# Butler v. Exxon Corporation

> Court of Appeals of Texas · November 16, 1977 · 559 S.W.2d 410

URL: https://www.frixlaw.com/law-library/cases/9666527

## Case

- **Full name:** Ted BUTLER Et Al., Appellants, v. EXXON CORPORATION, Appellee
- **Court:** Court of Appeals of Texas
- **Decided:** November 16, 1977
- **Citations:** 559 S.W.2d 410; 59 Oil & Gas Rep. 529; 1977 Tex. App. LEXIS 3563
- **Precedential status:** Published
- **Opinion:** Dissent by Preslar
- **Judges:** Osborn, Preslar
- **Cited by:** 11 later opinions in the Frix Law Library

## Citator (automated)

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- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/9666527

## Opinion text

PRESLAR, Chief Justice,
dissenting.
I concur in the affirmance of the judgment as to the three leases, but I respectfully dissent as to the reversal of the trial Court’s judgment as to the Veterans’ Land Board lease. At the outset, I dissent from the separate consideration of the Veterans’ Land Board lease and the granting of any judgment as to it separate from the other leases. The Appellants, as Plaintiffs in the trial Court, did not seek such relief and they have no points of error on appeal as to that lease alone. The pleadings speak only of “the leases” and the points of error and discussions thereof speak only of “the leases” or the “Butler leases.” Clearly, the case was tried and is appealed as though only one form of lease was involved; Appellants plead a single clause as applicable to all leases. Both parties have briefed the case that way. It is now unfair to the Appellee for the Court to single out one lease and grant judgment based on its terms which were never put in issue and as to which there have been no assignments of error and no need or opportunity for Appellee to respond to. The case should be affirmed as to all leases or reversed as to all leases because that was the way the parties elected to try it. Appellants have waived any right to the relief granted by the majority opinion.
The majority has concluded that the Veterans’ Land Board lease is governed by the construction of the royalty clause in the Vela case. Texas Oil & Gas Corporation v. Vela, 405 S.W.2d 68 (Tex.Civ.App.—San Antonio 1966), aff’d in part, 429 S.W.2d 866 (Tex.1968). With that I am unable to agree.
*418 I see the Vela lease and the Veterans’ Land Board lease in this case as containing two very different royalty clauses so that the construction given the one does not control the other. Neither lease is the typical or ordinary oil and gas lease as to gas royalty, for each contained only one applicable clause. Actually, the Vela lease contained a second clause providing for a share of the proceeds to be paid to the lessor, but that clause was limited to casinghead gas produced from oil wells while the Vela wells produced gas only, so it has only one clause applicable to such gas only production. As noted in the majority opinion, leases usually provide for free use of gas by the lessor or producer when used “on premises” because it is for the mutual benefit of the lessor and lessee. There is usually a clause providing for gas sold or used off the premises and a clause providing for outright sale of the gas. As distinguished from lessee’s free use of gas on the premises, this “sold or used off the premises” clause recognizes the fact that this is for lessee’s benefit alone and he should therefore account to the lessor for lessor’s share. Gas is a widely used fuel in the field in operating pumps and other machinery in the production of oil and the distribution of gas. The “sold or used” clause covers lessee’s use of such gas on his other leases in the area; it also covers the situation of sales to others in the field and recognizes that there is a local market for such gas in the immediate area. This clause as to use or sale in the local area is usually accompanied by “off the premises.” The use of “off the premises” in conjunction with “sold or used” characterizes it as not being the “free use on the premises,” but for the local area, and distinguishes it from a “sold” alone clause disposing of the total gas production to some transmission line. The use of such phrases as “market value” or “market price” is then necessary to the gas royalty clause for such local use or sales. As noted in the case of Phillips Petroleum Co. v. Johnson, 155 F.2d 185 (5th Cir. 1946) cert. denied: “In so far as this gas was ‘used’ there can be no ‘net proceeds’ * * There being no net proceeds where the lessee is using the gas off the lease, it becomes a question of what it is worth in arriving at the lessor’s royalty share, hence the “market value” phrase. Likewise, the provision for “market value” is needed for lessor’s sales on the local market under short term or day-to-day sales as distinguished from a long term fixed contract price. Also, as distinguished from long term contracts, the value of the gas on such short term or day-to-day sales or use would naturally be the time of delivery.
The royalty clauses in the Vela lease are:
“ ‘To deliver to the credit of lessor, free of cost, in the pipe line to which lessee may connect its or his wells, the equal one-eighth part of all oil produced and saved from the leased premises.
“ ‘To pay to lessor, as royalty for gas from each well where gas only is found, while the same is being sold or used off of the premises one-eighth of the market price at the wells of the amount so sold or used, * * *
“ ‘To pay to lessor as royalty for gas produced from any oil well and used by lessee for the manufacture of gasoline, one-eighth of the market value of such gas. If such gas is sold by lessee, then lessee agrees to pay lessor, as royalty, one-eighth of the net proceeds derived from the sale of said casinghead gas at the wells.’ ”
The Vela lease produced gas only so that the “net proceeds” clause never came into effect and, of course, the Court’s consideration was limited to the being “sold or used off of the premises” clause. But that is an entirely different situation from the leases before us. Three of them have “sold or used” clauses, but in addition thereto they have what is the usual or ordinary clause covering the sale of the gas with the price being a share of the net proceeds. It is this clause which covers the total disposition of the gas produced as distinguished from short term or local sales. This clause has no “used” provision. The Veterans’ Land Board lease differs in that it has a single clause. As to gas it provides for “one-sixteenth of the market value at the well of all *419 gas produced and saved from the leased premises.” It has no “sold or used” and no “off the premises” provisions which would call for or justify Vela application. Lacking these characteristics of local use or local sales, it must also lack another characteristic — the fixing of the price as of the time of delivery. In the absence of such provisions for short term or local sales, the reason for fixing the price as of the time of delivery disappears. The purpose of an oil and gas lease is to obtain production and sell the same for the mutual profit of the lessor and lessee. If that purpose is to be fulfilled, the gas must be sold. This lease has but the single clause; it is the only clause under which the gas can be disposed of; it must be held to meet the purpose of the lease in disposing of the total production. Under it, the gas is sold just as it is sold under the other three leases under consideration. I would construe it the same way.
A most respected authority on oil and gas law has criticized the Vela decision in these words:
“The majority in Vela fails to recognize that the market, in the case of natural gas, is not a market of spot sales or deliveries, but of long term contracts made at a given point in time. The minority opinion, recognizing this, is entitled to close attention in any jurisdiction not committed by precedent to the result reached by the majority in Vela.”
3A Summers, Oil and Gas, Sec. 589 (2nd ed. 1958). This respected authority is further of the opinion that such gas royalty clauses are fraught with ambiguity and that the ambiguity should be resolved in favor of the lessee as a matter of law. This, because of the fact that gas can only be sold and must be sold by long term contracts as to which prices are almost certain to get out of line with contemporary prices, plus the implied but very real obligation of the lessee to market the gas with dispatch.
The majority holds as to the Veterans’ Land Board lease that “market value means the prevailing market value at the time of the sale and sale occurs at the time of delivery to the purchaser.” Like the dissenters in Vela, I find something wrong with this holding in that the lessee in meeting his obligation to market the gas must have both a sale and a delivery to complete the transaction. By the 20-year contract the lessee has set the price for the 20-year period as well as the delivery for that 20-year period. By the majority opinion, the lessor/royalty owners are permitted to accept the benefits of the contract as to delivery and to disavow it as to the price. This, in the face of the trial Court’s finding that this gas could only be marketed by long term contracts. This finding is unchallenged on appeal and it stands before us as an established fact. I would hold the lessor/royalty owners to their share of the net proceeds received by the lessee for the sale of the gas under this 20-year contract.
Appellants argue, and the majority is persuaded, that “market value” means the current value. They rely on the Vela case, supra; Foster v. Atlantic Refining Company, 329 F.2d 485 (5th Cir. 1964), and J.M. Huber Corporation v. Denman, supra. While I do not agree that this “dictionary approach” of defining a single phrase is the proper construction of the lease, yet I am convinced that under such a rule of construction Texas law is to the contrary as to the meaning of the phrase “market value.” As we have seen in Vela, and will see as to Foster , the term was applied to an unusual royalty provision. The Huber lease is an even more unusual royalty provision as compared to the one before us. At this point it might be well to note that Foster and Huber, being federal cases, are not controlling. To the contrary, it is the duty of the federal Courts to follow state law. Erie Railroad v. Tompkins, 304 U.S. 64 , 58 S.Ct. 817 , 82 L.Ed. 1188 (1938). An examination of the law governing the production of oil and gas reveals that it is mostly case law. When the Supreme Court, or a Court of Civil Appeals if the Supreme Court has denied an application for a writ of error, has once given a definite effect to a specific writing or a particular fact situation, its determination is binding and conclusive on all subsequent suits involving the same subject matter. In recent years, a great vol *420 ume of the cases involving oil and gas matters have been in the federal Courts and it becomes increasingly important that the law of Erie Railroad v. Tompkins, supra, be strictly observed.
Until the 1964 decision in the Foster case, supra, there was no problem with the meaning of the typical gas royalty clause in Texas. See Summers, supra at Sec. 589. That case was the authority relied on by the majority in Vela, and rightfully so to a limited extent because of some similarity of the royalty clauses — the use of the present tense, “while” the same is being used or sold. But the gas royalty clause in Foster is so different from the leases before us that it provides no basis for a similar interpretation or construction. It has a single royalty clause providing:
“ ‘The conventional royalties to be paid by Lessee are: (a) On oil and gas, including all hydro-carbons, one-eighth (⅛⅛) of that produced and saved from said land, the same to be delivered to the credit of the Lessor into the pipe line and to be sold at the market price therefor prevailing for the field where produced when run; * * *’”
As can be seen, the clause is to both oil and gas, and the important thing is that it is in the form of the usual oil royalty clause. Oil and gas are marketed under different provisions in Texas because the royalty clauses are separate, distinctly so, and the method of marketing is different. Under an oil and gas lease in Texas, full ownership of the gas in place (the full %ths) is in the lessee and is marketed by him without direction from the lessor, while as to the oil, the lessor directs what is to be done with it by the terms of the lease. The above clause is a typical oil royalty clause. There has been little change in the wording of the oil royalty clause throughout the years. Brown, The Law of Oil and Gas Leases, Sec. 6.01 (1958). The usual provision is for the lessee to be required to deliver the lessor’s oil to the pipeline to which the lessee’s wells are connected. The purchaser of the lessee’s oil usually buys the royalty oil and through division orders agrees to pay the “posted price” in the field, usually the purchaser’s posted price. The price varies, but applies when the oil is “run.” Brown, supra. It is “run” when physical possession changes from lessee’s wells or storage tanks to the pipeline or storage tanks of the purchaser. This unusual provision of the Foster lease of having gas in an oil royalty clause makes the gas royalty payable “when run” and at the then prevailing price. But this has no application to the gas royalty clauses when present in the lease as here; as to those there are no directions to the lessee to deliver to pipelines or to pay at prevailing prices “when run.” To the contrary, the gas is the property of the lessor and it is left to him to do with his own property and account to the lessor after any sale. Our leases have oil royalty clauses not unlike the Foster clause, but they also have gas clauses. To apply the Foster holding to them would be like applying their own oil clause to the disposition of their gas. The Foster case has no application to the one before us, but through a chain of other cases it is by judicial interpretation made to apply.
The royalty clause in the Huber case specified the price. It provided: “ ‘four cents per one thousand cubic feet for the first ten years of this contract, and thereafter, the market price of such gas, but in no event shall the price be computed at less than four cents per thousand cubic feet.’ ” The construction given that clause has no application to our clause of such a different wording.
The Texas Supreme Court has thrice defined “market value” as used by the Legislature in the Statutes taxing the production of natural gas. That definition should be given weight here because the Statute is applicable to these parties in the operation of these leases which we are considering. The former article, Tex.Rev.Civ.Stat.Ann. art. 7047b, provided that the producer shall pay a tax on all gas produced and saved which this State equivalent to 5.2 percent of the market value “as and when produced.” The Statute defined market value to be:
“ ‘ * * * the value thereof plus any bonus, or premium, or anything of value *421 paid therefor, or any sum of money that such gas will reasonably bring if produced and sold in accordance with the laws, rules and regulations of this State, ⅛ * * > >>
W. R. Davis, Inc. v. State, 142 Tex. 637 , 180 S.W.2d 429 (1944). The Supreme Court, without a dissenting vote, held:
“ * * * When this definition is read as a whole it is reasonably clear that it contemplates that ‘market value’ is the price for which the producer sells his gas. * * * »
W. R. Davis, Inc. v. State, supra at 432. The phrase “market value” was again held to mean the price for which the producer sells the gas in Calvert v. Union Producing Co., 258 S.W.2d 176 (Tex.Civ.App.—Austin 1953, no writ); Calvert v. Union Producing Co., 269 S.W.2d 525 (Tex.Civ.App.—Austin 1954), aff’d, 154 Tex. 479 , 280 S.W.2d 241 (1955). Article 7047b has been supplanted by Tex.Tax. — Gen.Ann. arts. 3.01 and 3.02. Like the predecessor Statute, Article 3.01 provides that the tax on the business of producing gas be computed “on the amount of gas produced and saved * * * equivalent to seven and one-half per cent (7½%) of the market value thereof as and when produced.” Article 3.02 provides “market value of gas produced in this State shall be the value thereof at the mouth of the well; however, in case gas is sold for cash only, the tax shall be computed on the producer’s gross cash receipts.”
As late as 1970, the Supreme Court has construed the new tax Statute:
“ * * * We hold that the market value of gas at the mouth of the well in cases such as this is measured, as to all ownership interests, by the total proceeds of the sale of the component parts of the gas after processing, less transportation and processing costs * *
Mobil Oil Corporation v. Calvert, 451 S.W.2d 889 (Tex.1970). If, then, we are to decide the issue under the rule that the parties intended to use the phrase “market value” in its usual and ordinary sense, we have been told quite clearly what that meaning is.
I would hold that the intent of the parties to this lease is controlling of its construction. I find it completely unrealistic to assume that there was ever an intention by these parties that one of them would receive one price for his gas and the other a different price. The oil and gas lease is distinguished from other contracts in that it has a share provision, that is, that the parties will share in any oil or gas that may be found. As noted by Summers, supra at Sec. 590 entitled “Oil Royalties — A Share of the Production”:
“The consideration most usually given for the privilege of producing oil is a share, ordinarily one-eighth, or the value of such share, of the oil produced and saved from the premises, free of cost to the lessor. * * * ”
That the lessor’s share is ordinarily ⅛⅛ is so common that the Courts take judicial knowledge of it. Cheek v. Metzer, 116 Tex. 356 , 291 S.W. 860 (1927); Gibson v. Turner, 156 Tex. 289 , 294 S.W.2d 781 (1956). The purpose of both lessor and lessee was to find and produce the minerals for their mutual benefit. As is usual in such leases, everything to be done is left to the lessee; everything from exploration to production to sale, including compliance with all necessary governmental regulations, is left entirely to the lessee. It is the lessee who must bear the high cost of drilling, developing and operating, and he needs all the oil and gas he can produce in order to make a profit. The lessor, of course, has no expense but is vitally interested in the end results — the income from the production. Thus, the interests of the lessor and the lessee are identical in the desire to produce all of the oil and gas and sell it for the best price possible. There is nothing in this lease to even suggest that the parties intended anything but that they would share in the production and the proceeds thereof. I would give attention to the fact that they did not prepare this lease; rather, they simply selected a form. As material here, that form is common to the oil and gas industry. In selecting that form, the parties must have intended to give it the mean *422 ing that it had been given through wide use through the many years — that the proceeds of the gas production would be shared by them. I cannot agree with the holding that these people had a different intent from all of the other thousands of people who have executed the same or similar form.
The parties to the lease are charged with knowledge of the law and governmental regulations. In fact, such laws and regulations are held to be a part of their contract as if they were written therein. Under such rules and regulations, a long term contract for the sale of gas is a necessity. Gas cannot be carried in buckets; pipelines are required to market it. Before one can operate a pipeline, he must have a permit. Before he can obtain a permit, there must be a sufficient reserve of gas in the field to merit it. The pipeline carrier must have sufficient long term contracts for that gas to merit an award of the permit. This is an oversimplification of the law, but it is a body of law presumably known to the parties at the time of entering into their contract. Hence, the lessors knew when they entered into this oil and gas lease that the gas would be marketed by long term contract, and most importantly, they knew that the “market value” would be fixed by such long term contract. The Court has found, and the lessors admit in their briefs, that the only market for this gas was by long term contract. Clearly, the intent of the parties is established by the above. The amount received for the gas (the proceeds) is the market value.
While, as stated, I am of the opinion that on its face this oil and gas lease means that the lessee’s obligation is to pay the lessors their fractional share of the proceeds, any doubt as to this is resolved by the practical construction of the parties. Lone Star Gas Co. v. X-Ray Gas Co., 139 Tex. 546 , 164 S.W.2d 504 (1942); Superior Oil Co. v. Stanolind Oil & Gas Co., 230 S.W.2d 346 (Tex.Civ.App.—Eastland 1950), aff’d, 150 Tex. 317 , 240 S.W.2d 281 (1951); Livingston Oil Corporation v. Waggoner, 273 S.W. 903 (Tex.Civ.App.—Amarillo 1925, writ ref’d). The facts which show this construction are: (1) From the beginning of production in 1970 until October, 1975, lessee paid and the lessors accepted royalty payments based upon the amount realized from the gas sales under the 20-year contract. (2) Prior to receiving such royalty payments under these leases, the lessors executed “division orders” which, though modified slightly in 1973, remained in effect until they were revoked by the Appellants in April, 1975. These division orders stated: “Settlements for gas sold at wells or at a central point in or near the field where produced shall be based on the net proceeds at the wells.” This construction of the lease placed thereon by the parties themselves is evidence of their intent and should be given controlling effect. In distinguishing this case from the Vela case, it should be noticed that division orders were not executed by the Velas.
Another aspect of the division orders is that they should be held to be binding contracts until revoked. This is of no consequence under my interpretation of the lease, but under the majority construction of the lease, it would prevent any recovery for additional royalties prior to the revocation of the division orders in April, 1975. Contrary to the federal case relied on by the majority, Texas Courts have held division orders to be binding contracts until revoked. Chicago Corporation v. Wall, supra; Le Cuno Oil Company v. Smith, 306 S.W.2d 190 (Tex.Civ.App.—Texarkana 1957, writ ref’d n. r. e.), cert. denied, 356 U.S. 974 , 78 S.Ct. 1137 , 2 L.Ed.2d 1147 (1958).
I would affirm the judgment of the trial Court as to all four leases.

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/9666527. Public record. Not legal advice.