Atlanta Exploration, Inc. v. Ethyl Corp.

Decision Date12 February 1990
Docket NumberNo. 89-213,89-213
Citation784 S.W.2d 150,301 Ark. 331
PartiesATLANTA EXPLORATION, INC., J.C. Ferguson III and Bettye Perry, Appellants, v. ETHYL CORPORATION, Appellee.
CourtArkansas Supreme Court

William I. Prewett, Don B. Dodson, El Dorado, for appellants.

Anderson, Crumpler & Bell, Magnolia, for appellee.

GLAZE, Justice.

This appeal involves an oil, gas and mineral rights case. Appellants, Atlanta Exploration, Inc. (Atlanta), J.C. Ferguson III (Ferguson III), and Bettye Perry (Perry), contend the trial court erred (1) in holding Ferguson III's and Perry's ownership interests were effectively integrated in a brine production unit established by appellee, Ethyl Corporation (Ethyl), in 1982, (2) in finding Ethyl not liable for penalties or attorney's fees under Ark.Code Ann. §§ 15-74-601 to 15-74-604 (1987) and in failing to award prejudgment interest, and (3) in applying the three-year statute of limitations erroneously. 1 Ethyl, on cross-appeal, argues the trial court erred in finding that Ferguson III's grandfather, J.C. Ferguson Sr., had not committed fraud in executing certain documents and receiving royalties and in holding that Atlanta should not be barred from recovery because it knew about and benefited from that fraud. We affirm the trial court's decision on appeal, but modify the judgment to award the appellants prejudgment interest, and affirm on cross-appeal.

The facts are largely undisputed. On May 24, 1960, H.C. Ferguson conveyed by warranty deed all of his undivided interest in S.W. 1/4 of N.W. 1/4 of Section 18, Township 18 south, Range 19 west, located in Columbia County, to J.C. Ferguson Jr. (Ferguson Jr.), his grandson. This property is the center of this controversy. In 1964, Ferguson Jr. died intestate survived by his widow, Bettye Ferguson (now Perry), and his son Ferguson III. After Ferguson Jr.'s death, on February 11, 1966, H.C. Ferguson again conveyed the same property by warranty deed to his son, Ferguson Sr. In 1980, Ferguson Sr. executed leases for oil, gas and brine, regarding the property. Ethyl became the owner of the leases, and was unaware at the time that Ferguson III owned the Ferguson acreage subject to Perry's claim as Ferguson Jr.'s widow.

In 1982, Ethyl drilled Baker No. 1 well on a 160-acre oil and gas unit and Ethyl also petitioned the Arkansas Oil and Gas Commission to form a brine unit of 1076.5 acres using this same well. The Ferguson acreage was included in the units, but was not the land on which the well was located.

Notice of Ethyl's application to establish the brine unit was published for one day in the Magnolia newspaper, The Daily Banner News. The notice requested that the owners of unleased interests within the unit elect whether or not to participate in 60 days. The notice also contained a list of the owners of unleased mineral interest, but stated that it included but was not limited to those listed or named owners. Ferguson III and Perry were not specifically listed because Ethyl was unaware of their ownership of property. The acreage subsequently was unitized by order of the Arkansas Oil and Gas Commission. Ethyl's well proved very successful and produced oil, gas and brine from 1982 until 1986. In 1986, Ethyl completed the drilling of another well named Baker No. 2, and its first disbursements were made in January of 1987. Brine continued to be produced to the time this litigation was filed. Ferguson Sr., rather than Ferguson III and Perry, received royalties from the well's production because of the leases he previously executed.

When Atlanta learned of Ethyl's plans to drill Baker No. 2 well, it commenced acquiring oil and gas leases in the acreage involved, and on May 20, 1987, Ferguson Sr. executed such a lease, which included the same property described in the earlier leases. Alan Ribble, the sole stockholder of Atlanta, discovered Ethyl's earlier mistake when he forwarded the new lease to Ethyl. Ethyl refused to pay because the leases were signed "J.C. Ferguson," and the ownership of the property was in the name of Ferguson Jr. 2

Ribble subsequently called Ferguson Sr., and after discussing with him the relationships between the various Fergusons and the leases and deeds as they were executed, Ribble became fully aware that Ethyl had paid royalties to the wrong Ferguson.

Ribble did not immediately inform Ethyl of its mistake, because he first wanted to execute a lease with the correct person. After leasing from J.C. Ferguson III, Atlanta then notified Ethyl about its mistake.

Atlanta, Ferguson III and Perry joined forces in suing Ethyl to collect pastroyalties. 3 Specifically, they requested that the court quiet title to the Ferguson acreage in Ferguson III, recognize Perry's claim in such acreage, declare Atlanta the owner of the leasehold estate covering the acreage and award Ferguson III and Perry statutory penalties and attorney's fees for bringing the action. Ethyl answered denying the appellants were entitled to any relief. It also counterclaimed, raising certain general defenses but in particular, alleged that Atlanta was not entitled to relief because it had benefited from Ferguson Sr.'s fraudulent execution of documents and receipt of royalties. As previously noted above, the trial court denied Ethyl's claim altogether, and while it recognized appellants' respective interests in the property, leases and deeds in issue, the court limited recovery from Ethyl to those mineral interests payable only during the three-year period prior to the appellants' filing their action.

In their first argument, appellants claim basically that they are not bound by the Oil & Gas Commission's 1982 integration order that unitizes the Ferguson acreage or by any royalties paid as a result of it and that they are entitled to recover the fair market value of the brine produced since 1982, less the production costs. To support their argument, they argue the notice given by the Commission was not proper, it was not directed to "unknown owners" and it was not directed to non-resident owners, which Ferguson III was at the time the integration order was issued. Appellants offer no case authority in support of their argument and cite only Ark.Code Ann. § 15-76-309(b) (1987), which requires that integration orders be made after notice and hearing and § 15-76-310 (1987), which provides that a copy of the integration must be sent or otherwise made available to each owner in the unit.

Although Ethyl's notice did not mention unknown owners, it was addressed to "unleased mineral interest owners" and it then listed, but stated it was not limited to, each owner known at the time. Certainly, Ferguson III came within such a description. In these matters, the General Assembly has given the Commission broad authority when prescribing its procedure regarding its hearings as follows:

(a) The commission shall prescribe its rules of order and procedure with respect to all hearings or proceedings hereunder in accordance with and as limited by the laws of this state applicable to hearings and other proceedings before the commission under other acts of this state, including provisions of law regarding notice and hearing and provisions of law regarding the promulgation by the commission of rules, regulations, and orders, including changes, renewals, or extensions thereof and including emergency promulgations.

Ark.Code Ann. § 15-76-307(a) (1987).

Furthermore, § 15-76-307(b) provides the Commission with the authority to prescribe the manner and form of the notice given of the public hearing that is required before the Commission promulgates or issues any rule, regulation or order. The Commission's notice met the twenty-day notice requirement set out in § 15-76-307(b), and it also otherwise is in keeping with Ark.Code Ann. § 15-72-323 (1987), another related statutory provision, that requires a public hearing notice to be published at least one time in a general circulation newspaper in the county or counties where the lands are embraced. Appellants urge no constitutional or due process arguments regarding the notice provided by the Commissioner. Nor do they argue that Ark.R.Civ.P. Rule 4 should apply. 4 In sum, we hold the Commission's notice met the statutory requirements, and the public hearing and resulting integration order issued by the Commission in 1982 were proper and binding on the appellants.

In the second point, the appellants argue that they are entitled to 12% interest on the back royalties owed to Ferguson III and that their attorney's fees should be paid. Ark.Code Ann. § 15-74-601(a) (1987) establishes the time limits when oil and gas payments must be made. Section 15-74-601(e), in relevant part, provides that if payment is not made within these time limits, the first purchaser (here Ethyl) is required to pay interest to those legally entitled to the withheld proceeds at the rate of 12% per annum on the non-paid amounts. In addition, Ark.Code Ann. § 15-74-603(e) provides that the prevailing party in any proceeding brought for proceeds not paid timely shall be entitled to recover any court cost and reasonable attorney's fee. 5

In support of this argument that they are entitled to penalties and attorney's fees, appellants cite TXO Production Corp. v. Page Farms, Inc., 287 Ark. 304, 698 S.W.2d 791 (1985) and TXO Production Corp. v. First Nat'l Bank of Russellville, 288 Ark. 338, 705 S.W.2d 423 (1986). Although attorney's fees were affirmed on appeal in those two cases, the facts involved in those holdings are clearly distinguishable from the ones before us now. In the first TXO Production case, the court concluded that there was no evidence to support TXO's claim that it failed to pay proceeds because it found the title was unmarketable. The court found that even TXO's own title opinion failed to support TXO's position. In the second TXO case, this court merely affirmed the trial court's assessment of penalties and attorney's fees because TXO...

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