Texas Oil & Gas Corp. v. Hagen

• Decision Date: 25 September 1984
• Docket Number: No. 9176,9176
• Citation: 683 S.W.2d 24
• Parties: TEXAS OIL & GAS CORP., Appellant, v. Jeff HAGEN, et al., Appellees.
• Court: Texas Court of Appeals

Page 24

683 S.W.2d 24

TEXAS OIL & GAS CORP., Appellant, v. Jeff HAGEN, et al., Appellees.

No. 9176.

Court of Appeals of Texas,

Texarkana.

Sept. 25, 1984.

Rehearing Denied Nov. 13, 1984.

W.S. Barron, Jr., Brice & Barron, Dallas, for appellant.

David A. Lake, Tyler, Jesse L. Nickerson, Pittsburg, for appellees.

CORNELIUS, Chief Justice.

Jeff Hagen and others (plaintiffs) are royalty owners in three gas units operated by the defendant Texas Oil & Gas (TXO). They brought this suit as a class action representing themselves and all other similarly situated royalty owners, alleging that TXO had failed to pay the proper royalties on gas production from the units. Their action was based generally on breach of contract, failure to market the gas with good faith and reasonable diligence, and fraud by misrepresentation and concealment. After a nonjury trial the district court rendered judgment for plaintiffs in the amount of $1,075,030.02 actual damages, $300,000.00 exemplary damages and $250,000.00 attorney's fees. Actual damages represented the deficiency in gas royalties paid plus unpaid royalties on sulphur. TXO assigns twenty-two points of error alleging no evidence and insufficient evidence to support the vital findings, as well as certain procedural errors. We affirm the judgment as to liability but reverse the award of actual damages and remand the cause to the district court for the limited purpose of finding and reassessing actual damages in accordance with the directions of this opinion.

When the wells were placed on production TXO executed a gas purchase contract with Delhi Pipeline Company, its wholly owned subsidiary, which provided that the gas would be sold to Delhi at a stipulated price and delivered to it at or near the outlet of TXO's separators on the leased premises. From that point Delhi transported the gas to a central point in the Pittsburg field. There it was dehydrated and then transported seven and a half miles to the Getty New Hope plant where the hydrogen sulfide and carbon dioxide were removed. It was then transported approximately fifty miles to the Southwestern Electric Power Company Wilkes power plant in Marion County where about one-half of it was sold to SWEPCO. The remaining gas was transported an additional fifty miles and sold to International Paper Company at its Domino plant in Cass County. The prices paid to Delhi by SWEPCO and IPC were 15cents per MCF higher than the price provided by the contract between TXO and Delhi. TXO contends that its contract with Delhi constituted a sale of the gas at the wells, and it has accounted to the plaintiffs for their royalty on the basis of the price provided in that contract. Plaintiffs, among other things, contend that the actual sales took place at the SWEPCO and IPC plants, and consequently they should have been paid royalties on the basis of the market value at the well of the gas pursuant to the lease royalty provisions ¹, and also that they should have been paid royalties on the sulphur removed from the gas prior to its delivery to SWEPCO and IPC. Plaintiffs signed division orders which provided that the terms of the leases would "govern as to the price to be paid for said production ...," and that "the purchase and sale of gas ... shall be covered, subject to and controlled by ..." the gas sales contract between TXO and Delhi. Copies of the contract were not attached to or furnished with the division orders, however.

The ultimate facts and conclusions found by the district court were that the gas was sold off premises at the SWEPCO and IPC plants rather than at the wells to Delhi; TXO made fraudulent misrepresentations in its division orders and concealed material facts concerning its sale of the gas and its relationship with Delhi; and that TXO breached its position of confidence toward plaintiffs and failed to act in good faith and fairness in its obligation to market the gas for the highest price reasonably obtainable.

We find the evidence insufficient to support the conclusion that TXO made a positive misrepresentation of fact in its division orders. The statement in the division orders relied upon to constitute a misrepresentation was simply that the price of the gas for royalty purposes would be governed by the terms of the leases. That statement was and is true. The fact that TXO thought it could establish an "at the well" sale by contracting with its subsidiary to take the gas at that point does not convert the division order statement into a misrepresentation. A representation as to the legal effect of an instrument is ordinarily not actionable. Furman v. Keith, 226 S.W.2d 218 (Tex.Civ.App.--San Antonio 1949, writ ref'd); McGary v. Campbell, 245 S.W. 106 (Tex.Civ.App.--Beaumont 1922, writ dism'd); Franklin Ins. Co. v. Villeneuve, 60 S.W. 1014 (Tex.Civ.App.1901, no writ); 25 Tex.Jur.2d Fraud and Deceit § 37 (1961). To amount to an actionable misrepresentation, a statement must be clearly untrue. If, under a reasonable construction it is consistent with the truth, it cannot be actionable as a false statement. Estapa v. Saldana, 218 S.W.2d 222 (Tex.Civ.App.--San Antonio 1948, writ ref'd n.r.e.).

The judgment can be sustained, however, on the basis of breach of contract. There is sufficient evidence to support the district court's finding that the purported sale of the gas to Delhi was a sham, and that TXO used that arrangement and its relationship with its wholly owned subsidiary to create an unfair device to deprive plaintiffs of their rightful royalties. By proof that Delhi, in this situation, was merely the alter ego of its parent TXO, the district court could disregard the purported sale at the wells and find that the true sale was off premises at the SWEPCO and IPC plants. See Tyson v. Surf Oil Co., 195 La. 248, 196 So. 336 (1940); Kuntz, Oil and Gas § 40.4(e) (1967).

The mere fact that a subsidiary is wholly owned by the parent and there is an identity of management does not justify disregarding the corporate entity of the subsidiary, but where management and operations are assimilated to the extent that the subsidiary is simply a name or a conduit through which the parent conducts its business, the corporate fiction may be disregarded in order to prevent fraud and injustice. Gentry v. Credit Plan Corp. of Houston, 528 S.W.2d 571 (Tex.1975); Bell Oil & Gas Co. v. Allied Chem. Corp., 431 S.W.2d 336 (Tex.1968). There is ample evidence here to support such a conclusion with reference to TXO and Delhi. Both companies have the same officers, directors, and office and field personnel. TXO directly paid all of the payroll and directly controlled all of Delhi's business functions, including expenses, income, and capital expenditures. The only separation was by interoffice chargeback accounting. Both companies filed consolidated income tax returns, a single SEC registration and financial statement, and property in the name of Delhi was included in a TXO mortgage to a New York bank. All benefits earned by Delhi are direct benefits and amounts realized by TXO including income from the sale of sulphur from the gas in question. TXO owned all of Delhi's stock and acted as its representative for the gas sales agreements with SWEPCO and IPC.

The leases involved here provide that where the sale is off premises the royalty shall be one-eighth of the market value at the well. Market value at the well is the market value of the gas where sold, less the reasonable cost of transporting the gas to the market and the processing necessary to make it marketable. Le Cuno Oil Co. v. Smith, 306 S.W.2d 190 (Tex.Civ.App.--Texarkana 1957, writ ref'd n.r.e.), cert. denied, 356 U.S. 974, 78 S.Ct. 1137, 2 L.Ed.2d 1147 (1958); Reed v. Hackworth, 287 S.W.2d 912 (Ky.1956); Wall v. United Gas Pub. Serv. Co., 178 La. 908, 152 So. 561 (1934); Clear Creek Oil & Gas Co. v. Bushmiaer, 264 S.W. 830 (Ark.1924); Phillips Petroleum Co. v. Bynum, 155 F.2d 196 (5th Cir.), cert. denied, 329 U.S. 714, 67 S.Ct. 44, 91 L.Ed.2d 620 (1946); Sartor v. United Gas Pub. Serv. Co., 84 F.2d 436 (5th Cir.1936). Thus, plaintiffs were entitled to recover as actual damages the difference between what they had been paid and the market value of the gas where sold, less the reasonable cost of transportation and processing. Le Cuno Oil Co. v. Smith, supra; Reed v. Hackworth, supra; Clear Creek Oil & Gas Co. v. Bushmiaer, supra; Kuntz, Oil and Gas § 40.5 (1967). And as the real sale was at the SWEPCO and IPC plants, plaintiffs were also entitled to their royalties on the sulphur which was extracted and sold by Delhi prior to the deliveries to SWEPCO and IPC.

It was plaintiffs' burden to prove market value at the well. They attempted to discharge that burden by introducing testimony and exhibits showing prices paid for gas in the general area of the units involved here. TXO argues that the evidence was insufficient because the gas from its units had a lower BTU value than the other gas, and because the comparable sales were too remote in distance to allow a fair comparison. We disagree on this point. Plaintiffs' witness took account of the lower BTU content of TXO's gas and advised the court how his data could be converted to render the sales comparable. The other variations concerning quality, quantity, time and location were pointed out to and were undoubtedly considered by the court. These differences would go to the weight rather than to the admissibility of the evidence, and we find the data sufficient to allow the trial court to find the market value of the gas.

Market value of the gas for the purposes of paying royalties, however, cannot exceed the maximum price permitted by the Natural Gas...