Piney Woods Country Life School v. Shell Oil Co.

• Decision Date: 27 June 1990
• Docket Number: No. 89-4397,89-4397
• Citation: 905 F.2d 840
• Parties: The PINEY WOODS COUNTRY LIFE SCHOOL, et al., Plaintiffs-Appellants, v. SHELL OIL COMPANY, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 840

905 F.2d 840

The PINEY WOODS COUNTRY LIFE SCHOOL, et al., Plaintiffs-Appellants, v. SHELL OIL COMPANY, Defendant-Appellee.

No. 89-4397.

United States Court of Appeals, Fifth Circuit.

June 27, 1990.

Ernest G. Taylor, Jr., Watkins, Ludlam & Stennis, George F. Woodliff, III, Heidelberg, Woodliff & Franks, Jackson, Miss., for plaintiffs-appellants.

Paul H. Stephenson, III, W.F. Goodman, Jr., Jackson, Miss., Watkins & Eager, Robert B. Shaw, Melinda J. Stewart, New Orleans, La., for defendant-appellee.

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

Before KING, GARWOOD and SMITH, Circuit Judges.

JERRY E. SMITH, Circuit Judge:

I. Course of Proceedings.

On December 27, 1974, the Piney Woods Country Life School and the other plaintiffs (collectively, "royalty owners"), all of whom were mineral lessors in Rankin County, Mississippi, filed this suit against their lessee, defendant Shell Oil Company. The royalty owners claimed that Shell had failed to pay royalty based upon the market value of the natural gas extracted, as required by the express terms of their leases. They asserted (and still maintain in this appeal) that Shell's payment of royalty based upon the proceeds Shell received from gas purchasers under its long-term fixed-price gas purchase and sale contract was inadequate because, as a result of escalation in gas prices, amounts received by Shell pursuant to its sales contract no longer reflected market value. ¹ The action was tentatively certified as a class action on December 28, 1976, and was finally certified on December 15, 1978.

The case initially went to trial in 1979. On May 3, 1982, the district court issued its opinion denying all of plaintiffs' claims except for a relatively minor one. 539 F.Supp. 957 (S.D. Miss.1982) ("Piney Woods I "). An appeal followed. On March 8, 1984, we affirmed some of the district court's judgment but held that the royalty owners were entitled to be paid royalties based upon market value at the time of production rather than at the time of the sales contract. Accordingly, we reversed and remanded for a proper determination of market value. 726 F.2d 225 (5th Cir.1984) ("Piney Woods II "), cert. denied, 471 U.S. 1005, 105 S.Ct. 1868, 85 L.Ed.2d 161 (1985).

The matter was tried on remand in early 1988. An additional issue on remand was the royalty owners' assertion that Shell's plant-lease split accounting method failed to compensate the royalty owners properly for their royalty share of plant fuel.

The district court found that the royalty owners had failed to establish that the market value of the gas in question was at any time greater than the amount that Shell received under its sales contract and upon which Shell based its royalty payments. The court also found that Shell's "plant processing" charges were reasonable and that the royalty owners were adequately paid for their interest in plant fuel. Thus, the court ruled on April 24, 1989, that the royalty owners take nothing and one week later dismissed the action. The royalty owners appeal.

II. Facts.

The royalty owners began leasing their minerals to Shell in the mid-1960's. All of the leases provided that, should Shell use natural gas produced from the wells on the royalty owners' land, it would pay royalty on any gas so used based upon the market value of the gas. A substantial number of the leases provided that Shell was obligated to pay royalty at market value for any gas sold off the leased premises.

In May 1972, Shell entered into two intrastate gas purchase and sale contracts, one with Mississippi Chemical Corporation and Coastal Chemical Corporation ("MisCoa") (now Mississippi Chemical Corporation ("MCC")) and the other with Mississippi Power & Light Company ("MP&L"). The former contract provided for the sale of up to 46,667 mcf ² per day of processed gas from the tailgate of the Thomasville, Mississippi, plant, if available. MCC agreed to take up to 40,000 mcf per day, though Shell made no guarantee of minimum volume. For this gas, MCC agreed to pay $0.53 per mcf, with a 3% per year price escalation, no price redetermination provision, and a contractual term of fifteen years.

The Shell-MP&L contract was an excess-volume agreement, which the parties terminated in 1981. In 1982, Shell and MCC amended their contract; under the new terms, MCC could demand only 21,000 mcf per day. On November 23, 1982, Shell then contracted with Transcontinental Gas Pipe Line ("Transco") to sell in the interstate market volumes in excess of those delivered to MCC.

Gas produced from wells on the leases and later processed at the Thomasville facility was unprocessed high-pressure gas with a high hydrogen sulfide content. Considerable risks were associated with the production and delivery of this "ultrasour" gas. ³

III. Discussion.

A. Market Value.

The royalty owners argue that they presented more than adequate evidence to show that the market value of the gas from which they were entitled to royalties was much greater than the actual sales price received by Shell under the long-term Shell-MisCoa contract. They observe that we held in Piney Woods II that the "market value" of gas under the royalty contract meant market value at the wellhead at the time of production rather than market value at the time of the making of the original long-term contract. They thus maintain that their evidence of increased gas prices in the overall market after 1973 is dispositive. The royalty owners claim that they presented evidence showing sufficiently comparable processed gas sales such that the district court erred in not determining market value by the method of evaluating comparable processed gas sales and deducting processing costs, a method that the court in Piney Woods II preferred over the method used by the district court, i.e., actual sales price less costs.

1. Standard of Review.

The royalty owners assert that the district court, in using actual sales less costs as its determinant of market value, failed to follow the mandate in Piney Woods II and, consequently, that the district court's decision not to credit plaintiff's evidence must be overturned and should not be judged under the clearly-erroneous standard. We disagree.

As we stated in Piney Woods II, "Market value is a question of fact, and it is up to the factfinder to determine the probative strength of relevant evidence." 726 F.2d at 238. Moreover, we specifically permitted a determination of market value based upon actual sales less costs; we stated that the method of proof varies with the facts of each particular case, id., and noted that actual sales price of the gas less costs was " 'the least desirable method of determining market price,' but its persuasiveness is a matter for the factfinder." Id. at 239 (citation omitted).

In the instant case the district court did first consider both of the alternative methods that in Piney Woods II we deemed preferable to the actual-sales-price-less-costs method. Having found each of the two preferred methods ultimately unsuitable under the particular facts of this case, the court finally turned to the actual-sales-price-less-costs method. Because the district court adequately explained why the two generally preferred methods of assessing market value should not be used in the case at bar and because the choice of method of proof is a matter for the factfinder, the court's failure to use a method other than actual-sales-price-less-costs for calculating market value must be reviewed under a clearly-erroneous standard.

2. Burden of Proof.

The royalty owners observe that not only did we, in Piney Woods II, find their evidence presented at the first trial "plainly relevant," id. at 239 (emphasis in original), but the royalty owners also presented extensive additional evidence at the trial on remand. They claim Shell failed to rebut their evidence and note that Shell was unable to present a theory of its own that was acceptable to the court.

The royalty owners assert that the district court erred in not finding its "plainly relevant" evidence as to comparable processed gas sales to be decisive. In particular, the royalty owners rely upon the last two sentences of the penultimate paragraph of Piney Woods II, id. at 242:

If those efforts prove unsuccessful or unduly expensive, the court must determine market value based on the evidence already submitted. The evidence already produced by the plaintiffs on market value is clearly relevant, and Shell has the burden of rebutting that evidence and producing more accurate evidence of the market value.

The royalty owners suggest that we should interpret the above-excerpted language as a statement that they have already made their prima facie case and met their burden and thus have shifted that burden of persuasion to Shell to rebut their arguments.

However, we do not infer a shifting of the burden of persuasion to Shell from our statement, "Shell has the burden of rebutting that evidence." Rather, Piney Woods II found that it was possible for the royalty owners to present relevant unchallenged evidence, yet still not meet their burden of proof. We stated, "The evidence produced by plaintiffs may, in the opinion of the court, have been insufficient, but it was plainly relevant." Id. at 239 (emphasis in original).

Furthermore, even though we determined that actual sales price less costs was to be the least favorable method of determining market value, we did state, "[T]he Shell-MisCoa contract, while not conclusive evidence of market value, was also plainly relevant to the issue." Id. at 238 (emphasis in original). For as the choice of method of proof is on a case-by-case basis and the persuasiveness of individual methods is a matter for the factfinder, see id. at 238-39, the district court could easily be within its discretion to use the method that would be based upon the Shell-MisCoa contract (that is, the actual sales price...