Hockett v. the Trees Oil Co., 103,309.
| Decision Date | 20 May 2011 |
| Docket Number | No. 103,309.,103,309. |
| Citation | 251 P.3d 65 |
| Parties | Arthur Eldean HOCKETT, Individually, and on Behalf of All Others Similarly Situated, Appellants,v.The TREES OIL COMPANY, Appellee. |
| Court | Kansas Supreme Court |
1. The severance tax on minerals must be borne ratably by a royalty owner in proportion to the royalty owner's beneficial interest in the severed coal, oil, or gas.
2. A royalty owner who claims that the Kansas Department of Revenue (KDR) collected a severance tax on the royalty owner's share of helium produced in this state without the statutory authority to assess such a tax should seek redress against the KDR. A lessee has no obligation to pay the lessor, out of lessee's own funds, the amount of severance taxes which may have been improperly assessed and collected by the KDR.
3. K.S.A. 55–176 authorizes the Kansas Corporation Commission to assess a conservation fee against operators or their designated agents. An operator is a person who is responsible for the physical operation and control of a well, gas gathering system, or underground porosity storage of natural gas. Ordinarily, a royalty owner is not an operator subject to the assessment of a conservation fee.
4. Where the royalty clause of an oil and gas lease provides that the royalty on gas marketed from a gas-only well shall be one-eighth (1/8) of the proceeds if sold at the well, the term “proceeds” refers to the gross sale price in the contract between the first purchaser and the lessee/producer/seller, so long as the contractual unit price has been approved by the applicable regulatory authority, if such approval is required. For purposes of calculating royalty payments, the lessee is not permitted to deduct the amount of the operator's conservation fees from the gross sale price of the gas, even though the purchaser has withheld the conservation fee from its payment to the lessee.
5. The conservation fees assessed by the Kansas Corporation Commission are not postproduction costs that must be shared by the royalty owner.
Rex A. Sharp, of Gunderson, Sharp & Walke L.L.P., of Prairie Village, argued the cause, and Barbara C. Frankland and David E. Sharp, of the same firm, of Houston, Texas, were with him on the briefs for appellants.Jeffrey L. Carmichael, of Morris, Laing, Evans, Brock & Kennedy, Chtd., of Wichita, argued the cause, and Will B. Wohlford, of the same firm, was with him on the brief for appellee.Kimberly A. Green and David W. Nickel, of Depew Gillen Rathbun & McInteer LC, of Wichita, were on the brief for amicus curiae Kansas Independent Oil and Gas Association.Tammie L. Lord, of Legal Services Bureau, Kansas Department of Revenue, was on the brief for amicus curiae Kansas Department of Revenue.
Arthur Eldean Hockett appeals the district court's grant of summary judgment in favor of The Trees Oil Company (Oil Company) on Hockett's purported class action against Oil Company for the alleged wrongful withholding of taxes and fees from royalty payments. We affirm in part and reverse in part.
Pursuant to an oil and gas lease with Oil Company, Hockett has a 1/8 royalty interest in the production from a Haskell County well which produces natural gas (hereafter referred to as the “Hockett well”). Oil Company operates the Hockett well, along with a number of other oil and gas wells in this state.
Oil Company sells the gas produced from its Haskell County wells to certain entities that the parties refer to as “first purchasers.” Helium is extracted from the raw gas and sold separately. Before paying Oil Company for the production, the first purchasers deduct the severance tax imposed by K.S.A. 2010 Supp. 79–4217 and the conservation fee imposed by the Kansas Corporation Commission (KCC) under K.A.R. 82–3–307. Oil Company then pays Hockett 1/8 of the net sales proceeds, i.e., 1/8 of the amount Oil Company actually receives from the first purchaser.
On March 9, 2009, Hockett filed an action against Oil Company, which was styled as a class action. The class was defined in Hockett's petition as: “All royalty owners who were paid royalties for oil and/or gas produced from wells located in Kansas in which The Trees Oil Company has owned any working interest between Jan. 1, 1996 to the present.” Hockett claimed that Oil Company had no statutory right to subtract an amount from royalty payments equal to the conservation fee and had no statutory right to deduct a helium severance tax from royalty payments. The petition's prayer declared that Oil Company “should be ordered to provide an accounting and to pay its royalty owners within the Plaintiff Class for underpayment of royalties in the amount of the Conservation Fee deduction taken and severance tax deduction taken on helium.”
Oil Company filed a motion to dismiss for failure to state a claim. The motion argued that Oil Company could not be held liable for complying with the KCC regulation on conservation fees and that the severance tax on gas included helium as a matter of law. The district court denied the motion to dismiss but requested the filing of a summary judgment motion.
Hockett filed two motions for partial summary judgment: one addressing the conservation fees question and the other addressing the severance tax issue. Oil Company responded to Hockett's motions and filed a cross-motion for summary judgment. After further summary judgment pleadings, i.e., responses and replies to responses, the district court conducted a hearing on August 31, 2009. On September 23, 2009, the district court filed a journal entry denying Hockett's motions and granting Oil Company's motion for summary judgment. The district court found, in relevant part:
“... [O]n the conservation fee charged under K.S.A. 55–176, ... the state was attempting to impose an oil and gas operations fee and ... by imposing a mill levy on volume as opposed to a percentage of proceeds from production, ... the conservation fee was to be imposed on all participants in the oil and gas venture, including the royalty owners.”
Hockett appealed to the Court of Appeals, and this court transferred the appeal pursuant to K.S.A. 20–3018(c). Hockett presents two issues on appeal, which we paraphrase as follows: (1) Whether the district court erred in holding that K.S.A. 55–176 imposes a conservation fee on royalty owners; and (2) whether the district court erred in holding that the severance tax imposed on “gas” means that the tax is assessed against helium. We take the liberty of first addressing the severance tax issue.
The ruling from which Hockett appeals is the granting of summary judgment in favor of Oil Company. While it appears that there may be disputed facts in this case, none of them is material to the issue upon which the district court ruled as a matter of law. Accordingly, we review the summary judgment under a de novo standard. See Genesis Health Club, Inc. v. City of Wichita, 285 Kan. 1021, 1031, 181 P.3d 549 (2008). Additionally, Hockett asks us to interpret the severance tax statutes, which presents a question of law over which this court exercises unlimited review. See 285 Kan. at 1031, 181 P.3d 549.
Hockett asserts that his royalty payments were wrongfully reduced by the amount of severance tax attributable to helium. He apparently does not challenge that the severance tax applies to royalty owners. See K.S.A. 2010 Supp. 79–4217(a) (). Rather, the basis for Hockett's claim of wrongful deduction is that he believes there is no statutorily imposed severance tax on the helium component of the extracted gaseous product.
Hockett's statutory interpretation argument begins with the statutory language that imposes “an excise tax upon the severance and production of coal, oil or gas from the earth or water in this state.” K.S.A. 2010 Supp. 79–4217(a). The statute does not explicitly refer to helium. Hockett points out that the term “gas” is defined as “natural gas taken from below the surface of the earth or water in this state, regardless of whether from a gas well or from a well also productive of oil or any other product.” (Emphasis added.) K.S.A. 2010 Supp. 79–4216(c). Hockett contends that the physical properties of helium are so different from natural gas that helium must be considered in the “any other product” category. Therefore, he argues that the legislature's inclusion of the “any other product” language in the definition of gas manifests an intent to exclude helium from the severance tax, even though the gaseous helium is randomly commingled with the hydrocarbons and other gases at the time of severance.
Pointedly, Hockett does not discuss another provision in K.S.A. 2010 Supp. 79–4217(a) that specifies the severance tax “shall be applied equally ... to the gross value of the gas severed and subject to such tax.” The Secretary of the Kansas Department of Revenue (KDR) has interpreted this provision to answer the very question presented here, i.e., whether helium is subject to the mineral severance tax. In Revenue Ruling No. 92–1998–01, effective December 31, 1998, the KDR Secretary opined that, since helium is a component of natural gas and is measured as part of the full volume of gas as it is severed, helium contributes to the gross value of gas at the wellhead, making helium subject to the severance tax.
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...were wrongly deducted prior to the royalty calculation based on our recent decision in Hockett v. The Trees Oil Co., 292 Kan. 213, 251 P.3d 65 (2011) (conservation fee is expense attributable solely to well operator). That issue was resolved by the district court and is not in controversy o......
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