Stephens County v. Mid-Kansas Oil & Gas Co.

• Decision Date: 30 June 1923
• Docket Number: (No. 3569.)<SMALL><SUP>*</SUP></SMALL&gt
• Citation: 254 S.W. 290
• Parties: STEPHENS COUNTY et al. v. MID-KANSAS OIL & GAS CO.
• Court: Texas Supreme Court

Page 290

254 S.W. 290

STEPHENS COUNTY et al. v. MID-KANSAS OIL & GAS CO.

(No. 3569.)^*

Supreme Court of Texas.

June 30, 1923.

Certified Question from Court of Civil Appeals of Second Supreme Judicial District.

Action by the Mid-Kansas Oil & Gas Company against Stephens County and others to enjoin the assessment and collection of certain taxes. From judgment for plaintiff, defendants appealed to the Court of Civil Appeals, which certifies a question to the Supreme Court. Question answered.

C. M. Cureton, Atty. Gen., E. F. Smith, Asst. Atty. Gen., Veale, Caldwell, Bateman & Evans and Goggans, Bateman & Leaverton, all of Breckenridge, J. L. Goggans, of Dallas, Chas. L. Black, of Austin, and D. A. Eldridge, of Dallas, for appellants.

Penix, Miller, Perkins & Dean, of Mineral Wells, for appellee.

D. Edward Greer, of Houston, and R. E. Hardwicke, of Fort Worth, amici curiæ.

GREENWOOD, J.

Appellee, Mid-Kansas Oil & Gas Company, sued appellants, Stephens county and the tax collector, tax assessor, county judge, and county commissioners of Stephens county, to enjoin the assessment and collection of taxes on any separate right or interest of appellee as the assignee of the Texas & Pacific Coal Company, under the following instrument:

"Oil and Gas Lease.

"This lease made and entered into this 18th day of Aug., 1916, between S. R. Hill and wife, of Eliasville, county of Stephens, state of Texas, first parties, and the Texas & Pacific Coal Company, of Thurber, Erath county, Texas, second party, witnesseth:

"The first parties in consideration of forty-one & 25/100 dollars ($41.25) to them paid, receipt of which is hereby acknowledged, and of the covenants hereinafter contained on the part of the second party, do by these presents, let and lease to the second party the following described premises, situated in Stephens county, Texas, to wit: Being 165 acres of land and being the east part of Sec. No. 16, Blk. No. 2 cert. No. 17/507, S. P. Ry. Co. land in said Stephens county, Texas, containing 165 acres more or less, hereby granting to second party full and exclusive authority to enter upon said premises and to dig, drill, operate for and procure natural gas and petroleum together with the right of taking upon said premises and removing therefrom at pleasure any machinery, tools, lumber, pipe, casing and other things necessary in said work, and to construct on said premises and to remove therefrom, at pleasure, pumping plants, tracks, tanks, pipe lines and other things necessary in the operation of this lease, avoiding as far as practicable damages to fences and growing crops; but in case of damage to these, second party agrees to pay such damage, the same to be fixed by appraisers, should the parties hereto fail to agree to the amount of same.

"Should second parties discover on said premises natural gas in paying quantities and the same can be marketed to advantage second party shall pay first party a royalty of ten per cent. (10%) of the market price at the wells of the amount sold.

"In the event of the sale or marketing of petroleum, second party shall deliver as royalty to first parties, in tanks near the mouth of the well or wells, without cost to the first parties, one-eighth (1/8) of such products, or pay the market price in cash thereof, at option of second parties, and the remainder of such product shall belong to the party of the second part.

"A deposit of the moneys herein provided for the credit of the first parties in the First National Bank of Breckenridge, Texas, shall be taken and accepted by them as payment.

"If gas is discovered in paying quantities on said premises, first party shall have gas free for domestic purposes for one house now on said premises.

"The second party shall have the free use of any water on said premises for drilling and operating purposes, except that no water shall be taken from any well used by the first parties without their consent.

"It is further agreed between the parties hereto, that in case natural gas or petroleum are discovered on said premises that this lease shall continue in full force and effect so long as any of these are produced in paying quantities, but in the event of second party failing to pay to first parties in advance on ten days notice in writing by first party to second party, as above provided, the ground rent due under the terms and provisions hereof, that this lease shall be null and void and the first and second parties shall be released from all liabilities mentioned.

"And whereas, second party agrees that prospect work shall begin within a term of 18 months from the date hereof, either on S. R. Hill's land, as shown by this lease, or on Geo. W. Hill's land, as shown by his lease, or on J. W. Hill's land, as shown by his lease, or on S. H. Hill's land, as shown by his lease to said second party, and in the event said second party is not prospecting on some one of the different tracts of land named in this or Geo. W. Hill, J. W. Hill or S. H. Hill's contract within the 18 months from the date hereof, then, in that event, said second party is to pay to first party one dollar per acre instead of 25 cents per acre for all the time said second party shall keep or hold said lease on said land after 18 months has expired.

"The second party agrees to drill no well, except by consent of first party, within 500 feet of any building now on said premises.

"It is agreed by the parties hereto, that all the terms and conditions of this lease shall extend to and be binding on their heirs, executors and assigns.

"In witness whereof the parties of the first and second parts have hereunto set their hands and seals the day and year first above mentioned."

The instrument is duly signed and acknowledged by S. R. Hill and wife.

The suit was to also enjoin the assessment and collection of taxes on any rights or interests of appellee in and to 109 additional tracts of land, as the assign of the "second parties," under instruments in substantially the same form as the writing above copied.

The trial court overruled a general demurrer to appellee's petition and rendered judgment restraining Stephens county and its officers from collecting the taxes.

Appellants perfected an appeal to the Fort Worth Court of Civil Appeals, presenting one assignment of error, complaining of the overruling of their general demurrer, on the ground that the instruments conveyed such interests in the respective tracts of land therein described as were independently taxable under article 7503 and 7504 of the Revised Statutes.

The Honorable Court of Civil Appeals has certified to this court the single question whether appellee acquired, under the above-mentioned instruments, such interests or such estates in land as were subject to separate taxation. The certificate recites that numerous suits involving the question are pending and that its authoritative determination is of the utmost importance.

Looking to the manifest intent of the parties, we do not think it difficult to arrive at a correct answer to the question. The subject-matter of each contract was gas and oil in place. The principal consideration was royalties dependent on the marketing of the gas or oil. The land was leased for the purpose of prospecting for, producing, and marketing these minerals, and for no other purpose. It was solely to effectuate such purpose that the parties of the first part granted unto the parties of the second part, their heirs and assigns, full and exclusive authority to enter upon the lands and to conduct all necessary drilling and marketing operations. The gas or oil, in paying quantities, became the property of the parties of the second part, their heirs or assigns, who were obligated to pay to the parties of the first part, their heirs or assigns, the market price of one-tenth the gas sold, and to deliver to the parties of the first part, their heirs or assigns, one-eighth the oil, unless they elected to pay the market price of such oil, instead of making delivery thereof. On demand, the parties of the first part, their heirs or assigns, were also entitled to sufficient gas for domestic purposes in specified dwellings without charge. The exploratory term was 18 months from date, subject to renewal for a reasonable time, on payment of stipulated sums per acre. The instruments were to continue in full force as long as gas or oil was produced in paying quantities.

Denial that these instruments passed separately taxable interests in lands is grounded first on the proposition that there is no such thing as ownership or conveyance of gas or oil in place, because, until the gas or oil is brought to the surface and reduced to possession, any owner of land adjacent to that containing the gas or oil may lawfully appropriate same.

The opinion in Bender v. Brooks, 103 Tex. 335, 127 S. W. 168, Ann. Cas. 1913A, 559, contains an expression that the owners of the land had "no specific title" to the oil therein until its removal from the earth, but the subsequent opinion in Right of Way Oil Co. v. Gladys City Oil, Gas & Mfg. Co., 106 Tex. 103, 157 S. W. 737, 51 L. R. A. (N. S.) 268, makes clear that it was not intended to thereby deny that oil in place was capable of ownership; for both opinions were written by Judge Brown, who cites the case of Bender v. Brooks in support of the conclusion in the latter opinion that the owner of the soil owns the oil while beneath the surface, as a part of the land, though his title becomes more definite upon the oil's extraction. The court had previously held that before oil is extracted it is a part of the land like such solid minerals as iron, coal and lead. Swayne v. Lone Acre Oil Co., 98 Tex. 597, 86 S. W. 740, 69 L. R. A. 986, 8 Ann. Cas. 1117.

The opinion of the Commission of Appeals in Prairie Oil & Gas Co. v. State, 231 S. W. 1090, quotes with approval the statement in Gould on Waters that oil, like water, is not the subject of property until reduced to...