Flowers v. Diamond Shamrock Corp.

• Decision Date: 20 December 1982
• Docket Number: No. 81-1396,81-1396
• Citation: 693 F.2d 1146
• Parties: Clem G. FLOWERS, et al., Plaintiffs-Appellants, v. DIAMOND SHAMROCK CORPORATION, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1146

693 F.2d 1146

Clem G. FLOWERS, et al., Plaintiffs-Appellants, v. DIAMOND SHAMROCK CORPORATION, Defendant-Appellee.

No. 81-1396.

United States Court of Appeals, Fifth Circuit.

Dec. 20, 1982.

Rehearing Denied Jan. 10, 1983.

R.C. Hamilton, Amarillo, Tex., for plaintiffs-appellants.

Underwood, Wilson, Sutton, Berry, Stein & Johnson, Harlow Sprouse, Alan B. Jones, Amarillo, Tex., for defendant-appellee.

Appeal from the United States District Court for the Northern District of Texas.

Before GARZA, TATE and WILLIAMS, Circuit Judges.

TATE, Circuit Judge:

In this Texas diversity suit, the plaintiffs (the Flowers), lessors of the mineral rights of Texas oil and gas fields, seek additional royalties under a market value royalty provision contained in their leases with the defendant, Diamond Shamrock Corporation (Shamrock). The Flowers contend that Shamrock did not base royalty payments on the "market value" of subsequent sales of the gas from the leased properties, but rather only on the lower amount of the actual proceeds from Shamrock's long-term sales contract with an intrastate distributor. The plaintiffs Flowers' cause of action is founded upon the Texas jurisprudential holdings that a landowner-lessor is entitled to royalty payment for gas sold off his premises based upon the market value at the time of sale after production, not upon the price established between the producer and the distributor under an earlier long term contract. Texas Oil & Gas Corporation v. Vela, 429 S.W.2d 866, 870-71 (Tex.1968).

The district court set aside parts of favorable jury determinations that justified an award to the Flowers of increased royalties. In so doing, the court held (1) that the endorsement of royalty checks as a matter of law constituted an accord and satisfaction as to some of the earlier royalty payments, and (2) that the effect of the Natural Gas Policy Act prevented the recovery of additional royalties for some of the later payments, since those sought were in excess of the maximum price for intrastate gas permissible under this federal regulation. For the interim in which additional royalties were held to be properly due under Vela, the district court also (3) permitted Shamrock to deduct for payment of Texas severance taxes a percentage of the royalties so due. On their appeal, the plaintiffs Flowers attack these three determinations.

We affirm the district court's entry of judgment notwithstanding the verdict as to (2), but we hold as to (1) that the jury could properly find on the evidence before it that, when the Flowers endorsed the royalty checks, there was no bona fide dispute as to the amount thereof (an essential prerequisite under Texas law to an accord and satisfaction), so that the district court therefore erred in granting judgment notwithstanding

the jury verdict. We remand for the determination of additional royalties therefore due, and we also remand as to (3) for the determination of the severance-tax deduction issue.

The Facts

The plaintiffs Flowers have royalty interests under an oil and gas lease on lands in Ochiltree County, Texas. The defendant Shamrock, as lessee, agreed to pay the plaintiffs royalties based on the "market value" of the natural gas produced from a well it drilled on the property. ¹ Gas was discovered on the property in 1963 and since that date has been sold and used solely within the state of Texas.

Shamrock pipes the natural gas from the well to its refinery, where the liquid contents of the gas are stripped, ² and the residue is sold at the plant "tailgate" to a distributor. Although it commingles the gas from many wells at the refinery, Shamrock measures at each well the volume (by thousand cubic feet, or MCF) and the heating value (by British Thermal Unit, or BTU) of the gas. In 1965 Shamrock committed the gas from the Flowers' well, in addition to that produced from other leased properties, to a twenty-year sales contract with the Southwestern Public Service Company (Southwestern), setting a beginning price at 19.5 cents per thousand cubic feet of gas containing 1000 BTU per cubic foot, escalating over the life of the contract to 22.5 cents. Shamrock has paid the Flowers a royalty based on this contract price, or at times a slightly higher price.

Shamrock tendered to the plaintiffs monthly checks for royalty payments calculated upon the contract price, and the plaintiffs endorsed and cashed these checks. A stub was attached to each check which showed lease numbers, a number that presumably showed the volume of production, the amount of severance tax deducted, and an amount labelled "Your Part," which was the amount of the check. The following small print appeared on the back of the check itself:

ENDORSEMENTS

This check is issued in full settlement of the account stated and the payee accepts it as such by his endorsement. If not correct, return without alteration and state difference.

On February 15, 1974, Shamrock sent a form letter to its royalty owners, including the Flowers, offering to pay higher royalties if the lessor executed a contract agreeing to accept royalties directly based on the sales contract proceeds from the lessee-distributor sales contracts rather than on the market value method of computation set forth in the original leases. On July 29, 1974, Marvin Flowers, for the Flowers, replied that there was no reason to execute an agreement to obtain a rate increase to which the lessors were entitled, and requested payment of "deficit funds" from February. ³ Shamrock acknowledged receipt of that letter in a response attached to the plaintiffs' original pleading, but not introduced into evidence, informing the Flowers that it would continue to pay the royalty in accordance with the lease provisions.

The plaintiffs did not express further dissatisfaction with the amount of royalties received, but stopped endorsing and cashing the checks in February, 1977, ⁴ and eventually brought this lawsuit.

The plaintiff-lessors sued for the difference in the royalties due them under Vela since December, 1973. Trial was to a jury, which found the market values for the applicable months and failed to find for the defendant on its affirmative defense of accord and satisfaction. The trial court granted Shamrock's motion for judgment notwithstanding the verdict on two counts. First, the court held that the defendant had established its accord and satisfaction defense as a matter of law as to those months from 1973 to 1977 when royalty checks were cashed by the plaintiffs. No recovery was therefore awarded for those months. Secondly, the court held that under the Natural Gas Policy Act, 15 U.S.C. Sec. 3301 et seq. (1978), the contract price received by Shamrock measured the proper market value for royalties payable to the Flowers' lessors, thereby preventing recovery by the plaintiffs for additional royalties on production had after December 1, 1978. The district judge entered judgment in favor of the Flowers for additional royalties under Vela at the actual market value of the gas between 1977 (when the Flowers last endorsed the checks) and 1980 (the last years at issue in this case), but the court also ordered a deduction from the amounts so awarded in the amount of 7.5% for Texas production and severance taxes due upon the gas so produced.

As earlier stated, the Flowers contend that the district court erred in its rulings as to (1) accord and satisfaction, (2) market-value price established by federal regulation, and (3) severance-tax deduction.

I. Accord and Satisfaction

The district court held that the evidence adduced in trial showed, as a matter of law, that the royalty checks cashed by the plaintiffs were accepted in satisfaction of an unliquidated claim. Any dispute over the market value of the gas on which the Flowers' royalties were based was therefore conclusively resolved in an accord and satisfaction with Shamrock that foreclosed recovery of additional amounts.

The plaintiffs Flowers point out that judgment notwithstanding a jury verdict should not be granted by the trial court unless "the facts and inferences point so strongly and overwhelmingly in favor of one party that ... reasonable men could not arrive at a contrary verdict." Boeing v. Shipman, 411 F.2d 365, 374 (5th Cir.1969) (en banc). In ruling upon such a motion, the court must consider all the evidence "in the light and with all reasonable inferences most favorable to the party opposed to the motion." Id. Tested by this standard, we agree with the plaintiffs Flowers' contention that the evidence before the jury reasonably permitted a determination, as a factual matter, that at the time the Flowers perfunctorily endorsed their royalty checks, they were not aware of any bona fide dispute between themselves and Shamrock as to the amount of gas royalties due to them under the lease. The jury could thus find under the evidence that, by their endorsements, the Flowers could not have intended to relinquish their rights under Vela to additional gas royalties based upon the market value of the gas at the time of production and sale (rather than upon the much lower price received by Shamrock as a result of its long-term contract entered into years earlier with the intrastate distributor).

Shamrock argues that the Flowers' endorsement of the checks conclusively indicates that they relinquished claims to a greater amount. Shamrock contends that this amount was disputed by the Flowers at least as early as July, 1974, the date of the plaintiffs' letter to Shamrock indicating their belief that there may have been a deficit in royalty amounts paid. See note 3 supra.

The Supreme Court of Texas set out the requirements of an accord and satisfaction in Jenkins v. Henry C. Beck Co., 449 S.W.2d 454, 455 (Tex.1969):

This defense rests upon a new contract, express or implied, in which the parties agree to the discharge of the existing obligation by means of the lesser payment tendered...