Texas Oil & Gas Corp. v. Vela, A--11666

CourtSupreme Court of Texas
Writing for the CourtWALKER; Dissenting opinion by HAMILTON; Dissenting opinion by GRIFFIN; HAMILTON; GRIFFIN; WALKER
Citation429 S.W.2d 866
Decision Date03 April 1968
Docket NumberNo. A--11666,A--11666
PartiesTEXAS OIL & GAS CORPORATION et al., Petitioners-Respondents, v. Juan M. VELA et al., Respondents-Petitioners.

Page 866

429 S.W.2d 866
TEXAS OIL & GAS CORPORATION et al., Petitioners-Respondents,
Juan M. VELA et al., Respondents-Petitioners.
No. A--11666.
Supreme Court of Texas.
April 3, 1968.
On Rehearing July 2, 1968.
Rehearing Denied July 24, 1968.

Geary, Brice & Lewis, W. S. Barron, Jr., Dallas, G. C. Mann, Laredo, Robert R. Barton, Kerrville, for Texas Oil and Gas Corp. and others.

Page 868

Meer, Chandler & Carlton, Dean Carlton, Dallas, for Delhi-Taylor Oil corp.

Turner, Hitchins, McInerney, Webb & Hartnett, James J. Hartnett, Dallas, for Texas Oil and Gas and Delhi-Taylor.

Fansler & Fansler, C. N. Fansler, Jr., Laredo, for Hannah D. Gaines et vir.

Mann, Cronfel & Mann, John E. Mann, Laredo, Bobbitt, Brite, Bobbitt & Allen, Robert Lee Bobbitt, Jr., San Antonio, for Juan M. Vela and others.

W. Pat Camp, San Antonio, for L. A. Nordan.

WALKER, Justice.

This case involves an oil and gas lease executed in 1933 and covering 1,500 acres of land in Zapata County. Under its terms the lessee is obligated to 'pay to lessor, as royalty for gas from each well where gas only is found, while the same is being sold or used off of the premises, one-eighth of the market price at the wells of the amount so sold or used.' Gas has been produced and sold from the leased premises since 1935. In that year the owners of the working interest entered into contracts 'for the life of the lease' by the terms of which the gas was sold at a price of 2.3cents per mcf. Royalties have been paid on that basis, but more recent contracts for the sale of gas from the same field provide for substantially higher prices.

Subject to certain non-participating royalty interests, the title of the original lessors is owned by Juan M. Vela et al, hereinafter referred to as the Velas. They instituted suit to recover alleged deficiencies in royalty payments on gas sold from the leased premises during the period from February 1, 1960, to January 31, 1964, and for additional relief on the theory that the premises were being drained and had not been properly developed. The principal defendants, who will be referred to individually by name and collectively as respondents, are Delhi-Taylor Oil Corporation, the American-Texas Group, and Texas Oil & Gas Corporation. These respondents were owners of the working interest at different times during the four-year period. One member of the American-Texas Group is Mrs. Hannah D. Gaines, who owns a three-sixteenths non-participating royalty interest in the land. The named defendants also include L. A. Nordan, who owns a one-fourth non-participating royalty interest. Nordan and Mrs. Gaines, who will be referred to by name or as petitioners, answered and sought a recovery of any additional royalties to which they might be entitled. They and the Velas compromised and settled their claims against several defendants referred to as the Venture Group. Under and in accordance with the terms of the settlement agreement, judgment was rendered against the Venture Group for deficiencies in royalty payments with the understanding that no execution would issue thereon.

After a non-jury trial the district court rendered judgment: (1) awarding the Velas, Nordan and Mrs. Gaines a total of $55,750.13 for unpaid royalties and interest; (2) denying a recovery of damages for past drainage; (3) declaring that the working interest operators are obligated to pay as royalty one-eighth of the market price at the wells, at the time produced, of all gas sold or used off the premises after February 1, 1964; and (4) directing Texas Oil & Gas Corporation, the present owner of the working interest, to drill certain additional wells or suffer cancellation of the lease. The Court of Civil Appeals: (a) affirmed the money award in favor of the Velas but modified the judgment of the trial court to provide that the recovery against the members of the American-Texas Group should be several and not joint; (b) upheld the denial of damages for past drainage; (c) reversed and rendered judgment that Nordan and Mrs. Gaines take nothing by their suit for additional royalties; (d) modified the declaratory portion of the judgment to provide

Page 869

that the operators would be obligated to pay royalties on the basis of market price from and after the date of judgment; and (e) held that the royalty owners could be adequately compensated by an award of damages for drainage and failure to develop after the operator was notified of its failure to comply with the implied covenants of the lease. The judgment of the trial court, in so far as it directed Texas Oil & Gas Corporation to drill additional wells or suffer cancellation of the lease, was accordingly reversed, and that part of the case was severed and remanded to the district court for a determination of the amount of damages. 405 S.W.2d 68.

Applications for writs of error were filed by the Velas, Nordan, Mrs. Gaines, Delhi-Taylor, the American-Texas Group, and Texas Oil & Gas Corporation. All applications were granted, and the case was argued orally and submitted to the Court for decision. Some time after argument a joint motion was filed by the Velas, Texas Oil & Gas Corporation. Delhi-Taylor and the American-Texas Group stating that all claims and controversies between them have been settled and praying that the cause be dismissed as moot but without prejudice to the claims of Nordan and Mrs. Gaines against Texas Oil & Gas Corporation, the American-Texas Group and Delhi-Taylor. This motion is granted as hereinafter set out, but there are a number of questions to be decided in disposing of the claims of Nordan and Mrs. Gaines.

As indicated above, Nordan and Mrs. Gaines each own a fractional non-participating royalty interest. Their pleadings indicate that they would have been content if the claims of the Velas had been denied, but in the alternative they adopted the Velas' first amended original petition and prayed that they be given their portion of any relief granted by the court. In a later pleading they alleged their royalty ownership more specifically and prayed that they recover damages from Texas Oil and Gas Corporation and certain other defendants in proportion to any amount awarded the Velas on the basis of their second amended original petition. As we construe the pleadings and in so far as they affect the questions to be decided here, Nordan and Mrs. Gaines were seeking in the trial court substantially the same relief as the Velas. They brought forward a number of points of error to the Court of Civil Appeals and also adopted the brief filed there by the Velas.

Although the Court of Civil Appeals upheld the award of additional royalty to the Velas, it concluded that Nordan and Mrs. Gaines are equitably estopped from asserting their right to a similar recovery. This question will be discussed later. Respondents make two other basic contentions with respect to the action for the recovery of additional royalty: (1) that the contract price of 2.3cents per mcf at which they sold the gas is the market price within the meaning of the lease; and (2) that even if this is not so, there is no evidence to support the trial court's finding that the market price of the gas during the four-year period was 13.047cents per mcf. These contentions will be considered in the order in which they have been stated.

The leased premises are located in the Lopeno Field, which was discovered in 1934. The first gas well on the land was brought in shortly after that time, and six wells have now been completed thereon. These wells produce from the Upper Queen City sand. Another and lower Queen City sand located at a depth of about 2,700 feet was recognized in 1963 as a separate reservoir from the upper Queen City. There was no pipeline in the Lopeno Field and no market for the gas when it was first discovered. Nordan & Morris, a partnership composed of L. A. Nordan and John G. Morris, acquired various leases in the field. They entered into a gas sales contract with United Gas Public Service Company on November 20, 1934. Under its terms Nordan & Morris agreed to establish the commercial possibilities of the field by completing at least three gas wells

Page 870

capable of delivering a combined total of five million cubic feet of gas daily. United agreed to construct a pipeline to the field and was granted the exclusive right to purchase on a ratable basis all gas produced from land in the field in which Nordan & Morris owned or acquired an interest. This right was to exist for the terms of the leaseholds and any renewals or extensions thereof. The stipulated price was 3 1/2cents per mcf, computed at a base pressure of two pounds per square inch above an assumed atmospheric pressure of 14.4 pounds per square inch. 1

Nordan & Morris then entered into gas purchase contracts with various operators in the field. All owners of the working interest in the lease now in question executed such contracts, agreeing to sell the gas produced from the leased premises in accordance with their terms. There are three of these contracts, two of which were executed in 1935 and the third in 1937. They provide for an effective rate of 2.3cents per mcf at standard measurement, and for a term during the life of the leases covered thereby. All of the contracts were consummated, and all gas sold from the leased premises as well as from the surrounding land has been marketed pursuant to their terms.

The only producing formations in the Lopeno Field from the time of its discovery until 1960 were the Queen City sands. In 1950 Wilcox production was discovered in the area, the Wilcox formation being a deep sand found at depths below 6,500 feet. Additional pipelines were then built into the area, and there are now three companies purchasing gas from the Lopeno Field. They are Delhi Gas Pipeline Corporation, the successor to United, Tennessee Gas Transmission Company, and Alamo Gas Supply Company. The net prices paid by the last two...

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