Flewellen v. Simms Oil Co. (134 S.W.2d 687, 1939)

PRICE, Chief Justice.

This is an action instituted by plaintiffs to recover damages in the sum of $500,000 against defendants (appellees) Simms Oil Company, Tide Water Associated Oil Company, and Stanolind Oil and Gas Company, for the alleged breach of an implied covenant to develop for oil and gas an area held under an oil and gas lease upon which the said defendants, as to 374 acres involved, were bound to the same covenants and obligations as the original lessee. The plaintiffs alleged that they were the owners of fractional interests in the one-eighth royalty interest reserved in said lease. Fidelity Oil and Royalty Company and W. L. Goldston were joined as defendants as owners of the other portion of said one-eighth royalty interest. Said Fidelity Oil and Royalty Company and W. L. Goldston (here appellants) filed an answer consisting of a cross action against the other three defendants, seeking damages in the sum of $150,000 based on the royalty interest held by them and made substantially the same allegations as made by plaintiffs. The ap-pellees each interposed a general exception to the petition of plaintiffs and to the cross action of the other two defendants. These general exceptions were each sustained, and plaintiffs and cross-plaintiffs declining to amend, the court dismissed their action. Plaintiffs and cross-plaintiffs duly perfected their appeal, and the case is here for review.

In our consideration and treatment of the question involved it might tend to clarify matters if two well-settled and elementary legal principles are at all times borne in mind: (1) A general demurrer' admits all of the pertinent facts well pleaded by the plaintiffs; (2) mere conclusions and facts at variance with the exhibit attached evidencing the contract upon which the legal duty is sought to be founded are not to be considered in determining the sufficiency of the petition. Malone v. El Paso County Water Improvement District No. 1, Tex.Civ.App., 20 S.W.2d 815; Reeves v. Pecos County Water Improvement District No. 1, Tex.Civ.App., 293 S.W. 923; Cowden v. Broderick & Calvert, 131 Tex. 434, 114 S.W.2d 1166, 117 A.L.R. 61. This additional proposition might also be stated: That, challenged by a general demurrer, the allegations of plaintiffs are to be given a liberal construction.

The sole question involved is the sufficiency of the pleadings. Hence it is necessary to set forth literally the vital and controlling allegations of plaintiffs’ petition. A large portion of same may be summarized by stating that by pertinent and sufficient allegations it set forth the interest of appellants in the royalty interest reserved in the lease, and that the appellees were bound by the stipulations contained in the lease. Paragraphs ten to thirteen, inclusive, were as follows:

"X. In the year 1930 the East Texas Oil Field was discovered. Rapid development soon proved that it was a large oil pool, approximately fifty miles in length north and south and from five to twelve miles wide east and west and was one reservoir. As early as April, 1931, it was definitely proven that the 374 acres above mentioned, and being the subject of this law suit, or at least a part thereof, would produce oil in paying quantities, and on June 3rd, 1931, a well was brought in on the north 200 acres of the 987 acre tract hereinabove described, with a producing capacity in excess of 10,000 barrels of oil per day, and with a saturated sand thickness in excess of thirty-five feet. In the meantime a large number of wells had been brought in on the structure several miles south of the above mentioned well, which definitely proved that the 374 acre lease in question would produce oil in large and paying quantities. Thereupon it became the duty of the defendants, Stanolind Oil & Gas Company and Simms Oil Company, to proceed with the development of said 374 acre tract by continuously drilling the same in á workmanlike manner with reasonable diligence, until the entire tract had been drilled to a sufficient density to recover the greatest amount of recoverable oil imbedded in the sand beneath the surface area covered by said lease; that a reasonable program of development required'the drilling on said tract of at least two wells each month until the tract was drilled to a density of one well to approximately four acres, which would have resulted in 93 wells having been drilled on said property not later than the 1st of March, 1935.

“Notwithstanding the aforesaid facts the defendants, Stanolind Oil & Gas Company and Simms Oil Company, wholly failed and refused to perform the implied conditions of said lease requiring reasonable development thereof after the discovery of oil on said lands, and did not drill a well thereon until October 11th, 1931. Between that time and November 11th, .1933, they completed only twenty-four wells and then abandoned further drilling operations until July, 1934, the next well being brought in on July 6th, 1934, and being styled Well No. 26. From July 6th, 1934, to December 7th, 1935, said defendants drilled thirteen additional wells and thereupon advised the plaintiffs that they considered that the lease was fully developed, but to satisfy the demands of the plaintiffs they would drill two or three more wells on the property, provided no suit was instituted by the plaintiffs to compel additional drilling or to recover damages resulting from the dilatory tactics of the defendants in failing to reasonably develop said premises.

“Thereupon on the 1st day of February, 1936, this action was instituted, seeking damages and an order of this court requiring the defendants to specifically perform the terms and conditions of the lease contract hereinabove mentioned and praying that if they failed to do so within a reasonable time that the lease be cancelled, set aside and held for naught. Following the institution of the suit and between the 1st day of February, 1936, and the 24th day of August, 1937, the defendants drilled fifteen additional wells on said lease, bringing the total number of wells drilled to fifty-two, so that the lease at this time has been drilled to a density of one well to approximately every 7.19 acrés. The last well drilled on said premises was completed on August 24th, 1937. No additional wells have been drilled on said lease since that time.

“XI. Plaintiffs allege that said property could have been drilled to a density of a well to every four acres within the time and in the manner hereinabove set forth, and that such operations would have resulted in large profits to the defendants, and at the same time would have resulted in large quantities of oil being recovered from said premises which by reason of such failure to drill and develop said property will remain imbedded in the sands beneath said tract of land and never be recovered by anyone; that in addition large quantities of oil have been permitted to be drained from said premises through wells on adjoining properties, all of which constitutes a breach of the implied covenants of the aforesaid lease, and has caused the plaintiffs an enormous damage, as is more fully hereinafter set out.

“XII. Plaintiffs further allege that if the defendants had developed said property with reasonable diligence as above set forth that they would have received and been paid in excess of what they have received as royalty provided for in said lease, the sum of $400,000, being %ths of the ⅜⅛ royalty provided for in said lease, which these plaintiffs would have received had the defendants drilled and developed said property as they were required to do under the terms of the lease contract hereinabove mentioned over and above what the plaintiffs have been paid; that the breach of said contract on the part of the defendants in failing to drill and develop said property as they were obliged to do and as is herein-above set forth is the direct and proximate cause of said damages to the plaintiffs.

“XIII. The defendants, • Fidelity Oil & Royalty Company and W. L. Goldston, are made parties defendant in order that they may be cited to appear herein so that the rights of all parties may be adjudicated, and complete relief granted by this Honorable Court.”

Attached as an exhibit to plaintiffs’ said first amended original petition was the lease involved, which, omitting all description, is as follows:

“Agreement made and entered into the 31st day of October, 1919, by and between J. J. Flewellen of Gregg County, Texas, hereinafter called Lesser.? and Gaines B. Turner, Trustee, hereinafter called lessee.

“Witnesseth: That the lessors for and in consideration of the sum of $1974.00 cash in hand paid by issuing to the said lessors the sum of $1974.00 of the stock of the Virginia Company at its par valué, the receipt of which is hereby acknowledged, have granted, bargained, and leased, and by these presents do grant, bargain, and leased unto the said lessee for the sale and only purpose of mining and drilling for oil, gas and other minerals and of laying of pipe lines, building of tanks, power stations and structures thereon, to produce, save and take care of said products in and under all that certain tract or parcel of land situated in the counties of Upshur and Gregg, State of Texas, * * *.

“It is agreed that this lease shall remain in force for a term of twenty years from this date and as long thereafter as oil and gas or either of them is found and produced from the land by the lessee or his assigns.

“In consideration of the premises, the lessee covenants and agrees to deliver to the credit of lessor, free of cost, in the pipe line to which they may connect their wells the equal one-eighth part of all oil produced and saved from the leased premises. To pay the lessors $250.00 each year in advance, for the gas from each well where gas only is found, while the- same is being used off the premises and lessor to have gas free of cost from any such well for all stoves and all inside lights in the principal dwelling house on said land during the same time by making their own connections with the well at their own risk and expense.

“If said lessor owns a less interest in the above d'escribcd land than the entire and undivided fee simple estate therein, then the royalties and rentals herein provided for shall be paid the lessor only in the proportion which his interest bears to the whole and undivided fee, lessee shall have the right to use, free of cost, gas, oil and water produced on said land for all operations thereon except water from wells of .lessens. When requested by lessors, lessee shall bury their pipe line below plow depth. Lessee shall pay for all damages caused by all operations to growing crops on said land. 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. If the estate of either party hereto is assigned and the privilege of assigning, in whole or in part is expressly allowed, the covenants hereof shall extend to their heirs, executors, administrators, successors or assigns. Lessors hereby warrant and agree to defend the title to the lands herein described and agree that the lessee shall have the right at any time to redeem for lessors, by payment, any mortgages, taxes or other liens on the above described lands, in the event of default of payment by lessors, and be subrogated to the rights of the holder thereof.

“It is 'further agreed that in no event shall the lessee and his assigns be required to exercise his option to develop said premises in less time than twenty years unless a producing oil or gas well is brought in on ad adjoinin- or adjacent tract of land and that in that event the said lessee shall commence drilling an offset well within six months after such well on the adjoining tract has been brought in or else shall forfeit this lease as a penalty for such non development.”

Appellants’ appeal is predicated upon this proposition: “There is no express covenant in the lease which attempts to define the extent to which the property shall be drilled or developed after a well is brought in proving its productivity. Therefore, the usual covenant of reasonable .development is implied and the trial court committed fundamental error in sustaining the demurrer on that ground.” Cited as authorities to support this proposition are: Summers Oil & Gas, Per.Ed., Vol. 2, page 355, § 411; Summers Oil & Gas, Per.Ed., Vol. 2, pages 301-309, § 395; W. T. Waggoner Estate v. Sigler Oil Co., 118 Tex. 509, 19 S.W.2d 27; Thornton Oil & Gas (Willis) pp. 268-9, § 154; Merrill’s Covenants Implied'in Oil & Gas Leases, § 117, p. 279; Grubb v. McAfee, 109 Tex. 527, 531, 212 S.W. 464; Freeport Sulphur Co. v. American Sulphur Royalty Co., 117 Tex. 439, 454, 6 S.W.2d 1039, 60 A.L.R. 890; Texas Pacific Coal & Oil Co. v. Barker, 117 Tex. 418, 6 S.W.2d 1031, 60 A.L.R. 936; Gulf Production Co. v. Kishi et al., 129 Tex. 487, 103 S.W 2d 965; Ralph v. Magnolia Petroleum Co., Tex.Civ.App., 95 S.W.2d 222; Cowden v. Broderick & Calvert, 131 Tex. 434, 114 S.W.2d 1166, 117 A.L.R. 61; Rhoads Drilling Co. v. Allred, 123 Tex. 229, 70 S.W.2d 576; Stanolind Oil & Gas Co. v. Barnhill, Tex.Civ.App., 107 S.W.2d 746; Cole Petroleum Co. v. United States Gas & Oil Co., 121 Tex. 59, 41 S.W.2d 414, 86 A.L.R. 719; Brewster v. Lanyon Zinc Co., 8 Cir., 140 F. 801.

The brief for appellee Stanolind Oil and Gas Company sets forth this proposition: “The subject matter of development of the Flewellen tract of land is controlled by express covenants contained in the lease of October 31, 1919, from Flewellen to Turner, thereby precluding the existence of an implied covenant.” As authorities supporting. -this proposition the appellee cites: Cowden v. Broderick & Calvert, Tex.Civ.App., 108 S.W.2d 562; Cowden v. Broderick & Calvert, 131 Tex. 434, 114 S.W.2d 1166, 117 A.L.R. 61; Gulf Production Co. v. Kishi, 129 Tex. 487, 103 S.W.2d 965; Gulf Production Co. v. Kishi, Tex.Civ.App., 105 S.W.2d 733; Freeport Sulphur Co. v. American Sulphur Royalty Co. of Texas, 117 Tex. 439, 6 S.W.2d 1039, 60 A.L.R. 890; Becker v. Submarine Oil Co., 55 Cal.App. 698, 204 P. 245; Stoddard v. Emery, 128 Pa. 436, 18 A. 339; Skinner v. Ajax Portland Cement Co., 109 Kan. 72, 197 P. 875; O’Neil v. Sun Oil Co., 58 Tex.Civ.App. 167, 123 S.W. 172, writ refused; Burt v. Deorsam, Tex.Civ.App., 227 S.W. 354; Greek v. Wylie, 266 Pa. 18, 109 A. 529.

If the facts premised by the appellants’ proposition be assumed that: “There is no express covenant in the lease which attempts to define the extent to which the property shall be drilled or developed after a well is brought in proving its productivity,” the authorities cited support, or strongly tend to support, the proposition asserted.

We will attempt to state same as a pure proposition of law: Where there is no express covenant in the lease which attempts to define the extent to which the property shall be drilled or developed after a well is brought in proving its productivity, the usual covenant of reasonable diligence to develop is implied. Confining the proposition to the ordinary oil and gas lease, this proposition is fairly established by the decisions of this State. See authorities above noted as cited by appellants.

If we assume the premise of the proposition of appellees that: “The subject matter of the development of the Flewel-len tract of land is controlled by express covenants contained in the lease of October 31, 1919, from Flewellen to Turner,” the proposition finds strong support m the authorities cited by appellees.

The proposition may be stated as a pure legal proposition thus: “Where an. oil and gas lease contains an express covenant as to development, there is no room for an implied covenant.” Confined to the ordinary oil and gas lease, we believe this proposition is established by the decisions of this State. See authorities noted above as cited by appellees.

It will be noted that appellants and ap-pellees each cite, in support of their respective propositions, the following cases: Cowden v. Broderick & Calvert, 131 Tex. 434, 114 S.W.2d 1166, 117 A.L.R. 61; Gulf Production Co. v. Kishi, 129 Tex. 487, 103 S.W.2d 965; and Freeport Sulphur Co. v. American Sulphur Royalty Co., 117 Tex. 439, 6 S.W.2d 1039, 60 A.L.R. 890. Broadly and generally these three cases have this in common: in each there was recognized and vindicated the obligation of the lessee to develop in accordance with the express provision of the lease involved; in each the. principle is recognized that the lease being silent as to development, there might of necessity, by implication, be an obligation on the part of the lessee to use reasonable diligence to develop the area under lease. Thus each of the cases under the respective theories held is aptly cited by each party.

In Cowden v. Broderick & Calvert, supra, it was the obligation to develop in accordance with the discretion of the lessee rather than with reasonable diligence that was vindicated by the judgment of the Supreme Court. The opinion draws the distinction between the two classes of development.

Freeport Sulphur Co. v. American Sulphur Royalty Co., supra, held the obligation to be to operate one specific plant. There .was, by construction, implied, the duty to keep such plant in continuous operation.

Gulf Production Co. v. Kishi, supra, as to the point in question decided that a provision as to the exact number of wells to be drilled in developing governed. It was further held that the express provision as to the number of wells sanctioned only by the provision of forfeiture of the lease, precluded recovery for alleged' insufficient development under implied covenants as against the position that the provision related exclusively to development within specified period less than the entire term.

It appears, then, that the question involved in this appeal is the proper construction of the lease in question. The clause or paragraph thereof most specifically involved is the following: “It is further agreed that in no event shall the lessee and his assigns be required to exercise his option to develop said premises in less time than twenty years unless a producing oil or gas well is brought in on a