Pan American Petroleum Corporation v. Long
| Decision Date | 03 March 1965 |
| Docket Number | No. 21159.,21159. |
| Parties | PAN AMERICAN PETROLEUM CORPORATION and Socony Mobil Oil Company, Inc., Appellants, v. W. W. LONG et al., Appellees. SOUTHWESTERN LIFE INSURANCE COMPANY and Valley Royalty Corporation, Appellants, v. PAN AMERICAN PETROLEUM CORPORATION and Socony Mobil Oil Company, Inc., Appellees. |
| Court | U.S. Court of Appeals — Fifth Circuit |
COPYRIGHT MATERIAL OMITTED
J. K. Smith, Fort Worth, Tex., Roy L. Merrill, Houston, Tex., Jack W. Flock, Charles F. Potter, Tyler, Tex., Wardlow L. Lane, Center, Tex., R. T. Wilkinson, Jr., Houston, Tex., Ramey, Brelsford, Hull & Flock, Tyler, Tex., Spruiell, Lowery, Potter, Laster & Guinn, Tyler, Tex., for appellants.
John W. Ford, Kilgore, Tex., James P. Swift, Paul McCarroll and Swift, Walsh, McCarroll & Wood, Dallas, Tex., for appellee.
Robert S. Mizell, Golden, Croley, Howell, Johnson & Mizell, Dallas, Tex., amici curiae.
Before RIVES and BROWN, Circuit Judges, and GARZA, District Judge.
This case is another chapter in the litigation arising out of the recent slant hole oil episode in the East Texas field, this time involving two parties innocent of any purposeful wrongdoing. The question here is whether the slanted-on oil company may recover from a financial institution the proceeds of the stolen oil received by it from the purchasing pipelines in payment of loans and production payments made to or purchased from the slant-holing operator. There are two subsidiary questions. One is whether the Texas two-year Statute of Limitations, Vernon's Ann.Tex.Civ.Stat. art. 5526 (1958), applies to limit the oil company's recovery to proceeds received during the two-year period immediately preceding the filing of this action. The other is whether the financial institution must be given credit for the amount it received but paid over to its debtor pursuant to the mortgage or production payment agreement, such amount being in excess of the required monthly payments. We have concluded that the Trial Court was correct in holding Southwestern Life liable for conversion to the extent of all proceeds received during the two-year period. We therefore affirm.
Pan American and Socony Mobil,1 leaseholders on the east side of the field brought this action for conversion2 of oil and gas beneath their tracts against (1) the operator (H. L. Long) of the Long lease adjoining them to the west, (2) the owners of various interests in the Long lease (W. W. Long, Charles R. Stubblefield, and Mrs. Sarah Long Erickson), and (3) Southwestern Life and Valley Royalty.3 The jury in response to special interrogatories found that of the eleven wells on the Long lease, three were deviated and bottomed under the Pan Am lease and one, under the Socony lease; that all production from the Long lease came from the Pan Am-Socony leases; that the slanted wells were drilled with Long's knowledge; that operator Long had fraudulently concealed the slant drilling from Pan Am; and that Pan Am had no actual knowledge of facts which would have put them to inquiry, nor through the exercise of reasonable diligence would they have known of the slant drilling.
With this foundation, the Trial Judge entered judgment against Operator Long for the market value of 7/8; of the oil produced over the entire 13-year period of operation of the Long lease against the other lease interest owners for the amounts they actually received during this same period; and against SWL for amounts received by it during the last two years (with interest, $232,145.42).4 Because of Operator Long's fraudulent concealment and Pan Am's not being put on notice, the statute of limitations was tolled as to him, but not as to SWL. Only Pan Am and SWL have appealed.
Between 1955 and 1960, SWL, by itself and through its subsidiary Valley Royalty, engaged in a series of loan and production payment transactions5 with the owners of the operating interest in the Long lease. The first was a loan of $140,000 by SWL to H. L. Long which a year later was renewed and increased to $221,366.87. Both of these loans were secured by essentially identical deeds of trust (mortgages) on Long's interest in the leasehold. These instruments in addition to restricting Long's actions through various covenants6 and giving SWL various and considerable powers with regard to the operation of the well,7 as an additional security, contained an "assignment of runs" clause,8 whereunder all proceeds from the sale of oil and gas would go directly from the purchasing pipeline to SWL. Under the provisions of the initial and renewal mortgages, 80% of the amount received from the pipeline each month would be applied to retire the debt, any excess, under ordinary conditions, going to the debtor-Long. In the event 80% came to less than a fixed monthly figure ($1,963.00 in the first instrument), the percentage retained by SWL could be escalated as high as necessary to reach the specified amount, up to 100%.9
The "assignment of runs" clause contained a direction by the "grantor"-Long to any purchaser (pipeline) to pay all proceeds to SWL.10 In addition, a separate division order to the pipeline was executed by Long and SWL which recited that production having been transferred, credit should be given SWL for oil extracted from the Long lease. The division order, executed on a pipeline company form, declared the undersigned to be the "legal owners of the interest" and warranted their title thereto. Paragraph 4 then purported to dispose of the oil:
By a stamped clause above its signature, SWL made the express disclaimer "without warranty of any kind either expressed or implied." When the loan was renewed and enlarged, the same division order was continued in effect.
There were several production payment transactions, the principal one presumably being in the form, or to achieve the effect, of the customary ABC transaction.11 H. L. Long first conveyed his interest in the leasehold to Stubblefield reserving a production payment equal to 90% of the production until he had received, free of expense, $190,000 plus interest12 and specified taxes. On the same day, Long then transferred this production payment to Valley Royalty in exchange for $190,000. Valley Royalty borrowed this amount from SWL giving as security a deed of trust13 on the production payment which contained an assignment of runs similar to the one previously described in the SWL-Long transaction. All four parties (Stubblefield, Long, Valley Royalty and SWL) executed a division order,14 again similar to the one previously described, directing the pipeline to make payment for the oil it purchased to SWL (90%) and Stubblefield (10%). About a year and a half later, Valley Royalty assigned the production payment to SWL in exchange for cancellation of the debt and the deed of trust.
Thus the end result was that SWL stood in the shoes of the original Grantor-Owner of the reserved production payment. It had the same rights to payment as did Long and all of the obligations which were binding on the Grantee Stubblefield inured to its benefit. Although the production payment was out of 90% of the production, the conveyance prescribed that under ordinary conditions 85% of the proceeds would be applied to the production payment, so long as 85% was equal to $2,800 for each month (any excess going to the Grantee Stubblefield). If it was not, then the amount to be retained and applied could go as high as 90%. If 90% was less than $2,800 for any month, the deficiency was recoverable in future months by raising the percentage of the proceeds retained to 90%. This rather elaborate system of payment could be laid aside at any time, however, by the simple expedient of SWL giving Stubblefield 30 days' notice that it intended to retain the full 90% reserved.15
The activities of Grantee Stubblefield as a co-owner and the operator of the lease were seriously restricted by numerous covenants in the reservation of the production payment. In addition to limiting the Grantee's own actions,16 paragraph 10 of the covenants gave SWL, as the owner of the production payment, the right, upon determining that the property was not being operated in a prudent manner, to take over complete operation of the well.17 The other loan and production payment transactions18 were substantially similar in form and content19 to those described above.
From all definitions encountered the rubric seems to be some distinct act of dominion or control over the personal property of another.21 The convertor may either have actual or constructive possession of the property.22 Although the act of control or dominion must be positive and affirmative23 (mere non-feasance will not do), a wrongful or fraudulent intent or purpose is not required,24 and the presence of good faith in the convertor is relevant only on the issue of damages.25 Only where the owner is seeking to recover the actual property itself...
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