Team Bank v. Meridian Oil Inc.

• Decision Date: 08 August 1994
• Docket Number: No. 20892,20892
• Citation: 879 P.2d 779,1994 NMSC 83,118 N.M. 147
• Parties: TEAM BANK, a corporation, as Trustee for the San Juan Basin Royalty Trust, Plaintiff-Appellee, v. MERIDIAN OIL INC., a corporation, and Southland Royalty Company, a corporation, Defendants-Appellants.
• Court: New Mexico Supreme Court

Page 779

879 P.2d 779

118 N.M. 147

TEAM BANK, a corporation, as Trustee for the San Juan Basin Royalty Trust, Plaintiff-Appellee, v. MERIDIAN OIL INC., a corporation, and Southland Royalty Company, a corporation, Defendants-Appellants.

No. 20892.

Supreme Court of New Mexico.

Aug. 8, 1994.

[118 N.M. 148] Campbell, Carr, Berge & Sheridan, P.A., Michael B. Campbell, Michael H. Feldewert, Santa Fe, for appellants.

Gallegos Law Firm, P.C., J.E. Gallegos, Santa Fe, for appellee.

OPINION

FRANCHINI, Justice.

We granted an interlocutory appeal to Defendants Meridian Oil Inc. and Southland Royalty Co. ("Southland") from an order denying a motion to dismiss for improper venue. Team Bank, a corporation acting as Trustee for the San Juan Basin Royalty Trust, seeks monetary damages from Southland in a suit for breach of contract brought in Rio Arriba County. Team Bank alleges that Southland has underpaid royalties on natural gas production in Rio Arriba and other counties. We find that the trial court improperly denied the motion to dismiss, reverse the trial court, and remand for dismissal of the cause of action without prejudice.

Facts and proceedings below. Southland and Team Bank are Texas residents. Southland is the settlor, or creator, of an oil and gas royalty trust that is to receive royalties from oil and gas leasehold interests, royalty interests, and overriding royalty interests Southland owns in the San Juan Basin. The Trust is to collect the assets produced by the interests, convert them to cash, and distribute the cash to unit holders of the Trust. In 1980 Southland and Team Bank entered into a contract in Texas whereby Southland was to collect the proceeds from the sale of the oil and gas produced from certain lands in the Basin and pay to Team Bank, as Trustee, 75% of the net proceeds as an overriding royalty interest.

In 1992 Team Bank brought suit for breach of contract, alleging underpayment of royalties. Southland moved for dismissal of the suit on the basis of improper venue. At the hearing on the venue motion Team Bank withdrew its claims for divestiture and partition. Relying on Fullerton v. Kaune, 72 N.M. 201, 205, 382 P.2d 529, 533 (1963) (stating that funds resulting from the sale of production of a mineral well are realty interests), and NMSA 1978, Section 38-3-1(D)(1) (Cum.Supp.1993) (mandating venue in the county where real property is located when an interest in land is the object of the suit), the trial court found venue to be proper in Rio Arriba County. Alternatively, the court found that the subject contracts were performed in part in Rio Arriba County, and therefore, under NMSA 1978, Section 38-3-1(F) (allowing suit against foreign corporations to be brought in the county where the contract is to be performed), venue also was proper.

Venue in New Mexico is not mandatory under NMSA 1978, Section 38-3-1(D)(1). Under NMSA 1978, Section 38-3-1(D)(1), it is mandatory to bring all civil actions involving a dispute "[w]hen lands or any interest in lands are the object of any suit in whole or in part ... in the county where the land ... is situate." Team Bank argues that an action to determine the nature and extent of royalty interests has as its object an "interest in land" for venue purposes, citing to Fullerton for authority. In Fullerton the plaintiffs claimed ownership of a royalty interest in an oil and gas well, thus the trial court correctly held that the suit was for an interest in realty such that the statute of frauds applied to the contract. 72 N.M. at 205, 382 P.2d at 533. Fullerton, however, does not dispose of the issue in this case, which is: What is the object of this suit?

Southland argues that the Trust does not own an overriding royalty interest but rather only a "net profits interest" in the proceeds of the royalty. We disagree. The Conveyance, by its express terms, conveys a "net overriding royalty interest ... in and to the Minerals in and under, and if, as and when produced, saved and sold from, the Subject Lands ... equal to ... (75%) of the Net Proceeds attributable to the Subject Interests...." The fact that the value of the royalty interest is measured by a percentage of the net proceeds does not change the fact that the royalty interest itself was conveyed. Further, the Indenture states that a reason for the creation of the Trust was to avoid conveying legal title of an interest in the royalties to each shareholder, and that the royalties would instead be conveyed to the Bank as trustee.

Although an overriding royalty interest is an interest in real property, see Uhden v. New Mexico Oil Conservation Comm'n, 112 N.M. 528, 530, 817 P.2d 721, 723 (1991) (stating that "a grant ... of royalty rights ... in a mineral lease ... is a grant ... of real property"), the controlling issue is whether the royalty interest is the object of the suit at bar such that venue is mandatory in Rio Arriba County. We hold that it is not. The suit is not for a declaratory judgment to determine ownership of the royalty; it is for breach of contract to determine whether the correct amount of royalties has been paid. The object of the suit is not to establish an interest in the real property but to recover money owed by Southland. This is a transitory action, see NMSA 1978, Section 38-3-1(A), and venue was not mandatory in New Mexico under Section 38-3-1(D)(1). Cf. Naumburg v. Cummins, 98 N.M. 274, 275, 648 P.2d 313, 314 (1982) (holding that suit that could affect the title or ownership of land had as its object "an interest in land" under Section 38-3-1(D)(1)); see also Jemez Land Co. v. Garcia, 15 N.M. 316, 321, 107 P. 683, 684 (1910) (stating that venue in county where land not situated proper if claim for damages was the sole object of suit); Rito Cebolla Invs., Ltd. v. Golden West Land Corp., 94 N.M. 121, 123, 607 P.2d 659, 661 (Ct.App.1980) (holding that suit for damages for misrepresentations made in sale of real estate is a transitory action; Section 38-3-1(D)(1) did not control because action did not affect the title to or ownership of the property); M.E. Occhialino, Walden's Civil Procedure in New Mexico 2-19 (2d ed. 1988) (stating that "where the action, though related in some way to land, will not have an impact on title, there is no need to require the action to be brought where the land is located").

Venue is not proper under NMSA 1978, Section 38-3-1(F). In causes of action against foreign corporations in which no other mandatory rule applies, the proper venue rule is NMSA 1978, Section 38-3-1(F). This section states in part that venue is proper "in the county where the contract sued on was made or is to be performed or where the cause of action originated." It is uncontroverted that the contract in this case was made in Texas, and the contract specifically provides that payment of the royalties is to be made in Texas. Further, no liability for breach of the contract would attach until the royalty payments became insufficient for some reason. Because production of some of the gas and its measurement, however, among other things, took place in part in Rio Arriba County, the district court found that "the contract is to be performed at least in part in Rio Arriba County" and held that venue thus was proper under Section 38-3-1(F).

Venue "relates to the convenience of litigants," Neirbo Co. v. Bethlehem Shipbuilding Corp., 308 U.S. 165, 167, 60 S.Ct. 153, 154, 84 L.Ed. 167 (1939), and "reflect[s] equity or expediency in resolving disparate interests of parties to a lawsuit in the place of trial," Burlington Northern R. Co. v. Ford, 504 U.S. 648, ----, 112 S.Ct. 2184, 2186, 119 L.Ed.2d 432 (1992). In transitory actions the venue rules reflect an attempt to balance the common-law right of a defendant to be sued in his most convenient forum (usually the county of his residence) with the right of the plaintiff to choose the forum in which to sue. See id. at ---- - ----, 112 S.Ct. at 2186-87. The plaintiff's right to choose the forum does not become compelling until the suit is filed in a proper forum. In New Mexico the Legislature has expressed its intent to give foreign corporations that are admitted to do business and that have designated and maintained a statutory agent in this state the same "weight" in the venue balance as resident defendants. Compare Sec. 38-3-1(A) with Sec. 38-3-1(F). We are faced with the question of whether to give the words "where the contract sued on ... is to be performed" a broad construction that would allow suit in any county where any part of the contract might be performed or to give it a narrow construction such that suit could be brought only in the county or counties where a primary or principal activity is to take place. We believe that the latter construction is preferable for two reasons. First, the statutory provision is "an exception to the general rule that an action on contract is triable in the county of defendant's residence," 92 C.J.S. Venue Sec. 12(a), at 685 (1955); therefore it "should be strictly construed by the courts favorably to the rights of defendants." Id. Sec. 5(b), at 673; accord 77 Am.Jur.2d Venue Sec. 30 (1975) (stating that statutory "exceptions authorizing the bringing of certain suits in a county other than that of the defendant's residence are to be strictly construed"); cf. Fraser v. Clark, 128 Mont. 160, 273 P.2d 105, 118 (1954) (construing the words "in the county in which the contract is to be performed" to refer only to contracts that expressly indicate a place of performance);¹ Craig v....