Untitled Texas Attorney General Opinion ( 1939 )

I
Interest in production ,from oil wells
drilled under contract 'Submitted'is an
interest in real estate within contem-
.plationof dFticle,'l+725
proaiding &ire
insurance qompany.may make loans upon
first liens secured by real estate:
.
li&&a~ie .Walt& C. Wiocitiaid
Chairman Board of.Inaurance~:Co~ssiop``,~,.,
.Austiri,Texas
Dearsir: Opinion.Bo``.,O~ti6~.
',
Ref'~Inv0St&its of insurance
``hoq.++$ se~ctired~byoil
payments.:
,
.We are in receipt of ,your letter of May 23, .1939,
requesting
our'opinion upon the questions and facts hereinafter .setout.
'On July 26, 1938, the Board of Mineral Development of the state
.of Texas entered into.a contract with,the G. W. Drilling Company
a corporation, providing for the drilling of oil-wells on a
portion of what~is known as the.bed iafthenBig Wichita Eiver
in Nichita County, .Texas. The terms of this contract will be
discussed more 'fully in the course of this opinion.. It is pro-
posed thati.‘this contract, and all benefits thereunder, shall be
assigned to the Murwyn Investment Company,.a corporation, which
company will'assume the carrying ou$ of the contract, and in
consideration of the aa~signmentwill~axecute as',ev;idence.of in-
debtedness its notes secured.by a lien upon the prbperties or
interest assigned to it. This evidence of indebtedness will
then be transferred to the Reserve Loan Life Insur,anceCornpang+
which indebtedness will be secured by a lien on the minerals.o,r
- - . .. .
Eon. Walter C. Woodward, Page 2, O-865
mlneral Interest acqtiiredby the Muriyn Investment Company
under the above.lpentionedcontract.
The queitlon which'you wish to have answdred IS, whether or
not the-notes secured by the interest aaquitiedby Q.'W.
Drilling Company under the above mentione'dcimtract with the
Board of Kineral Development-are secured6y peal estate, and
whether they are seourlties in whiah life Insurance companies
are authorized to invest th<‘funds as provided in Article
4725? Revised Civil statutes, 1925..
'Artiole4725, Revised .ClvilL,Statuies, 1925, proviqes, In part,
as folloks~ '.
*a'-life.'lntkanek aompang :organlied .x&d& .&i‘ litwe:
ijit& 8
Stattimay fives% In ~or~l+s3~':uljon qab``]c+d~d;qgit&+ItIea; '.
und.nOne &hells, vlst~".: ... .: j
: ,'
?2, ,.ItmCry+xxi.ah$ Or -its.f-uzids``&d B99utmaiatlons;&akIng.as
seonri,ty.th``for'smh &i~lat&al as.,vndglr thi pr;eHo.~k'~&``.~,
41;9lslq it may *IlV?tst'*li;'-It .muy:aJ.bo lpake liians.tipc+I&t. .,'..
lIens.aaon.rea~,``~t.~t``..~e.t~t~e. $0 ~M~+@-la +.ld a+..hi-- 9 :;;:s~:.;::.:;
value o$ whlah.1 4C&%.,'
morg:'than+A&-'. am``.,lqaned.thereonr
,. . .._ ; ..:. :'c
...'.",'_
.::,
momp&h, in hii w&-~ti~Rei& Prop&t$;:pdi&ae$ S&&o~‘SS .-'
stat4.sthat: . ?In t~Zs..coiintry~-:SjQtfi-py &tatixteian@9omnion~lk~,~ L.
the ,teq .!renl-estaM'~is..geii````````.~or:.``.Iphr;cfse *l*s,;,
tenementu, and'h~SditBnients``!" ':
The oontrizctsets outAn gr&St detail the .~bllg&ti$ons.of tte-, .
aontractor with Fefesence to the .pi%per @4&ling ofnells,
tke ~equlpmen.t'tobe used, and.otQer prov$sIons ordinarily found
fin a``~drIll+gcontra+. ,: _ :
.~..
In the event the state deeires'that aotitradtor6perate'all
of ihe well drilled u&er this ~drilling-eontractupon the Board
of .MItieral
Development ~nlshing,aontraij~of.wIth a certified.
.ao'pyof a..resolutionof ,such%oar& to the sffeat3hat the sta.te
has elected that the Contra&or shall operate..#nohwella, then
'contrkctor, oblsgatea itself to operate the #me.while they
are.i3owIng.at.a co'stoften cents (lO#) per bai%el$'and $t~
further obllgat.es'Itselfto.so operate.sald.M1,&9 If,'as and
when same are.stand~dleed'or plaoed on the pump'at.a-~cost-of
Hon. Walter c. Woodward, June 2, 1939, p&e3, O-86
twenty'cents (209!)per barrel, which said cost of operations,
whether flowing or pumping shall be borne out of seventy-five
per cent (75%) of the oil'and gas produced, and the pipe line
taking the.oil Is authorized to pay to contractor the sums here-
in stipulated.
"11. State shaii pay contractor:
"(a) For drilling and completing eaoh of the wells.drilled and
completed In accordance withthe.terms
.A. -+d.&onditions hereof,
the sum of Sixty ~Thousand (%b0,000.00l``ollars, such sum to be
payable.onlg out of seventy-five per oent .(75%) 'of all the oil
and gas produced. saved and marketed from the .welle so drilled
ux@er the .termshereof.
and m&e&d from eaoh we.il.drllledan:the.ibovb desol'ibed
tracts of-&u~d shall be dellvered‘;%othe crda$t .&f the‘"State
.Xree'
of '&bet,-..@
the 'pipe line Co whlah .eont,rractoT
msy~.ewct::
said wells. ~-.. :*...
"(a) First to the cost-of operating said wells as.hereinabove
prov,idea. :(Ten oents per barrel while flowing andtwentyoents
per barrel wblle pumping).
._.
'*(a) To the compensatd.onto be:pa$d qo~traotei“.fbr'.drllling and
com$leting said wel'ls.as‘hereinabovep~vided,,(Jb60,00b,-00)for
each welld:rllled and completed.. .,
.
each well..equlppehfor p'iimping?
..C~
eS&t.tb.do; it'shall have :
"17; If the State at any time':,ahgll.
the right to’gake’over the operation~,.:
,of sa/d.well
: or,,wellsand to
. -
Hon. Walter C. Woodward, June 2, 1939, Page 4, O-865
thereafter operate said 'we.11
or wells, or in the event the
.State elects to se.&&the'property subje,ctto the~terms of
this drilling contract, then tiontractor'obligatesand binds
Itself to relinquish the operation of said well or wells to
the purchaser of said property, if.saldpurchaser desires to
operate the same."
Secti& 22 and 23 provide for ass%gnment,of 'the ccktractorls
: . 'rights and,.obligation*under the contradt, whether in whole-
or inpart. ..
We uridereta'ild~thatthe.weIls have been drilled and completed
.ae preduoers Insofar as the int+rest seeurlng the notes la eon-
o@rned, 'andtherefore dO..notCoZMlder the question of whether
~9; Wrt.Drl- a present vested interest In real
t?aifpanji'to$li: ~
estate when the,aontraot'was'exeoutea and.prlor to the.'drllllng
..@:a swell or,rwells.uhder'
.: th,e*'contraot.
..
drtlele~&x~kevlaed Mvll Statutes; i925;Sedtlon 8a,.-under
Mot this contract w&~e*ecuted,~clearly aontemplates that the
Boc:d of ,Ylnera&Development .tiy provide for .the deveiopakit'of
river beds andphaaiue~s for-011 and .&as purposes, either by
leaae,.drllllug.;oontraot, or outr&ght'aaXe'of the'inineralein. ; .. -.
plade‘wlthout,deve$opment requ+sments. " ~
Eketick &t, S'ubsectlon:& :provldes as follows:
.
"%i~'Roard'.ef&In&al Development 1s hereby aut.horlzedard It
Is ,madedts: duty. to:advertlse for:
.
., - .. :'~.
to drill sala'rlver~beds and'ohannelii
lnvolvtig compensation In oil:and/or gas and/or
money of the state'whereby~the state.will receive a proportionof
the 011 and/or gas as the same Is .produGd, or by way of-edv~anoe
scyalaltles
-pa&d $n money.' _,' ,~
'This department rendered'an'oplnion blay.2.~1938, addressed to the
Honorable R. IL Daniel, g&airman; B&a 'of'Insurarice Commissioners
In which It was held that real.estate wlthliithe meating of
Artlele 472.5'lndlude.sprodu~lng.oli, gas aiidmineral leases In-the
r0m ln.general use ln'this state; royalty dnterestimder producing
011, gas and mineral leases; ahd.mineral interests excepted or
re+-ved ln'or convey,edby a deed or other appropriate oonveyance.
That oll,.andgas leases ,are.conveyakes 'of-minerals ln plaae,
and the royalty interestexcepted'or~'reserved In the usual oil
and gas lease in use in this state;'tionstitutesreal estate, for
purposes of .recor~ation,,,taxatlon,and are wXthin the statute of
frauds, .whether&able~in.money &'klnd, 1s too well settled to
be open to question;' Shfiieffiekd
vsa;.Hogg, 77 SLW.::i2d)1021
hon. Walter C. Woodward, June 2, 1939, Page 5, O-865
and many other cases.
It does not necessarily follow, however, that the instrument
now under consideration create'sthe same interest as the usual
oil and gas leases or royalty Interest, aud that it works a
severauce of the minerals in place. On the other hand, the
contract appears to clearly contemplate that title to the
corpus shall remain In the state and that the contractor does
not, as'ln the usual011 and gas lease, acquire a determinable
fee In the minerals in place.
Much coufu~ion.has :resultedfrom attemptsto adtie .tae.
property intereats createdpya payment out of oil, whether in
.the form :of an noilpaymeritn oc+n %verrid$ug royalty s,~aua
it &ma not seem that all the~ooufuelon has beeu exitlrely
~eilminatea. However, -more reoent;expreaalona bg the.oourta
have pore cl'earlydef.Zued+he statue
__. of,..
such payments.; .~
.. ., i
Juatlce Oree~wo&, in.Sneffleld::ps~Eoggj.'j7SL$;.liaa): iO21.~
points put that 011 royaltlea,.whethe~ ore.a$q@br &ceptl-a,
i.~ab~at~dn,'or'~y'a~eem~t~that~:the~lessee-sha~l:``eld 6r
m..pa$nent to' lessor, blther lumouey or~'iukind;',.&re 'reals
'estatesmer,.oti .taxlug statute; aluce.t~y.:are.inIthe ua%ure
of renta~or profits...Unaaoured rents.ere luoorpofeal 'z::.l
hereditamenta and not ~peraonalty.aud.as- such pa~a``to,t@s``helrs
.aud uot,.tothe.pei%oual representatives.;'``.:.tsans~er..*part
froui-.thelau&la goverued.by the.statute .of,frauds.``~elat.lxig
to.sale of land. Being Incorporeal heredltGimi+s~:prir .to:the.
accrual they are Interests in real estate, although'un8er a
strict ooustruotlon ot:the iustrumeht there has npt-(beena
.oonveyauce of the minerals in plaae..~
.IiiTennat v8;:D&~(Comio. App'.j (1937) llO‘S.6. i2aj sji'the
language~of the lnstrment was mubh stronger ,sstendliigto-show
4ulntentlou to oonvey an'interest-in the'mlnerl.als.in.place,
.but the court there stated:~ : '
"We do not-agree with the.conaluslon expre’asecl
by the Court of
.Clvll Appeals that the instrument under construct$on ig a
conveyance 0f.part.of.th.e.cll,l.up.lace
. . l :.
." that the iust&umeut does not.
.nIt.does not follow, ,however,
create au tuterest'in laud orethat‘it evldences.ierelg a .debt
t0 be paid OU:.Of Oil p~OdUC+~.. . ln
,me b*tru&t in th``Ten&nt~.o& iras'ermshereof."
The co&t held that'the ao.tlonnas..not-inaeb’t,.but for apealfio
.performance of the agreementto exeoute a conveyance of the
interest in productlon,'whioh; underthe terms of the agre.saient,
ww that plaintifp should.be pa%8 #1!3X1.00pq month out of a
fractional part of the o~ilproduced, caved and sol& In
granting apeclfld performan&ijthe .wFt neoeasarllj-founa that
the ~plaintlffh&3 an interest in real estate; It isstated by
the courti:
"The payment from the produotldn of the'rlg rentals, $not
distinguishable; in prlnoiple. from the case where the-owner.
of a lease assigns ~ltupon the consideration of a~sum certain
to be vaia:him.out.of tib Oil produced and saved~theref3om.
&ch paymentsare profits lasul~ out of .the land .oovemd bg
the lease. When they'have aocrued'they.,beoomepersonal.prop~ertg;
but rents and royalties or other oil payments to accrue in.the,
future arean estate.In thelandf'rom which they issue ... .. . a
fact .thatthe..rentis,to bepaid In money'aoes not make it any
the less a.profit issuing out of'the 'land.w
.’ _:.:/ -&-
i- T
?j;~,:-‘
_ .-3 -
k.:;:*. . -
Eon. Walter C. Woodward. June 2, 1939;P& 7, O-865 :~
The most-recent case in which the Supreme Couct.has refused a \
writ of error IsSheppardvs. Stenqllnd Oil & Gas Company i
(Austin C.C.A. 1939) 125 S.W. (26) 643, where it was held that
the gross produotlon tax on the interest created by a provision
ln an oil.and gaslease, that'the lessor should be paid, “89
additional #@,250.00 to be paid out of one-sixth of flv&sixths
of the first 011 and gas produced", should not be taxed against
the lessee. In view of the provisions of the tax statute there
under consideration some of the expressions.of the court were
probably not necessary to the decision of the case, but they are
not without slgnlflcance.
The court, in referring to the opinion by Judge Greenwood in
Sheffield vs. Hogg, stated: ,_
'We ha& been &able to peruse the o&~Ion, holding Inmind
tha faots oi the instant ease, dtbout ~onoludlng``th%.Ct~.
~intemst here involved,by whatever nsme it may properly be _
oslled, is ap interest in eeal d&ate,:-aniptsrw&.& pry
.duotlon under the leases, ai@ suoh cin.int;erest
ss.$mposes upon
its oWner the burden of the production tsxaander the ststnte .
hueare oonsidering:: It ls~to-be obsellrtrd
that the oourt hsa
'the& undm oonslderatlon several-royalty‘olansesvsr%ously
warded. %e oourt.aJ.sohad in tidroyalty olti$sesip leases
'hotaotqall~befom.~l~;~ Tt ;rari,%h88xgMssed purposesof the
oourt to set titrest the question.0f.te.legal.s*atusof royalty1
by whatever wbrdifig anted or-reservedand however'papble -
whether in the speall?
lo pxduat (izi.011) 'orin money pleasured
. by t&e value of the produqt.. is-we have pointep:ou$,above,
there is no Inherent dfitlnotlonbetueen royalty 'and,.ths01% i
bonuses here involved,-exceptonlyin.the fa& that'the amount
of the latter is ldmlted to a fixed qosntlty of the prodnation
measured by its monbtary value. This differenae ,olearly
00ula havs'no effeot as regards its.ouner*s interest in.
produotloIl,n _ :
.,
We are of the opinion that.the interest of Murwyn Investment
Company in the production from wells drilled unaer.the contract
submitted is an interest $n real estate, aa that a.llfe,
iliau&nce company IS authorlsed to invest its funds in ev$denOe :
of'lndebtedness seourdd by a-first lien upon such real estate a8
provided by Article 4725.
.~. j
you dai, refer 3.hyour letter to a lease or contract executed to
CenteMial'Oll Company b the Board of Wneral Development, but
a copy or complete descr9ptkn of the instrument does not
accompany the request. If you are unable to determine the Status
of that lease or contraot‘upon the basis.pf this,opinion we shall
be glad to advise you further:.
..
Hon. Walter C. Woodward, Jke"2, 1939, Page 8, d-865
We, of ooume, express no opinion uponthe advisability Ok
accepting this ;or any other'type.securlty, that being a :
matter addressed primarily to the sound discretion of'the
Insurance Commlssloner.. ....
'Yoursvery truly
:A’PI&iEY.GmL OF T&&q
a[ Cecil-c..camma*
BY
Ceoil C:'Csnnimdk
~.Asglstsnt
: : .
QOOI -i+ags, .'.
'._ ._ - . ..__
l!hG oplnlowhas been oonsM&dd ln"&ferenc&,‘approvsd, .:
and mered i!eoorded, .. ..
._..,
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p.&$:& ~\,. : :.._, :
: . .&~G&oF.TjExBs: -
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