Piney Woods Country Life School v. Shell Oil Co.

• Citation: 726 F.2d 225
• Decision Date: 08 March 1984
• Docket Number: No. 82-4287,82-4287
• Parties: 40 UCC Rep.Serv. 1220 The PINEY WOODS COUNTRY LIFE SCHOOL, Ridgway Management, Inc., D'Lo Royalties, Inc., Thomas L. Spengler, Albert L. Fairley, Jr. and James V. Fairley, Executors of the Estate of Alethe V. Fairley, Individually, and all others similarly situated, Plaintiffs-Appellants, v. SHELL OIL COMPANY, Defendant-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

Page 225

726 F.2d 225

40 UCC Rep.Serv. 1220

The PINEY WOODS COUNTRY LIFE SCHOOL, Ridgway Management Inc., D'Lo Royalties, Inc., Thomas L. Spengler, Albert L Fairley, Jr. and James V. Fairley, Executors of the Estate of Alethe V. Fairley, Individually, and all others similarly situated, Plaintiffs-Appellants, v. SHELL OIL COMPANY, Defendant-Appellee.

No. 82-4287.

United States Court of Appeals, Fifth Circuit.

March 8, 1984.

Heidelberg, Woodliff & Franks, Kenneth I. Franks, George F. Woodliff, III, Watkins, Ludlam & Stennis, Ernest G. Taylor, Jr., Larry Keith Parsons, Barnett, Alagia &amp Pyle, L. Arnold Pyle, Jackson, Miss., for plaintiffs-appellants.

Watkins & Eager, William F. Goodman, Jr., Paul H. Stephenson, III, Jackson, Miss., for defendant-appellee.

Appeal from the United States District Court for the Southern District of Mississippi.

Before BROWN, WISDOM and JOHNSON, Circuit Judges.

WISDOM, Circuit Judge:

This case concerns the interpretation of royalty clauses in certain Mississippi oil and gas leases. The plaintiffs are the owners of mineral rights in the Thomasville, Piney Woods, and Southwest Piney Woods fields in Rankin County, Mississippi. They leased their rights to defendant Shell Oil Company through various conveyances beginning in the mid-1960s. The cause of this controversy, as in many similar suits across the country, was the unforeseen and unprecedented rise in natural gas prices brought on principally by the actions of the Organization of Petroleum Exporting Countries (OPEC) in the early 1970s. Unfortunately for both the plaintiff lessors and lessee Shell, Shell had already committed the gas for sale under long-term contracts at pre-OPEC prices. Unsurprisingly, the lessors brought this class action to recover royalties that they allege Shell owes and has not paid. The district court found for Shell, except on one relatively minor issue, and certified this appeal so that the questions of liability could be decided before the determination of damages. We affirm in part, reverse in part, and remand.

I. Facts

The facts of this case are recounted in detail in the district court's opinion. Piney Woods Country Life School v. Shell Oil Co., 1982, S.D.Miss., 539 F.Supp. 957. For our purposes it is enough to say that Shell began leasing activities in Rankin County in the 1960s. Shell used seven different lease forms, with three different royalty provisions. ¹ The "Commercial" royalty provision provides for royalty

"... on gas, including casinghead gas or other gaseous substance[s], produced from said land and sold or used, the market value at the well of one-eighth ( 1/8) of the gas so sold or used, provided that on gas sold at the well the royalty shall be one-eighth ( 1/8) of the amount realized from such sale[s]...."

The "Producers 88-D9803" provision calls for royalty

"... on gas, including casinghead gas or other gaseous substance, produced from said land and sold or used off the premises or in the manufacture of gasoline or other product therefrom, the market value at the well of one-eighth of the gas sold or used, provided that on gas sold at the wells royalty shall be one-eighth of the amount realized from such sale...."

And the "Producers 88 (9/70)" provision orders the lessee

"... to pay lessor on gas and casinghead gas produced from said land (1) sold by lessee, one-eighth of the amount realized by lessee, computed at the mouth of the well or (2) when used by lessee off said land or in the manufacture of gasoline or other products, the market value at the mouth of the well, of one-eighth of such gas and casinghead gas...."

The Commercial and Producers 88-D9803 leases provide for royalty based on "market value" except when the gas is "sold at the well[s]"; the Producers 88 (9/70) royalty is based on "amount realized" except for gas used by the lessee. Shell computed royalties in the same manner under all these provisions, however, and contends that they all have the same legal effect.

The gas from these fields is "sour"--it contains hydrogen sulfide. Before the gas can be put into the mainstream of commerce it must be processed. Rather than attempt to find someone to process the gas, Shell decided to do the processing itself. At its Thomasville plant, Shell treats the sour gas from the wells and recovers "sweet gas"--dry methane--and elemental sulfur.

Shell began efforts to market the gas from these fields in 1970. Shell sought buyers on the intrastate market because it wished to avoid restrictive federal regulations on interstate sales. See 15 U.S.C. Secs. 717-717z (1982); 42 U.S.C. Sec. 6399 (1976). After extensive negotiations with several potential buyers, Shell contracted with MisCoa, ² of Yazoo City, Mississippi, to sell up to 46,667 thousand cubic feet (Mcf) a day to MisCoa for 53 cents per Mcf, with an increase to 54.59 cents after 15 million Mcf were delivered, and price escalation of three percent a year thereafter. On May 23, 1972, Shell contracted to sell excess gas to Mississippi Power and Light (MP & L) for 45 cents per Mcf, with escalation of one percent a year. Both contracts appear to have been the best available at the time. Both contracts provide that title to the gas passes in the field, when the gas is still sour. But in fact the buyer does not take control of the gas until it is processed and "redelivered". In the MisCoa contract, the measurements of quality and quantity that determine how much MisCoa pays are not made until the gas is "redelivered", as sweet gas, in Yazoo City. The MP & L contract provides for "redelivery" near the Thomasville plant. Both contracts state that the sale price includes "substantial consideration" for Shell's agreement to gather and process the gas and, in MisCoa's case, to assume the risk of loss during transportation to Yazoo City. Apparently, the parties agreed that title would pass at the wells so that the parties could avoid state regulations on pipelines. But the passage of title at the wells is also relevant to the royalty clauses in Shell's leases. Because the gas is supposedly sold "at the wells", Shell has paid royalties based on the actual revenues received from its sales of sweet gas and sulfur, ³ rather than on market value. Shell deducts from these royalties a substantial portion of the costs of processing the gas.

The lessors filed this class action on December 27, 1974, alleging that Shell computed royalty payments improperly. ⁴ The case was tried without a jury in November and December 1979. On May 3, 1982, the court issued its findings of fact and conclusions of law. The court found that Shell properly deducted the costs of processing from the royalty payments and properly based royalties for gas sold on the actual revenues realized since title to the gas passed from Shell to MisCoa at the wells. The court also rejected the plaintiffs' claim that Shell breached its duty to market the gas. ⁵ The court did find that Shell should have paid royalties, based on current market value, for gas used in off-lease operations, but rejected the plaintiffs' evidence on market value and asked the plaintiffs to provide further evidence. Without explanation, the court also rejected the plaintiffs' claims for royalties on gas used by Shell at the Thomasville plant.

Upon the plaintiffs' motion the court issued a final judgment on the claims decided, and certified the case for appeal under Federal Rule of Civil Procedure 54(b).

II. Jurisdiction

Shell argues that we do not have jurisdiction over this appeal, on the ground that the claims not decided are inseparable from those certified. This is plainly incorrect. The district court's decision effectively disposed of all the issues except the amount of extra royalty owed by Shell. Litigation remains on only one claim, the royalties due on off-lease use of gas by Shell. One fact--the market value of gas--is relevant to several claims, but this does not make the claims inseparable. Alternatively, Shell argues that the district court abused its discretion in certifying the appeal. This contention is meritless. The only thing left for the plaintiffs to do in the district court is to present lengthy evidence on the market value of the small amount of gas Shell used in off-lease operations. The plaintiffs' potential recovery would not justify the expense of this proof. We think that the district court acted wisely and in the interests of "sound judicial administration" in certifying the case at this stage. See Curtiss-Wright Corp. v. General Electric Co., 1980, 446 U.S. 1, 9, 100 S.Ct. 1460, 1466, 64 L.Ed.2d 1, 12; Skinner v. W.T. Grant Co., 5 Cir.1981, 642 F.2d 981, 983-84.

Shell also argues that the certification reserves some issues other than the amount of Shell's liability on the off-lease use claim--for example, whether "market value" means "current market value" in the context of sold gas as well as used gas. We understand this appeal to present all the issues except two factual questions: the market value of the gas and the amount of gas for which royalties are due.

III. The Meaning of the Royalty Clauses

The basic issues underlying this case are the meaning of "market value" and "sold at the wells" in a royalty clause and the propriety of deducting processing costs from the lessors' royalties. The royalty clauses prescribe different formulas for the calculation of royalties depending on whether the gas is sold or used, and on whether the sale or use is "at the well". Consideration of these distinctions guides our resolution of all the issues in this case.

In both the Commercial and Producers 88-D9803 royalty clauses, the royalty on gas "sold at the well" is based on the amount realized from sale, while on other gas the royalty is based on "market value at the well." ⁶ In interpreting similar provisions, courts have struggled with perceived grammatical ambiguities. In Exxon Corp. v. Middleton, 1981, Tex., 613 S.W.2d 240, for example, the court held that "off the...