Ferguson v. Coronado Oil Co.

• Decision Date: 14 November 1994
• Docket Number: Nos. 93-164,93-165,s. 93-164
• Citation: 884 P.2d 971
• Parties: Darry A. FERGUSON, Appellant (Defendant), v. CORONADO OIL COMPANY, a Colorado corporation, Appellee (Plaintiff). CORONADO OIL COMPANY, a Colorado corporation, Appellant (Plaintiff), v. Darry A. FERGUSON, individually; Petrocarbon Energy Corporation, a Colorado corporation, for itself and as successor-by-merger to Pioneer Engineering Corporation, a Colorado corporation; Pioneer Engineering Corporation, formerly known as Engineering Operators, Inc., a Colorado corporation, Appellees (Defendants).
• Court: Wyoming Supreme Court

Page 971

884 P.2d 971

Darry A. FERGUSON, Appellant (Defendant), v. CORONADO OIL COMPANY, a Colorado corporation, Appellee (Plaintiff).

CORONADO OIL COMPANY, a Colorado corporation, Appellant (Plaintiff), v. Darry A. FERGUSON, individually; Petrocarbon Energy Corporation, a Colorado corporation, for itself and as successor-by-merger to Pioneer Engineering Corporation, a Colorado corporation; Pioneer Engineering Corporation, formerly known as Engineering Operators, Inc., a Colorado corporation, Appellees (Defendants).

Nos. 93-164, 93-165.

Supreme Court of Wyoming.

Nov. 14, 1994.

Tim Newcomb of Grant & Newcomb, Cheyenne, and Dana L. Eismeier of Burns, Figa & Will, Englewood, CO, for Darry A. Ferguson.

David D. Uchner, Cheyenne, and Peter A. Bjork and Gregory R. Danielson of Bjork, Seavy, Lindley & Danielson, Denver, CO, for Coronado.

Before GOLDEN, C.J., and THOMAS, CARDINE ^*, MACY and TAYLOR, JJ.

CARDINE, Justice, Retired.

These consolidated appeals are the result of a dispute between an operator of an oil field and a non-operator net profits interest owner. Darry A. Ferguson (Ferguson) appeals a jury verdict resulting in an award of $611,138.00 for conversion of Coronado Oil Company's (Coronado) net profits and $600,000.00 in exemplary damages. Ferguson challenges the appropriateness of an action for conversion in the context of a net profits agreement. Ferguson also asserts that the damages award should be reduced because of Coronado's failure to comply with a provision of the agreement. Coronado cross-appeals claiming that the district court failed to apply the correct interest rate to the damages award.

We affirm in part, reverse in part and remand.

In his appeal, No. 93-164, Ferguson frames the issues for review as follows:

Issue I: Conversion claim cannot lie because Coronado has no interest in the subject of conversion.

Issue II: Damages limited by Coronado's failure to provide written exceptions as required by agreement.

Coronado raises two issues in its appeal, No. 93-165:

1. Whether the Trial Court erred in dismissing the Plaintiff's and Cross-Appellant's fraud claim against the Defendants;

2. Whether the Trial Court erred in holding that Wyoming Statute §§ 30-5-301 to 305 (1992 Cum.Supp.) does not apply to the net profits interest owned by Coronado.

FACTS

In the mid 1950s, Coronado began to explore the possibility of utilizing waterflood operations to exploit the Osage oil field (the field) near Newcastle, Wyoming. Experimental projects indicated that the field was conducive to such operations. At the time, however, Coronado did not have the financial resources to fully capitalize on the field's potential. So Coronado sought an alliance with a company which did have the financial capability.

On July 23, 1968, Coronado entered into an agreement with Buttes Gas and Oil Company (Buttes). Coronado conveyed all of its interests in the underlying leases to Buttes while retaining a 50 percent, later reduced to 47.5 percent, interest in the net profits of any oil produced. In return, Buttes was to be the operator of the waterflood project. Buttes was to remit on a monthly basis the net profits, if any, to Coronado, determined in accordance with the accounting practices promulgated by the Council of Petroleum Accountants Societies of North America, which was an addendum to the agreement. Buttes was allowed to deduct certain expenses from the oil proceeds, limited to its actual costs. Buttes was not supposed to make any profit by virtue of the fact that it was the operator; profits were to be derived solely from the actual production of oil.

The agreement contains two other provisions which are relevant. First, Coronado retained the right to audit the operator's books to ensure that all expenses charged were legitimate. Second, Coronado had to make a written exception to any monthly statement from the operator within 24 months after the end of the calendar year in which the statement was received or the statement was presumed correct.

In 1980, Buttes sold its interest to Petro Lewis Oil Corporation (Petro Lewis). Petro Lewis ran the operation until 1985 when Petrocarbon Energy (Petrocarbon) bought its interest. Under Buttes and Petro Lewis's operation, Coronado received payments of net profits for 168 consecutive months.

At the time Petrocarbon purchased the Osage field operations, Ferguson was the president, treasurer, a director and owned 95 percent of the stock of the company. Petrocarbon contracted with Pioneer Engineering Corporation (Pioneer) to do the actual field operations. Pioneer was subsequently merged into Petrocarbon. A new corporation, Engineering Operators, Inc., was formed, and it took over Pioneer's field operations. Later, Engineering Operators was renamed Pioneer Engineering Corporation. For the sake of simplicity, we will refer to these entities collectively as "Pioneer." Ferguson owned 100 percent of Pioneer's stock.

Coronado received net profits payments for the first three months of Petrocarbon's operation. Coronado never received another payment. The operating expenses charged by Petrocarbon increased dramatically at that time. For example, Petrocarbon's expenses for the first fourteen months of operations averaged $85,503.05 per month while Petro Lewis, during the last eleven months of its operation, averaged $60,000.00 per month. The result was a net loss which, according to the terms of the agreement, was carried on to the next month. Through 1988 the cumulative net loss was over $300,000.

Coronado unsuccessfully attempted to alleviate its concerns about the expenses being charged. As required by the agreement, Coronado took written exceptions to the charges of November and December of 1985. Coronado also requested an audit of Petrocarbon's and Pioneer's books. Ferguson refused to allow an audit of Pioneer's books because, he claimed, Pioneer was a separate company, not subject to the provisions of the agreement.

An audit was conducted by Maupin & Associates (Maupin) in February of 1990. Maupin was allowed access only to Petrocarbon's books and only for 1988 and 1989. Maupin found numerous financial irregularities which led it to conclude that Petrocarbon had used its related entity, Pioneer, to circumvent the requirement of charging only costs. Maupin also concluded that Petrocarbon had double charged expenses and had included expenses which were not properly chargeable. It was also discovered that Petrocarbon did not repay Pioneer for expenses charged to Petrocarbon Later, during the discovery process, Maupin was able to audit Pioneer's books which permitted a precise calculation of Petrocarbon's overcharges. The final tally was a total of $2,194,292 in overcharges by Petrocarbon. Maupin recalculated the monthly net profits and concluded that Petrocarbon should have remitted to Coronado $508,000 as of June 1991.

although the expenses were being passed on to Coronado.

In September of 1990, Coronado filed this action against Ferguson, Petrocarbon and Pioneer in the District Court for Weston County, Wyoming. In its second amended complaint, Coronado made claims for relief based on breach of contract, breach of fiduciary duty, negligence, fraud, conversion and alter ego liability. Coronado also requested an accounting, appointment of a receiver and imposition of a constructive trust. Coronado's claims on breach of fiduciary duty, negligence and fraud were ultimately dismissed by the court.

Pioneer failed to appear, and default was entered against it. After trial, a jury returned a verdict against Ferguson and Petrocarbon. The jury found that Petrocarbon and Pioneer were acting as the alter egos of Ferguson. The jury awarded damages of $611,138 on the conversion claim and $600,000 for exemplary damages. The judge then awarded Coronado $107,891.34 in interest. Based on the alter ego finding, Petrocarbon, Pioneer and Ferguson are jointly and severally liable for all damages. Only Ferguson has chosen to appeal to this court. Coronado appeals the adequacy of the interest award.

ISSUES

A. Ferguson's Appeal

1. Conversion

Ferguson makes two arguments which are directed at the appropriateness of a conversion action under these circumstances. First, Ferguson argues that a net profits interest is not a property interest but contractual in nature. Since only property can be converted, Ferguson concludes that Coronado's interest was not susceptible of being converted. Second, Ferguson argues money cannot be converted unless it is in a form which is tangible, identifiable and segregated. Ferguson maintains that the money due Coronado under the net profits agreement fails to meet that criteria.

"Conversion is defined as any distinct act by dominion wrongfully executed over one's property in denial of his right or inconsistent with it." Western Nat'l Bank of Casper v. Harrison, 577 P.2d 635, 640 (Wyo.1978). Essentially, conversion occurs when a person treats another's property as his own, denying the true owner the benefits and rights of ownership. Frost v. Eggeman, 638 P.2d 141, 144 (Wyo.1981). To establish a cause of action in conversion a plaintiff must show that:

(1) he had legal title to the converted property; (2) he either had possession of the property or the right to possess it at the time of the conversion; (3) the defendant exercised dominion over the property in a manner which denied the plaintiff his rights to use and enjoy the property; (4) in those cases where the defendant lawfully, or at least without fault, obtained possession of the property, the plaintiff made some demand for the property's return which the defendant refused; and (5) the plaintiff has suffered damage by the loss of the property.

Frost, at 144; see also De Clark v. Bell, 10 Wyo. 1, 7, 65 P. 852, 853 (1901). Only personal property (chattel) can be converted. Restatement, Second, of Torts § 222A (1965); see H.D. Warren, Annotation, Nature of property or rights other than tangible...