Lightcap v. Mobil Oil Corp., 47991

• Citation: 562 P.2d 1,221 Kan. 448
• Decision Date: 05 March 1977
• Docket Number: No. 47991,47991
• Parties: Harry LIGHTCAP et al., Appellees, v. MOBIL OIL CORPORATION, formerly known as Socony Mobil Oil Corporation, Inc., Appellant.
• Court: United States State Supreme Court of Kansas

Page 1

562 P.2d 1

221 Kan. 448

Harry LIGHTCAP et al., Appellees, v. MOBIL OIL CORPORATION, formerly known as Socony Mobil Oil Corporation, Inc., Appellant.

No. 47991.

Supreme Court of Kansas.

March 5, 1977.

Syllabus by the Court

1. The Federal Power Commission has no jurisdiction over a royalty owner or over a dispute between a royalty owner and his producer as to the amoutn of royalties payable under a gas lease.

2. The obligation of a lessee to pay royalties to its lessor under a gas lease is a question of state law, to be determined under the terms of the lease.

3. The existence of federal regulation fixing the maximum rate a gas producer may receive from its purchaser is no obstacle to the fixing of a higher rate as the 'market value' of the gas it sells for the purpose of computing royalties.

4. Where a lease calls for royalties based on the 'market value' of the gas sold, in the absence of proof of a contrary intent that value is the price which would be paid by a willing buyer to a willing seller in a free market.

5. Where a lease calls for royalties based on the 'proceeds' from the sale of gas, the term 'proceeds' means the money obtained from an actual sale and lawfully retained by the seller.

6. Royalty payments made under the compulsion of a minimum price order of the Kansas corporation commission are not 'voluntary' payments so as to preclude their recovery if the minimum price order is later declared invalid.

7. The settlement of a suit to which a party has no defense cannot be said to be 'voluntary' so as to cut off the party's right of reimbursement from one who in equity owes a portion of the obligation for which the suit was brought.

8. Under K.S.A.1975 Supp. 60-213(d) a claim which is barred by the statute of limitations may nevertheless be used as a setoff if it (a) coexisted with the plaintiffs' claim and (b) arises out of the 'contract or transaction' on which the plaintiffs' claim is based.

9. Although K.S.A.1975 Supp. 60-213(d) does not permit affirmative relief on a claim which is barred by the statute of limitations, it does permit such a claim to be used, as a matter of pure defense, by way of setoff.

10. As a general rule prejudgment interest is not allowable on a claim for unliquidated damages.

11. The general rule calling for the disallowance of interest on unliquidated damages is subject to the qualification that, where necessary to arrive at full compensation, a court may in the exercise of its discretion award interest or its equivalent as an element of damages even where the primary damages are unliquidated.

12. Where a party retains and makes actual use of money belonging to another, equitable principles require that it pay interest on the money so retained and used.

13. In an action by lessor-royalty owners against their lessee-producer for gas royalties based on a market value in excess of the price received by the producer under Federal Power Commission regulation it is held: The trial court's judgment is affirmed firmed insofar as it awarded royalties on the free market value of gas sold under those leases which this court categorizes as 'market value' leases, and insofar as it awarded and denied prejudgment interest. It is reversed insofar as it awarded royalties in excess of moneys actually received and retained for gas sold under 'proceeds' leases, and insofar as it denied the producer's counterclaim for prior royalty overpayments.

Mark H. Adams and Richard Jones, Wichita, argued the cause, and John E. Robertson, Denver, Colo., and Jack D. Sage, Wichita, were with them on the briefs for the appellant.

Gerrit H. Wormhoudt, Wichita, argued the cause, and Dale M. Stucky and John T. Conlee, Wichita, were with him on the brief for the appellees.

FOTH, Commissioner.

In those six cases, consolidated for trial, the plaintiff-appellees are royalty owners and lessors under various natural gas leases in the Hugoton field now held by the defendant-appellant, Mobile Oil Corporation, as lessee. We are told that there are nearly three hundred similar cases pending in the district court whose outcome will be largely determined by the decision here.

Plaintiffs sought and received judgments for additional royalties on gas produced by defendant and its predecessor from late 1958 through June 30, 1963. The increase was based on the difference between the claimed higher 'market value' of the gas produced by Mobil, and the amounts actually received by it from its sales to its pipeline customer on which it paid royalties.

Mobil counterclaimed (by way of setoff) for alleged overpayments of royalties for the period January 1, 1954, through January 31, 1958; its counterclaim was denied. Mobil has appealed from the judgments for additional royalties and the denial of its counterclaim. In addition, the trial court allowed prejudgment interest on part of plaintiffs' claims but denied it as to the balance. Mobil appeals from the allowance of interest, and plaintiffs have cross-appealed from the partial denial.

I. Background; The Primary Issue

This case is closely paralled to Waechter v. Amoco Production Co., 217 Kan. 489, 537 P.2d 228 (June 14, 1975), adhered to after rehearing, 219 Kan. 41, 546 P.2d 1320 (March 6, 1976). In each case the basic claim of the plaintiff royalty owners was that under their leases they were entitled to have their royalties computed on the 'market value' at the wellhead of the gas taken by the producer. That 'market value,' they asserted, was to be determined by the traditional 'rree market, willing buyer-willing seller' test, without regard to any governmental regulation of the producer's sales price.

The producers, on the other hand (Amoco there, Mobil here) relied on the fact that their sales at the wellheard were for resale in interstate commerce, and their sales prices were thus subject to Federal Power Commission regulation under the Natural Gas Act of 1938, 15 U.S.C. § 717 et seq. (That principle was established June 7, 1954, by Phillips Petroleum Co. v. Wisconsin, 347 U.S. 672, 74 S.Ct. 794, 98 L.Ed.2d 1035.) The result, they claimed, was that the 'market value' of the gas they sold was the ceiling price fixed by the FPC.

The determination of the primary issue in both cases was delayed for several years by a federal injunction staying the state cases while the producers, along with other producers, conducted the litigation resulting in Mobil Oil Corporation v. Federal Power Commission, 149 U.S.App.D.C. 310, 463 F.2d 256 (1972), cert. den. 406 U.S. 976, 92 S.Ct. 2409, 32 L.Ed. 676. That case held that a royalty owner is not a 'natural gas company's as defined in the Natural Gas Act because he does not engage in the 'sale' of gas in interstate commerce. Hence the FPC has no jurisdiction over a royalty owner or over a dispute between a royalty owner and his producer as to the amount of royalties payable under a gas lease.

Once Mobil had been decided and review by the United States Supreme Court had been denied, the state litigation was allowed to proceed. The district courts in both Waechter and this case concluded that the plaintiff royalty owners were entitled to be paid on the basis of an unregulated 'market value.'

The producers in each case had committed their entire production to the interstate market under long term contracts. In Waechter the 1950 contract between the producer Amoco (then called Pan American Petroleum Corp.) and the purchaser Cities Service called for a fixed price until June 23, 1961, and thereafter for a 'fair and reasonable' price for each successive five year period, based on the going price in the field. When the parties were unable to agree the price was settled by a declaratory judgment action, affirmed, in Pan American Petroleum Corporation v. Cities Service Gas Co., 191 Kan. 511, 382 P.2d 645. The amount fixed in that case was employed by the district court in Waechter as the 'market value' of the gas. In this case there were two contracts between the predecessor of the producer Mobil and its pipeline purchaser, Northern Natural Gas company, called the 'A' and 'B' contracts. Both called for fixed prices until July 1, 1958, and for each five year period thereafter the 'fair, just and reasonable' price for gas produced in the field. These contracts called for arbitration in the event of disagreement, and as a result arbirators fixed a 'fair, just and reasonable' price for the gas sold under the contracts for the five year period here in issue. Neither the royalty owners nor Mobil offered any independent evidence on the issue of market value, as they might have. (See Lippert v. Angle, 211 Kan. 695, 508 P.2d 920.) As a result the district court in this case employed the arbitrated prices as the 'market value' under the leases in the same way the judicially fixed price was employed in Waechter.

In both cases the producers submitted the proposed new rates (the one determined by suit, the other by arbitration) to the FPC for approval. Neither rate was approved as filed, but both were ultimately adjusted downward. In both cases the royalty owners sought the difference between the royalties paid on the rates ultimately approved, received and lawfully retained by the producers from their purchasers, and the royalties they would have received if the FPC had approved the new rates based on the 'market value' of the gas.

In both cases the district courts construed the royalty clauses in the leases to require royalties based on an unregulated market value, found no constitutional impediment to requiring payment on that basis, and rendered judgment for the plaintiff royalty owners accordingly.

In Waechter we reversed on this issue, based on a contrary construction of the prototype royalty clause by which all members of the plaintiff class had agreed to be bound. We found that it called for royalties based on the 'proceeds' received by the producer, and not on the 'market value' of the gas. We observed that ...