Wegman v. Central Transmission, Inc., No. 18086-CA

• Court: Court of Appeal of Louisiana (US)
• Writing for the Court: LINDSAY
• Citation: 499 So.2d 436
• Parties: W.J. WEGMAN, Jr., et al., Plaintiff-Appellee, v. CENTRAL TRANSMISSION, INC., Defendant-Appellant.
• Decision Date: 03 December 1986
• Docket Number: No. 18086-CA

Page 436

499 So.2d 436 W.J. WEGMAN, Jr., et al., Plaintiff-Appellee,
v.
CENTRAL TRANSMISSION, INC., Defendant-Appellant. No. 18086-CA. Court of Appeal of Louisiana,
Second Circuit. Dec. 3, 1986.
Rehearing Denied Jan. 15, 1987.
Writ Denied March 20, 1987.

Page 439

Hudson, Potts & Bernstein by James A. Rountree, Monroe, for defendant-appellant.

William A. Hargiss, Monroe, for plaintiff-appellee.

Before JASPER E. JONES, NORRIS and LINDSAY, JJ.

LINDSAY, Judge.

The defendant appeals a judgment based upon a jury verdict which cast Central Transmission, Inc. (CTI) for damages consisting of unpaid gas royalties, penalties and attorney's fees pursuant to LSA-R.S. 31:140 et seq., for payment of the purchase price for gas under a gas purchase contract, and which cancelled six oil, gas and mineral leases held by other defendants referred to in the record as "limited partnerships."

Suit was filed on January 29, 1982, by Joe Wegman, Jr. (Wegman), Joe Wegman, Jr. Ltd. (Wegman Ltd.), and Bobby Joe Hodge (Hodge) against Central Transmission, Inc. (CTI), Central Transmission, Inc. Associates 1974-1 Ltd. (1974-1 Ltd.), Central Transmission, Inc. 1975-2 Ltd. (1975-2 Ltd.) and Central Transmission, Inc. Associates 1975-4 Ltd. (1975-4 Ltd.) (collectively "Limited Partnerships"). Plaintiffs sought to recover amounts due as payment for royalties on mineral leases and for the amounts due from a gas purchase contract, alleging that defendants' had failed to properly measure the gas produced, to apply the correct price to the gas produced and to properly maintain and drill gas wells so as to prevent drainage and loss of production. After a jury trial, the jury returned a verdict in favor of plaintiffs and against CTI finding that CTI failed to credit plaintiffs with the correct quantity of gas produced and failed to pay the proper price. The remaining claims against CTI and all claims against the remaining defendants were dismissed. The jury awarded plaintiffs a total of $225,929.73 and dissolution and cancellation of the leases between plaintiffs and CTI.

On November 29, 1984, defendants filed a motion for judgment notwithstanding the verdict. Pursuant to that motion, the trial court reduced the total of the award to $135,508.83 due to miscalculations by the jury. Although the total award decreased, certain portions of the award were increased. The defendant appealed. Having found merit in some of the issues raised by defendant, we amend the judgment of the trial court by reducing the total of the award to $132,391.31.

Briefly stated, and as an overview of this litigation, the record revealed that plaintiffs are the lessors under oil, gas and mineral leases and a grantor in a gas sales contract, all in favor of the defendant, CTI. The leases, as well as the gas purchase contract obtained from Wegman and Wegman Ltd., were modified by supplemental contracts.

CTI assigned the gas leases to various limited partnerships which it created. CTI retained the gas purchase contract. CTI purchased gas from the limited partnerships and others and transported the gas to IMC Pipeline Co., Inc., (IMC), to whom it was sold for a substantial profit. Under the gas purchase contract, CTI was operating in a similar manner by purchasing gas at a low price from the plaintiffs and selling it at a substantial profit, contrary to certain agreements which it entered into with the plaintiff. The primary issues in this case are the amount CTI was paying plaintiffs under the contracts at issue and whether CTI was paying plaintiffs for the quantity of gas actually produced.

The jury found that CTI was in bad faith in its dealings with the plaintiffs and was not paying the proper price or paying for the proper quantity of gas and awarded damages accordingly. The jury also awarded penalties and attorney's fees under the provisions of LSA-R.S. 31:140 et seq. Thereafter, as previously mentioned, certain modifications were made of the jury verdict by the trial judge, which will be mentioned fully hereafter. From the jury

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verdict and judgment of the court, CTI appealed.

For a proper understanding of the difficult and complicated issues presented in this litigation, and a determination of whether the jury verdict is supported by sufficient evidence, a detailed review of the various agreements entered into by the parties, the status of the parties themselves and the manner in which the business relationships were conducted is essential.

I. BACKGROUND FACTS

HODGE LEASE

This case involves three separate tracts of land, the first of which is governed by two separate transactions. On March 17, 1964, Hodge leased a tract of land ¹ (Hodge Lease) to Wegman for a 1/8 royalty. Wegman assigned this tract to Wegman Ltd., reserving a royalty interest for himself. Wegman Ltd. then drilled the W/H No. 1 Well on the eastern half of the lease.

a) Gas Purchase Contract

In 1974, John Swank, vice president of CTI, proposed buying gas produced by W/H No. 1 from Wegman Ltd. Wegman offered CTI a package deal involving a gas purchase contract, a gas pipeline and two separate leases. On July 22, 1974, CTI contracted with Wegman Ltd. to buy gas produced by W/H No. 1 at the rate of fifty cents per mcf plus one-half of any price received by CTI over eighty-five cents per mcf. A supplemental contract contains a provision providing for renegotiation of the price if the city of Monroe did not purchase the gas provided by Wegman Ltd. In order for CTI to sell gas to the city of Monroe, it would be required to build the approximately twenty mile long pipeline to transport gas to the city of Monroe, at considerable cost. If CTI did not incur this cost, Wegman hoped to renegotiate and obtain a higher price for himself.

b) Wegman/Hodge Lease

On December 21, 1974, Wegman Ltd. assigned the western one-half of the Hodge lease (described above) to CTI and reserved an overriding royalty. Thus, the Hodge lease is effectively split in two; one half governed by a gas purchase contract and the other half by an assignment of the lease.

WEGMAN LEASE

On September 30, 1974, Wegman granted an oil, gas and mineral lease to CTI, reserving a one-fifth royalty and requiring that a well be drilled within sixty days. ² CTI realized it could not drill the well within sixty days and convinced Wegman to enter into a new but nearly identical lease on November 19, 1974 covering the same tract of land.

B.J. HODGE LEASE

On July 10, 1975, Hodge granted an oil, gas and mineral lease to CTI, ³ reserving an overriding royalty of one-sixteenth. He also obtained an additional royalty amounting to the market value at the well of one-eighth of gas sold off the leased premises (for a total of three-sixteenths royalty).

SUPPLEMENTAL CONTRACTS

Thereafter, Wegman negotiated two undated supplemental contracts with John Swank, who represented CTI. The two supplemental contracts were unrecorded.

Page 441

The first covered the lease made by Wegman to CTI (the Wegman lease) and the second covered the lease between Wegman Ltd. and CTI (the Wegman/Hodge lease). It is disputed whether the second supplemental contract was applicable to the gas purchase contract.

The supplemental contract provided royalties based on a gas price at the wellhead of not less than fifty cents per mcf, plus one-half of any price escalation obtained above eighty five cents per mcf which might be obtained from the city of Monroe, Louisiana, to whom lessee proposed to sell production. Should gas be sold to buyers other than the city of Monroe, lessor was to be provided a copy of the gas sale contract, and lessee and lessor were then to come to an equitable agreement for a new price base for computation of royalties. However, under no circumstances was the price to be less than fifty cents per mcf. For purposes of computing royalties, the basis of measurement of gas production was to be the individual well meter reading, with a maximum allowable deviation of three percent of production, where justified, to adjust to master meter differences.

CTI'S LIMITED PARTNERSHIPS

CTI also began to form limited partnerships, or partnerships in commendam, in order to raise capital for the drilling of wells and to allow stockholders of CTI and others to take advantage of certain tax benefits. Plaintiffs claim that the formation of the limited partnerships was also the first step in defrauding them.

Although more fully discussed hereafter, plaintiffs contend that by controlling these "limited partnerships" CTI was able to buy gas from the limited partnerships at a low price, and on the basis of this low price, plaintiffs' royalties were paid. Plaintiffs contend that CTI, having purchased the gas at a low price from its "alter ego" limited partnerships, then resold the gas at a high price to IMC, thereby realizing a large profit while plaintiffs received low royalties.

CTI controlled the limited partnerships. For example, the limited partnerships contracted to sell gas produced from the leases to CTI several days before the leases were actually obtained from CTI. Additionally, one limited partnership actually drilled a well on a lease belonging to another limited partnership. Over a week later, the drilling partnership obtained the lease.

All of the gas purchase contracts and lease assignments were signed by Robert Fain as the representative of CTI and of each limited partnership. Many witnesses testified that various contracts were not "arms-length agreements" because of the favorable terms received by CTI, one person having negotiated for both parties and the partnership's failure to renegotiate after the primary term had expired or to take advantage of certain contractual provisions.

This evidence forms the basis of the jury's conclusion that the limited partnerships were completely controlled by CTI and being used to the advantage of CTI.

CTI'S GAS MARKETING

On January 9, 1976, CTI began selling its gas to IMC Pipeline Co., Inc. (IMC) and its...