Southern Minerals Corp. v. Simmons

111 F.2d 333, 1940 U.S. App. LEXIS 4860

• Court: Court of Appeals for the Fifth Circuit
• Decided: April 25, 1940
• Docket: No. 9183
• Status: Published

Opinions

SIBLEY, Circuit Judge.

Appellant .Southern Minerals Corporation (herein called Southern) sought unsuccessfully in the court below to enjoin appellees Jay Simmons and J. E. Webb from producing and disposing of gas from a well drilled by them on a tract of 333 acres in Nueces County, Texas, known as the Harrell Lease; or alternatively to exercise an option to acquire the well by paying its cost with an account of the - gas heretofore produced by appellees. The appellant and the appellees claim under Houston Oil Company of Texas (herein called Houston), which owned an oil and gas lease from Harrell dated March 24, 1930, covering the tract in controversy and reserving a % royalty on all oil and gas produced. Houston Oil Company owned other leases also, and on April 5, 1932, by a duly recorded deed to Southern Alkali Corporation in consideration of $177,750 did bargain, sell, transfer and assign all of the rights, title and interest of Houston Oil Company in named leases aggregating about 1300 acres and including the Harrell' Lease, “in so far as the same cover gas rights * * * together with three certain gas wells, now completed thereon”; but “subject to the following specific understanding and agreement, viz: Should Southern Alkali Corporation, or its assigns, as a result of its operations on said leases, or either of same, discover oil in any well drilled on said lands, said Southern Alkali Corporation agrees to set casing in said well and make a thorough and workmanlike test thereof with a view to bringing in an oil well. Should said well when completed produce as much as fifty barrels of oil per day for ten consecutive days, the Houston Oil Company may at its option within forty days after completion take over and own said well by paying to Southern Alkali Corporation the cost actually incurred in drilling and equipping said well, exclusive of overhead charges. The Southern Alkali Corporation shall settle with holders of royalties and overriding royalties on oil that may be produced from any oil well drilled by it on the premises and not taken over by Houston Oil Company under the terms hereof. Should Houston Oil Company as a result of its operations discover gas in any well drilled on said land by Houston Oil Company in an unsuccessful effort to complete a commercial oil well, the said Houston Oil Company agrees to complete said well as a gas well; and 'should said well when completed produce merchantable gas in marketable quantities, the Southern Alkali Corporation may, at its option, within forty days after the completion, take over and own said gas well by paying Houston Oil Company the cost actually incurred > in drilling and equipping said gas well, exclusive of any overhead charges and exclusive of any drilling costs below the producing horizon", provided, however, that it is distinctly understood and agreed that the Houston Oil Company shall not have the right or privilege of completing more than five such gas wells. The Houston Oil Company shall settle with holders of royalties and overriding royalties on any gas that may be produced from any gas well drilled by it on the premises and not taken over by Southern Alkali Corporation under the terms hereof.”

The Southern Alkali Corporation in 1933 assigned its rights to appellant; expressly subject to the operating agreements between the owners of the gas rights and the owners of oil and oil rights, which were referred to and incorporated by reference. On Jan. 6, 1938, Houston Oil Company; in consideration of an additional royalty of % of the oil saved, and of the drilling of successive wells until all that are allowed by the Railroad Commission shall be drilled, did “bargain, sell, transfer and assign, subject to the performance of the obligations hereby imposed, unto Jay Simmons and J. E. Webb, their heirs and assigns, all of its rights under the said existing leases, (including the Harrell Lease and part of another), in so far as the same cover a Wie working interest in the oil rights. * * * It is the intention of first party that this assignment of the oil rights shall assign to the second parties all of the rights under the original oil and gas leases except the rights of the Southern Alkali Corporation and Southern Minerals Corporation as evidenced by the contract and assignment of gas rights of April 5, 1932 * * * recorded in Vol. 12, page 340, of Oil and Gas Records of Nueces County, Texas, to which instrument and all of the terms thereof reference is hereby made as if same were fully copied herein." Emphasis is ours.

Simmons and Webb completed the well here in question about July - 5, 1938. It produced quantities of gas, but "wet gas,” so that by a simple process of condensation 150 or more barrels per day of liquid can be obtained from it. They promptly called attention of Southern Minerals Corporation to the well, saying they were uncertain whether it was an oil or a gas well, and offered it to Southern for cost. The court below found, and on conflicting evidence was justified in finding, that the offer was in relation to the option set forth in the deed of April 5, 1932. Southern refused the well, saying it “had more gas than Carter had oats.” Simmons and Webb then contracted to sell the gas, after removal of the liquids from it, and put in pipe lines and equipment for the purpose. Thereupon, on Aug. 12, 1938, Southern filed suit in a State court to stop Simmons and Webb from producing and selling the gas, but making no offer to take over and pay for the well under the option. Simmons and Webb answered, contending it was an oil well. That case was not tried, but the present similar suit was filed in the District Court of the United States. By amendment and as an alternative relief it was first prayed on Nov. 18, 1938, that the option of Southern to take over the well be enforced.

It is well settled that in the exercise of options the time limited is generally of the essence of the contract. Campbell v. Fetty, 5 Cir., 271 F. 671, 17 C.J.S., Contracts, page 1072, § 504. Especially is this true when a thing so uncertain and fluctuating as a new gas well is the subject of the option. 17 C.J.S., Contracts, page 1071, § 504. The option to take over this well, which was limited to forty days from its completion, could not be exercised four months after its completion. It is unnecessary to enquire whether the further finding of the district court was correct, that the option right was waived by Southern and the waiver was converted into an estoppel because Simmons and Webb made contracts and substantial expenditures on the faith of Southern’s statement that it did not wish the well.

But it is said that the failure or refusal of Southern to take and pay for the well did not forfeit its ownership of the gas in place tapped by the well nor authorize Simmons and Webb, who owned only oil rights, to produce and sell the gas. To this Simmons and Webb make two replies: first, that the well is an oil well and the gas that is sold is produced inseparably from their oil; and second, that if this is a gas well under the agreement of April 5, 1932, the true meaning of the agreement is that Houston should have the product of a gas well drilled by it if Southern did not take it over, and that Simmons and Webb stand in Houston’s shoes as assignees of its rights. Much of the record is taken up with expert testimony as to what the product of this well was in the earth at the pressure and temperature obtaining there, and whether the liquid separated out after production is oil; and the briefs make a question whether the well is to be classed as an oil or a gas well according to what it taps in the earth or what it produces at the surface. We enter on no discussion of these matters because it is unnecessary to decide them. We will assume that this is not a well “producing as much as fifty barrels of oil per day,” but is a well “producing merchantable gas in marketable quantities,” as described in the working agreement. There is also a contention in argument that it was not a well “drilled in an unsuccessful effort to complete an oil well,” because some oil sands were penetrated before the gas strata were reached. The evidence is that the drilling was continued beyond the gas strata in a search for oil still lower, when the drill was twisted off in the hole. This fairly shows a well unsuccessfully sunk in search of oil. Southern’s State court suit, and also that before us, alleged that Simmons and Webb completed the well “in an unsuccessful effort to produce oil.” This being true, the second part of the working agreement, assuming for the present that Simmons and Webb are privy to it, required that the well be completed by them as a gas well and gave Southern, being also privy, an option for forty days to take it over at cost. This Southern did not do. The fair meaning of the agreement is that thereupon the well so required to be completed as a gas well shall be owned and operated as such by the driller. This is clear from the concluding provision that the royalties on gas from a well not taken over shall be paid by the driller. There would be no royalties without production, and the royalties are justly paid by him who owns the production. There is an exact parallel provided when the owner of the gas rights, searching for gas, strikes oil. He too must complete the well and permit the owner of the oil rights to take the well at cost within forty days; but if the well is not taken over may operate it, paying the royalties on the oil. The original oil and gas leases required the lessees to explore for oil and gas. When Houston and Southern sought to separate the ownership of oil from gas, instead of leaving the matter in such shape that if one in drilling reached the other’s product, he would have to plug the well and lose the drilling cost, the agreement was made that the well should be completed, with a right in the other to pay for it and take it over. The intention was that if not taken ovet the completed well should remain the well of the driller, with the right to have whatever it would produce, paying the royalties on the product. A construction which would require the driller to complete the well for the other party to make his choice to take or reject it, and if he rejected it then to plug the well and lose it, would be too unfair to have been in contemplation.

But it is contended that only Houston could thus acquire a gas well, and it could acquire only five on the whole 1,300 acres in which the gas rights were transferred to Southern. It is pointed out that the right so to acquire oil wells not taken was given Southern Alkali Corporation or its assigns; but assigns are not mentioned in the parallel provision about gas wells; and it is queried, How many of the five rejected gas wells Can Simmons and Webb acquire as assignees of only 333 acres? It is evident that on April 5, 1932, when the deed from Houston to Southern Alkali Corporation was made, the latter intended to assign its rights, as it soon did, and its assigns were mentioned. It is probable that Houston did not then contemplate assigning any of its retained oil rights, and no mention was made of its assigns. But there was no personal trust or service or independent activity contemplated on the one side more than on the other. The working agreement between the owners of the oil rights and the owners of the gas rights was part and parcel of the separation of the two sorts of rights, and was intended to be and remain mutual. It was part of the deed which defined those rights, and in its nature as a property right was assignable, 6 C.J.S., Assignments, page 1054, § 8, 4 Am.Jur. Assignments § 17, 18; and indeed without express assignment as a covenant running with the lands it followed them into the hands of others. 14 Am.Jur.Covenants, § 19, 20, 25. Like the covenants in an ordinary lease affecting the property demised, this mutual covenant ran with, all subdivisions of the property. It is characteristic of covenants which run with land that they may, even at common law, be apportioned as often and as far as the land is subdivided. 15 C.J. Covenants, § 58, 80; 14 Am.Jur., Covenants, § 19. And it was the plain intent of Houston to impart to Simmons and Webb all its own rights as to wells drilled on the leases assigned to them. The assignment required them to drill all the wells the Railroad Commission . •'"lid permit, reporting each to Houston. Houston was to do no further drilling. Houston assigned all its oil rights under the named leases except its reserved royalty and what had been assigned to Southern Alkali Corporation. We do not stand wholly on the point that the working agreement would have passed as appurtenant to the assigned oil rights without special mention, because it is expressly stated in the assignment that Houston intended thereby to assign all of its rights under the original oil and gas leases except the rights of Southern Alkali Corporation under the agreement of April 5, 1932, which agreement and all the terms thereof were referred to as if copied. The working agreement was thus written into the assignment to Simmons and Webb, and in so far as it applied to the assigned leases all Houston’s rights under it were fully transferred to them. Houston retained no right to acquire any rejected gas well on that land drilled by Simmons and Webb. They were, so far as Southern was concerned, drilling for and in the stead of Houston, and with the same correlative rights and options. No one ever suggested anything else until late in this litigation. Houston has made no contrary claim. The limitation to five of the rejected gas wells that may be thus acquired and operated is of no importance now, for this is only the second such well. It is no concern of Southern on which lease or leases the first five occur. When five have been acquired; no others can be.

The decree refusing to enjoin the operation of the well in dispute, and refusing now to permit it to be taken over at cost was right and is affirmed.