Frey v. Amoco Production Co.
| Decision Date | 07 October 1991 |
| Docket Number | No. 90-3553,90-3553 |
| Citation | 943 F.2d 578 |
| Parties | Frederick J. FREY, et al., Plaintiffs-Appellants, v. AMOCO PRODUCTION COMPANY, Defendant-Appellee. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Frederick W. Ellis, Thomas C. McKowen, IV, Strain, Dennis, Ellis, Mayhall & Bates, David M. Ellison, Jr., Ellison & Smith, Baton Rouge, La., for plaintiffs-appellants.
Frank J. Peragine, Christina H. Belew, Simon, Peragine, Smith & Redfearn, New Orleans, La., for defendant-appellee.
Appeal from the United States District Court for the Eastern District of Louisiana.
Before REAVLEY, KING and JONES, Circuit Judges.
Frederick J. Frey and other gas royalty interest owners (collectively Frey) appeal from the district court's rulings that: (1) under the terms of the Louisiana gas lease at issue, take-or-pay payments received by the lessee under its gas sales contract are not part of the amount realized from the sale of gas; (2) royalty miscalculation claims based on royalties paid more than three years before suit are prescribed; and (3) Amoco's status as unit operator of the Morganza field does not subject its records to Louisiana's Public Records Act. We hold that royalties are due on take-or-pay receipts under Frey's Louisiana gas lease and that the district court's prescription ruling is not supported by sufficient findings, but we agree with the court's decision regarding Louisiana's Public Records Act.
Frey owns royalty interests under a mineral lease (the Lease) that covers part of the Morganza natural gas field in Louisiana. Amoco Production Co. (Amoco) prepared the Lease from a Bath Louisiana form and executed it in 1975 with Frey's predecessor-in-interest, F & L Planters (F & L). Amoco has produced and sold gas pursuant to the Lease since 1982.
The Lease provides Frey a "royalty on gas sold by Lessee [at] one-fifth ( 1/5) of the amount realized at the well from such sales." In 1981, Amoco agreed to sell the gas that it would produce under the Lease to Columbia Gas Transmission Corporation (Columbia). The contract between Amoco and Columbia (the Morganza Contract) contains a "take-or-pay" provision that requires Columbia to pay Amoco for a minimum amount of gas each year regardless of whether Columbia takes the minimum amount.
By July 1985, Amoco and Columbia were embroiled in litigation over approximately $265 million in take-or-pay liabilities that Amoco claimed under the Morganza Contract. Amoco and Columbia resolved their take-or-pay dispute in their Settlement Agreement. Under the Settlement Agreement, Columbia paid Amoco approximately $45.6 million as a "recoupable take-or-pay payment," meaning that over a five-year period, Columbia could take $45.6 million worth of gas over its minimum required annual purchase. Columbia also agreed to pay Amoco approximately $20.9 million as what Columbia and Amoco call a "nonrecoupable take-or-pay payment." Columbia cannot recoup this sum by taking extra gas. Finally, Columbia paid Amoco approximately $280.2 million under the Settlement Agreement for past and future price deficiencies in gas that Amoco delivered to Columbia under the Morganza Contract.
Amoco shared the $280.2 million with Frey under the Lease's gas royalty provision, but it did not similarly share the $66.5 million in take-or-pay settlement proceeds. Frey sued Amoco in April 1988, alleging that the Lease subjected Amoco's receipts of take-or-pay settlement payments to Frey's royalty interest and that Amoco made accounting mistakes which caused it to underpay Frey's royalty on the gas delivered to Columbia.
The district court granted Amoco partial summary judgment that the Lease does not entitle Frey to a royalty share of the take-or-pay amounts received by Amoco under the Settlement Agreement. Frey v. Amoco Production Co., 708 F.Supp. 783, 787 (E.D.La.1989). At the close of Frey's case-in-chief during a bench trial, the district court ruled that Frey's royalty miscalculation claims pertaining to the period before April 18, 1985 are barred by Louisiana's three-year prescription statute. Frey and Amoco then settled all of their post-April 1985 accounting disputes. After trial, the court denied Frey's request for a declaratory judgment that Amoco is subject to Louisiana's Public Records Act. Frey v. Amoco Production Co., 741 F.Supp. 601, 603 (E.D.La.1990). Frey challenges these three rulings.
The terms of a Louisiana mineral lease determine the obligations of its signatories. See Odom v. Union Producing Co., 243 La. 48, 141 So.2d 649, 656 (1961). Frey and Amoco dispute whether payments received by Amoco under its take-or-pay contract with Columbia are part of the "amount realized" from gas sold by Amoco. On cross-motions for summary judgment, the district court interpreted the Lease's gas royalty clause as requiring Amoco to account to Frey only for receipts attributable to specific gas production. The court considered the parties' contract dispute controlled by Diamond Shamrock Exploration Co. v. Hodel, 853 F.2d 1159, 1168 (5th Cir.1988) and granted Amoco partial summary judgment that it owes Frey no royalty on take-or-pay monies received from Columbia. Frey, 708 F.Supp. at 787. We review de novo the court's interpretation of the Lease's legal effect. FED.R.CIV.P. 56; USX Corp. v. Tanenbaum, 868 F.2d 1455, 1457 (5th Cir.1989).
In Diamond Shamrock, this court held that "production," as used in a mineral lease prepared by the Department of Interior, means the actual physical severance of minerals from the ground. Diamond Shamrock, 853 F.2d at 1168. This holding made gas royalties under the lease there at issue due only on gas actually produced and not on take-or-pay payments received by the lessee-producer from the pipeline-purchaser. Id.
Several facts distinguish Diamond Shamrock from this case. Foremost, the cases concern different lease language. In Diamond Shamrock, the lessor received as royalty a fraction of the "amount or value of production saved, removed, or sold" whereas Frey is entitled to a fraction "of the amount realized at the well from [the sale of gas]." Compare Diamond Shamrock, 853 F.2d at 1163 (emphasis added) with Frey, 708 F.Supp. at 786. Second, the Diamond Shamrock court applied federal law in determining the meaning of the Department of Interior leases there at issue, but we must predict how the Louisiana Supreme Court would allocate take-or-pay payments under the Lease. See, e.g., Piney Woods Country Life School v. Shell Oil Co., 905 F.2d 840, 851-52 (5th Cir.1990) (). Finally, the Department of Interior as lessor wrote the Diamond Shamrock lease, while here, Amoco as lessee prepared the Lease and presented it to F & L for execution. So Diamond Shamrock does not control the result in this case.
The Lease's paragraph 7(b) establishes
the royalty on gas sold by Lessee to be one-fifth ( 1/5) of the amount realized at the well from such sales.
The district court held that "a 'sale' of gas cannot occur absent physical production and severance of the gas." Frey, 708 F.Supp. at 786. Though the court cited authority for the proposition that in Louisiana, gas apart from the mineral estate cannot be owned by the buyer until it is produced, see id., the court assumed that a thing must be owned to be sold. 1 However, under Louisiana law a
sale is sometimes made of a thing to come: as of what shall accrue from an estate, of animals yet unborn, or such like other things, although not yet existing.
LA.CIV.CODE ANN. art. 2450 (West 1952). More importantly, the court gives no explanation for why take-or-pay payments are not considered part of the total consideration for the right to take gas under the Morganza Contract.
The Lease affords royalty on the amount realized from sales, not on production. Cf. Diamond Shamrock, 853 F.2d at 1161; Killam Oil Co. v. Bruni, 806 S.W.2d 264 266-67 (Tex.App.--San Antonio 1991, writ requested); State v. Pennzoil Co., 752 P.2d 975, 976 (Wyo.1988) (). This court before has held that take-or-pay arrangements can effect a "sale" of gas that brings take-or-pay arrangements within the jurisdiction of the Federal Power Commission despite the possibility that the producer may not deliver any gas pursuant to arrangement. Callery Properties, Inc. v. Federal Power Comm'n, 335 F.2d 1004, 1021 (5th Cir.1964), rev'd on other grounds, 382 U.S. 223, 230, 86 S.Ct. 360, 364-65, 15 L.Ed.2d 284 (1965). That the Lease explicitly bases oil and miscellaneous mineral--but not gas--royalties on production strongly suggests that we not interpret production to be a prerequisite to royalties on gas. 2 See LA.CIV.CODE ANN. art. 2050 (West 1987) ().
Amoco contends that practical accounting difficulties should keep us from dividing recoupable take-or-pay payments between it and Frey. Amoco relies on the following Diamond Shamrock statement to support its argument:
[Requiring take-or-pay payments to be shared] would lead to absurd results. For example, if royalty is payable currently when the take-or-pay payment is made, what happens when the pipeline later takes make-up gas? If the fair market value of gas rises, the pipeline is usually responsible for paying for the make-up gas at the increased market value. The [lessor] gets its proportionate share of the increased market value as royalty for the make-up gas now taken. The lessee-producer then has to pay the additional royalty due on the increased fair market value, necessitating two royalty payments on one purchase of gas.
If the price of gas drops, depending on the...
To continue reading
Request your trial
-
Independent Petroleum Ass'n of America v. Babbitt
...and application of Diamond Shamrock that is the relevant consideration. DOI cites another Fifth Circuit case, Frey v. Amoco Production Co., 943 F.2d 578 (5th Cir.1991), vacated for review by Louisiana Supreme Court, 951 F.2d 67, Part IIA reinstated, 976 F.2d 242 (5th Cir.1992), in an attemp......
-
Frey v. Amoco Production Co.
...appealed to the United States Court of Appeals for the Fifth Circuit. A three judge panel of that court reversed. Frey v. Amoco Production Co., 943 F.2d 578 (5th Cir.1991). The Court of Appeals decided, inter alia, take-or-pay payments are part of the "amount realized" from the sale of gas ......
-
Harvey E. Yates Co. v. Powell, 95-2214
...which have applied the Harrell rule to require the payment of royalties on take-or-pay settlement proceeds: Frey v. Amoco Prod. Co., 943 F.2d 578 (5th Cir.1991) ["Frey I "], withdrawn in part on reh'g and question certified, 951 F.2d 67 (5th Cir.1992) (per curiam), certified question answer......
- Magnolia Marine Transport Co., Inc. v. Laplace Towing Corp.
-
CHAPTER 9 STRATEGIES AND PROCEDURAL ISSUES IN ROYALTY CASES
...express marketing requirements. The implied covenant to market is discussed in section 9.02[A][3][C], infra. [48] 822 S.W.2d at 165. [49] 943 F.2d 578 (5th Cir. 1991). [50] Frey v. Amoco Prod. Co., 708 F. Supp. 783 (E.D. La. 1989). [51] Id. [52] The court looked to various provisions of the......
-
CHAPTER 4 INTERPRETING THE ROYALTY OBLIGATION BY LOOKING AT THE EXPRESS LANGUAGE: WHAT A NOVEL IDEA?
...565N.W.2d 887, 894,138 O.&G.R. 361 (1997). It is interesting to note that the Fifth Circuit opinion in Frey v. Amoco Production Co., 943 F.2d 578, 113 O.&G.R. 434 (5 Cir. 1991), that was withdrawn when the issues were certified to the Louisiana Supreme Court applied the parsing approach to ......
-
CHAPTER 9 RECENT CASES AFFECTING PIPELINES
...Producer's Gas Co., 870 F.2d 563 (10th Cir. 1989). [35] 708 F. Supp. 783 (E.D. La. 1989), aff'd in part, rev'd in part, remanded in part, 943 F.2d 578 (5th Cir. 1991), certifying question to, 603 So. 2d 166 (La. 1992). [36] 980 F.2d 521 (8th Cir. 1992). [37] Ark. Code Ann. § 15-74-705 (Mich......
-
CHAPTER 2 GAS MARKETING ROYALTY ISSUES IN THE 1990s
...Supra, note 6. [203] 806 S.W.2d at 268. [204] 828 S.W.2d 101 (Tex. Civ. App. 1992). [205] 822 S.W.2d 153 (Tex. Civ. App. 1991). [206] 943 F.2d 578 (5th Cir. 1991), withdrawn 951 F.2d 67 (5th Cir., 1992) and certified to the Louisiana Supreme Court. [207] 603 So.2d 166 (La. 1992). [208] No. ......