Imperial Colliery Co. v. Oxy USA Inc., 89-2373
| Decision Date | 24 September 1990 |
| Docket Number | No. 89-2373,89-2373 |
| Citation | 912 F.2d 696 |
| Parties | IMPERIAL COLLIERY COMPANY, Plaintiff-Appellee, v. OXY USA INC., (Formerly Cities Service Oil Company), Defendant-Appellant. |
| Court | U.S. Court of Appeals — Fourth Circuit |
Mark A. Swartz, Kay, Casto, Chaney, Love & Wise, Charleston, W.Va., argued (Dina M. Mohler, Kay, Castro, Chaney, Love & Wise, Charleston, W.Va., on brief), for defendant-appellant.
J. Thomas Lane, Bowles, Rice, McDavid, Graff & Love, Charleston, W.Va., argued (F.T. Graff, Jr., Bowles Rice McDavid Graff & Love, Charleston, W.Va., on brief) for plaintiff-appellee.
Before PHILLIPS, Circuit Judge, BUTZNER, Senior Circuit Judge, and WARD, Senior United States District Judge for the Middle District of North Carolina, sitting by designation.
OXY USA, Inc. (formerly Cities Service Oil and Gas Co.) (Oxy) appeals from a judgment awarding compensatory damages to Imperial Colliery Co. (Imperial) for Oxy's breach of an oil and gas lease between Imperial as lessor and Oxy as lessee. We affirm the district court's determination that Oxy was liable for breach of the lease in the ways alleged, but we vacate a portion of the court's award of damages and remand for further proceedings on the issue of damages.
The basic facts are undisputed.
At all relevant times, Imperial owned and leased to Oxy 2440 acres of oil and gas producing land in West Virginia upon which were located fourteen gas producing wells. This Imperial land was part of a larger 13,000-acre oil producing tract, all of which was subject to a lease created by predecessors in interest in 1944 (1944 Lease). Between 1944 and 1948, Oxy's and Imperial's predecessors in interest completed eighteen wells, four of which were plugged, and fourteen of which produced gas from the leased premises throughout the period in issue.
By the terms of the 1944 Lease, Oxy was required to pay Imperial
one eighth ( 1/8) of the current wholesale market value at the well for all gas produced ... which wholesale market value is hereby defined to mean the prevailing purchase price currently paid at the well by purchasers of gas at wholesale in the field in which the well is located.
The lease provided for a primary term of ten years, "and as long thereafter as oil or gas is produced therefrom and royalties paid by the Lessee...."
Under the lease, Oxy collected gas from the fourteen Imperial wells and a royalty meter located immediately off Imperial's 2440 acres measured the amount of gas the fourteen Imperial wells produced. After leaving the royalty meter, gas from Imperial's fourteen wells was commingled by Oxy with the rest of the gas produced on the 13,000 acres and piped to Oxy's compressor station, twelve miles from Imperial's 2440 acres. The gas produced on Imperial property was dedicated to interstate commerce by the terms of a 1948 gas sale contract between Equitable Gas Co. (Equitable) as buyer and Oxy as seller.
Beginning in 1976, Imperial began to express concern to Oxy about alleged royalty underpayments under the 1944 Lease and sought to have Oxy increase its royalty payments. Oxy disputed Imperial's assertions of underpayment and declined. The dispute turned on the question whether the 1944 Lease required royalty payments based upon proceeds from the Oxy-Equitable contract, as Oxy contended, or upon the existing market value for gas, as Imperial contended.
Beginning in 1980, Imperial stopped cashing Oxy's royalty checks, and in 1985 brought this action against Oxy seeking an accounting for the alleged royalty underpayments, lease termination as a consequence thereof, and damages sustained during Oxy's alleged tenure as a holdover tenant after March 3, 1985, when Imperial claimed Oxy's lease was forfeited. During extensive discovery, Imperial allegedly discovered that in 1978 Imperial's wells ceased to be profitable, and amended its complaint to allege that upon that earlier occurrence Oxy's lease was automatically terminated under the provisions of the 1944 Lease. Imperial has contended throughout that Oxy continued operation of unprofitable wells because Oxy's contract with Equitable for gas sold from the entire 13,000 acres was made more profitable if Oxy sold Imperial gas at a loss; by mixing Imperial's lower priced gas with higher priced gas from new wells, Oxy could charge Equitable a lower overall price, thus not jeopardizing its profitable relationship with Equitable.
In a non-jury trial the district court determined that Oxy had underpaid royalties due under the 1944 lease, and that that lease's term had been terminated automatically when the lease ceased to produce in paying quantities in 1978, making Oxy a bad-faith trespasser after that year.
The district court entered judgment and awarded damages in accordance with these determinations of liability. Oxy appealed.
Oxy challenges the court's determinations that Oxy underpaid royalties due under the lease before its termination and that the lease was terminated automatically in 1978 by failure to produce in paying quantities, making Oxy thereafter a bad faith trespasser. Beyond these challenges to determinations of its liability, Oxy challenges the court's assessment of the damages due by reason of any underpayment of royalties owed under the lease, and the measure of damages applied by the court to compensate for its wrongful occupation and use of the premises after 1978.
We first consider Oxy's challenge to the district court's determination that it underpaid royalties due under the lease during the period between 1975 and 1979 when Oxy was indisputably in rightful possession.
As indicated, whether there was any underpayment, hence any liability resulting from this period of the lease's operation, depends upon whether the lease obligated Oxy to pay royalties based on the fair market value of the gas produced or on the proceeds of Oxy's contract with Equitable and, if the former, whether the fair market value was greater than the proceeds value, for Oxy paid royalties on its Equitable contract proceeds throughout this period. Beyond this threshold question of whether there was any underpayment, hence any liability, there is the further issue of how much, which depends on the determination of fair market value during this period.
The district court, reaffirming an earlier pre-trial determination on partial summary judgment, concluded that throughout the period the lease obligated Oxy to pay royalties on the fair market value of the gas produced. The court then determined the fair market value in a precise amount, and because it was greater than the total proceeds value during the period, awarded damages of $23,735.40, representing the difference between the royalties paid and those due under the lease. We find no error in these determinations.
In oil and gas practice, there are two generally used lease clauses dictating the amount of royalties due under a lease: the "market value" clause and the "proceeds" clause. Under a market value clause, royalties are paid based upon the market value of the gas; under a proceeds royalty clause, upon the amount of money received by the lessee upon its sales of gas.
The 1944 lease required Oxy to pay Imperial
one eighth ( 1/8) of the current wholesale market value at the well for all gas produced ... which wholesale market value is hereby defined to mean the prevailing purchase price currently paid at the well by purchasers of gas at wholesale in the field in which the well is located.
J.A. at 16 (1944 lease).
We do not understand Oxy to contend that this provision is not clearly and unambiguously a market value clause. Rather, as we understand its rather confusing amalgam of arguments, the contention is that a 1971 "division order" had effectively amended the lease to convert the royalty provision into one based on contract proceeds. Beyond this contention that there had been no underpayment, hence no liability, for this period, Oxy contends alternatively that even if the terms of the lease required Oxy to pay royalties on market rather than proceeds value, the proceeds from the Oxy-Equitable contract represented the federally mandated maximum price Oxy could receive for the gas and therefore constituted market value as a matter of law; or that even if the federally mandated maximum gas price was irrelevant to the issue of market value for purposes of computing royalties, the district court improperly computed market value by reference to other factors.
We take these in order.
We consider first the amendment-by-division-order argument.
A "division order" alters lease provisions concerning fund distribution. See 4 H. Williams, Oil & Gas Law Sec. 701,
572 (1988). The relevant provision in the 1971 division order, in boilerplate, authorized Oxy "to pay for gas produced and marketed at the price at which gas is sold at the wellhead or at the outlet of a separator." J.A. at 46. Oxy's argument that this division order changed the royalty provision of the 1944 lease to a proceeds provision is not the clearest, but as we understand it, it runs as follows. Gas from the Imperial leasehold is not "sold at the wellhead or at the outlet of a separator" as stated in the Division Order and therefore there is no available wellhead price from which to compute royalties. Instead, gas is sold after compression and gathering. Accordingly, because everyone knew that the gas was sold after compression and gathering, and because there were no available wellhead price figures, and because the Division Order speaks in terms of "price at which gas is sold," the parties must have intended for the Division Order to require that royalties would be paid on the basis of the price at which the gas was sold under the Oxy-Equitable contract.
First off, that there was no available wellhead price does not necessarily preclude computation of...
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