Quinlan v. Koch Oil Co., a Div. of Koch Industries, Inc.

• Decision Date: 01 June 1994
• Docket Number: Nos. 92-5219,92-5223,s. 92-5219
• Citation: 25 F.3d 936
• Parties: James F. QUINLAN, Plaintiff-Appellee/Cross-Appellant, v. KOCH OIL COMPANY, A DIVISION OF KOCH INDUSTRIES, INC., Defendant-Appellant/Cross-Appellee, Phillips Petroleum Company; GPM Gas Corporation; Texaco Trading and Transportation, Inc., Amicus Curiae, National Association of Royalty Owners; Oklahoma Chapter of the National Association of Royalty Owners, Movant-Amicus Curiae.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 936

25 F.3d 936

James F. QUINLAN, Plaintiff-Appellee/Cross-Appellant, v. KOCH OIL COMPANY, A DIVISION OF KOCH INDUSTRIES, INC. Defendant-Appellant/Cross-Appellee Phillips Petroleum Company; GPM Gas Corporation; Texaco Trading and Transportation, Inc., Amicus Curiae National Association of Royalty Owners; Oklahoma Chapter of the National Association of Royalty Owners Movant-Amicus Curiae.

Nos. 92-5219, 92-5223.

United States Court of Appeals, Tenth Circuit.

Decided June 1, 1994.

Kelley D. Sears, Koch Industries, Inc., Wichita, KS (Cathy A. Ervin, Koch Industries, Inc., Wichita, KS, Stephen R. Clark of McCormick, Andrew & Clark, Tulsa, OK, with him on the brief), for defendant-appellant/cross-appellee.

Sam T. Allen, IV of Loeffler, Allen & Ham, Sapulpa, OK, for plaintiff-appellee/cross-appellant.

Randle G. Jones, Texaco Trading and Transp., Inc., New Orleans, LA, Shelley Himel, Phillips Petroleum Co., GPM Gas Corp., Oklahoma City, OK, filed an amicus curiae brief for Texaco Trading and Transp., Inc., Phillips Petroleum Co., and GPM Gas Corp.

Robin Stead of Stead & Associates, Norman, OK, filed an amicus curiae brief for the Nat. Ass'n of Royalty Owners and the Oklahoma Chapter of the Nat. Ass'n of Royalty Owners.

Before SEYMOUR, Chief Judge, LOGAN, MOORE, ANDERSON, TACHA, BALDOCK, BRORBY, EBEL, KELLY and HENRY, Circuit Judges and KANE ^*, District Judge.

ORDER

The court has for consideration petitions for rehearing filed by Texaco Trading and Transportation Inc., Phillips Petroleum Company and GPM Gas Corporation, as well as a petition for rehearing with suggestion for rehearing in banc filed by Koch Oil Company and Quinlan's response thereto. The Court also has for consideration Koch's motion for leave to file a reply brief.

Upon consideration whereof, Koch's motion to file a reply brief is denied.

The panel that rendered the decision sought to be reheard grants the petitions for rehearing for the limited purpose of amending the opinion heretofore filed in these cases. The panel withdraws the opinion filed April 12, 1994, and files an amended opinion as of the date of this order. Having filed an amended opinion, the panel denies the petitions for rehearing in all other respects.

In accordance with Rule 35(b), Federal Rules of Appellate Procedure, the suggestion for rehearing in banc was transmitted to all of the judges of the court who are in regular active service. No member of the panel and no judge in regular active service on the court having requested that the court be polled on rehearing in banc, Rule 35, Federal Rules of Appellate Procedure, the suggestion for rehearing in banc is denied.

Before ANDERSON and BALDOCK, Circuit Judges, and KANE, District Judge. ^*

BALDOCK, Circuit Judge.

Defendant Koch Oil Company ("Koch") appeals the district court's grant of partial summary judgment and the subsequent jury verdict, both in favor of Plaintiff James F. Quinlan ("Quinlan"). Quinlan cross-appeals, claiming the district court erred by reducing the jury's punitive damage award and erred in refusing to award Quinlan attorney's fees. We have jurisdiction pursuant to 28 U.S.C. Sec. 1291.

Koch, and its predecessor, Rock Island Oil ("Rock Island"), began purchasing oil from an oil lease located in Creek County, Oklahoma in 1954. Quinlan acquired a mineral interest in the oil lease by quitclaim deed from his father on May 6, 1965. Upon receiving a copy of this quitclaim deed in May 1965, Rock Island sent Quinlan a transfer order to complete. On May 26, 1965, Quinlan and his father completed and signed the transfer order, and then returned it to Rock Island. Rock Island, and later Koch, paid Quinlan for his oil interest from 1965 to 1971. In December 1971, the lease was unitized and included in the Scott Dutcher Sand Unit.

Unitization results in enhanced oil recovery by injecting water into some wells in the unit while other wells actually produce the oil. Because all wells do not produce oil after unitization, a new allocation to those owning an interest in the wells included in the unit must occur. Thus, an interest holder will not receive the same percentage of oil produced after unitization as the holder received from one well prior to unitization. At unitization, the facts giving rise to the present controversy began when Koch stopped paying Quinlan for his oil and began placing Quinlan's oil proceeds in a suspense account.

On February 29, 1972, Koch apparently mailed notice of the unitization with enclosed division orders to the operator of Quinlan's oil lease. The operator was to distribute and collect signed division orders from all leaseholders in the Creek County oil lease. Koch did not send a division order or notice of unitization directly to Quinlan, and if Quinlan ever received the division order from the operator (a fact which Quinlan was unsure of at trial), he neither signed it nor returned it to Koch.

Because Koch received no post-unitization documentation from Quinlan, it continued placing Quinlan's oil proceeds in suspense. Between September 1973 and December 1975, Koch did not purchase any oil from the unit, but resumed purchasing from the unit in January 1976. At this time, Koch mailed new division orders to a new operator. Again, Koch received no documentation from Quinlan, and Koch again suspended Quinlan's money. Because Quinlan was a poor record keeper, as he himself admitted at trial, Quinlan was not aware that oil proceeds to which he was entitled were being held in suspense.

In July 1988, an heir-finder group called International Searchers, Inc. ("ISI") contacted Quinlan and informed him that it had located assets unknown to him. ISI offered to reveal these assets to Quinlan in exchange for fifty percent of the amount recovered. When Quinlan was unable to determine what these assets might be, he contracted with ISI in November 1989, and ISI informed him of the suspense funds at Koch. Quinlan submitted a claim to Koch, and on January 1, 1990, Koch paid Quinlan $166,608.58 for monies suspended by Koch between 1976 and December 31, 1989. ¹ Later, on January 20, 1990 and April 1, 1990, Koch tendered checks for simple interest in the amount of $25,227.52 and $52,826.95, calculated by Koch at a rate of six percent.

In the district court, Quinlan claimed he was entitled to interest at the annual rate of twelve percent, compounded annually, pursuant to Okla.Stat. tit. 52, Sec. 540 D. ² The district court agreed, and in an order granting Quinlan's motion for partial summary judgment, the district court found that Quinlan was entitled to twelve percent interest compounded annually from July 1, 1980. ³ The district court also held, as a matter of law, that Koch owed a fiduciary duty to Quinlan to notify Quinlan of the suspense monies. Because the court in pretrial orders had decided Quinlan's Sec. 540 claim for interest and had found Koch owed Quinlan a fiduciary duty as a matter of law, the only issue before the jury was whether Koch had breached that fiduciary duty, and the jury found that a breach had occurred.

I.

Koch first argues on appeal that it was not required under Okla.Stat. tit. 52, Sec. 540 to pay Quinlan any interest at all on the monies held in suspense and that it paid Quinlan six percent interest only as a courtesy. Section 540 provides for two different rates of interest to be paid by the purchaser (in this case, Koch) depending upon the circumstances. If proceeds cannot be paid because marketable title is in dispute, Sec. 540 A provides that the purchaser must pay six percent interest. On the other hand, if a purchaser violates Sec. 540 by failing to pay proceeds to those legally entitled to them, the purchaser is required to pay twelve percent interest. ⁴ We review issues of state law de novo, giving no deference to the district court's conclusion. Salve Regina College v. Russell, 499 U.S. 225, 231, 111 S.Ct. 1217, 1220-21, 113 L.Ed.2d 190 (1991).

Koch argues that Quinlan was not entitled to twelve percent interest because he was not "legally entitled to the proceeds" as he failed to show either marketable title or sign a division order at unitization in 1971. This argument requires detailed explanation. In Hull v. Sun Refining and Marketing Co., 789 P.2d 1272 (Okla.1990), the Oklahoma Supreme Court held that a purchaser of oil could not withhold payment of the purchase price solely because of a seller's refusal to sign a division order and that "[t]he only condition justifying suspension of royalty payments is a lack of marketable title." Id. at 1279. The Hull court further stated that "[t]he right to payment rests upon a showing of marketable title." Id. Koch relies on the word, "showing," in Hull to argue that Quinlan neither made a showing to Koch of marketable title nor signed a division order, and thus Quinlan was not "legally entitled to the proceeds" under Sec. 540 and thus not entitled to recover twelve percent interest. We disagree.

We decline to read Hull as broadly as Koch would have us. Taken literally, the language in Hull that "[t]he right to payment rests upon a showing of marketable title," id., would require a royalty owner to establish a right to payment by a showing of marketable title every time a royalty payment was due. In light of other language in Hull, we do not believe this to be what the court contemplated. In interpreting the Oklahoma legislature's intent in enacting Sec. 540, the court in Hull stated, "[b]y using marketable title as a standard for payment under Sec. 540, the [l]egislature expressed its intent that suspense of royalty payments was proper only when a legitimate question as to marketability of title existed." Id. at 1277 (emphasis added). Because in the instant case we conclude that the marketability of Quinlan's title was not legitimately in question at the time of unitization, Sec. 540 did not require Quinlan to make an affirmative showing of marketable title at that time in order to be deemed ...