Thomas R. Goodwin
Goodwin & Goodwin
Charleston, West Virginia
Attorney for the Appellant
Charles W. Yeager
Steptoe & Johnson
Charleston, West Virginia
Donald R. Johnson
Bristol, Virginia
Attorneys for the Appellees
CHIEF JUSTICE McHUGH delivered the Opinion of the Court.
If an oil and gas lease contains a clause to continue the lease for a term "so long thereafter as oil or gas is produced," but also provides for "flat-rate" rental payments, then quantity of production is not relevant to the expiration of the term of the lease if such "flat-rate" rental payments have been made by the lessee. Therefore, in a case involving termination of such an oil and gas lease which provides "flat-rate" rental payments, it is reversible error for a circuit court to instruct the jury that the word "produced" in the lease means "produced in paying quantities."
McHugh, Chief Justice:
This case is before the Court upon the appeal of Columbia
Gas Transmission Corporation, the defendant below, from the May 9,
1991 order of the Circuit Court of Kanawha County, which upheld a
jury verdict against the appellant. The appellees and plaintiffs
below are: Edward F. L. Bruen, Lorna Harrah Bruen, and Nicholas
Livingston Bruen, as co-executors of the estate of Alexander Jay
Bruen, Jr; Edward F. L. Bruen, Constance Bruen Barrow and Evelyn
Bruen Trevor, an Dora D. B. Ide, and Citibank, N.A., as trustees
under the will of John Jay Ide.
At the conclusion of evidence, the circuit court ruled
that as a matter of law, the Bruens did not know, and with
reasonable diligence, could not have discovered information
concerning the alleged termination of the lease until after they
filed the 1980 federal action.
Although the trial of this case transpired over a two-week period, thus, producing a voluminous record, basically, the
theory of the appellees' case was that the lease at issue
terminated sometime between 1928 and 1971. Accordingly, the
critical jury instruction offered on behalf of the appellee
concerned the liability, if any, on the appellant's part from that
period to date.
The jury returned a verdict in favor of the Bruens,
finding that: (1) the lease terminated in 1933 for failure to
produce in paying quantities; and (2) neither the appellant nor its
predecessor-in-interest knew or should have known that the lease
had terminated, and therefore, the appellant was a "good faith
trespasser." Accordingly, the jury awarded the Bruens damages in
the amount of $29,584,693.00.
In this appeal, the appellant primarily contends that the
circuit court committed reversible error in instructing the jury on
the appellant's liability.
With respect to the "flat rate" involved in this case,
the lease specifically provides: "Lessee agrees to pay Lessor
Twelve Hundred Dollars ($1200.00) per year net rental until the
royalties and rentals reserved in this lease exceed that amount
unless lease be surrendered before said time as above provided."
Because the lessors are assured, under the terms of the
lease, $1200 per year, this type of oil and gas lease is designated
as a "flat-rate" lease.
The appellant points to the distinction between "flat-rate" leases and "production" leases, claiming that because the
lease in this case is flat-rate, then, a line of cases holding that
production is irrelevant would be applicable.
The line of cases to which the appellant refers is well
established. In McGraw Oil Co. v. Kennedy, 65 W. Va. 595, 64 S.E.
1027 (1909), this Court spoke to the nature of a flat-rate lease
for oil and gas:
This lease does not limit its term by
requiring that oil or gas shall be found in
paying quantity, as leases usually do. It
says that the lease shall endure 'five years
from this date and as long thereafter as oil
and gas, or either of them, is produced
therefrom by the party of the second part.'
So, this lease contains nothing in terms
allowing the lessor to end it because oil or
gas is not found in paying quantity.
65 W. Va. at 598, 64 S.E. at 1028 (emphasis supplied); see also
syl. pt. 1, id.
Similarly, in Bassell v. West Virginia Central Gas Co.,
86 W. Va. 198, 103 S.E. 116 (1920), the Court again addressed a
lease involving an annual rental per well.
The rental bears no relation to the quantity
of gas contemplated or actually produced. It
was compensation fixed in advance of
production and without any definite knowledge
as to what the production would be. Hence,
the rental reserved was the same for wells of
light production and wells of heavy
production.
86 W. Va. at 202, 103 S.E. at 117 (emphasis supplied).
In McCutcheon v. Enon Oil & Gas Co., 102 W. Va. 345, 135
S.E. 238 (1926), the Court said of flat-rate oil and gas leases:
[T]he lease does not in terms say the well
must produce gas in 'paying quantities' and be
marketed. Having no market, the lessee had
the right to shut the gas in and pay the
stipulated price. It would be of little
concern to lessor what was done with the gas,
if he gets his payments.
102 W. Va. at 354, 135 S.E. at 241 (emphasis supplied). And in
Ketchum v. Charters Oil Co., 121 W. Va. 503, 506, 5 S.E.2d 414, 416
(1939), the Court distinguished a flat-rate lease from the "usual"
lease: "Unlike the usual oil and gas lease, production of oil and
gas in paying quantities is not expressly required for the
extension of the instant lease beyond the fixed term." (emphasis
in original)
A more recent recognition of the distinction between
flat-rate leases and production leases by this Court was in Goodwin
v. Wright, 163 W. Va. 264, 255 S.E.2d 924 (1979). In Goodwin, we
held in that opinion's first syllabus point, that "[t]he term
'production,' when used in a mineral lease as the basis for
continuation of the lease in force, means production in paying
quantities." In that opinion's second syllabus point, we held:
When a well is not producing in paying
quantities and no royalties or rentals are
being received by the lessors, these being
required by the terms of a lease as necessary
to its continuation, receipt by lessors of
free gas for domestic purposes from the well
does not constitute consideration sufficient
to keep lessors bound by the lease, nor does
it amount to 'production.'
In the case now before us, however, production in paying
quantities is not what is "required by the terms of [the] lease as
necessary to its continuation," as set forth above. Rather, the
type of lease involved in this case requires "flat" payments of
rental in the amount of $1200 per year, regardless of production.
The lease at issue in Goodwin was not a flat-rate lease,
and the Court indeed recognized this:
We are cited to McGraw Oil & Gas Co. v.
Kennedy, 65 W. Va. 595, 64 S.E. 1027 (1909).
A well was drilled and capped, and the
producer paid lessor the amount of rental
payments as if he had sold the gas. When
subsequent leases from the property owner
attempted to void the lease which was the
authority for the drilling, we held that the
lessee, paying $200 per year as the lease
called for, as rental on 'each gas well the
product from which is marketed and used off
the premises,' could hold the lease even if he
capped the well. Lessor's position was
intact. Obviously the decision is not useful
here, however.
We decided that a lease had not expired
by its terms, even though production was not
in paying quantities, in McCutcheon v. Enon
Oil & Gas Co., 102 W. Va. 345, 135 S.E. 238
(1926). [The suit was to cancel an oil and
gas lease that was for 10 years and as long
thereafter as oil or gas, or either of them,
was produced.] There was a royalty for gas of
$75 quarterly for each well from which gas was
marketed and used off the premises. There was
also a free gas clause and if a well was not
completed within one year, a delay rental
payment of $131.25 quarterly.
We found no expiration even though gas
was 'shut in' and both lessor and lessee were
aware of this when they agreed to the lease.
Lessor treated it as a producing well.
He used gas from it. Its production
capacity was gauged at 1,500,000 feet per
day; however, the lease does not in terms
say the well must produce gas in 'paying
quantities and be marketed. Having no
market, the lessee had the right to shut
the gas in and pay the stipulated price.
It would be of little concern to lessor
what was done with the gas, if he gets
his payments.['] [135 S.E. at 241]
Both cases upheld leases when there was
no paying production, but both lessors
received rental payments as though there was
paying production, and in the same amount.
163 W. Va. at 267 n. 3, 255 S.E.2d at 926 n. 3 (emphasis in
original).See footnote 5
The appellees, on the other hand, contend that the
distinction between the types of leases is inapposite. Rather, the
critical focus should be on the good faith of the lessee to produce
in paying quantities. See South Penn Oil Co. v. Snodgrass, 71 W.
Va. 438, 451-52, 76 S.E. 961, 967 (1912) ("The tests of duty and
right are diligence and good faith in almost all cases when the
terms, read in the light of the conditions and circumstances, will
permit their observance.") Furthermore, the appellees maintain
that the cases relied on by the appellant involve situations where
there was no market for the product.
Although the lack of a market factor may have been
present in some of those cases, based upon this Court's
interpretation of the opinions in that line of cases, there is no
indication that a lack of market is the dispositive factor.
Furthermore, it has been noted by a leading scholar on this state's
oil and gas law, in speaking of the above-quoted cases and their
relation to the market:
It may be noted that [McCutcheon] is in
accordance with the theory announced in the
McGraw case, in which the marketing provision
was construed as a condition for the benefit
of the lessee which he might waive. This view
seems to be the correct one, if the question
is approached from the standpoint of the law
of contracts. However, it must be remembered
that irrespective of which party has the power
to waive the condition, it is still a
condition not alone qualifying a promise, but
from the viewpoint of the law of real
property, also limiting the duration of a
vested estate. The estate ends if neither the
well rental is paid nor the gas marketed,
quite as effectively as a determinable fee
ends when the land ceases to be used for a
specified purpose. . . . Moreover, the McGraw
and the McCutcheon cases both purport to limit
the rule to situations where there is no
available market for the gas. But if, as said
in the latter case, it is of no concern to the
lessor so long as he receives his payments, by
parity of reasoning it would seem that the
lessee by tendering the rental might
arbitrarily shut in the well even though a
market is available (perhaps holding for
higher prices). No decision on this point has
been made.
Robert Tucker Donley, The Law of Coal, Oil & Gas in West Virginia
and Virginia § 70, at 88-89 (1951) (emphasis supplied).
The appellees also rely heavily on a case that they
assert the circuit court used as a "guide" in instructing the jury.
In Clifton v. Koontz, 325 S.W.2d 684, 690 (Tex. 1959), the Supreme
Court of Texas held that "the terms 'produced' and 'produced in
paying quantities' mean substantially the same thing." See Garcia
v.King, 164 S.W.2d 509 (Tex. 1942). The circuit court did, in
fact, follow this holding in its instruction to the jury.See footnote 6
The Texas Clifton case, however, is clearly contrary to
the long line of authority that has been established in this
jurisdiction and set forth herein, specifically, that where a flat-rate lease is involved, quantity of production is irrelevant to the
continuation of the lease. Moreover, Clifton is not controlling in
this jurisdiction. Consequently, it was erroneous for the circuit
court to rely on that case in instructing the jury on the question
of liability. Giving this instruction clearly constitutes
reversible error because it went to the heart of the case in
establishing liability on the part of the appellant.
Accordingly, we hold that if an oil and gas lease
contains a clause to continue the lease for a term "so long
thereafter as oil or gas is produced," but also provides for "flat-rate" rental payments, then quantity of production is not relevant
to the expiration of the term of the lease if such "flat-rate"
rental payments have been made by the lessee. Therefore, in a case
involving termination of such an oil and gas lease which provides
"flat-rate" rental payments, it is reversible error for a circuit
court to instruct the jury that the word "produced" in the lease
means "produced in paying quantities."
Inasmuch as the parties do not dispute that the $1200
minimum annual rental payments were made, there is no liability on
the appellant's part and the judgment of the circuit court is
reversed on this issue.
In 1933, as part of an investigation by counsel for the
Bruens, the appellant responded that no oil and very little gas had
been produced. The appellant also noted the fixed rental rate.
In 1941, the Bruens ceased cashing the $1200 rental
payment checks.
In 1954, the Bruens, through counsel, again indicated
their dissatisfaction with the lease.
In 1956, by agreement between the parties, the Bruens
could again cash the rental checks without prejudice to their
rights and remedies under the lease.
In 1968, the Bruens again ceased cashing the rental payment checks.
Although the amended complaint alleged that the lease terminated as early as 1928, the Bruens' evidence, introduced by expert testimony, went back to 1926.
The Court instructs the jury that the
lease in question was for a period of ten (10)
years beginning in 1907, and for 'so long
thereafter as oil or gas is produced from the
land leased and royalty and rentals paid by
lessee therefor' and that, under law, the word
'produced' in an oil or gas lease means
'produced in paying quantities.'
(a) The Legislature hereby finds and
declares:
(1) That a significant portion of the oil
and gas underlying this state is subject to
development pursuant to leases or other
continuing contractual agreements wherein the
owners of such oil and gas are paid upon a
royalty or rental basis known in the industry
as the annual flat well royalty basis, in
which the royalty is based solely on the
existence of a producing well, and thus is not
inherently related to the volume of the oil
and gas produced or marketed;
. . . .
(3) That a great portion, if not all, of
such leases or other continuing contracts
based upon or calling for an annual flat well
royalty, have been in existence for a great
many years and were entered into at a time
when the techniques by which oil and gas are
currently extracted, produced or marketed,
were not known or contemplated by the parties,
nor was it contemplated by the parties that
oil and gas would be recovered or extracted or
produced or marketed from the depths and
horizons currently being developed by the well
operators[.]
. . . .
(b) In the light of the foregoing
findings, the legislature hereby declares that
it is the policy of this state, to the extent
possible, to prevent the extraction,
production or marketing of oil or gas under a
lease or leases or other continuing contract
or contracts providing a flat well royalty or
any similar provisions for compensation to the
owner of the oil and gas in place, which is
not inherently related to the volume of oil or
gas produced or marketed, and toward these
ends, the legislature further declares that it
is the obligation of this state to prohibit
the issuance of any permit required by it for
the development of oil or gas where the right
to develop, extract, produce or market the
same is based upon such leases or other
continuing contractual agreements.
(emphasis supplied) Similarly, W. Va. Code, 36-4-9a [1979]
provides, in part:
There shall be a rebuttable legal
presumption that the failure of a person,
firm, corporation, partnership or association
to produce and sell or produce and use for its
own purpose for a period of greater than
twenty-four months, subsequent to the first
day of July, one thousand nine hundred
seventy-nine, oil and/or gas produced from
such leased premises constitutes an intention
to abandon any oil and/or gas well and oil
and/or gas well equipment situate on said
leased premises, including casing, rods,
tubing, pumps, motors, lines, tanks,
separators, and any other equipment used in
the production of any oil and/or gas from any
well or wells on said leasehold estate.
This rebuttable presumption shall not be created in instances (i) of leases for gas storage purposes, or (ii) where any shut-in royalty, flat rate well rental, delay rental, or other similar payment designed to keep an oil or gas lease in effect or to extend its term has been paid or tendered, or (iii) where the failure to produce and sell is the direct result of the interference or action of the
owner of such oil and/or gas or his subsequent
lessee or assignee.
(emphasis supplied) Perhaps these statutes reflect a legislative intent to recognize the characteristics of a flat-rate oil and gas lease. However, they are not necessarily dispositive, inasmuch as they are not at issue in this case.
The Court instructs the jury that 'paying quantities' means the quantity of gas sufficient to pay a profit over production expenses. The term 'production expenses' means those expenses incurred by a reasonable and prudent operator in the actual production
and maintenance of the well and the expenses
necessary for the lessee to comply with the
lease, including taxes and rentals to be paid
by the lessee under the terms of the lease.
The Court instructs the jury that the
lessee, United Fuel Gas Company, predecessor
to Columbia Gas Transmission Corporation, in
order to possess the lease beyond the initial
or primary term of ten (10) years, must have
been producing gas from a well or wells in
paying quantities. If you find from a
preponderance of the evidence that the well or
wells on the lease premises failed to produce
in paying quantities after the initial or
primary term of ten (10) years, then you must
find that the lease terminated at the time
when failure to produce in paying quantities
occurred.
We make no decision in this opinion as to whether these instructions are proper in any case involving an oil and gas lease. It is sufficient to note that they are not relevant to the type of lease in this case, because it is a flat-rate type of lease.