State Nat. Bank of Corpus Christi v. Morgan

• Decision Date: 23 October 1940
• Docket Number: No. 1840-7550.,1840-7550.
• Citation: 143 S.W.2d 757
• Parties: STATE NAT. BANK OF CORPUS CHRISTI v. MORGAN et al.
• Court: Texas Supreme Court

143 S.W.2d 757

STATE NAT. BANK OF CORPUS CHRISTI v. MORGAN et al.

No. 1840-7550.

Commission of Appeals of Texas, Section B.

October 23, 1940.

Error to Court of Civil Appeals of Seventh Supreme Judicial District.

Action by the State National Bank of Corpus Christi against R. Morgan and others to recover half of the proceeds from an interest reserved in an oil and gas lease. Judgment for the defendants was affirmed by the Court of Civil Appeals, 123 S.W.2d 1036, and the plaintiff brings error.

Affirmed.

Kleberg, Eckhardt & Lowe, of Corpus Christi, and Robert W. Stayton, of Austin, for plaintiff in error.

Keys & Holt, of Corpus Christi, John P. Bullington and Baker, Botts, Andrews & Wharton, all of Houston, Wm. K. Hall, of Fort Worth, and T. J. Lawhon, of Houston, for defendants in error.

SMEDLEY, Commissioner.

The controversy herein is as to the ownership of undivided one-half interests in certain fractional parts of the oil, gas and other minerals in three tracts of land reserved to lessors in three leases until lessors should receive therefrom, free from cost of production or marketing, stated total sums. Judgment of the trial court in favor of defendant in error Morgan was affirmed by the Court of Civil Appeals. 123 S.W.2d 1036.

Plaintiff in error, State National Bank of Corpus Christi, the owner of a tract of land containing 234.55 acres in Nueces County, conveyed the land to James G. Fisher by general warranty deed containing the following paragraph: "It is expressly agreed and understood that there is reserved to grantor, its successors and assigns forever, and excepted from this conveyance an undivided 1/2 interest in and to all of the royalty in oil, gas, casing-head gas, gasoline, and in all other minerals in and under and that may be produced and mined from the above described land; however, grantor does not by this reservation and exception retain any right of participating in the making of future oil and gas lease nor of participating in the bonus or bonuses which shall be received from any future lease nor of participating in any rental to be paid for the privilege of deferring the commencement of a well under any lease, now or hereafter; it being intended and agreed that in no event will any lease or contract be made for the development of said land or any portion of same for oil, gas, or other minerals, providing for a royalty of less than one-eighth on oil and gas."

Fisher on the same day conveyed the land to defendant in error Morgan, the deed providing that the conveyance was subject to the reservation made in the deed from the bank to Fisher.

Thereafter Morgan executed three oil and gas leases, each covering an 80 acre portion of the 234.55 acre tract. The leases were in substantially identical terms. Each lease recited a cash consideration of $10 and contained the following paragraphs:

"4th.

"The royalties reserved by lessor and which shall be paid by lessees are:

"(a) On oil, one-eighth (1/8) of that produced and saved from said land, the same to be delivered at the wells or the credit of lessor in the pipe line to which the wells may be connected or at the option of the lessees, from time to time, the market price at the wells of such one-eighth (1/8) on the day it is run to the pipe line or storage tanks.

"(b) On gas produced from said land and sold or used off the land or in the manufacture of gasoline, including casing-head gas, the market price at the well of one-eighth of the gas so sold or used, provided that if and when lessees shall sell gas at the wells, lessor's royalty thereon shall be one-eighth of the amount realized from such sale.

"(c) On all other minerals, mined and marketed from said land, lessees agree to pay to lessor a royalty in kind or value, which shall be at lessee's election, one-eighth (1/8) of all such minerals so mined except that the royalty on sulphur shall be One Dollar ($1.00) per long ton for all mined and marketed.

"5th.

"In addition to all other reservations of royalties herein made and provided for the benefit of lessors, there is reserved to lessors, their heirs and assigns, the title to an undivided one-eighth of seven-eighths (1/8 of 7/8) equal part of all oil, gas, and/or other minerals in, under, and that may be produced and saved from said land, as, if, and when so produced and saved, but not otherwise, until lessors shall have received, free of cost of production, marketing, or handling, the sum of Forty-eight Thousand Dollars ($48,000.00), whereupon this reservation shall terminate and the title to said one-eighth of seven-eighths (1/8 of 7/8) undivided interest in said oil, gas, and/or other minerals shall thereupon vest in lessees, their heirs, successors, and assigns."

Morgan admits the bank's ownership of one-half of the one-eighth royalties reserved in the fourth paragraph of the leases. The dispute is about the ownership of the interests reserved in the fifth paragraph of the leases, the bank contending that it owns one-half of such interests, by reason of the reservation of an undivided one-half interest in all royalty contained in its deed to Fisher, and Morgan taking the position that the interests retained in the fifth paragraph of the leases are not royalties, but are bonuses, and therefore are not within the reservation in the deed. Thus it is apparent that the question for decision is whether the interest reserved in the fifth paragraph of the leases, which for brevity we designate an oil payment, is royalty within the meaning of the deed from the bank to Fisher.

Plaintiff in error's case is thus tersely stated in its application for writ of error: "Plaintiff in error insists that as a matter of law each of the leases, by means of such clause (that providing for the oil payment) should be construed as plainly and unambiguously providing for royalty and that such contract, being in writing could not, because of the parol evidence rule, be altered in meaning by extrinsic evidence of a contrary intention."

The argument presents first the point that the fifth paragraph of the leases is in substance one providing for royalty and not for bonus, and second, the point that said paragraph expressly designates what it contains as a reservation of royalty and that such designation should be immune from variation under the parol evidence rule.

The application for writ of error contains a careful and able presentation of cases dealing with similar reservations to that here under consideration and argues that the important and distinguishing elements of royalty as explained and set out in those decisions, and in other authorities in which the term royalty is defined, are present in the interests reserved in the fifth paragraph of the leases executed by Morgan. We find no decision directly decisive of the question here presented. After careful consideration of the various decisions cited in the application and in the briefs and of the definitions of the terms "royalty" and "bonus", we have reached the conclusion that it does not clearly and plainly appear from the language of the leases that the oil payment provided for in the fifth paragraph is royalty within the meaning of the deed from the bank to Fisher.

We shall refer briefly to some of the Texas decisions discussed in the briefs. In Schlitter v. Smith, 128 Tex. 628, 101 S.W.2d 543, it was held that a reservation in a deed of an undivided one-half of all royalty rights in all of the oil and gas and other minerals in, on and under a tract of land was a reservation only of an interest in oil, gas or minerals paid, received or realized as royalty and did not include bonuses or rentals. The opinion contains the statement that the words "royalty", "bonus", and "rentals" have well understood meanings in the oil and gas business. These terms are not defined in the opinion and the case does not involve in any way an oil payment or a reservation of an interest in the oil until a certain sum is paid.

In Tennant v. Dunn, 130 Tex. 285, 110 S.W.2d 53, 55, the owner of an oil and gas lease, for a cash consideration, assigned and conveyed to Mrs. Dunn all its right, title and interest in and to the lease "insofar as it covers and only covers Twenty Five thousand dollars ($25,000) worth of oil at the market price thereof at Joinerville, Texas, out of and from five forty-eighths (5/48) of Seven Eighths (7/8) of the oil produced from said well," etc. It was held that the right or interest created by the assignment to Mrs. Dunn was an interest in land. The opinion contains a discussion of several decisions involving royalty, and particularly of Sheffield v. Hogg, 124 Tex. 290, 77 S.W.2d 1021, 80 S.W.2d 741, points out that the gist of the decision in Sheffield v. Hogg is that oil and gas royalties are interests in land because they are profits arising out of land and concludes that the right acquired by Mrs. Dunn should for the same reason be classified as an interest in land.

O'Connor v. Quintana Petroleum Company, 134 Tex. 179, 133 S.W.2d 112, 134 S.W.2d 1016, was a tax suit in which it was decided that a reservation to the lessor of 7/32 of any oil, gas or other minerals produced from the land, until the proceeds of sale by the lessor of said 7/32 should aggregate two million dollars, constituted an interest in land, taxable as such against the lessor as its owner.

The oil payments that were the subject of litigation in the cases last referred to were similar in nature to the ordinary oil and gas royalties, as for example, those considered in Sheffield v. Hogg, being profits arising out of land, and accordingly were classified as interests in land. It was not held, however, in those cases that the oil payments were identical with the ordinary royalty or that any and all rights to payment out of oil, not chargeable with costs of production or marketing, are royalties. Defendant in error Morgan concedes, and correctly so, that the interest reserved in the fifth paragraph of the...