Fransen v. Conoco, Inc.

• Decision Date: 17 April 1986
• Citation: 64 F.3d 1481
• Parties: Ruth FRANSEN, Martha Harms, Elsie Hinz, Wilson Mahone, Mary Gene McCoy, Tim Ruyle, Brenda K. Ruyle, Jeanette Stone, Jack Stone, Cassandra Gibbons, Woody Dean Gibbons, Del Gordon d/b/a G.M. Properties, and Orman E. McCartney, Jr., and Rosaline O. McCartney, Trustees Under the McCartney Family Trust as Amended and Restated
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1481

64 F.3d 1481

Ruth FRANSEN, Martha Harms, Elsie Hinz, Wilson Mahone, Mary

Gene McCoy, Tim Ruyle, Brenda K. Ruyle, Jeanette Stone, Jack

Stone, Cassandra Gibbons, Woody Dean Gibbons, Del Gordon

d/b/a G.M. Properties, and Orman E. McCartney, Jr., and

Rosaline O. McCartney, Trustees Under the McCartney Family

Trust as Amended and Restated April 17, 1986, Plaintiffs-Appellants, Kirkland Royalty, Inc., Additional Plaintiff, v. CONOCO, INC. (formerly Continental Oil Company), and C.I.G.

Exploration, Inc., Defendants-Appellees.

Nos. 94-6234, 94-6268.

United States Court of Appeals, Tenth Circuit.

Aug. 30, 1995.

Michael J. Rovell (Lisa I. Fair with him on the brief) of Law Offices of Michael J. Rovell, Chicago, IL, for plaintiffs-appellants.

Gary W. Davis of Crowe & Dunlevy, Oklahoma City, OK (Mark D. Christiansen of Crowe & Dunlevy, Oklahoma City, OK, and Russell D. Howell of Conoco, Inc., Houston, TX, with him on the brief), for defendant-appellee Conoco, Inc.

Donna N. Blakley of Hall, Estill, Hardwick, Gable, Golden & Nelson, Oklahoma City, OK (Sharon Taylor Thomas of Hall, Estill, Hardwick, Gable, Golden & Nelson, Oklahoma City, OK, and Bruce Wolitarsky of C.I.G. Exploration, Inc., Houston, TX, with her on the brief), for defendant-appellee C.I.G. Exploration, Inc.

Charles B. Davis, Oklahoma City, OK, filed a brief for amicus curiae Association of Land and Mineral Owners.

Before EBEL, Circuit Judge, McWILLIAMS, Senior Circuit Judge, and JENKINS, Senior District Judge. ^*

JENKINS, Senior District Judge.

The plaintiffs own mineral interests in certain property in Oklahoma. They brought this diversity action against their lessees, Conoco, Inc., and C.I.G. Exploration, Inc. (CIGE), alleging that the lessees had failed to protect and develop their interests. The district court held that a prior decision of the Oklahoma Corporation Commission barred the plaintiffs' claims. We affirm.

I.

The plaintiffs own undivided interests in the oil and gas underlying section 14, Township 12 North, Range 16 West, Custer County, Oklahoma. Section 14 is a drilling and spacing unit for production of gas from the Des Moines common source of supply. Plaintiffs Ruth Fransen, Martha Harms, Elsie Hinz, Wilson Mahone, Mary Gene McCoy and Orman E. McCartney, Jr. and Rosaline O. McCartney, trustees under the McCartney Family Trust, leased their interests to Conoco. The other plaintiffs leased their interests to CIGE. Conoco operates the Meacham No. 1-14 well, which is the unit well for section 14, and owns a 37-percent interest in its production. In early 1981, shortly after the Meacham No. 1-14 well was completed, Anson Corporation completed the Downing No. 1-15 well on adjoining section 15. Conoco owns a 29-percent interest in production from the Downing No. 1-15 well; CIGE has no interest in the Downing No. 1-15 well.

The plaintiffs claim that the Downing No. 1-15 well is draining hydrocarbons from section 14. The plaintiffs brought this action claiming that the defendants breached their implied covenants under the leases to fully develop the leases, to protect them from drainage and to take whatever administrative or judicial action was necessary to protect section 14 from drainage. The plaintiffs claimed that the defendants breached their obligation to act as a prudent operator by failing to drill an additional well in section 14. The plaintiffs also claimed that Conoco breached the fiduciary duty it owed the plaintiffs as operator for the section 14 unit. The plaintiffs claimed that Conoco's actions in fostering the completion of the Downing No. 1-15 well caused fraudulent drainage of section 14 and were tortious, wanton and malicious, subjecting Conoco to punitive as well as compensatory damages. Finally, the plaintiffs claimed that the defendants were liable for unpaid royalties. The plaintiffs sought cancellation of their leases and damages.

In 1992 the Oklahoma Corporation Commission (OCC) denied an application from Great Bear Exploration, Inc. to drill an additional well in section 14. The plaintiffs and defendants were notified of the OCC proceedings. Conoco opposed the application. None of the other parties took part in the administrative proceedings. The OCC found that an additional well in section 14 was unwarranted and would violate the rights of owners in other sections of the Des Moines common source of supply. Specifically, it found that the Meacham No. 1-14 well "has and will continue to recover for the owners in Section 14 their fair share of the gas in the Des Moines common source of supply." Aplee.Supp.App. at 44. The OCC found that Conoco had acted prudently in recovering a fair share of the gas in section 14 and resisting Great Bear's application. The OCC also found that "[a]ny drainage occurring in Section 14 is compensated for through production of the No. 1-14 Meacham well. To allow an additional well to be drilled and produced in Section 14 would result in damage to the correlative rights of owners in adjacent sections." Id. at 45. The Oklahoma Court of Appeals affirmed the OCC order on appeal, and the Oklahoma Supreme Court denied certiorari. The OCC order is thus a final order.

Great Bear, the applicant before the OCC, assigned its interest in section 14 to Kirkland Royalty, Inc. The plaintiffs entered into agreements with Kirkland authorizing Kirkland to take any action on their behalf to protect their interests. Kirkland brought this action on behalf of the plaintiffs and is controlling and paying for this litigation. ¹

CIGE moved for partial summary judgment on the plaintiffs' claims for breach of their implied covenants to further develop section 14 and protect it against drainage. Conoco moved for partial summary judgment on all the plaintiffs' claims except their royalty underpayment claim. The district court granted both motions. The court concluded that, in light of the OCC's findings, the defendants' actions did not breach any implied covenant. The court reasoned that the defendants could not be liable for failing to drill an additional well in section 14 when the OCC had determined that an additional well should not be drilled. The court further held that Conoco was entitled to summary judgment on the plaintiffs' claim for breach of its fiduciary duty but concluded that, "[w]hether an award of punitive damages [against Conoco] is appropriate under any remaining theory cannot yet be determined." Aplt. App. at 278. The court also reserved the question of the defendants' liability for royalty underpayments. ² The court certified its partial summary judgments as final judgments under Federal Rule of Civil Procedure 54(b) and denied the plaintiffs' motion to reconsider its summary judgment rulings. The plaintiffs have appealed.

II.

This is not the first time we have considered claims by the owners of mineral interests in section 14 that Conoco failed to protect their interests. Other owners of mineral interests in section 14 brought an earlier action against Conoco's predecessor Continental Oil Co., alleging that offsetting wells were draining oil and gas from section 14, that Conoco had failed to protect the section from drainage and that Conoco had not prudently developed the section. The case was tried to a jury, which found that Conoco had engaged in fraudulent drainage, had breached its fiduciary duty to the mineral interest owners and had failed to develop the mineral interests adequately. On appeal, this court held that the trial court erred in not giving preclusive effect to the OCC order and remanded the case with instructions to enter judgment against the plaintiffs in that action. See Ruyle v. Continental Oil Co., 44 F.3d 837 (10th Cir.1994), cert. denied, --- U.S. ----, 116 S.Ct. 272, --- L.Ed.2d ---- (1995). Conoco and CIGE argue that the plaintiffs' claims in this action are similarly barred.

Ruyle held that the plaintiffs' claims there were barred on two grounds--under the doctrine of collateral estoppel (or issue preclusion) and under an Oklahoma statute prohibiting collateral attacks on OCC orders. See 44 F.3d at 841. Under the doctrine of collateral estoppel, once a court decides an issue of law or fact that was fairly and fully litigated and necessary to its judgment, that issue may not be relitigated in a suit on a different cause of action. See Wilson v. Kane, 852 P.2d 717, 722 n. 23 (Okla.1993); Veiser v. Armstrong, 688 P.2d 796, 800 nn. 9 & 11 (Okla.1984). Collateral estoppel, however, only binds those who were parties to the first proceeding or their privies. Wilson, 852 P.2d at 722 n. 23. None of the plaintiffs in this case, unlike the plaintiffs in Ruyle, took part in the OCC proceedings, although three of the plaintiffs--Ruth Fransen, Martha Harms and Elsie Hinz--entered into agreements with Great Bear, the applicant before the OCC, authorizing Great Bear to act on their behalf to have another well drilled in section 14. See Aplee.Supp.App. at 245-65.

Ruyle suggests that the plaintiffs may have been parties to the OCC proceedings under section 87.2 of title 52 of the Oklahoma Statutes, by virtue of their ownership of mineral interests in section 14. Section 87.2 provides that "mineral owners ... within the subject area of an application or the owners of correlative rights within the common source of supply or supplies embraced within an application to the extent such owners are directly affected by such application, shall be proper parties" to protest the application or present testimony or evidence at a hearing thereon. Okla.Stat.Ann. tit. 52, Sec. 87.2 A (West 1991). See also Ruyle, 44 F.3d at 844 ("Plaintiffs, as mineral owners on the lands covered by [Great Bear's] application, were thus statutorily designated as parties" to the OCC proceedings). It is not clear whether section 87.2 automatically makes a mineral owner a party to an OCC proceeding or merely designates who may be a party to an OCC proceeding, in which case some further action would...