Case Name: PHILLIPS PETROLEUM CO. v. JOHNSON
Court: United States Court of Appeals for the Fifth Circuit
Jurisdiction: United States
Decision Date: 1946-02-01
Citations: 155 F.2d 185
Docket Number: No. 11308
Parties: PHILLIPS PETROLEUM CO. v. JOHNSON.
Judges: 
Reporter: Federal Reporter 2d Series
Volume: 155
Pages: 185–196

Head Matter:
PHILLIPS PETROLEUM CO. v. JOHNSON.
No. 11308.
Circuit Court of Appeals, Fifth Circuit.
Feb. 1, 1946.
Rehearing Denied March 22, 1946.
Second Motions for Rehearing Denied May 17, 1946.
McCORD, Circuit Judge, dissenting.
Warren M. Sparks and E. H. Foster, both of Amarillo, Tex., Rayburn L. Foster, of Bartlesville, Okl., and C. B. Cochran, of Oklahoma City, Okl., for appellant.
D. H. Culton, of Amarillo, Tex., for appellee.
Before SIBLEY, McCORD, and WALLER, Circuit Judges.

Opinion:
SIBLEY, Circuit Judge.
The appeal is from a judgment on a jury verdict, for a balance due to a lessor by a lessee for gas royalties. A motion for a directed verdict made by the defendant Phillips Petroleum Company, and one for a judgment non obstante, were overruled. Besides this, errors are specified as to the admission of evidence and the charges and refusals to charge of the court. The main law questions arise on the construction of the royalty provision in the lease, and touching the tolling of the statute of limitation, and the allowance of interest before judgment.
The defendant's answer admits allegations in the petition that plaintiff, Clay Johnson, on June 7, 1928, made an exhibited oil and gas lease which passed to the defendant in 1937, and that defendant in September of that year completed a well which has ever since produced large quantities of gas, properly classed as "natural gas". None of it has been sold at the well, but all has been put by defendant into its own extensive system of pipe lines and mixed therein with gas from many other wells, and the mixture taken to plants of defendant where the easily liquefiable gasolene was taken out, and the residue gas sold to producers of carbon black; that monthly statements were sent Johnson of the volume of gas taken from the well with a check for the sum stated to be due; but that Johnson, though not disputing the amounts of gas, contended the payment was not correct, and would not accept the checks until on April 12, 1940, it was by letter agreed the checks should be cashed without prejudice to his rights.
The petition further alleges the statements were misleading, and did not show the true quantity of liquids extracted or the residue gas sold, and the true prices at which these were sold by defendant, and that petitioner did not learn of the falsity of these statements till shortly before suit. The answer contends the monthly statements were meant to show and did show the fair market value of the gas at the well, which was the true measure of defendant's liability: that what was done with the gas after it left the well was immaterial; and the four-year statute of limitation was specially pleaded. Thus the issues are drawn.
1. The royalty provision of the lease, the meaning and application of which is in dispute, reads: "If oil shall be found on said premises, lessee shall deliver as royalty to the lessor free of expense one-eighth part of the oil saved from that produced or lessee may at lessee's option buy such royalty oil, paying the current market price in the field at the time of production. If lessee shall operate so as to save and use casinghead gas from said premises, then lessee shall pay as royalty to lessor one-eighth part of the value of said gas calculated at the rate of four cents per thousand cubic feet of the casinghead gas. If any well on said premises shall produce natural gas in paying quantities, and such natural gas is used off the premises or marketed by lessee, then lessor shall be paid at the rate of one-eighth of the net proceeds derived, from sale of gas at the mouth of the well." (Italics added).
No oil was found. No casinghead gas was in fact produced, though the monthly statements appeared to be for that until after March, 1938. It is now conceded that only natural gas has ever been produced. The entire royalty agreement is quoted to show the care with which terms were used. As to oil, an eighth of the oil itself was to be delivered in kind, with an option to the lessee to buy it back at market price. Gas cannot well be divided and delivered in kind, so the more valuable casinghead gas, if any, was to be kept by the Uessee, he paying a fixed rate of four cents per MFC irrespective of the current market price or value. The natural gas is less clearly dealt with. It is to beget a royalty only if "used off the premises" or "marketed" by lessee, who then shall pay an eighth of "the net proceeds derived from gas at the mouth of the well." As to it there is no mention of either market price or market value, or a fixed price, but of net proceeds, which generally means the receipts, less expenses, of an actual sale. If this gas had been sold "at the mouth of the well" there would be no difficulty in applying the words, but the lessee took it away from the premises to its gasolene plant and "used or marketed" it there. There were no net proceeds derived at the mouth of the well. But if the raw gas had been sold at a market off the premises, the net proceeds at the mouth of the well might well mean the actual proceeds less the expense of transportation. Now it was transported in a mixture with gas from other wells, the condensable liquid was separated out, and the residue (the evidence shows about 97 percent by volume), sold to others for making carbon black. The liquid extracted was then put through more complicated processes of manufacture to make many refined or blended hydrocarbon products which were in turn sold by lessee. The plaintiff does not here contend that he can follow the liquid into these manufactured products and have an account of their sale, but he does contend that in such manufacture the liquefied elements of his gas were "used" by the lessee, and since this prevented there being any "proceeds" by sale, the account ought to be of the fair value of the liquid; and there ought to be an account of the actual proceeds of the residue gas, rendered "net at the mouth of the well" by allowing for the cost of transportation and separation. On the other hand the defendant contends that it "used" the gas as soon as it left the well by mixing it with other gas, and it should account for its fair market value at the mouth of the well since there were no proceeds derived there.
The law often resorts to "fair value" or "fair market value", when "market price" is stipulated and there is no market, or when "proceeds" are stipulated and there is no sale. This is because the contract evidently intends payment shall be made, and value is the nearest approach possible under the circumstances to' the measure of payment contracted for. In so far as this gas was "used" there can be no "net proceeds derived at the mouth of the well" and fair value must be resorted to. In so far as the gas was "marketed" we think the stipulation for a share of the "net proceeds derived" ought to be enforced, effect being given to the words "net at the mouth of the well" by allowing as expense the cost of transportir". separating, and marketing. This lessor did not consent to be left to the uncertainties of "fair value", or even "market price", as to the gas but was willing to take one-eighth of what the lessee sold it for, relying on the lessee's self-interest to secure a good sale. We think the mere mingling of this gas with other similar gas does not amount to a "use" of it. There is testimony that there is not much difference in the gas from the various wells in the vicinity. As we shall soon see, the lessee thought them near enough alike to treat this gas as average gas, and to calculate its returns as in proportion to volume in the statements rendered. Nor do we think the condensation of the gasolene vapors from the gas is a "use" of it within the meaning of this contract. About three percent of the volume of the gas was thus separated out, but only its physical state was altered. If allowed to evaporate it would become again just what it was. But when this liquid was by more intricate processes further altered and separated and blended into other hydrocarbon compounds, it might well be considered a "use" in manufacture, so that "proceeds derived" from the sale of the products cannot be followed in the account, and only the fair value of the condensed liquid before manufacture can be considered, it having been used and not sold.
This is the very interpretation put on the contract by Phillips Petroleum Company in the statements it rendered Johnson after March, 1938. They did not purport to account for the gas at its value at the mouth of the well, disassociated from everything that happened after it left there. They are headed, "Statement of gas purchased". After identifying the well there follows, "Clay Johnson, owner or owners whose share is computed hereon". The volume of the gas metered from this well is then stated, and "Residue value of the Gas", figured by obtaining the proportion from this well compared with the total gas handled during the month, under the heading "Meter Station proportion of total residue sold from plant"; and then "50% of net proceeds from total residue sold from plant, and lastly, "Meter station residue net proceedW', being the figure credited to Johnson on account of residue gas for that month. Then under the head "Gasolene Content value of the gas" there is a figuring of gasolene content by tise of the same proportional fraction, and a price per gallon, resulting in a figure called "Meter Station gasolene content value". Both credits are combined under the head "Total Meter Station residue net proceeds and gasolene content value after tax", for which check was sent Johnson. This we think plainly shows that, notwithstanding the mingling of this gas with other gas, the defendant understood it was accountable for the value of this gasolene liquid it separated out and used, and for the net proceeds of the residue gas which it sold. The 50% reduction in the proceeds of the residue, and a percentage reduction in the gasolene value also, are explained as estimated charges to cover expenses. We hold that as applied to the defendant's handling of this gas the measure of accountability is one-eighth of the fair value of the gasolene separated out and used, and one-eighth of the proceeds of sale of the residue gas, less a proper credit for the cost of transportation, separation, and sale.
2. The motions touching the verdict are based on the fact that the market price or value of raw gas at the mouth of the well was not proven. Under the view we have taken of the proper rule for the accounting such evidence was not necessary or pertinent.
3. As to error in the rulings on evidence, the evidence as to how much carbon black Huber made out of his residue gas was immaterial. As we understand the case, defendant actually sold the residue gas, and is accountable for the actual net proceeds only, whether the residue gas was worth more or less. The contract between defendant and Columbian Carbon Company for the sale of residue gas covered part of the period in controversy. It would appear to be relevant on the question of what price defendant actually got for residue gas.
The account for the gasolene extracted is another matter. That was not sold but used, and the question is not of the proceeds but its fair value. The quantity defendant says it extracted may be challenged, and checked against what might reasonably have been extracted. The objections made to evidence on this line are not clear and concrete enough for us to rule more specifically on them. Defendant's contract with Panhandle Eastern Pipe Line Company to extract the gasolene vapors from the latter's gas would seem to bear upon the fair allowance proper to be made for the cost of this operation.
4. The court submitted the case to the jury in general along the lines we have decided to be proper. The reference in the charge to defendant being in á trust relation to the plaintiff was inapt in a law case, because only a court of equity will declare the existence of an implied, constructive or resulting trust. This is not a suit in equity to have the defendant declared to be a trustee of one-eighth of the net proceeds received from the gas, with the consequent duty of such trustee to faithfully and fully account. It was tried by a jury as a suit at law for a debt arising out of a contract wherein the plaintiff retained no title to the one-eighth part of the gas here involved, but only a right to share in its net proceeds. Under Texas law plaintiff had no title to any of the gas, and the contract created no express trust. Assuming, but not deciding, that equity would declare that a trust existed as to the one-eighth of the net proceeds for which the defendant as such trustee would be required to account to the lessor, nevertheless, it was inappropriate in a case at law to give to the jury the charge that "In acquiring said lease providing for payment of one-eighth of the net proceeds derived from the sale of gas at the mouth of the well, a trust relationship was created." Under the federal Constitution, art. 3, § 2, the distinction between law and equity is to be observed.
In one part of the charge the court told the jury that the amount due the plaintiff might be arrived at by determining the fair and reasonable value of the raw gas at the gasolene plant, less a reasonable charge for transportation. In another part they were told their aim was to ascertain upon relevant factors the net proceeds derived from the gas at the mouth of the well, making full allowance for any appropriate deductions from gross proceeds. These seem rather confusing, if not contradictory, instructions. We think the simple rule stated at the conclusion of subdivision 1 of this opinion will be sufficient on another trial.
5. Gas production began in September, 1937. This suit was filed May 24, 1944. The four-year statute of limitation concededly applies. Items arising prior to May 24, 1940, are prima facie barred. Concealment of the facts by the defendant is relied on to estop from pleading the statute. The concealments are claimed to lie in the inaccuracy of the monthly statements. Johnson is an elderly physician living in Fort Worth at quite a distance from the field. The defendant shortly after the well was completed wrote him about it, and the "utilization of the casinghead gas" from it, advising that a pipe line was being laid by it. The monthly statements through March, 1938, were headed statements of casinghead gas utilized, which gave the "raw gas produced" and the "Code test gallons" taken from it, and a price per gallon, at first .0434, but drifting down the last two months to .0194 and .0245. Johnson, believing that casinghead gas was in question, refused the checks, demanding the price fixed in the lease. The monthly statements thereafter were on the form described above, dealing with value of gasolene content and net proceeds of residue gas. It was not till April 12, 1940, that the checks were agreed to be cashed without prejudice. It does not clearly appear at what date Johnson learned that the gas was not casinghead gas, but natural gas. So long as he was told that it was casinghead gas he might well think that what liquid it contained and its price was immaterial, for he was entitled to four cents per thousand cubic feet of gas, and nothing but volume mattered. He may thus be thought during that time to have been kept in ignorance that he had any claim for natural gas, to be paid for on a different basis. He testifies that he learned of the falsity of the statements as to content and proceeds of natural gas when he employed attorneys shortly before suing, but he also said: "I discovered it a long time ago but didn't have any way of proving it."
The Texas law is thus stated in. 28 Tex.Jur. 164, 165: "Nothing is better settled than the rule that the fraudulent concealment of a cause of action by the defendant, accompanied by the plaintiff's failure, after exercising ordinary diligence, to discover the concealment, will avoid the bar of the statute of limitations. The reason of the rule is that a party cannot in good conscience avail himself of the statute'when his own fraud has prevented the other party from knowing his rights." So also is Owen v. King, 130 Tex. 614, 111 S.W.2d 695, 697, 114 A.L.R. 859, and 34 Am.Jur., Limitation of Actions, § 234. It was the lessee's duty to know and to report truly the volume of gas it was taking out, and the disposition made of it, and the net proceeds if sold, for the facts were within its own knowledge. This duty greatly reduces the diligence necessary on the lessor's part to inform himself. In Hickok Producing & Development Co. v. Texas Co., 5 Cir., 128 F.2d 183, 185, we considered the effect of misleading statements by a lessee as affecting limitation and said: "The law of Texas is well settled on this point. 'Mere failure of a party to disclose a fact is not necessarily fraudulent concealment, but only silence is permitted. Any statement, word or act which tends to the suppression of the truth, renders the concealment fraudulent.' (citing authorities) If, in this case, the defendant had made no statements at all of'amounts due or had made the statements show that defendant was being paid only for Ysth of % instead of for %th of the whole, the statute would not have been tolled. When however, statements are drawn and settlements are made, as here, so as to create the impression that payments are being made in accordance with the contract and plaintiff is, as here, deceived by these positive acts of defendant, there is the concealment which tolls the statute." In this case Johnson had the burden to show concealment which deceived him and prevented a timely suit, and how long it continued. When he knew the statements were not true the concealment ceased to be effective, and the statute began to run. He could not wait to acquire better proofs, but should sue and then use the implements the Rules of Procedure provide for extracting from the opposite party and others the full truth. He cannot wait more than four years to investigate. Johnson did not make' clear the date he ceased to rely on the truth of the statements, or indeed that he ever really relied on them. Certainly the case required a full, clear charge on the law involved, and that given was very brief. It made the statute inoperative till Johnson "had knowledge of the facts constituting his cause of action." The jury must have thought this meant full and detailed knowledge, for they gave no effect at all to the statute. We do not understand that full and precise knowledge is requisite. That has not yet been attained perhaps. It is. enough for one to know that he has a cause of action, and that representations which before concealed it are not true. A concealment which no longer conceals the cause of action will not continue to toll the statute, though the full facts may not yet have been disclosed. Under the present evidence the verdict is not right as respects-limitation.
6. Six percent interest on each monthly balance to date of verdict was added by the jury by direction of the court, duly objected to. The statute, Rev.Civ. Stats, art. 5070, provides: "When no specified rate of interest is agreed upon by the parties, interest at the rate of six percent per annum shall be allowed on all written contracts ascertaining the sum payable,, from and after the time when the sum is due and payable." This might mean that only written contracts which on their face state the amount to be paid are included; but in Federal Life Ins. Co. v. Kriton, 112 Tex. 532, 249 S.W. 193, 195, it was held: "It is sufficient to come within the meaning of the statute if the contract provides the conditions upon which liability depends and fixes a measure by which the sum payable can be ascertained with reasonable certainty, in the light of the attending circumstances." But in Keystone Pipe & Supply Co. v. Zweifel, 127 Tex. 392, 94 S.W.2d 412, though a written contract fixed the quantity and quality of certain well' casing which was agreed to be replaced but was not, it was held that the value of it was dependent on testimony and was unliquidated, and no interest before judgment was recoverable. Under the evidence now before us, we think the amounts due for the fair value of gasolene taken from the gas and used by defendant from month to' month was unliquidated and bears no interest till ascertained, under the rule in the Zweifel case. On the other hand, the proceeds of the gas which was sold as residue ought to bear interest, for defendant knew the gross proceeds, and could with reasonable certainty ascertain the expense it had gone to in transporting and separating and selling it. Interest ought to be allowed on the net proceeds according to the Kriton case.
We' have not discussed the meaning and effect given royalty provisions in the many cases cited to us, because in none were the words and the facts like this case. We have not referred to the evidence in much detail, because the defendant introduced none, and that for plaintiff may de different on another trial, in view of the legal conclusions we have announced. For the reasons stated there should be a new trial; and to that end the judgment is reversed, the verdict set aside, and the cause remanded for further proceedings.
Reversed and remanded.
The proper difference in the terms, not always observed even by judges, is drawn in Shamrock Oil & Gas Corp. v. Coffee, 5 Cir., 140 F.2d 409.
In Valdes v. Larrinaga, 233 U.S. 705, 34 S.Ct. 750, 751, 58 L.Ed. 1163, it was said: "But whether the contract created a partnership under the definition of the Civil Code or not, it gave the appellee an equitable interest in the concession to the extent of securing his share of the profits, if any, and attached to these profits specifically if and when they came into being. Barnes v. Alexander, 232 U.S. 117, 121, 34 S.Ct. 276, 58 L.Ed. 530. It •established á fiduciary relation between Valdes, who had legal control, and the plaintiff. The bill alleges an abuse of the relation by a secret transaction from which it is alleged that the profits accrued. It is a proper ease for equitable . relief."
In Barnes v. Alexander, 232 U.S. 117, 34 S.Ct. 276, 278, 58 L.Ed. 530, the Court said: "And it is one of the familiar rules of equity that a contract to convey a specific object even before it is acquired will make the contractor a trustee as soon as he gets a title to the thing."