693 F.2d 1146 (5th Cir. 1982), 81-1396, Flowers v. Diamond Shamrock Corp.

Docket Nº:81-1396.
Citation:693 F.2d 1146
Party Name:Clem G. FLOWERS, et al., Plaintiffs-Appellants, v. DIAMOND SHAMROCK CORPORATION, Defendant-Appellee.
Case Date:December 20, 1982
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit

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693 F.2d 1146 (5th Cir. 1982)

Clem G. FLOWERS, et al., Plaintiffs-Appellants,



No. 81-1396.

United States Court of Appeals, Fifth Circuit

December 20, 1982

Rehearing Denied Jan. 10, 1983.

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[Copyrighted Material Omitted]

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R.C. Hamilton, Amarillo, Tex., for plaintiffs-appellants.

Underwood, Wilson, Sutton, Berry, Stein & Johnson, Harlow Sprouse, Alan B. Jones, Amarillo, Tex., for defendant-appellee.

Appeal from the United States District Court for the Northern District of Texas.

Before GARZA, TATE and WILLIAMS, Circuit Judges.

TATE, Circuit Judge:

In this Texas diversity suit, the plaintiffs (the Flowers), lessors of the mineral rights of Texas oil and gas fields, seek additional royalties under a market value royalty provision contained in their leases with the defendant, Diamond Shamrock Corporation (Shamrock). The Flowers contend that Shamrock did not base royalty payments on the "market value" of subsequent sales of the gas from the leased properties, but rather only on the lower amount of the actual proceeds from Shamrock's long-term sales contract with an intrastate distributor. The plaintiffs Flowers' cause of action is founded upon the Texas jurisprudential holdings that a landowner-lessor is entitled to royalty payment for gas sold off his premises based upon the market value at the time of sale after production, not upon the price established between the producer and the distributor under an earlier long term contract. Texas Oil & Gas Corporation v. Vela, 429 S.W.2d 866, 870-71 (Tex.1968).

The district court set aside parts of favorable jury determinations that justified an award to the Flowers of increased royalties. In so doing, the court held (1) that the endorsement of royalty checks as a matter of law constituted an accord and satisfaction as to some of the earlier royalty payments, and (2) that the effect of the Natural Gas Policy Act prevented the recovery of additional royalties for some of the later payments, since those sought were in excess of the maximum price for intrastate gas permissible under this federal regulation. For the interim in which additional royalties were held to be properly due under Vela, the district court also (3) permitted Shamrock to deduct for payment of Texas severance taxes a percentage of the royalties so due. On their appeal, the plaintiffs Flowers attack these three determinations.

We affirm the district court's entry of judgment notwithstanding the verdict as to (2), but we hold as to (1) that the jury could properly find on the evidence before it that, when the Flowers endorsed the royalty checks, there was no bona fide dispute as to the amount thereof (an essential prerequisite under Texas law to an accord and satisfaction), so that the district court therefore erred in granting judgment notwithstanding

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the jury verdict. We remand for the determination of additional royalties therefore due, and we also remand as to (3) for the determination of the severance-tax deduction issue.

The Facts

The plaintiffs Flowers have royalty interests under an oil and gas lease on lands in Ochiltree County, Texas. The defendant Shamrock, as lessee, agreed to pay the plaintiffs royalties based on the "market value" of the natural gas produced from a well it drilled on the property. 1 Gas was discovered on the property in 1963 and since that date has been sold and used solely within the state of Texas.

Shamrock pipes the natural gas from the well to its refinery, where the liquid contents of the gas are stripped, 2 and the residue is sold at the plant "tailgate" to a distributor. Although it commingles the gas from many wells at the refinery, Shamrock measures at each well the volume (by thousand cubic feet, or MCF) and the heating value (by British Thermal Unit, or BTU) of the gas. In 1965 Shamrock committed the gas from the Flowers' well, in addition to that produced from other leased properties, to a twenty-year sales contract with the Southwestern Public Service Company (Southwestern), setting a beginning price at 19.5 cents per thousand cubic feet of gas containing 1000 BTU per cubic foot, escalating over the life of the contract to 22.5 cents. Shamrock has paid the Flowers a royalty based on this contract price, or at times a slightly higher price.

Shamrock tendered to the plaintiffs monthly checks for royalty payments calculated upon the contract price, and the plaintiffs endorsed and cashed these checks. A stub was attached to each check which showed lease numbers, a number that presumably showed the volume of production, the amount of severance tax deducted, and an amount labelled "Your Part," which was the amount of the check. The following small print appeared on the back of the check itself:


This check is issued in full settlement of the account stated and the payee accepts it as such by his endorsement. If not correct, return without alteration and state difference.

On February 15, 1974, Shamrock sent a form letter to its royalty owners, including the Flowers, offering to pay higher royalties if the lessor executed a contract agreeing to accept royalties directly based on the sales contract proceeds from the lessee-distributor sales contracts rather than on the market value method of computation set forth in the original leases. On July 29, 1974, Marvin Flowers, for the Flowers, replied that there was no reason to execute an agreement to obtain a rate increase to which the lessors were entitled, and requested payment of "deficit funds" from February. 3 Shamrock acknowledged receipt

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of that letter in a response attached to the plaintiffs' original pleading, but not introduced into evidence, informing the Flowers that it would continue to pay the royalty in accordance with the lease provisions.

The plaintiffs did not express further dissatisfaction with the amount of royalties received, but stopped endorsing and cashing the checks in February, 1977, 4 and eventually brought this lawsuit.

The plaintiff-lessors sued for the difference in the royalties due them under Vela since December, 1973. Trial was to a jury, which found the market values for the applicable months and failed to find for the defendant on its affirmative defense of accord and satisfaction. The trial court granted Shamrock's motion for judgment notwithstanding the verdict on two counts. First, the court held that the defendant had established its accord and satisfaction defense as a matter of law as to those months from 1973 to 1977 when royalty checks were cashed by the plaintiffs. No recovery was therefore awarded for those months. Secondly, the court held that under the Natural Gas Policy Act, 15 U.S.C. Sec. 3301 et seq. (1978), the contract price received by Shamrock measured the proper market value for royalties payable to the Flowers' lessors, thereby preventing recovery by the plaintiffs for additional royalties on production had after December 1, 1978. The...

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