UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
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No. 91-6137
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IN THE MATTER OF: GHR ENERGY CORPORATION,
Debtor.
MEDALLION OIL COMPANY, ET AL.,
Appellants,
versus
TRANSAMERICAN NATURAL GAS
CORPORATION,
Appellee.
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Appeal from the United States District Court
for the Southern District of Texas
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(August 27, 1992)
Before BRIGHT1, JOLLY, and BARKSDALE, Circuit Judges.
BRIGHT, Senior Circuit Judge:
This is a case concerning overriding royalty interests granted
to Medallion Oil Company and H.S. Finkelstein [Medallion] on a
leasehold estate under a farmout agreement between TransAmerican
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Senior Circuit Judge of the Eighth Circuit, sitting by
designation.
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Natural Gas Corporation [TransAmerican] and El Paso Natural Gas
Company [El Paso].
Medallion appeals the district court's affirmance of the
bankruptcy court's grant of summary judgment, which determined that
Medallion's overriding royalty interests in the La Perla Ranch
leasehold estate did not survive the termination of the farmout
agreement between TransAmerican and El Paso.
In this appeal, Medallion challenges the bankruptcy court's
determination that: (1) Medallion's overriding royalties were
extinguished by the termination of the underlying farmout agreement
and leasehold interest; and (2) Medallion's overriding royalties
did not increase commensurate with the increased interest acquired
by TransAmerican in the La Perla Ranch. We affirm, but remand for
reformation of the bankruptcy court's order.
I. BACKGROUND
A. FACTUAL
In 1974, Medallion and Good Hope Refineries, Inc.,
TransAmerican's predecessor, entered into an agreement whereby
TransAmerican would assign to Medallion a one-sixteenth overriding
royalty interest in gas and oil production from mineral rights that
Medallion would assist TransAmerican in obtaining. In 1975,
TransAmerican and El Paso entered into a farmout agreement, for the
La Perla Ranch in Zapata County, Texas, under which El Paso granted
TransAmerican the right to explore and develop the La Perla Ranch
field and to obtain gas leases thereupon.
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In 1983, TransAmerican filed Chapter 11 bankruptcy. In order
to settle various disputes, TransAmerican and Medallion entered
into a settlement [Medallion settlement] in 1987, which recognized
a one-sixteenth overriding royalty for Medallion in the net
revenues from La Perla Ranch under the 1975 farmout agreement. The
settlement also granted Medallion a one and one-half percent
overriding royalty on production from certain interests owned by
TransAmerican, including the La Perla leasehold estate.
In 1990, TransAmerican and El Paso entered into a settlement
[El Paso settlement] of a dispute over a gas purchase agreement
that covered certain gas produced from La Perla Ranch. As part of
the settlement, TransAmerican terminated all prior agreements
between the two parties, including the 1975 farmout agreement and
all leases thereunder, and El Paso assigned all of its mineral
interest in La Perla Ranch to TransAmerican.
B. PROCEDURAL
This action arose during the course of TransAmerican's
bankruptcy proceeding, when Medallion filed a motion to compel
debtor's compliance with the Medallion settlement. In the motion
to compel, Medallion alleged that TransAmerican owed it increased
overriding royalties because TransAmerican had acquired the La
Perla Ranch mineral fee interest in the settlement with El Paso.
TransAmerican countered with the argument that it owed Medallion no
overriding royalties because the farmout agreement and leasehold
interest, upon which Medallion's overriding royalties were based,
had been terminated between TransAmerican and El Paso. Both sides
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filed motions for summary judgment. The bankruptcy court granted
summary judgment in TransAmerican's favor and the district court
affirmed its holding. This appeal followed.
II. DISCUSSION
Our review of a district court's grant of summary judgment is
plenary and we apply the same standard as the district court
applied. Lavespere v. Niagara Mach. & Tool Works, Inc., 910 F.2d
167, 177, reh'g denied, 902 F.2d 259 (5th Cir. 1990). Summary
judgment is proper only if there is no genuine issue as to any
material fact and TransAmerican is entitled to judgment as a matter
of law. Fed. R. Civ. P. 56(c), quoted in Celotex Corp. v. Catrett,
477 U.S. 317, 322 (1986). In reviewing the evidence, we must view
the facts and inferences in the light most favorable to Medallion.
Lavespere, 910 F.2d at 178.
On appeal, Medallion argues that the district court erred in
holding that its overriding royalties were extinguished by the
termination of the 1975 farmout agreement and underlying leasehold
estate between TransAmerican and El Paso. First, it contends that
when TransAmerican acquired the mineral fee rights, in effect,
TransAmerican's leasehold interest merged with El Paso's
reversionary interest. Thus, Medallion's overriding royalties in
the leasehold could not be wiped out because the concept of merger
should not operate to destroy Medallion's interests. In support of
its contentions, Medallion relies on portions of the settlement
between Medallion and TransAmerican. As part of the settlement,
TransAmerican
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agree[d] to assign and convey to [Medallion] an
overriding royalty interest of one and one-half percent
(1½%) of all oil, gas, other hydrocarbons, and all other
minerals . . . produced and saved from or attributed to
the interests owned by [TransAmerican] . . . as of April
23, 1987, at 12:01 a.m., in and to all . . . "Leases," .
. . "Agreements" and [] all other interests in land
. . ., in each case covering or consisting of land
situated in Webb and/or Zapata Counties, Texas, owned by
[TransAmerican] . . . as of April 23, 1987, at 12:01
a.m., and any increase in the quantity of interest
therein owned by [TransAmerican] . . . which is based
upon any additional or greater interests therein received
or realized by [TransAmerican] under reversions or other
terms of any contracts or agreements in existence as of
April 23, 1987, at 12:01 a.m. . . . .
Schedule A of the Supplement to Stipulation, at 1-2.
TransAmerican also agreed to
convey to [Medallion] . . . an overriding royalty
interest equal to one-sixteenth (1/16th) of the net
revenue interest earned, acquired or otherwise received,
and to be earned, acquired or otherwise received, by
[TransAmerican] . . . under the said Agreement of March
18, 1975 [the farmout agreement], with El Paso, as
supplemented and amended . . . .
Assignment of Overriding Royalty, Attachment to Schedule B of the
Supplement to Stipulation, at 4.
Both overriding royalties were subject to an extension and
renewal provision, stating that the overriding royalty
shall also apply, extend to and include each and every
renewal or extension of an oil and gas lease covered by
this Assignment which is acquired by [TransAmerican],
directly or indirectly, prior to or within one (1) year
of the expiration or termination of said oil and gas
lease.
Id. at 7; Assignment of Overriding Royalty, Attachment to Schedule
A of the Supplement to Stipulation, at 6.
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Also, both of Medallion's overriding royalty interests were
subject to the following clause, allowing TransAmerican to
terminate at will any of its underlying interests:
It is expressly agreed that operations, if any, on [the
lands covered hereby], and the extent and duration
thereof, as well as the preservation of such lease by
rental payments or otherwise, shall be solely at the will
of [TransAmerican].
Id.
Medallion's contention that the El Paso settlement resulted in
a merger of the leasehold and reversionary interests is
unpersuasive. TransAmerican terminated the leasehold estate and
farmout agreement and acquired the mineral fee estate, free and
clear of the leases. No leasehold remained in existence, thus,
there could be no merger.
"The term `overriding royalty' has a well defined meaning in
Texas. It is an interest which is carved out of, and constitutes
a part of, the working interest created by an oil and gas lease."
Gruss v. Cummins, 329 S.W.2d 496, 501 writ ref n r e (Tex. Civ.
App. 1959) (citations omitted). In the case at hand, TransAmerican
agreed "to pay an overriding royalty, a certain share of the
production, to [Medallion] as consideration for [its] services in
procuring a lease on certain lands." 3 W. L. Summers, The Law of
Oil and Gas § 554, at 625 (1958).
The bankruptcy court, in response to Medallion's claim that
its overriding royalties continued beyond the termination of the
underlying leasehold estate and farmout agreement, stated that:
An overriding royalty interest, because it is carved out
of a leasehold interest, is limited in duration to the
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leasehold interest's life, and the termination of that
leasehold estate extinguishes the overriding royalty.
Sunac Petroleum Corp. v. Parkes, 416 S.W.2d 798, 804,
[reh'g of cause overruled] (Tex. 1967); Keese v.
Continental Pipe Line Co., 235 F.2d 386, 388 (5th Cir.
1956) (unless instrument creating overriding or royalty
interest makes express provision to the contrary, the
interest continues or ceases with the leasehold estate
out of which it is carved and cannot survive termination
by surrender or release of the leasehold estate by the
owners).
The plain language of the Medallion Settlement shows
that Medallion's interest is not perpetuated should the
farmout agreement terminate. Nothing in the Medallion
Settlement provides that if TransAmerican acquires a fee
interest in the La Perla Ranch properties, Medallion's
overriding royalty interest would be redetermined to be
a non-participating royalty interest applicable to the
newly-acquired interest. In fact, the provisions relied
upon by the Medallion Group provide that Medallion's
overriding royalty interests relate only to
TransAmerican's interests in effect as of April 23, 1987,
at 12:01 a.m. As of that date, TransAmerican's working
interest consisted solely of leasehold interests. Not
until January 1, 1990 did TransAmerican's interest in the
La Perla Ranch become a mineral fee interest. Moreover,
the Medallion Group acknowledges in its Opposition to
TransAmerican's Motion for Summary Judgment that its
percentages were "carved out of TransAmerican's
properties." [citation omitted] Thus, Medallion's
overriding royalty interest, because it was carved out of
TransAmerican's leasehold interest, was extinguished when
TransAmerican's leasehold estate was terminated. See
Sunac and Keese, supra.
In addition, the Medallion Group expressly agreed
that the preservation of any lease under the Farmout
agreement was "solely at the will of [TransAmerican]."
This language clearly and specifically allows
TransAmerican to relinquish its obligation to pay the
Medallion Group the 1-1/2% and 1/16th overriding
royalties by merely terminating the lease.
Mem. Op. dated May 14, 1991, at 11-12.
We agree with this reasoning and adopt the bankruptcy court's
conclusion that Medallion's overriding royalties did not survive
the termination of the leasehold estate and farmout agreement.
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Second, Medallion argues that because gas production on La
Perla Ranch continued unabated, TransAmerican could not surrender
the leasehold interest and obliterate Medallion's overriding
royalties. In support of this contention it quotes clause two of
an oil and gas lease between El Paso and TransAmerican.
2. Subject to the other provisions herein
contained, this lease shall remain in force and effect
for so long thereafter as oil, gas, casinghead gasoline,
or any of them is produced from the above-described lands
or lands pooled therewith, or for so long as this lease
is extended under any subsequent provision hereof.
Exh. B to Exh. D to Affidavit, Bankruptcy Record No. 9541.
In the case of Fain & McGaha v. Biesel, 331 S.W.2d 346, 347-
48, writ ref n r e (Tex. Civ. App. 1960), the Court of Civil
Appeals of Texas held that, where the lease instrument authorized
release of any part of the leasehold, the leaseholder could
surrender a portion of the estate and terminate an outstanding
overriding royalty interest. The court noted that although
production of gas and oil on the leasehold never ceased, it did not
"believe this would be material or operate as a distinction in any
event." Id. at 347.
In the present case, clause twelve of the lease document
expressly authorized TransAmerican to surrender the leasehold.
12. Lessee, its successors and assigns, shall have
the right at any time to surrender this lease, in whole
or in part, to Lessor or its successors and assigns by
delivering or mailing a release thereof to the Lessor,
and by placing a release thereof of record in the county
in which said land is situated, thereupon, Lessee shall
be relieved from all obligations, express or implied, of
this agreement as to the acreage so surrendered.
Exh. B to Exh. D to Affidavit, Bankruptcy Record No. 9541.
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The cases cited by Medallion in support of its position are
inapposite because the leases therein did not allow the lessee to
surrender the lease at will. Further, as noted above in the case
at hand, TransAmerican's leasehold interest was to remain in effect
so long as production continued, however, the term of the lease was
subject to the operation of the other lease provisions, including
clause twelve allowing surrender of the lease. Therefore, we hold
that TransAmerican was free to terminate the leasehold estate,
where the lease language expressly authorized the surrender, and to
cut off Medallion's overriding royalties, despite the fact that gas
production never ceased on the leasehold.
Finally, Medallion claims that TransAmerican owes it increased
overriding royalties because TransAmerican expanded its interest by
acquiring El Paso's entire La Perla Ranch mineral fee interest. We
hold this argument to be without merit because Medallion's
overriding royalty interests depended upon the continued existence
of the leasehold estate and farmout agreement. The extension and
renewal clause in the settlement agreement provided coverage for
new or renewal leases acquired by TransAmerican, not for fee
interests. Also, Medallion failed to show that any contract in
existence on April 23, 1987 entitled TransAmerican to receive the
La Perla Ranch mineral fee in the El Paso settlement. In sum, the
termination of the leasehold estate and the farmout agreement
between TransAmerican and El Paso, with the consequent
extinguishment of Medallion's overriding royalties, precludes
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Medallion's claim to an increased overriding royalty. The parties
bargained for this result and we will not alter their bargain.
We AFFIRM the bankruptcy court's opinion and order, as adopted
by the district court's judgment and order; however, we REMAND for
reformation of the bankruptcy court's order to refine its coverage
to exclude interests in the La Perla Ranch, which were not at issue
in this case. In affirming, we note that, at oral argument,
Medallion expressly disclaimed reliance upon equitable relief and
chose to rely strictly upon the relevant contractual provisions.
AFFIRMED.2
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Medallion's Motion for Extraordinary Relief is hereby denied
as moot.
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