Weymouth v. Colorado Interstate Gas Company

• Citation: 367 F.2d 84
• Decision Date: 20 September 1966
• Docket Number: No. 21096.,21096.
• Parties: Fanny Fern WEYMOUTH and husband, C. E. Weymouth, et al., Appellants, v. COLORADO INTERSTATE GAS COMPANY, Appellee. COLORADO INTERSTATE GAS COMPANY, Appellant, v. Fanny Fern WEYMOUTH and husband, C. E. Weymouth, et al., Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

367 F.2d 84 (1966)

Fanny Fern WEYMOUTH and husband, C. E. Weymouth, et al., Appellants, v. COLORADO INTERSTATE GAS COMPANY, Appellee.

COLORADO INTERSTATE GAS COMPANY, Appellant, v. Fanny Fern WEYMOUTH and husband, C. E. Weymouth, et al., Appellees.

No. 21096.

United States Court of Appeals Fifth Circuit.

September 20, 1966.

COPYRIGHT MATERIAL OMITTED

D. H. Culton, B. M. Britain, L. A. White, R. W. Richards, Amarillo, Tex., Culton, Morgan, Britain & White, Amarillo, Tex., of counsel, for appellants.

A. J. Folley, Folley, Snodgrass, Calhoun & Kolius, Amarillo, Tex., James L. White, Denver, Colo., Lewis M. Poe, Robert R. McCracken, Colorado Springs, Colo., James T. Moran, Denver, Colo., Holland & Hart, Denver, Colo., of counsel, for appellee.

Before TUTTLE, Chief Judge, and BROWN and GEWIN, Circuit Judges.

JOHN R. BROWN, Circuit Judge:

As with another case this day decided,¹ this one, thought by the parties to be a private controversy, turns out to have transcendent public interest issues. In each, besides deciding the private law questions, we direct a reference to the Federal Power Commission for it to determine under the doctrine of primary jurisdiction the jurisdiction of the FPC over rates to be paid for gas royalty.

This appeal by both sides is from a contest between Lessors, the owners of the royalty interest on the 100,000-acre Masterson ranch located in the middle of the gas-rich West Panhandle field near Amarillo, Texas and Lessee-Pipeline, the producer-pipeline purchaser, Colorado.²

The Litigation

The complaint³ is that for the period 1957-1960 (1) Colorado underproduced the lease by failing to market the gas and (2) its royalty payments for the gas taken did not come up to "market value," the standard required by the terms of the lease. There have been two trials. The first resulted in a jury verdict that (a) Lessee-Pipeline had failed to exercise diligence in marketing and producing Masterson gas (b) in the amount of 4.5 to 5 billion cubic feet ⁴ for each of the five years,⁵ but (c) that the prices paid by Lessee-Pipeline⁶ were equivalent to "market value" — thus a victory for the Lessors on (1) undermarketing and for Lessee-Pipeline on (2) price.

A new trial on the issue of market value was granted on Lessors' motion. This was because one of Lessee-Pipeline's witnesses, whom the Court was led to believe would be — but never was — qualified as an expert, had been allowed to give extensive testimony on comparable gas sales — all based on hearsay. In the second trial the jury found a different market value for each of the years⁷ which had the effect of stepping up Lessors' judgment to $242,674.88 plus interest.

The appeal by the Lessors attacks the market value finding of the second trial.⁸ It presents in multi-issue form and meticulous detail the contention that the Trial Court erred in admitting certain defense exhibits and allowing supportive and explanatory expert testimony concerning other West Panhandle field prices paid for gas, either in the form of royalty payments or contract sales between producers and pipelines. Lessee-Pipeline's more broadly based appeal asserts that the trial Court improperly granted the motion for new trial, but also as a defensive matter it hastens to the trial Court's side — urging the correctness of the evidentiary rulings in the second trial. As to the underproduction failure to market finding in the first trial, Lessee-Pipeline maintains that it nominated and produced all it could under the applicable Texas Railroad Commission regulations and that this is a complete defense. Secondarily, on this point it insists that the evidence is insufficient to support the finding of lack of diligence. It also urged that the Federal Power Commission has primary jurisdiction over any demand for a higher price including that paid, in effect, as royalty.

Post argument consideration led the Court to the view that in the ultimate resolution of private law issues, there were problems of great public interest. The Court by memoranda to counsel in this and Huber (see note 1, supra) called for, and we have received, extensive helpful briefs.⁹

I. The Partial New Trial

We deal first with the propriety of the Court's granting a new trial on market value. Lessee-Pipeline's witness Melton testified and sponsored exhibits purporting to show the average purchase price being paid by other interstate pipelines in the West Panhandle field. This was hearsay information, but permissible when adduced by an expert to show the basis for his opinion. International Paper Co. v. United States, 5 Cir., 1955, 227 F.2d 201, 208; Hays v. State, Tex.Civ.App., writ ref'd, 1960, 342 S.W.2d 167. Although Melton had all of the background experience to qualify him as an expert and the trial Court expected that on this he would be asked to state formally an opinion based upon all of this data, this was never done. Looking backward as a motion for new trial requires, the Judge could see that there was no justification for the hearsay evidence. The trial Judge therefore properly considered this inadmissible. Lessee-Pipeline, however, asserts that the new trial was granted on the Judge's own motion out of time (5 months after date of judgment) when the Judge was without jurisdiction under the then 10-day requirement of F.R.Civ.P. 59(d).¹⁰ We do not reach this question because after full consideration of the testimony, objections of counsel and the Lessors' motion for new trial, timely filed under 59(b), we have concluded that this matter was fairly before the Judge in the Lessors' motion. The Judge therefore had continuing jurisdiction and did not abuse his discretion in granting a new trial on market value.

II. Market Value Proof

This brings us to the Lessors' appeal challenging evidentiary rulings. The broad problem of what kind of evidence may be used to establish the market value of the gas presents no difficulty, for the easy answer is that, among other ways, it may be established by expert opinion. Another rule which both parties accept is that laid down in condition II of Hays v. State, supra:

"Evidence of sales of comparable properties may be offered under three conditions: * * * (II) on direct examination of the value-witness to give an account of the factual basis upon which he founds his opinion on the issue of value of the property in controversy, * * *." 342 S.W.2d at 170.

Agreeing with this general statement, essentially Lessors assert that Lessee-Pipeline's experts, in preparing exhibits to be shown the jury and in testifying as to what factors they considered in arriving at their conclusions, took into consideration and were allowed to testify about transactions other than "comparable" sales. This objection, of course, went to both the exhibits and the back-up testimony. The main complaint relates to the use of royalties paid by the other interstate pipeline companies in the field. The defect here, say the plaintiffs, is that these payments, unless fixed in the lease, are not the result of arms length bargaining; they represent only what the pipeline chose currently to pay and were not even binding on the recipient royalty owner who like the Masterson owners might elect to go to court, as they often did (and do). Thus they are not competent to show "market value"¹¹ which the Court, with the approval of the Lessors, defined in its charge as:

"* * * that price which a willing buyer would pay and a willing seller would take, after fair negotiation, with neither party acting under compulsion."

Although no exception was taken to this charge, and no error is here asserted, a consideration of it does at least two things. First, it reveals that for this business — the gas business — the charge is woefully over simplified to the point of inaccuracy. And, second, the deficiencies of it reveal the factors, multiple and complex, which are relevant in determining market value of gas sold for resale in interstate commerce as all — or substantially all — of this gas is.

Of course, in this special application the test can still use the fictional willing "buyer" and "seller." But from that point on there must be increasing emphasis on those restraints which more and more circumscribe that "freedom" to make the phantoms less and less "willing."

The law must take account of the fallout of Phillips I.¹² That means that while the inquiry might be: what would a willing seller and buyer pay?, the circumstances of that fictional negotiation must reckon with the nature of this business. It is in no sense a "free" market. The usual "free, willing" negotiators contemplate a contract binding on each and enforceable as the bargain made. But this is only partially true for gas sales FRIC.¹³ The seller, for example, is bound, not for just the contract term. He is bound for the life of the reserves unless the FPC allows an abandonment.¹⁴ The buyer likewise is, or may be, bound to take way beyond the contract term under administrative compulsion that perhaps even permits the seller to fix the new price.¹⁵ Moreover, the parties are circumscribed as to what they may agree on or to do. Thus, contracts containing certain types of escalation, favored nations, etc. clauses never get to first base — the sale may not be consummated because never certified and never certified because the contract with forbidden clauses may not even be filed with the FPC.¹⁶ And as to contract terms which are administratively permissible in scope or nature — or, more likely, were included in pre- or early post-Phillips I contract filings — it is almost certain that these never will be given effectiveness. Thus, rate increases from automatic stepped up, escalation or similar contract provisions are scarcely more than "an invitation to a dance." The law treats them as a "rate" increase triggering § 4 of the Act.¹⁷ As such, they are subject to 5 months' suspension and collection thereafter under bond subject to refund. Even then, the...