Court Opinion

ID: 9643521
Source: CourtListenerOpinion
Date Created: 2023-08-22 20:31:59.168289+00
Date Added: 2024-06-11T18:11:01.162277
License: Public Domain

POPE, Justice
(dissenting).
The former dissenting opinion is withdrawn and this one is substituted for it.
The majority refuses to allow the producing cotenants to recover legal interest upon the capital they advanced to drill sixteen producing wells in which the nonproducing cotenants proportionately participate. The basis for this result appears to be either that (1) the nonproducing cotenants did not agree to pay the cost for which reason there is no debt, or (2) costs are recoverable only in nonspeculative beneficial advances, and the drilling of oil wells is speculative, or (3) policy reasons, with respect to interest only, forbid reimbursement of costs to the active cotenant who took all the risk. We shall examine these reasons.
Petitioners Cox and Hamon own %2 of the oil, gas and other minerals in the tracts on which Davison drilled sixteen producing wells. The parties have agreed that Davi-son advanced $114,069.54 for the sole benefit of the passive cotenants as their share of the costs, and that the active cotenants vainly sought the joinder of the nonopera-tors in the drilling venture. Despite some disturbing language in the course of the majority opinion, it is the settled law of Texas that an active cotenant may recover out of the production his necessary and reasonable cost of producing and marketing the product. We arrive, therefore, at a statement of the narrow issue. Is interest on the capital advanced by the active co-tenants recoverable as an item of cost or expense? It is my judgment that the majority at once falls into error by posing a variant and misleading question. It asks: Are costs expended by the active cotenants for the benefit of the passive cotenants in the nature of debts? Concluding that they are not debts the majority holds that interest is not collectible. In my opinion, the issue is shifted from, “Is the interest on capital advanced a cost?” to “Is the capital advanced a debt?” The latter is not the real problem at all. The basis for the settled law that the passive cotenant must account to the active one upon successful completion of a. well, is that it restores to the active co-tenant the funds he expended in the venture, the costs he incurred for the benefit of all cotenants. The extent to which this rule applies and the range in which the passive cotenant’s share is held accountable is illustrated in Burnham v. Hardy Oil Co., 147 S.W. 330, 334 (Tex.Civ.App.1912), affirmed 108 Tex. 555, 195 S.W. 1139 (1917):
“As to the appellee the Rio Bravo Oil Company, which asks for an af-firmance of the judgment in its favor, we think it would be improper to do so. Concerning its liability to plaintiffs with reference to oil taken from the land, we think the Texas Land & Cattle Company, having an unquestioned undivided interest in the league, had, by virtue of its undivided ownership in the land, the right to extract oil from the tract. In case oil was not found, it would have to bear the loss of its experiment and could not call on a nonparticipating cotenant for contribution. But where it found oil and marketed the same, the cotenant requiring it to account to him for his interest in the product, measured by his interest in the land, would be required to allow his proportion of the necessary cost of producing and marketing the product. Wolfe v. Childs, 42 Colo. 121, 94 P. 292, 126 Am.St.Rep. 152. This reasonable expense would include the cost of the machinery and appliances and other means necessary and proper to the production. In other words, all reasonable expenses incurred in the production and marketing would have to be deducted from the gross value, before a division of the proceeds between the cotenants. The result of the above is that the Texas Land & Cattle Com*205pany, or its lessees of the land, had the right to pay and to charge to the fund derived from the product the reasonable cost of what was necessary to he done in producing and marketing the oil. This being so, it, or its lessee, had the right to contract with the Rio Bravo Oil Company for a pumping plant and a pipe line for utilizing the oil and to pay for the same, either in money or in oil; and in a suit by other cotenants against the producing cotenant for its share of the value of the oil, the cost of the plant and pipe line to the extent that it is fair and reasonable should be allowed. And the Rio Bravo Oil Company would not be liable to plaintiffs for the oil it received for such necessary improvements, if it was a fair equivalent therefor. * *
Many cases hold that the passive coten-ant must pay his share of the costs but they do not do so because the items are debts. The recovery by the active cotenant is not as a creditor. He recovers costs as a charge against the proceeds of the oil or other commodity. He recovers his costs, not his debt. Stroud v. Guffey, 3 S.W.2d 592 (Tex.Civ.App.1927), affirmed 16 S.W.2d 527, 64 A.L.R. 730 (Tex.Com.App.1929); Durham v. Scrivener, 259 S.W. 606, 614 (Tex.Civ.App.1923), affirmed 270 S.W. 161 (Tex.Com.App.1925); Rosse v. Northern Pump Co., 353 S.W.2d 287 (Tex.Civ.App. 1962, writ ref., n. r. e.); Estes v. Texas Consolidated Oils, 266 S.W.2d 272, 275 (Tex.Civ.App.1954, no writ).
The majority cites cases which hold that interest is an incident of debt, which is true; and then concludes no debt, no interest. That is not true. Interest is a statutory creature in Texas. Article 5069 says that “ ‘Interest’ is the compensation allowed by law or fixed by the parties to a contract for the use or forbearance or detention of money * * *_» What the majority overlooks is that interest can arise by law as well as by contract. Bell v. C. J. Gerlach & Bro., 205 S.W. 470, 471 (Tex.Civ.App.1917, no writ). We shall mention a few instances. In Donaldson v. Meyer, 261 S.W. 369 (Tex.Com.App.1924), Donaldson furnished funds to Meyer under a contractual arrangement that failed by reason of Meyer’s mental incompetence. Donaldson’s prayer for contractual eight per cent interest on the sum of his advancements was denied but he was allowed six per cent legal interest, the Court saying:
“ * * * The j-jght 0f Donaldson to recover the $3,000 used by Meyer and wife as necessaries is not based on the contract that Meyer entered into, it having been ascertained that he was incapable of entering into a binding contract, but the relief given Donaldson is on the equitable ground that he is entitled to recover the money he had paid to Meyer, and which had been used by Meyer and his wife for necessaries, and, the right to recover not being based upon any contract of Meyer, then Donaldson could not recover the rate of interest mentioned in the contract, but could recover only the legal rate of 6 per cent.”
Norris v. Vaughn, 278 S.W.2d 582 (Tex.Civ.App.1955, no writ) allowed interest on a cotenant’s advancements for oil development and in so holding relied upon Schluter v. Sell, 194 S.W.2d 125, 133 (Tex.Civ.App.1946, no writ). Schluter sums up the reason for these holdings:
“It is the general rule that one who lends money to or makes advancements for another is entitled to interest, although nothing is said about interest. Parsons v. Parsons, Tex.Com.App., 284 S.W. 933; and in 40 Tex.Jur. 210, it is said that where ‘one co-tenant pays taxes on property jointly owned (he) is entitled to contribution, and the state’s lien for such taxes passes to him so that he has a lien on his co-tenant’s interest.’ Where pleaded interest is usually allowed on taxes paid by one having an interest in land from the date of *206payment. McDermott v. Steck Company, Tex.Civ.App., 138 S.W.2d 1106.”
In Hensel v. Kegans, 8 Tex.Civ.App. 583, 28 S.W. 705 (1894, no writ) the Court cited Freeman on Cotenancy for the principle that one cotenant who pays title expenses and advances taxes on behalf of another cotenant, upon principles of equity may recover his advancements, and enforce an implied lien. The Court’s order for remand was “with direction to the district court to ascertain and fix the amounts expended with lawful interest. * * * ” Accord: Wooley v. West, 391 S.W.2d 157, 161 (Tex.Civ.App.1965, writ ref. n. r. e.); Robinson v. Moore, 1 Tex.Civ.App. 93, 20 S.W. 994 (1892, no writ), cited with approval in Dakan v. Dakan, 125 Tex. 305, 83 S.W.2d 620, 627 (1937); Winn v. Winn, 131 Neb. 650, 269 N.W. 376, 379 (1936).
Hill v. Moore, 85 Tex. 335, 19 S.W. 162, 167 (1892) also concerned obligations imposed by law. A cotenant who advanced funds to perfect title and pay taxes was entitled to reimbursement and the Court decreed the manner:
“ * * * Looking to the relation of the parties to the land, and to the certificate by virtue of which it was acquired, we are of opinion that appellee will be entitled to the reasonable cost of procuring title to so much of the land as appellants may recover, with interest thereon from time title was obtained ; and, in addition to this, will be entitled to recover the sum paid as taxes on the lands appellants recover, with interest on same from time several payments may have been made. * * (Emphasis added.)
The second reason suggested by the majority opinion for denial of interest upon the capital advanced for the benefit of the passive cotenants is that the drilling of oil wells is speculative. Unless this is so, I can see no reason for the quotation from Stephenson v. Luttrell, 107 Tex. 320, 179 S.W. 260 and Shaw & Estes v. Texas Consolidated Oils, 299 S.W.2d 307 (Tex.Civ.App.1957). To the present time, the test has been one of viewing the situation after the drilling was completed. If the venture is unsuccessful it is speculative and the one taking all the risk suffers all the cost. If the well is completed as a producer, it is regarded as nonspeculative and the passive cotenant’s share is accountable proportionately. The elements of speculation are squeezed out by the time the venture is finished. This is the holding and the settled law as announced both in Luttrell and Texas Consolidated Oils. If it is the opinion of the majority that the drilling of sixteen producing oil wells, viewed after the fact, is speculative, it should clearly so state.
The third reason for the majority’s rejection of interest as a valid cost is based on policy. “Something (is) to be said for the non joining cotenant,” says the opinion, “Actual production of minerals is not the only way by which benefits may be obtained from the ownership of mineral interests in land. Drilling may and often does condemn property for mineral purposes.” Interest has not been allowed in the past and the Court declines “to rewrite the formula.” In a case of original impression about interest as a cost item, we hardly are rewriting anything. But the real fallacy of such an approach is the inherent inconsistency in applying the rule. The majority concedes that costs are recoverable and then, after assuming that interest is a cost, gives its reasons for rejecting this isolated cost item. Are we reduced to a case by case determination of policy on which items of costs will be allowed or disallowed? Whether interest is a cost at all is the question. The majority holds, however, that even if it be a cost, on policy grounds, it will not be allowed. For each claimed item of cost, the Court in the future will now determine anew the policy and equity of the many cost items.
We return to the only issue in the case. In a case in which it is admitted that the active cotenants advanced $114,069.54 for the passive cotenants who, without any *207risk of capital, became %2 owners of sixteen producing oil wells and were therefore benefited in a venture which in law was nonspeculative, are the active cotenants entitled to legal interest as costs for the “use or forbearance or detention of money”? We have cited a number of Texas authorities which have in fact allowed interest as costs.
On principles of cost accounting, interest on the funds advanced, if uncollected, is a loss. An active cotenant who already has employees and a drilling rig, nonetheless can charge off as costs the wages he pays and a fair rental for the use of his rig.
“Just as rent is the return for the use of land, and wages the return for the workman’s labor, so interest is considered as the return for the use of capital. Included in the proponents of this argument are economists, engineers, plant managers and owners who adhere to the economic interpretation of profits. ‘Net profit’ to them usually means pure profit, which is the profit that is attributed to the compensation for the risk taken in carrying on a business enterprise. Girded with this argument, the interest-inclusionist maintains that the interest upon the capital investment is just as logically a production cost item as is wages. To exclude it as an item of cost causes the production cost to be understated. By treating interest as a production cost (overhead expense), the resultant net profit is a pure profit or return for the business risk only. There is really a good argument for including interest as a cost, for to do so segregates the profit allocated to the use of capital goods from the profit attributed to the risk involved in the business venture. Certainly, if the production costs of two different enterprises in a given industry are to be comparable, where one business rents its plant and the other owns it, then interest on plant investment should be treated as a cost by the later concern. This is true because the rent paid by a tenant invariably includes an interest investment charge. Also, the interest on plant investment must be considered by the management in the long run, when selling prices are established, if an adequate return on the owner’s capital investment is to be earned.” Van Sickle, Cost Accounting-Fundamentals and Procedures, p. 270 (1938); See note, 3 Houston Law Review, 109, 112-113.
Whether interest is a proper item of cost is new to us. This is our first case. It is not new in other areas of the law. A patent owner can recover the revenues earned by an infringer, but he must allow the infrin-ger his production costs. In those cases interest as a cost item has often been closely examined. Even though the infringer is a wrongdoer, he may claim interest upon his capital outlay as a necessary cost item. He may do so whether he actually borrows money or merely furnishes his own capital to produce the sales. International Industries v. Warren Petroleum Corp., 248 F.2d 696, 702 (3rd Cir. 1957); W. H. Miner, Inc. v. Peerless Equipment Co., 115 F.2d 650 (7th Cir. 1940); Barber Asphalt Paving Co. v. Standard Asphalt & Rubber Co., 30 F.2d 281 (7th Cir. 1928); Permutit Co. v. Refinite Co., 27 F.2d 695 (7th Cir. 1927); Producers’ & Refiners’ Corporation v. Lehmann, 18 F.2d 492, 502 (8th Cir., 1927). International Industries, supra, cites many authorities for the rule and also states the reasons for it:
“ * * * The interest on the capital which the appropriator invests in his endeavor is allowed in an effort to arrive at a realistic determination of the actual costs in the standard of comparison analysis. This is a practical business problem to be solved by a method as accurate as possible, and the disal-lowance of interest would merely distort the actualities of the money expended.”
I would affirm.
HAMILTON, J., joins in this dissent.