Shearn v. Ward Petroleum Corp., CIV-91-622-A.

• Citation: 808 F. Supp. 1530
• Decision Date: 10 December 1992
• Docket Number: No. CIV-91-622-A.,CIV-91-622-A.
• Parties: Michael SHEARN, an individual Plaintiff, v. WARD PETROLEUM CORPORATION, an Oklahoma corporation, and the United States of America, Defendants.
• Court: U.S. District Court — Western District of Oklahoma

808 F. Supp. 1530

Michael SHEARN, an individual Plaintiff, v. WARD PETROLEUM CORPORATION, an Oklahoma corporation, and the United States of America, Defendants.

No. CIV-91-622-A.

United States District Court, W.D. Oklahoma.

December 10, 1992.

John M. Rowntree, Jr., Stephen G. Solomon, Larry Derryberry, Derryberry Quiqley Parrish, & Blankenship, Oklahoma City, OK, for plaintiff.

Donald K. Blackwell, Michael G. Harris, Sara W. Hurst, John C. Moricoli, Jr., Moricoli Wilson Harris, Cottingham & Hurst, Oklahoma City, OK, for Ward Petroleum Corp.

Ronny D. Pyle, U.S. Atty's. Office, Oklahoma City, OK, for U.S.

MEMORANDUM OPINION

ALLEY, District Judge.

This case involves the rights of the United States and its lessee to recover oil and gas production proceeds from the operator of a well drilled on a state-ordered spacing and drilling unit in which federal minerals are located.

All issues have been presented by motions and decided by the court in prior orders or resolved by stipulation of the parties, except for the issues of the amount of money damages, prejudgment interest, post-judgment interest, and attorney fees. This final judgment affirms all findings and orders previously entered and resolves all matters addressed in the case.

The plaintiff, Michael Shearn ("Shearn") brought this action as the lessee of federal mineral property located within a section of land designated by an order of the Oklahoma Corporation Commission as a spacing and drilling unit for the production of hydrocarbons. Shearn brought this action against co-defendant Ward Petroleum Corporation ("Ward"), as the operator of the producing oil and gas well on the unit (the "unit well"), claiming that Ward had not paid Shearn and the United States any production proceeds from the unit well. Shearn sought an accounting; a judgment declaring Shearn, as the lessee, to be a working interest owner and the United States, as lessor, to be a royalty interest owner in the unit well; and a money judgment against Ward for production proceeds of the unit well attributable to the federal mineral property which should have been paid to Shearn.

Ward moved to dismiss the action for failure to join indispensable parties claiming that all the working interest owners of the unit well had to be joined as parties. The court affirms its prior order denying Ward's motion. What Ward over-looked is the clear and abundant case law that holds that a unit operator stands in a fiduciary or trustee-like status as to the interest owners in a well. Young v. West Edmond Hunton Lime Unit, 275 P.2d 304, 309 (Okla.1954); Olansen v. Texaco, 587 P.2d 976, 981 (Okla.1978); Leck v. Continental Oil Co., 800 P.2d 224, 229 (Okla.1990); Reserve Oil, Inc. v. Dixon, 711 F.2d 951, 953 (10th Cir.1983). If Ward paid the wrong parties, then the improper payment is no defense to its fiduciary obligation to the plaintiff. Ward may seek another lawsuit to recover from the parties who were wrongfully paid, but Ward cannot as a matter of law require plaintiff to join those parties or defend by claiming that plaintiff should recover from them instead of Ward.

The United States cross-claimed against Ward stating the Government was approving and ratifying the Corporation Commission spacing and drilling unit order to include the federal mineral property in the unit and claimed that the United States was, as a full mineral interest owner in the unit, thus entitled to all of the federal mineral property's proportionate share of unit well production proceeds from the date of first production to the effective date of Shearn's lease. Thereafter, the United States contended, it is entitled, as lessor of the federal mineral property, to the royalty set forth in the lease.

In its answer to the allegations and claims of Shearn and the United States, Ward admitted that it did not own or claim an interest in the federal mineral property; that it had knowledge of the United States' ownership of the federal mineral property in the unit when the unit well was drilled; that Ward took no action to notify the United States of the existence of the unit well; and that neither Shearn nor the United States had received any production proceeds from the unit well. However, Ward denied that either Shearn or the United States had been or is now entitled to any production proceeds from the unit well.

The parties filed cross motions for summary judgment. The applicable standards to be applied to summary judgment motions in civil cases are well defined. The Supreme Court stated in Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986), that where the moving party shows that the opposing party is unable to produce sufficient evidence in support of the opposing party's case, summary judgment is appropriate. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986) refined this definition, stating that only disputes over facts that affect the outcome of the suit under governing law will overcome a finding of summary judgment. Applying these standards to the facts of the case, the Court finds as follows.

The following facts are not in dispute:

(1) In 1976 the Oklahoma Corporation Commission issued an order establishing Section 32, Township 13 North, Range 12 West, Blaine County, Oklahoma, a 640 acre governmental section of land, as a spacing and drilling unit, finding that the Springer and certain other formations were common sources of hydrocarbon supply underlying the entire unit, and ordering that no more than one well could produce from the common source of supply in the unit.

(2) At all time relevant to the case, the United States has been the owner of the federal mineral property located within the unit.

(3) In 1983, Ward became the operator of the unit well, the Laubhan-Friesen No. 1-32, completed drilling and began producing the unit well from the Springer formation in 1984, and has since continuously operated the unit well.

(4) Oil and gas production proceeds from the unit well have exceeded the unit well costs by millions of dollars.

(5) On March 1, 1990, the United States issued an oil and gas lease covering the federal mineral property to Shearn.

(6) Ward has not paid, or caused to be paid, any oil and gas production proceeds from the unit well to Shearn or the United States.

(7) In 1991, the District Manager of the Bureau of Land Management, United States Department of Interior approved and ratified the 1976 Oklahoma Corporation Commission spacing and drilling unit order and the inclusion of the federal mineral property in the unit.

FEDERAL MINERAL ENTITLEMENT TO UNIT PRODUCTION

Each of the parties moved for summary judgment on the basic issue of whether Shearn and the United States are entitled to recover production proceeds of the unit well from Ward.

Shearn and the United States showed that an Oklahoma Corporation Commission spacing and drilling unit order establishes all interest owners in the unit as co-tenants as of the date of the order and apportions production from the unit among all owners in proportion to the surface acres that their respective tracts bear to the total unit acreage.¹ They acknowledged that, without the United States' consent, a state spacing and drilling unit order cannot affect federal minerals. However, they claimed that the United States may consent to the federal mineral property being subject to the state spacing and drilling unit order by approving the state unitization order which establishes the federal mineral interest owner's co-tenancy and entitlement to share unit production with other unit interest owners.² Furthermore, Shearn and the United States contend that approval of unitization may be in the form of a ratification with retroactive effect to the date of the order which entitles the federal mineral property interest owner to share in all unit well proceeds since first production.³

Ward acknowledged that the Oklahoma State spacing and drilling unit order entitles all mineral interest owners in the unit to share in production from a well located anywhere in the unit. However, Ward argued that federal mineral interests can only be entitled to share in such unit production when communitization of the federal interest with nonfederal interests is accomplished by a communitization agreement as provided in 30 U.S.C. § 226(j) and, since there is no communitization agreement in this case, neither Shearn nor the United States is entitled to participate in the unit well. Ward also argued that communitization cannot be retroactively applied.

The Court disagrees with all of Ward's contentions. The court affirms its prior findings and orders that Shearn and the United States have sustained the burden of their motions for summary judgment and, even under the most liberal construction of summary judgment standards, Ward has failed to present sufficient legal authority or factual evidence to defeat their motions.

As a matter of law, the 1976 Corporation Commission drilling and spacing order operated to unitize or communitize the oil and gas mineral interests in the unit.⁴ The drilling and spacing unit order operated to apportion production from the total unit acreage proportionately among the owners of all tracts within the unit. Ward v. Corporation Commission, 501 P.2d 503 (Okl. 1972); Kirkpatrick Oil & Gas Co. v. United States, 675 F.2d 1122 (10th Cir.1982). In Kirkpatrick, the 10th Circuit noted that the United States has the discretion to approve modifications to federal mineral leases or unit plans. Id. at 1125.

The approval given by the United States allowed the Corporation Commission drilling and spacing unit order to apply to all the federal mineral property in the unit. Texas Oil and Gas Corp. v. Phillips Petroleum Co., 406 F.2d 1303 (10th Cir.1969), aff. 277 F.Supp. 366 (W.D.Okl.1967), cert. denied, 396 U.S. 829, 90 S.Ct. 80, 24 L.Ed.2d 80 (1969). Since, the United States has ratified this drilling and...