Opinion
5-29-1950
FEDERAL OIL CO. v. BROWER et al. Civ. 17365.
Marvin A. Freeman, Beverly Hills, for appellants. Reynolds, Painter & Cherniss, Thomas Reynolds, Los Angeles, for respondents.
FEDERAL OIL CO.
v.
BROWER et al.
May 29, 1950.
Rehearing Denied June 21, 1950.
Hearing Granted July 27, 1950. *
Marvin A. Freeman, Beverly Hills, for appellants.
Reynolds, Painter & Cherniss, Thomas Reynolds, Los Angeles, for respondents.
WHITE, Presiding Justice.
This is an appeal from a judgment declaring that respondents are the owners of a certain oil and gas overriding royalty interest and that appellants have no interest therein. The facts are not in dispute. The question assertedly presented is whether the right of respondents to receive a royalty on oil 'produced, saved, and/or sold from' a parcel of land includes the right to receive a royalty on oil recovered through a well located on the surface of such parcel but the producing interval of which well is located beneath adjacent land and entirely without the boundaries of such parcel.
In 1940 Ronald C. Smith and Security-First Company, as lessors, entered into an oil and gas lease with O. J. Rohde as lessee. This lease will be hereinafter referred to as the 'Smith lease'. By a partial assignment from Rohde, Federal Oil Company succeeded to the lessee's interest so far as it pertained to a parcel of land of approximately 16 1/2 acres, hereinafter referred to as the '16 1/2-acre parcel.' On February 18, 1941, Federal, by a written instrument entitled 'Overriding Royalty Interest', transferred to respondents' predecessors a 1- 1/3 royalty interest in 'the gross proceeds received from the sale of all of the gross oil which may be produced, saved, and/or sold at any time from' the 16 1/2-acre parcel. Thereafter this royalty interest was transferred to respondents. Federal drilled and is now operating five wells upon the property and is paying the prescribed royalty to respondents. The producing intervals of these wells are all within the boundaries of the 16 1/2-acre parcel.
On November 30, 1946, Ronald C. Smith and Security-First Company, the lessors in the 'Smith lease', entered into agreements whereby they leased to Hilo Oil Company a 100-foot strip of land included within and part of the 16 1/2-acre parcel for the purpose of using such land for the surface installation of oil wells to be slantdrilled northwesterly to points outside the boundaries of the 'Smith lease' (and hence outside the 16 1/2-acre parcel) and underlying the city of Culver City, so that oil migh be extracted from the Culver City land pursuant to a subsurface lease given by Culver City to Hilo Oil Company. The lease from Culver City and the lease of the 100-foot strip from Smith and Security-First Company were assigned to Federal. Federal slant-drilled a well from surface installations on the 100-foot strip parcel into the adjacent land of Culver City. This well, known as 'Culver City No. 1', leaves the land embraced in the original Smith lease before reaching any productive zone. Its producing interval is located entirely under and within the lands described in the Culver City lease.
In assigning its Culver City lease to Federal, Hilo reserved a royalty of 16 1/2% of all oil, etc. produced, saved and sold from any wells bottomed under the land described in the Culver City lease. The assignment contained the further provision that Hillo should indemnify and hold Federal harmless from any claims to the Culver City oil based upon ownership of any royalty interest in the oil produced pursuant to the original Smith lease.
The complaint filed in this action by Federal Oil Company set forth the foregoing facts, and alleged that the defendants (and appellants) Hilo Oil Company, the individual partners thereof, and certain assignees thereof, have demanded that plaintiff pay to them the aggregate of 1- 1/3 per cent overriding royalty in the production of the Culver City No. 1 well and that plaintiff not pay such royalty to the other defendants, respondents herein.
Each group of defendants, i. e., those claiming as overriding royalty owners from Federal under the Rohde assignment of a portion of the original Smith lease, and those claiming by virtue of the royalty reserved by Hilo in its assignment to Federal of the 100-foot strip lease, filed answers pursuant to a stipulation that the two groups of defendants 'interplead' their respective claims. It was further stipulated:
'That all of the defendants and plaintiff agree that the final adjudication between the said two groups of defendants as to which of the said two groups of defendants is entitled to the said aggregate of one and one-third per cent (1- 1/3%) overriding royalty interest and to the monies theretofore accrued and thereafter accruing in pursuance thereof shall for all purposes have the same legal effect as an adjudication between plaintiff and the said two groups of defendants, and shall be deemed to be such an adjudication between plaintiff and each of the said two groups of defendants, and between plaintiff and both of the two groups of defendants.'
The matter was presented to the trial court upon a written 'stipulation of facts' incorporating as exhibits the documents hereinbefore and hereinafter referred to.
Appellants state the question presented to be as follows:
'Does an overriding royalty interest in oil, gas and hydrocarbons produced, saved and/or sold from Blackacre entitle the grantee thereunder to that interest in oil, gas and hydrocardons extracted from the reservoir rock under and within the confines of Whiteacre solely by reason of the fact that the surface installations of the well so extracting said substances are located on Blackacre, when said oil, gas and hydrocarbons are extracted frm Whiteacre by means of a well 'whipstocked' or 'slant-drilled' from said surface installations located on Blackacre so that said well's productive interval or perforated area is located entirely under and within Whiteacre; and more particularly when the lease under which is created said overriding royalty interest in Blackacre expressly provides (1) that all wells drilled thereunder shall be bottomed under and within the confines of Blackacre and (2) that lessee shall not use that portion of the surface of Blackacre subsequently granted by lessor for the surface installation of said whipstocked well.'
The argument of appellants is that the oil must be deemed to be 'produced from' the lands in which the 'producing interval' of the well is located, irrespective of the location of the surface of the well; that by its decision the trial court has given to respondents an interest which no predecessor in title granted or could have granted, since the original lessors had no right or interest in oil under adjacent lands and no right to extract the same.
Respondents agree that the sole question is 'whether the 1- 1/3% royalty interest * * * should be awarded to the appellants or to the respondents.' They base their claim to the disputed interest upon the following points: 1. That the royalty owners are entitled to protection against drainage of the oil pool underneath the 16 1/2-acre parcel. 2. That the operating lessee (Federal) is a trustee for the royalty holders. 3. Under the express language of the assignment the royalty holders are entitled to their share of the proceeds derived from the sale of all oil captured and sold on the 16 1/2-acre parcel. 4. The lessee is bound by an express covenant in the assignment to 'protect' the royalty holders. 5. To deprive the royalty holders of their interest would open the door to fraud.
Appellants quote extensively from Alphonzo E. Bell Corp. v. Bell View Oil Syndicate, 24 Cal.App.2d 597, 76 P.2d 167 (hearing denied by Supreme Court), wherein it was held that the common right of surface owners to capture oil does not include the right to trespass upon neighboring lands by means of a slant-drilled well and extract oil by means of a producing interval located beneath the neighboring land. It is then argued that since neither lessor nor lessee had such right when the royalty assignments were made to respondents' predecessors, they could not have granted nor intended to grant an interest in oil obtained by means of a slant-drilled well. It follows, argue appellants, that the royalty instrument creating an interest in oil produced, saved or sold from the land should not be deemed to create an interest in oil extracted from beneath adjacent land. Concededly, 'The common supply, or common right, or correlative right is expressly limited to the right of each individual surface owner to take from the oil strata lying beneath his properties, oil, gas, and other hydrocarbons intercepted by wells sunk beneath his own property, in such a manner as not to commit waste.' Alphonzo E. Bell Corp. v. Bell View Oil Syndicate, supra, 24 Cal.App.2d page 599, 76 P.2d page 174.
We are of the view that appellants' argument, however logical it might be considered to be so far as concerns the usual meaning of the words 'produced * * * from', is inapplicable to the peculiar situation created by the transactions of the lessor and lessee as disclosed by the instruments in this particular case.
The interest created in any case depends upon the intention of the parties, Callahan v. Martin, 3 Cal.2d 110, 43 P.2d 788, 101 A.L.R. 871; La Laguna Ranch Co. v. Dodge, 18 Cal.2d 132, 135, 138, 114 P.2d 351, 135 A.L.R. 546. The assignment of the 'overriding royalty' by Federal Oil Company to respondents' predecessors reads, so far as here pertinent, as follows:
'* * * does hereby sell, set over, transfer, assign and convey * * * the total amount of one and one-third (1- 1/3%) per cent * * * of the gross proceeds received from the sale of all of the gross oil which may be produced, saved, and/or sold at any time from the real property * * * held under lease by Assignor by virtue of a partial assignment of an original oil and gas lease (the Smith lease) * * *
'To have and to hold forever unto the assignee so long as oil and gas and/or other hydrocarbon substances shall be produced, in paying quantities from said well (sic) upon the aforesaid premises and under the aforesaid lease, or any modification or substitution therefor. * * *
'The assignor will not sell, encumber, assign or convey its estate, or any part thereof or any interest therein without first making adequate provision for the protection of the interest holders and submitting a copy of the assignment, conveyance or other instrument utilized for such purpose to the Division of Corporations of the State of California.' (Emphasis added).
The instrument created an interest similar to that involved in La Laguna Ranch Co. v. Dodge, supra, where it was said, 18 Cal.2d page 138, 114 P.2d page 354: 'Similarly, while the operating lessee may assign an interest in his profit a prendre which is intended to make the assignee a tenant in common of his entire leasehold estate, he may, on the other hand, intend to retain in himself the operating rights contained in the profit a prendre, conveying to the assignee merely a fractional share of the oil and gas produced in the form of an overriding royalty.' Such interest is not unlimited, but is limited to the duration of the existing lease. But here we find express language that the interest of the assignee is to endure so long as oil is produced upon 'the aforesaid premises' and under 'the aforesaid lease', or any 'modification or substitution.'
Turning now to the original Smith lease, we find the following provision:
'The possession by Lessee of said land shall be sole and exclusive, excepting only that the Lessor reserves the right to occupy said land or to lease the same for agricultural, horticultural or grazing uses, which uses shall be carried on subject to, and with no interference with, the rights or operations of the Lessee hereunder.'
The lessor granted the exclusive right to occupancy of the surface for the purpose of drilling for and recovering oil. He reserved no interest in the surface for such purpose. We cannot agree with the assumption by appellant that the agreement of the lessee to bottom all wells within the tract and the agreement that lessee could not drill within 100 feet of Jefferson or Duquesne Avenues without the consent of the lessor, resulted in a reservation by the lessor of an interest entitling him to use any portion of the surface for the purpose of drilling for oil on adjacent lands or to lease the unused 100-foot strip of the surface for that purpose. Had such been the intention of the parties, apt language could have been used. The lessee was not excluded from the 100-foot strip; he could use it if necessary in his operations, but could not place a well thereon. The lessor's right to occupy it was solely for agricultural, horticultural or grazing purposes and subject to the lessees' needs.
Thus we see that by the second lease, of the 100-foot strip, the lessors purported to convey an estate or interest which they did not own. To avoid this difficulty they secured from Federal, the lessee of the entire surface, a 'consent' to the leasing of the 100-foot strip. Then, through instruments executed by Hilo Oil Company, Federal acquired the lease of the 100-foot strip as well as the right to extract oil from beneath the Culver City lands. The net result is nothing more than a 'modification' of or 'substitution' for the original lease pursuant to which the respondents were entitled to receive a royalty. The lessee is bringing oil to the surface of the land pursuant to a modified lease, to which, by the terms of the royalty assignment, the respondents' interest attaches.
The owner of the ground owned the right to exploit the surface of his land for the production of oil. While he had no interest in oil at rest under, or seeping through, adjacent lands, he did have the sole right to exploit his own surface for the purpose of lawfully reducing oil to possession. When he leased the land, he parted with this right, reserving to himself only the right to use the surface for agricultural purposes, and that subordinately to the needs of the lessee. This entire right, to use the surface to reduce oil to possession since it was not reserved, must have passed to the lessee. The lessee, who was entitled to the exclusive possession of the surface (subject only to agricultural rights, which in turn were subject to his needs) consented to what amounted to no more than a modification of his lease whereby (by means of conveyances simultaneously executed) he was granted permission to exploit the surface for the purpose of removing oil from beneath adjacent lands. Prior to this, and before he acquired such right, he could exclude the lessor and all others from exercising the same.
We hold, therefore, that under the instruments and the facts here presented, respondents are entitled to their share in any oil lawfully acquired by Federal through drilling operations conducted upon the surface of the leased lands. The objection made by appellants that whatever the rights of the respondent royalty owners may be, they are not entitled to be protected by giving them a royalty in oil belonging to somebody else, is answered by the statement that the royalty rights do not arise by reason of where the producing interval of the well is located, but by reason of the fact that it belongs to respondents' assignor, Federal Oil Company, and was produced through drilling operations within the boundaries of the Smith lease. It is not being taken from appellants, the Hilo Oil Company partners. Their loss results from their contract to indemnify Federal Oil Company against the claims of respondents.
For the reasons stated, the judgment is affirmed.
DORAN and DRAPEAU, JJ., concur. --------------- * Subsequent opinion 224 P.2d 4.