light of the language used to describe the powers.
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