Tr. Of The Dings Trust Agency v. Shell Western E & P Inc.

• Decision Date: 12 April 2010
• Docket Number: No. 106,470.,106,470.
• Parties: Nancy Fuller HEBBLE and Susan Fuller Maley, as Individuals; Nancy Fuller Hebble and Susan Fuller Maley, as Co-Trustees of Thomas R. Fuller Testament Trust; Wachovia Bank, N.A., as Executor of the Estate and Trust of Elizabeth Fuller Gardner Trust; and Marshall T. Steves, Trustee of the Dings Trust Agency, Plaintiff/Appellees, v. SHELL WESTERN E & P, INC., and Shell Oil Company, Defendant/Appellants.
• Court: United States State Court of Criminal Appeals of Oklahoma. Court of Civil Appeals of Oklahoma

238 P.3d 939

2010 OK CIV APP 61

Nancy Fuller HEBBLE and Susan Fuller Maley, as Individuals; Nancy Fuller Hebble and Susan Fuller Maley, as Co-Trustees of Thomas R. Fuller Testament Trust; Wachovia Bank, N.A., as Executor of the Estate and Trust of Elizabeth Fuller Gardner Trust; and Marshall T. Steves, Trustee of the Dings Trust Agency, Plaintiff/Appellees,

v.SHELL WESTERN E & P, INC., and Shell Oil Company, Defendant/Appellants.

No. 106,470. Released for Publication by Order of the Court of Civil Appeals of Oklahoma, Division No. 3.

Court of Civil Appeals of Oklahoma,Division No. 3.

Dec. 18, 2009.

Rehearing Denied Jan. 26, 2010.

Certiorari Denied April 12, 2010.

Appeal from the District Court of Stephens County, Oklahoma; Honorable Michael C. Flanagan, Trial Judge.

AFFIRMED.

Randall K. Calvert, Calvert Law Firm, Oklahoma City, OK, and Clark O. Brewster, Guy A. Fortney, Brewster & De Angelis Law Firm, Tulsa, OK, for Plaintiff/Appellees.

Sharon T. Thomas, Hall, Estill, Hardwick, Gable, Golden & Nelson, P.C., and R. Brad Miller, Durbin, Larimore & Bialick, Oklahoma City, OK, and Gregory A. McKenzie, Gregory A. McKenzie, P.C., Edmond, OK, for Defendant/Appellants.

John N. Hermes, Gary W. Catron, Kristin M. Simpsen, McAfee & Taft, Oklahoma City, OK, for Amicus Curiae, Oklahoma State Chamber of Commerce and Industry, Inc.

Mark D. Christiansen, Crowe & Dunlevy, Oklahoma City, OK, for Amicus Curiae, The Oklahoma Independent Petroleum Association.

Brian R. Matula, Oklahoma City, OK, for Amicus Curiae, Chesapeake Energy Corp.

Dennis C. Cameron, Bradley W. Welsh, Gable & Gotwals, Tulsa, OK, for Amicus Curiae, ConocoPhillips Company.

CAROL M. HANSEN, Presiding Judge.

¶ 1 Defendant/Appellants, Shell Western E & P, Inc. and Shell Oil Company (collectively Shell), seek review of the trial court's judgment based on a jury verdict in favor of Plaintiff/Appellees (Owners) for $13,205,916.00 in actual damages and $53,625,000.00 in punitive damages in Owners' action for underpayment of oil and gas proceeds. At issue is whether Owners's claims sounded in tort such that the statute of limitations was tolled until Owners learned of their loss. We hold Shell owed a fiduciary duty to Owners arising from its resort to the police powers of the state in unitizing oil and gas interests, and therefore, Owners timely brought a tort claim. We find no error of law in the conduct of trial and affirm.

¶ 2 Owners are the successors to a net profits interest reserved in a 1927 assignment of an oil and gas lease (Crews Lease) in Stephens and Carter Counties, Oklahoma. ¹ Shell acquired the Crews Lease in 1948 and drilled wells on the lease through the 1950s, paying a share of the net profits to Owners or their predecessors. In 1964, the Oklahoma Corporation Commission (Commission) granted Shell's application to create a waterflood unit for secondary recovery in the Sims Sand, called the Brittain Sims Unit. The Commission's order adopted a unitization plan which designated Shell as the unit operator. The plan expressly addressed net profits interests:

Any net profits, net proceeds, or other interest of a similar nature, which is payable out of profits resulting from operations under the instrument creating such interest, shall be payable as provided in such instrument, except that as to the Unitized Formation underlying the lands covered thereby included in the Unit Area, such computations shall be based not upon actual production from and costs incurred in operations on such land, but instead upon that portion of the unit production and unit expense which is allocated to such lands under the terms hereof.

In 1970, the Commission created the Brittain Deese Unit for secondary recovery by waterflood in the Deese Sands. It again adopted a unitization plan designating Shell as operator and providing the same language quoted above regarding net profits interests.

¶ 3 In 1972, the Commission adopted an order establishing 80-acre drilling and spacing units for the development of oil from the Sycamore formation. The order provided in part:

4. That all royalty interests within any spacing unit shall be communitized and each royalty owner within any unit shall participate in the royalty from the well drilled thereon in the relation that the acreage owned by him bears to the total acreage in the unit.

5. That in the event there are divided or undivided interests within any unit and the parties are unable to agree on a plan for the development of the unit, then their rights and equities shall be adjudicated by the Commission as provided for by subsection d, Section 87.1; Title 52, OSA.

Shell was the operator of the Brittain Deep No. 2, a unit well in the Sycamore. According to Shell, the Brittain Deep No. 2 was not located on the Crews Lease but was in the same 80-acre drilling and spacing unit for the Sycamore, and therefore revenue and expenses from that well should have included in the net profits calculations for the Crews Lease.

¶ 4 In 1985, Shell sold its interest in the Crews Lease to Maynard Oil Company (Maynard). Shell admits it failed to pay Owners $750,708.00 in net profits from 1973 through 1985. Over $715,000.00 from the Brittain Deep No. 2 Well and the rest was from the Brittain Deese Waterflood Unit. Shell paid the net profits due from the Brittain Sims unit.

¶ 5 In 1995, Owners filed the suit below against Shell and Maynard, seeking actual and punitive damages under theories of fraud and breach of statutory and quasi-fiduciary duties. Maynard settled with Owners and was dismissed. Shell filed multiple motions for summary judgment on statute of limitations grounds, among others. The trial court denied summary judgment, ruling Shell as operator had a fiduciary or quasi-fiduciary duty to non-operators whose interests were unitized by Commission order. It ruled Shell's duties continued until repudiation by Shell and communication of the repudiation to Owners. It found there were issues of material fact preventing summary judgment on the statute of limitations defense to the breach of fiduciary claim. It also found there was an issue of material fact as to when Owners knew or should have known of Shell's alleged fraud, preventing summary judgment on the statute of limitations defense to Owners' fraud claim.

¶ 6 The parties tried the matter to a jury in May 2008. The trial court bifurcated the issues of liability and actual damages from the issue of punitive damages. The jury found for Owners on their claims for (1) false representation, nondisclosure or concealment, deceit, or constructive fraud, and (2) breach of fiduciary duty. It awarded actual damages in the amount of $13,205,916.00. Prior to submitting the case to the jury at the second stage of trial, the trial court lifted the cap on punitive damages pursuant to the statute in effect at the time the case was filed, 23 O.S.1991 § 9(A). The jury then awarded $53,625,000.00 in punitive damages. The trial court entered judgment for Owners in the amount of $66,830,916.00. It denied Shell's motions for judgment notwithstanding the verdict and for remittitur or new trial. Shell appeals from these orders.

I

¶ 7 As a threshold matter, we must address Shell's contention the trial court erred in ruling Shell had a fiduciary duty to Owners and the statute of limitations did not begin to run on Owners' claim for breach of the fiduciary duty until Shell repudiated its fiduciary duty and communicated that repudiation to Owners. Shell asserts Owners' claims are contract-based and subject to the five-year limitations period of 12 O.S.Supp.2008 § 95(A)(1).

¶ 8 In Oklahoma, oil and gas operators have no fiduciary duty to non-operators arising solely from contracts such as leases, communitization agreements, or joint operating agreements. Howell v. Texaco Inc. (Howell), 2004 OK 92, 112 P.3d 1154, 1160-1161, and Tarrant v. Capstone Oil and Gas Co. (Tarrant), 2008 OK CIV APP 17, 178 P.3d 866, 870-871. An operator's breach of duties under such agreements gives rise to a breach of contract claim, not a breach of fiduciary duty claim. Tarrant, 178 P.3d at 871.

¶ 9 However, the Oklahoma Supreme Court has “recognized the existence of a fiduciary duty owed by a unit to the royalty owners and lessees who are parties to the unitization agreement or subject to the order creating the unit. This is not a duty created by the lease agreement but rather by the unitization order and agreement.” Leck v. Continental Oil Co. (Leck), 1989 OK 173, 800 P.2d 224, 229. After unitization, the leases no longer control. Howell, 112 P.3d at 1161. Instead, the parties' relationships are defined by statute and by Commission order. “The unit organization with its operator stands in a position similar to that of a trustee for all who are interested in the oil production either as lessees or royalty owners.” Young v. West Edmond Hunton Lime Unit, 1954 OK 195, 275 P.2d 304, 309. The fiduciary duty of the unit operator arises not only from the creation of field-wide units for secondary recovery under 52 O.S.2001 §§ 287.1-287.15, but also from the creation of drilling and spacing units under 52 O.S.Supp.2007 § 87.1. E.g., Leck, 800 P.2d at 229. The critical factor is the resort to the police powers of the state on the part of a lessee in unitization proceedings which modify and amend existing legal rights. Olansen v. Texaco Inc., 1978 OK 139, 587 P.2d 976, 985.

¶ 10 In the present case, Shell as the unit operator owed a fiduciary duty to Owners to properly account for and distribute oil and gas proceeds from the units. As to the Brittain Deese unit, this duty clearly arose from the Commission order creating the unit and appointing Shell as unit operator. The situation as to the Brittain Deep No. 2 unit is less clear-cut. The Commission created the unit and ordered the royalty interests communitized, but it did not pool the working interests and appoint an operator. Shell became the operator pursuant to a joint operating...