Stine v. Marathon Oil Co., s. 90-2570

• Citation: 976 F.2d 254
• Decision Date: 30 October 1992
• Docket Number: 91-2220,Nos. 90-2570,s. 90-2570
• Parties: , 37 Fed. R. Evid. Serv. 78 R.N. STINE d/b/a Patland Oil Company, Patricia W. Stine, Scott N. Stine, Susan M. Stine, Sherryl F. Stine, and Stacy E. Stine, Trustees, Plaintiffs-Appellees, Cross-Appellants, v. MARATHON OIL COMPANY, Individually and as Successor in Interest to Husky Oil Company, Defendant-Appellant, Cross-Appellee. R.N. STINE, etc., et al., Plaintiffs-Appellees, v. HUSKY OIL COMPANY, et al., Defendants, Marathon Oil Company, etc., Defendant-Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

Page 254

976 F.2d 254

24 Fed.R.Serv.3d 102, 37 Fed. R. Evid. Serv. 78

R.N. STINE d/b/a Patland Oil Company, Patricia W. Stine, Scott N. Stine, Susan M. Stine, Sherryl F. Stine, and Stacy E. Stine, Trustees, Plaintiffs-Appellees, Cross-Appellants, v. MARATHON OIL COMPANY, Individually and as Successor in

Interest to Husky Oil Company,

Defendant-Appellant, Cross-Appellee.

R.N. STINE, etc., et al., Plaintiffs-Appellees, v. HUSKY OIL COMPANY, et al., Defendants, Marathon Oil Company, etc., Defendant-Appellant.

Nos. 90-2570, 91-2220.

United States Court of Appeals,

Fifth Circuit.

Oct. 30, 1992.

Rehearing Denied Jan. 25, 1993.

Ben H. Schleider, Jr., David McDougald, Schleider & Bowers, Roger Townsend, Fulbright & Jaworski, Thomas Gibbs Gee, Baker & Botts, Houston, Tex., for Marathon Oil Co.

Everard A. Marseglia, Jr., JoAnn P. Russell, Butler & Binion, Houston, Tex., for amicus TMOGA.

Steven C. Oaks, Vickie Ainsworth, Charles A. Sharman, Campbell, Zukowski, Bresenhan & Woods, Arthur Val Perkins, Sandford, Kuhl & Perkins, Houston, Tex., for R.N. Stine, et al.

Appeals from the United States District Court for the Southern District of Texas.

Before BRIGHT, ^* JOLLY, and BARKSDALE, Circuit Judges.

E. GRADY JOLLY, Circuit Judge:

This appeal arises from a diversity action concerning an oil patch joint operating agreement to which Texas law applies.

The Stines and Patland Oil Company ("Stine") and Marathon Oil Company (through its predecessor, Husky Oil Company) ¹ became co-owners of oil leases in Texas and entered into a Joint Operating Agreement ("JOA"), which governed their relationship. The JOA contained an exculpatory clause and, under certain circumstances, gave Marathon, as Operator, a lien on the proceeds from the sale of Stine's share of oil and gas produced from the leases. The JOA also created duties and rights between the parties concerning drilling and operation of wells, abandonment of dry holes or wells, etc.

Stine alleged that Marathon breached duties owed him under the JOA in connection with testing and completion of wells; that Marathon tortiously interfered with his gas sale contract with Cibolo Gas, Inc. (the purchaser of Stine's share of gas); and that Marathon, by failing to drill certain exploratory wells, abandoned a substantial portion of the lease acreage and, therefore, he (Stine) was entitled to an assignment of that acreage.

Summary judgment was entered in favor of Marathon on Stine's claim for an assignment of lease acreage. After a jury verdict in his favor, judgment for Stine was entered on contract, tortious interference, and punitive damage counts. The district court awarded attorney's fees to Stine, but did not require a breakdown of fees between the contract and tort claims. In the court's view, the two claims were so intertwined that a breakdown would be "impossible" and, in any event, was not "required."

Marathon appeals the jury verdict and the award of attorney's fees; Stine cross-appeals summary judgment on the acreage assignment issue. For the reasons set out below, we AFFIRM in part, REVERSE in part, and REMAND for retrial of certain issues.

I

In its broadest outlines, the relevant background is as follows: In March 1982, Stine arranged with InterNorth, Inc. to take over and develop some 60,000 acres (the Whitehead ranch) of InterNorth leasehold in Concho and Menard counties in Texas. The agreement between Stine and InterNorth is known as a "farmout." Through this agreement the owner of a lease delegates, i.e., "farms out," the exploration and development of that lease and assigns that portion of its leasehold interest. With InterNorth's consent, Stine assigned a portion of his interest under the farmout agreement to Marathon in return for Marathon's payment to Stine of $843,750. Stine and Marathon memorialized their agreement in a "letter agreement" and the Joint Operating Agreement ("JOA"). The JOA is a comprehensive document that sets out in detail the rights and duties of the parties. The reach of the JOA's exculpatory clause is a central issue in this appeal.

The farmout from InterNorth required Stine to drill several exploratory wells and continue a regular schedule of drilling such wells; otherwise, the leasehold acreage that was not in actual production would revert to InterNorth or to the lessor. In the letter agreement between Stine and Marathon, Stine agreed to drill the first three exploratory wells. The agreement gave Marathon the right to take over as operator of the farmed out acreage after the first three wells were completed.

Stine drilled the wells, the last of which was productive. Marathon then took over as Operator and drilled two additional wells, which it said were dry. Marathon then proposed to plug and abandon the dry wells. Stine objected; he wanted the wells tested for oil in shallow formations. Marathon did not test the wells. According to Marathon, at that point, Stine failed to comply with the JOA's requirements to take over the wells. Marathon, therefore, later plugged and abandoned them, but only pursuant to what it contends was an order from the Texas Railroad Commission. Stine disputes that the Railroad Commission ordered the wells plugged and abandoned. It contends that the "order" was only an inquiry and that, before plugging and abandoning was actually required, Marathon could easily have obtained an extension of time. Stine argues that, because Marathon failed to turn these wells over to him in accordance with the JOA, the wellbore was damaged; consequently, he had to drill replacement wells in order to test the formations penetrated.

Marathon continued acting as Operator of what had become known as the South Branch Field for several years. During this time, both Stine and Marathon drilled other wells, some were successful and some were not. Stine and others laid a pipeline to the field so that gas could be sold, and further developed the leasehold. Stine contends that Marathon failed timely to complete wells in formations that later proved to be productive. Stine also contends that Marathon refused to share information, as required by the JOA.

Finally, Stine contends that Marathon tortiously interfered with his contract for the sale of his gas to Cibolo Gas, Inc., the operator of a gas pipeline that serves the South Branch field. The JOA sets out a procedure applicable to drilling and all other operations, pursuant to which the operator proposes operations and estimates costs. Each nonoperator then may consent to such operations and its share of the costs. When a nonoperator does not consent ("goes nonconsent" or "nonconsents"), he takes a gamble. If the operation is successful, the operator may collect a multiple of the nonoperator's share of the costs from any production gained by the operation as a reward for having assumed the risk. If, on the other hand, the operation does not result in production, the nonoperator pays nothing. Under the terms of the JOA, Marathon has the right to take the proceeds of a nonoperator's sale of oil and gas to recover the nonoperator's unpaid share, consent or nonconsent, of drilling and operation costs.

Marathon contends that by June 1983, Stine owed over $600,000 for his share of drilling and operating expenses. In his claim for tortious interference, Stine, while admitting that he owed Marathon his share of charges, argues that Marathon wrongfully overcharged him and wrongly collected his proceeds from Cibolo. Furthermore, on appeal, he argues that Marathon's "embargo" on information left him in the dark about how much Marathon claimed he owed it and how long Marathon would continue to take his proceeds from Cibolo.

Then Cibolo exercised its right under its contract and demanded that Stine reduce the price of his gas by nearly one-half. Stine contends that he refused to accept the lower price and allowed his contract with Cibolo to lapse in order to regain control of his gas revenue because he did not know when this situation with Marathon would end. Consequently, Stine argues that he was damaged by loss of sales of his gas to Cibolo.

Although admitting Stine was overcharged, Marathon disputes Stine's claim of damages. Marathon questions whether Stine was damaged and whether its conduct caused Stine's alleged damages. Marathon also contends that because the JOA gave it the right to take the proceeds of the sale of Stine's gas to Cibolo, it can be liable only for breach of contract. Marathon further contends that, because of the exculpatory clause in the JOA, it can be held liable on that basis only if Stine can show that its actions were grossly negligent or willful, a point on which the district court failed to instruct the jury.

II

In 1983, Marathon sued Stine and others for uncollected operating expenses. Stine counterclaimed and after Marathon had collected, the court realigned the parties. The district court then rendered partial summary judgment in Marathon's favor on Stine's claims that Marathon had abandoned its interest in the lease and that Stine had suffered damages. The remainder of Stine's claims were tried to a jury, which rendered a verdict on May 4, 1990.

The jury found that Marathon had breached its contract with Stine by not delivering operation of two wells to Stine before plugging and abandoning them. The jury found that this breach had caused $106,000 in damages to Stine. The jury also found that Marathon had breached its contract with Stine by not furnishing information as required, causing $750,000 in damages. It found a further breach in Marathon's failure to complete wells in the Tannehill and Lower Cook potential oil sands, which caused $1,500,000 in damages to Stine. The jury found that Marathon was not grossly negligent or guilty of willful misconduct in its operation of well 3, but it did find that Marathon's gross negligence or willful misconduct led to water intrusion in wells 3, 4, 6, and 7 causing $50,000 in damages to Stine. The jury also...