Phillips Oil Co. v. OKC Corp.
| Decision Date | 17 March 1987 |
| Docket Number | No. 86-3322,86-3322 |
| Parties | 22 Fed. R. Evid. Serv. 1227 PHILLIPS OIL COMPANY, Plaintiff-Appellee, v. OKC CORPORATION, et al., Defendants-Appellants. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Gene W. Lafitte, John M. Wilson, Joe B. Norman, Liskow & Lewis, New Orleans, La., for defendants-appellants.
Kennedy J. Gilly, Jr., Charles D. Marshall, Jr., Milling, Benson, Woodward, Hillyer, Pierson & Miller, New Orleans, La., for plaintiff-appellee.
Appeal from the United States District Court for the Eastern District of Louisiana.
Before RANDALL, JOHNSON and JONES, Circuit Judges.
Appellant, OKC Corporation ("OKC"), appeals from the district court's grant of partial summary judgment in favor of appellee, Phillips Oil Company ("Aminoil"), 1 and the decision in favor of Aminoil on trial of the accounting portion of the action. We affirm.
On July 1, 1967, Aminoil, with three partners, acquired from the United States a lease covering an area in the Gulf of Mexico known as South Pass Block 89 ("Block 89"). Aminoil and its partners, known collectively as the SLAM Group, each acquired a 1/4 working interest in Block 89.
According to OKC, from 1967 to 1977, exploratory wells drilled on Block 89 revealed the presence of hydrocarbon reserves having only marginal economic value. As of early 1977, those reserves thought to be recoverable were considered to be located in the northeast portion of Block 89.
In 1976, the operator of Block 89 for the SLAM Group, Marathon Oil Company ("Marathon"), proposed installation of a platform, designated as Platform A, in the northeast portion of Block 89 to drain the known reserves. According to OKC, development of the block in the area south of the platform was not anticipated.
Prior to Marathon's proposal, Aminoil had conducted internal reviews of geological data pertaining to Block 89. According to OKC, this information suggested that there were approximately four million barrels in "proven" and "potential" oil reserves in the area where Platform A was to be located. Another four million barrels were considered "possible," but the possibility of recovering them was "poor." According to OKC, Aminoil believed that even these "possible" reserves were located in the area to be drained by Platform A wells.
Based on its economic review, Aminoil chose not to participate in the proposed installation of Platform A or in the costs of further development. Instead, Aminoil decided that it would "farm out" its interest in Block 89 to a party willing to bear the construction costs of Platform A in exchange for the acquisition of an investment in the Block 89 lease.
In consideration of certain obligations to be undertaken by OKC, and subject to the reservation of an overriding royalty which was convertible to an escalating net profits interest, Aminoil "farmed out" its entire 1/4 working interest in Block 89 to OKC under a written agreement ("the Farmout") executed June 14, 1977. Aminoil and OKC subsequently executed, on July 11, 1977, an "Assignment of Interest in Oil and Gas Lease," pursuant to the Farmout. 2
Discussions concerning a possible farmout of Aminoil's interest in Block 89 began sometime in the fall of 1976 or the early months of 1977. According to OKC, at their first meeting, officials of OKC and Aminoil discussed the opportunity for OKC to acquire Aminoil's interest in Block 89 but did not discuss the reservation by Aminoil of any interest in the property. According to OKC, negotiations continued after the first meeting, with Aminoil representative, Harry Fisher, for the first time advising OKC representative, Gary Adams, that Aminoil wanted to retain an overriding royalty interest convertible upon payout of Platform A to a net profits interest in production from Platform A.
Adams advised OKC President Cloyce Box of Aminoil's desire. According to OKC, Box discussed the matter with Aminoil's George Dawson who proposed assigning to OKC Aminoil's entire interest in Block 89, subject to Aminoil's retention of an interest in production from Platform A, in return for OKC's assumption of Aminoil's cost obligations with regard to the Block. Box agreed to the proposal and according to OKC, no further communications occurred between the parties concerning different terms. A telex, dated March 25, 1977, was prepared by Aminoil, outlining the text of a letter of intent to be executed by the parties. In the telex, Aminoil described its retained interest with specific reference to Platform A. 3 The telex concluded with the representation that Aminoil would "enter into a farmout agreement which incorporates the aboe [sic] conditions and such other conditions as the parties agree are appropriate." Aminoil undertook to draft the required documents. 4
On May 11, 1977, the proposed Farmout was delivered to OKC, under the letter of Aminoil's Roger Edwards. Under the terms of the proposed Farmout, Aminoil agreed to assign its entire 1/4 interest in the Block 89 lease to OKC, subject to Aminoil's reservation of an overriding royalty convertible to an escalating net profits interest as provided in Paragraph IV of the proposed Farmout:
Aminoil shall reserve to itself from the interest to be assigned under the terms of this agreement, an overriding royalty interest equal to one-twelfth ( 1/12) of one-fourth ( 1/4) of eight-eighths ( 8/8) of production, until "net profits" are received as the term is defined hereafter, at which time Aminoil's overriding royalty interest shall automatically convert to a net profits interest equal to twenty percent (20%) of one-fourth ( 1/4) of eight-eighths ( 8/8) of production, until recovery from first production from the subject lease of four million (4,000,000) gross barrels of oil, condensate and/or gas equivalent based on ten (10) MCF of gas equaling one (1) gross barrel of oil and/or condensate; thereafter Aminoil's net profits interest shall be increased to thirty-three percent (33%) of one-fourth ( 1/4) of eight-eights ( 8/8).
Over a period of nearly five weeks, the proposed Farmout was reviewed by various OKC officials. 5 On June 14, 1977, OKC's Executive Vice President, without reading the Farmout himself, executed the Farmout without making any changes in the document that had been submitted by Aminoil to OKC for approval. On July 11, 1977, Norman Smith, one of the OKC employees who had reviewed the Farmout, accepted the assignment of one-quarter interest in Block 89 by virtue of the "Assignment of Interest in Oil and Gas Lease" subject to the Farmout.
From 1977 to 1980, exploratory wells were drilled in the southern portion of Block 89 and substantial accumulations of hydrocarbons were discovered. In 1980, the fabrication and installation of a development platform, Platform B, in the southern portion of Block 89 were proposed.
The instant controversy arose in February of 1981 when OKC, in aid of its liquidation, 6 mailed a public bid letter to various oil and gas companies, including Aminoil. The bid letter suggested that Aminoil's reserved interest was restricted to Platform A in the northern portion of Block 89, instead of the entirety of Block 89 (including Platform B). Following its receipt of OKC's bid letter, Aminoil filed the instant action against OKC seeking a declaratory judgment that Aminoil's reserved interest under the Farmout applied to the entirety of the Block 89 lease and all production therefrom, and for an accounting on that basis. The action was filed in federal district court on the basis of diversity jurisdiction.
Aminoil's complaint alleged that its reserved overriding royalty and net profits interest was effective as to all production from the subject lease, that this was disputed by OKC, and that Aminoil was entitled to a declaratory judgment in accordance with its interpretation of the agreements. OKC denied the correctness of Aminoil's interpretation of the Farmout and counterclaimed alleging error and seeking reformation of the Farmout to conform with OKC's argument that Aminoil's reserved interest was restricted to production from Platform A. OKC asserted that the mutual intent of the parties under the Farmout and Assignment was that Aminoil's reserved overriding royalty and net profits interest did not apply to production from the entire lease, but rather, only to production from Platform A.
Aminoil responded to OKC's counterclaim, contending that the Farmout clearly and unambiguously reflected the parties' understanding and mutual intention that Aminoil's reserved interest would apply to the entire lease and all production therefrom. Additionally, Aminoil alleged that if OKC were in error as to the extent of Aminoil's reserved interest, such error was the result of OKC's own negligence, fault, or inattentiveness in reviewing, or failing to review, the Farmout.
Aminoil moved for partial summary judgment and also filed a motion in limine to exclude parol evidence to be offered by OKC. 7 By minute entry dated July 27, 1984, the district court granted both motions. The court found that Aminoil's reserved interest applied to all production from the entirety of Block 89, saying that "the intent of the parties with regard to the scope of Aminoil's reserved interest is set forth in a clear, consistent and extensive manner which leaves no doubt as to what was intended." Minute Entry at 6. The court concluded that:
insofar as the scope of Aminoil's reserved overriding royalty and net profits interest, the Farmout and Assignment are clear, unambiguous and complete and, under controlling legal principles, parol evidence is inadmissible to vary or modify the words of the contract or to prove an intent different than that which is unmistakably and clearly stated in the contract. 8 Because, as a matter of fact and law, the Farmout and Assignment provide that Aminoil's reserved interest shall apply to the entirety of Block 89, summary...
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