Court Opinion

ID: 9846628
Source: CourtListenerOpinion
Date Created: 2023-09-24 03:44:27.129197+00
Date Added: 2024-06-11T09:19:40.796334
License: Public Domain

Fromme, J.,
concurring and dissenting:
As one of the three members of this court categorized in the opinion of the court as holding Position 4, I feel it necessary to explain our reasons for that position. The judgment of the lower court should be reversed as to all leases whether they call .for payment of royalty based on “market price” at the well or “proceeds” at the well. Under the facts of this case they both add up to the same in dollar amounts. We agree that the royalty obligation under a gas lease is a question of state law, to be determined from the terms of the lease. However, the dollar amount of royalty due under a lease for gas produced and obligated for interstate sale can be indirectly affected by federal price regulation.
The opinion of the court properly disposes of the royalty claims on those leases which call for payment of royalty based on a share of the “proceeds” at the well. See Waechter v. Amoco Production Co., 217 Kan. 489, 537 P. 2d 228, aff’d on reh. 219 Kan. 41, 546 P. 2d 1320. Accordingly, the lower court’s judgment is properly reversed as to the Lightcap, Cutter, Stewart and the first two Flower leases.
However, as to the Maupin, Parker and the third Flower leases, we feel the court is in error in denominating them “market value” leases and in affirming the lower court’s judgment as to them. These three leases call for the payment of royalty based on the “market price” of the gas at the well. In interpreting the meaning of the terms “market price” and “proceeds” as used in the leases certain matters should be considered.
*487These leases were executed prior to production and prior to the time a market had been obtained for gas. The lessors executed these leases and the lessees agreed to explore, produce and market any gas found in paying quantities. For this privilege the lessees agreed to pay royalties to the lessors based upon one-eighth of the gas produced. This one-eighth of the gas was to be marketed along with the seven-eighths belonging to the lessee-producers. All leases provided that the value of the gas to be sold from the leases was to be determined at the well unless sold off the leased premises. All of the gas from these leases has been sold at the well to a pipeline company which has its own gathering system and picks up the gas at the wellhead. At the time the first gas was produced there was no local market, and in order to fulfill its marketing covenants the lessee-producer had to obligate all production to the pipeline company which had developed markets in other states. The pipeline company is to pay for the gas as it is produced and metered into its gathering system. The entire payment is to be made to the lessee-producer who in turn is obligated by the lease to pay the lessor one-eighth royalty based either on the “proceeds if sold at the well” or at the “market price at the well”, depending on the wording in the respective leases.
Some thirty-five years have passed since the leases were executed. Gas has been discovered. The gas has been obligated to the pipeline company which has a developed market. Federal and state controls have been placed on production and the price to be paid for the gas by the pipeline company is now controlled by the Federal Power Commission (FPC).
In construing the royalty provisions in these leases we attempt to discern the intention of the lessor and the lessee at the time of the execution of these leases, i. e., before production began, before a market existed, before a gathering system was engineered, before the interstate market was obtained and before FPC controls were applied. So, what is a reasonable construction of the language in these leases? The rights of the parties to share in the economic benefits of the production were based upon a one-eighth and seven-eighths division. This division was to be determined by a measurement of the gas at the well. The lessee-producer was obligated under the lease to market all of the gas produced. The gas was marketed and sold to the pipeline company for the best price obtainable. The best price obtainable by the lessee-producer was cut back to 11 cents per mcf by the Federal Power Commission. With *488this in mind can it now be said that the parties intended the lessor to receive 15 or 16 cents per mcf on his one-eighth and the lessee receive 11 cents per mcf on his seven-eighths of the gas produced and sold at the well to the same purchaser? We think not. When the gas is committed to an interstate market at a controlled price on every cubic foot produced, we believe it was the obvious intention of the parties for the lessor to receive one-eighth and the lessee to receive seven-eighths based upon the best price available. The parties to these leases intended to measure the royalty as a fractional share of production. The mutual interests of the parties in such case would assure the lessor-owner of the best price available, for an increase in price would result in one-eighth to the lessor-owner and seven-eighths to the lessee-producer.
There can be no question that in the present case the lessee fulfilled the duties imposed upon it by these leases to use diligence in obtaining the best price available for the gas produced. The trial court in its third conclusion stated: . . The court further finds that the lessee has in good faith negotiated for the best prices available during all periods of time to date.” The trial court further found that “. . . the most economically feasible market available at the time the gas was marketed from the leases involved in these cases was the interstate market.”
Considering the above findings of the trial court the only remaining question should be — has the lessee accounted to the lessors for the royalty fraction of all monies received and retained by it as payment for such gas? This question was stipulated in the affirmative by the parties at a pre-trial conference. The pre-trial order controls.
An examination of the majority opinion discloses that the term “market value” is used as to royalties to be paid under the present leases. The correct term is “market price”. The distinction is pointed out in Shamrock Oil & Gas Corporation v. Coffee, 140 F. 2d 409 ( 5th Cir. 1944), cert. den. 323 U. S. 737, 89 L. Ed. 591, 65 S. Ct. 42, where it is said:
“Market price is the price that is actually paid by buyers for the same commodity in the same market. It is not necessarily the same as ‘market value’ or ‘fair market value’ or ‘reasonable worth’. Price can only be proved by actual transactions. Value or worth, which is often resorted to when there is no market price provable, may be a matter of opinion. There may be wide difference between them. . . .” (pp. 410, 411.)
The effect of such a distinction, if recognized in the present case, is apparent. Market value does not comprehend actual sales. *489If sales are made, a market price is established. The sales, of course, must be comparable and under terms and conditions similar to the terms and conditions involved in the contract under consideration. If there have been such sales and a market price has been established, then opinions and estimates of experts as to what the buyers should have paid are entirely irrelevant to establishment of the market price. An arbitrated figure would likewise be irrelevant.
In our present case the leases provide for royalty based on either “market price” at the well or “proceeds” if sold at the well. None of the gas was used or marketed off the leased premises. The term “market value” at the well appears in these leases only with reference to royalties if the gas is marketed off the leased premises. Therefore the repeated use of the terms “market value” and “market value leases” is improper, misleading and creates confusion.
The exact wording of the present leases with reference to royalty payments when the gas is purchased and metered at the wells is as follows:
(a) The Lightcap lease,
“The lessee shall monthly pay lessor . . . one-eighth (3s) of the proceeds if sold at the well, ...”
(b) The Cutter lease,
“The lessee shall monthly pay lessor . . . one-eighth (3s) of the proceeds if sold at the well, . . .”
(c) The Maupin lease,
“To pay the lessor one-eighth, at the market price at the well for the gas so used, . . .”
(d) The Stewart lease,
“The lessee shall pay lessor, as royalty, one-eighth of the proceeds from the sale of the gas, as such, . . .”
(e) The Parker lease,
“Lessee shall pay Lessor for gas from each well where gas only is found (a) that is located on Parent Tract, the equal fifteen one-hundredths of one-eighth (15/100 of 3s) of the gross proceeds at the prevailing market rate, for all gas used off said tract.”
(f) The Flower leases,
(1) “The lessee shall monthly pay lessor . . . one-eighth (Js) of the proceeds if sold at the well, . . .”
(2) “The lessee shall pay lessor, as royalty, one eighth of the proceeds from the sale of the gas, as such, . . .”
(3) “To pay the lessor one-eighth, at the market price at the well for the gas so used, . . .” (Emphasis supplied.)
*490None of these leases call for payment of royalty based on market value.
The argument is made that there is no distinction between a “proceeds” and a “market price” royalty clause. We have held otherwise. (Waechter v. Amoco Production Co., supra.)
The lessee does not seek to avoid its obligation to secure a market at the best price obtainable. It is not disputed that such a market was obtained by the lessee and the trial court so found. There is no evidence that the prices obtained were inferior to prices for any other gas being marketed from the field during this same period. The lessee recognizes there is a significance in the differing language of the royalty clauses. However, such a difference does not prevent the amount received as “proceeds” from adding up in dollars to as much as that received as “market price”. The trial court found the lessee had obtained the best prices obtainable for the gas and the record shows the prices so obtained were the maximum prices permitted under the FPC guidelines and ceilings for the period in question. Under these circumstances the one-eighth royalty payments under both “proceeds” and “market price” royalty clauses simply amount to the same in dollars.
In Waechter v. Amoco Production Co., supra, this court determined that the terms “proceeds” and “market price” were not equivalents. However, the dollar amounts arrived at by applying these different terms can ultimately add up to the same dollar amounts. In Waechter it was said:
“. . . Proceeds ordinarily refer to the money obtained by an actual sale. This connotation is not without significance in the gas business. Where the sale is at the wellhead the lessor does not consent to the uncertainties of what the market or fair value or price of the gas may be — he is willing to take what the lessee sells it for, relying on the lessee’s self-interest in obtaining the best price possible. Under the usual lease for every dollar the lessor receives the lessee receives seven. Where sale is off the leased premises market value at the well comes into play in determining royalty but other factors also may play a part in determining the parties’ intention, such as items of expense away from the wellhead, other sales and the like, in determining just what that market value is. In such situation there is no real sale at the wellhead from which proceeds are derived. Contrariwise, where gas is sold at the wellhead there are ‘proceeds’ of that sale — the amount received by the seller from the purchaser.” (p. 512.)
The existence of regulation is a limiting factor on the royalty bases under a “market price” lease just as surely as it is under a “proceeds” lease. In the absence of regulation the “willing buyer-willing seller” concept would apply to “market price” leases, not to *491“proceeds” leases. This is in accord with our holding in Lippert v. Angle, 211 Kan. 695, 508 P. 2d 920, where we held:
“Market value of property may be shown by independent proof of comparable sales. To be comparable the sales must be similar or under substantially similar conditions. Mere similarity as to some particulars is not sufficient where gross dissimilarity exists as to other factors which have a bearing on value.” (Syl. 1.)
The majority opinion completely disregards the question of what evidence may be necessary to establish a “market price”. There was no evidence of market price in the record of this case except the FPC ceiling price. In Waechter the question of what effect a controlled market might have on royalties under “market price at the well” leases was not reached. The leases considered in Waechter were stipulated by the parties as “proceeds at the well” leases.
In the present case the lessors argue that certain aborted arbitrated figures on reasonable value somehow establish “market price at the well”. Not so.
The lessee-producer, in an effort to secure an increase in the sale price to be paid by the pipeline company, thus benefiting both it and the lessors, obtained an agreement from the pipeline-purchaser to obtain an increased price by arbitration. It was agreed the arbitrated price in the final analysis was to depend upon approval by the FPC. The agreement to submit the question to arbitration stated:
“The decision of the arbitrators in accordance herewith in their determination of the questions hereby submitted shall be binding upon the parties hereto, who do mutually agree and covenant to and with each other that such decision and award shall in all things by them and each of them, and by their successors and assigns, be well and faithfully kept, observed, and performed, subject, however, to applicable laws and the rules, regulations and orders of any regulatory body properly exercising jurisdiction regarding such price.”
In accordance therewith a fair and reasonable price for the gas was determined without regard to one factor having a bearing on value, i. e., federal regulatory ceilings to be set by the FPC. Evidence of comparable sales to establish reasonable market value, as enunciated in Lippert v. Angle, supra, must include sales made under substantially similar conditions. The final FPC determination was a factor having a bearing on value and the arbitration proceedings were initiated and conducted with the understanding that the arbitrated value would not be binding upon the parties until approved by the FPC. The FPC refused to accept the arbitrated figure as a fair and reasonable price for the gas. Under these *492circumstances how can it be said that the fair and reasonable market price for this gas is the theoretical arbitrated figure?
In Waechter v. Amoco Production Co., supra, this court said:
“The sales of gas were not unregulated. Sales of natural gas in interstate commerce became subject to federal regulation by virtue of the [Natural] Gas Act of 1938; however, the FPC did not assume jurisdiction over the pricing of natural gas at the wellhead in the Hugoton field until in 1954 (see Cities Service Gas Co. v. State Corporation Commission, 184 Kan. 540, 337 P. 2d 640). Prior to that time there had been a measure of state regulation. Most of the leases contained a clause that both the lessor and lessee contemplated and agreed that the lease in all respects should be subject to valid orders of any duly constituted authority having jurisdiction of the subject matter of the lease. Even without such language in a lease private contracts .are subject to the laws of the1 land (Home Bldg. & L. Assn. v. Blaisdell, 290 U. S. 398, 78 L. Ed. 413, 54 S. Ct. 231). . . .” (p. 511.)
Most of the leases in our present case contained similar clauses contemplating future regulation of the production and marketing of gas.
The majority opinion, as well as the opinion of the Chief Justice, makes use of what we perceive to be an erroneous conclusion based upon a reading of Weymouth v. Colorado Interstate Gas Company, 367 F. 2d 84 (5th Cir. 1966), and J. M. Huber Corporation v. Denman, 367 F. 2d 104 (5th Cir. 1966). The majority opinion states, “Huber thus stands for the proposition that a market value’ lease on its face calls for payment at the theoretical free market value. . . .” The opinion of the Chief Justice also utilizes a theoretical free market value to arrive at its conclusions.
Such statements, if based upon Huber, can only relate to unregulated sales of gas for as to regulated sales, the court in Huber said:
“. . . Ever since the decision in Bayne Field [United Gas Improvement Co. v. Continental Oil Co., 381 U. S. 392, 14 L. Ed. 2d 466, 85 S. Ct. 1517] the Supreme Court has made it clear that neither the form of the transaction nor the peculiarities of state law are controlling in determining whether there is a jurisdictional sale of gas under the Act. ‘A regulatory statute such as the Natural Gas Act would be hamstrung if it were tied down to technical concepts of local law.’ 381 U. S. 392, 400, 85 S. Ct. 1517, 1522, 14 L. Ed. 2d 466, 472. . . .” (p. 114.)
The court in Huber refused to decide the question of the effect of FPC regulation upon the royalty owner’s fair market value and concluded:
*493“Thus we end, as we began, a consideration of these factors pro and con demonstrate that there is at least an arguable basis for FPC jurisdiction. Moreover, these factors ought first to be evaluated by the FPC in the resolution of the question of statutory power and, if that is found to exist, the necessary implementation of that in terms of the extent to which the exercise of that power is or will be appropriate. Lest we be misunderstood, we emphasize again that this analysis is merely to indicate why we conclude primary jurisdiction reference should be made, the Court all the while disclaims any purpose by what it has said or left unsaid, by its comments, express or implied, of declaring or intimating what its views are on the questions referred for initial decision by the FPC and the arguments pro and con.” (p. 120.)
In the companion case of Weymouth v. Colorado Interstate Gas Company, supra, speaking of the “theoretical free market value” concept as applied to a regulated market, the same judge who wrote Huber said:
“So this ‘free,’ ‘willing’ buyer is not so ‘free.’ Nor is his counterpart, the seller. Nor is the commodity. Nor is the business. Nor is the sale. The test in capsulated form is then, what would a willing seller and a willing buyer in a business which subjects them and the commodity to restriction and regulation, including a commitment for a long period of time, agree to take and pay with a reasonable expectation that the FPC would approve the price (and price changes) and other terms and then issue the necessary certificate of public convenience and necessity.” (p. 90.)
In our opinion neither Weymouth nor Huber will support a conclusion that the lessor in a market price lease is entitled to royalty payments based upon a theoretical free market value when in truth and in fact the market is regulated by the FPC. The majority adopt that conclusion erroneously.
The lessee-producer was obligated to pay royalty based on the best price obtainable at the wellhead. The trial court found it acted in good faith and sold the gas for the best price obtainable in the only market available. Under these circumstances the one-eighth royalty payments due under both the “proceeds” and the “market price” leases simply amount to the same in dollars. The entire judgment of the district court should be reversed.
Prager and Miller, JJ., join in the foregoing concurring and dissenting opinion.