Cameron v. Stephenson, 9028.

• Decision Date: 23 June 1967
• Docket Number: No. 9028.,9028.
• Citation: 379 F.2d 953
• Parties: M. B. CAMERON, Appellant, v. J. F. STEPHENSON and J. M. Huber Corporation, Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

379 F.2d 953 (1967)

M. B. CAMERON, Appellant, v. J. F. STEPHENSON and J. M. Huber Corporation, Appellees.

No. 9028.

United States Court of Appeals Tenth Circuit.

June 23, 1967.

Richard L. Bohanon, Oklahoma City, Okl. (Joseph F. Rarick, Bert Barefoot, Jr., J. Edward Barth, and Barefoot, Moler, Bohanon & Barth, Oklahoma City, Okl., with him on the brief), for appellant.

Paul Brown, Oklahoma City, Okl. (George N. Otey, of Otey & Evans, Admore, Okl., attorney for J. F. Stephenson, and Thomas O. Moxcey, Denver, Colo., attorney for J. M. Huber Corp., with him on the brief), for appellees.

Before BREITENSTEIN, SETH, and HICKEY, Circuit Judges.

BREITENSTEIN, Circuit Judge.

In this diversity action tried without a jury, appellant-plaintiff sought the forfeiture of Oklahoma oil and gas leasehold interests. She alleged the breach of covenants to pay certain overriding royalty interests reserved by her in assignments of the leases to appellee-defendant Stephenson. The district court held that there was no breach and denied forfeiture. On the counterclaim of Stephenson and appellee-defendant J. M. Huber Corporation, to which Stephenson had assigned an interest in the leases, the court reformed the assignments by eliminating the forfeiture provisions. The court also quieted the title of the defendants. This appeal followed.

Plaintiff was in the business of trading and brokering oil and gas leases. She negotiated with the owners of certain tracts for the execution of these leases on the payment of a bonus of $60 an acre. Defendant Stephenson made the bonus payment of $5,880 and, on December 9, 1960, the leases were issued to plaintiff. On December 30, 1960, she assigned the leases to Stephenson reserving a 1/16 of 7/8 overriding royalty. The pertinent provisions of each assignment read thus:

"There is hereby excepted from this assignment and reserved to the assignor an undivided 1/16 of 7/8 part of the oil, gas and casing-head gas produced from the above described property which part assignee for himself, his heirs, executors and assigns covenants to deliver free of cost to the credit of assignor at the pipeline to which he shall connect his wells; and it is expressly agreed and understood that the burden of this covenant is hereby made a lien upon the above described leasehold and shall run with the lease and be binding upon all subsequent assignments, modifications, renewals or encumbrances thereof, and the assignor shall upon a breach of this covenant be entitled to the forfeiture of this assignment and to recovery of the rights and interests hereby assigned."

Stephenson assigned one-half of his working interest in the leases to his co-defendant Huber which became the operator of the leases. Huber drilled and completed six productive oil and gas wells on the leases. After unsuccessful attempts to sell the oil to others, Huber sold it to Rock Island Oil & Refining Company. At the time, there was no pipeline connection to the wells and the nearest Rock Island pipeline was 14 miles from the wells. Plaintiff signed division orders submitted by Rock Island whereby Rock Island agreed to pay at the price posted by it

"for oil of the same grade and gravity in the same producing field or fields in the area on the date said oil is received by it. If, however, it is necessary to transport crude oil hereunder by truck, then in that event it is authorized to deduct from such price, the trucking and handling charges."

For a time, the oil was trucked and the plaintiff made no objection to the deduction of a 22-cent per barrel trucking charge.

Plaintiff later received another division order providing for payment "at the price posted by Rock Island Oil & Refining Co., Inc., effective 10-19-64, less 10¢ per bbl." Plaintiff protested this order and did not sign until a clause was inserted saving her rights against Stephenson and Huber under the lease assignments.

The 10¢ a barrel charge was the result of an agreement between Huber and Rock Island whereby Rock Island undertook to build a pipeline to the wells and pay part of the cost thereof. The remainder of Rock Island's cost was to be recouped by a 10¢ per barrel deduction in payments to the lessees and the royalty holders. This deduction was to continue until a specified amount of oil had been purchased or a stated date reached. Plaintiff asserted that the charge for pipeline cost violated her assignment to Stephenson and brought this action to enforce the forfeiture provisions of the assignments.

At the time of the trial, all payments under the pipeline agreement had been made and the deductions had ended. The total deduction for the plaintiff's share of the pipeline cost was $248.59. If during the period of these deductions the oil had continued to be carried by truck, the deductions would have been $946. The plaintiff's net receipts from her overriding royalty interests amounted to approximately $14,000 at the time of trial. The net value of the leases sought to be forfeited was $850,502, with $245,173 remaining as unrecovered costs on January 1, 1966.

In spite of the disparity between the amount which plaintiff says she has lost and the value of the property for which she demands a forfeiture, she insists that the violation of her legal rights justifies her action and entitles her to the resulting windfall. The prime question is whether the 10¢ per barrel deduction for the pipeline cost breaches the obligation to pay the reserved overriding royalty.

The assignment requires the assignee to deliver the royalty oil "free of cost to the credit of assignor at the pipeline." Plaintiff makes no claim that the trial court was wrong in its finding that the arrangement reached by Huber and Rock Island for the construction of the pipeline was "made by Huber in good faith and by arm's length negotiation, but without consulting the plaintiff." Also she makes no attack on the finding that: "The best price that could be obtained for the oil produced on the leases was the price paid by Rock Island under the arrangement made with Huber Corporation."

We consider these facts to be determinative. The assignments required that her part of the production should be delivered free of cost to the pipeline. This was done. Huber unsuccessfully offered the oil to others before making the arrangements with Rock Island. No showing is made that any other purchaser was or could have been interested or would have paid any higher price than Rock Island after the 10¢ per barrel deduction.

In Meeker v. Ambassador Oil Co., 10 Cir., 308 F.2d 875, 882, reversed on other grounds 375 U.S. 160, 84 S.Ct. 273, 11 L.Ed.2d 261, we defined an overriding royalty as

"a fractional interest in the gross production of oil and gas under a lease, in addition to the usual royalties paid to the lessor, free of any expense for exploration, drilling, development, operating, marketing and other costs incident to the production and sale of oil and gas produced from the lease."

Plaintiff says that the 10¢ charge is a marketing cost which must be borne by Stephenson and Huber. The Meeker case had nothing to do with marketing and its definition of an overriding royalty, with which we agree, has no bearing on the issue here presented. We are not concerned here with an express or implied duty to produce and market. Our concern is with an obligation to deliver free of cost to the pipeline.

The decisions cited by plaintiff are not persuasive. Foster v. Atlantic Refining Co., 5 Cir., 329 F.2d 485, concerned a lease which provided for royalty based on the "market price therefor prevailing for the field where produced when run," Id. at 488. The holding was that the lessee had to pay royalty based on the field price at the time of delivery even though it had entered into a long-term contract with a pipeline to sell at a lesser price. Atlantic was bound by the terms of the contract which it had made even though it was a bad bargain. In Barton v. Laclede Oil & Mining Co., 27 Okl. 416, 112 P. 965, the lessee agreed to pay royalty on all gas used and sold off of the premises. It then made an agreement with a purchaser whereby it was paid for only ½ of the gas used off the premises. The court held that the royalty had to be paid on all gas as required by the royalty agreement. Clark v. Slick Oil Co., 88 Okl. 55, 211 P. 496, was an action for conversion and damages for failure to deliver the lessor's share of the oil to the pipeline. In the case at bar, delivery of the plaintiff's royalty share is not questioned.

In considering situations where oil is produced from land where a market is not readily available, the text writers say that the royalty owner must bear the transportation charges.¹ This principle was followed in Kretni Development Co. v. Consolidated Oil Corp., 10 Cir., 74 F.2d 497, 499-500, which held that a lessor was not entitled to royalty based on price received at the end of a 90-mile pipeline because the lessee was under no duty to provide pipeline facilities. Indeed, the plaintiff recognizes her obligation to stand the trucking...