Court Opinion

ID: 9546511
Source: CourtListenerOpinion
Date Created: 2023-08-07 17:30:55.550794+00
Date Added: 2024-06-11T15:16:32.483186
License: Public Domain

Schroeder, J.,
dissenting: The basic premise underlying the court’s decision is that under the oil and gas leases in question the royalty owners are entitled to payment as royalty on gas marketed from each well one-eighth of the “proceeds’ if sold at the well. This results from the court’s interpretation of a gas royalty clause reading:
*522“Lessee shall pay lessor monthly as royalty on gas marketed from each well one-eight (Js) of the proceeds if sold at the well, or, if marketed by lessee off the leased premises, then one-eighth (Is) of the market value thereof at the well.”
By concluding that all of the lessors’ one-eighth interest in the gas is sold at the well the court holds the royalty owners are entitled to only the “proceeds” of the gas ultimately realized by Amoco Production Company, the appellant.
In my opinion this is an erroneous premise upon which to found a decision in the case at bar for several reasons.
This is a class action by approximately five hundred named landowners, representing a class of some 3,000 landowner-lessors, all in the Kansas Hugoton gas field. The appellant’s evidence, “Exhibit D” attached to the Calonkey affidavit, which forms the basis of the trial court’s finding No. 40, is unrefuted in the record and discloses that 48 different forms of gas or oil and gas leases have been dedicated to the fulfillment of the gas purchase contract with Cities Service Gas Company (dated June 23, 1950). These leases contain numerous variations in the gas royalty clauses. Among these are leases calling for payment to the royalty owners of “One-fourth of the proceeds of gas sold at the prevailing market rate” (emphasis added); “One-eighth of the gross proceeds at the prevailing market rate for gas used off the premises.” (emphasis added); “One-eighth of the proceeds when the gas is marketed off the leased premises or if not marketed off the leased premises then Vs of the market value at the well.” (emphasis added); and others. The royalty provision seized upon by the court to determine this lawsuit is at variance with these clauses and reads as first above quoted.
Clearly all of the members of the class are not bound by the royalty payment provision used by the court to determine this lawsuit. Neither the trial court nor the appellees regarded the variation in the royalty payment clauses of the many leases to be of major significance, in view of the appellant’s conduct through the years, wherein it construed all of the various provisions regarding payment of royalty in the various leases to be the same, and as imposing identical obligations upon it to compensate the royalty owners for their share of the gas produced at the prevailing market value. The failure of the court to adopt the appellees’ theory, however, does not warrant arbitrary action which penalizes all members of the class whose specific royalty payment clauses require compensation to *523the royalty owners on the basis of the fair market value of the gas at the well.
Even if it be assumed that all royalty owners in the class are bound by one and the same royalty payment provision, and assuming further that such provision is identical to the royalty payment provision seized upon by the court to determine this lawsuit, the conclusion of the court is not warranted.
In the majority opinion the single word “proceeds” is lifted out of context from the clause and is said to control without regard to any other language in the clause. In other words, the leases in question are construed to be strictly “proceeds” leases. The practical effect of this construction is to tie the royalty owners to payment for their share of the gas produced to the established F. P. C. rate at a given time. This construction of the leases could not have been within the contemplation of the parties when the leases were entered into in 1950 and prior thereto. To ascertain the intention of the parties concerning payment under the royalty clause use of the other words “gas marketed”, “market value”, “marketed” and “sold” cannot be ignored.
Under the specific terms of the provision used by the court for payment of royalty, when the gas is marketed by the lessee off the leased premises, the lessee is required to pay one-eighth (}s) of the market value thereof at the well. Simply stated this means the royalty owners are entitled to payment as royalty the market value of one-eighth of the gas produced at the well. The entire provision discloses an intention by the parties to the lease that one-eighth of the “proceeds” from the sale of gas at the well are to be measured by the market value of the gas produced. If the gas produced is marketed off the leased premises the cost of transporting the share of the royalty owner’s gas to the place of sale is deducted to arrive at the fair market value of the gas at the well.
The appellant seeks to avoid its contractual royalty obligations to pay based on the value of the gas sold by asserting the same position it took before the F. P. C. that the lessors herein are only entitled to a “royalty share” of the gas sold. The appellant urges this court to interpret the leases as though they provided for payment of gas royalty in kind. But under the actual lease terms the lessors neither own nor possess any such gas and have no natural gas to sell. There is no such “royalty share” of the gas. It is apparent that something other than payment in kind was intended as to gas royalty.
Fundamentally, the interpretation of contracts requires a determi*524nation of the intention of the parties. (Springer v. Litsey, 185 Kan. 531, 535, 345 P. 2d 669.) This intention must be determined as of the time the contract was executed. (Kittel v. Krause, 185 Kan. 681, 685, 347 P. 2d 269.) This intention is to be determined from within the four comers of the instrument, absent ambiguity. This intention shall be ascertained by consideration of all pertinent provisions of the contract and not by isolating a single word or phrase. (Drilling, Inc. v. Warren, 185 Kan. 29, 34, 340 P. 2d 919.)
Where words or other manifestations of intention bear more than one reasonable meaning, an interpretation is preferred which operates more strongly against the party from whom they proceed. (Restatement of Law, Contracts, §236 [d], p. 330.) Since one who speaks or writes can, by exactness of expression, more easily prevent mistakes in meaning, than one with whom he is dealing, doubts arising from the ambiguity of language are resolved against the former in favor of the latter. (Smith v. Russ, 184 Kan. 773, 779, 339 P. 2d 286.)
Under Kansas law the construction of oil and gas leases containing ambiguities is in favor of the lessor and against the lessee because the lessee usually provides the lease form, or dictates the terms thereof, and if such lessee is desirous of more complete coverage, the lessee has the opportunity to protect itself by the manner in which it draws the lease. (Gilmore v. Superior Oil Co., 192 Kan. 388, 388 P. 2d 602; see also Stady v. The Texas Company, 150 Kan. 420, 94 P. 2d 322.)
The record discloses the appellant has by its conduct through the years, and by argument in its brief, recognized that all of the various lease provisions in question here should be treated the same regarding payment of royalty, and that all of them place identical obligations upon it. At the time the gas purchase contract was executed in 1950, the appellant and Cities Service Gas Company did not anticipate that the Natural Gas Act would be made applicable to the producers of natural gas. On June 23, 1961, the appellant was entitled to a redetermined “fair and reasonable price” from Cities Service with a minimum of 12 cents per Mcf at 16.4 psia. The question was litigated in Pan American Petroleum Corporation v. Cities Service Gas Co., 191 Kan. 511, 382 P. 2d 645. The appellant was there contending the “fair and reasonable price” for the gas sold under the contract for five years commencing June 23, 1961, should be 19 cents per Mcf at 14.65 psia. Cities Service contended it should be 12 cents per Mcf at 16.4 psia. The *525Supreme Court upheld the trial court’s determination that the new fair and reasonable price for the gas was 14.5 cents per Mcf at 14.65 psia, effective June 23, 1961. In the opinion the court discussed the supervision by the Federal Power Commission over a regulated natural gas company furnishing gas to a distributing company under a long term oontract, and said:
“On May 22, 1961, plaintiff filed a Notice of Rate Change with the Federal Power Commission in which it requested thei rate under the contract be changed to 120 on June 23, 1961, inasmuch as it is the guaranteed minimum specified in the contract. The Notice incorporated the provisions of the contract, recited the pendency of this law suit in Shawnee County, Kansas, and specifically reserved the right to file for any increase in price that might be determined by the Court. On August 4, 1961, the Federal Power Commission entered an order setting aside the former rate and permitting the 120 rate to go into effect as of June 24, 1961. The order recognized the pendency of this law suit and specifically permitted the change in rate without prejudice to this litigation. These proceedings before the Federal Power Commission instead of showing a waiver by plaintiff of its right to file for any additional price determined by the Court, preserved that right. The Federal Power Commission thus recognized plaintiff’s right to file for any additional price that might be determined by the Court in this case.
“The appellee, on finding it impossible to fix the price by negotiations, could do nothing more than file the minimum rate provided by the contract while it sought the determination of the reasonable price by the court.” (p. 521.)
The appellant having taken the position regarding payment of royalty, that the various leases place identical obligations upon it to compensate the royalty owners for their share of the gas produced at the prevailing market rate, cannot successfully argue that they now have “proceeds” leases, instead of “value” leases in which the royalty is based on the market value of the gas at the wellhead, independent of the actual sale price obtained by the appellant.
The appellees contend the royalty obligation was never intended to be measured by a governmentally-imposed rate and that under the pertinent lease provisions it is apparent the yardstick for determining royalty was intended to be that price anticipated from an arm’s length sale made by appellant, as a free and willing seller, to free and willing buyers.
A reading of the royalty provision used by the court shows the parties contemplated a disposition of gas by appellant at either the wellhead or at some point off the leased premises. Appellant argues the parties contemplated a different standard of measurement for royalty purposes, depending upon the point at which appellant parted with title to the gas produced. It will be assumed *526that this occurred at the wellhead as a result of the appellant’s sale of its gathering lines to Cities. See, Stanolind Oil & Gas Co. v. Cities Service Gas Co., 178 Kan. 202, 284 P. 2d 608, where it was stated that the “opinion will not be in the nature of a discussion of any particular legal principle, and that what is said will be of interest only to the parties themselves” in a case to which the appellees herein were riot parties.
In both cases (wellhead or off-the-leased-premises sale), the disposition is preceded by reference to “gas marketed from each well”. What did the parties mean by this quoted phrase? According to Webster’s Third New International Dictionary (1961), a market is, “1 a (1) a meeting together of people, at a stated time and place, for the purpose of traffic ... by private purchase and sale. . . .” Since F. P. C. rate regulation was nonexistent when the lessors executed the leases in question (even as late as 1950, both the lessee and its purchaser, Cities, “did not anticipate that the Natural Gas Act would be made applicable to the producers of natural gas.” Pan American Petroleum Corporation v. Cities Service Gas Co., supra, p. 519), it is obvious the parties must have intended disposition of the gas by private and unregulated sale, if the words employed by the parties are given their ordinary meaning.
This conclusion is fortified by an analysis of the language applicable to the marketing of gas at the wellhead and off the leased premises. As to wellhead dispositions, the lessors are to receive, as royalty for gas so marketed, one-eighth (Is) of the proceeds if sold at the well. A sale is certainly not the equivalent of an imposed governmentally controlled rate. “A. sale’ implies willing consent to the bargain. A transaction although in the form of a sale, but under compulsion or duress, is not a sale.” (Dore v. United States, 97 F. Supp. 239, 242 [Ct. Cl. 1951]).
When the appellant received the proceeds on a regulated per Mcf basis for the gas produced from appellees’ lands, it is manifestly contrary to the intention of the parties to say the appellees’ royalty should be measured by such proceeds, when they do not constitute the proceeds of sale, as that term was used and intended by the parties.
As for gas not marketed at the wellhead, the parties specified “if marketed by lessee off the leased premises, then one-eighth (%) of the market value thereof at the well.” (Emphasis added.) The dominant concept again is the marketing of gas to determine the *527amount of royalty to be paid. And, despite the fact that marketing of the gas off the leased premises is here contemplated, the yardstick for royalty purposes in such instances is expressly stated as the market value at the well, which makes the place where gas is to be valued identical in both cases.
Conceding that the proceeds permitted to be received or retained by the appellant as a regulated F. P. C. producer, measured on a per Mcf basis, represented less than proceeds receivable under the contract of 1950 or market value of the gas, appellant urges the contract or market values do not constitute a proper standard for royalty purposes. According to the appellant, language used in the lease must be construed to mean that off-premises disposition of gas entails a market value at the well standard for royalty purposes, while the parties intended something different when they referred to gas marketed through sales technically occurring at the wellhead. If the appellant is correct that F. P. C. rates govern royalty payments where appellant disposes of gas at the well, but such F. P. C. rates do not govern when gas is marketed away from the well, even though royalty is to be measured by the market value of the gas at the well — such a result is wholly incongruous, unreasonable and inconsistent.
In both instances, it was contempated that the gas would be marketed and sold by appellant. Undoubtedly, apart from unforeseen government regulation, it is reasonable to assume when the leases were signed the appellant’s duty to market would result in sale prices established at arm’s length by appellant as a free and willing seller, which sales prices would approximate the market value of the gas at either location, less a deduction for transportation costs when sales occurred at a point removed from the leased premises. The appellant’s own self-interest precluded good faith sales at prices less than those obtainable in the prevailing, unregulated market for gas, regardless of where the sale was made. But these obviously anticipated controlling conditions do not govern payments for gas received by appellant when such payments represent the per Mcf proceeds obtained from imposed rates, instead of proceeds received from unfettered sales such as those obviously contemplated when the leases were signed.
The parties obviously intended that the most appropriate place for establishing the per Mcf factor, however it was to be measured, was at the wellhead. The landowner-lessor could rely on the economic self-interest of the lessee to obtain the maximum sales price *528for his own benefit. The term “proceeds if sold at the well” would, accordingly, equal the market value at that point.
This is the only interpretation which harmonizes all parts of the entire royalty clause. It also accords with common sense. It is the construction which is consistent with the uniform per Mcf basis used by lessee in paying royalty under all of the 48 lease forms.
In other words, sales at market value occurring at the well were dictated by lessee’s own self-interest at the time the leases were signed and it was deliberately emphasized that the same market value standard would apply as to sales made off the leased premises.
For the above reasons the owners as a class in this action are entitled to payment on gas marketed from each well one-eighth (%) (or one-fourth [If] in some cases) of the fair market value of the gas at the well.
While the court is bound by that interpretation of the Natural Gas Act which restricts the amounts which producers of natural gas may receive upon interstate disposition of their product, nothing in the federal statutory scheme governing the profits of producers controls the issues here before the court. Royalty agreements between landowners, such as appellees here, and producers, such as appellant, are not subject to regulation by the F. P. C. under the Natural Gas Act. Mobil Oil Corporation v. Federal Power Commission, 463 F. 2d 256 (1972), cert. den. 406 U. S. 976, 32 L. Ed. 2d 676, 92 S. Ct. 2409, 2410, 2413, reh. den. 409 U. S. 902, 34 L. Ed. 2d 166, 93 S. Ct. 103; and see findings Nos. 53, 54, 55 and 56 in the court’s opinion. In Mobil, the commission took the position that when a landowner executed a “ ‘proceeds’ ” or “ ‘value’ ” lease, “ “he has contracted to retain an economic interest in interstate sales by the producer,’ ” and “ ‘has joined the other interest owners in such sales and he has become a seller of natural gas.’ ” The court, however, held Congress did not give the F. P. C. jurisdiction to take whatever action it might deem appropriate and said:
“. . . The FPC is limited by the provision establishing its jurisdiction, and we do not find in that provision, rooted as it is in a sale in interstate commerce, any basis for reaching out to cover the landowner’s lease or its royalty payments. We think it too far removed from the interstate sale. . . .” (p. 263.)
Since the advent of federal regulation, the major portion of our nation’s supplies of natural gas, including that from the once rich store in the Kansas Hugoton field, has been substantially depleted in the span of a few decades. By prevention of market place de*529termination of the price payable for interstate sales of natural gas, millions of consumers far removed from sources of supply have been able to obtain heretofore seemingly unlimited quantities of natural gas at artifically low cost, while those who purchase in the uncontrolled markets have been paying higher prices as a result of market forces. The soundness of a policy which has hastened the depletion of our natural gas reserves and which has postponed the development of alternative sources of fuel is not a matter appropriate for judicial determination, but, again, nothing in the issues presently before the court requires it to either deliberately further or to hinder a program, the consequences of which are becoming increasingly disastrous for all those consumers who have become dependent upon an artificially cheap and supposedly inexhaustible supply of natural gas. Certainly, compelling facts today might well support a legislative policy which encourages conservation of our remaining gas reserves to the extent that normal market forces would operate to do so. The court is not concerned with these policy considerations. Rather, the fundamental question before the court is whether the parties to the leasing contracts intended, when they were written, to limit the measure of compensation for royalty to whatever rates were federally imposed upon the appellant to limit its profits in connection with its own interstate disposition of gas produced from appellees’ land.
The fair market value of the gas at the well was judicially determined in an independent action designed to resolve that issue in Pan American Petroleum Corporation v. Cities Service Gas Co., supra. The district court there determined the fair and reasonable price for gas sold under the contract involved herein for five years commencing June 23, 1961, based on and compared with the price for gas then being paid by other purchasers in the field under similar contracts and conditions, was the sum of 14.5 cents per Mcf at 14.65 psia. That decision and judgment was affirmed by the Kansas Supreme Court on appeal. This is the best and actually the only evidence of market value for the period in question. The finding of the trial court herein based upon such evidence is binding on appeal.
Subsequent to the production of the gas and the purchase of the royalty owners’ interest therein by the appellant, the delivery and transportation of the gas in interstate commerce, where it became subject to F. P. C. regulation, does not alter the obligation of the appellant to pay the royalty owners the fair market value for the *530gas. (Craig v. Champlin, Petroleum Company, 300 F. Supp. 119 [1969].)
The royalty owners’ share of the gas was purchased at the well, prior to its becoming subject to F. P. C. price regulation. The function of the F. P. C. under the Natural Gas Act is to permit sales of natural gas in interstate commerce to' consumers at rates which it finds to be just and reasonable. The rate making process includes consideration of the interests, not only of the consumers, but also of the investors in order that returns on investments may be sufficient to assure confidence in the financial integrity of the enterprise. The resulting utility rates found acceptable by F. P. C. are not based upon the value of the natural gas produced, but upon the “actual legitimate cost” incurred in production, gathering, transportation and marketing of the natural gas, including the cost of the royalty owners’ share of the gas purchased at the well. (Power Comm’n v. Hope Gas Co., 320 U. S. 591, 88 L. Ed. 333, 64 S. Ct. 281.) In the early 1960’s the F. P. C. began to substitute area rates for company-by-company rate-making. (Wisconsin v. Fed. Power Comm’n., 373 U. S. 294, 10 L. Ed. 2d 357, 83 S. Ct. 1266.)
Appellant contends that royalty payments, by virtue of the lease provisions, must be considered on a different basis than all other “aotual legitimate costs”, which taken together govern the maximum amount it may receive for its delivery of interstate gas as determined by the F. P. C. While market forces oontrol other costs incurred by the appellant, the royalty clauses, it argues, subject royalty payments to rate regulation. According to appellant, its royalty obligation is limited to payments derived from its allowable rate and consequently, its royalty costs alone must be determined after, not before, its rates are established.
The F. P. C. regulated rates are designed to prevent overall excess profits to the appellant over and above the regulated return. But it does not follow that effect should not be given to the intention of the parties as to the standard of value to be applied in determining appellant’s royalty obligation. Again, it is the duty of the courts to give effect to the intention of contracting parties whenever it is possible to do so. Requiring the appellant to make payment for royalty on the basis of the fair market value of the gas does not place any hardship upon the appellant which cannot be alleviated by the adjustment of its F. P. C. rates to absorb such royalty costs. This court cannot assume the F. P. C. would do otherwise, since royalty payments are one of the appellant’s actual costs bearing upon the *531determination of its allowable utility rate for the resale of gas to its customers. Presumably, all of the appellant’s other costs are determined by market forces, and no reason warrants an exception for its royalty costs.
Had the appellant consistently paid royalty in accordance with the fair market value of the gas at the well, it would have been in a position to include such royalty costs in its F. P. C. rate base, even though the contract proceeds might have been in excess of the amount the appellant could keep or receive, on a per Mcf basis. But, when appellant ascertained that its allowable F. P. C. rates were less, on a per Mcf basis, than contract prices obtainable, it and other producers undertook to avoid their contractual royalty obligations by urging the subjection of royalty payments to F. P. C. rate regulation. The appellant succeeded in its efforts before the F. P. C., but did not prevail before the federal courts. Even if the appellant is eventually unable to retroactively recover the full extent of its royalty costs from its pipeline customers (Cities), that will be attributable to appellant’s own initial failure to fulfill its royalty obligation in accordance with the provisions of its lease agreements.
“The inability of Atlantic to make a gas sales contract with escalation provisions is beside the point. The obligation of Atlantic to pay royalties is fixed and unambiguous. It made the gas sales contract with full knowledge of this obligation and did nothing to protect itself against increases in price. The fact that its purchaser would not agree to pay the market price prevailing at the time of delivery does not destroy the lease obligation. . . .” (Foster v. Atlantic Refining Company, 329 F. 2d 485, 489 [5th Cir. 1964].)
When a producer subject to F. P. C. regulation is required to account for royalty on the basis of its fair market value, it is still in the producer’s self-interest to account for royalty on such basis in order to include the full royalty cost in its rate base. It is not the function of a court, when called upon to give effect to the intention of parties to a royalty agreement, to rewrite their agreement because one of the parties subsequently was subjected to governmental regulation which does not extend to their contract.
“It is elemental contract law that since the lessor is not a party to the gas purchase contract entered into between lessee and a third party, he is not bound by the terms of same, if they are in conflict with lessee’s obligation under the lease. . . .” (Texas Oil & Gas Corporation v. Vela, 405 S. W. 2d 68, 74 [Tex. 1966].)
Appellant, in its reliance on the isolated lease term “proceeds”, seeks to obscure the distinction crucial to a resolution of this case. Two concepts must be distinguished. The contract price of natural *532gas must be distinguished from the regulated rate, stated on a per Mcf basis, to' arrive at the amount of money it may receive or retain to prevent excessive profits, considering its overall operations. The appellees’ judgment in the lower court is based upon the contract price. The appellant’s appeal is based upon the federally regulated F. P. C. rates.
Here the appellant did not pursue an ultimate determination by the F. P. C. It compromised by settling the dispute, accepting a 12.5 cent rate which the F. P. C. approved. It must be conceded the appellant had the right and authority to compromise with Cities Service Gas Company and seek F. P. C. approval insofar as it affected its own interests, but it was not authorized to bind the royalty owners to the F. P. C. rate. (See F. P. C. v. Sierra Pacific Power Co., 350 U. S. 348, 100 L. Ed. 388, 76 S. Ct. 368.) The reduced rate was not imposed unilaterally by the F. P. C. upon the parties. Rather, it was the rate sought by the appellant in conjunction with a “package” deal which the appellant submitted to the F. P. C. for approval. The record discloses a settlement proposal which indicates the underlying assumption, wherein the lessors relied upon the economic self-interest of the lessee to secure marketing arrangements to their mutual advantage, no longer obtains.
Here the appellees’ claims are based solely upon the contractual rights secured to them by their oil and gas leases.
References in Pan American Petroleum Corporation v. Cities Service Gas Co., supra, pp. 519, 520, to the effect that the 14.5 cent contract price “cannot be made retroactive and form the basis of a money judgment for past sales” and that under the Natural Gas Act the contract provisions that any new price shall be retroactive is “void and unenforceable” must be understood in the light of the above discussion of the Mobil doctrine under which the contract price, as distinguished from the per Mcf filed rates, continued in effect as the contract price, with lessee being paid on a given date the contract price and at other rates lower than the contract price because of the differing way in which F. P. C. regulation was imposed.
Accordingly, the royalty owners are entitled for gas taken during the period of June 23, 1961, to June 22, 1966, to collect the fair and reasonable value of 14.5 cents per Mcf at 14.65 psia instead of the lower price paid by the appellant to them.
In my opinion the trial court correctly determined the appellant *533on or subsequent to February 15, 1963, had no legally enforceable claim against the lessors for a refund of royalty paid by the appellant for production of gas dining the period January 1, 1954, through December 22, 1957, pursuant to K. C. C.’s eleven cent minimum price order.
Under the oil and gas leases in question the lessors have absolutely no say as to when, where, or how deep the wells are drilled, nor the size of the hole or pipeline, when or how much gas is produced, to whom it is sold, the price for which it is sold, the duration of the contract under which it is sold, where it is transported, and how it is to be used. The trial court in conclusion No. 13 stated:
“. . . Since lessees have the exclusive control of these matters surely this creates a relationship to lessors which requires the utmost good faith by the lessees in all their dealings as to such gas because of the lessees’ opportunities, as a result of such exclusive controls, to take an unfair advantage of the lessors.”
The trial court continued in conclusion No. 13 to declare the appellant’s duties under these circumstances were equivalent to the imposition of fiduciary duties.
Although the imposition of fiduciary duties upon the lessee under these circumstances does not find support in American authorities, the court in its opinion says:
“. . . It seems well established that a lessee under an oil and gas lease is not a fiduciary to his lessor; his duty is to act honestly and fairly under a contractual relationship (Bunger v. Rogers, 188 Okla. 620, 112 P. 2d 361).
This statement is too broad and does not conform to either the Oklahoma or the Kansas law. The Bunger case summarily disposed of the matter before it. There the court only had to decide that there was no fiduciary obligation imposed upon the lessees under an oil and gas lease to hold the action barred by the statute of limitations and “laches”.
Under both Oklahoma and Kansas law an implied duty or obligation is imposed upon the lessee to exercise the diligence of a prudent operator, having due regard for the interests of both the lessor and the lessee, to obtain a market for the gas at the best price obtainable. (Gazin v. Pan American Petroleum Corporation, 367 P. 2d 1010 [Okla. 1962]; Townsend v. Creekmore-Rooney Co., 358 P. 2d 1103 [Okla. 1960]; Harding v. Cameron, 220 F. Supp. *534466 [1963]; and Craig v. Champlin Petroleum Company, 300 F. Supp. 119 [1969].)
In Gilmore v. Superior Oil Co., 192 Kan. 388, 388 P. 2d 602 this court held the duty to market gas rests constantly upon the lessee who is under an implied obligation to exercise reasonable diligence in marketing the gas produced. If a market value for the gas produced does not actually exist, the basis of the reasonable value thereof may be established by competent evidence.
The inescapable conclusion in the instant case is that the appellant acted in a dual capacity, as both buyer and seller of the gas at the wellhead, (Stanolind Oil and Gas Co. v. Cities Service Gas Co., 181 Kan. 526, 313 P. 2d 279), when' it dedicated all of the gas or oil and gas leases it had in the Hugoton field to the fulfillment of the gas purchase contract with Cities Service Gas Company on June 23, 1950. Under the circumstances, the appellant was obligated to exercise the diligence of a prudent operator, having due regard for the interests of the lessors to obtain the fair market value for the gas. If the best price obtainable in the open market is established by the sale of gas in intrastate commerce than the appellant was obligated under the leases to pay the lessors the fair market value of the gas so established at the wellhead.
The regulatory body in Kansas was the Kansas Corporation Commission which for the period of time in question had fixed the price at eleven cents. This sum was paid by the appellant to the appellees under its contractual obligation to do so. Subsequent efforts by the appellant to recover, what it conceived to1 be overpayments to the appellees, including self-help without notice to some of the appellees, falls short of good faith and fair dealing in the exercise of reasonable diligence for and on behalf of the appellees. Under these circumstances the trial court came to the correct conclusion and its judgment should prevail.
In my opinion a dangerous precedent is established by the court’s decision construing the royalty clauses of the leases here in question to be “proceeds” leases. Damages to the landowners of the state, who have executed similar leases, will be irreparable. Giant corporations of national and international scope operating in the oil and gas industry, with the ingenuity of counsel available to them, can operate through parent and wholly-owned subsidiary corporations to completely defeat the rights of the lessors to the fair market value of their royalty interest in the gas produced. *535A good illustration of a parent company and a wholly-owned subsidiary company, indicating the magnitude of their close dealings, is Power Comm’n v. Hope Gas Co., 320 U. S. 591, 88 L. Ed. 333, 64 S. Ct. 281, where the Hope Natural Gas Company is a wholly-owned subsidiary of Standard Oil Company of New Jersey.
The impossibility of identifying the controlling corporation in many instances, coupled with the possibilities sanctioned by the court in Cline v. Angle, 216 Kan. 328, 532 P. 2d 1093, wherein a circuitous sale from the lessor-producer Angle to Kansas-Nebraska, and a sale back to Angle as purchaser-processor of the gas, was permitted to defeat the clear provisions of a paragraph in a lease assignment agreement upon which the parties had negotiated and reached agreement, foretells oil and gas lessors in the State of Kansas of “handwriting on the wall.”
It is respectfully submitted the judgment of the lower court should be affirmed.
Kaul, J., joins the foregoing dissenting opinion.