Pabst v. Roxana Petroleum Corp. , 1932 Tex. App. LEXIS 640 ( 1932 )

The dissent rests, in the main, upon these conclusions:

(1) "A general demurrer is a suggestion to the court that the facts stated in the pleading demurred to, if true, do not entitle the pleader to any relief from the court. This does not raise any question as to the manner and form of pleading, but only as to the substance, and if upon a fair, reasonable construction, giving to all ambiguities the reasonable interpretation most favorable to the pleading, there appear in it sufficient facts to show a legal right in the pleader, the general demurrer should be overruled." Townes' Texas Pleading (2d Ed.) bottom page 530 and top 531; Zacharie v. Bryan, 2 Tex. 274; Lambeth v. Turner,1 Tex. 364; Holman v. Criswell, 13 Tex. 38; Williams v. Warnell,28 Tex. 611; Mayfield v. Averitt's Adm'r, 11 Tex. 140; Junction City School Incorporation v. Trustees of School-District No. 6, 81 Tex. 152,16 S.W. 742.

(2) The plaintiff's petition in this instance, while unduly long and in places somewhat involved, when given the benefit of the liberal rule of interpretation thus obtaining under the blended system of law and equity extant in Texas, does state a good cause of action in at least one respect, to wit: For the recovery of damages for the failure of the defendants, after having discovered sulphur in paying quantities under the land on October 19th of 1926, to produce or pay royalty on any of it between that date and April 19th of 1928, when, although they had still retained possession thereunder throughout the intervening one and one-half year period, they attempted to rid themselves of all responsibility to the plaintiff under the lease contract by surrendering or abandoning it.

(3) The sole considerations to the plaintiff for the lease were the payment of $1,250 in cash, and the expectation on his part that sulphur would be found and produced, together with the several expressed "covenants and agreements" "to be paid, kept, and performed" by the lessee, one of which was: "To pay Lessor for all sulphur mined and marketed from the land a royalty of $1.00 per ton"; the only purpose of the grant from him, by express recitation, was that of conferring upon the lessee the exclusive right to use the land in exploring for and in the mining of oil, gas, and sulphur, and, in case any of these was found in paying quantities, by the plain import of its provisions as a whole, the mutual contemplation of both parties was that there would be a prompt "mining, saving, and taking care of such product"; to that end, the fixing of its duration, the statement of what was expected of the lessee in going about the attainment of such joint expectations, and the vesting of the interests thereunder, was thus further expressed: "This lease shall remain in force for a term of one year after September 21 of 1925," and "as long thereafter as oil, gas, or sulphur, or either of them, is produced from said land by the Lessee. It is, however, expressly agreed that if, at the expiration of said one (1) year from and after said 21st day of September, 1925, the Lessee shall be conducting drilling operations on said land, this lease shall remain in force so long as such operations are prosecuted with reasonable diligence, it being provided as to such thus-continuing operations that a period of sixty (60) days only shall be allowed to elapse between the completion of one well and the commencement of another, and if any well or wells thus drilled prove to be productive of oil, gas, or sulphur, or either or any of them, the completion of such well or wells shall take effect by relation as if said well or wells had been completed before the expiration of said one (1) year period, and the Lessee shall thereupon become vested with a lease-hold estate in the said land so long as oil, gas, or sulphur, or either or any of them, shall be produced thereon, subject to the payment of royalties as hereinafter provided."

There is on the one hand no clause expressly requiring the production of sulphur if or when found, nor, on the other, one likewise according a right in any event to surrender or abandon the contract.

(4) Thus, after the expiration of the one year, the principal, if not indeed the sole, consideration to the lessor for permitting the lease to longer "remain in force" was the specified $1 per ton royalty "for all sulphur mined and marketed from the land," and, in turn, likewise by express stipulation, the only way the lessee could so preserve and thereafter prolong its life was to be at the time the year expired actually "conducting drilling operations" thereon, which it henceforth had to continuously "prosecute with reasonable diligence" to the completion of one well after another, according to a stipulated measure and with a stated vesting of estate, or else suffer an ever-impending termination of the grant.

(5) It is in effect further averred that the lessee and its assignee, the Sulphur Company, to whom it had, with notice thereof going to appellant, transferred and assigned an interest in the sulphur rights under the lease, were so conducting drilling operations when the one year expired, discovering sulphur in paying quantities under the land as early as October 19th of 1926, according to paragraph 23 of the demurred-to petition, and finding the deposit of that mineral therein so rich that, if they had then used reasonable diligence in realizing upon the discovery, they could and should thereafter have produced 100,000 tons thereof per month, beginning with January 1st of 1927, but instead of doing so, negligently, fraudulently, and in the utmost bad faith toward lessor, not only designedly withheld the production of any at all, but all the while pursued their preconceived purpose and plan of really preventing any mining of sulphur anywhere on Clemens Dome, inclusive of plaintiff's land; that meanwhile, although at first, when endeavoring to induce a change in the existing lease, having once informed him of their discovery of it in paying quantities on his tract, they then suppressed and hid from him all information showing the extent of their findings, the actual amount of sulphur disclosed, the location and logs of the different wells, and even excluded him from the premises, when he went there seeking to find out about the progress of developments thereon; finally, in his verbis:

"That said Roxana Petroleum Corporation and said Texas Gulf Sulphur Company and each of them retained possession of the 25 acres described in said lease of September 21, 1925, until April 19, 1928, when said Roxana Petroleum Corporation, in writing, undertook to absolve itself from further liability by signing and tendering a release to plaintiffs, which they refused to accept, and both defendants then abandoned said premises, after destroying all possibility of plaintiffs' ever producing sulphur therefrom by the acts hereinbefore set forth."

(6) The finding of sulphur in such highly paying quantities as is thus directly and unequivocally alleged, which must accordingly be accepted as true in fact, imposed upon the appellees — at least for the subsequent one and one-half years they retained possession of the land, and wholly irrespective of any right they may have had to either surrender the lease or abandon their interest thereunder at the end of that period — two clearly implied legal obligations toward the appellant:

(1) To use reasonable diligence to produce, save, and pay him his stipulated royalty on all sulphur it could in that manner have mined from his land. Mills and Willingham, Law of Oil and Gas, pars. 102, 105, 108, 110, and footnote cited authorities; Thuss, "Texas Oil and Gas," par. 128 and cited authorities; Thornton on "Oil and Gas," vol. 1, par. 111; Texas P. Coal Oil Co. v. Stuard (Tex.Civ.App.) 269 S.W. 482; Id. (Tex.Civ.App.) 7 S.W.2d 878; Freeport Sulphur Co. v. American Sulphur Royalty Co. 117 Tex. 439, 6 S.W.2d 1039, 60 A.L.R. 890; Texas P. C. O. Co. v. Barker, 117 Tex. 418, 6 S.W.2d 1031, 60 A.L.R. 936; Bates v. Georgia Fertilizer Co., 144 Tenn. 32, 229 S.W. 153; W. T. Waggoner Estate v. Sigler Oil Co., 118 Tex. 509, 19 S.W.2d 27, at page 29(4).

(2) To use good faith toward him, not only in first duly testing the property for the existence of sulphur, but further in thereafter operating it in his interest, along with their own, to the end that he might receive the royalty it was capable of yielding. Summers, "Oil Gas," p. 431; Merrill's "Covenants Implied in Oil Gas Cases," par. 112, p. 266; Thuss on "Texas Oil and Gas," p. 154; Waggoner Estate v. Sigler Oil Co., 118 Tex. 509, 19 S.W.2d 27; Freeport Sulphur Co. v. American Sulphur Royalty Co., 117 Tex. 439, 6 S.W.2d 1039, 60 A.L.R. 890; Humphreys Oil Co. v. Tatum (C.C.A.) 26 F.2d 882; Brewster v. Lanyon Zinc Co. (C.C.A.) 140 F. 801; Kline v. Wright (D.C.) 51 F.2d 564; Poe v. Humble Oil Refining Co. (Tex.Civ.App.) 288 S.W. 264, 265; Texas Co. v. Roos (C.C.A.) 43 F.2d 1.

(7) There is, too, as before indicated, affirmative charge that both of these duties toward him were negligently, fraudulently, and wholly disregarded, to his damage in at least the sum of $1 per ton on 100,000 tons of sulphur per month for the whole of the year 1927, and the first three and one-half months of 1928; his right to damages ensued perforce (Waggoner Estate v. Sigler Oil Co., and other authorities cited, supra), and, if this was not the true measure thereof, the facts relating to it were fully pleaded, and the matter became one of law for the court. Texas P. Coal Oil Co. v. Barker, 117 Tex. 418, 6 S.W.2d 1031, 60 A.L.R. 936; Freeport, etc., Co. v. American, etc., Co., 117 Tex. 439,6 S.W.2d 1039, 60 A.L.R. 890; International G. N. R. Co. v. Glover (Tex.Civ.App.) 84 S.W. 604; Southwestern Portland Cement Co. v. Kezer (Tex.Civ.App.)174 S.W. 661, 669.

(8) The rationale for these two implications is the same whether the lease be one for solid or fugacious minerals, being, as to the first of them, that it is necessary to effectuate the manifest purpose of the parties in entering upon the enterprise; as to the second, that it invariably inheres in their engagements as a matter of equity and good conscience; concerning the former, it is said in paragraphs 108 and 110 of Mills and Willingham on "The Law of Oil and Gas," supra:

"An oil and gas lease is, in effect, a mining enterprise between the lessor and lessee, and from the very nature of the contract, the return to the lessor, from the reservation of the royalty, depends upon development of the land upon discovery of oil or gas. As it must be assumed that the expectation of an income accruing from such royalty was one of the considerations, if not the only consideration, that induced the lessor to enter into the lease, the purpose of the lease fails without such development. For such reason, it is universally held that the lessee, when it has been established by a well drilled upon the land that it is capable of producing oil or gas in paying quantities, is under an implied covenant to drill such number of wells as shall be reasonably sufficient to develop the lease. * * *

"Upon discovery, the lease is automatically changed from one for years into one that shall endure as long as oil or gas is produced.

"Closely related to the covenant for development is the implied obligation to operate the premises for the production of oil and gas after discovery in paying quantities has been made, and to market the product. * * * This covenant is based upon the proposition that the lessor is entitled to the royalties accruing under the lease, which is payable only from production, and a failure to produce and market by the lessee is a violation of the lessor's right."

Under the latter, the obligation of the lessee to do nothing to impair the value of the lease to the lessor is thus epitomized in Thuss, "Texas Oil and Gas," at page 154: "Since they have a community of interest, the lessees must work for the mutual advantage of both parties, so as to make the largest possible return," which doctrine is sententiously revamped by the Supreme Court of Texas (Waggoner Estate v. Sigler Oil Co. 118 Tex. 509,19 S.W.2d 27, at page 32) in this declaration: "There can be no fraudulent evasion with respect to the use which keeps the [lessee's] estate alive."

(9) The completion of wells on and after October 19th of 1926, "productive of" sulphur in paying quantities vested the appellees with "a lease-hold estate in the land," that is, under the rule of decision in Texas (Waggoner Estate v. Sigler Oil Co., supra), a determinable fee susceptible of loss — either through a complete cessation of the use of the property for the purposes of the lease, regardless of their intention, or through an abandonment thereof with the intention of giving up their interest therein — but in neither contingency, since under the facts here alleged no such cessation nor abandonment occurred until April 19th of 1928, were they absolved from liability to the appellant for their violation prior to that time of their bounden obligation to him to fairly produce during the interim the sulphur they already had so abundantly found, consonantly with this pithy pronouncement of our Supreme Court in the cited Waggoner Case:

"Not only may the lessor recover minerals granted under the ordinary oil or gas lease, which remain unproduced, on cessation of mineral operations, or on the lessee's abandonment of his rights; but, where a solvent lessee is merely guilty of negligence, to the lessor's injury, in the conduct of the work of exploring, developing, producing, or marketing the minerals, the lessor may recover his damages." Summers on "Oil and Gas," edition of 1927, pars. 168 and 209; Thornton on "Oil and Gas," vol. 1, par. 161, p. 467, 40 Corpus Juris, 1098; Daughetee v. Ohio Oil Co., 263 Ill. 518, 105 N.E. 308; Galey v. Kellerman, 123 Pa. 491,16 A. 474; Brewster v. Lanyon Zinc Co. (C.C.A.) 140 F. 801; Double v. Union Heat Light Co., 172 Pa. 388, 33 A. 694; Humble Oil Refining Co. v. Strauss (Tex.Civ.App.) 243 S.W. 528.

It is accordingly submitted, not without much respect for the contrary action of the majority, that a reversal should have been ordered.