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C. L. THORNHILL, ET AL. v. SYSTEM FUELS

APRIL 06, 1988

C. L. THORNHILL, ET AL.
v.
SYSTEM FUELS, INC., ET AL.



ON PETITION FOR REHEARING

EN BANC.

HAWKINS, PRESIDING JUSTICE, FOR THE COURT:

The petition for rehearing is denied. The original opinion is modified in that Harris v. Griffith, 210 So. 2d 629 (Miss. 1968), insofar as it conflicts with our holding in this case, is overruled.

 C. L. Thornhill and others have appealed from a decree of the chancery court of Jefferson Davis County finding that a mineral conveyance to Thornhill in 1945 conveyed only a non-participating royalty interest rather than an undivided mineral interest of the minerals "in place." The only issue before us is a construction of this conveyance and determining which type interest was conveyed.

 Persuaded Thornhill acquired an undivided one-half mineral interest to all minerals, subject only to the right reserved by the grantors to the bonuses and delay rentals from oil and gas leases, we reverse and render judgment for the appellants.

 FACTS

 Hardy McLeod and Joseph McLeod owned the Northwest Quarter of the Southwest Quarter (NW-1/4 SW-1/4) of Section 30, Township 6 North, Range 17 West, in Jefferson Davis County. On September 9, 1944, the couple executed an oil, gas and mineral lease covering the land in favor of Frank Ryba. Thereafter, on May 14, 1945, the McLeods executed a mineral deed to C. L. Thornhill conveying an undivided one-half (1/2) interest in the minerals. The deed to Thornhill appears on a standard "Form R-101 Mineral Right and Royalty Transfer" instrument. On the face of this deed was typed:

 It is the intention of the grantors to convey, and they do hereby convey, twenty (20) full mineral acres of land of said tract.

 Non-participating as to present or future lease rentals or bonuses.

 A copy of the conveyance as it appears in the public record is attached as an appendix.

 On July 28, 1948, four years after the mineral conveyance to him, Thornhill filed an application for ad valorem tax exemption on his mineral interest acquired from the McLeods. Paragraph (4) of the printed form states: "Fractional interest for which exemption is applied and nature of such interest: . . ." Following this there is

 typed "1/2 Royalty."

 After Thornhill received his interest, both Thornhill and the McLeods executed numerous instruments conveying fractional interests in the minerals and oil and gas leases. None of these conveyances are important to the issue before us.

 On December 22, 1979, appellee System Fuels, Inc., spudded the A. M. Speights 30-13 Well on a 160-acre unit encompassing this forty acres. The Speights Well began producing oil on March 20, 1981. On November 11, 1980, System Fuels spudded the gas unit 30-12 on the tract, which began producing on February 6, 1981.

 C. L. Thornhill and those claiming through him, the appellants here, filed suit in the chancery court alleging the McLeods, by the instrument in question, conveyed an undivided one-half mineral interest in all minerals in place, subject only to the reserved right of the grantors (as to such undivided one-half interest conveyed) to receive all bonuses and delay rentals from the oil and gas lease in effect when the instrument to Thornhill was executed, as well as to all future oil and gas leases. The appellees, System Fuels, Inc., and others, answered, denying such ownership, and claiming that all Thornhill acquired by such conveyance was a non-participating royalty interest in the oil and gas produced, which carried with it no right to execute oil and gas leases on the land.

 The chancellor found the conveyance to be a nonparticipating royalty interest only, and entered a decree in favor of appellees. Hence this appeal, with the sole question before us: Was this a mineral interest conveyance, or a non-participating royalty interest?

 LAW

 In Mississippi we have two basic types of ownership of interests in minerals.

 First, by far the most common way the holder of an interest in minerals obtains his interest is either from a reservation of or a conveyance of a fractional interest in the minerals. Such a reservation or conveyance simply creates a tenancy in common between the parties as to the minerals. Thus, if A reserves an undivided one-half interest in the minerals in his deed conveying Blackacre to B, A and B are tenants in common as to the minerals. Also, if X by a mineral deed conveys an undivided one-half interest of

 Blackacre's minerals to Y, X and Y are also tenants in common as to the minerals. Both parties have an equal right to go upon the land and drill for or mine minerals. Both would have to sign an oil and gas lease in order for the lessee to get a good title to all the mineral interests in Blackacre and be authorized to drill. Each would be entitled to share equally in the bonuses paid for the oil and gas lease, as well as the delay rental payments made under such lease. Finally, in event of discovery of oil or gas as between the two, they would share equally in the royalty payments made under the oil and gas lease.

 It is also well settled that in such a mineral deed or reservation of the grantor may convey or reserve certain attributes of this mineral ownership. Thus, in a mineral deed the grantor may convey an undivided mineral interest, but reserve unto himself all bonuses or delay rentals, or both, as to any oil and gas lease. Mounger v. Pittman, 235 Miss. 85, 108 So. 2d 565 (1959), infra. Ford v. Jones, 226 Miss. 716, 85 So. 2d 215 (1956); Westbrook v. Ball, 222 Miss. 788, 77 So. 2d 274 (1955).

 Another type of mineral interest ownership is a royalty interest. This interest only becomes meaningful if there is a commercial production of oil and gas, at which time the royalty owner receives the agreed-upon fraction of the production. The owner of a royalty interest has no control or right of possession, and no obligation to the remaining mineral interest owners. And, unless or until oil or gas is produced commercially, no obligation of any kind is due him. A royalty interest does not share in the bonuses or delay rentals with the other mineral interest owners. He is not required to sign an oil and gas lease in order for the lessee to have the right to go upon the land and drill for oil and gas. His interest cannot be charged with any costs of drilling a well as it could be if he held a mineral interest as a tenant in common and his cotenant drilled a producing well. Lackey v. Corley, 295 So. 2d 762 (Miss. 1974).

 Generally, it is quite clear just what type of ownership the parties have. A conveyance or reservation of a royalty interest will, as a rule, specifically state that the royalty owner has no right to sign oil and gas leases, and that he cannot participate in bonuses or delay rentals, and cannot be charged with drilling or exploration costs.

 In this case we have a mineral deed which reserved to the grantors the rights to bonuses and delay rentals under any oil and gas leases. Did this reservation so change the character of the instrument from a mineral deed to transform

 it into a royalty conveyance? We hold it did not.

 In the evolution of oil and gas law in this state, our courts have endeavored to accommodate to the practical needs of the parties involved with the end in view of promoting the development of our natural oil and gas resources as efficiently as possible commensurate with fairness to all parties. The words used to denote mineral ownership have occasionally had fuzzy edges. We could, of course, hold that certain words have a definite, fixed meaning at all times and under all circumstances. Circumstances occasionally show, however, that the parties did not mean what the words standing alone might appear to mean. We therefore have had to look to surrounding circumstances in addition to relying upon the words themselves. In such instances we deemed it better to let the words remain just what they are: a strong, but not necessarily conclusive indication of what the parties meant.

 Here again we are confronted with the same problem. We are asked to determine whether an instrument is a mineral deed, conveyance of a "mineral estate" of the "minerals in place," or a conveyance of a "non-participating royalty interest" ? As stated in Hemingway, Law of Oil and Gas:

 In probably no other area of oil and gas law, than in cases involving the mineral-royalty distinction, can examples be found of courts, on behalf of befuddled litigants, benevolently and improperly granting reformation in the guise of a judgment for title.

 Section 2.7 (2nd Ed. 1983).

 The chancellor's problem in this case was a consequence of our decision in Harris v. Griffith, infra, wherein we benevolently took care of "befuddled litigants" to let their words accommodate what we thought the parties intended. Before discussing Harris v. Griffith, we ...


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