Yzaguirre v. KCS Resources, Inc.

Yzaguirre and other landowners (plaintiffs) leased oil-and-gas rights to KCS Resources' (defendant) predecessors. The lease based royalties on market value for gas sold off the well site, and on amount realized for gas sold at the well. KCS sold gas to a pipeline company under an agreement designating the point of sale at a processing plant miles away — triggering the market-value clause — and KCS paid Yzaguirre royalties based on the prevailing market price. But KCS's actual sales contract with the pipeline company was for a price higher than that market price. Yzaguirre sued, arguing he was owed royalties based on the higher price KCS actually received, and that paying only market value breached KCS's implied covenant to reasonably market the gas for the best price. The trial court granted KCS summary judgment, the court of appeals affirmed, and Yzaguirre appealed further.

Whether a lessee under an oil-and-gas lease owes royalties based on the prevailing market price of gas, rather than the higher price it actually received, when the lease bases royalties on market value.