State v. Quintana Petroleum Co.

• Citation: 133 S.W.2d 112
• Decision Date: 22 November 1939
• Docket Number: No. 7634.,7634.
• Parties: STATE et al. v. QUINTANA PETROLEUM CO. et al.
• Court: Supreme Court of Texas

133 S.W.2d 112

STATE et al. v. QUINTANA PETROLEUM CO. et al.

No. 7634.

Supreme Court of Texas.

November 22, 1939.

Error from Court of Civil Appeals, Eighth Supreme judicial District.

Suit by the State of Texas against Thomas O'Connor, Quintana Petroleum Company, and Humble Oil & Refining Company and others to recover taxes on interest in minerals for the year 1936. Judgments for plaintiff against defendants Quintana Petroleum Company and the Humble Oil & Refining Company were reversed by a Court of Civil Appeals which rendered judgment in favor of the Quintana Petroleum Company and the Humble Oil & Refining Company and remanded the cause as between the State of Texas and Thomas O'Connor, 127 S.W.2d 354, and the State of Texas and Thomas O'Connor bring error.

Judgment of the Court of Civil Appeals affirmed.

Gerald C. Mann, Atty. Gen., George W. Barcus, and A. S. Rollins, Asst. Attys. Gen., and Hobart Huson, of Refugio, for the State.

Crain, Vandenberge & Stofer, of Victoria, for plaintiff in error O'Connor.

Harry Holmes, of Houston, for defendant in error Quintana Petroleum Co.

K. W. Gilmore, of Houston, for defendant in error Humble Oil & Refining Co.

Sanders & Scott, of Amarillo, amicus curiae.

SMEDLEY, Commissioner.

The State of Texas filed this suit against plaintiff in error Thomas O'Connor in Refugio County for the recovery of state and county ad valorem taxes, together with interest and penalties, due for the year 1936 on account of his alleged ownership of an interest in the oil, gas and other minerals in 4000 acres of land in Refugio County and for foreclosure of lien. The petition describes the property as being a mineral interest reserved by O'Connor in an oil and gas lease of said land executed by him to Quintana Petroleum Company on January 19, 1934, and sets out the paragraph in the lease reserving the said interest, which is as follows:

"In addition to the foregoing reserved interests, (the usual one-eighth royalties) there is furthermore reserved to the grantor one-fourth (1/4) of the remainder of any oil, gas or minerals produced from said land after the reservations above set forth are made, until the proceeds of the sale (such sale to be made at not less than the market price) by grantor of said one-fourth of the remainder shall aggregate Two Million Dollars ($2,000,000.00) whereupon this reservation of title to said 1/4 interest shall terminate and this interest shall vest in grantee and its assigns".

The interest described in the quoted paragraph is generally referred to in the petition and in the briefs as being a 7/32 (1/4 of 7/8) interest in the minerals in the 4000 acres of land. The petition alleges that the said interest was owned by O'Connor on January 1, 1936, that it was duly and legally assessed to him for ad valorem taxes for said year at a valuation of five hundred thousand dollars and the taxes lawfully levied and that O'Connor became personally liable and obligated to pay the taxes on said interest with penalties and interest. Quintana Petroleum Company and Humble Oil & Refining Company, the owners of the leasehold estate, were made parties defendant, and the petition alleges that if plaintiff is mistaken as to said O'Connor having been the owner of said reserved interest on January 1, 1936 and it is held that the title thereto was owned on said date by Quintana Petroleum Company and Humble Oil & Refining Company, nevertheless the taxes assessed against the said interest, together with penalties, interests and costs, are due and collectible and are a charge upon and secured by a paramount and superior lien upon the said mineral interest. The prayer is that the State have judgment against O'Connor for the taxes, penalties, interest and costs, with foreclosure of lien, and in the alternative in the event the court should hold that O'Connor was not the owner of the mineral interest and is not personally liable for the taxes, that the court determine the amounts which the plaintiff is entitled to recover and that it have judgment against all the defendants fixing and foreclosing its lien on the said interest.

The trial court sustained O'Connor's general demurrer to the State's petition, holding that the petition, specially pleading the lease contract, affirmatively disclosed that O'Connor owned no taxable interest in the 7/32 interest in the minerals reserved in the lease. The case as between the State as plaintiff and Quintana Petroleum Company and Humble Oil & Refining Company as defendants was tried on an agreed statement of facts and judgment was rendered in favor of the State in accordance with the alternative prayer in the petition.

The Court of Civil Appeals in its first decision of the case held that Quintana Petroleum Company and Humble Oil & Refining Company are the owners of the 7/32 interest in the minerals as a part of the leasehold estate and affirmed the judgment of the trial court. On rehearing, however, it held that O'Connor is the owner of the said mineral interest, reversed the trial court's judgment, rendered judgment in favor of Quintana Petroleum Company and Humble Oil & Refining Company, and remanded the cause as between the State and O'Connor. 127 S.W.2d 354.

Both plaintiffs in error O'Connor and the State, in their applications for writs of error, take the position that ownership of the 7/32 interest in the minerals passed in the execution of the lease to the lessee and that the paragraph in the lease, by which O'Connor as lessor reserved 7/32 of the oil, gas and other minerals produced from the land until the proceeds of the sale thereof by him should aggregate two million dollars, had the effect of reserving the title or interest in the minerals only by way of security for the payment of the said sum. The State's application for writ of error presents the theory that O'Connor reserved a right to receive oil, gas or other minerals of the value of two million dollars out of the 7/32 interest and that such right is distinct and apart from the ownership of the 7/32 which forms a part of the lessee's 7/8, the working interest, while in a supplemental brief filed in behalf of the State it is contended that the lessor O'Connor sold and conveyed 7/8 of the mineral estate to the lessee and retained a lien on 1/4 of the 7/8 to secure the payment of two million dollars out of the proceeds received from the sale of the minerals as produced.

The question presented for decision is: Does the 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 shall aggregate two million dollars, constitute an interest in land taxable as such against the lessor as its owner?

The question stated is to be answered, and the sufficiency of the petition on general demurrer is to be determined, by examination and construction of the lease, which is set out in full in the petition. The petition contains allegations, in addition to those hereinbefore copied and stated, sufficient at least against general demurrer, showing that the mineral interest under consideration was subject to ad valorem taxation in Refugio County for the year 1936, that the same was not rendered to the assessor by O'Connor or by any of the other defendants, that it was duly and legally rendered by the tax assessor and assessed to O'Connor for ad valorem taxes for said year at a valuation of five hundred thousand dollars, and that the taxes thereon in the amounts set out in the petition were lawfully and regularly levied and are past due and unpaid. The petition further alleges that a short time after the execution of the lease the lessee Quintana Petroleum Company and Humble Oil & Refining Company, to which an interest in the leasehold was conveyed, entered upon the land and drilled a great number of producing oil wells thereon which have continued to produce oil in paying quantities, and that the lessor O'Connor from the proceeds of the sales of the 7/32 interest in the oil produced had received on January 1, 1936 only a small part of the two million dollars specified in the lease.

The lease, which designates the lessor as grantor and the lessee as grantee, does not purport to convey to the lessee 7/8 of the oil, gas and other minerals. It grants and leases the land to the lessee for the purpose of drilling, mining for and producing oil, gas and other minerals, with the added provision that in case of any discovery of any of such products "there is expressly reserved to grantor certain interests therein hereinafter set forth, full title to such reserved interests being retained by the grantor". It is provided that in the event of discovery and production of oil in paying quantities in any well the lease shall continue in effect so long as gas, oil or other minerals are produced and marketed in paying quantities.

Section VI of the lease contains the reservation of interests to the lessor in the following language:

"In case of discovery and production by grantee of any oil, gas or other minerals upon and from the leased premises, interests in all of such products and full title thereto are retained by grantor as follows:

"(a) One-eighth (1/8) of all oil produced and saved from said land as long as any production is maintained; provided, however, that as to any unmerchantable oil derived from the wells, containing more than two per cent B. S. and water, such one-eighth shall bear its proportionate expense of treating such unmerchantable oil to make it merchantable as crude.

"(b) One-eighth (1/8) of the gas produced...