Roye Realty & Developing, Inc. v. Watson

• Decision Date: 10 September 1996
• Docket Number: No. 76848,76848
• Citation: 1996 OK 93,949 P.2d 1208,1996 WL 515794
• Parties: 137 Oil & Gas Rep. 83, Util. L. Rep. P 26,576, 1996 OK 93 ROYE REALTY & DEVELOPING, INC., an Oklahoma corporation, Appellee, v. R.D. WATSON and Dorothy Watson, Appellants, v. ARKANSAS LOUISIANA GAS COMPANY, A DIVISION OF ARKLA, INC., Appellees.
• Court: Oklahoma Supreme Court

Page 1208

949 P.2d 1208

137 Oil & Gas Rep. 83, Util. L. Rep. P 26,576,

1996 OK 93

ROYE REALTY & DEVELOPING, INC., an Oklahoma corporation, Appellee, v. R.D. WATSON and Dorothy Watson, Appellants, v. ARKANSAS LOUISIANA GAS COMPANY, A DIVISION OF ARKLA, INC., Appellees.

No. 76848.

Supreme Court of Oklahoma.

Sept. 10, 1996.

As Corrected Sept. 12, 1996.

Rehearing Denied Feb. 6, 1997.

Mandate Issued Jan. 26, 1998.

Eric S. Gray, Thomas P. Gorensen, and Gregory F. Pilcher, Roberts, Gray, Gorensen & Moriarty, Oklahoma City, for Appellee, Roye Realty and Developing, Inc.

James R. Eagleton, Eagleton, Eagleton & Harrison, Tulsa, for Appellants, R.D. Watson and Dorothy Watson.

Graydon Dean Luthey, Jr., J. Kevin Hayes, Richard T. McGonigle and Mark Banner, Hall, Estill, Hardwick, Gable, Golden & Nelson, P.C., Oklahoma City, for Appellee, Arkla Energy Resources, a Division of Arkla, Inc.

Mart Tisdal, Cornell & Tisdal, Clinton, Amicus Curiae, for Oklahoma Mineral Owners Association.

J. Michael Medina, Holliman, Langholz, Runnels & Dorwart, Tulsa, and Bland Williamson and J. Randolph, Pray, Walker, Jackman, Williamson & Marlar, Tulsa, Amicus Curiae, for Oklahoma Independent Petroleum Association.

Robin Stead, D.F. Heath, Jr., Stead & Associates, P.C., Norman, Amicus Curiae for National Association of Royalty Owners and the Oklahoma Chapter of the National Association of Royalty Owners.

Mark D. Christiansen, Crowe and Dunlevy, Oklahoma City, and Brenton B. Moore, Tulsa, Amicus Curiae, for Oklahoma-Kansas Mid-Continent Oil & Gas Association.

Gregg R. Renegar, Tom M. Moore, James W. Bruce, Kornfeld, Franklin, Renegar & Randall, Oklahoma City, and Tom J. Ruble, Ruble & Bozarth, Taloga, Amicus Curiae, for George R. Eckles, Jr. on behalf of Appellants R.D. and Dorothy Watson.

HARGRAVE, Justice.

Certiorari to Court of Appeals, Oklahoma Division IV, to review an unpublished opinion of the Court of Appeals. The issue addressed in the present matter is whether, under Oklahoma law, royalty owners may be entitled to share in money paid by purchaser to producer in settlement of take-or-pay litigation?

SUMMARY OF FACTS AND PROCEDURAL HISTORY

Roye Realty & Developing (Roye), the gas producer/lessee, and R.D. and Dorothy Watson (Watsons), the lessors, executed oil and gas leases covering certain lands located in Haskell County. The primary term of the leases extended one year. Roye drilled and initially completed gas wells apparently capable of production in paying quantities within the primary terms of the leases. The royalty clauses of the leases provided for payment of royalties on gas "produced and sold." Roye subsequently entered into a gas purchase agreement with Arkla. This agreement included a take or pay provision which read:

If Buyer does not receive the annual minimum which Buyer is obligated to receive hereunder during a particular Contract Year, and the annual minimum was available and tendered by Seller for delivery hereunder in accordance with the provisions of this contract, Buyer shall pay to Seller at the price per MMBtu payable hereunder on the last day of the particular Contact Year for a volume (hereinafter for convenience referred to as the "annual shortage") equal to the difference between the volume actually received during the Contract Year and the minimum volume Buyer was obligated to receive during the year. If Buyer thus pays for an annual shortage not actually received, Buyer shall have the right to recoup the volume thus paid for but not received out of future production from any or all wells delivering gas under this contract without further payment...

The Gas purchase contract, specifically the aforementioned take-or-pay clause, was the subject of litigation between Arkla and Roye in Arkla Energy Resources v. Roye Realty & Developing, Case No. C-86-67, District Court of Haskell County, Oklahoma, which resulted in a "confidential settlement agreement" dated February 6, 1989, between Roye and Arkla. Since the settlement in that case was confidential, no discovery was allowed by the trial court into the specifics therein. Subsequent to the settlement, a dispute arose between the Watsons and Roye. The Watsons were claiming a share of the proceeds of the settlement under the lease agreement, by virtue of their oil and gas lease. Roye filed the instant suit requesting a declaratory judgment defining the rights and liabilities of the parties under the oil and gas leases. Watsons filed an answer, counterclaim and third-party petition and added the gas purchaser, Arkansas Louisiana Gas Company (Arkla), as a third-party defendant. This answer/counterclaim urged seven grounds for recovery. ¹

Roye and Arkla filed motions for a protective order, claiming that the Watsons were not entitled to receive a copy of the confidential settlement between Roye and Arkla which terminated take-or-pay litigation. This motion was never resolved. Roye and Arkla also filed motions for summary judgment, claiming that they were entitled to a declaration from the court that the Watsons were not entitled to share in the proceeds of the settlement of that take-or-pay litigation. The Watsons also filed a motion for partial summary judgment, claiming that, as a matter of law, they were entitled to share in the settlement proceeds paid by the purchaser to the producer to resolve any breach of the take-or-pay gas purchase contract. The District Court denied the Watsons motion for summary judgment, and granted the Roye and Arkla's motions for summary judgment.

The Court of Appeals summarily reversed the trial court's decision and held that Roye's granting Arkla a right to refuse gas, under the take-or-pay provision, resulted in Roye's marketing of the gas. The Court of Appeals held that summary judgment was premature, and that the Watsons were entitled to partial summary judgment because they were entitled to royalties based upon the take-or-pay settlement. Finally, the Court of Appeals compelled production of the settlement agreement and vacated the award of attorney fees. Arkla and Roye petition for certiorari. Certiorari granted on this first-impression question.

THE TRIAL COURT PROPERLY GRANTED ARKLA'S MOTION FOR SUMMARY JUDGMENT

Title 52 O.S.1991, § 540 reads in pertinent part:

A. The proceeds derived from the sale of oil or gas production from any oil or gas well shall be paid to persons legally entitled thereto, commencing no later than six (6) months after the date of first sale, and thereafter no later than sixty (60) days after the end of the calendar month within which subsequent production is sold. Provided, such payment is to be made to persons entitled thereto by the first purchasers of such production ... The first purchaser shall be exempt from the provisions of this subsection and the owner of the right to drill and to produce under an oil and gas lease or force pooling order shall be substituted for the first purchaser therein where the owner and purchaser have entered into arrangements where the proceeds are paid by the purchaser to the owner who assumes the responsibility of paying the proceeds to persons legally entitled thereto.

See Seal v. Corporation Commission, 725 P.2d 278, 295 (Okla.1986).

Roye is responsible for paying the royalty, under the gas purchase contract between Arkla and Roye, as well as under the leases with the Watsons. Arkla has already settled the take-or-pay litigation with Roye, and hence, Arkla is not responsible for any

monies due to the Watsons. Therefore, the trial court properly dismissed the action against Arkla as Arkla had satisfied the provisions of § 540.

AN OVERVIEW OF ROYALTY OWNERS RIGHTS TO TAKE-OR-PAY

SETTLEMENTS AS DETERMINED BY OTHER JURISDICTIONS.

This is a matter of first impression in the State of Oklahoma. Other jurisdictions that have been faced with this issue have split. Those jurisdictions favoring the producer rely primarily on a strict interpretation of the language in the leases concerning what constitutes a "sale" and "production", while those jurisdictions finding for the royalty owners have adopted a broader "economic benefit" test based on the lessee's implied covenant to market gas and on unjust enrichment theories.

Texas Courts have found in favor of the producer. In Killam Oil Co. v. Bruni, 806 S.W.2d 264 (Tex.App.--San Antonio 1991, writ denied), the Texas Court of Appeals--San Antonio, was faced with a royalty clause similar to the case at bar. This clause provided that royalties would be paid on gas produced and sold or used off premises. The Court in Killam, adhered closely to the lease contract, and defined "production" as actual physical extraction of the mineral from the soil. Furthermore, the court defined "sold" as actual delivery of the mineral. Killam at 267. The court held:

We hold, as a matter of law, that the Trust is not entitled to royalties on the settlement proceed arising from the take-or-pay provision of the contract between Killiam, Hurd and UTTCO. Therefore, we need not address the Trust's contention as to what the proceed might have represented. This is because under a standard lease, take-or-pay payments do not constitute any part of the price paid for produced gas, nor do they have the effect of increasing the price paid for the gas that was taken. These payments are made when gas is not produced, and as such, bear no royalty.

Killam at 268. ²

The Supreme Court of Wyoming also found in favor of the producer. In State v. Pennzoil, 752 P.2d 975 (Wyo.1988), the Wyoming Supreme Court held that production required severance of the minerals from the ground, and that no sale could be made until the minerals were severed. Pennzoil at 979-980. The Court strictly construed the royalty clause of the oil and gas lease which provided for royalties payable on "oil, one-eighth of that produced, saved, and sold ...". The royalty owner in that case sought royalty on a recoupable ³ take-or-pay payment made pursuant to a gas contract....