Columbia Gas Transmission Corp. v. Allied Chemical Corp.

• Decision Date: 04 August 1981
• Docket Number: No. 79-2416,79-2416
• Citation: 652 F.2d 503
• Parties: COLUMBIA GAS TRANSMISSION CORPORATION, a corporation, Plaintiff-Appellant, v. ALLIED CHEMICAL CORPORATION, a corporation, acting by and through its "Union Texas Petroleum Division," et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 503

652 F.2d 503

61 A.L.R.Fed. 429

COLUMBIA GAS TRANSMISSION CORPORATION, a corporation, Plaintiff-Appellant, v. ALLIED CHEMICAL CORPORATION, a corporation, acting by and through its "Union Texas Petroleum Division," et

al., Defendants-Appellees.

No. 79-2416.

United States Court of Appeals, Fifth Circuit.

Aug. 4, 1981.

Frank J. Peragine, James A. Burton, New Orleans, La., H. L. Snyder, Charleston, W. Va., for plaintiff-appellant.

Gordon, Arata & McCollam, John M. McCollam, John A. Gordon, New Orleans, La., for W. O. Toce, et al.

Deborah Bahan Price, Gene W. Lafitte, William R. Pitts, New Orleans, La., for Allied Chemical Corp., et al.

Jones, Walker, Poitevent, Carriere & Denegre, John V. Baus, J. Mort Walker, Jr., and Edward B. Poitevent, II, New Orleans, La., for James R. Moffett.

Landwehr & Foley, Dan A. Smertherman, New Orleans, La., for Mid-Continental Supply Co.

Robert D. Nordhaus, Gen. Counsel, Jerome M. Feit, Deputy Sol., Joshua Z. Rokach, Atty., E. E. R. C., Washington, D. C., for amicus curiae E. E. R. C.

Appeal from the United States District Court for the Eastern District of Louisiana.

Before HENDERSON, ANDERSON and SAM D. JOHNSON, Circuit Judges.

SAM D. JOHNSON, Circuit Judge:

Columbia Gas Transmission Corporation sought injunctive relief and damages for alleged wrongful diversion of natural gas from reserves claimed to have been "dedicated" to its interstate pipeline system, by virtue of two gas purchase contracts between Columbia and certain predecessor producer-lessees, and by virtue of the commencement of deliveries of gas to Columbia pursuant to certificates of public convenience and necessity issued by the Federal Power Commission (FPC), now the Federal Energy Regulatory Commission (FERC), to the predecessor producer-lessees. Columbia appeals from the district court's entry of judgment in favor of all defendants. 470 F.Supp. 532 & 552 (E.D.La.1979). This Court affirms in part, reverses in part, and vacates and remands in part with instructions to the district court to refer a specified portion of this case to FERC.

I. Facts

In the late 1940's and early 1950's, the Wylie Heirs, landowners in Louisiana, granted two oil and gas leases on two sections of land to two different producers. These producers entered into gas purchase contracts with United Fuel Gas Company, to whom Columbia has succeeded by merger. Shortly after the contracts were executed the FPC issued certificates of public convenience and necessity pursuant to section 7 of the Natural Gas Act of 1938 (NGA), 15 U.S.C.A. § 717f. These certificates authorized the respective lessee-producers under the two gas purchase contracts to sell and deliver gas in interstate commerce to United Fuel for resale. Neither the leases, the contracts, nor the certificates contained any limitation as to the depth of the dedicated reserves or the duration of the dedication.

The producer-lessees developed only those reserves above 10,600 feet subsea in depth. The Wylie Heirs wanted the producers to drill deeper, and in 1972 made formal demands on the producers for further development of the lease premises. After the producers failed to additionally develop the leaseholds, the Wylie Heirs made formal demand for the release of the undeveloped portions of those leases, in particular, all reserves below 10,600 feet subsea. When the requested releases were not forthcoming, the Wylie Heirs in 1973 filed suit in state district court to cancel the leases on the basis of nondevelopment.

The litigation was settled by a series of transactions that returned the undeveloped reserves below 10,600 feet to the Wylie Heirs. In 1973, James R. Moffett, the McWilliams Group, and the Rankin Group, together known as the Moffett Group, entered into negotiations with the then current producer-lessees with a view to acquiring the operating rights under the original leases. These negotiations were successfully completed, and the leasehold rights formally assigned to the Moffett Group. Soon after this assignment, the Moffett Group negotiated with the Wylie Heirs to compromise and settle the pending lawsuit. The settlement required that the Moffett Group release all rights to depths below the deepest sand then productive (10,600 feet subsea) and increase the Wylie Heirs' royalty interest from one-eighth ( 1/8) to one-sixth ( 1/6) on all new production above 10,600 feet subsea, with the royalty interest of one-eighth ( 1/8) to remain unchanged on production from previously drilled wells. In exchange for the Moffett Group's concessions, the Wylie Heirs agreed to dismiss the suit for cancellation and to deliver one new lease covering both sections as to depths above 10,600 feet subsea.

The Moffett Group had acquired only seven-eighths ( 7/8) of the working interest in the original two leases. Mid-Continent Supply Company owned the other one-eighth ( 1/8) of the working interest in the two sections as a nonoperator. Subsequent to the settlement between the Moffett Group and the Wylie Heirs, Mid-Continent agreed to settle the lease cancellation suit on the same basis as that agreed to by the Moffett Group. Pennzoil Producing Company owned an overriding royalty interest of 1/32 of 7/8 in the leasehold interest to one of the sections. Pennzoil agreed to release its interest in that original lease in exchange for the granting of an overriding royalty interest of 1/32 of 7/8 in a new lease to be granted by the Wylie Heirs covering both sections down to a depth of 10,600 feet.

In late 1973, pursuant to the settlement, the Moffett Group, Mid-Continent, and Pennzoil executed releases of their interests in the original two leases. The Wylie Heirs executed to defendant Toce, as leasing agent, a new "shallow gas" lease covering both sections and limited to depths above 10,600 feet. Toce then executed an assignment to Pennzoil of an overriding royalty interest of 1/32 of 7/8 in the new shallow gas lease, and executed an assignment of the new shallow gas lease to the Moffett Group and Mid-Continent.

The Wylie Heirs then executed to defendant Toce a new "deep gas" lease covering both sections and limited to the depths below 10,600 feet subsea. Toce then executed a sublease of the new deep gas lease to Allied Chemical Corporation, reserving to himself an overriding royalty interest of 3.91 percent. (Allied Chemical as early as 1972 had expressed to the Wylie Heirs an interest in acquiring a mineral lease in one or both of the two sections in the event the landowners were successful in obtaining the cancellation or release of the leases then covering those sections.) Allied Chemical executed an assignment of portions of the working interest in the new deep gas lease to Petrofunds, Inc., Osias Biller, and Sunny South Oil & Gas, Inc., which together with Allied Chemical constitute the Allied Chemical Group.

In early 1974, the Allied Chemical Group completed a new gas well on one of the sections at a depth below 10,600 feet, but denied any obligations to sell and deliver to Columbia any gas produced from both sections at depths below 10,600 feet subsea. In late 1974, Columbia formally demanded recognition of its right to purchase all gas produced from both sections, and this demand was rejected by the Allied Chemical Group as to gas produced from depths below 10,600 feet subsea. The Allied Chemical Group accordingly sold and delivered the deep gas to Sugar Bowl Gas Corporation in the intrastate market. The Allied Chemical Group did so without applying to the Commission for abandonment authorization with respect to any certificate obligation to sell the deep gas in interstate commerce.

Columbia then filed suit against all defendants other than the Wylie Heirs in October 1974, and the Wylie Heirs were given leave to intervene as parties defendant. Columbia originally alleged six separate causes of action in its complaint. The first was that all defendants had violated the NGA by diverting gas originally dedicated to interstate commerce without first obtaining the permission and approval of the FPC to allow it to abandon services and facilities previously dedicated. The second and third counts alleged breach of the gas purchase contracts by failure to give Columbia notice of the intention to surrender the leaseholds and failure to offer the working interest in those leaseholds to Columbia. The fourth and sixth counts sounded in tort, but Columbia amended its complaint to drop these counts. The fifth count was against Allied Chemical alone and also sounded in tort. Columbia stipulated that the fifth count stood or failed on the result of the first count.

The district court granted Pennzoil's motion for summary judgment, which Columbia did not oppose and does not appeal. Mid-Continent and the Moffett Group also moved for summary judgment, which was granted in favor of those defendants on the contract claims and from which Columbia does appeal. The case proceeded to trial on the alleged violation of the NGA. Subsequent to the trial, and after the parties post-trial memoranda had already been filed and the case taken under submission, the Supreme Court decided the case of California v. Southland Royalty Co., 436 U.S. 519, 98 S.Ct. 1955, 56 L.Ed.2d 505 (1978) (4-3 decision). Shortly thereafter, Congress enacted the Natural Gas Policy Act of 1978 (NGPA), 15 U.S.C.A. §§ 3301-3432. Section 2(18)(B)(iii) of the NGPA, id. § 3301(18)(B)(iii), provides an exclusion from the definition of gas "committed or dedicated to interstate commerce." This exclusion limits the prospective application of the Southland decision without reversing it on its facts. Supplemental briefs were filed with regard to the Southland decision and the NGPA.

The district court concluded that Columbia was entitled to no recovery. It first found that the original gas purchase contracts, the leases, and the certificates covered all the reserves under the acreage in question. It also found that the certificates were of...