                         i   ~


                                            NEY       GENEELM.

                                             EXAS

                                 AuS’rxiw    11. ‘I’EXaS
     PRICE   DANIEL
     ATTORNEY CF.NERAL                March 211,1949


          Hon. C. H. Cavness
          State Auditor
          Austin, Texas            Opinion No'.V-791
                                  Re: Legal interest on delin-
                                      quent bonuses, rentals,
                                      and royalties due the Pub-
                                      lic Free School Fund.
          Dear Sir:
                    You have requested our opinion regarding
          interest on bonuses, rentals, and royalties arising
          from mineral leases, payment of which has been with-
          held or allowed to become delinquent. You do not
          submit copies of any lease contracts. We assume
          that they contain no specific provisions for wlth-
          holding royalties or the payment or non-payment of
          interest. Since In each of your cases the principal
          sums which were withheld have been paid and accepted
          by the General Land Office without demand for interest,
          we do not have before us any question of interest as
          damages. Our discussion Is therefore confined to the
          interest which can arise by operation of law.
                    We are appreciativeof the fact that the
          proceeds of the sale of lands set apart to the Public
          Free School Fund are, by the Constitution,directed
          to be invested in bonds and securities. Art. VII,
          Sec. 4, Constitutionof Texas. The Interest derived
          therefrom is the Available School Fund which is applied
          annually to the support of the public free schools.
          Art. VII, Sec. 5, op. cit. If the payment of proceeds
          for the sale of school fund lands is withheld for any
          reason, the school fund loses the interest which might
          be derived from the investment of such proceeds.
..
                    In Texas, when no specified rate of interest
          Is agreed, interest at six per cent is allowed by sta-
                                         ’   i
Han, C. H. Cavness - Page 2 - V-791


tute on "all written contracts ascertainingthe sum
payable from and after the time when the sum is due
and payable." See Art, 5070, R. C. S. 1925. The
State, when circumstanceswarrant, is due interest
under this statute. State v. Powell, 70 S. W. 26
297; Bee?Stat’e~~
                ir.:‘Stg&&rd ‘&$$$d&t I*#; &;$‘;203
Si W.i2d 984',(Cl~*:"Agp."lp47,:brjr,ref.,)1ci Qden. _~
v, Gates;''24,:.
             8,..W-Y:  381 o
                    ea.,
          Your case No. 1 involves the question of
interest on the State's 1/16th 011 and gas royalty
withheld after productionunder what we assume is a
RelinquishmentAct lease, The lessee, who also pur-
chased the minerals after production,submitted affi-
davits of production each month for the period July
1, 1942 to April 30, 1948 but withheld payment of
royalty until June 14, 1948, when payment under pro'
test was made to the General Land Office. No express
demand for the principal is shown prior to March 25,
1948. No interest was paid by lessee or demanded by
the Commissionerof the General Land Office. You ask
us to assume that the General Land Office now holds
the principal In suspense as requested by the lessee.
The lessee has given as its reason for withholding
the royalty payments "the general boundary line dis-
pute in this area."
          It is settled that an oil and gas lease of
mineral reserved school lands executed under the Re-
linquishmentAct Is a contract between the State and
the lessee. It is also settled that Articles 5380 and
$381, R, C. S., which provide a t%me and place for the
payment of the State's royalties,are Incorporatedby
law into every RelinquishmentAct lease, and that "toge-
ther they constitutean obligation in writing. o e .'
Empire G. & F. Co. v. State, 121 Tex. 138, 47 S.W. 2d
265; Permian oil CO. v. State, 161 S. W. 2d 568, The
sums payable as royalty by the lessee to the State un-
der the instant contract were ascertainable,and In
fact were ascertained,by the lessee each month, It
is therefore our opinion that the obligationof this
RelinquishmentAct lessee to pay royalty bears legal
interest under the statute. The,lnterestshould be
calculated on each royalty payment withheld from the
time such payment became due and payable under the
Hon. C. H. Cavness - Page 3 - V-791


statutes cited to the date of payment under protest.
31-A Tex. Jur. 338.
          We enclose herewith a copy of the Opinion
of Hon. R. W. Yarborough,when an Assistant Attorney
General, to Hon. T. J. Tapp, Assistant State Auditor,
dated July 9, 1931, reaching the same conclusion. We
do not believe that the lessee's reason for withhold-
ing the royalties, "the general boundary line dispute
in this area," is sufficient to suspend the Interest.
The obligation of the lessee to pay royalty is uncon-
ditional and the time for payment is fixed by statute.
We understand that the pipe line companies have a
custom of withholding royaltieswhen title is in dls-
pute. This custom may be both profitable for such
companies and convenient for lessees, but it cannot
relieve this lessee from its obligation Imposed by
statute. See Wolfe v. Texas Company, 83 F. 2d 1125(10th
Cir., 1936).
          This rule does not require the State's
lessee to pay royalties at Its peril. As owner of
the mineral estate, such lessee Is a necessary party
to any boundary litigation affecting the leased pre-
mises. As a party, it could avoid liability for inter-
est by payment into the registry of the court. Hishl
v. Humble Oil & Refining Co., 10 F. 2d 356 (5th Mr.).
If the leasehold were not affected but the right to
the royalty were in dispute, this lessee could have
interpleadedthe rival claimants. If this lessee were
concerned that litigation as to other lands might af-
fect its leasehold, though not directly, it could have
prevented any liability for interest to the State by
paying the royalties under protest, as was finally
done, and, as you say, this same lessee did on other
state leases in the same field. No liability to third
parties for interest could arise after such action,
there being no written contract with such third party,
no demand by him, and no detention of any royalty money
by the lessee.
          The fact that the principal sum was accepted
by the General Land Office In this and your other cases
does not discharge the obligationfor unpaid "legal
interest" accruing prior to such payment. It is stated
                                             -_




Hon. C. PI.Cavness - Page 4 - V-791


that:
          "Where the debtor makes a payment
     equal in amount to the principal, upon
     the stipulationand agreement that It
     shall be applied In satisfactionof the
     principal, and It is so accepted and ap-
     propriated by the creditor, the principal
     is thereby extinguishedand ceases to bear
     interest, leaving nothing due but the un-
     paid Interest." 32 Tex. ,Jur.689, 690.
         "The right to recover interest after
    the payment of'the principal sum due de-
    pends upon whether Interest is due by the
    terms of the contract; or whether It Is
    merely implied and allowed by way of dam-
    ages in an action for the principal. If
    interest is due by the terms of the con-
    tract, the payment of the principal is no
    bar to Its subsequentrecovery, but if it
    is not due by the terms of the contract,
    the payment of the principal sum due is a
    bar to recoveryan 100 A. L. R. 96.
Regarding "legal Interest,",it Is stated that:
         "Where the obligationis one that by
    statute bears interest, some courts regard
    this as an equivalentof contractualinter-
    est and, therefore, allow recovery, even
    though the principal sum has been paid,
    while others regard it in the nature of dam-
    ages, and refuse recovery after the payment
    of the principal sum." 100 A. L. R. 104.
          The Texas courts have long distinguishedbe-
tween interest which is a matter of right and Interest
which is assessed as damages. 3 Tex. Jur. 96. It is
our conclusion that payment of the principal sum does
not absolve the debtor from liability for "legal ln-
terest" previously accruing by statute on a written
contract. State v, Powell, supra, sustains us in this.
         Your case No. 2 involves the question of
Hon. ::.H. Cavness - Page 5 - V-791


Interest orithe State's 1/16th free royalty interest
reserved in the sale of a tract of vacant land under
the 1931 Sales Act. The 011 and gas was produced
and sold to pipe line companies by the fee owner,
without the usual lease. The pipe line companies
withheld the State's royalties for a thirteen month
period ending September 30, 1944, because the Attor-
ney General had attacked the validity of the opera-
tor's title; and in their answer, the operators had
contended that the State had no right to royalties
because no vacancy had existed in the first place.
Interest was first demanded on October 25, 1947.
The papers furnished do not show whether the pipe
line companies were parties to the litigation,
          The operatorswere not paid for the oil
purchased during the pendency of the litigation.
          The State has a contract relationshipwith
purchasers of land under the 1931 Sales Act with re-
gard to its free royalty. It likewise has a con-
tract relationshipwith any mineral lessee of a tract
sold under the 1931 Sales Act:
          I!
           . * . we think that this act, when
     construed in the light of the policy of
     this State relating to public lands and
     minerals as expressed in certain laws, if
     not directly, impliedly authorizes the land-
     owner to actsas the agent of the State in
     executing mineral leases thereon, and re-
     serving to the State the free royalties
     described in Section 4 thereof." Winter-
     mann v. McDonald, 129 Tex. 275, 102 S. W,
     2d 167, 104 S. W. 2d 4.
          The mineral development of the tract involved,
from the papers you have furnishedus, was by a grantee
from the patentee, His deed and agreement recites the
State's royalty interest but makes no specific provision
as to when such royalties shall be paid. We have found
no statute directly governing the time of payment of
the State's "free royalty."
Hon. C. H. Cavness - Page 6 - V-791


          We will not here attempt to analyze the
nature of the State's mineral interest under the
1931 Sales Act. .Certalnrights exist, both before
and after the awardee or patentee has executed a
lease. See Jones, Non-ParticipatingRoyalty, 26
Texas Law Review 569 (1948). In the absence of a
specific provision by statute or lease requiring
the payment of royalties at a particular time, how-
ever, the courts have held that the lessee has the
implied authority and duty to sell the royalty oil
to a pipe line company, and that his contract with
such company regarding the time for payment of roy-
alties will bind the royalty owner. Wolfe v. Prairie
Oil & Gas Co., 83 F. 2d 434 (10th Cir., 1936), Whe-
ther such a contract binds the State, we need not
determine for reasons hereafter expressed.
          We have no copy of the pipe line contract
In this case, but we understand that such a con-
tract usually requires the seller to show good title.
This provision has even been Implied In the absence
of express contract. Wolfe v. Texas Co., 83 F. 2d
425 (10th Cir., 1936). The effect of such a provl-
slon Is that the pipe line company is not liable for
interest on royalty 011 after it notifies the royalty
owners that an adverse claim has been asserted. Gulf
Pipe Line Co. v. Nearan, 135 Tex. 50, 138 s. w. 2d
1065 (reversingGulf Pipe Line Co. v, Mann, 111 S.W.
2d 335).
          In the Nearan case the plaintiffs sued the
pipe line company for the value of royalty oil retained
for ten years during which a title controversy,to
which the pipe line company was not a party, was pend-
ing and for legal interest from the delivery dates of
the oil. The lease was operated by the Gulf Production
Company, which delivered the oil to the Gulf Pipe Line
Company. The plaintiffshad executed a division order
providing in one paragraph for the papent of royalty
on certain dates and In another that s . s In case of
any adverse claim of title to the oil run hereunder. s 0
or to the land from which It la run . D . (plaintiffs
will) furnish Gulf Pipe Line Company satisfactoryevi-
dence of title, or, in case of failure to do so, to
furnish satisfactoryindemnity bond m . D against such
Hon. C. H. Cavness - Page 7 - V-791


adverse claim or claims, and that the Gulf ,Pipe
Line Company may retain the purchase price of the
oil until such bond shall be furnished, or until
the dispute as to ownership is settled, so as to
relleve_the company from all liability for oil re-
ceived," Plaintiffswere requested to, but did
not, furnish this bond.
          The Court of Civil Appeals, 111 S. W. 2d 335,
construed the division order as obligating the pipe
line to pay the purchase price of the royalty oil on
the delivery date. The contractualright to elect to
refuse to make payment was held not to excuse interest
due on the amounts so withheld, citing Art. 5070,R.C.S.
The Court clearly stated the problem, saying:
         "The division order was prepared by
    appellant and presented to appellees for
    their signatures, there was nothing in the
    original lease contract that required ap-
    pellees to join in Its execution. Had the
    division order stipulated on its face that
    appellant would have had the right to retain
    appellees' money . . . without paying interest,
    in this case for ten years, appellees might
    have refused to execute it; in that event
    appellant would have been compelled to pay
    for the 011 as stipulated in the lease con-
    tract or to refuse to receive the oil under
    the lease. By its constructionof the divl-
    sion order, appellant would read into it an
    extremely onerous obligationwhich was not
    in the contemplationof the parties when the
    original lease contract was executed."
          The Commission of Appeals, opinion adopted by
the Supreme Court, reversed on the interest point, Say-
ing that:
         "The Honorable Court of Civil Appeals. . .
    took the view that the purchase price for the
    oil received became due and payable s . . on
    or before the 25th day of such month. . . . If
    there had been no adverse claims asserted to
    the royalty oil, there could be no doubt but
Hon. C. H. Cavness - Page 8 - V-791


     that this could be a correct conclusion.How-
     ever, in the fourth,sectlonof the division
     order the defendants in error agreed In case
     of any adverse claim of title to the 011
     run . . . to furnish to the Gulf Pipe Line
     Company satisfactoryevidence of title or . . .
     to furnish satisfactoryindemnity bond . . .
     and that the Gulf Pipe Line Company may retain
     the purchase price of the 011 until such bond
     shall be furnished or until the dispute as to
     ownership is settled so as to relieve’,the,:com-
     pany from all llablll.tyof oil received.
          “Under the fourth section it Is clear to
    ,ourminds that the parties Intended to provide
    for alternatlveprovisions in which a postpone-
    ment of the time when the purchaser of the 011
    Would have to pay for it. . . . ,The pipe line
    company had no right to determine which claimant
    owned the oil and was not obligated under the
    division order to litigate the question of owner-
    ship for the defendants in error with adverse
    claimants. Assoon as the Pipe Line Company had
    notice of an adverse claim Ming asserted It had
    the right to notify defendants in error . . .
    When . . . (an) Indemnity bond was refused after
    reasonable demand, under the specific terms of
    the division order, the Pipe Line Company had
    the right to retain the purchase price of the
    oil. . . . It seems to us that the purchase
    price of the royalty oil under the division order
    is not due and ayable until the disputes as to
    ownership have een settled or until a bond ia
    furnished. . . . The purchase price of the oil
    under the facts of this case not being due and
    payable until the adverse claim was extinguished
    forces the conclusion that the defendants In
    error are not entitled to collect interest until
     the trial courtts judgmentwas entered . . .
    which settled and extinguishedthe dispute as to
    the adverse claims. . . .”
          The Court distinguishedKlshl v. Humble Oil
Company, supra, on the ground that no division order
was there involved and that such case has no application
Hon. C. H. Cavness - Page 9 - W-791


when there is a written contract between the parties.
          The court excused the failure of the Pipe Line
Company to tender the royalty money into registry of the
court on the ground that the plaintiffs'refusal to
accept the principal without interest made a formal
tender unnecessary and was equivalent to a valid tender.
          We do not doubt that Interest can accrue as
against a patentee, his assignee or lessee when such a
party withholds the State's royalty after it is due and
payable. But when the lease is silent as to the time
for royalty payments, neither the fee owner of a tract
purchased under the 1931 Sales Act, his lessee nor the
pipe line company is liable for legal interest on oil
sold to a pipe line company under a contract which pro-
vid~esthat the company can withhold payments pending
determinationof adverse claims. In such a case, the
company is liable for interest only if it fails to take
the steps required of it by the contract. Gulf Pipe
Line Co. v. Warren, 45 S. W. 2d 719. It is true that
the Nearan case turned on the constructionof a divi-
sion order and that the Commissionerof the General
Land Office, correctlywe think, refuses to execute any
division orders respecting the State's royalty. This
does not, however, give us grounds for distinguishing
the case. For the State to claim legal interest against
the pipe line company, there must be a written contract
or a statute having the effect of a contract. Here,
we have no statute. The mere purchase of oil from the
State's lessee creates no contractualrelationshipwith
the State. State v. Reagan County PurchasingCo., 186
S. W. 2d 128, error refused. If the State chooses to
assert rights against the pipe line company, claiming
as a beneficiary under the written contract (if any)
between the producer and company, the State must also
recognize the remaining terms of such contract. We
find, therefore, that we cannot claim legal interest
against this pipe line company, for without a contract
there is no basis for legal Interest, and with a con-
tract, In the usual form, there is no liability for in-
terest under these circumstances.
         State v. Powell, supra, has no application to
Hon. C. H. Cavness - Page 10 - V-791


your case No. 2 unless the pipe line company con-
tracted in writing to pay the State's royalties and
unless this contract contained no withholding pro-
vision.
          On the Informationpresented, It is our
opinion that the operator in your case No. 2 is not
liable for interest on the royalties withheld by the
pipe lines. We do not have sufficient information
to pass on the liability of the pipe line companies.
          Your case No. 3 is of a RelinquishmentAct
lease dated December 7, 1946, and filed for record in
the county February 28, 1947, but not tendered, with
bonus, to the General Land Office until November 24,
1947. We are giving further study to the matter of
legal interest on this transactionand will advise you
by separate opinion.
          Your case No. 4 involves a lease of submerged
lands upon which the royalty for the period of July 1,
1940 to August 31, 1947,,was underpaid by the lessee
and subsequentlyrecalculatedand the principal paid in
full. The documents furnished do not show the reason
for the underpayment. You do not furnish a copy of
the lease.
          As to oil and gas produced and sold and for
which the lessee was paid, interest Is due upon the
portion of the State's royalty which was retained by
the lessee from and after the time such royalty became
due and payable to the State by the terms of the lease
contract and the law, Wichita Petroleum Co. v. Wlnant,
295 F. 67 (5th Cir., 1924). For any portion of the
underpaid royalty which'may have been based upon the
value of a product in the hands of a third party, and
not on the sales made by the lessee, as between the
State and its lessee, we believe that the amount bore
no interest until ascertained. See Phillips Petroleum
Company v. Johnson, 155 F. 2d 185 at 191.
          You have asked us "Is the Commissionerof the
General Land Office required to collect interest on de-
linquent bonuses, rentals and royalty in the above cited
and all similar cases? If so, what Interest rate should
        -      -



Hon. C. Hi Cavness - Page 11 -V-791



be paid?"
          Our discussion under each of your cases
indicates that interest may be due the State on some
items and not due the State on others. We do not
think, however, that it is the duty of the Com-
missioner of the General Land Office to recover or
collect any item of Interest that may be due. This
officer, upon ascertaining that interest is or may
be due, may make demand for payment; and upon default,
should certify the matter to the Attorney General.
          When legal interest Is due by statute on a
written contract, it should be paid at the rate of
six per cent for the period from and after the time
when the principal sum is due and payable until pay-
ment of the principal sum is made and accepted, or
non-payment thereof is excused. Art. 5070, R. C, S.;
Gulf Pipe Line Co. v. Nearan, 135 Tex. 50, 138 S.W.
2d 1065; Gulf Pipe Line Co. v. Warren, 45 S. W. 2d
719; State v. Powell, 70 S. W. 2d 297; Phillips Pe-
troleum Co. v. Johnson, 155 F. 2d 185; Kishi v. Hum-
ble Oil & Refining Co., 10 F. 2d 356; and Wichita
Petroleum Co. v. Winant, 295 Fed. 67.

                          SUMMARY

                 1. A RelinquishmentAct lessee
            who withholds the State's royalties
            after the statutory time for payment
            thereof Is liable to the State for legal
            interest until the withheld royalties
            are paid to the Commissionerof the Gen-
            eral Land Office. The existence of a
            general boundary dispute in the area
            does not excuse the non-payment of such
            royalties, the lessee not having paid
            the royalties into court, interpleaded
            the rival claimants, or paid the royal-
            ties to the Land Commissionerunder pro-
            test when due. Articles 5380-5381, R.C.S.;
            State v. Powell, 70 S. W, 2d 297; Opinion
            of July 9, 1931 to T. J. Tapp, Assistant
Hon. C. H. Cavness - Page 12 - V-791



         State Auditor.
              2. The grantee of land sold un-
         der the 1931 Sales Act with reservation
         of free royalty to the State Is not
         liable for legal interest on the State's
         royalty payments withheld by pipe line
         companies,where such grantee produces
         the oil and there is no lease contract
         providing a definite time for payment
         of the State's royalty. Art. 5070,
         R. C. S.
              3. Pipe line companiespurchasing
         011 from the grantee of land sold under
         the 1931 Sales Act with reservationof
         free royalty to the State are not lia-
         ble to the State for legal interest on
         the royalty oil purchased under the usual
         form of purchase contract when there is
         an adverse claim of title. Gulf Pipe
         Line Co. v. Nearan, 135 Tex. 50, 138
         S. W. 2d 1065; State,v.,Reagan County
         Purchasing Co., 186 S, W. 2d 128, error
         ref'd; State v. Powell, distinguished.
              4. The lessee of submerged lands
         IS liable to the State for legal interest
         on royalties which It has underpaid if the
         amount of such royalty is capable of as-
         certainmentfrom the terms of the lease
         contract and the law. Such a lessee is
         not liable for legal Interest on any por-
         tion of the underpaid ,royaltywhich may
         have been based on the value of a product
         in the hands of a third party until the
         value thereof had been ascertained. Art,
         5070, R. C. S.
              5.  The acceptanceby the Commissioner
         of the General Land Office of the principal
         sum after It Is due and payable does not
         absolve the obligor from the payment of
Hon. C. H. Cavness - Page 13 - V-791


         legal interest theretoforeaccruing.
              6. When legal Interest Is due to
         the State, It should be paid at the rate
         of six per cent per annum for the period
         from and after the time the principal
         sum Is due and payable until pay~nentof
         the principal sum is made and accepted.
         Art. 5070, R. C. S.
              7. It is the duty of the Land
         Commissionerto ascertain when interest
         Is due upon delinquent bonus, rentals
         and royalty and to make demand there-
         for. If payment Is refused or default
         occurs, such facts should be certified
         to the Attorney General.
                              Yours very truly~




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