HOWELL v. TEXACO, INC.

HOWELL v. TEXACO, INC.
2004 OK 92
112 P.3d 1154
Case Number: 100164
Decided: 12/07/2004

THE SUPREME COURT OF THE STATE OF OKLAHOMA

William E. Howell, as Trustee of the Howell Family Revocable Trust, Amanda L. Irwin De Martin, individually and as personal representative of the Estate of Georgya Lee Calderon, Anita Sue Loos Zellitti, Betty Frensley, Billy Joe Frensley, Bobbie K. Howell, Daniel E. McCarley, Dean L. McCarley, Dinah L. McCarley, The Hazel Thompson Trust 40%, The Hazel Thompson Trust 60%, J.F. Buck Trust ABC, Jennifer S. Howell, John Ed Mosier, June Mosier Chambliss, Justin Brady Loos, Kenneth S. Howell, Lynn Earl Mosier, Paragon Holding Co., Johnyne Rees, Phillip D. Loos, Richard E. Loos, Robert W. Frensley, Sonya Lynette Meador, William R. Frensley, Susan Frensley, Fran E. Vestal, The Maye Powers Trust, The Patsy A. Hosfeld Trust, Billie Nell Loos, The J.F. Buck Revocable Trust, Doulgas R. Irwin, Jennifer Irwin, Kimberly Kay Loos Rayburn, Jerry Baker, The Deborah Baker Cochran Trust, Angela Baker Steely, Jeffrey Mark Cooper, Leigh Baker Cooper, The Deborah Baker Cochran Childrens Trust, The Jay Allen Satterwhite Revocable Trust, The Betty L. Whitten Trust, The Jerry D. Whitten, Jr., John R. Whitten, The Daisy O. Whitten Trust, Melinda Whitten Craig and Stephen R. Whitten, Petitioners,
v.
Texaco Inc., Texaco Exploration and Production, Inc., Humphreys Unit, Respondents,
Ybles Unit, H.Z. Stiefel Unit, and Milroy Deese Unit, Defendants.

On Writ of Certiorari to Review Certified Interlocutory Order
of the District Court of Stephens County,
The Honorable Allen McCall, Presiding

¶0 The royalty owners of gas sued the producer for underpayment of royalties, for breach of fiduciary duty, and for fraud. The producer moved for partial summary judgment. The trial court granted partial summary judgment on the issues of underpayment of royalties on market value leases, breach of fiduciary duty, and fraud. The trial court certified the order, and this Court granted the writ of certiorari.

CERTIFIED INTERLOCUTORY ORDER AFFIRMED IN PART
AND REVERSED IN PART;
CAUSE REMANDED FOR FURTHER PROCEEDINGS.

Henry C. Bonney, Ronald Edward Corley, Bonney Corley LLP, Duncan, Oklahoma;
Terry J. Barker, R. K. Pezold, Joseph C. Woltz, Gene Guy Boerner, Pezold Barker & Woltz, Tulsa, Oklahoma, for Petitioner.
M. Benjamin Singletary, Oliver S. Howard, Richard Billings Noulles, David Edward Keglovits, Gable & Gotwals, Tulsa, Oklahoma; Thomas Taylor Ellis, Elbert J. Buckholts, Ellis Leonard & Buckholts, Duncan, Oklahoma, for Respondent.
Douglas Burns, Terry Lee Stowers, Burns & Stowers, P.C., Norman, Oklahoma, for Amicus Curiae Coalition of Oklahoma Surface and Mineral Owners, Inc.
Mark D. Christiansen, Crowe & Dunlevy, Oklahoma City, Oklahoma, for Amicus Curiae Mid-Continent Oil and Gas Association of Oklahoma.
John Richard Reeves, Mock, Schwabe, Waldo, Elder, Reeves & Bryant, Oklahoma City, Oklahoma, for Amicus Curiae American Petroleum Institute.

TAYLOR, J.

¶1 The issues presented for review are: (1) What is the appropriate method for determining market value of gas at the wellhead if the first arm's-length sale occurs after the gas has been processed; (2) Whether a producer has a fiduciary duty to a royalty owner based solely on a lease and communitization agreement; and (3) Whether there is a genuine issue of material fact that the producer is liable to the plaintiffs for actual and constructive fraud.

I. PROCEDURAL HISTORY

¶2 The plaintiffs are owners of mineral rights in the Sho-Vel-Tum Field, which is primarily located in Stephens and Carter counties in Oklahoma. The plaintiffs filed suit in Stephens County, Oklahoma, against Texaco Inc., Texaco Exploration and Production Inc. (Texaco), the Humphries Unit (collectively respondents), and three other units alleging that they had breached their lease contracts by underpaying royalties, had breached their fiduciary duties, and had committed fraud. The three other units are not part of the proceedings before this Court.

¶3 Texaco submits there were three basic types of leases involved in the proceedings before the trial court: (1) leases which base royalty on the market value or proceeds at the prevailing market rate at the mouth of the well or at the well (market value leases), (2) leases which base royalty on the proceeds at the prevailing market rate, and (3) leases which base royalty on a fixed-rate. Texaco moved for partial summary judgment asking the trial court to find that it had met its royalty obligations only as to the market value leases. The other two types of leases were not before the trial court on Texaco's motion for partial summary judgment on the issue of underpayment of royalties and are not part of this Court's review of the issue of underpayment of royalties.

¶4 Most of the wells are not subject to a statutory unitization procedure, but a few are. See 12 O.S.2001, §§ 287.1-.15. Texaco moved for partial summary judgment on the issue of breach of fiduciary duty against the royalty owners whose wells were not part of an area subject to a unitization order. In the same motion, Texaco asked for partial summary judgment on the issues of actual fraud and constructive fraud against all of the plaintiffs. The trial court granted both of Texaco's motions and certified the order for immediate review.

II. FACTS

¶5 The plaintiffs entered into lease contracts with either Texaco or its predecessor. Some of the wells which are not in a unitized area are in voluntarily communitized areas. The communitization agreements provide for the royalties to be paid on the production in proportion to the acreage owned by each royalty owner. Otherwise, the leases in their entirety remain in force by reason of production on any of the communitized area.

¶6 Texaco is the producer of the wells covered by the plaintiffs' leases. Texaco gathered the gas from these leases and processed it at the Velma Plant, which is owned by Texaco's gas plant division. Texaco submits that the gas was marketable at the wellhead. Texaco's production division and Texaco's gas plant division entered into an intra-company "contract" for the sale of the gas covered by the plaintiffs' leases at the wellhead. After the gas was processed, Texaco sold the residue gas and the natural gas liquids to third parties.

¶7 In addition to the gas subject to the intra-company contract, Texaco contracted with unaffiliated, third-party producers to purchase gas under percent-of-proceeds (POP) contracts. Under POP contracts, the producer is paid a percentage of the proceeds from the sale of some of the products after processing. An expert considered the amount paid for gas pursuant to the POP contracts with Texaco to be the market value of gas for purposes of royalty payments.

¶8 Except for the two-year period between January of 1999 and December of 2000, Texaco computed the plaintiffs' royalty payments on prices established by the intra-company contract. The intra-company contract was based on the POP contracts with the unaffiliated third parties. The intra-company contract prices were at least as much as the prices Texaco paid to third-party producers who sold their gas at the wellhead under POP contracts for processing at the Velma Gas Plant. In calculating the royalty payments, Texaco did not measure, did not account to royalty owners, and did not pay royalty on scrubber oil and drip condensate. Texaco asserts that the scrubber oil and drip condensate are considered in the percentage paid under both the intra-company and third-party POP contracts for residue gas and natural gas liquids.

¶9 Beginning in the middle to late 1990s, Texaco generated internal memoranda stating that the royalty payments should be based on 100 percent of the residue gas and natural gas liquids sold. The memoranda further stated: "The market value of the gas will be determined by multiplying the monthly wellhead MMBTU's . . . by the weighted average sales price . . . per MMBTU received by Texaco . . . for residue gas at the tailgate of the plant." It is unclear whether Texaco corrected royalty payments based on the memos. However, in 1999 and 2000, Texaco paid royalties on the sales proceeds of the residue gas and the natural gas liquids.

¶10 In 1985, Mobil offered to purchase casinghead gas from Texaco for more than Texaco was paying under its intra-company contract. In a memorandum, Texaco recognized that because the intra-company price was less than Mobil's offer, problems arise when evaluating the intra-company sale. The memorandum concluded with a recommendation that the intra-company sales "include terms equal to or better than" Mobil's offer.

¶11 The only communication Texaco had with the royalty owners regarding payments was the check stubs which indicated a sales price but did not show the purchaser or the terms of the intra-company contract. The royalty owners' check stubs did not show that Texaco was deducting a cost for marketing and a profit allowance from the royalty payments. At no time did Texaco disclose to the plaintiffs that it was calculating royalty payments based on its intra-company contract.

III. THE PARTIES CONTENTIONS

¶12 The plaintiffs' arguments are as follows. The market value at the wellhead in this case should be based on the first arm's-length transaction. Here that transaction occurred after the gas was processed. Thus, royalties should be calculated based on the amount Texaco received after processing and should include the amount received for scrubber oil and drip condensate. By failing to pay royalties under the method advocated by the plaintiffs, Texaco breached the lease agreement. Also by failing to inform the plaintiffs of its basis for calculating royalties, Texaco breached its fiduciary duty and committed actual and constructive fraud.

¶13 Texaco advocates using the prevailing market price to calculate royalties. To determine the prevailing market price, Texaco determined what other royalty owners received based on its POP contracts with other producers. Texaco asserts that the leases required it to pay the prevailing market price. Texaco reasons that it met its royalty obligation by paying the plaintiffs an amount equal to or more than what other royalty owners whose gas was processed at the Velma Plant were paid.

¶14 Texaco argues that, absent special circumstances, a producer has no fiduciary duty to royalty owners and that no special circumstances are present in this case. Texaco also argues because the royalty owners did not rely on Texaco's representations on the check stubs, except for the delay in filing this suit, they cannot recover damages for fraud. Texaco admits and we agree that the intra-company contract is not an arm's-length transaction, that it is not a legal basis on which Texaco can calculate royalty payments, and that there was not an arm's-length sale at the wellhead. However, Texaco does argue that the intra-company contract reflects the prevailing market price of plaintiffs' gas.

IV. STANDARD OF REVIEW

¶15 Under rule 13 of the Rules for District Courts, a court is to grant summary judgment if the moving party shows that there is no genuine issue of any material fact and is entitled to judgment as a matter of law. 12 O.S.2001, ch. 2, app. 1, rule 13. The moving party must propose material facts which it contends are not in dispute and must demonstrate, with references to proper authority, why summary judgment should be granted. Id. If the moving party meets its burden, then the adverse party has the burden of demonstrating the existence of a dispute of material facts. Hughey v. Grand River Dam Auth.,

¶16 Both parties must support their positions of the facts with evidentiary material such as affidavits, depositions, and admissions. Id. All facts and inferences are to be viewed in the light most favorable to the non-moving party. Martin v. Aramark Services, Inc.,

V. ANALYSIS

A. Market Value of Gas at the Wellhead

¶17 Market value is the price negotiated by a willing buyer, not obligated to buy, and a willing seller, not obligated to sell, in a free and open market. Johnson v. Jernigan,

¶18 There are three basic methods of establishing the market value at the wellhead. The first and most preferred is an actual sale reached through arm's-length negotiations. Tara Petroleum Corp. v. Hughey,

¶19 If the market value at the wellhead is not established by an actual arm's-length sale at the best price available, then the market value may be constructed by evidence of the prevailing market price. Cimarron Utils. Co. v. Safranko,

¶20 In addition to evidence of sales of like gas, the market value may be established by the work-back method. Wood v. TXO Production Corp.,

¶21 In Mittelstaedt, the lease provided for royalty payments of "3/16 of the gross proceeds received for the gas sold." Id. at ¶ 1, 954 P.2d 1204. The clause prohibits a producer from deducting the costs of obtaining a marketable product. Id. at ¶ 2, 954 P.2d at 1205. However, the costs incurred after the gas becomes marketable may be apportioned between the royalty owner and the producer. Id. at ¶ 2, 954 P.2d at 1205. In order to burden the royalty interest with a proportionate share of the costs, the producer must show: (1) that the costs enhanced the value of an already marketable product, (2) that such costs are reasonable, and (3) that actual royalty revenues increased in proportion with the costs assessed against the nonworking interest." Id. at ¶ 2, 954 P.2d at 1205.

¶22 A royalty owner has a right to be paid on the best price available. Johnson,

¶23 The plaintiffs' also complain that they were not paid for the scrubber oil and drip condensates sold to third-parties after processing. Texaco posits that they are not required to pay royalties separately on the scrubber oil and drip condensate because they were taken into consideration when the third-party POP contracts were negotiated. Texaco continues that the scrubber oil and drip condensate are reflected in the percentages paid under the third-party POP contracts and in the plaintiffs' royalty payments. This is a matter of fact for the trial court to consider on remand. However, when using the work-back method, the court must consider their value in calculating the market value at the wellhead. Katschor,

B. Fiduciary Duty

¶24 Relying on Young v. West Edmond Hunton Lime Unit,

¶25 The communitization agreements, unlike unitization orders, are contracts just as the leases are contracts. In this case, the communization agreements do not impose any greater obligations on Texaco than do the leases. In short, the communization agreements do not create a fiduciary duty on Texaco's part. See Finley v. Marathon Oil Co., 75 F.3d 1225, 1229-30 (7th Cir. 1996).

¶26 In Bunger v. Rogers,

¶27 In Leck,

¶28 The plaintiffs' have misconstrued these cases. This court has not held that a royalty lease alone creates a fiduciary relationship. To the extent that other courts have so held when applying Oklahoma law, they have misread our decisions. See Roberts Ranch Co., 43 F. Supp. 2d at 1265. Texaco had no fiduciary duty to the plaintiffs based on the leases or the communitization agreement.

C. Constructive and Actual Fraud

¶29 Constructive fraud is the concealment of a material fact by one who has a duty to disclose. Varn v. Maloney,

¶30 In the present case, the Production Revenue Standards Act,

¶31 The PRSA provisions give the royalty owners a right to be accurately informed of the facts and place a legal duty on the respondents to accurately inform the plaintiffs of the facts on which the royalty payments are based. The respondents failed to include any statements or evidentiary materials in their motions for partial summary judgment showing that they complied with the PRSA.

¶32 In addition to the constructive fraud claim, the plaintiffs are seeking damages for actual fraud. Actual fraud is "a material false representation, made with knowledge of its falsity or recklessly without knowledge as to its truth or falsity, as a positive assertion, with the intention that it be acted upon by another." Varn,

¶33 The respondents, in the statement of facts in their motion for partial summary judgment state: "[H]owever, no Plaintiff relied to his or her detriment on any information contained in those check stubs." The respondents then reference the depositions of some, but not all, of the plaintiffs. Thus, the respondents have failed to support their statement of material facts as to which they contend that there is no genuine dispute by sufficient evidentiary materials as required by the rule on summary judgment. By failing to adequately support their statement of this fact, the respondents were not entitled to partial summary judgment on the issues of actual fraud and constructive fraud. See 12 O.S.2001, ch. 2, app. 1, rule 13.

V. CONCLUSION

¶34 We hold that an intra-company gas sale cannot be a basis for calculating royalty payments. The trial court erred in granting Texaco's motion for summary judgment on the issue of underpayment of royalties. There exists a genuine issue of material fact as to the market value of plaintiffs' gas and whether Texaco underpaid the royalties. The trial court properly granted judgment in favor of Texaco on the issue of breach of fiduciary duty as to those wells which are not in an area subject to a unitization order. Because material facts remain in dispute, partial summary judgment on the issues of actual and constructive fraud was improper. We affirm in part and reverse in part.

CERTIFIED INTERLOCUTORY ORDER AFFIRMED IN PART AND REVERSED
IN PART; CAUSE REMANDED FOR FURTHER PROCEEDINGS.

¶35 Watt, C.J., Lavender, Hargrave, Winchester, Edmondson, Taylor, Colbert, JJ., concur.

¶36 Kauger, J., concurs in result.

¶37 Opala, V.C.J., dissenting.