United Fuel Gas Co. v. Swiss Oil Corporation

• Decision Date: 13 May 1930
• Docket Number: No. 5266.,5266.
• Citation: 41 F.2d 4
• Parties: UNITED FUEL GAS CO. v. SWISS OIL CORPORATION et al.
• Court: U.S. Court of Appeals — Sixth Circuit

41 F.2d 4 (1930)

UNITED FUEL GAS CO. v. SWISS OIL CORPORATION et al.

No. 5266.

Circuit Court of Appeals, Sixth Circuit.

May 13, 1930.

Simeon S. Willis, of Frankfort, Ky. (Harold A. Ritz, of Charleston, W. Va., on the brief), for appellant.

Clinton Harbison, of Lexington, Ky. (E. L. McDonald and Wilson & Harbison, all of Lexington, Ky., on the brief), for appellees.

Before DENISON and HICKENLOOPER, Circuit Judges, and KILLITS, District Judge.

HICKENLOOPER, Circuit Judge.

The United Fuel Gas Company, appellant, filed its bill in the court below against the Swiss Oil Corporation, Thomas A. Combs, its president, and E. L. McDonald, its secretary, praying for a mandatory injunction requiring said defendants to resume delivery of natural gas produced under certain leases originally held by the Union Gas & Oil Company and assigned to the defendant corporation. While the owner of said gas leases, the Union Gas & Oil Company entered into a contract with the United Fuel Gas Company, both operating in the state of Kentucky, whereby it was agreed that the Union Gas & Oil Company "has sold, and does hereby sell," all of the natural gas that may be produced by the vendor from the lands named, together with such rights of entry, use, and occupation as the vendor had in and to the surface of said lands, to the extent that the United Fuel Gas Company might require for the purposes of the agreement. The agreement also provided for the construction by the United Fuel Gas Company of a pipe line from the pipe line then operated by the Central Kentucky Natural Gas Company, vendee and distributor of the United Fuel Gas Company, to a central point upon said leased lands; and for the construction by the Union Gas & Oil Company of gathering lines from producing wells then drilled, or thereafter to be drilled, and of a compressor station at a suitable point upon the pipe line to be constructed by appellant. Provision was made for measuring the gas delivered, by meter furnished by the United Fuel Gas Company and connected to the pipe line to be constructed by it, but upon a site to be furnished by the Union Gas & Oil Company. This meter was to be read daily by the latter company and statements based upon such readings were made conclusive upon both parties unless exceptions thereto in writing were made within ten days after the receipt of such statements. By paragraph 8 of the general covenants, the Union Gas & Oil Company agreed to diligently operate said lands for gas. The present controversy turns in large degree upon the provisions of section 9 of the general covenants, which is quoted in the margin.¹

Having acquired all the capital stock of the Union Gas & Oil Company and having accepted independent assignment of the leases involved, the Swiss Oil Corporation continued for a time to furnish gas under the original contract while disclaiming liability or obligation so to do. Its dissatisfaction with the contract was one of price. In one of the letters of negotiation it stated: "The present price has not been sufficient to even pay the costs of the operation of the property, to say nothing of returning the costs of development, so that we could not continue such burdensome operations for your benefit." Having been unable to negotiate a new contract, deliveries were discontinued August 1, 1927, four grounds being principally relied upon in defense of the present action, viz.: (1) that the contract was not binding upon the defendant as assignee of the leases; (2) that the complainant had breached such contract by moving the measuring station from a point adjacent the compressor to the opposite end of its six-mile pipe line; (3) that the contract was terminable under section 9, in that gas was no longer being produced "in paying or marketable quantities;" and (4) that the relief sought was, in substance, the specific performance of the contract, which could not be granted since it involved continuous supervision of acts involving personal service, skill, and the exercise of discretion.

In Kentucky, contrary to the general rule, the courts seem to have adopted the doctrine that oil and gas may be conveyed in place and that such oil and gas therefore partakes of the nature of real property. Compare Kennedy v. Hicks, 180 Ky. 562, 203 S. W. 318; Scott v. Laws, 185 Ky. 440, 215 S. W. 81, 13 A. L. R. 369; Hudson & Collins v. McGuire, 188 Ky. 712, 223 S. W. 1101, 17 A. L. R. 148; Crain v. West, 191 Ky. 1, 229 S. W. 51; Foxwell v. Justice, 191 Ky. 749, 231 S. W. 509; Eli v. Trent, 195 Ky. 26, 241 S. W. 324. Under a contract such as the instant one, in which a present sale of oil and gas in place is attempted, delivery to be made upon capture, an immediate equitable interest in such gas and in the leases themselves is created in the vendee. No legal title is conveyed, but an equitable title passes as soon as the gas is produced and the purchaser may come into equity to enforce such equitable title or interest. Union Stock-Yards Bank v. Gillespie, 137 U. S. 411, 11 S. Ct. 118, 34 L. Ed. 724. The fact that the defendant purchased with notice preserves that equity, and it would seem immaterial whether the covenants "ran with the land" at law or not, if the question were simply one of the appellant's right to an injunction against cutting off the supply of gas otherwise to be marketed or used, or of the right of the appellant to go upon the lands, and itself gather, compress, and transport the gas by pipe line. People's Natural Gas Co. v. American Natural Gas Co., 233 Pa. St. 569, 82 A. 935; Southwest Pipe Line Co. v. Empire Natural Gas Co. (C. C. A. 8) 33 F.(2d) 248, 252, 253, 64 A. L. R. 1229; Cf. Texas Co. v. Central Fuel Oil Co., 194 F. 1 (C. C. A. 8); Montgomery Traction Co. v. Montgomery Lt. & W. P. Co., 229 F. 672 (C. C. A. 5). In cases of exclusive or total production contracts, also, the inclination is strong to imply the negative covenant to sell to no other (Montague v. Flockton, L. R. 16 Eq. 189) and to enforce such negative covenant by injunction. Karrick v. Hannaman, 168 U. S. 328, 336, 18 S. Ct. 135, 42 L. Ed. 484. Such an injunction might here issue against a sale elsewhere, or the use of the gas by defendant, but this relief was not urged and was therefore not considered below. To this extent the contract seems to control the interests of the parties, and we do not find it necessary to decide whether the appellee is bound thereby further than as just indicated.

The defense that the appellant has itself breached the contract by moving the measuring station to the opposite end of the 6-mile pipe line, in which it is claimed there were numerous leaks and the defendant thus deprived of payment for large quantities of gas, is not tenable. The vibration of the compressor station was such as to cause disfigurement of the meter charts and difficulty in accurate measurement. Neither the measuring station nor the meters were in fact removed but an additional measuring station was constructed with knowledge of the Union Gas & Oil Company. Under the contract the duty rested upon the vendor to read the meters and no serious objection was thereafter raised to the use of readings from the new station in rendering statements. The contract makes such statements conclusive upon the...