Spurlock v. Santa Fe Pacific R. Co.

• Decision Date: 18 October 1984
• Docket Number: CA-CIV,No. 1,1
• Citation: 143 Ariz. 469,694 P.2d 299
• Parties: Ransom Theodore SPURLOCK and Vernie Maria Spurlock, his wife; and Charles Patrick Spurlock and Nancy Jeneen Spurlock, his wife, Plaintiffs-Appellees, v. SANTA FE PACIFIC RAILROAD COMPANY, a corporation; and Kerr-McGee Corporation, a Delaware corporation, Defendants-Appellants. 6938.
• Court: Arizona Court of Appeals

Page 299

694 P.2d 299

143 Ariz. 469

Ransom Theodore SPURLOCK and Vernie Maria Spurlock, his wife; and Charles Patrick Spurlock and Nancy Jeneen Spurlock, his wife, Plaintiffs-Appellees, v. SANTA FE PACIFIC RAILROAD COMPANY, a corporation; and Kerr-McGee Corporation, a Delaware corporation, Defendants-Appellants.

No. 1 CA-CIV 6938.

Court of Appeals of Arizona Division 1, Department C.

Oct. 18, 1984.

Review Denied Jan. 29, 1985.

Martori, Meyer, Hendricks & Victor, P.C. by Robert L. Palmer, Ron Kilgard and James A. Bush, Phoenix, for defendant-appellant Kerr-McGee Corp.

Fennemore, Craig, von Ammon, Udall & Powers, P.C. by Philip E. von Ammon, Donald R. Gilbert and Timothy Berg, Phoenix, for defendant-appellant Santa Fe Pacific R. Co.

Jack E. Evans, Ltd. by Jack E. Evans, Phoenix, for plaintiffs-appellees.

OPINION

MEYERSON, Judge.

I. NATURE OF THE ACTION

The issues involved in this appeal arise from an action filed by Ransom and Vernie Spurlock and Charles and Nancy Spurlock (hereinafter collectively referred to as Spurlock) charging the defendants-appellants with the conversion of helium extracted from deposits underlying lands owned by Spurlock.

The conversion charges against defendant Santa Fe Pacific Railroad Company (Santa Fe Pacific) were based on the extraction of helium from underneath Spurlock's lands by various third parties who had leased mineral rights from Santa Fe Pacific. Santa Fe Pacific previously owned all of the ranch lands involved and claimed ownership of the underlying helium and other substances by reason of a mineral reservation in its original conveyances to Spurlock's predecessors in title. In addition to requesting damages for the conversion of helium, Spurlock also sought to quiet title to the helium as against Santa Fe Pacific. The conversion charges against defendant Kerr-McGee Corporation (Kerr-McGee) were based on the purchase of the raw helium gas by Kerr-McGee from Santa Fe Pacific's mineral lessees for processing at a plant constructed by Kerr-McGee for that purpose.

After the filing of the Spurlock action for conversion of the helium, Santa Fe Pacific filed separate actions against Spurlock seeking to quiet Santa Fe Pacific's title under the mineral reservation clause to nitrogen, potash, petrified wood and industrial clay. Subsequently, Spurlock also filed a quiet title action against Santa Fe Pacific relating to sand and gravel on the lands involved. As to the sand and gravel, Santa Fe Pacific did not claim ownership by reason of the mineral reservation clause, but rather claimed a nonexclusive right to take gravel and ballast for railroad purposes pursuant to a different provision contained in the deeds to Spurlock's predecessors in title. These actions were all consolidated in the trial court proceedings.

After the denial by the trial judge of various motions and cross-motions for summary judgment, the consolidated matters eventually proceeded to trial before a jury. ¹ An extended trial lasting approximately eight months was held, and eventually judgments were entered in favor of Spurlock and against Santa Fe Pacific and Kerr-McGee on virtually all issues. These judgments quieted title in favor of Spurlock and against Santa Fe Pacific as to all of the substances in issue, with an award to Spurlock of attorney's fees on the quiet title issues.

On the conversion claim, judgment was entered against Santa Fe Pacific in the amount of $664,502 for compensatory damages and in the amount of $20,000,000 for punitive damages. The judgment against Kerr-McGee on the conversion claim was in the amount of $250,305 for compensatory damages and $487,732 for punitive damages. Spurlock was also awarded pre-judgment interest on the compensatory damages awards. Attorney's fees were awarded to Spurlock in the amount of $525,000 against Santa Fe Pacific and $325,000 against Kerr-McGee.

Many issues have been raised in this appeal by Santa Fe Pacific and Kerr-McGee, and we will not attempt in this preliminary overview to state these issues individually or to set forth in detail the complete factual background necessary for their resolution. However, a principal issue involves the trial judge's refusal to grant judgment as a matter of law in favor of Santa Fe Pacific and Kerr-McGee under the mineral reservation clause. Other issues concern alleged misconduct of counsel for Spurlock; the trial judge's legal conclusions regarding the corporate nonexistence of Santa Fe Pacific; the trial judge's conclusion that the mineral reservation clause was void in its entirety; the sufficiency of the evidence to support the amount of compensatory damages awarded; and the amount and propriety of an award for punitive damages in an action for conversion of minerals in place. In light of our holding that judgment as a matter of law should have been rendered in favor of Santa Fe Pacific and Kerr-McGee (on all claims except sand and gravel), we need not reach every issue raised by appellants.

II. THE MINERAL RESERVATION

A. Factual Background

Prior to 1946, Santa Fe Pacific was the owner in fee simple of virtually all of the lawsuit lands. Most of these lands were acquired by Santa Fe Pacific under patents issued by the United States. The remainder of these lands was acquired by warranty deed from the New Mexico and Arizona Land Company. Santa Fe Pacific leased almost all of this property for grazing purposes. During 1945 and 1946, Santa Fe Pacific decided to sell many of its land holdings and offered the lands for sale to its grazing lessees. Each of these offers was made by a letter from E.O. Hemenway, the land commissioner of Santa Fe Pacific, to the grazing lessee, and each letter stated that Santa Fe Pacific intended to "retain all minerals."

Under this program, in three separate transactions, Santa Fe Pacific conveyed what became the lawsuit lands to others. In 1946, Santa Fe Pacific conveyed by warranty deed 864.35 acres to Grace Porter. In 1947, Santa Fe Pacific contracted to sell some 76,000 acres of its holdings to Cowden Livestock Company and approximately 37,000 acres to the partnership of Spurlock & Wetzler. In September of 1951, Santa Fe Pacific issued warranty deeds to Cowden Livestock Company and Spurlock & Wetzler. Each of the three warranty deeds contained an identical reservation. See Section II.B., infra.

In 1950, non-combustible helium-bearing gas was discovered in the "Pinta Dome," an area to the west of the lawsuit lands and the Spurlock ranch. Kerr-McGee and others began to explore for and develop this helium-bearing gas. By 1959-60, exploration efforts expanded to the east into an area on the Spurlock ranch known as Navajo Springs, which was largely land subject to the Santa Fe Pacific mineral reservation. Beginning in 1959, Santa Fe Pacific entered into mineral leases for portions of the lawsuit lands with persons interested in exploring for and producing helium gas. In 1960, helium-bearing gas deposits were discovered under the lawsuit lands.

B. Law of Other Jurisdictions

The primary issue in this case is whether a deed reservation of "all oil, gas, coal and minerals whatsoever, already found or which may hereafter be found, upon or under said lands" ² includes the disputed substances of helium, nitrogen, potash, petrified wood, and industrial clay. Although we find no Arizona cases construing such a reservation, similar provisions have been the source of extensive litigation in other jurisdictions.

All jurisdictions agree that in construing deeds, the court's role is to give effect to the intent of the contracting parties. E.g., Shulansky v. Michaels, 14 Ariz.App. 402, 405, 484 P.2d 14, 17 (1971). If the instrument is unambiguous, the intent of the parties must be discerned from the four corners of the document. E.g., Pass v. Stephens, 22 Ariz. 461, 466, 198 P. 712, 714 (1921). If, however, the instrument is ambiguous, then extrinsic evidence of intent is admissible. Id., 198 P. at 714.

But beyond agreeing on these basic principles of construction, courts have adopted varying approaches to ascertain what substances the parties intended to include in a general mineral reservation. Courts have focused their analysis on the proper definition of "mineral" with widely divergent results. Because of the importance of this issue in Arizona, we believe it appropriate to summarize some of the common approaches used in other jurisdictions. Some courts find the term mineral ³ to be inherently (and always) ambiguous and admit extrinsic evidence to determine the parties' intent. In Colorado, for example, extrinsic evidence is admissible to show what the word mineral means "in the vernacular of the mining world, the commercial world and [to] landowners at the time of the grant, and whether the particular substance was so regarded as a mineral." Morrison v. Socolofsky, 43 Colo.App. 212, 213, 600 P.2d 121, 122 (1979) (quoting Farrell v. Sayre, 129 Colo. 368, 373, 270 P.2d 190, 193 (1954)). Thus, in determining whether gravel was included within a reservation of "oil, gas and other minerals," the Morrison court concluded that evidence regarding the geological location of gravel with respect to the surface, the impact on the surface of extracting the gravel deposits, the nature of the use of the surface estate, and testimony of geologists-consultants in the gravel industry and of agricultural lenders and landowners on the common meaning of the term mineral at the time of the conveyance, were all properly admissible as bearing on the parties' intent. Id. at 214, 600 P.2d at 122.

Likewise the Arkansas courts find the term mineral to be ambiguous and require the admission of extrinsic evidence as to whether the substance at issue would be considered a mineral in the common commercial speech and usage at the time of the conveyance. See, e.g., Thomas v. Markham & Brown, Inc., 353 F.Supp. 498 (E.D.Ark.1973) (pulaskite stone not considered a mineral at the time of the conveyance); ...