Archer County v. Webb

Dorothy Scarbauer and others obtained by deed an interest in oil and gas royalties on a parcel of land for a term of 15 years “or so long as oil or gas shall be produced from said premises, or any part thereof in commercially paying quantities.” The deed provided that if the lands were not producing oil or gas after 15 years, the conveyance would expire. The initial conveyor was Margaret Shannon. The conveyance occurred in 1929. When Shannon died, the parcel of land passed by will to C.R. Webb and others (defendants), as trustees of Shannon’s estate. In 1940, the defendants leased oil and gas rights on the property to R.G. Carr, who assigned the lease to Phillips Petroleum Company (Phillips) and Fred Turner. The lease had a ten-year term, but could be extended by either production or by payment of a shut-in royalty. Specifically, the lease stated that upon the payment of the shut-in royalty, gas will be considered produced “within the meaning of paragraph 2 hereof.” In the years that Phillips and Turner’s well did not produce, they paid the shut-in royalties to the defendants. Meanwhile, after the 15-year term in the original deed expired, Archer County and others (plaintiffs), as trustees for Scarbauer, brought suit, seeking a declaratory judgment that Scarbauer’s royalty interest was still in effect on account of the shut-in royalty payments made under the subsequent lease. The trial court held that the Phillips lease and related shut-in royalty payments extended the term of Scarbauer’s royalty interest. The Texas Court of Civil Appeals reversed. The plaintiffs appealed.