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Bi-county Properties v. Wampler

OPINION FILED JUNE 22, 1978.

BI-COUNTY PROPERTIES, PLAINTIFF-APPELLANT,

v.

WILLARD R. WAMPLER, JR., ET AL., DEFENDANTS-APPELLEES. — (ASHLAND OIL, INC., DEFENDANT-APPELLEE.)



APPEAL from the Circuit Court of Wayne County; the Hon. HARRY L. ZIEGLER, Judge, presiding.

MR. JUSTICE GEORGE J. MORAN DELIVERED THE OPINION OF THE COURT:

Plaintiff Bi-County Properties appeals from a decree of the Circuit Court of Wayne County entered in favor of Willard R. Wampler, Jr., and Laura J. Wampler on their counterclaim for a declaratory judgment regarding the interpretation of an oil and gas lease.

Plaintiff instituted the action by filing suit seeking a declaratory judgment as to the interpretation to be given to language in an oil and gas lease reserving an overriding royalty in the assignors. The defendants filed a counterclaim also seeking a declaratory judgment as to the meaning of the contract. The issues were submitted to the court on a pretrial stipulation as to the evidence, and judgment was rendered for the defendants. Ashland Oil Company, the purchaser of the crude oil from the land operated by the plaintiff, was also joined as a defendant since it occupied the position of stakeholder of the monies which both parties claimed. Ashland Oil is not a party to the appeal.

The land to which the oil and gas lease refers is known as the Weaver Lease. In 1937, Sarah M. Weaver executed an oil and gas lease to Guy M. Wampler for 40 acres of land in Wayne County. Laura Wampler and Willard R. Wampler later acquired a portion of this interest. These rights were assigned to Dee Miller by the three defendants in 1944 with the assignors reserving an overriding royalty interest in the oil produced. Under this reservation, the assignor-defendants were to receive one-eighth of the oil produced from the lands if the average daily production equaled or exceeded an average of 40 barrels of oil a day measured over successive monthly periods. If the production fell below a 40-barrel-perday average, the royalty paid would drop to one-sixteenth of the oil produced. The reservation in the contract provided:

"It is also understood and agreed that as a further consideration for this Assignment, said Assignee binds and obligates himself, his heirs, successors and assigns:

1. Upon the discovery of oil on said premises, to deliver to the credit of said Assignors, in equal parts, or to their respective successors or Assigns, free of all development, equipment, operating and marketing costs and expenses, in the pipeline or storage tanks to which the well or wells on said premises may be connected, an excess or graduated overriding royalty as follows:

(a) The equal 1/8th part or portion of all oil produced, saved, and marketed from said premises so long as the daily average production from all wells on said premises for each succeeding calendar month equals or exceeds an average of 40 barrels per day; or,

(b) The equal 1/16th part or portion of all oil produced, saved and marketed from said premises when the daily average production, from all wells on said premises for a calendar month is less than an average of 40 barrels per day."

The working interest assigned to Dee Miller was further transferred until, in 1960, the lease interest was separated into two portions. F.C. Barkley was assigned the working interest in the lease below the base of the McCloskey formation with further reservation of an interest in royalties retained by the assignor. The working interest in the lease as to formations below the McCloskey formation eventually rested in the plaintiff, Bi-County Properties. Two producing wells have been established under this lease. The oil obtained under this lease is purchased by Ashland Oil Company which pays the respective parties their proportionate working or royalty interest. Both the plaintiff and the defendants signed a division order with Ashland Oil Company in 1971 which set forth the respective portions each party was to receive under the prior lease agreements.

The working interest in the lease with regard to the property above the McCloskey formation was assigned in 1965. The assignees of the interest in the lease as to the land above the formation joined in the execution of the Johnsonville South Unitization Agreement in 1967. The unitization agreement provided for secondary recovery of oil from the land above the McCloskey formation as well as other surrounding land. It did not include the formation lying below the McCloskey formation. The defendants did not sign the unitization agreement.

The percentage of participation in the recovery under the unitization agreement was fixed at 20.529187% for the land above the McCloskey formation. The production under the unitization agreement was operated by Texaco, Inc. Texaco paid the defendants their overriding royalty interest on the basis of the production allocated to the land above the formation even though the defendants had not signed the unitization agreement. The defendants accepted the payments.

The defendants also accepted payments from Ashland Oil for their interest in the production zones beneath the McCloskey formation according to the division order executed by the plaintiff and the defendants. This arrangement lasted from December 1, 1971, the date of the execution of the division order until October 1, 1974. On that date, the defendants notified Ashland Oil of their claim that their overriding royalty interest should be based on the actual production by the Bi-County Properties wells together with the production allocated to the land above the McCloskey formation under the unitization agreement.

If the allocated production under the unitization agreement is added to the actual production from the land below the McCloskey formation, the average daily production measured on a monthly basis frequently exceeded 40 barrels a day. Under the terms of the 1944 assignment, the defendants would be entitled to receive a one-eighth overriding royalty interest for these periods rather than a one-sixteenth overriding royalty interest. During the period of the unitization agreement, Texaco has performed tests on the property above the McCloskey formation. These tests were conducted on a fairly regular monthly basis. On a certain day each month, the tests were conducted to determine the production from the land. The results were extrapolated to a 24-hour period to yield a calculated daily production. The parties stipulated that if these results were considered, the combined production under the two leases would not exceed an average of 40 barrels per day measured on a monthly basis. The plaintiff does not contend that the tests accurately measure the actual production of oil from the land.

On appeal, Bi-County Properties contends that the phrase "produced, saved, and marketed" in the 1944 assignment refers to the natural producing ability of the lands rather than to the allocated production under the unitization agreement. In addition, the plaintiff contends that the execution of the division order with Ashland Oil and acceptance of payments thereunder constitutes a ...


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