Brown v. Shell Oil Co.

• Decision Date: 19 October 1983
• Docket Number: Docket No. 63011
• Citation: 128 Mich.App. 111,339 N.W.2d 709
• Parties: Albert K. BROWN, et al., Plaintiffs-Appellants, v. SHELL OIL COMPANY, a Delaware corporation, Defendant-Appellee.
• Court: Court of Appeal of Michigan — District of US

Page 709

339 N.W.2d 709

128 Mich.App. 111

Albert K. BROWN, et al., Plaintiffs-Appellants, v. SHELL OIL COMPANY, a Delaware corporation, Defendant-Appellee.

Docket No. 63011.

Court of Appeals of Michigan.

Submitted April 8, 1983.

Decided Aug. 16, 1983.

Released for Publication Oct. 19, 1983.

Thompson, Zirnhelt, Bowron, Senger & Rosi, P.C. by Philip R. Rosi, Traverse City, for plaintiffs-appellants.

Foster, Swift, Collins & Coey, P.C. by Webb A. Smith and Scott A. Storey, Lansing, Lynam & Flynn by Terence V. Lynam, Lansing, for defendant-appellee.

Before HOLBROOK, P.J., and HOOD and GREEN ^*, JJ.

HOOD, Judge.

Plaintiffs appeal as of right from a Grand Traverse County Circuit Court order granting defendant partial summary judgment, GCR 1963, 117.2(1).

Plaintiffs are holders of royalty interests as lessors of mineral rights in oil wells owned and operated by defendant, Shell Oil Company (Shell). Shell deducts a pro rata share of the state severance tax on oil and gas, M.C.L. Sec. 205.301 et seq.; M.S.A. Sec. 7.351 et seq., from plaintiffs' royalty interests. The leases between plaintiffs and Shell are silent regarding defendant's authority to withhold and deduct such taxes from plaintiffs' royalties. Plaintiffs brought this suit to challenge this and other of Shell's practices.

The trial court rejected plaintiffs' claim that the severance tax statute did not authorize Shell to withhold a proportionate share of that tax from plaintiffs' royalty interests. Rather, the trial court ruled as a matter law that the statute defined plaintiffs as producers and, as such, that plaintiffs are required to pay their proportionate share of the severance tax. Thus, plaintiffs failed to state a claim in regard to Shell's practice of withholding a share of the severance tax from their royalties.

The statute authorizing a severance tax on oil and gas, 1929 P.A. 48, as amended by 1965 P.A. 299, states in part:

"Sec. 1. There is hereby levied upon each producer engaged in the business of severing from the soil, oil or gas, a specific tax to be known as the severance tax." M.C.L. Sec. 205.301; M.S.A. Sec. 7.351.

" 'Producer' as used in this act means a person who owns, or is entitled to delivery of a share in kind or a share of the monetary proceeds from the sale of, gas or oil as of the time of its production or severance." M.C.L. Sec. 205.312(2); M.S.A. Sec. 7.362(2).

In this appeal, plaintiffs concede that they are producers as defined by the statute. Nevertheless, they argue that the trial court erred by finding them responsible for a proportionate share of the severance tax because they are not producers who are "engaged in the business of severing from the soil, oil or gas". Moreover, plaintiffs argue that, because they denied in their complaint that they were engaged in the business of severing, they raised a fact question that precludes the grant of summary judgment for failure to state a claim, GCR 1963, 117.2(1).

Shell argues that the trial court's statutory interpretation was correct because the Legislature's amendment to the statute in 1965 added the definition of producer in order to make holders of royalty interests proportionately responsible for payment of the severance tax.

This question of the interpretation of the statute authorizing an oil and gas severance tax is novel in this Court. We review the statute by applying the well-recognized rules of statutory interpretation and by reviewing cases in other jurisdictions which have interpreted similar statutes.

The primary rule of statutory construction is to ascertain and enforce the legislative intent in enacting the provision. Melia v. Employment Security Comm, 346 Mich. 544, 562, 78 N.W.2d 273 (1956). Insight into legislative intent must first be obtained by a review of the statute's language in the context of the entire act plus its amendments. Kizer v. Livingston County Board of Comm'rs, 38 Mich.App. 239, 349-350, 195 N.W.2d 884 (1972). While every word and phrase of a statute is to be given effect, Melia, supra, an amendment is generally construed as changing the meaning of a statute. Reinelt v. Public School Employees' Retirement Board, 87 Mich.App. 769, 774, 276 N.W.2d 858 (1979), lv. den. 407 Mich. 855 (1979). Amended statutes should be interpreted in light of court decisions which prompted the amendment. E.F. MacDonald Co. v. Dep't of Treasury, 62 Mich.App. 626, 632, 233 N.W.2d 678 (1975). Amending legislation should be liberally construed so as to correct defects in predecessor statutes. E.F. MacDonald, supra.

Although there is no Michigan case law on point prior to the 1965 amendment, the Attorney General in OAG 1963-1964, No. 4160, p 118 (June 17, 1963), did interpret the severance tax statute. In that opinion, the Attorney General said that payment of severance and privilege taxes are the primary responsibility of producers of oil and gas, not of holders of royalty interests. The opinion was prompted by the state's own Conservation Department questioning the practice by which oil companies holding leases from the state withheld from the state's 12 1/2% royalty interest a pro rata share of both the severance tax and the separate privilege tax, M.C.L. Sec. 319.22; M.S.A. Sec. 13.139(22), before its amendment by 1973 P.A. 61. The Attorney General relied in part upon the commentator in Summers, The Law of Oil and Gas, Sec. 801, p. 410, who concluded that the pre-1965 severance tax statute did not require the royalty owner to bear any part of the then 2% severance tax upon the extracted gas and oil.

Section 1 of the severance tax act prior to 1965 stated:

"There is hereby levied upon each corporation, association, or person engaged in the business of severing from the soil oil or gas, a specific tax to be known as the severance tax. * * * "

The 1965 amendment substituted the term producer for corporation, association, or person and added the definition of that term in Sec. 12. The 1965 amendment also altered the language of Sec. 3 of the act which provides the tax rate, computation, payor, and method of withholding. The pre-1965 Sec. 3 provided:

"The severance tax required to be paid by each producer at the time of rendering each monthly report, or by any pipe line company, common carrier or common purchaser, for and on behalf of any such producer, shall be in the amount of two (2) per cent of the gross cash market value of the total production of such oil or gas during the preceding monthly period. The value of all such production shall be computed as of the time when and at the place where the same have been severed or taken from the soil immediately after such severance. Except as otherwise provided in this section, the payment of said severance tax shall be required of the severer or producer actually engaged in the operation of severing the oil or gas." M.C.L. Sec. 205.303; M.S.A. Sec. 7.353. (Emphasis added).

The emphasized language above was amended in 1965 to provide: "Except as otherwise provided in this section, the payment of the severance tax shall be required of each producer."

We find that the 1965 amendment to the severance tax act was, in part, a reaction to OAG 1963-1964, No 4160, supra. Although Sec. 1 still retains the phrase qualifying a producer as one "engaged in the business of severing from the soil * * * ", the amended statute now requires the payment of the severance tax to be the responsibility of all producers, including holders of royalty interests. We note that Sec. 3 now explicitly exempts the state, as a producer, from paying any severance tax.

We find additional support for this interpretation in cases from other jurisdictions. In some decisions, similar statutes, even though explicitly allowing operators to withhold a pro rata share of the tax from royalty interests, have been held unconstitutional. See, Cole v. Pond Fork Oil & Gas Co., 127 W.Va. 762, 35 S.E.2d 25 (1945), cert. den., 326 U.S. 765, 66 S.Ct. 147, 90 L.Ed. 461 (1945) (statute invalid as impairing obligation of contract); Ohio Oil Co. v. Wright, 386 Ill. 206, 53 N.E.2d 966 (1944) (statute was unconstitutional for lack of uniformity). Other jurisdictions have reviewed the specific language of their statutes and held that the gas or oil tax was to be assessed against the lessee only as the party engaged in the business of owning,...