Pan Eastern Exploration Co. v. Hufo Oils
| Decision Date | 27 September 1988 |
| Docket Number | No. 87-1033,87-1033 |
| Citation | 855 F.2d 1106 |
| Parties | PAN EASTERN EXPLORATION CO. and Anadarko Petroleum Corp., Plaintiffs-Appellants Cross-Appellees, v. HUFO OILS, et al., Defendants-Appellees, and Billy Mack Gideon, Canadian Commercial Bank and First National Bank in Albuquerque, Defendants-Appellees Cross-Appellants. PAN EASTERN EXPLORATION CO. and Anadarko Petroleum Corp., Plaintiffs-Appellants Cross-Appellees, v. MITCHELL ENERGY & DEVELOPMENT CORP., et al., Defendants-Appellees, and Billy Mack Gideon, Canadian Commerce Bank and First National Bank in Albuquerque, Defendants-Appellees Cross-Appellants. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Butler & Binion, James V. Hammett, Jr., Deborah Essig Taylor, Houston, Tex., for appellee Mitchell Energy, et al.
Eugene B. Labay, San Antonio, Tex., for Pan Eastern Exploration Co. and Anadrako Petroleum Corp.
Reynolds, Allen & Cook, Andrew M. Taylor, Ivan D. Hafley, Austin, Tex., for appellee Billy Mack Gideon.
Bracewell & Patterson, Joe H. Foy, Mary Katherine Kennedy, Sarah B. Pierce, Houston, Tex., for appellees--Houston Natural Gas Corp., et al.
Cotton, Bledsoe, Tighe & Dawson, Charles L. Tighe, Susan R. Richardson, Midland, Tex., for appellees--First Nat'l Bank in Albuquerque.
James L. Stone, Stephen W. Seifert, Denver, Colo., for appellee Canadian Commercial Bank.
Tim Gideon, Austin, Tex., for appellee Hufo Oils, et al.
Dan Lain, Hurst, Tex., Glover Roberts, Dallas, Tex., for appellees J. Michael Curran, Trustee for the Bankruptcy Estate of Ted True, Inc., and Dean Gandy, Trustee for the Bankruptcy Estate of Ted True.
Marshall S. McCrea, Jr., Midland, Tex., for appellee Aplex Oil & Gas, Inc., et al.
Jerry D. Courtney, Clarendon, Tex., for appellee Robert Brent, et al.
Carrington, Coleman, Sloman & Blumenthal, Marvin S. Sloman, William B. Dawson, Rebecca P. Adams, Dallas, Tex., for appellee Canadian Commercial Bank.
Appeals from the United States District Court for the Western District of Texas.
Before CLARK, Chief Judge, and GEE and RUBIN, Circuit Judges.
Plaintiffs Anadarko Petroleum Corporation ("Anadarko") and its wholly-owned subsidiary Pan Eastern Exploration Company ("PEEC") own the natural gas rights in certain sections of land in the Panhandle Field of Texas. Certain of the defendants own the oil and casinghead gas rights in the same sections. The plaintiffs sued, claiming that some defendants wrongfully produced their gas, and that other defendants purchased, processed, and transported the converted gas. The defendants argued that they did not take the plaintiffs' gas; also, they asserted that even if they did the taking was with the consent of the plaintiffs or their affiliate corporation Panhandle Eastern Pipe Line Company ("PEPL" or "the pipeline") whose acts were binding on the plaintiffs. Some defendants made counterclaims against the plaintiffs and claims against PEPL. The jury rejected all claims by all parties. Plaintiffs and certain defendants appeal from various orders and from judgment entered on the jury verdict. We affirm in large part and remand in part for further proceedings.
Beneath the surface of the Texas Panhandle is a vast hydrocarbon reservoir that since 1917 has produced huge quantities of oil and gas. The parties vigorously dispute the precise geological structure of this reservoir, but roughly speaking the upper formations--the so-called Red Cave, Brown Dolomite, and Moore County Lime formations--tend to be more productive of gas while the lower formations--the Granite Wash being the only one relevant here--tend to be more productive of oil.
Throughout much of this region the right to produce gas from beneath a given tract has been severed from the right to produce oil and casinghead gas, so that one party may own the gas rights and another party the oil and casinghead gas rights throughout all horizontal formations beneath the very same piece of land. The division of gas rights from oil rights in the Panhandle Field of Texas apparently occurred many years ago, but only recently--under new market incentives to produce valuable "undedicated" natural gas 2--the oil and casinghead gas owners and their lawyers discovered that the division of rights is a rich deposit of legal ambiguities waiting to be mined. With the advent of new drilling and legal strategies, the so-called "split leases" have now for several years produced a steady flow of gas, controversy, and litigation. 3 This massive case may be one of the last surges in production, reaching our Court as Texas administrators and courts have started to limit the flow. 4
PEPL held gas leases and owned the gas wells on the disputed sections for many years. Anadarko was its wholly-owned subsidiary, formed to hold and develop various properties including some of the leases at issue in this case. In the early 1970s, PEPL assigned the ownership of the wells to PEEC, a newly-formed subsidiary of Anadarko. This assignment, undertaken with the permission of the Federal Power Commission, allowed PEEC to charge more for the gas under federal regulations than could its super-parent PEPL. In the early 1980s, PEPL spun back a new corporate parent called Panhandle Eastern Corporation, turning itself into an affiliate rather than the parent of the plaintiffs. The scorecard then looked like this: Panhandle Eastern Corporation--the new corporate parent--owned all the stock of PEPL and of plaintiff Anadarko; Anadarko in turn owned all the stock of plaintiff PEEC. At all times relevant to this dispute PEPL was an affiliate of the plaintiffs.
Plaintiff Anadarko was a fully-functioning exploration and production subsidiary of Panhandle Eastern Corporation with hundreds of employees and various corporate activities. Plaintiff PEEC, on the other hand, was what a non-lawyer would call a "shell" corporation. It owned several former PEPL wells but had only one full-time employee. Anadarko took care of the day-to-day management of PEEC's affairs, while PEPL continued to operate PEEC's gas wells (formerly PEPL's wells) under a contract denominating it an "independent contractor" of PEEC. PEPL's responsibilities for PEEC's wells included administrative, legal, field, and office work, including regulatory, purchasing, insurance, taxation, negotiation, and accounting services on behalf of PEEC. As is typical of such a corporate "family," Panhandle Eastern Corporation (the parent), Anadarko and PEEC (the plaintiffs), and PEPL (the affiliate) had interlocking but not identical officers and directors. The profits and losses of all members of the Panhandle Eastern family were aggregated for purposes of financial statements and periodic disclosures to the Securities Exchange Commission (Panhandle Eastern Corporation was a publicly held corporation). At all times, however, all corporate formalities were strictly observed and there is not a hint in the record of any legal irregularities in the way the various affiliates operated.
The plaintiffs sued a number of defendants for conversion and other wrongs. The parties have divided the defendants into functional groups. The "operator defendants" are the persons and entities that drilled and produced the oil wells or that owned a working interest in the wells; this group includes the two main operators Hufo Oils and Ted True, Incorporated and their owners. The "processing defendants" are Mitchell Energy & Development Corporation and its subsidiary Liquid Energy Corporation; these defendants installed a small gas plant on the property that processed the gas produced by the operator defendants before it was sold to the pipeline defendants. The "pipeline defendants" are Houston Natural Gas and its subsidiaries Houston Pipe Line Company and Intratex Gas Company; along with PEPL, the operator defendants' first customer, these pipeline companies purchased gas from the operator and processing defendants. Finally, the "bank defendants" are Canadian Commercial Bank and First National Bank in Albuquerque; they loaned money to Ted True, Inc. to drill and complete many of the wells at issue in this case.
In 1981, Hufo Oils, a partnership of defendants Lynn Hunt and Carl Foulds, obtained an oil and casinghead gas lease covering certain sections of land in which the plaintiffs held the gas rights. Hufo Oils assigned working interests to a number of investors. The investors elected Hufo Production Corporation, also owned by Hunt and Foulds, to be the operator of the leases. Hufo's leases were initially limited by horizon to the Red Cave and the Granite Wash formations, the most shallow and deepest 5 formations in the Panhandle Field. After drilling the first well, Foulds thought that the formations between the Red Cave and Granite Wash--including the Brown Dolomite and Moore County Lime--looked promising for oil and casinghead gas production. Hufo later obtained new leases from the landowners, giving it the oil and casinghead gas rights throughout all these formations.
Meanwhile, Hunt approached PEPL gas purchase agent John Gurche to see if the pipeline would be interested in purchasing the casinghead gas that Hufo planned to produce. Apparently, Hunt sought out PEPL because it was already purchasing gas from Hufo at other locations in the Panhandle Field. The pipeline was eagerly looking for new supplies of gas because at that time there was a tremendous unmet demand for gas. At first, Gurche and pipeline engineers studied Hufo's proposal and rejected it because the initial projected volumes from the Red Cave and Granite Wash were too small to justify the necessary expenses in hooking up the wells to the pipeline. In late 1981, Hunt once again approached Gurche with an offer to sell casinghead gas to the pipeline. This time, the pipeline's engineers projected total gas production more...
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