Southland Royalty Co. v. Pan Am. Petroleum Corp.

• Decision Date: 31 January 1962
• Docket Number: No. 5501,5501
• Citation: 354 S.W.2d 184
• Parties: SOUTHLAND ROYALTY COMPANY et al., Appellants, v. PAN AMERICAN PETROLEUM CORPORATION et al., Appellees.
• Court: Texas Court of Appeals

Page 184

354 S.W.2d 184

SOUTHLAND ROYALTY COMPANY et al., Appellants, v. PAN AMERICAN PETROLEUM CORPORATION et al., Appellees.

No. 5501.

Court of Civil Appeals of Texas, El Paso.

Jan. 31, 1962.

Rehearing Denied Feb. 21, 1962.

Jackson, Walker, Winstead, Cantwell & Miller, Kilgore & Kilgore, Charles B. Wallace, Dallas, Stubbeman, McRae, Sealy & Laughlin, Jack Vickrey, Midland, for appellants.

Turner, Rodgers, Winn, Scurlock & Terry, Dallas, Richard C. Milstead, Kermit, J. K. Smith, Fort Worth, L. A. Thompson, Tulsa, Okl., for appellees.

Archie E. Groff, Houston, for North Central Oil Corp.

LANGDON, Chief Justice.

This is an appeal from a summary judgment out of the District Court of Winkler County, which decreed that appellants (plaintiffs below) 'take nothing' in a suit brought by appellants for the recovery of gas royalties allegedly due them under the terms of an oil and gas lease on lands in Winkler County. Declaratory judgment relief was also granted to appellees upon a cross-action.

Appellants (Southland Royalty Company, Avoca Corporation and Socony Mobil Oil Company, Inc.) had each filed separate suits in the district court against appellees (Pan American Petroleum Corporation and Westbrook-Thompson Holding Corporation). The three petitions were substantially the same. The suits were consolidated, and a single petition was filed by all three appellants in the consolidated cause. Thereafter, appellants joined in a motion for summary judgment, incorporating therein the pleadings, exhibits and admissions on file. Appellees filed an answer and a cross-action, and also a motion for summary judgment in which they likewise incorporated the pleadings, admissions and a large number of affidavits and exhibits in support thereof.

After hearing and argument on the motions for summary judgment, the trial court sustained the motion of appellees, denied the motion of appellants, and decreed that appellants take nothing. Upon appellees' cross-action, the court further decreed (1), that the cloud be removed from appellees' leasehold title, cast thereon by the filing of this suit; and (2), that the oil and gas lease, by its own terms, provided separately for the royalties to be paid for each of the separate substances which the parties thereto contemplated might be discovered and produced thereunder, including:

'To pay to the lessor One Hundred Dollars, each year in advance for the gas from each well where gas only is found, while the same is being used off the premises.'

From such judgment this appeal has been duly perfected.

The lease involved in this controversy is on a printed form in which the blanks have been filled in with a typewriter and certain interlineations made in long-hand on the printed portions thereof. It is dated March 27, 1925, covers 10,240 acres of land in Winkler County, and was executed April 1, 1925 by T. G. Hendrick and wife, Ida Hendrick, lessors, to J. W. Grant, lessee (appellees' predecessor in title). Appellees are the present owners of the lease in so far as it covers three quartersections of land (480 acres) of the 10,240 acres included therein, and appellants are the owners of varying mineral interests in the lands covered by the lease, including the 480 acres of land with which we are here concerned.

Under the terms of the lease, T. G. Hendrick and wife, Ida Hendrick, granted and leased the premises to appellees' predecessor in title 'for the sole and only purpose of mining and operating for oil and gas potash or other minerals'. Among other provisions, the lease contract specified, 'It is agreed that this lease shall remain in force for a term of 20 years from this date, and as long thereafter as oil or gas, potash or other minerals or either of them is produced from said land by the lessee.' A nominal consideration was recited and, in addition thereto, three covenants were specified as follows:

'In consideration of the premises the said lessee covenants and agrees:

'1st. To deliver to the credit of lessor, free of cost, in the pipe line to which they may connect thei-- wells, the equal one-eighth part of all oil produced and saved from the leased premises. and 1/8 of the net proceeds of potash and other minerals at the mine.

'2nd. To pay the lessor One Hundred Dollars, each year in advance for the gas from each well where gas only is found, while the same is being used off the premises, and lessor to have gas free of cost from any such well for all stoves and all inside lights in the principal dwelling house on said land during the time by making their own connections with the well at their own risk and expense.

'3rd. To pay lessor for gas produced from any oil well and used off the premises at the rate of Fifty and No/100 Dollars per year, for the time during which such gas shall be used, said payments to be made each three months in advance.' (Emphasis ours.)

We have italicized all hand-written interlineations in the printed portions of the lease from which we have quoted above.

The principal question presented by this appeal is whether the words, 'and 1/8 of the net proceeds of potash and other minerals at the mine', added in long-hand to the first royalty paragraph of the lease, entitles appellants to receive from appellees, their alleged proportionate part of 1/8 of the proceeds realized from the sale of gas and distillate produced by appellees from three deep wells on the 480 acres of land involved here.

Appellants have predicated their appeal upon four points. Points One and Two are based upon the contentions that the amounts received by appellees from the sale of gas from the three deep wells are proceeds of minerals within the meaning of the first royalty provision of the oil and gas lease, on which appellants are entitled to be paid their part of the 1/8 royalty; and that such gas was sold and was therefore not 'being used off the premises' within the meaning of the second royalty paragraph of the lease.

In support of their contentions, appellants rely heavily upon the case of Reynolds v. McMan Oil & Gas Co., 11 S.W.2d 778, decided by the Commission of Appeals in 1928, in which it was said:

'* * * The words 'used off the premises' in covenants 2 and 3 are very significant. They indicate an acquaintance with the custom of using gas for developing such leases, and indicate that this was the extent of the right (or perhaps the probable desire) of the lessees to use gas from the lease. 'Used' in this connection is not necessarily synonymous with 'disposed of' or 'sold.' Rather, it is synonymous with 'employed' or 'consumed.' Meaning must be given to the word according to the nature of the thing to be used and according to the subject-matter of the agreement for use. The fair meaning of the third clause of the royalty covenant in the light of the other parts of the instrument simply is that, in the event the lessee uses gas produced from an oil well off the premises, he shall pay to lessor the rate of $100 per year for the time it is so used.'

The royalty covenants in the oil and gas lease construed in the Reynolds case are very similar to those contained in the lease now before us.

In December of 1928, three cases involving substantially the same questions of law were decided by Section B of the Commission of Appeals. These cases were Reynolds v. McMan Oil & Gas Co. (supra); Magnolia Petroleum Co. v. Akin, 11 S.W.2d 1113; and Magnolia Petroleum Co. v. Connellee, 11 S.W.2d 158. In each of these cases the lessor, or mineral owner, sought to recover from the oil and gas lessee, under the stipulation for the 1/8 royalty on oil produced and saved, a like royalty on gasoline manufactured from gas produced from oil wells (casinghead gas). Lessor was allowed recovery of an oil royalty on gasoline manufactured from casinghead gas in the Reynolds case, but the lessors in both the Commellee and the Akin cases were denied any such recovery. The Reynolds and Akin cases were handed down December 12, 1928 and, although the Connellee case appears to have been handed down on December 5, 1928, the opinion in the Akin case states: 'The instrument of lease involved in this case is identical with that this day construed by us in Magnolia Petroleum Co. v. Earn T. Connellee, [Tex.Com.App.,] 11 S.W.2d 158, and the decision of that case controls the disposition of this one.'

The only real distinction between the three cases is that second and third royalty provisions contained in the Connellee and Akin leases employed the words, 'sold or used off the premises', while in the same numbered royalty paragraphs of the Reynolds lease, the word 'sold' was omitted, and only the words 'used off the premises' were employed.

Since the decisions in the Reynolds, Akin and Connellee cases, the Supreme Court has had the opportunity to express itself on at least two different occasions with respect to the meaning of the term 'used off the premises.' In the case of Humble Oil & Refining Co. v. Poe, 29 S.W.2d 1019, decided by the Commission of Appeals in 1930, the court was confronted with a royalty clause almost identical to the second royalty clause of the Hendrick lease. In the Poe case the lease provided:

'* * * lessee agrees to pay the lessor at the rate of $250 each year, payable quarterly in advance, for the gas from each well where gas only is found, while the same is being used off the premises.' (Emphasis ours.)

In the Poe case, while there was no evidence as to what disposition was being made of the gas, and particularly whether such gas was being 'sold', or otherwise disposed of at a profit, the court laid the question at rest in the following unequivocal language:

'Plaintiff in error acquired the right to use the gas produced from a gas well it might drill on the premises covered by the lease by the payment of the agreed rental of $250 per annum. Having bought and paid for such gas it owned the same, including all of its constituent elements, and therefore had the lawful...