Court Opinion

ID: 9600184
Source: CourtListenerOpinion
Date Created: 2023-08-22 01:24:55.508994+00
Date Added: 2024-06-11T09:04:38.049061
License: Public Domain

ALMA WILSON, Chief Justice,
dissenting to opinion on rehearing:
This action was initiated in September, 1984, by a group of working interest owners (Heiman) against the operator (ARCO) to recover their respective shares of gas production proceeds. ARCO stipulated that Heiman was entitled to receive $535,496.23 as their pro rata share of the proceeds for gas produced and sold from April 5, 1982, to May 3, 1983. In January, 1988, ARCO paid Heiman $535,496.23, but refused to pay any interest which may have accrued prior to the date of payment. Because the interest issue in this case is controlled by 52 O.S.1981, § 540, I must respectfully dissent to today’s opinion on rehearing.
Heiman and ARCO were working interest owners in the Petree No. 1-35 well, in Dewey County, Oklahoma. The parties designated ARCO as operator of the well in their operating agreement dated December 17, 1980. The operating agreement provided that each party may take in kind or separately dispose of the proportionate share of gas produced and in the event any party failed to make arrangements necessary to take in kind or separately dispose of its proportionate share, that' the operator may sell it for the account of the non-taking party. The operating agreement expressly excluded a gas balancing provision and was silent as to cash balancing.
Production commenced on April 5, 1982. Heiman did not take in kind, nor make arrangements to separately dispose of its share of the production. Heiman did, however, make several attempts to separately dispose of their gas by contract with ARCO’s gas purchaser, Michigan-Wiseonsin before and after production commenced. Michigan-Wiseonsin would not contract with Heiman without ARCO’s consent and ARCO refused to consent to the contract. Beginning with the first production, ARCO sold 100 per cent of the gas production to Michigan-Wiseonsin. Heiman made repeated demands on ARCO for their proportionate share of the production proceeds, but ARCO refused to distribute any gas proceeds to Heiman.
Enacted in 1980,1 52 O.S.1981, § 540 was in effect throughout the involved production period. Section 540 required distribution of production proceeds to persons legally entitled thereto within six months after the commencing of production. The applicable version of § 540 read:2
A. The proceeds derived from the sale of oil or gas production from any oil or gas well shall be paid to persons legally entitled thereto, commencing no later than six (6) months after the date of first sale, and thereafter no later than sixty (60) days after the end of the calendar month within which subsequent production is sold. Such payment is to be made to persons entitled thereto by the first purchasers of such production. Provided, such purchasers' may remit to the persons entitled to such proceeds from production semiannually for the aggregate of six (6) months’ accumulation of monthly proceeds of amounts less than Fifteen Dollars ($15.00). Further *1260provided, that any delay in determining the persons legally entitled to an interest in such proceeds from production caused by unmarketable title to such interest shall not affect payments to person whose title is marketable. Provided, however, that in those instances where such proceeds cannot be paid because the title thereto is not marketable, the purchasers of such production shall cause all proceeds due such interest to earn interest at the rate of six percent (6%) per annum, until such time as the title to such interest has been perfected. Marketability of title shall be determined in accordance with the then current Title Examination Standards of the Oklahoma Bar Association. The first purchaser shall be exempt from the provisions of this subsection and the owner of the right to drill and to produce under an oil and gas lease or force pooling order shall be substituted for the first purchaser therein where the owner and purchaser have entered into arrangements where the proceeds are paid by the purchaser to the owner who assumes the responsibility of paying the proceeds to persons legally entitled thereto.
B. Any said first purchaser or owner of the right to drill and produce substituted for the first purchaser as provided herein that violates this act shall be liable to the persons legally entitled to the proceeds from production for the unpaid amount of such proceeds with interest thereon at the rate of twelve percent (12%) per annum, as the penalty.
C. The district court for the county in which the oil or gas well is located shall have jurisdiction over all proceedings brought pursuant to this act. The prevailing party in any proceeding brought pursuant to this act shall be entitled to recover any court costs and reasonable attorney’s fees.
Section 540 required Michigan-Wiseonsin, as the first purchaser, or ARCO, as the operator, to distribute proceeds derived from the sale of the gas production to Heiman, persons legally entitled thereto. Michigan-Wiseonsin paid 100 per cent of the proceeds to ARCO because ARCO refused to authorize the first purchaser to pay Heiman their proportionate share.
Notwithstanding the dictates of § 540 and the demands for payment by Heiman, ARCO held Heiman’s half a million dollars for at least five years. On rehearing, ARCO asserts that industry custom and usage was presumptively included in the operating agreement and therefore Heiman had no right to the proceeds until depletion. Although ARCO presented no evidence of industry custom and usage before the trial court, on rehearing ARCO explains that industry custom declared that ARCO, the operator, was the owner of 100 per cent of the gas which it produced and sold and that Heiman, working interest owners who failed to take in kind or separately dispose of their share of the gas, were not entitled to receive any production proceeds until depletion of the well.
This unproven industry custom3 flies in the face of § 540. Subsection B of § 540 clearly provides that if ARCO, the operator, the owner of the right to produce, refuses to distribute production proceeds as it did herein, then ARCO shall be liable to the persons legally entitled to the proceeds from production, Heiman, for the unpaid amount of such proceeds, half a million dollars, with interest thereon at the rate of twelve percent (12%) per annum.
ARCO apparently recognized the distribution dictates of § 540 on May 3, 1988, even though ARCO continues to assert the contrary industry custom on rehearing herein. *1261On May 3, 1983,4 Heiman and Tenneco, ARCO’s gas purchaser at that time, executed a division order for the distribution of proceeds to Heiman.5 Tenneco distributed production proceeds to Heiman for the production months of May, 1983 through depletion of the well on March 31, 1987. But, ARCO continued to hold Heiman’s half a million dollars from the gas sales that had occurred between April 5,1982, and May 3,1983, while Heiman continued to make demands for those revenues and ultimately filed this action in September, 1984.6
Enactment of 52 O.S.Supp.1983, §§ 541-547 clearly signaled the demise of abusive industry customs such as that asserted by ARCO herein. Not only did ARCO recognized the impropriety of its industry custom on May 23, 1983, but so did this Court.7 In Seal v. Corporation Commission we unequivocally rejected the industry custom — delaying distribution of production proceeds until depletion — relied upon by ARCO.8 In Seal v. Corporation Commission, we concluded that the 52 O.S.Supp.1983, §§ 541-547 and § 540, enacted prior thereto, required distribution of production proceeds before depletion.9
We believe the Legislature in enacting Section 545 clearly incorporated the time frame provisions of Section 540 into the gas [cash] balancing scheme. We conclude the various time frames in which payment is to be made as set forth in the challenged Rules are inconsistent with the provisions of Section 540 as incorporated by Section 545 and are thus invalid.
Seal v. Corporation Commission, 725 P.2d at 296.
ARCO, argues that, even if Heiman’s right to a ratable share of the proceeds of past production sales vested on May 3, 1983, § 540 is not applicable because the operating agreement imposed an absolute obligation on Heiman to take the gas in kind or to market it, which Heiman failed to do. The operating agreement clothed ARCO with the right to sell the gas for Heiman, if Heiman failed to take in kind or separately dispose of it. ARCO exercised the right to sell Heiman’s share of gas production on account for Hei-*1262man, according to the operating agreement. Nothing in the operating agreement clothed ARCO with the right to hold half a million dollars of production proceeds for five years.
ARCO failed to promptly distribute the gas proceeds to Heiman in accordance with the requirements of 52 O.S.1981, § 540. Upon the effective date of 52 O.S.Supp.1983, §§ 541-547, ARCO recognized it could no longer refuse to distribute production proceeds to Heiman. On that date ARCO permitted the first purchaser to distribute proceeds to Heiman thereby recognizing that the operating agreement did not authorize the withholding of proceeds from Heiman. And, on that date the amount of proceeds due Heiman from the past sales was readily ascertainable.10 Accordingly, I would find that ARCO is liable to Heiman for interest on the undistributed production proceeds from May 3, 1983 until January 20, 1988 at the rate of 12% per annum. I would affirm the trial court’s summary judgment in favor of Heiman for interest at the rate of 12% from May 3, 1983 until January 20, 1988.11

. 1980 Okla.Sess.Laws, ch. 205, § 1.

. Section 540 was amended in 1985, by adding new language to clarify that the 12% interest is to be calculated from the date of first sale. 1985 Okla.Sess.Laws, ch. 141, § 1. Section 540 was further amended and renumbered by 1992 Okla. Sess.Laws, ch. 190, §§ 10 and 28, effective July 1, 1993, and is now codified at 52 O.S.Supp. 1992, § 570.10, of the Production Revenue Standards Act, 52 O.S.Supp.1992, § 570.1, et seq.

. The court has a duty to recognize established business practices. Goss v. Trinity Savings & Loan Association, 813 P.2d 492 (Okla.1991). The party relying upon industry custom has the duty to plead and prove the existence of the custom. Fellers v. St. Louis-San Francisco Ry. Co., 572 P.2d 972 (Okla.1977); Clemson v. Century Petroleum Co., 179 Okla. 193, 64 P.2d 1219 (1937).

. The "Sweetheart Gas Bill” went into effect on May 3, 1983, requiring ratable sharing of revenues from gas production. 52 O.S.Supp.1983, §§ 541-547. Even though these statutes have been amended several times since the first enactment, the provisions granting interest owners the right to ratably share in gas produced and sold and requiring ratable sharing of proceeds under § 540 remain intact. Most recently, these statutes were amended and/or renumbered by 1992 Okla.Sess. Law, ch. 190, § 19 et seq., effective September, 1992, and are now codified within the Natural Gas Market Sharing Act, 52 O.S.Supp.1992, § 581.1, et seq.

. Under the facts in this case, ARCO’s recognition that it was not entitled to withhold distribution of proceeds from Heiman is implicit in the signing of the division order. In Hull v. Sun Refining and Marketing Co., 789 P.2d 1272, 1280 (Okla.1989), this Court said that the custom and usage which required the execution of a division order as a condition precedent to payment of royalty proceeds did not survive the enactment of § 540; and, concluded that the requirement that lessors execute division orders before proceeds will be paid conflicts with the spirit and letter of § 540 and is contrary to public policy intended to promote prompt payment of oil and gas proceeds.

.Pursuant to § 540, six months after first production Heiman could have filed an action for distribution of its proportionate share of the proceeds plus interest at the rate of 12 per cent per annum.

. Seal v. Corporation Commission, 725 P.2d 278 (Okla.1986).

. One of the issues in Seal was a challenge to the Oklahoma Corporation Commission’s Rule 6-104, captioned "Gas Statements of Production.” Rule 6-104 required interest owners who produce and separately sell or otherwise dispose of gas to maintain an accounting of the volumes of gas produced and sold and to provide monthly statements to all requesting owners. Subsection F. required a final balancing of production sales which occurred prior to May 3, 1983, to be achieved through a cash balancing, without interest, when production permanently ceases.

. In Seal, we held that the "Sweetheart Gas Bill” is not retroactive. The retroactivity of § 540 is not at issue. Teel v. Public Service Co. of Oklahoma, 767 P.2d 391, 399 (Okla.1985). The original 1980 version of § 540 was in effect when the "Sweetheart Gas Bill” became effective and at the involved production times and at the time this suit was filed.

. Both the trial court and the Court of Appeals found that Heiman’s ratable share of the sales proceeds was readily ascertainable by ARCO and ARCO does not dispute this finding.

. It appears that the trial court granted interest at the rate established by 52 O.S.Supp.1980, § 540. If interest had been calculated under the prejudgment interest statute, 23 O.S.1981, § 6, the court would have been required to utilize annual rates set by statute for 1983, 1984 and 1985 and rates determined by the Court Administrator for 1986, 1987 and 1988. 12 O.S.Supp. 1986, § 727. However, on appeal, the trial court judgment will be affirmed if it is supported upon any legal theory, regardless of the legal authority upon which the trial court pronounced judgment. 12 O.S.1981, § 78; 20 O.S.1981, § 3001.1; and, Utica National Bank & Trust v. Assoc. Prod, and City of Lawton, 622 P.2d 1061 (Okla.1981).