Watts v. Atlantic Richfield Co.
| Decision Date | 10 June 1997 |
| Docket Number | No. 96-7041,96-7041 |
| Citation | 115 F.3d 785 |
| Parties | 137 Oil & Gas Rep. 106, Util. L. Rep. P 14,167, 97 CJ C.A.R. 907 Mose C. WATTS, individually; Mose C. Watts, Co-Trustee of the Mose C. Watts Ranch Trust; Ronald W. McGee, as Co-Trustee of the Mose C. Watts Ranch Trust; Edith B. Wartick; John Allen Wartick; Rita L. Park; Judith Ann Hollingback; Thomas Owen Wartick; Edith B. Wartick, Co-Trustee of the Edith B. Wartick Trust; John Allen Wartick, Co-Trustee of the Edith B. Wartick Trust; Rita L. Park, Co-Trustee of the Edith B. Wartick Trust; The Wartick Family Limited Partnership, an Oklahoma Limited Partnership; Raan Ladawn Jones, also known as Ladawn Jones; Winfrey Turner, individually; Billy Jean Turner; Truman Mathiews, individually; Devola Mathiews, individually; Truman Mathiews, Trustee of the Truman Mathiews Trust and of the Devola Mathiews Trust; Devola Mathiews, Trustee of the Truman Mathiews Trust and of the Devola Mathiews Trust; H.L. Dollins, III; Angelina Dollins; Nancey Dollins Sudduth; Violet Dollins; George Milton Dollins; David Dollins; Jack Dollins; Beverly Ann Dollins; Creeda June Dollins; Rocky Dean Dollins; Karen Danon Chaney; Robson Royalty Co.; Jerry L. Dollins; Ruth Every; Ruth Every, as Trustee of the Allen Every Revocable Trust; Ruth Every, as Trustee of the Ruth Every Revocable Trust; W.P. Lerblance; Earl Jeffrey; James David Lucas, also known as David Lucas; Betty Leflore; Helen Caldwell; Frances Richmond; James F. Elliott; Linda L. Angeli; Debbie Holuby; Billie Jean Leflore; Neil Wayne Dollins, Plaintiffs--Appellants, v. ATLANTIC RICHFIELD COMPANY; Vastar Resources, Inc., Defendants--Appellees. |
| Court | U.S. Court of Appeals — Tenth Circuit |
Terry Joe Barker, Pezold, Richey, Caruso & Barker, Tulsa, OK (Danny P. Richey and Joseph C. Woltz, Pezold, Richey, Caruso & Barker, Tulsa, OK, Douglas G. Dry, Wilburton, OK, and George Zellmer, Allford, Ashmore, Ivester & Zellmer, McAlester, OK, with him on the briefs), for Plaintiffs-Appellants.
Jay A. Brandt, Hutcheson & Grundy, Dallas, TX (Cynthia L. Frankel and Nishita S. Shah, Hutcheson & Grundy, Dallas, Texas, and Joe Stamper, Stamper & Hadley, Antlers, OK, with him on the brief), for Defendants-Appellees.
Before TACHA, McWILLIAMS, and BALDOCK, Circuit Judges.
Several lessors of oil and gas mineral interests ("Lessors") brought this diversity action against their lessee, Atlantic Richfield Company and Vastar Resources, Inc. (collectively "ARCO"). Lessors allege that ARCO: (1) failed to pay royalties on proceeds received from the settlement of certain disputes with its gas purchaser, Arkla Energy Resources ("Arkla"), (2) failed to obtain the highest price available for Lessors' gas, and (3) failed to protect several of Lessors' units against drainage. The district court granted summary judgment to ARCO on all three claims. We exercise jurisdiction pursuant to 28 U.S.C. § 1291. For the reasons set forth below, we reverse and remand for further proceedings.
Lessors own oil and gas mineral interests located in the Wilburton Field in Latimer County, Oklahoma. There are forty-one separate oil and gas leases between Lessors and ARCO setting forth the respective obligations of the parties. 1
I. THE ROYALTY DISPUTE AND SETTLEMENT AGREEMENT
Pursuant to a long-term gas purchase contract, ARCO has supplied Arkla, a natural gas pipeline and gas purchaser, with natural gas produced from the Wilburton Field at stipulated prices. In 1988, ARCO and Arkla became involved in litigation over Arkla's refusal to purchase gas from the Wilburton Field. Arkla contended that it was not obligated to take gas from ARCO's Wilburton wells because the gas did not meet quality specifications and, therefore, ARCO had improperly classified the wells as § 103 wells under the Natural Gas Policy Act ("NGPA"). See 15 U.S.C. § 3313. Based on Arkla's refusal to take gas and pay the correct contract price, ARCO brought a claim for breach of contract against Arkla. In its complaint, ARCO sought damages of $279 million, reflecting the highest lawful price Arkla allegedly was obligated to pay for NGPA § 103 gas.
During settlement negotiations, ARCO and Arkla became involved in a separate dispute involving Arkla's gas purchases from a field located off the shore of Louisiana in the Gulf of Mexico, known as the Mississippi Canyon. In 1987, the parties had attempted to resolve the dispute regarding the Mississippi Canyon by entering into a Compromise and Settlement Agreement ("1987 Settlement Agreement") under which Arkla made a recoupable $30 million prepayment to ARCO for gas On February 8, 1989, ARCO and Arkla entered into a settlement agreement ("1989 Settlement Agreement") resolving both the Wilburton litigation and the Mississippi Canyon dispute. ARCO agreed to sell gas from the Wilburton Field to Arkla at an initial price of $2.20 per MMbtu to be adjusted later according to a formula. In return, ARCO received: (1) sixty monthly recoupable prepayments of $5 million ($300 million total) for gas from the Wilburton Field, (2) a new gas gathering system in the Wilburton Field, (3) Arkla's agreement to enter into a gas transportation contract, at specified discount rates, for gas from the Wilburton Field, (4) a $35 million recoupable prepayment for gas from the Mississippi Canyon, and (5) a January 1, 1995 deadline for ARCO to refund any unrecouped portion of the $300 million prepayment for the Wilburton Field, the $35 million prepayment for the Mississippi Canyon, and the $30 million prepayment under the 1987 Settlement Agreement.
from the Mississippi Canyon. The parties, however, continued to dispute their respective obligations under the 1987 Settlement Agreement.
Since the 1989 Settlement Agreement, ARCO has paid Lessors royalties on gas produced and sold from the Wilburton Field. ARCO, however, has not paid royalties on any of the other settlement proceeds. Lessors brought this suit against ARCO seeking damages for ARCO's failure to pay royalties on the settlement proceeds. Lessors sought royalties under six separate legal theories: (1) breach of the contractual duty to pay royalties, (2) breach of the implied covenant to market, (3) breach of fiduciary duty, (4) constructive fraud, (5) breach of the duty of good faith, and (6) civil conspiracy. Lessors also sought damages against ARCO for failing to obtain the best price available for Lessors' gas under the 1989 Settlement Agreement. The district court granted summary judgment to ARCO on both of Lessors' claims.
1. THE DRAINAGE ISSUE
In the mid-1980s, ARCO discovered the Arbuckle formation, a large source of natural gas underlying other formations in the Wilburton Field. ARCO is the operator of fourteen of sixteen wells producing gas from the Arbuckle formation pursuant to private joint operating agreements with other working interest owners. 2
On January 31, 1991, the Oklahoma Corporation Commission ("OCC") issued Field Rules, retroactive to May 1, 1990, recognizing the Arbuckle Formation as a common source of supply, meaning that any one well could ultimately drain all the gas in the formation. The Field Rules established certain limits on the monthly production of each unit, called "allowables." The OCC determined that because seven of the Arbuckle wells were limited in their ability to produce gas, the Field Rules were necessary to ensure that each well would produce approximately its fair share of the gas.
The Field Rules contained several provisions concerning the treatment of a well that is underproducing its allowable, known as an "underage." The Field Rules specified that underages accumulated by a well could be carried forward and added onto that well's monthly allowable, effectively increasing the limit on future production. If a well's underages exceeded a specified amount, however, those underages would be canceled. The Field Rules contained an "Effective Date" provision as follows:
These rules shall be effective May 1, 1990, and the Unit Operator of each Unit shall have the period from the effective date of the rules to December 31, 1991 to adjust any over and under production before it is adjusted in accordance with [the cancellation provision].
App't.App., Vol. I at 227 (emphasis added).
After the Field Rules were issued, three of ARCO's wells (the Yourman No. 2, the Costilow No. 3, and the Kilpatrick No. 2) began to Several of the Lessors owning interests in adjacent units contend that the workovers caused the three wells to drain gas from their units, resulting in decreased production relative to the "draining" wells. Before the district court, Lessors sought damages against ARCO for uncompensated drainage, asserting a number of theories including: (1) breach of the implied covenant to protect against drainage, (2) tortious drainage, (3) breach of fiduciary duty, (4) breach of good faith, (5) conversion, and (6) unjust enrichment. In addition, Lessors contended that by selectively performing the workovers on units in which ARCO has a greater working interest, ARCO acted tortiously, wantonly and maliciously, subjecting ARCO to liability for punitive damages. The district court granted summary judgment to ARCO on the basis that the Field Rules bar all of Lessors' claims.
accrue underages each month and were approaching the point at which their underages would be canceled pursuant to the Field Rules. In early 1991 ARCO performed "workover" operations on the three underproducing wells to increase their deliverability. The successful workovers resulted in increased production in all three wells and permitted two of the wells to make up their underages and meet the allowables established by the Field Rules.
We review the grant of a motion for summary judgment de novo, applying the same standard used by the district court pursuant to Fed.R.Civ.P. 56(c). Harvey E. Yates Co. v. Powell,...
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