## F I L E D United States Court of Appeals Tenth Circuit 

### APR 9 1997 

### PATRICK FISHER Clerk PUBLISH UNITED STATES COURT OF APPEALS

TENTH CIRCUIT

In re: TULSA ENERGY, INC.,

Debtor.

TULSA ENERGY, INC.,

Plaintiff-Appellee,

v. KPL PRODUCTION COMPANY,

Defendant-Appellant, DALCO PETROLEUM, INC.,

Defendant-Appellee, and
OKLAHOMA OIL & GAS MANAGEMENT, INC.; ASSOCIATED TRANSPORT AND TRADING; TOTAL PETROLEUM, INC.; TRIDENT NGL, INC.; DYNEX ENERGY, INC.; DALCO FIFTH GEOSTRATIC LIMITED PARTNERSHIP;

Defendants. No. 96-5125-2-

In re: TULSA ENERGY, INC.,

Debtor.

TULSA ENERGY, INC.,

Plaintiff-Appellee,

v. KPL PRODUCTION COMPANY,

Defendant-Appellant, and DALCO PETROLEUM, INC.; ASSOCIATED TRANSPORT AND TRADING; TOTAL PETROLEUM, INC.; TRIDENT NGL, INC.; DYNEX ENERGY, INC.; DALCO FIFTH GEOSTRATIC LIMITED; OKLAHOMA OIL & GAS MANAGEMENT, INC.; Defendants. No. 96-5173

APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF OKLAHOMA

(D.C. No. 95-C-417-C)* Honorable Robin J. Cauthron, District Judge, UnitedStates District

Court for the Western District of Oklahoma, sitting by designation.

1 After examining the briefs and appellate record, th is panel has determined unanimously to grant the parties’ reques t for a decision on the briefs without oral argument. See Fed. R. App. P. 34(f) and 10th Cir. R. 34.1.9. Th e case is therefore ordered submitted without oral ar gument. -3- Submitted on the briefs: James H. Chaney and Thomas J. Daniel IV, of Kirk & Chaney, Oklahoma City, Oklahoma, for Defendant-Appellant. Malcolm E. Rosser IV, of Crowe & Dunlevy, Tulsa, Ok lahoma, for DefendantAppellee Dalco Petroleum, Inc.

Before BRORBY and KELLY, Circuit Judges, and CAUTHR ON, * District Judge.
BRORBY, Circuit Judge.
In these consolidated appeals, appellant KPL Produc tion Company (KPL) seeks review of the district court’s orders (1) aff irming the bankruptcy court’s determination that KPL owes statutory interest on p roduction proceeds it withheld from appellee Dalco Petroleum, Inc. (Dalco), and (2 ) awarding Dalco attorney’s fees as the prevailing party under Okla. Stat. tit. 52 § 570.14. We reverse and remand for further proceedings. 1 “In reviewing a district court’s decision affirming the decision of a bankruptcy court, this court applies the same stand ards of review which governed2 Dalco assigned its working interest in the wells to Tulsa Energy on

June 19, 1992. -4- the district court. The bankruptcy court’s finding s of fact will be rejected only if clearly erroneous. Its conclusions of law, however , are reviewed de novo .” Broitman v. Kirkland (In re Kirkland) , 86 F.3d 172, 174 (10th Cir. 1996) (further citations omitted). Dalco owned a working interest in certain oil and g as wells. Beginning in May 1984, KPL, the operator of the wells, withheld proceeds belonging to Dalco and appellee/debtor Tulsa Energy, Inc., due to a ti tle dispute between Dalco and Dynex Energy. 2Tulsa Energy thereafter filed this adversary proc eeding, seeking turnover of the suspended revenues from KPL. On Au gust 10, 1984, KPL paid the withheld proceeds, without interest, into the r egistry of the bankruptcy court. At issue here is whether KPL should have paid inter est on these proceeds. KPL contends that it does not owe Dalco interest, b ecause Dalco signed a division order allowing KPL to withhold production proceeds without interest in the event of a title dispute. The division order Dalco signe d provided, in part, as follows:

In the event any dispute or question arises concern ing the title of Owner to the Property and/or the oil or gas prod uced therefrom or the proceeds thereof, you will be furnished evidenc e of title satisfactory to you upon demand. Until such eviden ce of title has been furnished and/or such dispute or question of t itle is corrected or removed to your satisfaction, or until indemnity satisfactory to you has been furnished, you are authorized to withhold the proceeds of such oil or gas received and run, without interest.-5-

Appellant’s App. at 59 n.7. Both the bankruptcy court and the district court co ncluded that this waiver was in derogation of Oklahoma’s Production Revenue Standards Act, which provides in part as follows: D. 1. Except as otherwise provided in paragraph 2 of this subsection, where proceeds from the sale of oil or gas producti on or some portion of such proceeds are not paid prior to the end of the applicable time periods provided in this section, that portion not timely paid shall earn interest at the rate of twel ve percent (12%) per annum to be compounded annually, calculated from th e end of the month in which such production is sold until the day paid. 2. a. Where such proceeds are not paid because the title thereto is not marketable, such proceeds shall earn interest at the rate of six percent (6%) per annum to be compounded annually, c alculated from the end of the month in which such production was s old until such time as the title to such interest becomes marketab le. Okla. Stat. tit. 52, § 570.10 (1992) (formerly foun d at Okla. Stat. tit. 52 § 540, with language substantially the same). Under Oklahoma law, parties generally may waive rig hts conferred by law or by contract. See Isenhower v. Isenhower , 666 P.2d 238, 241 (Okla. Ct. App. 1983). However, “[w]hen a statute contains provisi ons that are founded upon public policy, such provisions cannot be waived by a private party if such waiver thwarts the legislative policy which the statute wa s designed to effectuate.” Id. Both the bankruptcy court and the district court fo und that the interest payment provisions of § 570.10 could not be waived because they reflect an Oklahoma-6-

public policy which requires prompt payment of prod uction proceeds, relying on Hull v. Sun Refining & Marketing Co. , 789 P.2d 1272 (Okla. 1990). In Hull , the Oklahoma Supreme Court stated the following:

The Legislature’s use of the term “shall” in § 540( A) in relation both to the time when payments must commen ce and to payments to interest owners with marketable title i ndicates a legislative mandate equivalent to the term “must,” requiring interpretation as a command.

. . . . Section 540 was enacted for a purpose--to ensure th at those entitled to royalty payments would receive proceeds in a timely fashion. . . . In enacting § 540, the Legislature has expressed its intent that it shall be the public policy in Oklaho ma for royalty owners to receive prompt payment from the sale of o il and gas products. Id. at 1277, 1279 (emphasis added). Hull thus indicates that there is a public policy in Ok lahoma for interest owners to receive prompt payment of proceeds. In a ssessing the applicability of this policy to the waiver at issue here, however, i t is important to distinguish between the two types of interest available under § 570.10. Section 570.10(D)(2)(a) provides for six percent interest o n unpaid proceeds, in the event that funds are withheld because the interest owner’ s title is not marketable. Section 570.10(D)(1) provides for twelve percent interest, in the event that payments are withheld for any other reason. The bankruptcy court has determined (without challenge in this appeal) that the six per cent provision, not the twelve-7-

percent provision, applies to the funds withheld inthis case. See Appellant’s App. at 58-59. It is clear that the twelve percent interest provis ion is designed to facilitate prompt payment of proceeds. See Fleet v. Sanguine, Ltd. , 854 P.2d 892, 899-900 (Okla. 1993) (“Prejudgment interest in the § 540(B) sense is not merely compensation for the use of money belonging to another. Rather, it is interest qua penalty to compel compliance with § 540(A).” (footn otes omitted)). Therefore, there is a strong rationale for applying the public policy rule in Hull to forbid attempts to contract around the twelve percent prov ision. However, the applicability of this rationale to the six percent interest provision is not on such solid ground. Section 570.10(D)(2)(a), the “six percent” provisio n, recognizes the operator’s rightto withhold proceeds in the absence of marketable title. See Hull , 789 P.2d at 1277 (“§ 540 justifies suspension of ro yalty payments [in the event] of unmarketable title”). It is the interest owner’ s responsibility to establish marketable title so that he can receive proceeds. See id. at 1279 (“The right to payment rests on a showing of marketable title.”). Public policy requiring prompt payment of proceeds cannot spur on the party respon sible for payment, because he cannot be, and is not, required to pay until the other party has cleared up his title.-8-

In Fleet , 854 P.2d at 899-900, the Oklahoma Supreme Court d rew a distinction between interest designed to compensate for the use of money, and interest designed to compel the performance of an a ct. It placed only the twelve percent interest provision in the latter category. See id. There is additional evidence in the Oklahoma statutes that the six perc ent rate is intended only to compensate for the use of money, not to compel perf ormance. Okla. Stat. tit. 15 § 266 sets the interest rate on all contrac ts where no rate is specified at six percent. The six percent rate in § 570.10 is thus exactly the same as the “standard,” nonpunitive rate of interest contained elsewhere in the Oklahoma
statutes. We conclude that the six percent interest provisionhere, rather than being designed to compel prompt payment, merely compensat es the party entitled to payment for the “use of his money” until he can est ablish marketable title. Appellee has not pointed to any public policy whichwould prevent parties from agreeing to waive interest of this type in a divisi on order. In fact, the Oklahoma statutes are to the contrary. We note that under § 266, parties are free to “waive” the six percent “default rate” on sums due under co ntract and to set their interest rate, by agreement, at any rate that is not usuriou s; including, one presumes, at “zero percent.”-9-

The bankruptcy court should not have refused to giv e effect to the waiver contained in the division order, to the extent it w aives the right to six percent interest, on the basis of Oklahoma public policy. Our holding in this respect makes it unnecessary for us to determine whether Da lco was the “prevailing party” for purposes of Okla. Stat. tit. 52 § 570.14 ; any questions concerning attorney’s fees can be resolved on remand as part o f the further proceedings we now order. The judgment of the United States District Court fo r the Northern District of Oklahoma is REVERSED and this matter is REMANDED for further proceedings in accordance with this order and judgm ent. KPL’s Motion to Certify Question of State Law is DENIED.