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Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 

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UNITED STATES COURT OF APPEALS 

FOR THE TENTH CIRCUIT 

PATRICIA JANE EVANS, 

Plaintiff-Appellee, 

FIL · D 

United States Court of Appeals 

Tenth Circuit 

AUG 9 1989 

ROBERT L. HOECKER 

Clerk 

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No. 88-1967 

SOHIO PETROLEUM COMPANY, 

doing business as STANDARD 

OIL PRODUCTION COMPANY, 

(D.C. No. CIV-87-1100-T) 

(W. D. Okla.) 

Defendant-Appellant. 

ORDER AND JUDGMENT* 

f d . . d ** Be ore LOGAN, SEYMOUR an BALDOCK, Circuit Ju ges. 

The legal issue presented in this Oklahoma diversity case is 

whether under an oil and gas lease, Standard Oil as lessee may 

deduct gas transportation fees from royalties paid to Patricia 

Evans as lessor, where the lease requires the lessee to pay the 

lessor "three-sixteenths (3/16) of the gross proceeds received for 

the gas sold?" The district court said no. We affirm 

* This order and judgment has no precedential value and shall not 

be cited, or used by any court within the Tenth Circuit, except 

for purposes of establishing the doctrines of the law of the case, 

res judicata, or collateral estoppel. 10th Cir. R. 36.3. 

** After examining the briefs and appellate record, this panel 

has determined unanimously that oral argument would not materially 

assist the determination of this appeal. See Fed. R. App. P. 

34(a). 10th Cir. R. 34.1.9. The cause is therefore ordered 

submitted without oral argument. 

Appellate Case: 88-1967 Document: 01019974677 Date Filed: 08/09/1989 Page: 1 
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substantially for the reasons set forth in the district court's 

order in this case and its memorandum opinion and order in Walls 

v. Baruch-Foster Corp., No. Civ-80-401-T, slip op. at 4-8 (W.D. 

Okla. May 12, 1983), copies of which are attached hereto. 

AFFIRMED. 

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Entered for the Court 

Bobby R. Baldock 

Circuit Judge 

Appellate Case: 88-1967 Document: 01019974677 Date Filed: 08/09/1989 Page: 2 
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--' ... -l J; TH!: 1Ji;1 ·,.;: STATI:£ Dl STRl C-': COUR': :t .;f. THE 

\\"'ESTI:RN PlSTP.lC'! or OKIAHOK.:. ··- .. 

BOBE:: L. WhU.£ anc Ju ANN Wlll..~, 

anc. ..JA?-,U;:. L. TtJl.:L anc MARY ... :- · ) 

TUL ... , =or1 behali o: themselves ) 

anc others similarly &lt.uatec., ) 

) 

t/:;, .. l ·· ~:;: ·~, ..... ., 

Plaintiffs, ) 

) 

C. • J-.. CARGl~:., :JF.. anc j 

OKl.AHC»-'..J. CARGILL BOO:., ) 

. N::ft•~~- ~ kD•r 

~-·: ~.,,#( - ------~- - ,-----

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Plaintiffs-Intervenors, ) 

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VS. ) NO. CIV-80-401-1 

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BARUCH-TOSTE:R CORPORATIO~, ) 

~ Dela~are corporation, ) 

) 

Defendant. ) 

NEMORANI>lTM OPINION AND ORDER 

This class action j,s before the Court for determinatior. 

of the parties• cross -,u,ons fo~ awmnary judgment. 'J'he parties 

have extensively. briefed their respective positions and afte:-

consideration of the entire record before it., 'the Court finds 

that as to the issue 0! liability for cc•;•n•ory de•a7es only, 'there 

I is no qenuine iaaue as ~ any aaterial fact.. Accor4i.Dgly, the 

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Court enters this &D'IOza.ndlam .opillirm whi.ch aball oonatitute its ·• 

.ti.11c.'1.n95 of fact and CODcl.uions of la1' •. 

The aateri.Al facts cf Uis act.ion are 'IIDdispute~ by the 

partie5 as follows: 5eginn;n,; in 197£, the cSefen4ant drillec ~ 

. .11eries of 4as a,ells locatacl 1.n Lincoln, cntek ~ Payne counties, 

Okla.home.. These wells are collectivel1· ltnown as the a.vend.al£ 

Field. tJ'he defendant developed t:his field as t:be leaaee, or assignee 

• 

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Appellate Case: 88-1967 Document: 01019974677 Date Filed: 08/09/1989 Page: 3 
.. - • ~ J_ c. : t.n~ o:-iclr,c.: J.t:·ssee: . unoe:- c. numbe:- o: oi: an~ ~es l~aseE.. ·r-n:: 

~ :.ass o: plaintif is owr. miner a: interestE ir, prooucin;: wells ir. 

tn~ kaven6ale F1el6 an~ hav~ execu~e6 oil ant gas leases tc th~ ... 

oefenaant o:- its assi~no= . 

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~the time o: the aevelopment of the Ravendale Fielc, nc 

market. for the gas frorr, the wells existec at the wellheac. .ThE 

oeienaan~ took the steps necessary to insure the construction o: 

the kavenciale Gas· Gatherins:- Syster.., ·'extending some eight. miles tc 

c Cities Service Gas Company pipelinE. The point of sale for all 

o: the gas from the subject wells is at the point. where the Ravendale 

Ga s Gatherin~ Systerr. feeds into the Cities Service Gas Campany 

pipeline. The gathering systen: accepts the gas at each individual 

~ell anc transports, compresses, dehydrates and treats the gas for 

delivery to Cities Service Gas Company as the purchaser. Gatheriri~ 

charqes are asse&sec at a eet rate against all 9as passing through 

Lhe- gas gathering aysteJr,. Defendant has assessed the qatbering 

charges .against all persons owning an interest .in the wells connectec 

t:o the gathering systen., including l.easors, working .interest owners, 

1P..n6 overriding royalty interest C111Ders. ~bus, 1:.be defenaant has 

deducteo .a proportionate ab.are of the 4atberi.ng charges :from paymen~E 

t.o t:he :cl.aas • w)JeY"t; -ana laas -circulated mvi.sicm .orders fo:r 

f!f.ignatures autbo:d.si.Dg •11cb delSucticms. ~be aajori ty of the cl.ass 

"1'erabers. approxillately 13 out of a total o! lOB, have signed the: 

e ivision orciers circulated by tile ClefCUMlant. 

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P!"imarily at i.asue .in this action .is the legal interpretatior: 

the l.ease clause in t.be ~ollowi.ng ~orm: 

_•In consideration of tile premises the saic 

l.essee covenants and a~rees • • • to pay 

ieasor for 9as of what:aoever -t1ature 0:-

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Appellate Case: 88-1967 Document: 01019974677 Date Filed: 08/09/1989 Page: 4 
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· CHI- ;,v~ '-'• w::,,c._ ...,_. ~uo; •C::G:t>t:I.. !-'• ,111,.:,t:~ 

c:- use:: ir. the ,nu:fnc::t-ur~ ,.._: proauct~ 

therei ror. .. \,,ue-eiaht.:. ( l /Elth ) :;: ~rosE 

pro~eeaE rec=.vec 10= -~nt g"as solt, use= 

c:: th~ premises, o:- ir. the manufac~ur~ 

o: proaucts therefror.., .bl·- Jr: nc, even~ 

more than one-eiahtt-!1/Bthi k: the actua: 

amoun:. reCelVeC bY t-~ .LeSSec . Saic payment.S 

1:..0 bE: mace mont.n~-~ 

ThE plaintiffs contenc that this clause prohibits the cietenaan-: :rror. 

oeauct.inc;: any 9a·therin9 charges fron: royalty payments t.o lesso:-s. 

The division orders circulatec by the aefendan~ contain the followin; 

language: 

"Settlement for ~as sold shall be ba&ec 

on the net proceeds realized at the well ' 

by you, after deducting any costs 

incurrec in compressing, treating, 

transporting and/or · dehydrating the g_as 

for deli very. For 9as used off the 

lease, settlement shall be baseo on 

market value· at the well.~ 

The Court has certified this case as a class action. Further, 

~e Court has divided the class into tvo sub-classes composeo o:: 

(a) those individuals who have signed a di vision order regardins 

the s.ale of gas; and Cb) those .individuals vho have not signed c 

c.ivision orde:-. The defen4ant .has made royalty payments, on theliuch orders. 'l'be defe:iadant bas -aade no royalty payaents to the class 

m---....mber.s ·who Jlave zot •i9Jled a div.i.sion order t,ut the defendar.~ 

4!"...s r.:erts .it J:uu; offered to -pay these .claas iaembers royal ties, compute:: 

on the basis of the provisions cf the propoaec division crcie.::-.s, 

,without prejudice to t:be plaintiffs' claims. Pl.aintiffs aeei: inJunctive relief prohibiting the defendant fr0111 deducting 9atherin~ 

cha rges .from royalty payaent& to l.esaors., an accounting of all such 

aa·:.hering charges and royalty payments previously vitbhelc, anc 

punitive damages. 

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Appellate Case: 88-1967 Document: 01019974677 Date Filed: 08/09/1989 Page: 5 
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.... ~THERING CHARGE~ 

Tne deterrriinatior. o:: whethe!" th: aefendan-:. 1E · enti tlec ,. 

to cieCluc:· a proportionate share o! transportatiori, compressi.or,, 

ciehyciration anc treatment. expenses frorr. royalty payments to lesso::-E= 

~- ··- is :a~estion of construction o! the lease provision noted above. 

The defendant argues that the Oklahoma Supreme Court, in Johnson 

Y. Jerniaa~, 475 F.2c 396 (Okla. 1970j, determinec that the grosE 

p roceeds received . for gas sole are aeterm1nec at the wellhead anc 

t h e produce::- is enti tlec to deduct frorr, royalty payments a 

p roportionate share of the expenses incurred in marketing_ the gas 

.be yonc the wellhead. The defendant relies primarily upon the 

s tatement o: the Oklahoma Supreme Court in Johnson as follows: 

''As the prevailing market rate is 

determined at the wellhead or in the field 

so must the term 'gross proceeds' be 

interpreted. •Gross proceeds' has reference 

to the value of the gas on the leased 

property without -deducting any of the 

expenses involved in developing anc 

marketing the dry gas to this point of 

delivery. When iessee has made the gas 

available for marke~, then his sole 

financial obligation ceases, anc any 

further expense beyond the l.ease property 

must be borne proportionately by the 

lessor and the ieasee.• ~75 P.26 at 399. 

Existing in a vacuum, the language of .Johnson relied upon by 

aefendant vould be ·persuasive. B011ever, the Court's statement was 

not a general statement of Oklahoma 1aw to the effect that •gross 

proceeds" are synonymous to •prevailin9 marke't rete .. when usec i:r. 

connection vi.th the payment of gas royalties unde= an oil and gaE 

lease. Rather, the Oklahoma Supreme Court was construing the 

Gpecific language of a disputed provision of an oil and gas leas,. 

The ianguage in issue in Johnson is as follows: 

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Appellate Case: 88-1967 Document: 01019974677 Date Filed: 08/09/1989 Page: 6 
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'"Tc pay .e.ss. fo= c;;as frorr. each well 

fo::- 9as only as founc, the equal oneei9h: {l/8J o: the 9ross proceeds at the 

prevailins market rate fo= all gas sole 

of: the premises.'' .. TnE- Court's s~atemen-t, "As the prevailin~ market. rate is deterrninec 

at t.he-"Wellhead or in the ·tte"fc so must the tern. •·gross proceeds' 

be interpreted, '' was not intenciec to equate "gross proceeds" with 

''prevailing market rate." The sentence immediately preceedin~ 

t.his statement by - the Court clearly -and unmistakably indicates theterrr. '' gross proceeds,'' as used in the lease provision in questior,, 

Kasa factor to be used in determining the amount of royalty to bE: 

paic. The lease provision in dispute in Johnson provided that the 

royalty owner was to receive a portion (l/8) of a quantity (the 

sross proceeds) of a specifically determinable amount (the prevailin~ 

market rate). In Johnson, the Oklahoma Supreme Court distinguished 

the lease provision before it from the lease provision before it in 

B,:1rton '\'. Laclede Oil , Minino Co. , 112 P. 965 (Okla. 1910) , by 

statins: 

"In the Barton case the royalty payment 

is based upon a 1/lOth portion of every 

gas welj,_. In the present -case tile 

royal1:y payment is baaed upon a prevailinc market rate. The court in the 

Barton.case did not have under consideration 

vhethe:- ;.nere was a prevailing aarket rate 

at the wellhead.~ ~57 P.2d at 400. 

-:the lease provision disputed here analte& no reference to any 4 

"'p--:-evailing marke~ rate, .. •market value," or other variable base:: 

upon other transactions i.n the aarketplace in determining the iunoun't 

of any royalty payment. Rather, the lease expressly provides tha~ 

the royalty shall be computed on the basis cf a portion (1/B) of a 

a e terminable amount (the gross prooeed& received) • 

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Appellate Case: 88-1967 Document: 01019974677 Date Filed: 08/09/1989 Page: 7 
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The aefenaan~ furthe= ar~ues tha~ it is entitlec tc aeauc~ 

.1 ts costs beyonc the wellheaa because the ''gross proceeds'' 

provision of the lease is modi:ilec by the statemer.~, "but in nc 

event more than one-eiohth (1/Bthl o: til€ actua~ amount receivec - ~ - by lessee: .... '' Defendant contends that the actu.al amount it 

receives as lessee is the sales price less the 9atherin9 charges. 

'J·o support this interpretation of the lease~ ciefencian~ relie~ 

primarily upon LeCuno Oil Co. v. Sm1tr., 306 S.'K.2o 190 (Te>:. Ci\". 

·Ap~. 1957). Other cases the defendant asserts in support of its 

position are Hardine'\'. Cameron, 220 F. Supp. ·.066 (K.D. Okla. 1963), 

Cimarron Utilities Cc. '\·. Safranko, 101 P.2d 258 (Okla. 1940), anc 

Katschor v. Eason Oil Co., 63 P.2d 977 (Okla. 1936). 

The Court has carefully considered the cases \lrged by 

defendan~ and finds them to be unpersuasive. In LeCuno, the 

Court held that transportation and marketin9 charges could be 

proportionately assessed against the royalty interests when the 

division orders provided that settlement was to be basec upon the 

.. price received at the wells ... SincE: the gas was sold at a distance 

-1.rom the wells, the Court reasoned that transportation and othe= 

expenses incurred in getting the gas to the point of sale ir. c 

n;.arket.able condition were expenses the division orders ciic no: 

require the l.essee to aasmae. 1n 6afranko, the Court helc that 

where there e>d~sted no market at the mouth o! the well, thE "'marke~ 

p rice•· as e basis for settlement under the l.ease was cietermineo by 

ded ucting the transportation and marketing expenses from the fair 

m.ar.ket value of the gas at the point cf sale. :ln Jtatschor, the 

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Appellate Case: 88-1967 Document: 01019974677 Date Filed: 08/09/1989 Page: 8 
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Court. helc tha~ ''value,'' ''market value'' anc "actual value'' were 

interchangeable terms ir. an oil anc gas lease and where those: term~ 

coulc not. be deterrni.nec by refe-rence tc a sale: at the wellhea~, 

theY coulc be establishec by showin9 the ultimate- sale price less ~ - - - the-marketin9 expenses. The lease provision before the Court ir. 

Hardine '-'. Cameron was nearly identical to the provision at issue 

in Johnsor, Y. Jerniaar. in that it proviciec for settlement on the 

basis o: "l/Bth o: the proceeds at the mouth of the well, at the 

prevailins market rate." In aardinc the Court cited Katschor anc 

Safranko for the proposition that the "value" or "market price'' of 

eras at the wellheac is determined by deducting the marketing 

expenses beyond the wellhead from the gross price which the lessee 

receives from the purchaser. The language involved in each of the 

cases relied upon by defendant is substantially different from the 

language used in the leases herQ at issue in that the language at 

issue here refe~s to a 6ingle, indentifiable sum of money - the 

ilCtual amount received by lessee - while the defendant's cases 

refe::- to settlement based upon general industry conditions (the 

"market price" in Safrancko, the •prevailing market rate" in 

. Bardins, and the •market -value• in Katschor) or a specific 1ocation 

of the sale c•at tlie mouth of the well" in Baraino and •at the 

r...;,ells .. in .LeCuno). 

The defendant would have the Court hole that the •actual 

,nmount received by• the defendant is the amount which the purchaser 

pays for the gas less the 9atherinq expenses incurred by the 

defendant in delivering the qas for sale. Defendant argues that 

~ny other interpretation circwnvents the obvious intent of the 

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Appellate Case: 88-1967 Document: 01019974677 Date Filed: 08/09/1989 Page: 9 
"· - c lause, does inJub-lC~ to th~ application c:-dne clause ~o thi: 

part.icula:- si t:uat.1or., anc renders the clause virtually -meanin9les£. 

The Court does no: agree. A more plausable interpre~ation of 

the meaninC: o: the phrase ''bu-: ir. no event. more- thar: 1/6 o: tht 

ac~ount. received by i"!'nee ,, is that the lessee will not bEliable to account for gas sold at less than fair market value if 

it is establishec that the lessee sold the gas pursuant to a bon ~ 

f ide arms length ~ransaction. Such~ provision protects -the 

defendant from additional liability w}lere the aas is sold under c:. 

term contract and the ~air market value of the gas sold escalates 

to a level above the contract rate during the term of the contract. 

Accordingly, it is the conclusion of this Court that the 

lease provision here at issue does not allow the defendant to settle 

,-.-ith the royalty owners by deducting from royalty payments a 

froportionate share of the defendants' gathering expenses. 

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FILED 

IN THE UNITED STATES 'r.' n J.-,,-4 .• 1 iJ3'~ 

WESTERN DISTRICT OF OKLAHOMA "OIICPT C' DCNr11r 

CLO~. u. . DISTRICT co 

PATRICIA JANE EVANS, 

Plaintiff, 

v. 

S0HIO PETROLEUM COMPANY, 

d / b/a STANDARD OIL PRODUCTION 

CPMPANY, 

Defendant. 

0 R D E R 

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BY u~, 

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CIV-87-1100-T 

Before the Court is the Motion for Partial Summary Judgment 

filed by the plaintiff, Patricia Jane Evans. The defendant, 

Sohio Petroleum Company, d/b/a Standard Oil Production Company, 

has responded. 

This case involves an oil and gas lease which was executed 

Le. tween Harry C. Chapman and Elsie D. Chapman, lessors, and 

Hadson Petroleum Company, lessee, on December 4, 1980, covering 

t he NE/4 of Section 14, Township 12 North, Range 24 West of Roger 

Mills County, State of Oklahoma. The parties herein are successors to the original lessee and lessor. The Sohio Petroleum 

Company is currently the manager of a joint venture known as the 

Roger Mills Gas Gathering System ("Gathering System"). The 

Gathering System accepts the gas at each individual well and 

transports, compresses, dehydrates and treats the gas. Gathering 

charges are assessed at a set rate against all gas passing 

through the gas gathering system. The defendant deducts a 

proportionate share of the gathering charges from payments to the 

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Appellate Case: 88-1967 Document: 01019974677 Date Filed: 08/09/1989 Page: 11 
 

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plaintiff. Plaintiff has objected to the withholding of a 

gathering charge as a violation of the express terms of the lease 

and has demanded return of all monies wrongfully withheld. 

Pl Aintiff has brought this litigation for an accounting and 

enforcement of the original lease terms. 

The eY.press terms of the subject oil and gas lease with 

re r;a rd to royalties are as follows: 

In consideration of the premises the said lessee 

covenants and agrees: to pay lessor for gas of 

whatsoever nature or kind (with all of its constituents) produced and sold or used off the leased premises 

or used in the manufacture of products therefrom, 

three-sixteenths (3/16) of the gross proceeds received 

for the gas sold, used off the premises or in the 

manufacture of products therefrom, but in no event more 

than three-sixteenths (3/16) of the actual amount 

received by the lessee, said payments to be made 

monthly . 

. , i:-c· plaintiff contends that this lease expressly provides that 

th '::"~ royalty shall be computed on the basis of a portion of a 

de t erminable amount (the gross proceeds received). However, 

dr. :endant has been deducting gathering fees prior to calculating 

pro ceeds for royalty payments. The defendant contends that the 

gross proceeds upon which plaintiff's royalty fraction are to be 

paL d are to be determined at the wellhead - not at the distant 

mnrket to which the gas is sold. 

This Court addressed this precise question in a 1983 class 

action styled Walls v. Baruch-Foster Corporation, Case No. 

CIV-80-401-T. In a Memorandum Opinion and Order filed on May 12, 

1983, the Court examined a lease which the exact langua~e of the 

1 case in the present case and determined that the lea~e provision 

expressly provides that the royalty shall be computed on the 

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