Yzaguirre v. Kcs Resources, Inc.

53 S.W.3d 368 (2001)

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Nature of the Case

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Facts

In 1973, D or their predecessors in interest granted oil and gas leases to the predecessor of P. The leases include a bifurcated royalty clause, providing that the royalty for gas sold at the wells is based on the 'amount realized,' while the royalty for gas sold off the premises is based on 'market value.' n 1979, P entered into a 20-year gas purchase agreement (GPA) with Tennessee Gas Pipeline Co., under which Tennessee agreed to purchase gas at a set price from the leases. The GPA specified that the point of sale was to be a processing plant several miles away from the leased property. The GPA sales triggered the clause in the oil and gas leases that obligated P to pay a market-value royalty on gas sold off the premises. For many years, gas production from the leases was minimal, but large production resulted after the Bob West field was discovered in 1990. Automatic price escalations in the GPA caused the GPA price to far exceed the market value of the gas. Eventually, P intervened in a suit seeking a declaration as to what payments were due under the lease. Ds' counterclaimed against P with a variety of fraud and contract claims. P moved for summary judgment that it owed royalty payments based only on the value of the gas on the open market. The district court granted P's motion for partial summary judgment, leaving only the determination of market value for trial. Ds' expert proposed to testify that the price P received under the GPA was also the market value of the gas. The court excluded this testimony because the GPA price was not a comparable sale that showed market value. The court rendered a final judgment in favor of P. The court of appeals affirmed. Ds now appeal to this Court on issues of venue, the measure of the gas royalties, and the admissibility of sales made under the GPA to show market value. Ds contend that producers have always based 'market-value' royalty payments on actual sales proceeds so that the leases already require P to pay royalties based on the GPA price.