Phillips Petroleum Co. v. Adams

• Decision Date: 22 May 1975
• Docket Number: No. 74-1777,74-1777
• Citation: 513 F.2d 355
• Parties: PHILLIPS PETROLEUM COMPANY, Plaintiff-Appellee, v. J. H. ADAMS et al., Defendants. Robert O. SCHNELL, W. S. Etchieson, and Jack Gross, Defendants-Appellants, v. J. H. ADAMS, Waylon Adams, and Arlwone H. Adams, Defendants-Appellees-Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 355

513 F.2d 355

PHILLIPS PETROLEUM COMPANY, Plaintiff-Appellee, v. J. H. ADAMS et al., Defendants.

Robert O. SCHNELL, W. S. Etchieson, and Jack Gross, Defendants-Appellants, v. J. H. ADAMS, Waylon Adams, and Arlwone H. Adams,

Defendants-Appellees-Appellants.

No. 74-1777.

United States Court of Appeals Fifth Circuit.

May 22, 1975.

John E. Morrison, Borger, Tex., for Schnell and others.

Thomas L. Cubbage, II, Jack Ritchie, Amarillo, Tex., for Phillips Petroleum Co.

R. C. Hamilton, Robert L. Templeton, Amarillo, Tex., for Adams Family.

J. E. Blackburn, Spearman, Tex., for Patricia Nelson.

Appeals from the United States District Court for the Northern District of Texas.

Before TUTTLE, GEWIN and GOLDBERG, Circuit Judges.

GOLDBERG, Circuit Judge:

In this case of first impression, and in two similar cases also decided today, First National Bank v. Phillips Petroleum Co., 5 Cir. 1975, 513 F.2d 371 ( , 1975, No. 74-2230), and Phillips Petroleum Co. v. Riverview Gas Compression Co., 5 Cir. 1975, 513 F.2d 374, we must determine the rightful owners of funds payable by a pipeline company under contracts for the sale of casinghead gas, ¹ where the gas underlying the debts was produced while the mineral leases were held by claimants who assigned their leasehold interests to other claimants before the debt owed by the pipeline company became due and payable. ² After certain preliminary skirmishing, the pipeline company brought this diversity interpleader action to obtain a judicial resolution of its contractual difficulties. The assignor-claimants (those who held the leasehold interest at the time the gas was produced) counterclaimed against the pipeline company for interest on the funds held by the company. After a trial without a jury, the district court decided that the assignor-claimants ought to have the principal sum involved but that the pipeline company owed them no interest; the pipeline company, the assignor-claimants and the assignee-claimants all appeal. We affirm the district court's decision as to the ownership of the principal sum; we believe, however, that equity requires that the assignor-claimants should receive interest as well, so we must reverse that portion of the judgment below relating to interest.

I

On July 1, 1963, the assignor-claimants (the Adams family) purchased an oil and gas lease on property situated in Hutchinson County, in the Texas Panhandle. At the time of this purchase, a casinghead gas contract was in force between Phillips Petroleum Company (Phillips) and the holders of the mineral rights to the property. This contract provided that Phillips would purchase the casinghead gas produced on the lease and would pay therefor a price based on the price which Phillips itself obtained for all gas sold by it which originated in the Panhandle Field of Texas. On September 1, 1966, the Adams family concluded another percentage-of-proceeds gas sales agreement with Phillips which was substantially similar to the one in force from 1963 until 1966.

In 1967, one Schnell, a friend of one of the Adamses, expressed interest in purchasing the mineral leasehold interest in the Hutchinson County property. A deal was soon worked out, and on June 5, 1967, the Adams family conveyed to Schnell "all right, title and interest of the Original Lessee and present owners in and to (the lease in question), and rights thereunder . . . together with all personal property and equipment used or obtained in connection therewith, and located thereon. . . ." The assignment was to be effective as of June 1, 1967, at 7:00 a. m. The very next day, Schnell conveyed his interest in the property to two business associates, Etchieson, a recently-retired Phillips executive, and Gross. On September 27, 1968, Etchieson and Gross reconveyed their interests to Schnell, who held title to the mineral rights in question when this lawsuit commenced. We shall henceforth refer to Schnell, Etchieson and Gross as "the Schnell group."

The difficulty in this case arises from the pricing provision in the casinghead gas contracts, for just as the price Phillips undertook to pay to the holder of the mineral rights was pegged upon the average price of gas sold in the Panhandle Field, that field price was in turn dependent upon the rate that the Federal Power Commission allowed Phillips to charge for its gas, which latter variable was very variable indeed until long after the Adams family had assigned its lease to Schnell. In 1954, in Phillips Petroleum Co. v. Wisconsin, 347 U.S. 672, 74 S.Ct. 794, 98 L.Ed. 1035, the United States Supreme Court determined that the Natural Gas Act, 15 U.S.C. § 717 et seq., (the Act) requires the Federal Power Commission to regulate well-head sales by producers of natural gas to interstate pipeline companies for interstate transportation and resale. From that time, gas prices charged by pipeline companies such as Phillips have been subject to FPC approval.

In the nature of things, pipeline companies desire to raise their gas prices from time to time, and, also in the nature of things, the wheels of the FPC's rate-setting mechanism grind slowly, at best. To add to the obvious difficulties attendant upon long waits for approval of price increases, a pipeline company may not file retroactive price increases, 15 U.S.C. § 717c(d) and (e); Atlantic Refining Co. v. Public Service Commission, 1959, 360 U.S. 378, 389, 79 S.Ct. 1246, 1253, 3 L.Ed.2d 1312, 1319-20; Shell Oil Co. v. FPC, 3 Cir. 1964, 334 F.2d 1002, 1009; see 18 C.F.R. § 154.102, ³ so that if a pipeline company were to wait for FPC approval of a proposed price hike, it might very well lose ten years' worth of increased prices. Congress has resolved this difficulty by allowing a pipeline company to increase its prices on its own initiative, subject to a five-month suspension period which may be imposed by the FPC, and subject to a duty to refund to its purchasers any portion of the increase that the FPC ultimately fails to approve. 15 U.S.C. § 717c(e); 18 C.F.R. § 154.102. ⁴ The FPC may also order the pipeline company to pay seven per cent interest on refunded monies if equitable considerations so dictate. 15 U.S.C. § 717c(e); 18 C.F.R. § 154.102(c). ⁵

The effect of this regulatory scheme is that the pipeline company collects the increased prices for years and years, using the funds thus collected as it pleases, although it will ordinarily characterize this "suspense money" as a liability for accounting purposes. See Ashland Oil & Refining Co. v. Staats, Inc., D.Kan.1967, 271 F.Supp. 571, 578. Then, one fine day, the FPC tells the pipeline company which portion of the funds it can keep and which portion it must refund to its purchasers, with interest. At this point, the pipeline company, such as Phillips in this case, must recompute the price it must pay to its suppliers under percentage-of-proceeds production agreements such as the ones involved here. ⁶ Where the ownership of the mineral leasehold interest does not change during the ten or fifteen years in which the FPC is pondering the proposed price increase, all the pipeline company need do is to send a check along to the current leaseholder. Where, as here, the leasehold has changed hands in the interim, the pipeline company's task is more difficult.

In this case, Phillips filed a proposed price increase with the FPC subsequent to the Supreme Court's decision in Phillips Petroleum Co. v. Wisconsin, supra, and charged its customers the higher price, subject to refund, during the period in which the Adams family held the leasehold interest in the property involved in this lawsuit. From 1963 until 1967, Phillips made monthly payments to the Adams family, based only on the "firm proceeds" of its own sales, that is, proceeds calculated on the rate which the FPC had already approved; the pipeline company deferred any payments calculated on the basis of the higher, unapproved prices which Phillips was actually charging its customers throughout the period. On September 18, 1970, the FPC finally concluded its deliberations on Phillips' proposed rate hikes, approving a portion of the price increases but rejecting another portion. ⁷ Hugoton-Andarko Rate Case, Op: 586, 44 F.P.C. 761, aff'd, 9 Cir. 1972, 466 F.2d 974. After the Ninth Circuit affirmed the FPC's order, Phillips divided the principal sum of the suspense money collected over the years into two categories: "refundable monies," which it returned to its purchasers with interest, and "sustainable monies," to which it now had certain entitlement. But a portion of these sustainable monies represented certain debts payable to all producers who had supplied Phillips with gas under percentage-of-proceeds contracts. With respect to the particular property involved here, Phillips determined that the Schnell group was the undisputed owner of all sustainable monies due on gas produced after June 1, 1967, and Phillips settled a dispute with the Adams family's predecessors in interest with respect to monies collected before 1963. It was readily apparent, however, that the Adams family and the Schnell group were irremediably antagonistic with respect to the 1963-1967 funds, so Phillips brought this interpleader action to determine title to $12,296.81, which sum was the amount that Phillips owed either to the Adams family or to the Schnell group for gas purchased during 1963-1967. ⁸

II

The district court ruled that the Adams family ought to receive the disputed suspense money, on the ground that the payments were "in part payment of gas severed from the leasehold estate and sold therefrom prior to any assignment of the lease by the Adams family," and that the document of assignment from the Adams family to Schnell could not be construed to constitute an assignment of the suspense money. The Schnell group and Phillips ⁹ argue that the money was not due and payable until after the FPC order in Hugoton-Andarko, and contend that since the order was not...