Cox v. Miller

184 S.W.2d 323, 1944 Tex. App. LEXIS 993

• Court: Court of Appeals of Texas
• Decided: October 20, 1944
• Docket: No. 2474.
• Status: Published

Opinions

GRISSOM, Justice.

On September 13, 1937, Mitchell M. Cox and others executed an oil and gas lease to R. M. Ragsdale. It recited that for a consideration of $10 paid and “the covenants and agreements hereinafter contained on the part of the lessee to be paid, kept and performed,” the lessors had leased 179 acres for the purpose of mining and operating for oil and gas. The lease contained the following provisions material to a decision of the case (1) “It is agreed that this lease shall remain in force for a term of five years from this date, and as long thereafter as oil or gas, or either of them, is produced from said land by the lessee.” (2) That lessee agreed to pay lessor ⅛ of the proceeds derived from the sale of gas; and (3) “If no well be commenced on said land on or before the 13th day of September, 1938 this lease shall terminate as to both parties, unless the lessee on or before that date shall pay * * * One Dollar per acre, which shall operate as rental and cover the privilege of deferring the commencement of a well for twelve months from said date. In like manner and upon like payments ⅜ * * commencement of a well may be further deferred for like periods of the same number of months successively.”

(4)“Should the first well drilled on the above described land be a dry hole, then and in that event, if a second well is not commenced on said land within twelve months thereafter, from the expiration of the last rental period for which rental has been paid, the lease shall terminate as to both parties, unless the lessee on or before the expiration of said twelve months shall resume the payment of rentals in the same amount and in the same manner as hereinbefore provided. And it is agreed that upon the resumption of the payments of rentals, as before provided, that the last preceding paragraph hereof, governing the payment of rentals and the effect thereof, shall continue in force just as though there had been no interruption in the rental payments.”

(5) "Lessee shall have the right at any time to remove all machinery and fixtures placed on said premises, including the right to draw and remove casing.”

(6) “Lessee agrees, as part of the consideration for the execution and delivery of this lease, to commence the drilling of a well upon the above described 179 acre tract on or before the expiration of sixty (60) days from the date of the execution of this lease by all the lessors above named, and in any event not later than the 1st á&y of December, 1937; said well to be drilled so as to test the Ranger Lime at an approximate depth of 2500 feet, unless oil or gas should be found in paying quantities at a lesser depth. In the event lessee should fail to commence the drilling of said well within the time and in the manner hereinabove stated, this lease shall be of no further force and effect, and neither party thereto shall be under any further liability to the other.”

On March 21, 1938, Ragsdale assigned the lease to Dr. J. H. Harvey. April 1, 1938, Dr. Harvey began drilling a well. On or before September 13, 1938, Dr. Harvey completed the well. Gas was discovered with a daily potential production of 1,000,000 cubic feet with 390 pounds pressure. There was no oil. Dr. Harvey decided to save the well as a paying producer of gas and informed plaintiffs of his intention and that he was going to attempt to market the gas. Whereupon, Dr. Harvey capped the well, shutting in the gas and leaving 1087 feet of 8½ inch casing and 2410 feet of 5¾ inch casing in the well. He then, according to his testimony, diligently sought a market for the gas and tried to get a pipe line built to the well; these efforts continued from September 1938 until the spring of 1943; he was never able to sell any gas. He, therefore, decided to plug the well and salvage the casing. Miller drilled the well for Dr. Harvey and owned some part of the casing in the well. As a part of the consideration for drilling the well, Miller was entitled to an additional $2500 to be paid out of gas or oil produced and sold from the well. Miller was instructed by Dr. Harvey in April, 1943 to draw the casing and plug .the well. When Miller attempted to draw the casing plaintiffs, on April 20, 1943, obtained an injunction preventing him from doing so. Dr. Harvey then sold or gave his interest in the casing to Miller.

Plaintiffs, Mitchell M. Cox and John Mc-Innis, obtained the injunction restraining defendant from pulling the casing upon allegations to the effect that the lease had terminated long ago; that no producing oil or gas well was ever drilled by defendants; that defendants had abandoned the lease; that defendant’s claim to the casing was barred by limitation and that pulling the pipe would injure plaintiff’s land. Dr. Harvey filed a disclaimer and was dismissed from the suit.

Miller filed an amended answer and cross-action, wherein he alleged the execution, in September, 1937, of the lease by Cox and others to Ragsdale, alleged its terms and specifically (1) the fifth provision, giving lessee the right to remove his casing “at any time.” Miller further alleged (2) that, in March 1938, lessee Ragsdale sold and assigned the lease to Dr. Harvey; that the assignment recited that plaintiffs should receive %i of the proceeds from the sale of oil and gas credited to the ⅞ working interest in said lease to the extent of $3,000, if and when produced, saved and marketed. Defendant also alleged that “said sale, assignment and transfer was made with the acquiescence and approval of the said Mitchell M. Cox and John Mclnnis, who owned the surface estate and part of the royalty in said land and who received an additional cash consideration from the said Dr. J. H. Harvey for reinstatement of said lease, and all the lessors in said original lease recognized the validity of said lease, notwithstanding the failure of the lessee, R. M. Ragsdale, to comply with drilling obligations thereof, up to that time, the said J. H. Harvey was induced to accept said assignment and drill a test well for oil and gas on said lease to reliance upon the validity of said oil and gas lease.” Defendant further alleged (3) that on April 1, 1938, Dr. Harvey, having contracted with Miller to drill the test well, the drilling of said well was duly commenced and thereafter diligently prosecuted by defendant Miller for Dr. Harvey and “gas was discovered at a depth of about 2510 feet, with daily potential production of 1,000,000 cubic feet and rock pressure of 390 pounds; that in drilling said well 710 feet of ten inch casing was run therein, 1890 feet of 8½" casing was run and set on top of the gas sand and cemented; that after discovery of said gas and failure to discover oil in paying quantities the said Dr. J. H. Harvey decided to save said gas well as a paying gasser and he informed the plaintiffs herein of his intention to save said gasser and to attempt to market the gas and left said well cased with 1087 feet of 8½" casing and 2410 feet of 5¾" casing and capped said well shutting in the gas pending the finding of a market therefor; that said well was completed as a gas well on or about the first day of September, 1938.”

By supplemental petition plaintiffs admitted the foregoing allegations of the defendants’ answer. Miller alleged the further facts (not admitted in plaintiffs’ pleadings) that a gas well was discovered “in sufficient quantity and sufficient rock pressure to constitute the same a paying gas well, conditioned on available market therefor; that there was no immediate market for said gas and no gas pipeline in the vicinity to which connection could be made”; and that it was necessary to either sell the well and lease or find a market for the gas; that Dr. Harvey tried to find a purchaser for the well or a market for the gas, both before and after expiration of the five year term. Miller alleged that “because of the discovery of said gas and completion and equipping said well which was capable of producing gas in paying quantity whenever a market therefor could be obtained,” Dr. Harvey had a valid lease on plaintiffs’ land from September 13, 1937, to September 13, 1942, “without any obligation to drill or pay rentals”; that from the completion of the well until enjoined from pulling the casing Dr. Harvey tried to find a market for the gas “but without success.” He alleged that Dr. Harvey had transferred his interest in the casing to Miller; that “there is no reasonable prospect of a market for the gas from said well notwithstanding its capacity to produce gas in paying quantities.” Miller asked for dissolution of plaintiffs injunction and judgment for title to the casing and an adjudication of his right to pull the casing or for judgment against plaintiffs for converting it. He also sought judgment for damages caused by the injunction.

The jury found:

1. That the gas well at the time of completion was a producing gas well in paying quantities.

2. That from September 13, 1939 to April 13, 1943 was, under all the facts and circumstances in evidence, a reasonable time for Miller to pull the casing.

2a. That from September 13, 1942 to April 13, 1943 was, under all the facts and circumstances in evidence, a reasonable time for Miller to pull the casing.

3. That Harvey did not abandon the' casing.

4. That Miller was not damaged by the injunction.

5. That the value of the pipe in the well was $2,585.

Judgment was rendered that plaintiffs take nothing; that the injunction be dissolved; that Miller have judgment for title and possession of the pipe and authorizing Miller to remove it from plaintiffs’ land within 90 days after final judgment, and that plaintiffs be enjoined from interfering with defendant in so doing. The judgment further recited that plaintiffs could keep the pipe by paying $2,585 to defendant.

Plaintiffs have appealed.

Plaintiff Mclnnis testified concerning the consideration paid by Dr. Harvey to plaintiffs in his purchase of the lease from Ragsdale substantially as alleged by defendant. The evidence showed that plaintiffs actually received a cash consideration from Dr. Harvey in connection with the assignment of the lease to Harvey, and in substance that they agreed with Harvey, at the time he purchased the lease from Ragsdale and paid a cash consideration to plaintiffs and promised them an additional consideration to be paid out of the oil and gas to be produced and marketed from the lease, that paragraph 6 of the lease, requiring commencement of a well by December 1, 1937, had been complied with. Plaintiff Mclnnis testified that “Shortly after he (Ragsdale) took the lease, Tip Winters drilled a hole twenty-five or thirty feet and stopped; and I think that was done in the interest of Mr. Rags-dale to hold the lease for him.” Under the circumstances plaintiffs are estopped io contend that the lease had terminated before Harvey bought it, because Ragsdale had not commenced a well by December 1, 1937. Mitchell v. Simms, Tex.Com.App., 63 S.W.2d 371; McCoy v. Texon Royalty Co., Tex.Civ.App., 124 S.W.2d 877, 881; Myers v. Crenshaw, Tex.Civ.App., 116 S. W.2d 1125, 1132. Therefore, we shall hereafter disregard said sixth provision of the lease, requiring commencement of a well by December 1, 1937.

It is defendant’s contention that a well producing gas in paying quantities was completed by Dr. Harvey on or before September 13, 1938, and, therefore, the lessee was not thereafter required to either drill another well or pay delay rentals to preserve the life of the lease for the full primary term of five years, ending September 13, 1942. It is defendant’s alternative position that if the well was equivalent to a dry hole, because of Harvey’s inability to market the gas, the lease remained in effect until September 13, 1939. Defendant concludes that his attempt to remove the casing was made within a reasonable time after termination of the lease, regardless of whether the date of its termination was September 13, 1939, or September 13, 1942.

As we understand plaintiffs’ chief contentions, they are, first, that the lease terminated on December 1, 1937, because the evidence shows conclusively that no well was commenced until April 1938. In making such contention plaintiffs are relying upon the sixth provision of the lease, which required commencement of a well by December 1, 1937. Said contention is overruled for the reasons heretofore stated. Plaintiffs further contend that the well drilled by Dr. Harvey in 1938 did not produce in paying quantities and therefore the lease terminated one year after completion of the well, or September 13, 1939.

The lease provided that if a well was not commenced on or before September 13, 1938, the lease would terminate unless a rental of $1 per acre was paid. A well was not only commenced, but was completed by September 13, 1938. But, the lease further provided that if the first well drilled was a “dry hole,” then, if a second well was not commenced within 12 months thereafter the lease would terminate, unless on or before the expiration of said period lessee paid $1 per acre rental. Such requirement was applicable to each subsequent 12 month period during the 5 year primary term. After comple tion oí the gas well by Harvey ⅛ September 1938, no other well was commenced and no rentals were paid.

The lease is what is commonly called an “unless” lease. 31 Tex.Jur. 743. Said provision is not one for forfeiture based upon a condition subsequent but is a limitation upon the lessee’s estate, marking the limit of the estate granted. The effect of failure to either pay rent or drill within the time stipulated, when required, is to automatically terminate the lease. Humble Oil & Refining Co. v. Davis, Tex.Com.App., 296 S.W. 285, 287; Guerra v. Chancellor, Tex.Civ.App., 103 S.W.2d 775, 777, writ refused; Mitchell v. Simms, Tex.Com.App., 63 S.W.2d 371; Empire Gas & Fuel Co. v,. Saunders, 5 Cir., 22 F.2d 733; Davis v. Bussey, Tex.Civ.App., 298 S.W. 656, 657, writ refused; Hammonds v. FleWellen, Tex.Civ.App., 48 S.W.2d 813; Temple Lumber Co. v. Arnold, Tex.Civ.App., 14 S.W.2d 926, 929; 31 Tex.jur. 842.

The provision that the lease should remain in force for five years and as long thereafter as oil or gas is “produced” from said land means produced in paying quantities. Garcia v. King, 139 Tex. 578, 164 S.W.2d 509. The stipulation that lessee should have a right to remove the casing “at any time,” means nothing more than that the lessee has a reasonable time after termination of the lease to remove the casing. 39 A.L.R. 1258; Terry v. Crosswy, Tex.Civ.App., 264 S.W. 718, 720; Armstrong v. Federal Supply Co., Tex.Civ.App., 17 S.W.2d 170.

In order for the lessee or his as-signee, or one standing in their place as Miller does, to show that gas was “produced” it is necessary to show that gas was discovered within the time prescribed in sufficient quantities to warrant its use in some market, and that the probable income therefrom is in excess of the cost of producing and marketing the gas, but not including the cost of drilling the well. It must also be shown that there was a reasonable expectation and probability of a market for the gas at the time the well was completed. Hanks v. Magnolia Petroleum Co., Tex.Com.App., 24 S.W.2d 5. Under the decision in Stanolind Oil & Gas Co. v. Barnhill, Tex.Civ.App., 107 S.W.2d 746, 749, it must be held that the fact that the well was capable of producing did not make it a well producing gas in paying quantities within the meaning of provision 1, that the lease would be in force for 5 years and as long thereafter as gas or oil is “produced.” See also Kies v. Williams, 190 Ky. 596, 228 S.W. 40; Butler v. Jenkins Oil Corp., Tex.Civ.App.., 68 S.W.2d 248, 251, affirmed 128 Tex. 356, 97 S.W.2d 466.

In Stanolind Oil & Gas Co. v. Barnhill, Tex.Civ.App., 107 S.W.2d 746, 749, writ refused, it was held that gas was not “produced” in paying quantities and the lease terminated at the expiration of the primary term. The facts were that a 5 year lease was executed February 4, 1930; on March 31, 1931, the lessee completed the drilling of a gas well. It had a potential production of 7,000,000 cubic feet of sour gas per day and a pressure of 410 pounds. The lessees made every reasonable effort to market the gas but were unable to do so until October 1935, when a market for said gas developed. Appellants contended that the lease did not terminate by failure to sell the gas on account of a non-existing market. The reason for the holding was simply that there was no market for the gas. The court said: “Appellants did not contract for a term which would depend upon the possibility of procuring a market for the product at some date subsequent to its express date of expiration. The lease did not provide that it should remain in force and effect for five years, and as long thereafter as there may be prospects of a market for the product, and it is not the duty of the courts to make contracts for parties but only to construe such contracts as they make for themselves.” Where the real consideration for a lease is a part of the oil or gas produced, or its proceeds, the lessee’s obligation to “produce” oil or gas in order to prevent termination of an “unless” lease is not discharged merely by drilling or by discovering oil or gas with potential production in paying quantities, but the lessee is further required to operate the well and market the product within a reasonable time. In Smith v. Sun Oil Co., 172 La. 655, 135 So. 15, the Supreme Court of Louisiana held that although gas wells on a lease were capable of producing from a one-half million to a million feet of gas .per day, it was not producing in paying quantities when there was no market for the gas and, therefore, the lease terminated, notwithstanding such potential production. See Collins v. Mt. Pleasant Oil & Gas Co., 85 Kan. 483, 118 P. 54, 38 L.R.A.,N.S., 134, and South Penn Oil Co. v. Snodgrass, 71 W.Va. 438, 76 S. E. 961, 43 L.R.A.,N.S., 848, 852. The rule is otherwise where the lease provides in the alternative for a stipulated rental for each gas well and the rental is paid. Summers Oil & Gas (Perm.Ed.) Vol. 2, p. 141, sec. 299; p. 349, sec. 400; p. 157, sec. 300. See also Watson v. Rochmill, 137 Tex. 565, 155 S.W.2d 783, 137 A.L.R. 1032, and 8 Tex.Law Review 519.

Special Issue No. 1 inquired whether the gas well completed by Dr. Harvey in September 1938 was at the time it was completed a producing gas well in paying quantities. The jury answered said issue “Yes”. In connection with that issue the court instructed the jury that “the words 'in paying quantities,’ as applied to a gas well mean that the gas discovered must be sufficient at the time of the completion of the well to pay the lessee a profit, though small, over operating and marketing expenses, although it may never repay the cost of drilling the well.” In connection with this issue plaintiffs requested the court to give the following instruction: “You are instructed that by the term 'dry hole’ as used in the lease Contract is meant any well that does not come within the definition of a producing gas well in paying quantities as defined by the court’s charge given you herein.” This instruction was refused. Plaintiffs assert that the court erred in refusing to give said instruction. The term “dry hole” was not used in the charge and hence did not need to be defined. Plaintiffs do not in any other way present a point that would call for a specific decision as to whether or not the gas well was a “dry hole” within the meaning of that term as used in the lease. We agree with plaintiffs that issue 1, that is, whether at the time of its completion the well produced gas in paying quantities, was not a question of fact. Assuming that the well was capable of producing gas in paying quantities if connected with a pipeline, it does not follow that gas was “produced” within the meaning of that word as used in provision one of the lease. It is undisputed that no pipeline was available; that there was then no market for the gas, and, although Harvey and defendant made diligent effort to find or create a market from the completion of the well until the institution of this suit, no market was found and no gas sold. The record conclusively shows that gas was not “produced” within the meaning of provision one of the lease, that the lease should remain in effect for 5 years “and as long thereafter as oil or gas * * * is produced from said land.” Stanolind Oil & Gas Co. v. Barnhill, Tex.Civ.App., 107 S.W.2d 746, 749, writ refused; Watson v. Rochmill, 137 Tex. 565, 155 S.W.2d 783, 784, 137 A.L.R. 1032; Freeman v. Magnolia Petroleum Co., 141 Tex. 274, 171 S.W.2d 339; Garcia v. King, 139 Tex. 578, 164 S.W.2d 509.

We question the correctness of the idea that the well in question, with capacity to produce 1,000,000 cubic feet of gas per day, should be considered a “dry hole”, as a matter of law, within the meaning of the term as used in the lease, solely because there was no market for the gas. True, the real purpose of the parties in the execution of the lease was to obtain production from which a profit might be derived. If there is no market, there can be no profit. But, if the parties meant that an oil or gas well that had a potential capacity to produce in tremendous quantities should be considered a “dry hole”,— simply because there was no market — they could easily have so stipulated in the lease. The terms “dry hole” and a well “producing gas in paying quantities” are not necessarily the converse of the other. “Dry hole” is not defined in the lease. If it has a technical meaning it is not shown. See Chapman v. Ellis, Tex.Civ.App., 254 S.W. 615, 617; Hall v. McCleskey, Tex.Civ.App., 228 S.W. 1004, 1006; Frost v. Martin, Tex.Civ.App., 203 S.W. 72; Murphy v.. Garfield Oil Co., 98 Okl. 273, 225 P. 676; Summers Oil & Gas, Vol. 2, p. 264, sec. 351; Parish Fork Oil Co. v. Bridgewater Gas Co., 51 W.Va. 583, 42 S.E. 655, 59 L.R.A. 566, 569. If the well is not a dry hole then provision 3 is not controlling. However, we are not required to definitely decide whether or not, under the circumstances of this case, a well capable of producing 1,000,000 cubic feet of gas per day, when there is no market for the gas, constitutes, as a matter of law, a “dry hole”, within the meaning of that term as used in the lease. See McGraw Oil & Gas Co. v. Kennedy, 65 W.Va. 595, 64 S.E. 1027, 1029, 28 L.R.A.,N.S., 959; Summerville v. Apollo Gas Co., 207 Pa. 334, 56 A. 876; Cole Petroleum Co. v. U. S. Gas & Oil Co., 121 Tex. 59, 63, 41 S.W.2d 414, 86 A.L.R. 719; Elliott v. Crystal Springs Oil Co., 106 Kan. 248, 187 P. 692, 694; Buffalo Valley Oil & Gas Co. v. Jones, 75 Kan. 18, 88 P. 537.

The question as to when the lease terminated is a preliminary one. Its determination ■ is important only on the question of whether Miller attempted to remove his casing within a reasonable time. At the end of the five year primary term, September 13, 1942, neither oil nor gas was being “produced” from said land, as required by provision one of the lease, therefore, the lease was not in force after expiration of the five year primary term. Stanolind Oil & Gas Co., v. Barnhill, Tex. Civ.App., 107 S.W.2d 746, writ refused. If September 13, 1942, was the date the lease terminated, Miller’s effort to pull the casing in April, 1943 was certainly made within a reasonable time, and the jury has so found. The jury has further found that if the lease terminated September 13, 1939 (one year after completion of the well), that plaintiffs’ effort to remove the casing was made within a reasonable time from said date. Under all the facts and circumstances in evidence and giving full credence to Miller’s and Harvey’s testimony as to their continuous efforts to market the gas with the apparent knowledge and acquiescence of plaintiffs, as we are required to do under the jury’s finding that defendant attempted to remove the casing within a reasonable time, we have concluded that we are not authorized to hold as a matter of law that Miller’s delay from September, 1939 to April, 1943 was unreasonable. Therefore, if we assume that the well completed September 13, 1938, was a dry hole and that the lease terminated September 13, 1939, because Harvey failed to then commence another well or pay rental, nevertheless, under the findings of the jury, Miller’s effort to withdraw the casing was made within a reasonable time, and such finding supports the judgment. (On the question of what constitutes a reasonable time within which the lessee may remove pipe from the well, see Meers v. Frick-Reid Supply Corp., Tex.Civ.App., 127 S.W,2d 493; Armstrong v. Federal Supply Co., Tex.Civ.App., 17 S.W.2d 170, 172; 39 A.L.R. 1259; A. & M. Petroleum Co. v. Friar, Tex.Civ.App., 152 S.W.2d 470, 471; 36 Words & Phrases, Perm.Ed., p. 375 et seq.; In re Sternberg, D.C., 300 F. 881, 884; Dunning v. Badger, Tex.Civ. App., 74 S.W.2d 151, 155; Alsam Holding Co. v. Consolidated, etc., 167 Misc. 732, 4 N.Y.S.2d 498, 505; Houston & T. C. R. Co. v. Roberts, 50 Tex.Civ.App. 69, 109 S. W. 982, 983; English v. Underwood, Tex. Civ.App., 5 S.W.2d 1033, 1036; Szanto v. Pagel, Tex.Civ.App., 47 S.W.2d 632, 635; Smart v. Panther, 42 Tex.Civ.App. 262, 95 S.W. 679, 681. We are of the opinion that what constituted a reasonable time was a question of fact, and that it was fairly presented to the jury under the instructions given by the trial judge. In Hart v. Bullion, 48 Tex. 278, 289, the Supreme Court said: “What is a reasonable time depends undoubtedly upon the nature and character of the thing to be done, the circumstances of the particular case, and the difficulties surrounding and attending its accomplishment. As an abstract question, what is a reasonable time for performance may be one of law; but unless the facts upon which its determination depends are admitted, its determination involves a mixed question of law and fact, and must be determined by the jury, under the instructions of the court, where the pleadings and evidence are sufficient to present an issue of fact in regard to it.” Fisher v. L. E. Whitham & Co., 120 Tex. 516, 530, 39 S.W.2d 869, 79 A.L.R. 1095, and J. W. Crowdus Drug Co. v. Nichols, Tex.Civ.App., 194 S.W. 484, 486 are to the same effect.

We think that the errors mentioned were not calculated to injure plaintiffs and that reversible error is not shown. The judgment is affirmed.