*1 Jr., HULL, Voit, and Robert C. W.S. W.F.
Bonner, Jr., Trustees of the Edward F. Trust, Tuttle,
Reed and Edward E. Mer Allen, III,
lin T. W. Call and Sam Trust Mary Reed
ees of the Elizabeth and the Trust,
Margaret R. Kosek Plain
tiffs/Appellees/Cross-Appellants, AND
SUN REFINING MARKETING
COMPANY,
Defendant/Appellant/Cross-Appellee.
No. 71179.
Supreme Court Oklahoma.
Sept. 3,May
As Corrected
Rehearing May Denied *2 Hart, Philip Bugg, D. Steven W. O.S.Supp.1985 justifies suspension Okla- City, defendant/appellant/cross- homa royalty payments is the existence of un- appellee. title, marketable failure to execute a divi- *3 sion order is not a defense to an action for Stead, Norman, Gipson, Robin Fred A. payment proceeds produc- the of from oil Seminole, plaintiffs/appellees/cross-ap- tion; 2) agent-lessee the could not bind the pellants. principal-lessor usage to a longer trade no Muchmore, Clyde A. Mark D. Christian- recognized contrary public to policy; sen, City, Oklahoma for amicus curiae 3) the lessors prevailing parties are Co., Petroleum, Inc., Koch Oil Total entitled to attorney’s reasonable fees under Corp. Citgo Permian Corp. Petroleum O.S.Supp.1985 540(C). The determina-
tion that owners need not execute KAUGER, Justice. division orders commencing before an ac- pursuant tion to negates the necessi- 1) presented The issues are: whether a ty addressing of the issues of whether the lessor’s demonstration of marketable title trial court in composing erred a list of sufficient to maintain an action under 52 properly factors included in division orders 540,1 O.S.Supp.1985 providing for the improperly or considered extrinsic evidence proceeds gas pro- of from oil and list, drafting the and whether the divi- duction; 2) whether by lessors are bound presented sion of interest by form the les- provision implied contract from custom and sors was sufficient to they par- show were usage requiring execution of a division or- ties payment pursuant entitled to to negotiated der in a contract by a lessee as agent oil; 3) for the sale of and whether party may either pre- characterized as a FACTS
vailing party entitled to court costs and attorney’s reasonable fees. We find that: lessors have marketable title to all 1) because the oil, condition for which gas, 52 the and other underlying minerals O.S.Supp.1985 provides: 1. Title 52 title examination standards of the Oklahoma purchaser Bar Association. The first shall be proceeds "A. The derived from the sale of oil exempt provisions from the of this subsection gas production any gas or from oil or well right and the owner of the to drill and to paid persons legally shall be entitled there- produce gas to, under an oil and lease or force (6) commencing no later than six months pooling order shall be sale, substituted for the first after the date of first and thereafter no purchaser pur- (60) therein where the owner and sixty days later than after the end of the arrangements chaser have entered into where subsequent pro- calendar month within which proceeds by paid purchaser are duction is sold. Such is to be made responsibility pay- owner who assumes the persons of pur- entitled thereto the first ing proceeds Provided, persons legally production. chasers of such entitled such purchasers may thereto. persons remit to the entitled Any purchasers B. proceeds production said first such from owner of the semian- nually (6) produce aggregate to drill and for the substituted of six months’ for the monthly provided first proceeds accumulation of herein that vio- of ($15.00). persons lates amounts less than this act shall be liable to the Fifteen Dollars legally provided, any delay proceeds produc- Further entitled to the from in determin- ing unpaid persons legally proceeds tion for the amount of such entitled to an interest proceeds production with interest in such from thereon at the rate of caused twelve (12%) annum, percent per unmarketable title to such calculated interest shall not from payments persons date of first sale. affect whose title is mar- Provided, however, county C. The district court ketable. for the in which that in those in- juris- proceeds the oil or well is located paid stances where such shall have cannot be marketable, proceedings brought pursuant diction over all because the title thereto is not purchasers prevailing party production any pro- to this act. The of such shall cause all proceeds ceeding brought pursuant due such to this interest to earn interest at act shall be (6%) annum, percent per any the rate six entitled to recover court costs and until reason- attorney’s such time as the title to such interest has been able fees.” perfected. Marketability May of title shall be de- This section was amended effective termined in accordance the then with current 1989. See note infra. 1) oil it quality and how (Reed). miner- cover: # These Reed 1-31 well measured; 2) 3) comingling; war- Five will be Jones d/b/a were leased to C.M. als title; 4) sales; 5) passage oil ranty of Company on October Oil & Star Gas interest; 7) title; 6) change tax deduc- lease, enti- the lessors are 1983. Under the standards; 9) tions; ef- production (¼) costs, all tled, to one-fourth free division order. fective date leased saved from the produced and oil to Bill assigned premises. The lease divi- Hull refused Sun’s standard (Andress/lessee/operator), Andress submitting instead a sion order Reed at the time the operator lessee and form on March 1986. In addi- interest *4 completed. Production was drilled and respective percentage providing the tion to in of 1985. began the December from Reed each and their tax identi- interests of lessor to take Although the were entitled lessors numbers, of the division interest fication V) kind, they not do so. in did their interest 1) provided that: the lessors were the form Therefore, Andress, be- acting on his own royalties payable the owners of lessors, negotiat- for the agent half and Reed, legal description prop- of giving a the purchase an contract with Sun. Sun ed oil 2) royalties the the erty; lessors certified pur- that a material term of the oil asserts according to payable cash the lease were the requirement chase contract included subject applicable and to federal agreement division that the lessors their standard of laws until a notification and state argue and order. lessors that Sun change was received of interest necessity did of Andress not discuss 3) purchaser; royalties less than of $25.00 part signing a as a of the oil division order per could allowed to accrue to month be contract, that did purchase and Andress respective year; or December of the $25.00 routinely orders not understand such were 4) that the division of interest form and precedent royalty required as a condition to supersede any previously executed would However, deposition payments. both his prop- covering order the described division trial, he un- and at Andress testified that erty. royalty parties derstood that all entitled to Hull’s of accept refused to division Sun required sign divi- payments would to be 1) on that it: did not interest form the basis part customary prac- sion orders as 2) specific purchase; terms contain purchase negotiating tice in an oil contract. 3) provide title; warrant did did not purchaser responsible for Sun is first disputes; resolving title and mechanism for pursuant royalty payments to the lessors subject 4) to to the attempted make Sun order 540. Sun received division prepared sub- of the lease. Sun and terms opinion February On the February title on on a revised division order mitted stan- opinion, of the Sun submitted its provid- basis division order revised signature to Hull for on dard order the division order did not amend ed that setting forth the own- provisions March 1986. Besides between the interest lease provi- lessor proportionate royalty share of each and the lessee and divided those ers respective applicable royalty and interest owners is entitled to receive their sions numbers, specifically applicable or- that identification the division from those were tax working owners.2 which to interest der contains nine other covenants any change provisions writing transfer of interest or 2. This revised order contained seven only upon receipt of the applicable providing would bind Sun that: Sun the lessors original designated agent transfer change a certified alloca- instrument of is the receive the oil thereof, copy would become owners that the ble under the division order day of the month com- agree indemnify from on first and hold Sun harmless effective mencing notice, days receipt that liability payments after for made to the owner order; 2) provided written notice in the would be would Sun accordance with the any pleading of suit filed monthly payments of a certified $25.00 or less form and that owner, affecting that if Sun $25.00 the interest of an accrue to or Decem- would be allowed to suit, 31; 3) party would notify owner was to Sun in was made ber the owner 6, 1986, payable upon On October the lessors filed a execution of a division order containing factors those set petition alleging pur- was a first similar to forth Sun party the court. Neither was found to responsible royalty payments chaser for prevailing party meaning abe within the prayer under the Reed. The lessors party Each was ordered to bear royalties all relief included due attorneys his/her own costs and fees. interest, costs, owing, court 12% attorney's petition reasonable fees. The 8, 1987, January on
was amended
to reflect
I
ownership
the lessor’s
23, 1987,
payments.
January
On
Sun filed THE ONLY CONDITION PRECEDENT
petition
its answer to the amended
admit-
O.S.Supp.
TO RECOVERY UNDER 52
ting
prod-
that it was the first
1985 540 IS A SHOWING MAR-
OF
denying
ucts from the Reed
but
KETABLE TITLE. THE CUSTOM
legally
royalty pay-
lessors were
entitled to
AND
AT
USAGE RECOGNIZED
defense,
ments. As an affirmative
REQUIRING
COMMON
EXE-
LAW
*5
alleged
purchase
that it had entered an oil
CUTION OF A DIVISION ORDER AS
contract
pursuant
with Andress and
A CONDITION PRECEDENT TO
terms,
required
contract
the lessors were
PAYMENT OF ROYALTY PRO-
to execute a standard division order as a
DID
CEEDS
NOT SURVIVE THE
precedent
receiving royalty
condition
to
O.S.Supp.1985
ENACTMENT OF 52
payments. Because no division order had
signed,
alleged
been
Sun
that the lessors
payment
were not entitled to
under the
A
prayed
judgment
contract. Sun
that
be
payment
royalties
from an
entered in its favor and that it be allowed
expressly governed
oil or
unit is
by 52
attorney’s
to recover costs and
fees. The
O.S.Supp.1985
540.3 Hull asserts that
cause was tried to the court on March 17
only
justifying suspension
condition
parties
and
1988. Both
pro-
submitted
royalty payments under
540 arises when
posed findings of fact and conclusions of
questioned.
title is
argues
Sun
18, 1988,
May
law. On
the trial court
540(A)
language in
referring
subsection
to
judgment finding
rendered
that the division
persons legally
payment
entitled to
indi
of interest form submitted
Hull was
may
cates that there
be conditions other
requirements
insufficient to meet the
justifying
than unmarketable title
delayed
the oil
but that the two division
payment. Sun believes one of these “con
orders submitted
Sun were overinclu-
precedent
payment
ditions”
require
is a
sive, containing matters not essential to a
ment that the lessor execute a division or
determination that the
legally
lessors were
der.
royalty payments.
entitled to
The trial
court
legally
found that the lessors
540(A)
were
specifically provides
Subsection
proceeds
entitled to
royalty payments
accrued interest
paid
“shall be
indemnify
against any judgment
day
and reim-
order will be effective on the first
costs,
fees,
attorney’s
burse Sun’s
penses
and other ex-
commencing
days
receipt
month
after
suit;
conjunction
4)
incurred in
with the
provi-
written notice of cancellation. Both the
dispute affecting
that in the event
aof
claim or
relating
proceeds
sion
to accumulation of
and to
provide
change
title or failure to
notice of
in
royalties suspended
of interest on
due
ownership, Sim would be authorized to’ with-
questions
subject
any appli-
to title
are made
payments
hold
until the claim was settled or the
cable statute.
5)
provided;
information
the owner warrants
authority
that the lessee has full
the lessee
to sell on terms
Comm’n,
Corporation
3. Seal v.
725 P.2d
determines,
produced
all oil
from the
(Okla.1986),
dismissed,
appeal
294-95
U.S.
6)
property;
described
Sun is authorized to
107 S.Ct.
division orders are conditions to Teel because the statute was enacted after Both Blausey the suit filed and the trial court had trilogy distinguishable are one royalty ordered of the escrow funds. Wolfe cases, respect deciding material those —in Supreme neither the Ohio Court nor the B Tenth had them a Circuit before statute addition, In similar to 540.9 in the general usage part A custom or Wolfe cases, legitimate question as to the mer- usage A practice common law.10 is a Here, chantability par- title existed. all regularity method observed with with agree ties that the lessors are the owners respect being perf to the transaction oil, of and have marketable title to all the law, ormed.11 recog Under the common gas underlying and other minerals usage nized custom and of the oil and Reed. industry requirement included the roy that alty holders execute division orders before relies Sun also on Teel v. Public Serv. receiving royalty payments.12 Co., Sun asserts (Okla.1985), 767 P.2d for the interpretation that an proposition finding of 540 that owners must purchasers if execution of a division order is division orders are to have not a condi protection prerequisite from suits for Al- tion royalty pay conversion. to a suit for though recognized impor- impermissible the Court ments creates an conflict Teel, tance of division orders in it did not with the nothing common law. Because find that the absence of an executed divi- specifically abrogates necessity justify sion order was sufficient to a find- order, signing argues ing conversion. The qf must interpreted 540 must be in a fashion to operator’s also have notice that to preserve purchaser’s right to demand product market the has In been revoked. execution of a division order. addition, is in the posture Teel same Blausey Except both and the cases. Section as altered our constitu Wolfe nature, prospective in apply statutes, did not to tion and the common law remains *7 emphasizing impor 9. Even those provides: authors 11. Title 25 O.S.1981 § 19 tance of division orders to the oil and indus "Usage public is a reasonable and lawful cus- try recognize that statutes similar to 52 O.S. concerning tom transactions of the same na- Supp.1985 may require payment 540 § in ab thereby, ture as those which are to be affected See, sence of an executed division order. P. existing place obligation at the where the is to Lear, Accounts,” Suspense "First Purchaser see performed, par- be ties, and either known to the 17-16, 17.04(l)(a), supra; Legg note 5 at W. & established, general or so well and uni- Murrah, Jr., "Royalty Payments A. Owes —Who form, they presumed must be to have Inst, How Much to Whom and When?” 35 on acted with reference thereto.” 159, (1984); Oil & & Gas L. Tax’n 165 S. Holli- 1-205(2) provides: Title 12A O.S.1981 § mon, Primer,” "Division Orders—A 34 Ins. on usage any practice "A of trade is or method of Twenhafel, (1983); Oil & Gas L. & Tax’n 332 M. dealing having regularity such of observance Origin, "Oil-Gas Division Orders: Their ties, Varie 1479, place, Usage,” justify in a Rockey vocation or trade as to & 27 an Mtn.Min.L.Inst. Pur-, (1982); Jr., Boyd, expectation 1508-09 W. "Crude Oil that it will be observed with re- Orders,” chasing Opinions spect Title & Division question. to the transaction in The ex- —Its Inst, 233, (1967). 18 on Oil & Gas L. & Tax’n 262 scope usage istence and of such a are to be Additionally, other courts have held that execu proved as facts. If it is established that such a prece tion of a division order is not a condition usage is embodied in a written trade code or See, receipt royalty payments. dent to Fonte writing interpretation similar of the writ- Co., Sunray not v. Mid-Continent Oil So.2d 197 ing is for the court.” 715, also, (La.Ct.App.1967). 719 See Sellers v. Co., 435, (La. Continental Oil So.2d 168 437-38 Corp., v. Shell Petroleum see note 8 at Wolfe (In Ct.App.1964) partially a which lease was 442-43, Co., 8, supra; v. Texas see note Wolfe royalty payments cancelled for failure to make supra; Territory Illuminating Indian Oil Co. v. signed by where no division order was sor.). the les 78, 505, Killingsworth, 175 Okl. P.2d 51 506-07 728, (8th Corp., 10. Cruce v. Pierce Oil 279 F. 731 Cir.1922).
1279 may payment upon showing rests a of market- and effect.13 Statutes in full force able title. in- right where the a common law abolish Al- plainly expressed.14 to do so is
tention
Division orders are contracts be
expressly state that
though
does not
540
production and the
tween the sellers of
custom and
recognized common law
protect
primarily
executed
or-
usage requiring execution of
Although
do
purchaser.18
division orders
provide
abrogated,
provisions,19they
has
it does
are revo
der
been
not alter lease
binding upon
pay
authorizations to
justified as to
cable
suspension
when
that even
Therefore,
royalty
until revoked.20
owners
lack
marketable
parties due to
some
royalty
a division
when a
owner executes
title,
pay-
not affect
that situation “shall
order,
provisions
by
the owner is bound
market-
persons whose title is
ments to
may abrogate or
the division order which
not inconclu-
The text of
540 is
able.”
rights
interpre
under the lease. An
alter
justifying suspen-
only
condition
sive.
the common law custom and
tation
is a lack of mar-
royalty payments
sion of
usage relating to division orders survived
usage repugnant
ketable title. Custom
the enactment of
540 would
provisions of a statute is
expressed
express provision
contravene the statute’s
exists between a
void.15 When conflict
requiring payment
parties with market
usage,
the statute
statute and custom
title,
permit purchasers
it
able
would also
540 was enacted for a
controls.16 Section
Legislature’s
intent
with
to defeat
purpose
ensure that
those entitled
—to
an
holding payment until lessors execute
proceeds in
royalty payments would receive
containing provisions
unaltered document
enact-
timely fashion. Where a statute is
the lease and
may
both contravene
purpose
preventing
an act—
ed for
Although
be unfavorable to the lessor.
here,
suspension
royalty pro-
needless
negotiations
preclude
did not
be
ceeds,
prevail
provi-
can
over its
no custom
royalty
purchasers
owners and
tween
540,
enacting
Legislature
In
sions.17
order, purchasers
signing
of a division
expressed
intent that it shall be the
has
its
guise
may not under the
of custom
public policy in Oklahoma for
own- usage impose
conditions on
unfavorable
payment from the
prompt
using
suspended
ers to receive
threat of
royalty owners
acquiesence.
coerce
gas products.
sale of oil and
Corp.,
18. Maddox
provides:
Oil
222 Kan.
Title 12 O.S.1981
Gulf
denied,
(1977),
law,
cert
434 U.S.
P.2d
as modified
constitu-
"The common
(1978);
law,
Wag-
statutory
judicial
L.Ed.2d 767
decisions
98 S.Ct.
tional and
Co.,
people,
Sunray
and wants of the
and the condition
Mid-Continent Oil
182 Kan.
ner v.
*8
general
81,
1039,
(1957).
shall remain in force in aid of the
P.2d
1047
318
Oklahoma; but
the rule of the
statutes of
law,
derogation
common
statutes
Energy,
ed their and must AND REMANDED REVERSED payment. order to be entitled to
HARGRAVE, C.J., LAVENDER, and usage that Sun The custom and WILSON, JJ., and ALMA DOOLIN upon of a division order relies concur. —execution precedent for as a condition V.C.J., HODGES, OPALA, and SIMMS the en royalty proceeds not survive —did SUMMERS, JJ., dissent. agents may Although actment of principals to trade contract and bind their Justice, SIMMS, dissenting: usages,21 power does customs Today majority holds that with the are usages extend to customs O.S.Supp.1985, enactment of 52 policy.22 illegal contrary public either requirement of execution of a division or- divi requirement that lessors execute prerequisite royal- der as a receiving royalty pay sion orders before ty proceeds public pol- became “violative letter of spirit ments conflicts with icy.” my opinion, majority’s holding In public policy 540 and is violative of *9 contrary unsupported by the law and is to promoted through its enact intended to be case, respect- and I must royalty the facts of this prompt payment to owners ment— gas. fully oil or dissent. proceeds from the sale of of also, Fletcher, See, (Second) Agency See Johnson v. & 245 Ala. Restatement of 34 Shook 406, (1957) 123, (1944); providing pertinent part: in So.2d 413 South Carolina 16 Weil, Co-op interpreted light Ass’n v. 220 Ala. in of all Cotton Growers’ "An authorization is accompanying circumstances, 568, 637, including (1929); Hilsinger v. Trick 126 So. 642 among (b) 286, 305, ett, (1912). matters ... other Ohio St. 99 N.E. 307 86 business, usages general usages the the of Paine, employments kind trades or of the to of 224 Mass. 112 N.E. 158 22. Hall relates, and the busi- (1916). which the authorization principal ness methods of the ...”
1281 erroneous, being majori- the to policy” In addition “public broad-brush To reach this unnecessarily inserted has ty’s decision apparently inter- result, majority has the in and confusion a stable set- conflict and isolation, for in its total preted § gas law. tled area of oil acknowledged majority has opinion the own that: interpreta- the trial court’s agree I with requires proceeds simply It long tion of device of
1) order is a A division paid from an oil and sale to be derived industry purchasing in the oil standing thereto”, no persons “legally entitled to the custom and recognized part of and a the date of first than six months after later industry; and usage of the Certainly purchaser the first purchase. usage, division 2) Through custom may proceeds when title is not withhold required to en- always orders have been marketable, market- but demonstration of payment to receive royalty title a owner in and of alone is not sufficient able title purchaser; proceeds for from “legally itself to cause an owner be of a di- 3) of execution requirement then, payment. Clearly entitled” to receive is royalty owner order before vision “causes” other than unmarket- the payment part is of entitled to receive may exist which make an owner able title in full force law which remains common “legally entitled” to receive plainly ex- unless a statute and effect production. Failure to exe- proceeds for intent to abolish that com- presses the pro- purchaser order to cute a division right; mon law pay- purchaser that with directions for vide 4) plainly, or other- 540 does not Section setting ment and forth the terms and condi- wise, the express any royalty intent to abolish oil is one purchase tions for the usage require- must be custom and such “cause” under which common law orders; royalty owner would be “le- and met before a of division ment of execution proceeds. paid from gally entitled” amendment to The new 1989 540(B), pro- O.S.Supp.1989, explicitly Additionally, persuaded by I am not the mat- majority’s attempt distinguish execution of division orders this vides for the v. Pub- from its recent decision Teel prerequisite for ter as a Oklahoma, Okl., Company lic owners, the date Service from and after effective appreciate I the tenu- P.2d 391 July itself Oil must see position ous which Sun admissions, it would seem these With light holding the of Teel occupying, in the would hold beyond question that Court it language therein. While is and the used in a manner that 540 should be construed states, majori- majority true as the existing common law. consistent with did not find ty opinion Teel statutory construction re- Basic axioms in and of itself a division order absence of however, Instead, majority quire it. finding of con- sufficient to sustain doggedly proceeds to its conclusion order is find that a division version—it did 540, division orders are violative of under § protect itself essential for holds, because, it public policy Using pen, the same a claim. against such payment is demonstration prerequisite for in Teel stated: majority title. of marketable agree- of an “A order consists opinion, I majority The effect of working interests and ment between it, year a four “win- is the creation of view provides a formula purchasers (1985-1989) during which the law dow” purchaser’s price payment and what what it was before protect pur- different from function is to gas. Its *10 legislative Nonetheless, enact- Different liability. it will be after. chaser from subject, to the same unless the pertaining protected ments purchaser harmoni- the division together as a the interest should be construed owners of executed of an See, Conservancy In the absence Letteer v. order. ous whole. of no- presence in the Okl., order and P.2d 796 division District No. non-contraetmg cotenant tice that sell, operator’s Willis, revoked the has Lloyd WILLIS Charlotte to account to each failure of Plaintiffs-Appellees, pro for his/her working interest owner proceeds subjects the rata share AND COMPA liability the NOWATA LAND CATTLE as purchasers to the same INC., Corporation, NY, purchaser may become operator and the an Oklahoma Gilmartin, individual, property.” a converter of De 397] an [At and John Emphasis added. fendants-Appellants. instant case was at best large part In No. 64719. declaratory judgment as to plea Supreme of Oklahoma. Court plaintiffs’ of whether question abstract form of interest
proposed royalty 31, 1989. Oct. to, at least a sufficient superior or April Rehearing Denied for, proposed division replacement Sun’s merely petition amended order. Plaintiffs’ they an executed
alleged submitted to defen-
royalty division of interest form had refused to but that defendant
dant payments plaintiffs.
make much of the action before the gist not even to receive
trial court was majority, granted here but
relief judicial declaration of
simply to obtain a should be
which form was better which
approved. “public policy” uses
The Court unsupport- reach a result which is
crutch to There is no factual basis this
able. in the contract issue which
record or today.
justifies pronouncement made majority just to mention has failed unfair unfavorable conditions were
what or royal-
attempted imposed upon to be these guise
ty owners under the of custom justify a result.
usage which would such majority opinion in the
Nothing in the in the division order
record shows terms Oil which were unfair or
prepared
oppressive. a clear
The recent amendment to 540 is public policy and mandate of the
statement always has existed this State—in- through 1989. I
cluding years the trial court.
would affirm state that Vice
I am authorized to Chief OPALA, and Justice HODGES
Justice in the join with me
Justice SUMMERS expressed herein.
views