Yzaguirre v. KCS Resources Inc.

• Decision Date: 30 August 2001
• Docket Number: No. 00-0829,00-0829
• Citation: 53 S.W.3d 368
• Parties: (Tex. 2001) Tomas Chapa Yzaguirre, et al., Petitioners v. KCS Resources, Inc., Respondent
• Court: Texas Supreme Court

Page 368

53 S.W.3d 368 (Tex. 2001)

Tomas Chapa Yzaguirre, et al., Petitioners v. KCS Resources, Inc., Respondent

No. 00-0829

SUPREME COURT OF TEXAS

Argued on April 4, 2001

Decided June 21, 2001.

Rehearing Overruled Aug. 30, 2001.

On Petition for Review from the Court of Appeals for the Fifth District of Texas

Chief Justice Phillips delivered the opinion of the Court.

When royalty payments are based on market value under an oil and gas lease in Texas, the lessee owes royalties based on the price of gas on the open market, even though the gas was actually sold for less than this price under a long-term sales contract. Texas Oil & Gas Corp. v. Vela, 429 S.W.2d 866, 871 (Tex. 1968). In this case, we must decide whether the open-market price is still the correct measure under such a lease when the lessee sells the gas for more than market value under a long-term sales contract. The royalty owners argue that the lessee breached express and implied duties by paying royalty on the open-market value rather than the greater amount actually realized. The district court, concluding that the market-value royalty clause controlled, disagreed with the royalty owners and granted summary judgment for the lessee. The court of appeals affirmed. 47 S.W.3d 532. We also conclude that the plain language of this lease requires the lessee to pay royalties based on fair market value, not on the price the lessee actually receives for selling the gas. We therefore affirm the judgment of the court of appeals.

I.

In 1973, the petitioners or their predecessors in interest granted oil and gas leases in Zapata County to the predecessor of KCS Resources, Inc. The leases include a bifurcated royalty clause, providing that the royalty for gas sold at the wells is based on the "amount realized," while the royalty for gas sold off the premises is based on "market value." In 1979, KCS entered into a 20-year gas purchase agreement ("GPA") with Tennessee Gas Pipeline Co., under which Tennessee agreed to purchase gas at a set price from the Zapata County leases. The GPA specified that the point of sale was to be a processing plant several miles away from the leased property. Because KCS's sales to Tennessee took place away from the property, the GPA sales triggered the clause in the oil and gas leases that obligated the lessee to pay a market-value royalty on gas sold off the premises. KCS paid royalties for production from one gas well based on the GPA price until 1994, although it paid market-value royalties for its two other wells.

For many years, gas production from the leases was minimal, but large production resulted after the Bob West field was discovered in 1990. Meanwhile, automatic price escalations in the GPA caused the GPA price to far exceed the market value of the gas. Tennessee sued for a declaratory judgment that the GPA did not obligate it to purchase all of the gas from the leases at the GPA price. That action was eventually resolved in favor of the producers, including another predecessor of KCS. Lenape Resources Corp. v. Tennessee Gas Pipeline Co., 925 S.W.2d 565 (Tex. 1996).

While Tennessee's suit was still pending, two other producers who held interests in the same leaseholds sued the royalty holders for a declaratory judgment that they need only pay royalty based on market value rather than the higher GPA price. KCS intervened in that suit a week later, seeking the same relief. Tomas Chapa Yzaguirre and the other royalty owners (collectively, "the Royalty Owners") counterclaimed against KCS with a variety of fraud and contract claims. The Royalty Owners also filed a plea in abatement and a motion to transfer venue from Dallas County to Zapata County. KCS moved for summary judgment that it owed royalty payments based only on the value of the gas on the open market.

The district court denied the Royalty Owners' plea in abatement and motion to transfer, then granted KCS's motion for partial summary judgment, leaving only the determination of market value for trial. The parties then filed a joint motion for a ruling on the admissibility of appraisal testimony by the Royalty Owners' expert, who proposed to testify that the price KCS received under the GPA was also the market value of the gas. The court excluded this testimony because the GPA price was not a comparable sale that showed market value. Because the Royalty Owners otherwise stipulated to market value, the court rendered final judgment in favor of KCS. The court of appeals affirmed. 47 S.W.3d 532. Having abandoned their arguments below regarding division orders, estoppel, waiver, laches, and various tort claims, the Royalty Owners now appeal to this Court on issues of venue, the measure of the gas royalties, and the admissibility of sales made under the GPA to show market value.

II.

We must first decide whether venue was appropriate in Dallas County, even though the mineral estates at issue are located in Zapata County. The Royalty Owners argue that venue is mandatory in Zapata County, where the real property lies, under section 15.011 of the Texas Civil Practice and Remedies Code. At the time this suit began, that section provided:

Actions for recovery of real property or an estate or interest in real property, for partition of real property, to remove encumbrances from the title to real property, or to quiet title to real property shall be brought in the county in which all or a part of the property is located.

Act of May 17, 1985, 69th Leg., R.S., ch. 959, § 1, 1985 Tex. Gen. Laws 3242, 3247 (amended 1995) (current version at Tex. Civ. Prac. & Rem. Code § 15.011).¹ The Royalty Owners argue that the nature and extent of their royalties is a question of their "interest in real property," so that section 15.011 required venue to be in Zapata County. We disagree.

Although oil and gas leases are an interest in real property, the applicable version of section 15.011 applied only when ownership of the property was in dispute. See, e.g., Marantha Temple, Inc. v. Enterprise Prods. Co., 833 S.W.2d 736, 738 (Tex. App.-Houston [1st Dist.] 1992, no writ); Scarth v. First Bank & Trust Co., 711 S.W.2d 140, 141-42 (Tex. App.-Amarillo 1986, no writ). KCS and the Royalty Owners do not dispute ownership of the royalty interests or the extent of those interests, as was the case in Renwar Oil Corp. v. Lancaster, 276 S.W.2d 774 (Tex. 1955). There, the royalty owners sought a declaratory judgment fixing their royalties. Lancaster v. Renwar Oil Corp., 270 S.W.2d 289, 292 (Tex. App.-Dallas 1954), rev'd, 276 S.W.2d 774 (Tex. 1955). Contrary to the court of appeals, we concluded that venue was mandatory in Nueces County because the royalty determination necessarily depended on resolving a dispute over the lease's boundaries. 276 S.W.2d at 776. The substance of the dispute in the present case is about the obligations KCS owes to the Royalty Owners under the terms of the leases, not the boundaries of the leases or the percentage of the Royalty Owners' royalties. See, e.g., Texas Oil & Gas Corp. v. Moore, 630 S.W.2d 450, 452-53 (Tex. App.-Corpus Christi 1982, writ dism'd w.o.j.) ("[C]laims for past and accrued royalties are properly characterized as claims to recover personalty and, therefore, do not meet the requirements of [the predecessor to § 15.011].") Because the suit does not involve recovering real property or quieting title, the court of appeals correctly concluded that the mandatory venue provisions of the former version of section 15.011 do not apply.

III.

We turn now to this case's central question, which is how to measure the royalty KCS owes to the Royalty Owners under the 1973 leases. KCS urges that it owes the Royalty Owners a market-value royalty, which is a royalty based on the prevailing market price at the time of sale. Vela, 429 S.W.2d at 871. Market value may be wholly unrelated to the price the lessee receives as the proceeds of a sales contract. Id. But the Royalty Owners contend that producers have always based "market-value" royalty payments on actual sales proceeds, so that the leases already require KCS to pay royalties based on the GPA price.² We agree with KCS.

The royalty clause of each lease at issue states:

The royalties to be paid by Lessee are: . . . on gas, including casinghead gas or other gaseous substance, produced from said land and sold or used off the premises or for the extraction of gasoline or other product therefrom, the market value at the well of one-eighth of the gas so sold or used, provided that on gas sold at the wells the royalty shall be one-eighth of the amount realized from such sale . . . .

The leases therefore provide "market value" and "amount realized" as the two measures of the royalties due to the Royalty Owners, depending upon whether the sale is made on or off the premises. The Royalty Owners claim that the distinction between these types of royalties lies in what costs are deducted before calculating the royalty, not in the rate on which the royalty is based. In their view, both amount-realized and market-value royalties start with the price the producer actually receives for the gas, with the difference being that the lessee subtracts transportation costs from the proceeds before paying a market-value royalty.

We disagree. The parties to these leases, in unambiguous terms, based the royalty on the amount realized for gas sales at the well and on market value for sales that occurred off the premises. These provisions are similar to the royalty terms in Texas Oil & Gas Corp. v. Vela, in which the oil and gas leases provided for a market-value royalty for off-premises sales and a proceeds-based royalty for sales of gas at the well. Id. at 868; 870-71. Because the lessee in Vela sold the gas produced off the premises, the royalty owners claimed they were owed a market-value royalty, rather than a much lower royalty based on the proceeds the lessee actually received under a long-term sales contract. Id. at 868....