Case Title: Andrau v. Michigan Wisconsin Pipe Line Co.

Citation: 

Docket Number: 

State: wyoming

Court: Wyoming Supreme Court

Date: 1986-01-16T00:00:00Z

Document:
Andrau v. Michigan Wisconsin Pipe Line Co.1986 WY 11712 P.2d 372Case Number: 85-97, 85-98Decided: 01/16/1986Supreme Court of Wyoming
WILLIAM E. ANDRAU, 
APPELLANT (DEFENDANT), 

 
 
v. 

 
 
MICHIGAN WISCONSIN PIPE 
LINE COMPANY, APPELLEE (PLAINTIFF), WILLIAM E. ANDRAU, APPELLANT (DEFENDANT), v. 
W.A. MONCRIEF, JR., APPELLEE (PLAINTIFF).

 
 

Appeal from the District 
Court, FremontCounty, Elizabeth A. Kail, 
J.

 
 
 
 
Representing 
Appellant:

Neil J. Short, Casper.

 
 
Representing 
Appellee:

Richard L. Williams 
(argued) of Williams, Porter, Day & Neville, Casper, and George Hellstrom, ANR Production Co., 
Houston, Tex., for appellee in 85-97. 

Thomas F. Reese (argued) 
of Brown, Drew, Apostolos, Massey & Sullivan, Casper, for appellee in 
85-98.

 
 
Before THOMAS, C.J., and 
ROONEY,* BROWN and CARDINE, JJ., and RAPER, 
J., Ret.

* Retired November 30, 
1985.

 
 

CARDINE, 
Justice.

 
 

[¶1.]     These two cases are 
consolidated for purposes of this appeal. In both cases, appellant, a working 
interest owner, admittedly owes the appellees, operators, for drilling expenses 
he agreed to pay. Appellant claims, however, that the operators in each instance 
owe nonoperators a fiduciary duty which includes collecting debts, owed by him 
to the operators, in the least onerous manner. The court below did not find that 
appellees were required to collect the debt in the manner appellant asserted. 
Instead, the court found that, pursuant to the unit operating agreement, 
appellee Moncrief had a valid lien on all of appellant's working interests 
committed to the unit, and that Moncrief could foreclose this lien by selling 
this interest in accordance with the statutes dealing with foreclosure of real 
property mortgages.1 Appellant has appealed from this 
judgment. We affirm.

 
 
FACTS

 
 

[¶2.]     Appellant is a 
nonoperating working interest owner in the Long Butte Unit, a gas reservoir in 
Wyoming. 
Appellee Moncrief is the operator of this unit and has managed the development 
of the unit under a unit operating agreement. The operating agreement provides 
that each nonoperator working interest owner is to be informed of the 
anticipated costs of each project by an authority for expenditure (AFE), and the 
working interest owner can then elect whether or not to participate. If the 
working interest owner chooses to participate, he is billed for his share of the 
costs, and he agrees to pay each bill within fifteen days after receipt. The 
agreement provides that the nonoperator grants the

 
 
"Unit Operator a lien 
upon its Committed Working Interests, its interest in all jointly owned 
materials, equipment and other property and its interest in all Production, as 
security for payment of Costs chargeable to it * * *." Article 
15.5

 
 

[¶3.]     In addition to this 
unit operating agreement, the parties entered into a gas storage and balancing 
agreement which states that its purpose is "to permit each party to produce and 
dispose of its interest in the gas production from the unit area with as much 
flexibility as possible * * *." The storage agreement allows a party to produce 
and deliver to his purchaser that portion of the allowable gas production which 
is not produced by a party taking less than its full share. The party who sold 
less than its full share would be "underproduced" and have "gas in the bank," so 
that later he could sell more than his full share until the underproduction no 
longer existed. This storage agreement specifically 
states:

 
 
"13. Nothing herein shall 
change or affect a party's obligation to pay its proportionate share of all 
costs and liabilities incurred, as its share thereof is set forth in the Unit 
Operating Agreement."

 
 

[¶4.]     Appellant, an 
experienced member of the oil and gas industry, was sent the AFE's for projects 
in the unit and executed each AFE, thereby agreeing to pay his share of the 
costs indicated. Although he agreed to pay these costs, appellant failed to pay 
the invoices sent to him. Under the terms of the operating agreement, the 
operator thus was granted a lien upon appellant's working interest committed to 
the unit and his interest in all jointly owned property.

 
 

[¶5.]     Appellant does not 
contest the amounts that he owes, approximately $300,000 to Moncrief and 
$260,000 to Michigan Wisconsin Pipe Line Company. Nor does he claim that the 
operators breached any part of the agreements during any stage of the 
development or operation of the unit. Instead, he contends that the appellees 
must accept, as payment for his debt, the "gas in the bank" which he has as a 
result of being "underproduced" at this time. Appellant has some 60,000 mcf gas 
in the bank, which he values at $7.50 per mcf.

 
 

[¶6.]     This underproduction 
was made possible by the operating and the storage and balancing agreements. The 
operating agreement provides that each party is to take in kind or separately 
dispose of his own share of production. Appellant failed to contract to sell his 
share of the production, while Moncrief did contract to sell his share for a 
price which represented the market at the time, but which is approximately three 
times greater than purchasers are willing to pay today.

 
 

[¶7.]     Appellant contends that 
appellees must take appellant's "gas in the bank" as payment for his debt at a 
price of $7.50 per mcf, which is the average overall price for all gas sold from 
the Long Butte Unit. Evidence presented clearly showed that gas contracted for 
sale at the time of trial would sell for approximately one-third of $7.50 per 
mcf, or $2.50 per mcf. It is clear that if appellant's claim is upheld, the end 
result would be to force appellees to sell appellant's gas under the very 
favorable contract which Moncrief had the foresight to make for himself for the 
sale of his gas and underproduced gas.

 
 

[¶8.]     After trial without a 
jury, the court entered a judgment and decree of foreclosure in favor of 
Moncrief and a money judgment in favor of Michigan Wisconsin. Appellant thus 
brings this appeal, urging the same claim upon which he relied below, and 
stating the issues as:

 
 
"I. Whether the appellee, 
as operator of the Long Butte Unit, stands in the position of a fiduciary or 
trustee in his relationship with appellant as a working interest owner in the 
Long Butte Unit.

 
 
"II. Whether appellee, as 
operator of the Long Butte Unit, is obligated to use the means least onerous to 
the appellant/working interest owner when collecting amounts due and owing by 
appellant.

 
 
"III. Whether the 
contractual arrangements between the parties have created a `bank' which 
provides for the appellee/operator the source of funds to collect any debts due 
and owing by the appellant/working interest owner."

 
 

[¶9.]     Appellees state the 
issues differently, but it appears they agree that the issues are those stated 
by appellant in I and II above.

 
 
THE CLAIMED FIDUCIARY 
DUTY

 
 

[¶10.]  Appellant claims that it is "well 
accepted that [a] Unit Operator stands in the position of a fiduciary or trustee 
to nonoperators." He places great weight on the cases of Beadle v. Daniels, Wyo., 362 P.2d 128 (1961); Young v. West Edmond 
Hunton Lime Unit, Okla., 275 P.2d 304 (1954); and Reserve Oil, Inc. v. Dixon, 711 F.2d 951 
(10th Cir. 1983), to support this claim. While these cases do support 
appellant's contention that there is often a fiduciary or trustee-type 
relationship between operator and nonoperator owners, they do not provide 
support for the fiduciary duty appellant claims is owed in this case. Appellant 
cites no authority, and this court has found none, which supports the 
proposition that an operator holding a valid lien upon a nonoperator's entire 
working interest cannot foreclose that lien, but must instead foreclose only 
upon the production obtained from the working interest. No court, to our 
knowledge, has ever imposed this duty. Even more important in this case, 
however, is the operating agreement which expressly negates such a duty. The 
agreement controls the disposition of this case. 

 
 

[¶11.]  First, we distinguish Reserve Oil, Inc. v. Dixon, supra. 
There, nonoperator working interest owners of an oil and gas well sued the 
operator alleging breach of a fiduciary duty when the operator sold the well's 
production in which the nonoperator had an interest but failed to turn over the 
proceeds of the sale to the nonoperator. The court stated that the contract gave 
the nonoperator full control over its proportionate share of the oil and gas and 
that the operator had no right to, or interest in, the oil and gas or its 
proceeds beyond a nonoperator's unpaid share of costs. The court went on to hold 
that the "contract created a trustee 
type relationship imposing a duty of fair dealing between the operator and 
non-operator owners in the matter of distribution of shares among the owners." 
(Emphasis added.) 711 F.2d  at 953.

 
 

[¶12.]  The court in Reserve Oil, Inc. v. Dixon, supra, 
expressly noted that it was simply construing the parties' contract. The 
contract created a narrow trustee-type relationship when the operator sold the 
nonoperator's production from the well. Nothing stated in the Reserve Oil, Inc. 
case supports the appellant's claim that the operator's fiduciary duty prevents 
him from foreclosing upon all of the nonoperator's working interest to satisfy 
debts owed for drilling costs.

 
 

[¶13.]  Likewise, neither Young v. West Edmond Hunton Lime Unit, 
supra, nor Beadle v. Daniels, supra, 
found the broad fiduciary duty claimed here. In Young, the Oklahoma Supreme 
Court held that an operator of a unit forcibly created by statute holds a 
position similar to that of a trustee. The court found that the fiduciary duty 
owed by the operator was breached when it purchased production of the unit at a 
price lower than that offered by other purchasers. The court stated that the 
statutes (which compelled interest owners to surrender all rights to produce 
from the unit) required the operator to account to all owners for unit 
production at the highest market price available.

 
 

[¶14.]  Young v. West Edmond Hunton Lime Unit, 
like Reserve Oil, Inc. v. Dixon, 
dealt with an operator selling production belonging to a nonoperator. Both 
of those cases held that when the operator so acted, there was a trustee-type 
relationship which imposed certain duties upon the operator. But in the present 
case there is no claim that the operator was doing anything that was not 
strictly according to the parties' express written agreement. The gas he 
contracted to sell and sold was gas he owned or was authorized to sell for his 
own account per the agreement. If it included some of the nonoperator's share of 
production, the agreement provided a gas-in-the-bank arrangement to the 
nonoperator. The actions in the present case fall well outside of the areas in 
which there was found a fiduciary duty in Reserve Oil, Inc. v. Dixon and Young v. West Edmond Hunton Lime 
Unit.

 
 

[¶15.]  In Beadle v. Daniels, supra, the operator, 
a corporation, was sued by nonoperators when the operator's officers purchased 
pumping equipment for less than that charged to the nonoperators. This court 
held that the officers of the operator owed a fiduciary duty to the operator, 
and that the operator was the agent for the nonoperators. We stated that the 
operating agreements were controlling in reaching our decision; and, therefore, 
we thought it "unnecessary to consider [the] suggestion that said agreements 
created a mining partnership * * *." 362 P.2d  at 131.

 
 

[¶16.]  The holding in Beadle v. Daniels was that the operating 
agreements imposed a fiduciary duty upon the operator which prevented the 
operator from charging nonoperators a higher price for pumping equipment than 
had been paid by the operator. Beadle does not stand for the proposition that a 
fiduciary relationship exists between operators and nonoperators irrespective of 
their express agreement. Beadle does, however, aid us in our decision in this 
case; the fiduciary duty claimed in the present case, like that in Beadle, is 
specifically dealt with in the operating agreement. 

 
 
THE 
AGREEMENTS

 
 

[¶17.]  Parties are permitted to limit their 
fiduciary obligations by contract provisions specifically authorizing particular 
acts. Frankfort Oil Company v. 
Snakard, 279 F.2d 436 (10th Cir. 1960). If the contract speaks to a 
particular point, the courts are "without power to rewrite the contract for the 
parties," id. at 444; and where the written agreement is clear, the parties must 
abide by the plainly stated terms. 
Rainbow Oil Company v. Christmann, Wyo., 656 P.2d 538 (1982). Of course, contracts which are 
contrary to public policy will not be recognized by the court. Tate v. 
Mountain States Telephone and Telegraph Company, Wyo., 647 P.2d 58 (1982). 
However, "[w]e will not invalidate a contract entered into freely by competent 
parties on the basis of public policy unless that policy is well settled * * *." 
Sinclair Oil Corporation v. Columbia 
Casualty Company, Wyo., 682 P.2d 975, 979 
(1984).

 
 

[¶18.]  In this case the parties specifically 
addressed the possibility of a nonoperator failing to pay his share of expenses 
which he agreed to pay. The contract provides that "[e]ach Non-Operator shall 
pay its proportion of all bills within fifteen (15) days after receipt." 
Appellant readily admits he failed to pay as provided in the agreement. The 
joint operating agreement also provides:

 
 
"15.5 Lien. Each of the 
other Parties hereby grants to Unit Operator a lien upon its Committed Working 
Interests, its interest in all jointly owned materials, equipment and other 
property and its interest in all Production, as security for payment of Costs 
chargeable to it, together with any interest payable thereon. Unit Operator 
shall have the right to bring any action at law or in equity to enforce 
collection of such indebtedness with or without foreclosure of such lien. In 
addition, upon default by any Party in the payment of Costs chargeable to it, 
Unit Operator shall have the right to collect and receive from the purchaser or 
purchasers thereof the proceeds of such Party's share of Production, up to the 
amount owing by such Party plus interest at the rate of 10% per annum until 
paid; each such purchaser shall be entitled to rely on Unit Operator's statement 
concerning the existence and amount of any such default."

 
 

[¶19.]  This section of the operating agreement 
contains two provisions which are contrary to the duty appellant seeks to impose 
upon appellees. First, the agreement authorizes the operator "to bring any 
action at law or in equity to enforce collection of such indebtedness with or 
without foreclosure" of its lien upon appellant's interests. Appellant would 
have this court rewrite the agreement by limiting the operator's remedies 
because of a claimed fiduciary duty. Appellant is, in effect, asking this court 
to strike the right of the unit operator "to enforce collection * * * with * * * 
foreclosure" of his lien. We refuse to do so.

 
 

[¶20.]  The agreement also provides that the 
operator, in addition to foreclosure, 
has the right to collect from the purchaser of the defaulting party proceeds 
attributable to that party's share of production. Appellant would, under his 
claim of a fiduciary duty, rewrite this provision to change this "right" of the 
operator into a duty to collect debts only in this manner. Apparently appellant 
would also require the operator to dispose of a nonoperator's share of 
production under the operator's contract to sell since, in this case, appellant 
has not contracted to sell his share of production. Again, this court refuses to 
rewrite the parties' contract as requested by appellant.

 
 

[¶21.]  We find nothing in these provisions, 
dealing with collection of the debts of appellant, contrary to public policy. In 
fact, if we accept appellant's argument, we would disrupt the provisions of the 
operating agreement which allow nonoperator working interest owners to consent 
or refuse to consent to proposed projects. If the nonoperator consents, he risks 
the costs for his share of drilling, not knowing whether the well will be 
profitable. If he does not consent, he does not risk these costs, but he suffers 
a penalty because he is deemed to have relinquished, to the drilling parties, 
his working interests in the well until the production attributable to his 
interest equals 400% of his share of the costs.2 The loss of an additional 300% of 
their share of the costs of drilling serves as an incentive to working interest 
owners to provide the cash "up front" needed to drill wells. Appellant, in 
seeking to pay his share of the cost from production of the well, is attempting 
to avoid both the risk consenters take and the penalty imposed upon 
nonconsenters. This would obviously remove any incentive for working interest 
owners to consent and provide the needed cash for drilling additional 
wells.

 
 

[¶22.]  We note that appellant contends that 
allowing foreclosure on his entire interest produces an unfair result because 
his interest is worth three to five times the debt owed. Appellant is not 
prevented from bidding at the foreclosure sale, or from convincing others of the 
high value he places upon his interest so that they are encouraged to bid. In 
dealing with this claim of unjust results, we query whether appellant would 
assert his "right" to sell his production under Moncrief's contract if the 
market value of gas had instead increased dramatically from the time of 
Moncrief's contract. It seems clear that if we were to accept appellant's 
argument, then those in his position would have the enviable choice of selling 
their share of production under the operator's contract, or under their own 
contract if the market value increases.

 
 

[¶23.]  The remedies provided for in the 
agreement are clear and are not contrary to public policy; therefore, they are 
enforceable as written. Imposing the fiduciary duty for which appellant contends 
would effectively rewrite the parties' agreement - something we cannot 
do.

 
 

[¶24.]  Appellant claims that the agreements 
created a bank which provides the appellee/operator the source of funds to 
collect any debts due and owing by the appellant/working interest owner. The 
storage agreement does provide that a party can be underproduced and thus be 
said to have "gas in the bank." Its stated purpose is to "permit each party to 
produce and dispose of its interest in the gas production * * * with as much 
flexibility as possible * * *." The storage agreement specifically states: 
"Nothing herein shall change or affect a party's obligation to pay its 
proportionate share of all costs * * * set forth in the Unit Operating 
Agreement." Clearly the agreement was not meant to provide a "bank" from which 
the operator must collect debts owed by working interest 
owners.

 
 

[¶25.]  Finally, we deal with Moncrief's 
assertion that this court should treat this as a frivolous appeal and impose the 
costs provided in Rule 10.05, W.R.A.P.3 Although we will enforce the 
provisions of Rule 10.05, see e.g., Skurdal v. State, Wyo., 708 P.2d 1241 
(1985), we rarely refuse to certify that there were reasonable grounds for 
appeal. Osborn v. Warner, Wyo., 694 P.2d 730 
(1985). Rule 10.05 should not be used to discourage all appeals. We find that 
there were reasonable grounds for appeal; therefore, the additional costs of 
Rule 10.05 will not be imposed.

 
 

[¶26.]  The claimed fiduciary duty does not 
exist. Therefore, the trial court did not err in failing to limit appellees to 
collecting their judgments only from appellant's share of 
production.

 
 

[¶27.]  Affirmed.

1 Appellee Michigan 
Wisconsin Pipe Line Company, like Moncrief, was the operator of a well in the 
same unit as Moncrief under a designation of operator from Moncrief. Both are 
admittedly owed drilling costs by appellant. Michigan Wisconsin has received a 
money judgment which, unlike Moncrief's judgment, does not state that the 
operating agreement created a lien upon appellant's working interest that could 
be foreclosed as a real property mortgage. However, the issue presented in both 
cases is the same regardless of the language in the judgments. The agreements 
relied upon in the opinion are identical in both cases, and any factual 
distinctions in the two cases do not affect our decision. The opinion will not 
unnecessarily detail these differences.

 
 

2 Other courts have upheld 
the validity of this type of provision. See Hamilton v. Texas Oil & Gas Corporation, 
Tex. App., 
648 S.W.2d 316 (1982).

 
 

3 Rule 10.05, W.R.A.P., 
provides in part:

 
 
"When, in a civil case, 
the judgment or final order is affirmed, * * * [u]nless the court certifies that 
there was reasonable cause for the appeal, there shall also be taxed as part of 
the costs in the case, a reasonable fee, to be fixed by the court, not less than 
one hundred dollars ($100.00) nor more than five hundred dollars ($500.00), to 
the counsel of the appellee, and to the appellee damages in such sum as may be 
reasonable, not exceeding one thousand dollars ($1,000.00) * * *."