Yzaguirre v. KCS Resources, Inc.

Tomas Yzaguirre and other landowners (plaintiffs) granted oil and gas leases to the predecessors of KCS Resources (KCS) (defendant). The lease stated that royalties for gas sold off the premises of the wells would be based on market value. Royalties for gas sold at the wells were based on the amount realized. KCS then entered into a gas-purchase agreement with a pipeline company. The purchase agreement specified that the point of sale was to be a processing plant several miles away from the leased property. Thus, the market-value royalty clause in the agreement between Yzaguirre and KCS was triggered. KCS paid market-value royalties to Yzaguirre. However, KCS’s agreement with the pipeline company was for a higher amount than the prevailing market value. Yzaguirre and the other landowners argued that they were owed royalties based on the actual sales proceeds, not on the prevailing market price. Yzaguirre also argued that by not paying royalties based on the proceeds received under the sales agreement, KCS breached its implied covenant to reasonably market the oil and gas to obtain the best price for the benefit of the royalty owner. Finally, Yzaguirre argued that the price KCS received from the pipeline company was relevant to the determination of market value. The trial court granted summary judgment in favor of KCS. The appeals court affirmed. Yzaguirre then appealed to the state supreme court.