SEECO, Inc. v. Hales

• Decision Date: 30 October 1997
• Docket Number: No. 96-1392,96-1392
• Citation: 954 S.W.2d 234,330 Ark. 402
• Parties: SEECO, INC., et al., Appellants, v. Allen HALES, et al., Appellees.
• Court: Arkansas Supreme Court

Page 234

954 S.W.2d 234

330 Ark. 402

SEECO, INC., et al., Appellants, v. Allen HALES, et al., Appellees.

No. 96-1392.

Supreme Court of Arkansas.

Oct. 30, 1997.

Thomas A. Mars, Fayetteville, Kenneth S. Gould, John J. Watkins, Little Rock, for Appellant.

Don A. Smith, Fort Smith, Marilyn J. Eickenhorst, Houston, James M. Sturdivant, M. Benjamin Singletary, Thomas A. Carney, Tulsa, for Appellee.

BROWN, Justice.

Appellants SEECO, Inc. (SEECO), and Arkansas Western Gas Company (AWG) are wholly owned subsidiaries of appellant Southwestern Electric Company (Southwestern). Appellees Allen Hales, et al. (the royalty owners), are lessors under various oil and gas leases possessed by SEECO who brought a class action suit to claim royalties that were allegedly due but not paid. The trial court certified the royalty owners as a class after considering the criteria set out in Rule 23(a) and (b) of the Arkansas Rules of Civil Procedure. The class is estimated to consist of more than 3,000 members. SEECO, AWG, and Southwestern have appealed the class certification and specifically contest the trial court's findings that common questions of law and fact predominate over questions affecting individual class members. The appellants further reject the claim that the royalty owners' class action is the superior method for the fair and efficient adjudication of this controversy. As a corollary issue, the appellants contend that the constitutional right to trial by jury will be skewed by having bifurcated trials with one jury deciding common questions for the royalty owners and a second jury determining individual questions. We affirm.

In their complaint, the royalty owners claim that SEECO failed to enforce the provisions of a gas-sales contract, known as Contract 59, against AWG and further failed to pay the royalty owners the proper proceeds from the gas produced under the numerous SEECO leases affected by the contract. The complaint states that Contract 59 was entered into between SEECO and AWG on July 24, 1978. It alleges that under Contract 59 SEECO dedicated acreage in Franklin, Johnson, Washington, Crawford, and Logan Counties for oil and gas production, and that AWG obligated itself for 20 years to purchase volumes of gas under a "take-or-pay" arrangement at a guaranteed price. That arrangement provided that the purchaser (AWG, in this instance) would either buy a volume of gas at the contract price or pay a specified price without taking the gas. The royalty owners allege that throughout the term of Contract 59, SEECO did not require AWG to pay the guaranteed prices or take the required volumes of gas per the terms of the agreement.

The royalty owners further allege: (1) that SEECO allowed AWG to freeze gas prices below the contract price for the period between December 1984 and July 1, 1994; (2) that SEECO imprudently and arbitrarily released wells, acreage, and production from Contract 59 throughout the term of the contract, which resulted in the sale of gas for less than the contract price; (3) that SEECO failed to drill additional wells and fully develop a plan for increased production on the royalty owners' acreage; and (4) that SEECO continuously provided gas storage to AWG without compensation. Other misdeeds by SEECO were set out in the complaint which, according to the royalty owners, resulted in lower prices for gas and, thus, less proceeds for them.

The royalty owners also allege that SEECO fraudulently concealed its failures under Contract 59 by intentionally refusing to document the pricing and other deficiencies under Contract 59. They state that SEECO engaged in conduct favorable to AWG due to their relationship as affiliate companies wholly owned by Southwestern and that SEECO's course of conduct resulted in significant losses to the royalty owners.

The complaint specifically alleges that in 1987 SEECO solicited the purchase of mineral interests from the royalty owners and misrepresented the market price for natural gas. In that solicitation letter, SEECO noted that gas prices had been declining in recent years, but, according to the allegation, SEECO failed to disclose that under Contract 59 AWG was obligated to make minimal volume purchases of gas and to pay for that gas at a certain price. The complaint also asserts that in a 1983 letter SEECO advised the royalty owners that it had entered into a gas-sales contract with Natural Gas Pipeline (NGP) which would result in reduced royalties. The royalty owners claim that SEECO failed to disclose that the same gas dedicated under the NGP contract was already dedicated under Contract 59, with its take-or-pay provision, at a significantly higher purchase price.

The royalty owners seek compensatory damages in excess of $58,450,000 and punitive damages against appellants, jointly and severally, on the legal theories of: (1) fraud and constructive fraud; (2) breach of the oil and gas leases; (3) breach of the duty to market the gas reasonably; (4) breach of the duty of good faith and fair dealing; (5) violation of Ark.Code Ann. §§ 15-74-601 & -602 (Repl.1994), which govern penalties for fraudulently withholding oil and lease payments; (6) unjust enrichment; (7) tortious interference with contractual relations; (8) civil conspiracy; and (9) violation of Ark.Code Ann. § 15-72-305 (Repl.1994), which requires calculation of royalties on a weighted-average price. The royalty owners also asked for certification of a class pursuant to Rule 23 of the Arkansas Rules of Civil Procedure.

At the class-certification hearing, Dr. David Taylor testified that he was a named plaintiff seeking to become a class representative because of his royalty interests in eleven oil and gas leases dedicated under Contract 59. He testified that his claims concerned the lack of enforcement of Contract 59 regarding the price of gas sold by SEECO to AWG as well as the volume of gas to be purchased. On cross-examination, Dr. Taylor stated that SEECO had voluntarily converted the leases from fixed-price leases to proceeds leases based on its performance over the last number of years. He also contended that the terms of the leases should not control because SEECO and AWG were affiliates which were not dealing at arms' length; therefore, the royalty-price determination should be dictated by the terms of Contract 59, as opposed to his leases. Dr. Taylor further contended that there was fraud in connection with the 1983 letter and the 1987 solicitation letter sent out by SEECO because neither letter made reference to Contract 59 and AWG's take-or-pay obligation under that contract.

In rebuttal, SEECO attacked Dr. Taylor's assertion of fraudulent concealment and showed that Contract 59 had been on file with the Arkansas Public Service Commission (PSC) since 1978 or 1979. SEECO also offered several newspaper articles with information that, it argued, should have put royalty owners on notice about pricing. One was a January 21, 1991 article entitled "Purchasing Practices Defended by Company," from the Ozark Spectator, which documented challenges from the PSC and the Attorney General's Office regarding high prices paid by AWG, which were passed on to ratepayers under Contract 59. A second article was a January 15, 1993 story entitled "Gas Company Left Prices High, PSC Told" from the Arkansas Democrat-Gazette, which also indicated that AWG was paying too much under Contract 59. Finally, a November 1, 1994 article entitled "Settlement Reached After 3 Years" in the Northwest Arkansas Times documented a settlement between the Attorney General's Office, PSC staff, SEECO, and AWG, causing a reduction for AWG ratepayers because Contract 59 violated Arkansas's least-cost purchasing law. Dr. Taylor testified that he was unaware of these articles.

Allen Franklin Hales, another named plaintiff and potential class representative, testified that he was asking for certification as a royalty owner under two leases with SEECO which were dedicated to Contract 59. In his deposition, Hales echoed Dr. Taylor's concerns about the fact that the 1983 and 1987 letters were silent about Contract 59. Dr. Robert Gordon Jeffers also testified by deposition that SEECO should have enforced Contract 59.

Brooks Clower, an attorney employed by Southwestern, testified that he perused the oil and gas leases of Dr. Taylor, Dr. Jeffers, and Mr. Hales, and concluded that some leases contained a fixed-price royalty and a disclaimer of implied covenants, while other leases provided for royalties to be paid on a proceeds basis and did not contain a disclaimer clause. He also testified that the various leases differed with respect to government-regulation clauses, which would make some leases subject to certain defenses that would be unavailable in connection with other leases. The leases also differed in form, with Dr. Taylor, for example, having three different types of leases. Clower testified that the leases may or may not be subject to pooling agreements made for the purpose of forming a drilling unit, which would also vary the terms of the lease agreements.

The trial court entered an order certifying the class of royalty owners affected by the alleged acts and omissions of SEECO, AWG, and Southwestern. Two subclasses were created based on whether the subclass leases were leased to SEECO and dedicated under Contract 59, or leased to third parties and affected by Contract 59. The trial court's order found that the following common and predominating issues existed:

The evidence produced by the plaintiffs indicates: an alleged overall scheme and course of conduct by the defendants designed to defraud the members of the proposed class as a group irrespective of the type of oil and gas lease or the volume of production from the leases; that SEECO in deference to Arkansas Western Gas Company's interest allegedly failed to enforce the take, price and other provisions of Contract 59 almost since the contract's inception and...