Westland Oil Development Corporation v. Gulf Oil Corporation

Facts

Mobil Oil Corporation owned oil and gas leases covering twenty-nine sections. The six sections comprising the subject matter of this suit were a part of those twenty-nine sections. On August 4, 1966, Mobil and P entered into a farmout agreement. The farmout agreement covered, among others, sections 19, 23 and 24. The agreement provided that at such time as P complied with its drilling obligations and completed a producing well, it would be entitled to receive an assignment of one-half of Mobil's interest in those sections. P was obligated to commence a wildcat well by September 1, 1966. P sought more time, and Mobil granted an extension of time to December 1, 1966, in a letter dated August 29, 1966. C & K became interested in taking over P's obligations under the Mobil/P farmout agreement. The agreement made to accomplish this was a November 15, 1966 letter of agreement. C & K assumed all of the obligations imposed by the Mobil/P farmout agreement, agreed to pay P $50,000.00 in cash, and assigned to P a 1/16 of 8/8 overriding royalty interest on any acreage earned from Mobil, 1/32 of the working interest obtained from Mobil under the farmout agreement, and a production payment of $150,000.00 payable out of the production from the test well. The November 15, 1966, agreement contained an area of mutual interest agreement. In an area of mutual interest agreement, the parties attempt to describe a geographic area within which they agree to share certain additional leases acquired by any of them in the future. This necessarily contemplates that oil and gas leasehold interests will be conveyed. An area of mutual interest agreement is in the nature of a contract to convey interests in oil and gas leases. The November 15, 1966, agreement contained an area of mutual interest agreement. In an area of mutual interest agreement, the parties attempt to describe a geographic area within which they agree to share certain additional leases acquired by any of them in the future. This necessarily contemplates that oil and gas leasehold interests will be conveyed. An area of mutual interest agreement is in the nature of a contract to convey interests in oil and gas leases. The mutual interest agreement reads as follows: 5. If any of the parties hereto, their representatives or assigns, acquire any additional leasehold interests affecting any of the lands covered by said farmout agreement, or any additional interest from Mobil Oil Corporation under lands in the area of the farmout acreage, such shall be subject to the terms and provisions of this agreement; provided, however that in no event shall the owners of the working interest under any portion of such acreage be entitled to less than 75% working interest leases. P seeks to enforce paragraph 5 against D. C & K included several other investors in the farmout well. It was completed on January 23, 1968. The well was marginal but earned the acreage. By assignment dated March 7, 1968, Mobil conveyed to C & K, Union Texas as the operator, and the other investors in the well, one-half of its leasehold interests in the farmout block, which included the leases covering sections 19, 23, and 24. This assignment provided that as to all the lands and depths assigned, with one exception, the assignment would be subject to all the provisions of a certain operating agreement dated March 1, 1968. The precise language of that assignment was as follows: 'This Assignment is made without warranty of title, either express or implied. In addition, as to all the lands and depths herein assigned (except as to said Section 18), this Assignment shall be subject to all the provisions of that certain Operating Agreement dated March 1, 1968, by and between Assignor and Assignee. The provisions hereof shall be binding upon, and shall inure to the benefit of, the parties hereto and their respective heirs, devisees, legal representatives, successors, and assigns.' The March 7, 1968, assignment is the only instrument mentioned thus far that was recorded. It was filed on May 16, 1968. The March 1, 1968, operating agreement was executed by Mobil, C & K, Union Texas, and the other owners of the interests in the six sections of land described in the Mobil/P farmout agreement. It stated: ' B. This Agreement shall supersede and replace that certain Operating Agreement attached as Exhibit 'A' to the said Farmout Letter Agreement dated August 4, 1966, between Mobil Oil Corporation and Westland Oil Development Corporation. In the event of any conflict between this Contract and the Farmout Letter Agreement dated August 4, 1966, between Mobil Oil Corporation and Westland Oil Development Corporation as amended by letter dated August 29, 1966, and November 11, 1966, and a Letter Agreement between Chambers and Kennedy and Westland Oil Development Corporation and L. C. Kung dated November 15, 1966, then such prior agreements shall prevail over this Agreement.' The operating agreement also stated: 'C. Exhibit 'A' lists all of the parties, and their respective percentage or fractional interests under this Agreement. Such interests are specifically subject to all terms, conditions, and reservations set forth in that Farmout Agreement Letter dated August 4, 1966, between Mobil Oil Corporation and P, as amended, and that certain Assignment dated March 7, 1968, from Mobil Oil Corporation to C. Fred Chambers and W. D. Kennedy and Union Texas Petroleum.' By letter dated April 18, 1972, Mobil entered into a farmout agreement with Hanson wherein Mobil agreed that if Hanson commenced a test well on Section 25, Block 49, to a depth sufficient to test the Ellenberger formation and completed it as a producer, Mobil would assign all of its leasehold rights below a depth of 15,000 feet in section 25, and an undivided 60% of its leasehold rights in sections 19 and 30, Block 48, and Sections 23, 24, and 26, Block 49. Sections 19, 23, and 24 were the three southernmost sections involved in the Mobil/P farmout agreement. Sections 25, 26, and 30 abut those three sections to the south. The farmout agreement with Hanson stated that the lands and leases covering sections 19, 23, and 24 were covered by the March 1, 1968, operating agreement between Mobil, C & K, and Union Texas and that any interest earned by Hanson from Mobil would be subject to that agreement. Hanson then assigned this farmout agreement to D and Superior. Hanson also approached C & K, Union Texas, and their other partners, and obtained from them farmouts similar to the one received from Mobil. These farmouts covered part of their interests in leases covering sections 19, 23, and 24 which were earned pursuant to the Mobil/P farmout agreement and the November 15, 1966, letter agreement. Most of these farmout agreements refer to the March 1, 1968, operating agreement. Hanson also assigned these farmout agreements to D and Superior. In 1972, D and Superior drilled the test well as required by the Hanson farmout agreements. This well was completed as a large gas producer. D and Superior thereby earned the acreage under these farmout agreements, and the earned leasehold estates were assigned directly to Dand Superior. The assignment from Mobil was dated May 22, 1973, and was expressly made subject to the March 1, 1968, operating agreement. P filed suit and sought a declaratory judgment that the November 15, 1966, letter agreement was valid and applied to the interests acquired by P and Superior from Mobil, and would cover any acreage so acquired. P moved for summary judgment. P contended that P and Superior were on notice of the November 15, 1966, letter agreement, and that, by references made therein to other existing instruments, their interests acquired under the letter agreement covered the interest acquired by P and Superior from Mobil. The trial court granted P's motion for summary judgment and declared the November 15, 1966, letter agreement enforceable as to the interests and acreage acquired by P and Superior from Mobil. D and Superior opposed the motion for summary judgment on the basis that they were innocent purchasers for value and without notice of the equitable claim of P. P was required to prove as a matter of law that D and Superior were on notice of its equitable claim to the leases in question. D appealed. The court of appeals held that a question of fact existed as to whether D and Superior, as reasonable purchasers, would have been placed on the duty to conduct a complete inquiry of the operating agreement by the reference to it in their assignment from Mobil. The court believed that the normal function of an operating agreement was to define and control the development operations of a certain tract of land, and not to affect title to property. Thus, a question of fact existed as to what a reasonable purchaser would have done under the circumstances. P appealed. 

Issues

Rule of Law

Holding and Decision

Legal Analysis

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