Phillips Petroleum Co. v. Johnson
| Decision Date | 17 May 1946 |
| Docket Number | No. 11308.,11308. |
| Citation | 155 F.2d 185 |
| Parties | PHILLIPS PETROLEUM CO. v. JOHNSON. |
| Court | U.S. Court of Appeals — Fifth Circuit |
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Warren M. Sparks and E. H. Foster, both of Amarillo, Tex., Rayburn L. Foster, of Bartlesville, Okl., and C. B. Cochran, of Oklahoma City, Okl., for appellant.
D. H. Culton, of Amarillo, Tex., for appellee.
Before SIBLEY, McCORD, and WALLER, Circuit Judges.
The appeal is from a judgment on a jury verdict, for a balance due to a lessor by a lessee for gas royalties. A motion for a directed verdict made by the defendant Phillips Petroleum Company, and one for a judgment non obstante, were overruled. Besides this, errors are specified as to the admission of evidence and the charges and refusals to charge of the court. The main law questions arise on the construction of the royalty provision in the lease, and touching the tolling of the statute of limitation, and the allowance of interest before judgment.
The defendant's answer admits allegations in the petition that plaintiff, Clay Johnson, on June 7, 1928, made an exhibited oil and gas lease which passed to the defendant in 1937, and that defendant in September of that year completed a well which has ever since produced large quantities of gas, properly classed as "natural gas". None of it has been sold at the well, but all has been put by defendant into its own extensive system of pipe lines and mixed therein with gas from many other wells, and the mixture taken to plants of defendant where the easily liquefiable gasolene was taken out, and the residue gas sold to producers of carbon black; that monthly statements were sent Johnson of the volume of gas taken from the well with a check for the sum stated to be due; but that Johnson, though not disputing the amounts of gas, contended the payment was not correct, and would not accept the checks until on April 12, 1940, it was by letter agreed the checks should be cashed without prejudice to his rights.
The petition further alleges the statements were misleading, and did not show the true quantity of liquids extracted or the residue gas sold, and the true prices at which these were sold by defendant, and that petitioner did not learn of the falsity of these statements till shortly before suit. The answer contends the monthly statements were meant to show and did show the fair market value of the gas at the well, which was the true measure of defendant's liability: that what was done with the gas after it left the well was immaterial; and the four-year statute of limitation was specially pleaded. Thus the issues are drawn.
1. The royalty provision of the lease, the meaning and application of which is in dispute, reads: (Italics added).
No oil was found. No casinghead gas was in fact produced, though the monthly statements appeared to be for that until after March, 1938. It is now conceded that only natural gas has ever been produced. The entire royalty agreement is quoted to show the care with which terms were used. As to oil, an eighth of the oil itself was to be delivered in kind, with an option to the lessee to buy it back at market price. Gas cannot well be divided and delivered in kind, so the more valuable casinghead gas, if any, was to be kept by the lessee, he paying a fixed rate of four cents per MFC irrespective of the current market price or value. The natural gas is less clearly dealt with. It is to beget a royalty only if "used off the premises" or "marketed" by lessee, who then shall pay an eighth of "the net proceeds derived from gas at the mouth of the well." As to it there is no mention of either market price or market value, or a fixed price, but of net proceeds, which generally means the receipts, less expenses, of an actual sale. If this gas had been sold "at the mouth of the well" there would be no difficulty in applying the words, but the lessee took it away from the premises to its gasolene plant and "used or marketed" it there. There were no net proceeds derived at the mouth of the well. But if the raw gas had been sold at a market off the premises, the net proceeds at the mouth of the well might well mean the actual proceeds less the expense of transportation. Now it was transported in a mixture with gas from other wells, the condensable liquid was separated out, and the residue (the evidence shows about 97 percent by volume), sold to others for making carbon black. The liquid extracted was then put through more complicated processes of manufacture to make many refined or blended hydrocarbon products which were in turn sold by lessee. The plaintiff does not here contend that he can follow the liquid into these manufactured products and have an account of their sale, but he does contend that in such manufacture the liquefied elements of his gas were "used" by the lessee, and since this prevented there being any "proceeds" by sale, the account ought to be of the fair value of the liquid; and there ought to be an account of the actual proceeds of the residue gas, rendered "net * * * at the mouth of the well" by allowing for the cost of transportation and separation. On the other hand the defendant contends that it "used" the gas as soon as it left the well by mixing it with other gas, and it should account for its fair market value at the mouth of the well since there were no proceeds derived there.
The law often resorts to "fair value" or "fair market value", when "market price" is stipulated and there is no market,1 or when "proceeds" are stipulated and there is no sale. This is because the contract evidently intends payment shall be made, and value is the nearest approach possible under the circumstances to the measure of payment contracted for. In so far as this gas was "used" there can be no "net proceeds derived at the mouth of the well" and fair value must be resorted to. In so far as the gas was "marketed" we think the stipulation for a share of the "net proceeds derived" ought to be enforced, effect being given to the words "net at the mouth of the well" by allowing as expense the cost of transporting, separating, and marketing. This lessor did not consent to be left to the uncertainties of "fair value", or even "market price", as to the gas but was willing to take one-eighth of what the lessee sold it for, relying on the lessee's self-interest to secure a good sale. We think the mere mingling of this gas with other similar gas does not amount to a "use" of it. There is testimony that there is not much difference in the gas from the various wells in the vicinity. As we shall soon see, the lessee thought them near enough alike to treat this gas as average gas, and to calculate its returns as in proportion to volume in the statements rendered. Nor do we think the condensation of the gasolene vapors from the gas is a "use" of it within the meaning of this contract. About three percent of the volume of the gas was thus separated out, but only its physical state was altered. If allowed to evaporate it would become again just what it was. But when this liquid was by more intricate processes further altered and separated and blended into other hydrocarbon compounds, it might well be considered a "use" in manufacture, so that "proceeds derived" from the sale of the products cannot be followed in the account, and only the fair value of the condensed liquid before manufacture can be considered, it having been used and not sold.
This is the very interpretation put on the contract by Phillips Petroleum Company in the statements it rendered Johnson after March, 1938. They did not purport to account for the gas at its value at the mouth of the well, disassociated from everything that happened after it left there. They are headed, "Statement of gas purchased". After identifying the well there follows, "Clay Johnson, owner or owners whose share is computed hereon". The volume of the gas metered from this well is then stated, and "Residue value of the Gas", figured by obtaining the proportion from this well compared with the total gas handled during the month, under the heading "Meter Station proportion of total residue sold from plant"; and then "50% of net proceeds from total residue sold from plant, and lastly, "Meter station residue net proceeds", being the figure credited to Johnson on account of residue gas for that month. Then under the head "Gasolene Content value of the gas" there is a figuring of gasolene content by use of the same proportional fraction, and a price per gallon, resulting in a figure called "Meter Station gasolene content value". Both credits are combined under the head "Total Meter Station residue net proceeds and gasolene content value after tax", for which check was sent Johnson. This we think plainly shows that, notwithstanding the mingling of this gas with other gas, the defendant understood it was accountable for the value of this gasolene liquid it separated out and used, and for the net proceeds of the residue gas which it sold. The 50% reduction in the proceeds of the residue, and a percentage...
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