CHAPARRAL ENERGY, L.L.C. v. PIONEER EXPLORATION, LTD.

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CHAPARRAL ENERGY, L.L.C. v. PIONEER EXPLORATION, LTD.
2010 OK CIV APP 126
Case Number: 108113
Decided: 08/13/2010
Mandate Issued: 11/04/2010
DIVISION I
THE COURT OF CIVIL APPEALS OF THE STATE OF OKLAHOMA, DIVISION I

CHAPARRAL ENERGY, L.L.C., an Oklahoma Limited Liability Company, Plaintiff/Appellee/Counter-Appellant,
v.
PIONEER EXPLORATION, LTD., a Foreign Limited Partnership, Defendant/Appellant/Counter-Appellee.

APPEAL FROM THE DISTRICT COURT OF OKLAHOMA COUNTY, OKLAHOMA

HONORABLE PATRICIA G. PARRISH, TRIAL JUDGE

REVERSED AND REMANDED

Toby M. McKinstry, TOMLINSON & O'CONNELL, P.C., Oklahoma City, Oklahoma, and Keith D. Tracy, Oklahoma City, Oklahoma, for Plaintiff/Appellee,
Michael E. Smith, Sharon T. Thomas, HALL, ESTILL, HARDWICK, GABLE, GOLDEN & NELSON, P.C., Oklahoma City, Oklahoma, for Defendant/Appellant.

CAROL M. HANSEN, Judge:

¶1 This appeal arises from the action of Plaintiff/Appellee/Counter-Appellant, Chaparral Energy, L.L.C. (Chaparral), against Defendant/Appellant/Counter-Appellee, Pioneer Exploration, Ltd. (Pioneer), to recover for a gas imbalance. Both parties seek review of the trial court's order granting summary judgment in favor of Chaparral for conversion and setting damages based on the imbalance's value as of the date the trial court found the conversion claim accrued. We reverse, holding the parties' accounting dispute did not as a matter of law give rise to a conversion claim.

¶2 The gas imbalance arose before the parties acquired their interests in the two wells at issue, the McLain F Nos. 1-32 and 4-32 wells. Pioneer acquired its interest and assumed operations from Phillips Petroleum Corporation in July 1999. Chaparral purchased its interest from the bankruptcy estates of Bristol Resources Corporation and its affiliates (collectively Bristol) effective July 1, 2000.

¶3 In 2006, Chaparral requested gas balancing statements for the time period immediately prior to July 1, 2000. In response, Pioneer requested documentation showing Chaparral was entitled to the gas balancing adjustments prior to July 1, 2000. Chaparral provided a copy of the conveyance document from Bristol to Chaparral, which transferred all of Bristol's "rights, titles, and interests" in the mineral interests, royalty interests, overriding royalty interests, and mineral leases in the described lands, as well as in associated contracts, including operating agreements. The conveyance excepted gas imbalances from a reservation of rights or choses in action arising prior to the effective date of the conveyance.

¶4 Pioneer took the position the conveyance did not address the underproduction prior to July 1, 2000. It therefore continued to show the gas imbalance attributable to Chaparral in its records as beginning with July 1, 2000 production. It did not attribute Bristol's imbalance (Historic Imbalance) to Chaparral.

¶5 Chaparral sued Pioneer for an accounting, in-kind or cash balancing, breach of contract, conversion, and violation of the Natural Gas Market Sharing Act (Sweetheart Gas Act), 52 O.S.2001 §§581.1-581.10. Pioneer answered and denied liability. Chaparral moved for summary judgment on its claim for conversion, arguing Pioneer wrongfully converted the Historic Imbalance when it "eliminated" the imbalance instead of transferring it to Chaparral. In response, Pioneer conceded Chaparral assumed Bristol's position as an underproduced or overproduced party when it acquired Bristol's interests in the McLain wells, but argued Chaparral had only a chose in action for gas balancing, and not a tort claim for conversion.

¶6 Pioneer counter-moved for partial summary judgment as to Chaparral's claims for conversion and violation of the Sweetheart Gas Act, arguing (1) Pioneer's failure to show on the gas balancing statements a gas imbalance attributable to Chaparral's interest in the McLain wells prior to July 1, 2000 does not constitute a conversion of tangible personal property as a matter of law, and (2) the Sweetheart Gas Act does not apply where an operating agreement provides for the taking, sharing, and marketing of gas even if the agreement does not contain a gas balancing agreement.

¶7 The trial court granted summary judgment in favor of Chaparral on its conversion claim and denied Pioneer's counter-motion on the claim. The trial court denied Pioneer's motion for summary disposition as to the Sweetheart Gas Act claim based upon Chaparral's voluntary dismissal of its claim. The trial court dismissed Chaparral's breach of contract claim based upon its ruling at a hearing not included in the appellate record.

¶8 After a separate hearing on damages, the trial court entered an order finding the amount of Historic Imbalance from the McLain F Nos. 1-32 and 4-32 wells attributable to Chaparral and converted by Pioneer was 6,559 mcf1 and 19,364 mcf, respectively. The trial court denied Chaparral's request to value damages pursuant to 23 O.S.2001 §64(2) at the highest market value of the property at any time between the conversion and the verdict, finding Chaparral did not exercise due diligence in pursuing its conversion claim. However, it did grant Chaparral's alternative request to value damages pursuant to §64(1) at the value of the property at the time of conversion on November 14, 2007, with interest from that time. The trial court granted judgment to Chaparral in the amount of $311,919.14. It dismissed Chaparral's remaining claims without prejudice.

¶9 Both sides appeal from the judgment. Pioneer contends the trial court erred in granting judgment for conversion because an underproduced party has a claim for equitable gas balancing in the absence of a gas balancing agreement, not for conversion. Chaparral contends the trial court erred in refusing to award damages based on the highest market value of the Historic Imbalance between the date its conversion claim accrued and the date the trial court granted summary judgment.

¶10 Because a grant of summary judgment involves purely legal determinations, we will review the trial court's decision under a de novo standard. Carmichael v. Beller, 1996 OK 48, 914 P.2d 1051, 1053. Summary judgment is appropriate only when there is no substantial controversy as to any material fact and one of the parties is entitled to judgment as a matter of law. 12 O.S.Supp. 2002, Ch. 2, App. 1, Rule 13.

¶11 Conversion is an act of dominion wrongfully exerted over another's tangible personal property in denial of or inconsistent with the owner's rights in the property. Conversion does not lie for a debt. Welty v. Martinaire of Oklahoma, Inc., 1994 OK 10, 867 P.2d 1273, 1275. Oil and gas do not become personal property until produced and severed from the leasehold. When they are in situ, they are considered part of the realty. Halliburton Oil Producing Co. v. Grothaus, 1998 OK 110, 981 P.2d 1244, 1251. Therefore, oil and gas in situ are not subject to conversion.

¶12 After oil or gas is produced, it is tangible personal property and is subject to conversion. However, under the common law in Oklahoma, working interest owners in an oil or gas well are tenants in common. Each cotenant has the right to develop the property and market production, subject only to the duty to account to other cotenants. Therefore, under ordinary circumstances, the sale of gas to a purchaser by a cotenant without the consent of other cotenants is lawful and does not constitute conversion on the part of either the working interest cotenant or the purchaser. Anderson v. Dyco Petroleum Corp., 1989 OK 132, 782 P.2d 1367, 1371-1372.