Amoco Production Co. v. Heimann
| Citation | 904 F.2d 1405 |
| Decision Date | 24 May 1990 |
| Docket Number | Nos. 88-2070,88-2255 and 88-2355,88-2072,s. 88-2070 |
| Parties | AMOCO PRODUCTION COMPANY, Plaintiff-Counterdefendant-Appellant and Cross-Appellee, v. J. Casper HEIMANN; Owaissa Heimann, his wife; Roberta Nelson; Bobby D. Adee; Howard W. Robertson; Pauline Robertson, his wife; Johnann Adee, as Trustee for Sharon Adee and Dowlen Adee; J. Casper Heimann, as Trustee for Randall Lynn Heimann, Jay Dee Heimann, Gene Alvin Heimann and Russell Gary Heimann; Pauline Robertson, as Trustee for Van Howard Robertson; Deana Shugart, a married woman dealing in her sole and separate estate; and Johnann Adee, in her capacity as Personal Representative of the Estate of Fred P. Heimann, deceased, Defendants-Counterclaimants-Appellees and Cross-Appellants, Rocky Mountain Oil and Gas Association; New Mexico Oil & Gas Association, Amici Curiae. |
| Court | U.S. Court of Appeals — Tenth Circuit |
William F. Carr (Michael B. Campbell & John H. Bemis, with him on the brief), Campbell & Black, Santa Fe, N.M., for plaintiff-counterdefendant-appellant and cross-appellee.
Steven L. Tucker (Jerry Wertheim & Arturo L. Jaramillo, with him on the brief), Jones, Snead, Wertheim, Rodriguez & Wentworth, Santa Fe, N.M., for defendants-counterclaimants-appellees and cross-appellants.
Charles L. Kaiser and Mary A. Viviano, Davis, Graham & Stubbs, Denver, Colo., filed an amicus curiae brief for the Rocky Mountain Oil and Gas Ass'n.
Paul A. Cooter, Rodey, Dickason, Sloan, Akin & Robb, Santa Fe, N.M., filed an amicus curiae brief for the New Mexico Oil and Gas Ass'n.
Before SEYMOUR and BALDOCK, Circuit Judges, and THEIS, District Judge. *
Amoco Production Company (Amoco) appeals from a $4 million judgment arising out of its unitization of a carbon dioxide field in northeastern New Mexico. Amoco argues, inter alia, that the district court 1) misinstructed the jury on an oil or gas lessee's duty of good faith, and 2) improperly failed to accord collateral estoppel effect to the findings of the New Mexico Oil Conservation Commission (OCC). Our jurisdiction over this diversity case arises under 28 U.S.C. Sec. 1291. We hold that 1) a good faith inquiry into an oil and gas lessee's conduct is unnecessary where the unitization previously was approved by an independent state agency which passes on the fairness of the participation formula, such as the OCC, and 2) the OCC's approval of the unitization plan in this case has collateral estoppel effect upon the appellees' challenge to the unit's allocation formula. Accordingly, we reverse.
Defendants-Counterclaimants-Appellees (the Heimanns) are a family of ranchers who have lived in northeastern New Mexico since the early part of this century. The Heimanns own 48,120 acres of ranch land in Union, Quay and Harding Counties, New Mexico. Between 1971 and 1974, the Heimanns executed three carbon dioxide (CO2 ) and mineral leases with Amoco. Each of these three leases contained a unitization clause which granted Amoco the right to unitize the Heimanns' mineral interests with other lands in the area, subject to approval "by any governmental authority." The leases granted the Heimanns a one-eighth royalty of the net proceeds received from all oil, gas or CO2 produced on their lands.
In the late 1970's, Amoco embarked upon a plan to pipe CO2 from northern New Mexico to its west Texas oil fields in order to enhance recovery there. Amoco therefore sought to unitize the mineral rights to approximately 1,174,225 acres of land in Harding, Union and Quay Counties, including the Heimanns's land. 1 The proposed agreement for the "Bravo Dome" unit allocated royalties on the basis of "surface acreage;" production was allocated according to the total surface areas contained in each tract. Amoco sought approval of the Bravo Dome unit from the OCC. 2 The Commission found that "approval of the proposed unit agreement should promote the preventions of waste and the protection of correlative rights within the unit area" and consequently approved the unit agreement. Amoco Prod. Co., No. R-6446, unpub. order at 1 .
Together with other opponents of the Bravo Dome unit, all represented by counsel, the Heimanns successfully petitioned the OCC for rehearing. On October 9, 1980, the Heimanns and other opponents of the unit appeared before the OCC and presented evidence that the per-acre participation formula did not protect their correlative rights. The OCC found in pertinent part:
(14) That the evidence presented demonstrated that there are two methods of participation which would protect the correlative rights of the owners within exploratory units through the distribution of production or proceeds therefrom from the unit; these methods are as follows:
(a) a formula which provides that each owner in the unit shall share in the production from any well(s) within the unit in the same proportion as each owner's acreage interest in the unit bears to the total unit acreage, and
(b) a method which provides for the establishment of participating areas within the unit based upon completion of commercial wells and geologic and engineering interpretation of presumed productive acreage with only those parties of interest within designated participating areas sharing in production. Such participation would be based upon the proportion of such owner's acreage interest within the participating area as compared to the total acreage within the participating area.
(15) That each of the methods described in Finding No. (14) above was demonstrated to have certain advantages and limitations.
(16) That there was no evidence upon which to base a finding that either method was clearly superior upon its own merits in this case at this time.
(17) That the method of sharing the income from production from the unit as provided in the Unit Agreement is reasonable and appropriate at this time.
. . . . .
(25) That the evidence presented in this case establishes that the unit agreement at least initially provides for development of the unit area in a method that will serve to prevent waste and which is fair to the owners of interests therein.
....
Amoco Prod. Co., No. R-6446-B, unpub. order at 3-4 .
The Heimanns appealed the OCC's order on rehearing to the New Mexico state district court for Taos County. They argued that there was not substantial evidence supporting the OCC's determination that the proposed unitization would protect their correlative rights. The district court, however, affirmed the Commission. Casados v. Oil Conservation Comm'n, No. 81-176, unpub. order at 4 (N.M. 8th Dist. Apr. 5, 1982). The Heimanns appealed the district court's order to the New Mexico Supreme Court which affirmed. Casados v. Oil Conservation Comm'n, No. 14,359, unpub. order at 8 (N.M. Nov. 10, 1983). The Supreme Court held that the record contained "substantial evidence in the record supporting the Commission's conclusion that the correlative rights of all property owners in the Bravo Dome Unit area will be protected." Id.
In 1984, Amoco filed suit against the Heimanns in federal district court seeking a declaratory judgment under 28 U.S.C. Sec. 2201(a) that Amoco had properly unitized the interests covered under the leases. The Heimanns counterclaimed alleging three theories of recovery: 1) unfair allocation of royalties under the unitization agreement; 2) undervaluation of the extracted CO2 ; and 3) surface damage. At the conclusion of the trial, the court instructed the jury on the components of Amoco's good faith duty which it was obliged to follow in exercising its powers under the unitization clause:
Amoco's duty of good faith is not fulfilled merely by refraining from dishonest conduct. Rather, Amoco has certain affirmative duties which it must fulfill as a prerequisite to a finding of good faith. These are:
(a) Disclosure to the Heimanns of the material facts affecting their interest in the proposed unitization, including the geological and geophysical characteristics of their lands compared with that of other lands within the proposed unit area, and the significance of that data as it affects the Heimanns' interest;
(b) Cooperation with the Heimanns in planning the unitization program. Such cooperation may consist of communicating to the extent possible with the Heimanns in an effort to impart pertinent knowledge to the Heimanns; and
(c) Disclosure to the Heimanns of any interests of Amoco in unitization which were adverse to the interest of the Heimanns.
The jury returned a special verdict in favor of Amoco on the fair market value and surface damage claims, but found for the Heimanns on the royalty allocation charge. The jury awarded the Heimanns damages in the amount of $3,500,000 compensatory damages and $500,000 punitive damages. The district court then held that Amoco had violated its duty of good faith and declared the unitization of the Heimanns lands void.
Unitization refers to the consolidation of mineral or leasehold interests in oil or gas covering a common source of supply. 3 1 B. Kramer & P. Martin, The Law of Pooling and Unitization Sec. 1.02 at 1-3 (3d ed.1989); see Parkin v. Corporation Comm'n of Kansas, 234 Kan. 994, 677 P.2d 991, 1002 (1984). Unitization resulted from state legislatures' efforts to modify the rule of capture which had previously been applied to oil and gas law. See Clark Oil Prod. Co. v. Hodel, 667 F.Supp. 281, 290 (E.D.La.1987); Kramer & Martin, supra p. 1410, Sec. 3.02. The goals of unitization are conserving resources by preventing waste and protecting landowners' correlative rights. 4 See, e.g., N.M.Stat.Ann. Sec. 70-2-11 (1987 Rep.Pamp.). Following unitization of an oil field, the royalty clause of a oil and gas lease generally is modified and the lessor becomes entitled to a royalty based on a pro rata share of the production attributable to its land,...
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