Harrell v. Samson Resources Co.

• Court: Oklahoma Supreme Court
• Writing for the Court: Hargrave
• Citation: Harrell v. Samson Resources Co., 1998 OK 69, 980 P.2d 99, 69 OBJ 2493 (Okla. 1998)
• Decision Date: 07 July 1998
• Docket Number: No. 82,139.,82,139.
• Parties: Kent J. HARRELL, d/b/a Harrell Energy Co.; Anderman Oil Corporation; Ellen Anderman; Dona M. Mohan; Ralph H. Smith, d/b/a Sunrise Exploration; and St. Mary Parish Land Company, Appellees, v. SAMSON RESOURCES COMPANY, Charles Schusterman; Harold Josey Schusterman Irrevocable Trust dated May 3, 1977; Harold Josey Schusterman's Children's Irrevocable Trust dated May 3, 1997; Stacy H. Schusterman's Children's Irrevocable Trust dated May 3, 1997; Jerome R. Schusterman's Children's Irrevocable Trust dated May 3, 1997; and Ace Company IV, Appellants.

980 P.2d 99

1998 OK 69

Kent J. HARRELL, d/b/a Harrell Energy Co.; Anderman Oil Corporation; Ellen Anderman; Dona M. Mohan; Ralph H. Smith, d/b/a Sunrise Exploration; and St. Mary Parish Land Company, Appellees, v. SAMSON RESOURCES COMPANY, Charles Schusterman; Harold Josey Schusterman Irrevocable Trust dated May 3, 1977; Harold Josey Schusterman's Children's Irrevocable Trust dated May 3, 1997; Stacy H. Schusterman's Children's Irrevocable Trust dated May 3, 1997; Jerome R. Schusterman's Children's Irrevocable Trust dated May 3, 1997; and Ace Company IV, Appellants.

No. 82,139.

Supreme Court of Oklahoma.

July 7, 1998.

Rehearing Denied June 14, 1999.

Certiorari to the Court of Civil Appeals, Division No. 3.

¶ 0 On their claim for pre-depletion cash balancing, the Honorable Gail W. Harris, trial judge, awarded plaintiffs $828,882.84 based on an overbalance of 201,234 MCF at a weighted average price of $4.119 per MCF. In a post-judgment proceeding the trial court assessed prejudgment interest in the amount of $1,025,718.52, calculated from July 1983 to October 22, 1993 at the rate of 12% per annum. Plaintiffs were awarded $77,256.34 in attorney fees. The Court of Civil Appeals reversed the trial court, determining that the claims were barred by the statute of limitations. We granted certiorari previously and now vacate the opinion of the Court of Civil Appeals. We affirm the trial court judgment awarding pre-depletion cash balancing in the amount of $828,882.84, and reverse the award of attorney fees. The trial court's award of prejudgment interest is reversed with directions to award prejudgment interest calculated from March 20, 1989, the date of plaintiffs' demand on Samson, to October 22, 1993, at the rate of 6% per annum.

CERTIORARI PREVIOUSLY GRANTED; THE OPINION OF THE COURT OF CIVIL APPEALS IS VACATED; THE TRIAL COURT'S JUDGMENT IS AFFIRMED IN PART AND REVERSED IN PART, WITH DIRECTIONS.

James A. Kirk, Matthew L. Standard, Kirk & Chaney, Oklahoma City, Oklahoma, For Appellants.

James E. Poe, Emily D. Poe, Tulsa, Oklahoma; W. Bland Williamson, John L. Randolph, Jr., Pray, Walker, Jackman, Williamson & Marlar, Tulsa, Oklahoma, For Appellees.

HARGRAVE, J.

¶ 1 The issue to be determined is whether this gas balancing dispute should be resolved by allowing balancing in kind, pre-depletion cash balancing or cash balancing upon depletion. The trial court allowed pre-depletion gas balancing on the Deputy 21-1 well at the weighted average price received by defendants, and awarded prejudgment interest and attorney fees to the plaintiff.

¶ 2 Plaintiffs and defendants executed a joint operating agreement covering all of Section 21, Township 12 North, Range 16 West, Custer Co., Oklahoma, in which Conoco, Inc. (not a party to this suit) was designated as the Operator. Conoco owned 81.25% of the working interest, Plaintiffs own 12.5% interest and defendants own 6.25% interest. All of Section 21, Township 12 North, Range 16 West, constitutes a drilling and spacing unit established by the Oklahoma Corporation Commission on August 7, 1978 in Order No. 143939, for production from the Des Moinesian common source of supply. There is no Gas Balancing Agreement between the parties, and the question of whether the parties were marketing gas under the Sweetheart Gas Act has been removed as an issue.¹ It does not appear that the parties are common law tenants in common because they do not own undivided interests in the same property. We must determine the legal relationship of the working interest owners under the terms of their Operating Agreement and any trade usage or industry custom incorporated therein.

¶ 3 The Deputy well was completed by Conoco, the operator, as an oil and gas well on October 5, 1981. On November 9, 1981, the Deputy well first went on line for gas sales from Conoco to Producer's Gas Company as purchaser. In February 1982, defendant Samson contracted to sell its share of the gas produced to El Paso Natural Gas. In March 1982 the plaintiffs contracted to sell their share of gas to Producer's Gas Company.

¶ 4 In late 1982, Producers stopped taking gas from Conoco and the plaintiffs, under the force majeure clause in the contract. Conoco sued Producers for breach of contract. Plaintiffs did not sue Producers because their contract provisions were different. On February 21, 1984, plaintiffs terminated their gas purchase contract with Producers. While plaintiffs and Producers were in conflict, plaintiffs did not sell any gas from November 1982 through November 1984 (except for the month of April 1983). Producers had the only pipeline connection to the Deputy well and during the contract dispute period, Conoco, the operator, flowed gas from the Deputy to Producers, which allocated 100% of the gas to Samson's purchaser, El Paso Natural Gas.

¶ 5 In March 1989, Samson offered its interest in the Deputy 21-1 well bore for sale at auction, along with interests in other wells. Three days before the auction, plaintiffs objected to the sale and demanded cash balancing from Samson within thirty days. The interest was sold at auction but, before the assignment was recorded, Samson rescinded the sale. Plaintiffs sued for: 1) an accounting under the Sweetheart Gas Act, 52 O.S. § 540 et seq., 2) conversion, and 3) the common law remedy of equitable accounting and cash balancing. The previous trial judge in the case gave judgment for Samson on the plaintiff's conversion claims, and, in a second order, held that the plaintiffs' claims under the Sweetheart Gas Act were time barred. The plaintiffs' claim for cash balancing was the sole issue remaining for trial.

¶ 6 The district court ordered pre-depletion cash balancing based on its determination that balancing in kind was not physically possible because Samson had sold more than its share of estimated reserves and that gas balancing at depletion would be inequitable. The trial court held that the sale of Samson's interest in the Deputy well in 1989 was an act in derogation of plaintiffs' rights and created a basis for cash balancing. The trial judge found that postponing an accounting and cash balancing would be "entirely inequitable and unjust to plaintiffs." The trial court awarded plaintiffs $828,882.84 based upon an overbalance of 201,234 MCF at a weighted average price of $4.119 per MCF, representing the average of prices received during the months Samson was overproduced. Upon motion by plaintiffs, the trial court awarded plaintiffs prejudgment interest, under 23 O.S. § 6, at the rate of 12% per annum set out in 52 O.S. § 540, in the amount of $1,025,718.52 for the period from July 1983 through October 22, 1993. Plaintiffs were awarded $77,256.34 in attorney fees under 52 O.S. § 540. On appeal, the Court of Civil Appeals found as a matter of law that the parties were not cotenants and that therefore the statute of limitations began to run when they first could have brought a claim for being under-produced. We granted certiorari.

¶ 7 We find that the trial court did not err in allowing pre-depletion cash balancing, but that the trial court erred in awarding an attorney fee to plaintiffs, and in the calculation of pre-judgment interest. We find that the right to demand cash balancing was triggered by Samson's attempted sale of its interest and that prejudgment interest should run from the date plaintiffs made demand on Samson.

¶ 8 The working interest owners in the Deputy 21-1 well are cotenants as to the oil and gas produced and sold therefrom, by virtue of their Joint Operating Agreement. The Joint Operating Agreement (hereinafter "JOA") dated May 1, 1981 is the 1956 Form 610, covering all of Section 21, Township 12 North, Range 16 West, Custer County, Oklahoma. The ownership clause in Part 4 states that all of the parties and their respective percentages or fractional interests under the agreement are listed in Exhibit A, and provides in pertinent part:

". . . Unless changed by other provisions, all costs and liabilities incurred in operations under this contract shall be borne and paid, and all equipment and material acquired in operations on the unit Area shall be owned, by the parties as their interests are given in Exhibit "A". All production of oil and gas from the Unit Area, subject to the payment of lessor's royalties, shall also be owned by the parties in the same manner." (emphasis added) ¶ 9 The ownership clause of this operating agreement creates a cotenancy as to production from the contract area. See, for example, Reserve Oil, Inc. v. Dixon, 711 F.2d 951, 952 (10th Cir.1983) (the contract vests ownership of the oil and gas produced from the wells in the parties in the same percentage that they own interests in the well); See also, Pierce, The Law of Disproportionate Gas Sales, 26 Tulsa L. Jour. 1 (1990). The ownership clauses in the 1977 and 1982 model form operating agreements, on the other hand, specifically provide that they shall not be deemed a cross-conveyance of interests. Id.

¶ 10 The JOA also provides that each owner shall take its share of production in kind and separately dispose of it. The take-in-kind clause provides:

"Each party shall take in kind or separately dispose of its proportionate share of all oil and gas produced from the Unit Area . . . Any extra expenditure incurred in the taking in kind or separate disposition by any party of its proportionate share of the production shall be borne by such party."

¶ 11 The two provisions of the JOA are contradictory with respect to the legal relationship between the parties. The ownership clause creates a cotenancy in the oil and gas produced, but the take-in-kind provision is antithetical to a cotenant-like relationship.² Requiring each owner to take and separately market its gas may cause gas imbalances to occur, but no provision is made in the JOA for balancing among the separately selling owners.

¶ 12 The "take in kind" provisions are included in operating agreements...