Henry v. Ballard & Cordell Corp.
| Decision Date | 30 June 1981 |
| Docket Number | No. 8267,8267 |
| Citation | 401 So.2d 600 |
| Parties | W. F. HENRY, Jr., Individually and as Trustee For J. A. and Martha Davis Trust, et al., Plaintiffs-Appellants-Appellees, v. The BALLARD & CORDELL CORPORATION, et al., Defendants-Appellees-Appellants. |
| Court | Court of Appeal of Louisiana — District of US |
Jones, Jones & Alexander, Jerry G. Jones, Cameron, for plaintiffs-appellants-appellees.
Gene Lafitte and Lawrence R. Simon, Jr., of Liskow & Lewis, Lafayette, for defendants-appellees-appellants.
Before DOMENGEAUX, GUIDRY and SWIFT, JJ.
Certain gas leases executed in the 1950s and early 1960s provided that lessors would receive as royalty a percentage or fraction of the market value of the gas sold. Lessees have paid royalty amounts based upon the amounts they have received from the interstate purchaser of the gas under the terms of a twenty year gas sales contract executed in 1961. Lessees contend that the purchase price represented the fair market value of natural gas in 1961, and that that value is the one plaintiffs' royalties should be based upon. Lessors claim that their royalties are to be calculated and paid on the basis of the current market value of natural gas, not on the basis of the price received by lessees for the gas.
The issue we must decide: Is the amount due the lessors as royalty under these leases to be based upon the prevailing market value at the time the gas was committed to the purchaser by the lessees under a long term gas sales contract, or is the royalty to be based instead upon the current market value determined on a daily basis the moment gas is produced and/or delivered to the purchaser?
This issue has never been decided by a court of this state and its ultimate resolution is certain to have a substantial impact upon the parties involved as well as many other similarly situated lessors and lessees. 1
The mineral leases involved in these two consolidated cases 2 affect property in the Calcasieu Pass Field in Cameron Parish. The leases, and the various plaintiffs claiming as lessors thereunder, are as follows:
(a) "Davis Lease No. 1" dated March 19, 1953;
(b) "Davis Lease No. 2" dated December 10, 1960;
(c) "Davis Lease No. 3" dated June 22, 1964; and
(d) "Rogers Lease" dated September 7, 1962.
Plaintiffs in No. 8267 suing as lessors under all three Davis leases are: W. F. Henry, Jr., as Trustee for J. A. & Martha Davis Trust for Mary Henry, Wilma Guthrie, Furman Davis, and Lonnie Davis, Mary Davis Henry, and Wilma Guthrie.
Plaintiffs in No. 8268 suing as lessors under the Rogers lease are: Milford A. Rogers, J. B. Jones, Jr., Faye Jones, Jerry G. Jones, Jr., and Jerry G. Jones representing the minor child Lori Sue Jones.
The pertinent gas royalty provisions of these four leases provide as follows:
(a) Davis Lease No. 1:
"(b) on gas ... sold or used off the premises ... the market value at the wells of one-eighth of the gas so sold or used ..."
(b) Davis Lease No. 2:
"(b) one-sixth (1/6th) of the market value of the gas sold or used ...."
(c) Davis Lease No. 3:
"(b) 18.5% of the market value of the gas sold or used ...."
(d) Rogers lease:
"(b) On gas ... sold or used off the premises .... the market value at the well of one-fourth (1/4th) of the gas so sold or used ...."
The cases were tried on a consolidated basis without a jury on April 21 and 22, 1980, and the trial court rendered a single judgment disposing of both cases. The judgment was rendered in favor of the above-named plaintiffs-lessors, and against the following defendants in both suits: Wiley P. Ballard, Jr., Robert M. Cordell, Lay Exploration Corporation, the George Williamson Estate, Herman W. Lay as Trustee of William B. Oliver Trust, Herman W. Lay as Trustee of Agnes Cluthe Oliver Trust, Arthur L. Montgomery, Shenandoah Oil Corporation, Karl F. Hagemeier, R. E. Kellerman, Millcreek Oil Company, Miss Sondra Press, Hal B. Wallis, Gwendolyn P. Weiner, Arthur O. Wellman, Ted Weiner Oil Properties, Charles Weiner, Mary Don Weiner, Diana Weiner, Stanley Weiner, Charles Weiner Trustee, Texas Crude Oil Company, Texas Crude, Inc., and H. J. Lasieur, in proportion to their ownership interests in the various leases. In addition, judgment was rendered against Robert R. Durkee, Jr., in No. 8267 only.
The defendants have appealed from that portion of the judgment requiring them to pay additional royalties under the Davis and Rogers leases. The plaintiffs have appealed from the court's denial of their claim for double damages under La. R.S. 31:140.
TRIAL COURT DECISION
The trial court held that the market value provisions of the royalty clauses in the three Davis leases and the Rogers lease require that royalties be settled on the basis of current sales, 3 including sales made in the intrastate market through November, 1978, and that thereafter, market value is determined by reference to Section 109 of the Natural Gas Policy Act of 1978. Based on this holding, the court ordered defendants to account to plaintiffs from September, 1976, through the date of judgment for the difference between the proceeds actually received and the "market value" of the gas attributable to the fractional share of the plaintiffs. The court also ordered that henceforth, royalties must be based on the prices published by the Federal Energy Regulatory Commission (FERC) applicable to Section 109 under the Natural Gas Policy Act of 1978.
In its opinion the district court adopted this definition of market value:
"... the market value of a thing is the price which it might be expected to bring if offered for sale in the market."
Defendants contend that the plaintiffs' royalties should be calculated by using the 1961 market value of natural gas since that is when the gas sales contract was executed between the Ballard & Cordell Corporation (Ballard and Cordell), the operator of the leases, 4 and the American Louisiana Pipeline Company (later to become the Michigan Wisconsin Pipeline Company), the interstate purchaser of the gas production. According to defendants, the sale was complete at that time because there existed an agreement for the object and price, although the object was not yet delivered nor the price paid. La. C.C. Art. 2456.
The trial court rejected defendants' argument, relying upon the principle that the sale of minerals still in the ground is no sale at all; it is merely the creation of a real right. The court concluded that a fugacious mineral becomes subject to a true sale only when it has been reduced to possession; since natural gas, unlike crude oil, is never stored, it cannot be reduced to possession (and thus cannot be subject to ownership or the object of a sale) until it is actually in the defendants' pipeline; only then, after it is in the pipeline, can the market value of that particular gas be determined; and since this reduction to possession occurs on a daily basis, the relevant comparison would be to sales occurring at the same time.
Defendants argued in the alternative that if "market value" in plaintiffs' leases meant current market value determined on a daily basis as the gas is reduced to possession, then the only comparable sales which should be considered to establish the current market value are sales of gas committed to the federally regulated interstate market since this gas was sold in that market; sales of gas in the unregulated intrastate market should not be considered.
Defendants proposed this argument because prices paid by intrastate purchasers of natural gas had, from the early to the late 1970s, far outstripped the maximum allowable price for interstate gas set by the FERC. If the lessors were adjudged to be entitled to additional royalties, and the current market value of gas destined for the interstate market was determined by higher prices paid for gas on the intrastate market, then the lessees would be forced to pay as royalty for lessors' fractional interest a substantially higher price than they would if only interstate sales were considered.
The court rejected this argument too and held that the current market value should be determined by sales of gas in the intrastate market as well as the interstate market. The court reasoned that use of the restricted interstate market as the sole criterion for determining the "market value" standard provided by the leases would amount to a re-writing of the leases.
We reverse the trial court judgment. We find that the parties intended for the royalties to be governed by the market value of natural gas which prevailed in 1961 when the gas was committed to the purchaser under the gas sales contract rather than by the current market value, to be determined on a daily basis as gas is produced and/or delivered to the purchaser. Although we agree with the trial court that the market value of a thing is the price which it might be expected to bring if offered for sale in the market, we do not agree with its conclusion that the term market value, standing alone, clearly means current market value.
We need not reach and hence will not consider whether sales of gas in the intrastate market should be considered when determining the market value of gas committed to the interstate market. We also need not reach and will not consider the plaintiff's claim for double damages under La. R.S. 31:140 since we decide they are not entitled to any damages.
According to unrefuted evidence presented by the defendants, including expert testimony, 5 natural gas was very plentiful in 1961 when Ballard & Cordell sought a market for the gas in the Calcasieu Pass Field. Because of the field's geographically isolated position, 6 there was but one economically feasible market for the gas. This market was the American Louisiana Pipeline Company, an interstate purchaser of natural gas. However, because of the abundant supplies of natural gas existing at the time, a buyer's market...
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