Lightcap v. Mobil Oil Corporation

47,991 No. Lightcap

Harry W. Lightcap, and Lela I. Cutter, Fern Ellen Richard M. and Fannie M. Maupin, Stewart, Harold Parker known Flower, Corporation, Mobil formerly Oil Appellees, Socony Corporation, Inc., Oil Appellant.

(562 1) P. 2d Opinion 5, March filed 1977. Jones, Wichita, argued cause, Mark H. Adams and Richard of and John Robertson, Denver, Colorado, Sage, Wichita, E. and D. of were Jack appellant. on the for the them briefs Wichita, Wormhoudt, argued cause, Stucky Gerrit H. and Dale M. Conlee, Wichita, appellees. T. with him on the brief for the John C., Foth, by The was to his be- following opinion prepared prior filed and is now ordered coming member the Court Appeals, as the of the court: opinion trial, cases,

In six consolidated for the plaintiff-appellees these natural leases owners and lessors under various Oil Mobil defendant-appel'ant, field now held Hugoton three nearly We there are as lessee. are told Corporation, district whose outcome court similar cases pending hundred here. determined largely will be decision royalties received additional sought judgments Plaintiffs for 1958 from defendant and late predecessor its gas produced 30, was the difference based on increase through June 450 “market value” of the produced

between claimed 'higher Mobil, from its sales to actually the amounts received its customer on which it Mobil counter- pipeline paid royalties. way claimed (by setoff) alleged overpayments royalties 1, 1954, 31, 1958; period January counter- through January claim was denied. Mobil from the appealed judgments has addition, In additional denial of its counterclaim. part the trial court allowed interest on prejudgment plaintiffs’ it as to the claims but denied balance. from the appeals interest, have plaintiffs cross-appealed allowance of partial denial.

I. Issue Background; Primary Co., v. Amoco Production This Waechter closely parallel case to after 1975), 537 P. 2d adhered re- Kan. (June In 1976). Kan. 546 P. each case (March hearing, under their claim of owners plaintiff royalty the basic leases were entitled have their on the they royalties computed by of the taken the producer. at the wellhead “market value” value,” asserted, by was to determined the they That “market test, market, “free seller” without willing traditional buyer-willing sales regard any governmental producer’s price. regulation there, (Amoco the other hand Mobil here) The producers, the for the fact that sales at wellhead were resale relied on their commerce, were prices subject in and their sales thus interstate the Gas Act Power Commission under Natural regulation Federal 1938, 717 was established (That 15 U. S. et seq. principle C. § 672, Wisconsin, U. S. 7, 1954, Co. v. 347 Petroleum Phillips June claimed, result, was that 1035, they The L. 74 S. Ct. 794.) 98 Ed. the fixed ceiling price sold was gas they the “market value” the FPC. delayed issue in both cases primary determination of was The state cases staying a injunction federal years for several conducted the along with other producers, producers, while the in Federal Power Corporation Mobil litigation resulting Oil 406 U. S. 1972), cert. Commission, 463 F. 2d 256 C. Cir. den. (D. held that a S. 2409. That case L. Ed. 2d 92 Ct. 32 in Natural Gas as defined gas company” is not a “natural owner interstate in in “sale” he engage Act because does owner no over a the FPC has commerce. Hence jurisdiction as to his producer a owner and dispute a between over a lease. under royalties payable the amount Once Mobil had decided and been review United States denied, Supreme Court had been the state was litigation allowed in The district both this case proceed. courts Waechter and concluded owners entitled to be plaintiff royalty were of an “market value.” unregulated basis committed in each entire producers case had their production term long to the interstate market under contracts. In Waechter the 1950 contract between the Amoco called Ameri- (then Pan producer and Cities for Corp.) purchaser can Petroleum Service called a 23, 1961, until thereafter for “fair and price fixed June year for each successive five based on price period, reasonable” field. When were unable to agree going price action, affirmed in judgment was settled price declaratory Co., 191 Pan American Petroleum v. Cities Service Gas Corporation P. was em- 2d 645. amount fixed in that Kan. case as the district court Waechter the “market value” of ployed by In this there two contracts between the gas. prede- case cessor of the Northern producer pipeline purchaser, Mobil and its “A” “B” Both Natural Gas called the contracts. Company, 1,1958, called fixed until and for each five prices July year period “fair, just gas produced thereafter the price reasonable” These called for arbitration event of the field. contracts “fair, fixed a just result arbitrators disagreement, sold under the contracts for five reasonable” in issue. owners nor here Neither the year period value, of market on the issue any offered evidence independent P. 2d Kan. have. (See Lippert Angle, they might the arbi- court in this case employed As a result district 920.) way same the “market leases prices as value” trated employed Waechter. judicially fixed new rates submitted proposed In cases the producers both FPC suit, arbitration) to the by the other by determined one (the filed, but both rate was approved Neither approval. owners cases the royalty In downward. both ultimately adjusted ulti- on the paid rates royalties the difference between sought by producers retained lawfully received and mately approved, received would have they royalties and the purchasers, from their “market value” based on the the new rates the FPC had approved if the gas. clauses in courts cases the district construed In both value, require on an royalties unregulated based leases to found no requiring constitutional on that impediment payment basis, rendered for the plaintiff royalty owners judgment accordingly. issue,

In Waechter we reversed on this based on a con- contrary prototype royalty struction of the clause all members of We agreed class had to be bound. found that it called plaintiff based on the received royalties “proceeds” producer, not “market value” We gas. on the observed that .“Proceeds an actual sale.” ordinarily refer to the obtained Kan. money (217 on the 512.) royalties paid “proceeds” Since had been all Cities, sales any Amoco’s owners were entitled royalties. additional

Under that the court was not called Waechter reasoning upon value,” how might to construe the term “market or to determine it case, however, In we con- regulation. be affected FPC this lease, with forms of some of which indis- fronted different several “market price” call for or “market value.” putably royalties based court, no majority, and trial make distinction between (The them Both are construed to terms but use interchangeably. those will without marketplace, what the product bring mean value.) necessary is therefore any element “inherent” regard “market case whether “market (or this to determine value” market, in a free price”) hypothetical means value value in regulation. market as limited interstate II. and FPC Regulation Jurisdiction however, so, juris- to examine the doing appropriate Before any other basis the courts to order diction of if Obviously producer. than the FPC sales approved further into terms of inquiry no jurisdiction lacking, such to no case where required. question We are cited leases determined, think but we the fair implication squarely has been does area is such jurisdiction from decisions the federal exist. of Weymouth cases Colorado begin companion

We M. 1966), Cir. (5th Gas 367 F. Company, Interstate J. In Denman, 1966). 2d 104 Cir. F. Corporation (5th Huber requir- leases with clauses looked at gas each the court value,” carefully distinguished on “market based ing payments concluded, result, was that leases. The them necessarily was not payments value” of the “market from the sale proceeds actual as the the same however, that ceiling. argued, Huber lessee-producer market and thus committing subjecting the interstate gas the “market” to FPC had determined price regulation which “market determined. The court responded value” was to be this argument: beguiling appeal theory. “We do not minimize the of the Lessee-Producer’s doubt, approval, until Without a full this committed Lessors’ to this exhaustion of the all of the to this contract and hence reserves buyer descriptive ‘market.’ But the ‘market’ as of the or the outlet synonymous meaning fixing price larger sale is not value. For in with its or particular that situation the law not to transaction but the theoretical looks contemporary buyer supposed one between free free seller vis-a-vis freely property dealing length supposedly in relation to which arm’s own, not, theory buy neither will would make ever or sell. It was read, agreement pay from market received l/4th Rather, price’ pay or which this is sold. it was to of the ‘market l/4th (367 might 109-10.) ‘market as the case be.” F. 2d at value’ Huber thus that “market value” stands for the proposition on its at the theoretical free value. payment calls face much, however, the court encountered Having decided that if the to be proven fact that market value of the impact amount would be a substantial claimed the lessors there It went on to is a say,“there on the lessee’s regulated operation. federal, Court, initially or either serious whether a state question court, or both by jury, fixed ultimately, any allow amounts may express prior approval without royalty payments as increased these, fixed if, thus would Federal Power Commission (Id. 110-11.) the FPC.” prescribed would exceed levels determine trial proceedings court therefore directed a ruling until abeyance held in free market price juris- had agency on whether from the FPC could be obtained rates. diction over Com- v. Federal Power Oil Corporation

The result was Mobil Circuit reversed of Columbia mission, in which the District supra, pro- rates. Various over jurisdiction the FPC’s assertion of the potential basis of on the jurisdiction for FPC there argued ducers on consumers and the burden commerce on interstate impact in excess of on “market values” based result might On first issue found the FPC. rates fixed the producers’ “on the the act its terms beyond to stretch insufficient record it observed: ground second As necessity.” score whether, gives opinion concrete indication no FPC’s [T]he “. economically extent, may mean- circumstances, be an there or to what what ceilings. ingful problem prices’ of market In the Huber case the excess entitling royalty pursue judgment their claim no the owners to made deter- recovery. Apparently litigation may of of to mination amounts such come pursued as to on involve substantial sums even if so recover based ceilings higher filed This infer from the fact that Mobil Oil than rates. we producers although appealed ruling FPC and other have from the of the that royalty filing by filings obligations of the made the owners’ are met virtue royalty pro- producers, by by to rate filed the the a owner is not limited the may calling higher permitted his a rate ducer and enforce contract as for if by simply may on the Act. The record does focus what be involved recovery possibility royalty prices’ on the calculated the basis 'market (Id. 264.) higher ceilings.” than at The court then went on to observe: interject any misunderstanding that been “. To avoid we we have not us, uneasy producers presented by to we see have made the contentions being impediment producers’ theoretical held on the basis a contract no producers’ payment higher rate. base than the to a related to a filed Corp., Pipe Co. Gas 350 U. S. 76 S. Ct. United Gas Line v. Mobile Service Emphasis added.) (1956).” (Id. L. 100 Ed. 373 264-5. courts, end open result was that Mobil left it either federal, or between state to determine lease controversies noted, dic- expressly by way or only owners lessees. but a that court con- tum: “We can visualize the certainly possibility to market basis contention of fronted entitlement consider it to counter ceiling than the would run higher producer’s there to rebut something to the unless parties, intention interstate movement they contemplated that presumption the fair It also (Id. 265.) therewith.” prices compatible considerations, and under suggested public policy problems clause, by a reference both of which be obviated supremacy might FPC. All such have considered the court factors been decision here. the Fifth Circuit affirmed In a southern Louisiana area rate case failed to they FPC Mobil that rates fixed claims despite Mobil decision possibility into account take a rate than higher based on might be royalty obligations Commission, Oil Federal Power (Placid Company ceiling. held that this was possibility The court 1973].) Cir. F. 2d [5th rate, saying: the FPC disturbing no basis components royalty obligations producers are cost “Of course the necessarily component Any alter would of this rate structure. alteration holding of the D. C. departure point And under the of the rate calculations. stating Mobil, contract Erie would determination Circuit principles applicable law— upon of state royalty percentage based totally beyond agency regulatory charged the control of the federal with the responsibility regulating natural rates. stay willing implementation “But we are not alter of area wide industry merely might happen for the rates entire basis of what producers’ prevails. costs some this statement of law if “If, subsequent producers develop, put events their bind obligations, they may certainly petition FPC for relief.” individualized (483 911.) 2d at F.

The closest the United has States Court come to Supreme ruling nom., decision, question affirming the Placid sub FPC, S. Corp. Mobil Oil 417 U. 41 L. Ed. 2d 94 S. Ct. Of Mobil which (1974). same contention had been below, the rejected court said: complains provide “Mobil also failed to automatic Commission adjustments compensate anticipated higher in area costs. rates FPC, 310, Corp. App. Oil C. 256 It relies on Mobil v. S. D. 463 F. 2d U. (1972), Appeals where the Court of District of Columbia Circuit re- the holding subjected royalties

versed a Commission that to FPC administrative ceilings. argues that that 1971 rate must under decision the schedules higher obligations. agree possibility into account the of with take We Appeals argument hypothetical stage that Mobil’s at this and of Court any producer is event an entitled to seek individualized that affected relief.” (417 added.) Emphasis U. S. .at then last two Court quoted approval paragraphs Circuit Thus the that possibility the Fifth above. opinion quoted clearly recog- exceed the ceiling base FPC might 380, 395, cf., Inc., 397-8, 41 L. Ed. 417 U. S. And FPC Texaco nized. that “market emphasizes the court 94 S. Ct. where gas utility regula- reasonable” rates for “just value” the prob- things. (Approaching two and distinct separate tion are FPC end, case held that other the court in that from the lem if it per- function statutory setting be its rate abdicating would charged the rates to sold fix be mitted the value to its any producers jurisdiction.) argument to Mobil’s furnishes the answer concept think this We that require clause supremacy interest public the gas “market value” of fixing ceiling be accepted FPC fixes rates which the producer The FPC royalty purposes. matter as a purchaser (Northern) its pipeline may charge (Mobil) is, basically a rate designed That fixes rate utility setting. a reason production plus its reasonable costs the producer allow Oil v. Company Placid (See, e.g., its return on investment. able Commission, Oil v. Forest supra; Corporation Power Federal C., 1959]; F. P. Detroit, 263 F. 2d Cir. City Michigan [5th Com’n, Federal Power 230 F. 2d 810 C. Cir. 1955].) [D. One of the complaints against area rate setting was that it failed account variances of individual producers. costs This was first argument rejected Cases, the Permian Basin Area Rate 390 U. S. 20 L. Ed. 2d 88 S. Ct. 1344 One basis for (1968). rejection, as recognized by the Court in the Supreme southern FPC, Louisiana rate (Mobil area cases Oil Corp. supra) was the availability costs, of individualized relief to a producer whose A including royalties, unusually high. producer required to in excess of pay royalties those contemplated by estab- rates lishing original rate relief from FPC. may seek The fact that such relief cannot be retroactive is immaterial. An Inc., based on similar was made in argument grounds FPC v. Texaco where the court was supra, considering FPC order which had removing eifect rates small charged by producers from FPC regulation. Large direct producers pipelines, who bought producers, from the small to make their own bargains and thus wiere market value. The costs pay thereby incurred could initially consumer, on to the if it passed subject to refund were later deter- mined that such costs were excessive. Although FPC order deficient, it was found was not because of the economic hazards on the The Court imposed regulated companies. said: pipelines large producers “This to the contention of leads and the regulation unfairly subjects No. the scheme of indirect envisioned Order unjust them to the later determination that their costs are and un- risk obligation they reasonable and refunds which cannot in turn make producers high. recover from the small whose rates been too But have found regulated characteristically bear the risk those whose rates burden justifying regulation unavoidably their rates and limits their costs. Rate profits protected against, as as well income. . All that is in a constitu- sense, by higher tional is that the rates fixed the Commission be than a con- fiscatory (417 391-2.) U. S. at level.” it It down to this: Mobil contends that the rate is permitted boils may on costs it incur. As the ceiling to charge puts above, at the other process begins court reads the cases cited state end. The to be are first to be determined under royalties paid law, The so determined royalties terms of the lease. based on the cost, in the FPC by to be considered component then become a to In this charge. respect rates it will determining permit fuel way to a same as gas producer are costs royalties paid cost is under directly Neither utility. are costs to an electric bills the jurisdiction of the utility’s regulatory but both agency, are considered in the agency’s rate function. making

On this issue Mobil also points a clause in if appearing most all leases involved here: express implied “All subject covenants of this lease shall be all Laws, Orders, Regulations, Federal and State Executive Rules or and this lease terminated, part, shall not in damages, or in whole nor lessee held liable comply therewith, compliance prevented by, failure to if ifor such failure of, any Law, is the Order, Regulation.” result such Rule or argues this all language subjects terms the leases to federal regulation, and thereby subjects royalty clause FPC rate The setting. argument too reads much into fairly standard lease clause. If FPC rate setting royalties, then of applicable course the royalty clause lease yield would perforce federal regulation. But, The clause relied on makes that clear. the D. C. Circuit opinion Mobil says, regulation does not reach royalties to be under a lease. Hence compliance clause is not by any prevented regulation, federal clause heavily relied so Mobil never comes into play. The clause subordinates the only lease rules and applicable regu- lations, and FPC rules and are not regulations applicable. hold, therefore,

We that the existence of federal regulation over the rates which is no gas producer may receive obstacle to the rate as “market fixing higher of a value” sells for purpose computing royalties.

III. The Leases turn, then, We to a consideration of what called for commonly two litigation. recognized the leases There are leases and gas industry, “proceeds” types employed of leases See Produc- generally, Hugoton “market value” leases. Matzen 1045; 456, 463-4, 576, 73 R. Co., tion 182 Kan. 321 P. 2d A. L. Denman, In M. Huber Corporation supra. pri- Waechter J. court was which covered issue determined mary category there: clause of pay monthly marketed from each well “Lessee shall lessor or, (?a) well, one-eighth proceeds if lessee off if marketed sold 01) one-eighth thereof premises, of the market value at the then leased 522.) (217 Kan. at well.” mentions, seen, both clause will be “market all majority value.” Waechter concluded since sales are in this (as they case) were made at the wellhead the producer was clause “proceeds” part applicable. that actually The there to the fact there were pointed dissenters variety of leases in to the and that prototype, involved addition in many of these other leases reference their clauses made to “the market well.” prevailing to “the rate” or value market that instru- recognized ambiguous the well doctrine They applied their Smith v. construed draftsmen. strictly against ments are to be 779, 286; Russ, Bank 339 P. First National Kan. 181 Kan. 309 P. 2d Lawrence v. Methodist Home the Aged, for 389; America, 73 P. 2d 1. Royal Green v. Kan. Neighbors of lease, normally case means strict con- In the of an oil and of the lessor- struction favor against lessee-producer Co., 192 owner. Oil Kan. 388 P. 2d Superior Gilmore clause with the a broad look at the entire in context Taking construing the lessee- strictly against clauses other the dissenters Waechter concluded: producer, provision entire an intention “. The discloses ‘proceeds’ one-eighth from sale of that the well (217 523.) produced.” value of the Kan. at be measured which be said to fall may There are in six cases at bar leases clearly seem to call for two but three Some just categories. into sale, clearly royalties of a some for based sold, which follow the “market value” of and some on the term, we shall which, for want of a better Waechter pattern leases. refer to as “Waechter” by Mobil’s predecessor had committed

Production each been “A” Northern (the two contracts with separate to one be- prices, presumably for different contracts). “B” These called The differential gas. of different qualities cause “fair, just fixed the they when arbitrators maintained period litigation. for the five-year reasonable” price (al- clause three types trial court examined all The recognized only two) without benefit Waechter though, concluded: ‘proceeds’ provide or value and a ‘market’ herein both “The leases question royalty. paid gas one-eighth Thus the value to

basis difference, any, be drawn from these presented if that should ‘proceeds’ precisely strongly urges that means provisions. defendant approved prices question periods to FPC it translates and that and ‘B’ history in both the ‘A’ paid. of the leases show have been prices to predecessors the same have and its defendant contracts the proceeds lessors under each contract distinction without as to or market value price ceiling prices leases. The minimum and are asserted as the for reason However, prior regulated price this. to the existence of either no dis- base royalty payments. relationship tinction was made in This finds that court the price n duty lessor, the lessee with its to market the best based market of for implied lease, obligations on covenants in the result in the same on the lessee proceeds under both the market value and basis. the Thus intentions parties recognized payments history by has been of the identical the lessee predecessors sought and its afterthought and the distinction now is an based subsequent regulation anticipated that neither lessors nor lessees the when leases were executed. ‘proceeds’ price’ “The court therefore that concludes ‘market value’ ‘market ‘gross proceeds prevailing impose and at the market rate’ all the same burden pay royalty bases, e., on lessee to market on the i. same the best market good value obtainable. court that the lessee has in further finds faith negotiated prices during periods the best available all time to date. for of pay “4. The court that the intentions the hereto finds prevailing pur- lessors on the the basis market rates as the reflected negotiated by predecessors chase contracts with Northern. The defendants prices-,set per contract resulted in arbitration with at 16.75 cents mcf per contract, ‘A’ pressure contract and 15 cents mcf for the ‘B’ both at a base p judgment prices 14.65 s i a. Plaintiffs are therefore entitled to applicable period beginning years prior a based on these rates for five to the filing respective (Emphasis added.) of their cases to hereof.” date On take holding the correctness the members the court four separate positions:

Position 1. Two trial court’s that finding members agree a duty “proceeds” lessee’s same under lease and a “market lease, value” and that to secure best obtainable distinction, therefore, They any free market. make no between varieties, the three lessee’s regard obligation pay royalties on the They rely as value.” fact being measured “market into play, leases were made before federal came long regulation Huber, Circuit’s arguments and are convinced the Fifth above, Waechter, that “market quoted dissent value” They means in the free market the arbitrated (here price). value to be trial court owners entitled with the agree leases, would affirm across under all that basis there is a distinction other five members believe board. (The but differ they and “market value” between “proceeds” categories.) to the the two treatment with the agrees previous 2. One member of court

Position He, value” are concerned. as true “market leases two insofar cate- however, decided both as to correctly Waechter was believes and as basing “proceeds” the lease there gorizing royalties moneys under a lease on actual received proceeds producer. 3. also One of the court that a “market agrees

Position member free (the value” lease calls for on a arbi- dispo- He believes that dictates trated). proper also Waechter lease, out in sition of a but the reasons set “proceeds” true he believes ambiguity royalty clause) dissent (relating lease. Waechter lease a “market value” Position Three members are that Waechter opinion there, all correctly covers the lease other question however, that the They, leases as well. believe “market value” of market as it obtainable greatest means amount sale, exists, e., for regulated i. in the market. actually an interstate that proceed categorize roy- With division mind we can alty in these and of the trial provisions dispose involved six cases each. to each ruling court’s on We refer case plaintiffs name, each of clause: emphasize controlling portion royalty case:

(a) Lightcap monthly royalty gas pay lessor on marketed from each “The lessee shall as well, proceeds gas only found, one-eighth (%) sold at well is where if of (%) premises, one-eighth its marketed lessee the leased then if off market value at well.” 4 a Position justices taking This is ‘Waechter” lease. The three 2 in that justice holding Position this joined taking be calculated on the actual is a lease. are to “proceeds” Royalties decision, received, as in the trial proceeds held Waechter in holding court erred otherwise. Cutter case:

(b) monthly gas pay from each lessee shall lessor as on marketed “The proceeds gas found, one-eighth (%) well, only is well where sold if (Vs) premises, one-eighth or marketed lessee the leased then if off well. . market value . .” by (a) also lease and is above. governed This is a “Waechter” Maupincase: (c) gas one-eighth, for the pay market at the well “To the lessor at the found, gas only used, the same is while for the from each well where so premises. being .” used . . off the court four members of a “market lease. Those

This is value” above, court that with the trial agree Positions adopting value market arbitrated paid on this lease should be royalties of the gas. Stewart case:

(d) lessor, pay one-eighth proceeds royalty, “The lessee shall as of the from such, gas only found, sale from wells where and where fifty ($50.00) pay per not sold shall Dollars annum as from each such well, paid produc- so while such such shall held to well be be a ing paragraph well under numbered two hereof. .” This is a lease. The five members of court adopting Positions 3 and to be agree royalties this lease are on amounts paid actually lawfully received retained producer. judgment below is as to this reversed lease. Parker case:

(e) in the royalty clause lease in case original replaced this aby clause making royalties a dependent production from section known quarter “Parent Tract”: pay gas only “Lessee shall Lessor for from each well where is found (a) Tract, equal is located on Parent fifteen one-hundredth one- (Wioo %) proceeds eighth gross prevailing rate, at the for all gas used said tract.” off The four members of the taking court or 3 Positions consider lease, “market value” on the arbi- trated market value.

(f) Flower case: Three leases are involved this case each covering quarter- They section. were made subject to unitization agreement (to- with the fourth gether quarter directly didn’t section) clauses, but gave affect the to each lessor a “percentage Royalty” Vs) anywhere (25% production section. The are: royalty clauses monthly pay gas “The lessee shall lessor as marketed from each gas only found, proceeds one-eighth (%) well where is sold of if well, (is) by premises, one-eighth or marketed its lessee leased then if off

market value at the well.” pay lessor, proceeds royalty, one-eighth “The lessee shall of the from such, found, gas, gas only the sale and from wells where is pay Fifty ($50.00) per not sold where shall Dollars annum as from such . each well. . .” pay one-eighth, price “To the lessor at the market at the well for so used, found, only is from each while the same well where being premises. used off the . . lease, The first of these is a Waechter and “proceeds” is deemed a case, lease under the decision in the The (a) above. Lightcap lease, clearly second is by is controlled case, decision the Stewart The third a “market (d) above. lease, case, value” and is by Maupin (c) controlled above.

IV. Mobil’s Counterclaim for alleged overpayments In its answers counterclaimed 1954, 31, January through plaintiffs to January price on a sales were During period royalties paid Mobil’s predecessor Mcf under between both per contracts 11# Northern; order of the price fixed a minimum price was 2, 1953. A deci entered December commission corporation Kansas was Cities KCC order reversed court upholding sion this 78 S. Ct. Comm’n., 391, 2 Ed. 2d 355 U. S. L. Service State contracts, in the called for 1958. The January prices decided price minimum which would have but for invalidated governed per “A” order, Mcf contract were under the per 7.15# 8.74# for the stan “B” contract each case Mcf under the (adjusted of 14.65 psia). dardized pressure promulgated first price

When the KCC minimum order was comply only that would predecessor Northern advised Mobil’s a refund if the KCC order and would protest, expect under its royalty in ton advised found to Mobil’s predecessor be invalid. litigation, was to validity of the order owners that subject checks based on the that acceptance each advised 11^ which was any part to refund an agreement order constituted negotiated accepted Plaintiffs later determined be excessive. the checks. Court Supreme

After the KCC order was invalidated over- Delaware recover Northern Mobil’s predecessor sued That was eventu- litigation made it under the order. payments settled, refund to Northern of with FPC Mobil’s approval, ally in excess amount $2,517,522.92, 73%of the total paid or about contracts absence under the two which would have been share” of 73% “royalty the plaintiffs’ order. 11^ counterclaim. to recover through that Mobil refund seeks payments because The trial court denied the claim with Northern settlement was because voluntary, owners the statute was barred because the claim voluntary, and was limitations. Waechter, where rejected was ground specifically first said: the KCC order. We under also been overpayments had

there voluntary. payments be said can “. Nor compulsion making hazard in them. Appellant of a business prece- pay ‘as a condition compelled minimum order KCC 114 comply supply’. If it to failed source from common for withdrawal dent subject penalty with commission order it to criminal under K. S. A. penalty (217 514-15.) 55-708 civil under 55-710.” Kan. at Neither fact does the the settlement with Northern was “voluntary” cut off Mobil’s right reimbursement. The settlement 4, here was reached Amoco, on January 1963. The between dispute the producer Waechter, Service, and its purchaser had Cities to gone judgment 19, in favor of the on November purchaser (See Finding Co., No. Waechter v. Amoco supra, Production 217 Kan. at Mobil 495.) could that point foresee the readily outcome of its own case. If we analogize Mobil’s to right reim- bursement its royalty holders right indemnity, to we find general rule to be: “Indemnity against losses does not losses for cover which the indemnitee is person, improperly pays. person not liable to a third and which he But a legally damages indemnity may liable for to who is entitled settle claim against indemnitor, though and recover over even he has been com- pelled by judgment pay voluntary payment to the loss. fact of does not negative right indemnity, person obligation to since a confronted legally obligated he cannot resist is not to wait to be to lose a sued (41 opportunity compromise.” 2d, Indemnity, 33.) reasonable Am. § Jur. Co., 295; also, See Cason v. P. Irrigation Geis Kan. Revell, v. Fenly 170 Kan. 228 P. 2d 905.

There is no contention here that had defense to any suit, Northern’s or that the was in any way imprudent. settlement go Plaintiffs that the did not say only litigation judg- Delaware ment, Under hence Mobil’s not “determined.” liability was above, is not deny sufficient general principle quoted Mobil the to which is otherwise entitled. simply reimbursement what was legally obligated pay. limitations, As to the it had no doubt run before the statute action asserted. cause of accrued counterclaim was Janu- 20, 1958, invalidated KCC order. when the Court Supreme ary Co., 212 F. Supp. Producing Gas Co. United Cities Service See 1960); Pipe Company Eastern Line D. Okla. Panhandle 116 (N. Brecheisen, 1963). 2d 79 the statute (10th Applying 323 F. Cir. A. claim became 60-512) S. unjust (K. enrichment relating Waechter, 217 Kan. at 516-17.) 1961. (See on January barred however, claim not, the assertion of the as a prevent This did (d) provides: 60-213 Supp.) K. S. A. (now setoff. persons circum- under such existed between cross demands have “When other, against that, brought an action counterclaim if one had

stances up, deprived of the benefit can be been set neither could have cross-claim 464 assignment thereof or of the other or reason of the death statute arising peitition if out of the or transaction set

limitations contract forth plaintiiFs subject as foundation of claim or connected with the action; compensated they equal so as but the two demands must be deemed far each other.”

Thus, a setoff if it may (a) even an outlawed claim be used as co- the “contract existed with the claim and arises out of plaintiffs’ (b) transaction” on which claim is based. plaintiffs’ or

Here, 1, 1958, when the accruing plaintiffs’ began July claims new, arbitrated market value came into as actions on play, years. claims for the next written contracts continued as viable five S. A. were thus “alive” Supp. Plaintiffs’ claims (K. 60-511.) 1963; claim “alive” from July, July, from Mobil’s was through coexisted for at through January, 1961. thus January, They met the first years, thereby require- least some two and one-half See, Holtzman, 60-213 Tobin Co. (d). ment of Construction 525, 485 P. 2d 1276. Kan. out

The second of the statute —that the claim arise requirement Both claims contract transmission—is likewise met. same e., i. the “same clearly respective to arise out of appear contract,” spans. Although different time covering even though claim it relief on its outlawed can Mobil cannot secure affirmative defense, e., against any judg- it i. as a setoff pure a matter of use Akin, See, 183 Kan. it. rendered Christenson against ment counter- court therefore erred denying 326 P. 2d 313. trial its claim for over- entitled to setoff for in toto. claim claims plaintiffs only against although portion payments, e., accruing those claims of (i. plaintiffs coexisted with which January 1961). before

V. Interest of prejudgment trial and disallowance allowance court’s their made When the arbitrators way: came about in this interest “fair, rates for sales and reasonable” just in 1958 fixing award filed those MobiFs years, predecessor the next five Northern for to FPC, it was tariff. The as its new proposed with the FPC rates Act, suspended effective- Gas do under Natural authorized to of their lawfulness. investigation its pending new rates ness that it be permitted asking filed motion predecessor MobiFs to refund rates, new, obligation subject higher collect found later be might any portion Northern excessive, at 6%. interest plus 20, 1958, through December from approved,

This motion predecessor Mobil and collected period litigation entire Mcf and per rates of Northern the arbitrated from 16.750 At same respectively. "B” contracts Mcf on the “A” and per the basis of the old contract rates royalties time it paid 8.740 Mcf. per and 7.150 current part that it have to refund at least of its

Realizing might Northern, additional and would have to receipts pay retain, Mobil’s predecessor the excess would be permitted reserves A of these this purpose. established reserves for portion deposit. in securities and government were invested certificates Used treasury and corporate was into put general The balance any working like other operations just capital. for current Gas Natural predecessor Mobil out its bought (Republic When assets, 31, its 1961, its acquired December Company) liabilities, all adminis- litigation and its in and position pending trative the latter for proceedings. Among request was new, In the of 1964 spring arbitrated rates. approval which included with the FPC rate settlement proposal filed “B” Northern. The approved “A” and contracts with settlement was 26, an order which final on approved became July covering rates in as follows: period litigation Period “B” Contract ‘A” Contract Mcf Mcf Dec. 31/60 150 16.750 20/58-Mar. Mcf Mcf Apr. 110 110 1/60-Dec. 31/61 Mcf Mcf 150 16.750 1/62-Nov. 30/62 Jan. Mcf Dec. Mcf 1/62-Apr. 30/64 1, July rate continued as both contracts until (The was setting FPC area rate when went to as a result 12.50 field.) for Hugoton-Anadarko much receipts was final of how of its result determination to retain.

from Northern Mobil would able during period fluctuations, was, for irrational the amount Despite apparently the entire substantially excess of the and period, 8.740 7.150 had royalties. which Mobil been paying tendered Mobil at various times in 1964 and 1965

By pleading, and court the royalties previously paid into difference between the was due the FPC rates. tender royalties (The approved ways from time April modified to time not now On material.) trial latest court ordered Mobil to to its pay according in- no which it deducted counterclaim offered (in tender was distributed to terest) plaintiffs resulting payment particular without to the claims of the prejudice plain- —in tiffs’ to interest. claims It was on this that the trial court allowed payment prejudgment interest: “Judgment granted plaintiffs for interest will be the amounts received finding thirty-three defendant set forth in of fact number herein. These are the predecessor rates received defendant and its under the arbitration of tire gas purchase agreement approved full the FPC. Since defendant had receipt money

use and control from until into this court the tender equitable compel legal considerations court to allow interest at the rate period plus interest thereon to this date.” The second interest involves the additional amounts question below, rendered based on excess judgment was “market value” over the FPC it had made approved When rate. good on its tender Mobil had all the due on royalties amounts received from Northern which it permitted by was below, however, FPC to retain. The af- judgment which we are firming for the first time part, liability established Mobil’s those it had to these over above As previously paid. amounts the court concluded: delay concluding litigation “The unusual of these cases in which evidentiary hearing November, findings proposed was held in July 1, 1974, and conclusions and briefs until the direct were submitted injunction result issued the Federal District Court of this state. While litigation effectively enjoined directed to the to this it court. This plaintiffs’ request pre judgment matter is noted because of interest if granted, been, judgment is conclusion number four above. Plaintiffs has delay applying injunction. How- state the was caused defendant in for the ever, appeal injunctive the record reveals no from the order and the interim litigation in the FPC and United States Circuit Court determined the has question jurisdiction royalty provisions. plus this basic of FPC These facts impression pre judg- being court to a case initial leads this conclude judgment provided not and is not as to ment interest should allowed four conclusion number above.” re- rulings.

Neither is content with trial court’s side for damages that an claim general “unliquidated” lies on the rule by judgment. interest until liquidated usually does not draw — Corp. Co., Line 176 v. Panhandle Eastern Pipe Columbian Fuel 711, 773; v. 130 Kan. Bros. Reagor, Kan. 271 P. 2d Govenius result, is that no interest should says, 288 2. The Syl. Pac. owed, all, admittedly ten- either on the amounts be allowed at due. to be adjudged on the additional amounts dered and or paid, hand, amount Plaintiffs, royalties assert that the on the other on due the arbitrated “market was ascertainable readily value” times, all was allow- “liquidated” purpose therefore interest, Co., ing v. 193 Kan. citing Schupbach Continental Oil 408, 2d 1. P.

This court is of the that the trial was correct opinion court on both of the As to aspects interest the amounts which problem. judgment determined be due when was entered be- only low, general unliquidated we believe the rule as claims should apply. question liability (one from of “initial Apart impres- sion” as noted the trial the amount due if there court), was liability was not determined The “market value” judgment. until of the sold was trial evi- subject by any proof competent dence. Weymouth See v. Colorado Gas Company, Interstate P. supra; Lippert Angle, Kan. Here plain- tiffs chose to rely the arbitrated value as establishing value, and that was figure trial court ab- accepted result, however, sence of any other evidence on the issue. Such a could have been well under litigation not foretold before this was until time claim was way, unliquidated. total That Lippert supra, instructive this issue. was Angle, the gas also a on the gas royalties suit based market value There, had the lessee at the wellhead. no been paid, them the lessors’ an un- execution of having impounded pending made; usual form of division order. No tender even was due. value” was de- admittedly litigated amounts “Market termined, on the resulting interest was allowed prejudgment affirmed, claim court not on basis that the was judgment. This and vexatious because of “unreasonable liquidated but the lessee’s A. 16-201. case the present under K. S. In the delay payment” fault, not but solely that the Mobil’s delay trial court found was the time the injunction pending during the federal was caused Plaintiffs, the trial litigated. was question of jurisdiction order, noted, injunction they not appeal did court not to await the outcome they had been content could have that Mobil implication clear Columbia suit. The District of would delay” vexatious “unreasonable and guilty agree. We of interest. by way justify damages subject Mobil and held actually received money however, When first a different order, footing. stands the FPC advised each predecessor Mobil’s this receiving money began be rates would higher his on the owner that after the FPC acted a account” and “segregated in placed In funds.” “impounded owners would be out above, fact, either invested or used money indicated was noted, its predecessor Mobil and in the trial court the business. As money. control” of this “full use and had rule damages general unliquidated We find qualification this language: in damages interest as general authorities is that followed some “The rule therefor, any statutory provision cannot, recovered as a absence of unliquidated upon claim. In right contract in an action of matter however, jurisdictions, interest on such growing number of allowance court, unliquidated discretionary with the and interest will be allowed claim is Therefore, necessary required give compensation. where in order full

where discretion, compensation, court, at a sound to arrive fair exercise of may equivalent damages.” (22 or Am. include interest as an element Jur. 2d, Damages, see, Damages, 52a.) 185. And 25 C. S. § § J. This type reasoning award employed to prejudgment interest on an claim in Union Gas Co. v. unliquidated Brooklyn Gas L. Corp., Transcontinental P. 201 F. D. Tex. Supp. (S. 1960), aff'd 299 F. 2d 692 5th That 1962). Cir. was an action ( by gas distributors alleged made to their ultimate overpayments suppliers, Mobil and Ohio Oil their immediate Company, through Transoo. supplier, The court treated the matter of restitution as one Restatement, and found that interest should be allowed under Restitution, 156. It also found that courts are “the district vested § with considerable discretion of interest awarding damages upon restitutory sums. Considerations of fairness and traditional equitable guide the exercise principles discretion.” (201 F. Supp. 682.)

The defendants there contended interest could not until start order; meantime, the dissolution of a previously issued stay said, they they entitled to collect the Their higher duty rates. did not repay, they argued, arise until the became obligation The court’s unconditional. to this response argument was: argument Yet, logical appeal. “Defendants’ has considerable Mobil and Ohio money receipt. Similarly, plaintiffs have had the use of this from the date of its deprived have been such use of funds from the time these increased Equitable charges rates were reflected Transco’s to them. considerations compel respective the conclusion that interest should from the commence (Id. overpayments 682-3.) dates Transco’s to the defendants.” We have enunciated the general principle: compensation “Interest has been law or fixed defined as the allowed use, money. detention, society In our for the forbearance of today money commodity legitimate price market and with a on the loss use, delay its ordinary corporation, whether occasioned or default of an citizen, municipality compensable.” (Shapiro state or should be v. Kansas Employees System, 353, 357, Public 1081.) Retirement 216 Kan. 532 P. 2d

Here Mobil and its made predecessor active use of plaintiffs’ money, Under plaintiffs that use. the reason- deprived ing of the' foregoing cases are entitled to be plaintiffs compensated for their loss. Mobil was FPC order Northern obligated by to pay 6%interest on Northern’s share of the “impounded” money; equitable principles require owners receive the same treat- ment to their share. the trial court’s orders Accordingly as to interest are affirmed.

VI. Conclusion The trial court’s judgment is affirmed insofar itas awarded royal- ties on the e., free market value the arbitrated (i. price) sold under those leases which this court categorizes as “market leases, value” and insofar as it awarded and denied prejudgment interest. It is reversed insofar as it royalties awarded in excess of moneys actually received and retained for sold under the insofar as denied Mobil’s counterclaim. The cases are remanded for further proceedings in accordance with this opinion.

APPROVED BY THE COURT. C. J., concurring and dissenting: Fatzer, The crux of controversy this the amount of Kansas landowners have the to be to the right paid pursuant leases before court. landowners claim that royalty payments such should be based on the of 16.75 arbitrated and 15.00 cents prices contracts, Mcf fixed “B” per pursuant to the “A” and respectively. Mobil claims the must finally basis for be the ap- rates order of the Federal Commission. proved by Power this late 1958 During period controversy, through June 1963, the contract in effect the “A” and “B” prices under contracts were 16.75 pipeline purchaser between lessee (Northern) Mcf and 15.00 cents this per respectively. During five-year period, actually and its received the current predecessor, Republic, Mobil of 16.75 15.00 cents delivered gas they contract prices Northern, later decide these to refund should the FPC subject rates. “just During did not reasonable” prices provide contract five-year paid royalties plaintiffs this same period, Mcf, prices of 8.75 and 7.15 cents contract per the basis In late 1963 and five-year period early preceding (1953-1958). to re- appellee landowners commenced these actions had pay which Mobil failed to ac- cover additional the lease contracts. with obligation cordance March, 1964, Mobil filed company-wide In natural rate contracts, involving FPC proposal settlement some instant “B” two of which were the “A” and contracts. order proposal by settlement which became final

approved order period 1964. The rates fixed July controversy are as follows: “B” Period “A” Contract Contract Mcf Dec. Mcf 16.75$! 15.00$! 20/58-Mar. 31/60 Mcf Mcf Apr. 11.00$! 11.00$! 31/61 1/60-Dec. Mcf Mcf 15.00$! 16.75$! 1/62-Nov. 30/62 Jan. Dec. Mcf Mcf 11.00$! 11.00$! 30/63 1/62-June. must It is these rates which Mobil claims be the measure of now royalty its due owners. royalty obligation appellee in judgment district made of fact and entered court findings majority judg- of the landowners. The reverses plaintiff favor with to the due under the respect royalties ’’pro- ment amount of leases. ceeds” first four and syllabus

I concur cor- paragraphs due lessor- majority Royalties portions opinion. responding lessee, As terms of leases. are controlled landowners to to owners is obligation pay royalties royalty Mobil’s Kansas Moreover, juris- law. FPC’s of state law—not federal question royalties owners does not extend to or royalty diction full with Consequently, compliance under lease. payable by any is not federal or prevented regulation clause royalty basis for recognized have that the clearly order. Federal courts greater amount than the FPC may Commission, v. Corporation rate. Mobil Oil Federal Power ceiling 976, 32 ed. 406 U. L. (D. 1971), 463 F. 2d Cir. cert. den. S. C. 676, 92 S. Ct. majority’s prejudgment I also concur in the issue ruling counterclaim. disposition interest and Mobil’s addition, I the court’s as to the ruling In am in full accord with are to under entitled royalties lessor-landowners amount I majority part company value” leases. Where the “market due Kansas royalties is in their determination leases, the so-called the “proceeds” including owners under I are ceiling “Waechter” fixed rate. must dis- sent from that portion majority opinion.

I. STATE-FEDERAL JURISDICTION: first is one of with to the determina- jurisdiction respect issue tion under “market payment “pro- both value” 24, 1966, Mobil controversy ceeds” leases. On October between and the in Kansas district courts over plaintiff pending landowners to be their status paid plaintiffs amounts owners, upon the FPC as lessors referred Matzen, F. of Mobil. Oil v. Carl (Mobil Corporation complaint al., RI These consolidated et Docket No. 67-114.) proceedings Waechter, Pan C. Corporation American Petroleum Leland al., RI suc- et Docket No. 67-400. Amoco Production Company to Pan American was the defendant party cessor interest Co., 217 Kan. 537 P. 2d Waechter Amoco Production 41, 546 P. 219 Kan. 2d 1320. rehearing, adhered after question order issued the FPC stated By June issue follows: payments question presented made “The common is whether juris- proceedings subject lessors named in these this Commission’s the Natural Gas Act.” diction two, jurisdic- to determined it had a vote of three the FPC By leases now Act the oil and Natural tion under the Gas over thereunder. of royalty payments this court and amounts before under both payments that royalty of the decision was purport based on leases could not be an value” and “market in rate. ceiling FPC amount excess Oil v. Fed- was Mobil Corporation

The Commission reversed Commission, juris- Mobil held FPC has no supra. eral Power owner, executed over oil and leases a royalty over diction his producer owner and him, a dispute or over a between under such leases. payable the amount toas to Exxon has but to refer foregoing questioning Anyone RI 76-29 Docket No. (May Declaratory Order-Royalty, FPC Corp., the FPC said: wherein 1976), by producers royalty payments to jurisdiction over "The Commission’s C., Corporation P. v. F. F. Oil rejected by 463 the Court lessors cert, den’d, (1976). (D. 1972), The Court held 406 U. S. C. Cir. pro- jurisdiction charged by although over rates had the Commission that computing price] jurisdiction [or the rate had utilized ducer, no over royalty payment.” (emphasis supplied) (p. 2) consideration, Thus, area under federal jurisdic- in the specific is authorized to act is limited to fixing “just tion which and reasonable” rates charged producer protection no over the jurisdiction the consumer. The FPC has utilized in computing royalty payments.

The Constitution of the United States established federal sys- concerned, tem of For here sovereignty. dual federal purposes of that the Constitution jurisdiction consists conferred and valid Congressional enactments. Governmental not delegated powers United States Constitution are reserved Tenth Amendment to the states —or to the An essential feature people. of our system dual is that some areas federal ex- jurisdiction is others, exclusive, others, clusive. In jurisdiction state is and in still 2d, federal jurisdiction and state is concurrent. Am. (16 Con- Jur. Law, 198-209, stitutional pp. 433-448.) § context, In its broadest regulate therefore to power (and commerce an protect) express grant authority Constitutional federal government. When federal in this sovereignty area has been implemented, state acts which are in conflict must give But way. the Constitutional is not a universal provision grant, available under all any and conditions. express specific allocation of and it legislative power, Congress reg- ulates among commerce the states and foreign nations.

The United States Court has Supreme Congress, determined Act, by the enactment of the Natural Gas did not intend fed eral government to occupy entire regulatory jurisdic field of tion exclusion of the Comm'n v. (Power states. Panhandle Co., 498, 502-515, 337 U. S. 1503-1510, 93 L. Ed. 69 S. Ct. Co., 591, 609-613, Commn v. Hope Power Gas 320 U. S. 333, 348-350, L. Ed. 64 S. Ct. In Power Comm'n v. 281.) Pan Co., handle supra, was said: designed supplement “. power [T]he Natural Gas Act was state produce comprehensive regulation and to industry. a harmonious regulatory body upon Neither jurisdic- state nor was to encroach federal tion the other. Congress enacted this Act after full consideration

problems production and distribution. It considered the state interests as producers well as the national interest. It had both and consumers in mind. Legislative adjustments (em- conflicting were made to reconcile the views.” (Id. phasis supplied) 513) at In F. P. C. v. 1, Transcontinental Gas 365 U. S. 5 L. Ed. 2d Corp., 377, 81 S. Ct. 435 (January Court 1961), said: Congress, enacting

“. Act, give . . the Natural Gas did not comprehensive powers every gas production, Commission over incident Rather, Congress transportation, only and sale. was ‘meticulous’ to invest the authority aspects field, Commission with over certain leaving the resi- Pipe regulation. Panhandle Eastern due for state Line Co. v. Public Service Comm’n, (Id. (emphasis supplied) 8) U. S. 507.” at and further: Congress Act, “. When enacted the Natural Gas it was motivated protect against exploitation ‘to desire consumers at the hands of natural Sunray companies.’ Comm’n, Mid-Continent Oil Co. v. Federal Power end, Congress 364 U. comprehensive S. 147. To that ‘meant to create a regulatory Pipe and effective scheme.’ Panhandle Eastern Line Co. v. Pub Comm’n, lic Service See, S.U. Public Utilities Comm’n v. 520. Co., United Fuel Gas true, course, Congress S.U. It is that comprehensive

did not desire regulation; authority much was reserved federal (Id. 19) for the States.” We have here the clearest possible field over example is there concurrent state and jurisdiction. federal In the area jurisdiction to determine royalty payments, either the state or government federal must regulatory power one prevail only— sovereign jurisdiction. has

Clearly, Congress could have given the FPC jurisdiction use the ceiling rate to determine royalty payments due Kansas land- owners; just as clearly, Mobil teaches it has not done Congress so. was “meticulous” only to invest the FPC with over cer- authority tain aspects of interstate transportation sale of natural gas, leaving residue of the power be exercised states. In- by die deed, the Commission s jurisdiction is only limited that conferred Act—to fix “just and reasonable” rates with to gas respect moving interstate commerce for resale to consumers “protect against exploitation at the hands of natural gas No companies.” express implied power upon was conferred the Commission with respect to lessor-landowners or their interest in the natural gas produced from their land. The Act silent concerning is use of the FPC ceiling rate to determine the lessee’s royalty pay- ments to the lessors. jurisdiction conferred by the Natural Gas Act was for the

limited purpose protecting public. A consuming “just reasonable” rate fixed purpose. Where exercised, has purpose been the FPC’s Act jurisdiction end, exhausted. be may expanded not jurisdiction courts. rate fixed under FPC’s limited for the the consumer purpose protecting used another may measure purpose payment Mobil decided royalty. —to 474 under the Gas Act does extend to jurisdiction

FPC’s Natural owner, a lease between the and pro a contract landowner thereunder, further, ducer, that the or the payment FPC rate fixes no limit on the measure of be ceiling See, v. Federal Power Company under a lease. Placid Oil Commission, Corp. 483 2d v. (5th 1973); F. 880 Cir. Mobil Oil FPC, 283, 72, 41 417 U. S. L. Ed. 2d 94 S. Ct. 2328 (1974). The rate a within FPC’s not be purpose jurisdiction may fixed for wholly used outside that purpose agency’s jurisdic different may tion. The FPC rate not be used this court as the measure these leases.

II. THE ROYALTY INTEREST has been deemed to interest that consumer public be low Toward gas artificially prices. natural purchase able end, only “just have been allowed receive producers of return for the delivered. These reasonable” rate rates may charge carrier producer (Mobil) pipeline (Northern) rate The utility setting. are fixed the FPC as a matter of rate of production fixed allow its reasonable costs producer plus on its The rate is return investment. derived reasonable See, rather than field e. Permian prevailing prices. g., cost data 747, Cases, 312, 20 Ed. 88 390 U. S. L. 2d S. Ct Basin Area Rate C., 1344; F. F. 1061 1975); Oil v. P. 520 2d Cir. Company (5th Shell Commission, re Oil v. Power In Company supra; Placid Federal Case, F. 466 2d 974 9th Cir. ( 1972). Area Rate Hugoton-Anadarko C., F. of the Court Shell Oil P. Company discussion fixing on the rate light process: sheds some supra, “ for the new [T]he . Commission adhered to cost as the basis developed methodology Area utilized the national rate. FPC (1965), (Permian Basin), aff’d, Proceeding Permian Basin 34 FPC 159 Rate 1344, 747, (1968), Cases, 20 L. Ed. 2d 312 U.S. S. Ct. Area Rate 390 88 Proceeding proceeding, Area Rate Southern Louisiana modified the second aff’d, (1971), (Southern Louisiana), Co. v. Federal Placid Oil 46 86 FPC nom., 1973), Commission, (5th Cir. sub 2d 880 Power F. aff’d (1974) FPC, Corp. [So. Ed La. S. 94 S. Ct. L. Oil 417 U. average projecting Basically cost find the rate was determined II]. e., January gas,’-i. over ing producing discovered after new adding percent annual producing a 15 wells life of the estimated predicted to at for the future rate of return. Historical items cost expenses producer its actual tempt would recover to insure that commonly accepted Relating these estimated costs time done. work is allowable rate consumer results in a maximum unit of sold 1066) e., (520 Mcf, F. 2d at per feet.” i. thousand cubic in cents natural Factors of cost and return on investment production considered at the arriving “just producers reasonable” rate costs, may charge include following: successful well (1) (2) costs, costs, (3) hole other dry acquisition costs of pro- (4) facilities, costs, duction (5) other exploration (6) over- exploration head, costs, (7) area gathering production (8) operating expense, tax, cost, (9) production (10) recompletion and deeper drilling (11) expense, royalty (12) net regulatory expense, (13) liquid credit (subtracted from return costs), (14) production invest- ment, (15) See, return on working Shell Oil v. capital. Company C., F. P. supra; Commission, Placid Oil v. Federal Power Company supra. noted, it will be is

Royalty, one of the producer’s which expenses considered is in the rate. arriving ultimate FPC The amount the paid by an producer royalty owner is expense just as the wages drilling his the he price pays crews the he in the pipe ground. sinks other costs are These controlled by Royalty forces. should be treated no differently. Area rates do not into take account cost variances of individual producers. Commission, Placid Oil Company Federal Power If supra. royalty by costs or other a particular pro- costs incurred than ducer those in higher by the FPC establish- contemplated rate, the See, ing producer may seek individualized relief. FPC, Mobil Oil Corp. supra.

The final company-wide by rates established the FPC the action with instant share a common national basis area rates and on the its producer’s nego- rates —all are based costs. In settlement FPC, tiations the Mobil company-wide cost of presented production information. The record Mobil did not pre- indicates specific production sent cost information on its under the instant “A” “B” contracts of some 200 (two contracts involved' the so, it company-wide Had chosen do could settlement). the “A” and “B” presented have contracts costs the FPC on claimed owners appellee basis these cases since were when Mobil filed its settlement pending All the proposal. five-year rates established for the involved period controversy in this determined the producer’s company- wide cost of Even the some 24 production. periods two totaling months Mobil was allowed to retain full had contract analysis an Republic’s (Mobil’s received were determined production. costs revenue and predecessor) Mobil’s is value totally commodity rate unrelated public, For the benefit of rate is set to gas. consuming on its production a reasonable give producer return costs need only enough being investment. be to avoid confis- high Inc., 417 U. S. 41 L. Ed. 2d catory. FPC v. Texaco nor it will com- S. Ct. Neither value is taken into consideration unregulated marketplace mand is, essence, being given away. the FPC rate. The fixing is not in producer pay- The FPC controlled which the receives rate to cover the costs and commodity producers ment gas; investment. provide producers certain return on the With the measure respect majority says lessee-producer rate which the receives for (cid:127)of is the FPC share his gas. produced To landowners say production,; land is to measured cost producers totally the value and which unrelated to reflected protecting consuming public by a rate purpose fixed for lease, owner, his jurisdiction over agency having no is, incon- amount royalty payment, my his judgment, credulity It taxes to the my This sense gruous. logic. offends of breaking point. with the same clauses, the deal language, All whatever royalty is the landowner’s “Royalty” of royalty. interest the landowner — which is as com actually oil gas produced in the share See, Magnusson to drill produce. for the right pensation 577; 568, 331 P. 2d Shelly 183 Corp., Oil and Gas Kan. Colorado 226, 246; Co., Rut P. 2d Oil 160 Kan. Oil Co. Cities Service land Steele, 2d 741. The 155 Kan. P. Bank v. Savings land of cost producers of the interest is not share royalty owner’s to the totally unrelated not a share of an amount production. fixed of an amount It is not a share commodity gas. the of value has agency consuming of the protection public for the his lease. The landowner’s the or over landowner jurisdiction no actually produced. gas in the the value interest share royalty of its permit being do not of gas properties Because the physical commodity the his share of stored, royalty owner takes But, royalty gas itself. than a share dollars rather form of at the commodity Gas—the produced. tied to gas is still —is com Gas—the leases. gas all obligation royalty heart of of FPC rate which market. a value in the have modity—does value or its commodity gas based on related or neither law, be, the market cannot measure simply logic or of on his land. produced landowners interest in the royalty gas Co., on Waechter v. Amoco Production 217 Kan. Relying rehearing, P. 2d adhered to after 219 Kan. 546 P. 2d 1320, the the FPC rate is the measure majority summarily decides of under before this court. royalty “proceeds” leases now Waechter, decided. my opinion, incorrectly Relying it here error. compounds the

Waechter noted that and “market royalty value” “proceeds” lease, clauses are not the same. It said that a “proceeds” market, the lessor chooses not to be tied to the uncertainty but instead chooses to his share from royalty take whatever can lessee get on the lessee’s economic self- gas relying— rationale, interest to obtain best Under this price possible. whatever amount the producer receives must be the measure distinction, IWhile royalty. understand I do not think it can be stretched to the point completely breaking away commodity the basis for Under a royalty. “pro- which is lease, ceeds” is it the lessor possible received contemplates and his will determined royalty by something share other than if landowner’s commodity gas? Surely tire interest is in a share of the value of the his gas produced, royalty payment to, will or be determined at the least by, very be related the value commodity regardless of whether his lease calls for a share market value of the proceeds of the gas. sale

“Proceeds” and “market both value” are measures the lessee’s obligation obligation commands payment —an lessor portion gas produced. Both are related to the commodity value. This aspect common of all obligation gas leases has not unnoticed. gone One commen- tator has that while observed a literal distinction can be made between “market value” royalty provisions, prac- tice, courts seem to the at the apply same standard —market value on wellhead —whether a lease “mar- predicates royalty “proceeds,” See, Siefkin, ket Rights value” or “market Lessor and price.” of Lessee with Gas Provi- Respect Royalty Sale Gas and as to of sions, Fourth Oil and Gas Inst. 214 (Matthew 1953), Bender Sneed, and cases cited therein. after recognizing Professor proceeds does afford different standard than market or price value, says the this standard parties probably contemplate Sneed, other standard. from any different return will no yield Is Gas Pro- Only Where Production Lessors Share Value of of duced, L. 655 (1947). Rev. Tex. under- illustrate the common basis leases themselves Some of the value” The modified types. the and “market lying “proceeds” both Parker lease provides: prevailing (is) gross proceeds . . .” market rate. of at the

“. . . the rate” means If means actual sales price, “market “proceeds” contradictory. this is obviously for the clause gas, the market value out of the the lessee meaning: “proceeds” only It can have one on realizes, the gas lessor paid royalty produced the shall the of the well. basis market value at in all gas royalty the common element

When one recognizes commodity gas produced— the value of the clauses—a share of just of stated above meaning it becomes clear that proceeds court. The FPC must all the leases before the apply to the gas rate is unrelated completely imposed producer on costs based essentially or its value. is rate produced utility case, of this the arbitrated contract production. In “A” “B” value of only contracts is the evidence of the market is contract rate commodity gas. This the FPC tied to the and its value. This value must serve gas produced for the share leases. proceeds the basis lessor’s Out realizes the sale proceeds lessee of of from his the basis the lessor share on produced, should be arbitrated the market value the well as evidenced contract prices. It is well established that the landowner’s share & In 3 production. is of the costs of Williams free produced Law, 643.2, it is Oil said: Meyers, p. (1975), and Gas § ordinarily payable money gas royalty rather than “Inasmuch as wellhead, proceeds at is not custo- kind and measured value kind, royalty payable specify mary, inas case of the oil production production. Freedom such costs is free of cost of provision proceeds implicit payment or value share (emphasis supplied) wellhead.” Jernigan, 1970), 475 P. 2d (Okla. In Johnson stated: court proceeds’ “. reference to the value ‘Gross has any developing deducting expenses property involved in without point delivery.” dry gas marketing

Given that free of costs of proposition royalty pro- duction, using the FPC rate 'as the basis for determining royalty creates which is paradox: royalty, not to be burdened with any costs of production, is determined a rate based on costs of pro- duction. Surely, this cannot have the result been intended by the parties. Fromme would have the FPC rate as the serve basis for

Justice royalty under both “proceeds” and (he “market price” distinguishes between market price value) royalty says clauses. He that although the two different, types royalty clauses are such does not prevent difference amount received as from adding up dollars as much as that received as “market price.” I do not agree with his view that the FPC rate may serve as the do, basis for I royalty. however, agree the amount royalty may be the same in dollars under both “market “proceeds” and value” leases. I have pointed length, As out the FPC rate is foreign basic nature interest. The FPC rate is ill-suited to serve as the measure of under “proceeds” leases. Market value can and must as the serve measure under both “market value” and “proceeds” leases now before this court. Under hand, the circumstances at the one-eighth royalty payment types both leases amounts to simply the same in dollars. majority makes a distinction between “proceeds” and “market value” but to recognize fails another distinction: proceeds in a Texaco, and an regulated unregulated market. As noted in Inc. Commission, Federal Power 474 F. C. Cir. (D. 1972): unregulated industry] governed by “. . . [an the market . while regulated industry], by definition, subject governmental [a active control.” “just market value gas and reasonable” rates man- dated the Natural Gas Act two separate and distinct things. Inc., FPC v. Texaco supra.

Proceeds the form of an imposed, govemmentally controlled cost of production certainly equivalent rate are pro- from sale of in an gas unregulated ceeds market. The former is a sum commanded cost factors unrelated to commodity gas to its or value. The latter is a sum commanded on the based sale produced. Royalty proceeds market is necessarily tied to the value of the be- unregulated gas, it is cause commands received the pro- in the form ducer. based of the FPC Royalty proceeds ceiling with the interest —a share of value rate is at odds produced. III. LEASE CONTRACTS THE is controlled It is that due a lessor-landowner fundamental contracts. They the terms of lease. Such leases are I un- common law this am not governed by jurisdiction. mindful of the rules for the interpretation well-established rule to ascertain the construction of contracts. The cardinal into the contract they the time entered parties intention if be done consistent and to effect to that intention can give See, Kurata, Acres, v. 211 Kan. Mobile Inc. legal e. principles. g., 889; 833, P. v. Methodist 508 National Bank Lawrence First 100, first look 181 Kan. 309 P. 2d 389. Courts Aged, Home for The to used to ascertain their intent. parties language its ordinary contract will be given an oil language no for understood when reáson commonly meaning appears 239, Oil 202 447 P. 2d otherwise. Co. v. Kan. doing Skelly Savage, 971; 550, 395, v. 75 Kan. 89 Pac. 1011. 38 ALR 3d Collier Monger, to In that is totally fact rate unrelated my judgment, ample as the basis for commodity royalty provides serves otherwise. doing reason using utility cost basis

In face created paradox this as the court gas produced, rate measure to these ascertain construing warranted lease contracts fully of this dissent parties foregoing portions intended. what be may these lease contracts understood clearly “proceeds” show Where majority. than that ascribed meaning reach other two more understood reach language may of a lease of construction is proper. resort to rules possible meanings, when an existing agreement The circumstances and conditions inten- the court in the real clarifying was made sometimes aid may Jehan, Investment Co. v. E. Amortibanc parties. g., tions of 918; 33, Oil supra. 220 551 P. 2d Co. Skelly Savage, Kan. period during were executed question leases 11, Act was 1938, 18, Gas to November The Natural January 1938, until G. 717 et was not seq. U. S. enacted § June Wisconsin, 7, 1954, Phillips Petroleum Co. decision June States L. Ed. S. Ct. the United 347 U. S. Power Commission Court determined the Federal Supreme charge- Act the rates regulate Natural authorized Gas now before court. lessee by the able It is obvious that when the parties executed the in- they tended the “proceeds” would result from sale in an unregulated market. In market, the free commands the amount received the producer, rather than an artificial rate based upon production cost factors and determined as a matter of utility rate setting the benefit of the ultimate consumer. It seems clearly contrary to the intention of the say that the measure of royalty under the “proceeds” leases should be the FPC regulated rate utility received Instead, for the gas produced. it may be said the parties intended the lessors’ royalty share of production de- nominated as “proceeds from the sale of gas” would result from a sale in an unregulated market and be based on gas produced and related to the value of that gas.

Another aid in construing provisions a contract susceptible more than one meaning is the conduct of the parties thereto subse- quent to execution. When such terms have been construed and acted upon by themselves, the parties such construction will be adopted, even the though used language may more strongly suggest another construction. Desbien v. Penokee Farmers Union Coopera- Association, tive 220 Kan. 552 P. 2d 917.

The district court found conduct of parties the the reflected an intention that be on the royalty based value of the That gas. finding is supported by substantial evidence. From the time production on 30, 1953, these leases started until the gathering system uti- June for lized delivery gas to the pipeline purchaser by was owned Sales, therefore, wellhead, the lessee-producer. were not at the but off leased premises. the The for the and the price paid gas basis for the contract the royalty price by was established between lessee- and the The contract producer pipeline purchaser. and mea- price for royalty sure were related to and determined the value the gas produced. 30, 1953, On into producer the entered pipeline June the the Sales transferring gathering system pipeline.

contract date, same the thereafter at the wellhead. On that contracts were to pipeline the sale of from were amended. governing producer substantially. Royalty payments contract increased were based on contract again the amended contracts the under the gas. determined the market value of which was conduct does not bear out assertion the The foregoing on the cost of producer’s based royalty payments intended be transferring gathering system FPC rate. In production —the its costs. the contract pipeline, producer decreased Yet It renegotiated at the time were is clear prices same increased. were not producer royalty costs material basis for pay- ments. history clearly the leases payments a practice shows value measuring against without to costs. were the same under Royalty payments reference all the whatever clause. language Another In rule of construction deserves consideration. constru- contract, ing reasonable interpretations rather than unreasonable law, favored which vitiate purpose results absurdity the terms of the contract to an should be avoided. reduce Inc., Center, Inc. v. Food Kan. 519 P. Garvey Specialties, It cannot in no value way be the FPC rate disputed reflects is commodity disputed Neither can be that the rate gas. development and costs and not production for for itself. basis manifestly is clear that to allow such rate to serve it is royalty totally commodity divorces This an absurdity. based. An is illustrated the three leases equally unreasonable result These to a in the Flower case. three leases made subject those acreage unitization all burdened agreement. Accordingly, unit, leases in a from the three single gas produced three value”; the leases single leases from a well. One of is “market two, same majority “proceeds.” opinion, the other Under will two subjected from the different measures same well due lessors. determining royalty payments the FPC calling ceiling To these leases as interpret more as the is unreasonable for even proceeds rate measure juris- no federal courts have held FPC has basic reason. The and producer over lease contract between landowner diction courts the of thereunder. These same payment royalty nor over limit on measure of FPC no the ceiling said that the sets have the the majority, leases. To as does say, under the royalty these leases “proceeds” is of under royalty rate the measure FPC directly. courts did not do what federal is to do indirection the restrictive, these lease contracts is of majority’s interpretation administrative judicial the and unwise. renders unwarranted and in v. Federal Power Corporation Mobil Oil culminating proceedings at the Commission, futility. Royalty payments, exercise supra, lack inapplicable were held ceiling rate of this court the majority have noio been reinstated jurisdiction, payments. “proceeds” royalty as the basis of The construction construction be noted. One final rule of should interpretation more than one is in subject oil to gas of an and Oil Superior the the lessee. Gilmore against favor of lessor for this Co., simple. 602. The reason rule 192 Kan. P. 2d lease; the part preparation never has the The lessor almost form, the lessee, the has who the lease or chose prepared either employed through language itself opportunity protect in favor of lessors these leases Construing “proceeds” lease. from began. Royalty this arises me back to where dissent brings of that gas. related to value and its measure produced paid share to be the lessor’s From the lessee’s proceeds, the well as evidenced of the market value at on the basis from the sale of must be gas” “Proceeds contract prices. arbitrated or obtainable the absence obtained proceeds construed mean the sale “Proceeds from regulation producer. of cost-oriented value. market prevailing proceeds must mean gas”

CONCLUSION nu- and “B” all the produced The “A” contracts cover 129,220 acres in Stevens merous wells 644 leases on about a number of dif- The leases involved take and Morton Counties. have several variations of clauses. ferent forms and bar, extent, the additional ease at to a will control large leases, parties due under these leases. The intention of value,” “market expressed price,” the words “market through from the “proceeds gas,” “gross prevailing sale of proceeds rate,” values, rates “proceeds,” prices, was that such determined in market for proceeds were the unregulated selection commodity to be The fortuitous produced. day “market value” lease forms one lease forms the next “lease first so-called hound” who the leases acquired from the lessor-landowners should not be allowed affect that, It was not the intention. intention any such words in using payments should be any true— based the lessee’s cost of The reverse is upon production. royalty was to be free clear of consideration of les- see-producer’s costs. years, lessee-producer interpreted has all

Throughout provisions per various lease same Mcf basis requiring not now contend that various royalty; may Mobil payment effect as to the legal applied pay- have different provisions lease royalties. ment of “A” “B” to the parties gas purchase

The intention of contracts, effect to prior amended 'and into placed which were frustrated the cosit-related FPC Phillips 1954), (June indicated, As both lessee-producer. parties of the regulations them during five-year period these with complied contracts Thereafter, made pursuant refunds were question. under the Nat- in the exercise of its of the FPC orders jurisdiction were filed prices and rate schedules down- ural Gas Act adjusting of the “A” and “B” con- the contractual despite provisions ward In my opinion, par- the intentions higher prices. tracts for a matter of given way, to the “A” and “B” contracts have as ties law, Natural Act. to the Gas intention of the respect

A different situation exists contracts before this court and to royalty pay- lease and royalty ments thereunder. Under Mobil the lessors payments Natural Act or orders subject regulations are not to the Gas Hence, FPC. common-law of such intentions determination be lease contracts construed common law may made without principles regulations fixing reference to cost-related FPC contracts. Like- producer’s charges gas purchase under the wise, common law remedies available lessor-landowners wellhead, to recover value of the at the irre- commodity gas spective type under consideration. provision While, generally “market value” in the traditional speaking, is not sense equivalent gas,” the sale of when “proceeds the district court has determined to state common law pursuant remedies that market value of the is the measure all indicated, under such amounts bemay awarded. As “proceeds from sale of gas” should construed to mean pro- at the circumstances, ceeds prevailing market value. Under the the differing language of royalty clauses does prevent amount awarded for “market value” leases from same being in dollars as that awarded as “proceeds”; payments both royalty clauses amount to simply the same in dollars.

Based dissent, the foregoing portions of this I conclude: Since (1) neither jurisdiction of the FPC under the Natu- ral Gas Act nor the purpose the Act extends to the determina- tion of royalties under a gas contract, and since the FPC rate based utility setting a matter of rate is determined ceiling on investment totally return costs and on factors production is fixed for the pro- itself or to its value and to the unrelated the value of the and since consuming public, tection of the of the costs interest which is free royalty the heart law, rate the FPC that, I as matter of would hold production, in lease royalty used this court as a measure of not be may lessee-producer. contracts landowners and the between Kansas the FPC holding If a further reason need stated for (2) leases, it not be measure may royalty rate under “proceeds” be found in their construction. It is obvious that when may executed, leases were did not intend the FPC rate to be the measure of “Proceeds from the sale of must royalty. gas” mean or in the be construed to obtained obtainable ab- proceeds e., regulation proceeds sence cost-oriented producer —i. value. prevailing Market value as evidenced the arbitrated contract (3) prices should be measure of under all the leases before this royalty Mobil, court. Such a is consistent v/ith in holding holding with the with underlying basis of the interest and intention of the parties. court with

(4) The district judgment respect measure of under all the leases should be affirmed. reasons, which affirmance of

(5) foregoing mandate judgment district court’s with both the “market value” respect leases, are “proceeds” to the leases in equally applicable Co., Waechter Amoco Production supra, majority very there characterized as leases. Those leases were in the involved in decision of Mobil Oil proceedings resulting Commission, Corporation Power Federal Those supra. court,

just the ones now before this are subject teaching Yet, cite, of Mobil. majority’s in Waechter not opinion did discuss, apply, distinguish or comment its rela- upon reason, to that case. tionship For that Waechter be said cannot to announce any applicable of law with re- controlling principle spect questions before this court. I payments did Waechter, but I with participate agree Schroeder’s Justice dissenting opinion there in which Kaul Waechter joined. Justice overruled, should be and this court’s mandate judg- recalled and ment entered for in that plaintiffs case.

Schroeder, J., concurring dissenting: I would affirm trial decision and with court’s “Posi- identify tion 1” indicated The reasons for my court’s dissent opinion. herein stated in fully in Waechter v. my dissenting opinion Co., 489, 521, Amoco Production P. 2d 228. Kan. I J., concurring dissenting: joined in Justice Kaul, Co., Schroeder’s v. Amoco dissent Waechter Production Kan. 537 P. 2d on the premise proto- clause and, type lease therein reasons ambiguous involved stated dissent, a “market must be construed as value” lease. There- fore, Waechter, my consistent with I would affirm the position trial court’s as to Cutter first decision Flower Lightcap, as Waechter leases in the I (denominated opinion). court’s 3” as in the court’s identify opinion “Position indicated concur therein in all other respects.

Fromme, J., concurring and dissenting: of As one the of court the categorized three members 4, I of as to opinion necessary the court Position feel holding the our for that The lower judgment reasons of explain position. leases whether call .for they pay- court should reversed as to all be at of on the well or “proceeds” ment based “market royalty price” to they well. the facts this case both add the up the Under at the We royalty obligation same dollar amounts. agree law, to be from the lease is state determined gas question However, amount of due under royalty terms of the lease. the dollar for interstate can be gas obligated and sale produced a lease federal indirectly regulation. affected price the court of the claims opinion disposes The properly on a which call for based share payment on those leases at the well. See Waechter v. Amoco Production of the “proceeds” reh. 546 P. 2d Co., 217 537 P. 2d on 219 Kan. Kan. aff’d lower is reversed judgment properly the court’s Accordingly, Cutter, the Flower and first two leases. Stewart Lightcap, as to the the Flower However, and third Maupin, to the Parker as them “market value” denominating in error the we feel court them. as to These judgment the court’s affirming and in lower leases based on the “market payment for the leases call three of the meaning interpreting the well. In at gas price” used in leases certain and “market price” terms considered. should be matters to the and production prior were executed to prior

These leases executed these had been obtained for lessors gas. a market time any to agreed explore, produce and the lessees leases agreed For this the lessees privilege in paying quantities. found gas of the one-eighth gas the lessors based upon to pay royalties to along was to be marketed gas one-eighth This produced. All leases lessee-producers. seven-eighths belonging with the sold was leases gas that the value to provided off the leased premises. at the well unless sold to be determined to a been sold the well All from these leases has gas system picks up which its gathering has own pipeline company was gas At time the first produced at the wellhead. market, marketing to fulfill its there no local order production had to all lessee-producer obligate covenants the in other states. markets company developed had pipeline produced is to company pay The pipeline is to be made payment The entire system. metered into gathering pay in turn is obligated who lessee-producer if sold “proceeds either on the the lessor based one-eighth well”, depending at the the well” or at the “market leases. wording respective were executed. since the leases years have thirty-five passed

Some the pipe- obligated has been Gas has been discovered. state Federal and market. developed which has a company line to be production placed controls have been now controlled pipeline company Power Commission (FPC). Federal we attempt in these

In leases construing royalty provisions time of the lessee at the and the the intention lessor discern before e., began, production of these i. before execution before existed, system engineered, was market before a gathering were FPC controls and before market was obtained the interstate in So, language of the construction what is a reasonable applied. economic in the to share parties The the rights these leases? and seven- upon one-eighth based the production benefits of measure- determined aby was to be This division division. eighths was obligated lessee-producer The well. gas ment The was gas produced. market all lease to under the ob- price for best company the pipeline and sold to marketed cut was lessee-producer obtainable price best tainable. The With Power Commission. the Federal bymcf per to cents back mind this in can it now be said that intended the parties lessor one-eighth to receive 15 16 cents mcf on his per or lessee mcf on his seven-eighths gas produced receive per cents to We think purchaser? at the well the same not. When and sold interstate market at a is committed to an controlled price we was the inten- cubic foot believe it obvious every produced, the lessor to one-eighth tion of for receive and the lessee parties to receive The seven-eighths upon price based the best available. to these leases intended to measure as a frac- parties share of tional The mutual interests of the in production. parties such case would assure the lessor-owner best avail- price able, increase would result price one-eighth to lessor-owner and seven-eighths lessee-producer. can question

There be no that case the lessee ful- present imposed the duties these upon diligence filled leases use obtaining price the best trial produced. available court its third . conclusion stated: . The court further has in faith finds the lessee for the best good negotiated prices periods available time to date.” The trial during all court further that “. . . feasible economically found most market available was the time the marketed from leases in these involved was cases the interstate market.” only the above of the trial court the

Considering findings remain- ing should be—has the lessee accounted question lessors for the fraction of monies all received and retained by it for such This payment gas? question stipulated affirmative at a pre-trial conference. The pre-trial controls. order

An examination of the majority opinion discloses that the term “market value” is used as to paid be under the present leases. The correct term is price”. distinction “market is out in & pointed Shamrock Oil Gas Corporation v. Coffee, 140 F. 5th Cir. den. ( 1944), cert. 323 U. S. 89 L. Ed. 65 S. Ct. it is where said: actually buyers “Market is the same commodity necessarily in the same market. is not the same as ‘market value’ ‘fair only proved market value’ or ‘reasonable worth’. Price can worth, actual transactions. Value or which is often resorted when price provable, may opinion. there no may be a matter There (pp. 411.)

be wide difference between them. .” distinction, The effect of recognized such if in the present case, apparent. Market value does comprehend actual sales. sales, made, If a market established. The price sales are course, terms and conditions similar must comparable under con- the terms conditions involved the contract If has sideration. there have been such sales and price market established, experts been then and estimates of as to what opinions should have irrelevant buyers entirely to establish- ment of the An arbitrated would likewise be price. figure market irrelevant.

In our case the leases for present provide based on either at or “market the well if at price” sold the well. None of the gas was off used marketed the leased premises.

term value” at the well only “market these leases appears reference to if the gas is marketed the leased premises. off Therefore the use of the repeated terms “market value” and “market value leases” improper, misleading and creates confusion.

The exact of the wording present leases with reference to payments when the gas purchased and metered at the wells is as follows: lease,

(a) The Lightcap monthly pay one-eighth “The shall lessee (3s) lessor . . . proceeds well, if sold at the ...” lease, (b) The Cutter monthly pay one-eighth “The (3s) lessee shall lessor . . . of the

proceeds well, if sold at the . . .” lease, (c) Maupin pay one-eighth, gas “To used, the lessor at the the well market at

so . .” . lease, (d) The Stewart pay lessor, royalty, one-eighth proceeds “The lessee shall as of the gas, such,

the sale . of the as . .” lease, (e) The Parker pay “Lessee only shall Lessor from each well where is found (a) Tract, equal that is located Parent fifteen one-hundredths of one- eighth (15/100 3s) gross proceeds rate, prevailing of the at the

for all off used said tract.” (f) The Flower (1) monthly pay “The one-eighth lessee shall (Js) lessor . . .

proceeds well, if . sold . .” (2) pay lessor, royalty, lessee eighth proceeds “The shall one such, gas, from the sale of . . .” (3) pay one-eighth, “To the lessor at the market the well used, (Emphasis supplied.) so .” on market based call for payment these leases

None of value. a is no distinction between made that there is argument have clause. We held price” royalty and a “market

“proceeds” Co., (Waechter supra.) v. Amoco Production otherwise. to secure obligation to avoid its does not seek The lessee that such disputed It is not the obtainable. price market at best trial so found. court the lessee a market was obtained were inferior prices that the obtained prices There is no evidence this same field during marketed from the any gas being other differing in the recognizes significance there is a The lessee period. However, a difference does clauses. such language in adding received from “proceeds” up amount as prevent not The trial price”. much as that received as “market dollars to as obtainable for court obtained the best prices found lessee had were the record obtained prices and the shows so ceilings prices guidelines maximum under the permitted these in Under circumstances one- period question. and “market eighth payments under both “proceeds” price” amount to in royalty clauses the same dollars. simply Co., In Production court deter- supra, Waechter Amoco the terms and “market were “proceeds” price” mined However, dollar amounts arrived at equivalents. applying these different terms can add to the same dollar ultimately up In Waechter it said: amounts. ordinarily money “. . Proceeds refer obtained actual significance is not sale. This connotation without business. Where the sale at lessor does not consent the uncertainties the wellhead the may price willing be—he is what market or fair value obtaining for, relying on self-interest in take what the lessee sells it the lessee’s every price possible. the best the usual lease for dollar lessor Under premises sale off the the lessee receives seven. Where leased

receives play determining royalty market into in but value at the well comes other intention, part determining may play parties’ as factors also such like, expense away wellhead, items of and the deter- other sales mining just no sale what market value is. In such situation there is real proceeds Contrariwise, where wellhead from which derived. ‘proceeds’ sold at the there are of that amount received wellhead sale —the (p. purchaser.” 512.) the seller from the regulation The existence is a factor on limiting bases as it is under a price” surely under a “market just regulation lease. In the “proceeds” “willing buyer- absence of willing seller” to “market not to apply would concept price” leases. is in This accord with our holding Lippert Angle, 211 Kan. 508 P. 2d we where held: property may independent proof “Market value be shown com- parable comparable sales. To be the sales must be similar or under substan- tially similarity particulars similar conditions. Mere as to some suffi- is not gross dissimilarity cient where bearing exists as to other factors which have (Syl. 1.) on value.” The majority opinion completely disregards what question of may evidence necessary establish a “market price”. There was no evidence of market the record of this case except the FPC In ceiling price. Waechter the of what question effect a controlled might have on under “market the well” leases was not reached. leases considered Waechter by the stipulated “proceeds at the well” leases.

In the case the present lessors that certain argue aborted arbi- trated on reasonable figures value somehow establish “market price well”. Not so.

The lessee-producer, to an effort secure increase in the sale price paid by to be the pipeline thus company, benefiting both lessors, and the obtained an from the agreement pipeline-purchaser to obtain an price increased arbitration. It was by arbi- agreed trated in the final price analysis depend to upon approval The agreement FPC. to submit to question arbitration stated: “The decision the arbitrators in accordance herewith in their determina- questions hereby binding upon parties

tion submitted shall be hereto, agree mutually who do other such and covenant to and each that them, things by decision award in all each of their and shall them and assigns, faithfully kept, observed, performed, successors and be well and rules, subject, however, regulations applicable laws and the orders any regulatory body properly exercising jurisdiction regarding price.” such In for the price accordance therewith a fair and reasonable bearing a having was determined without to one factor gas regard value, e., the FPC. be set regulatory ceilings i. federal value, market Evidence of sales to establish reasonable comparable include sales made as v. must supra, enunciated Lippert Angle, final FPC determination similar substantially conditions. pro- the arbitration on value and having bearing was a factor a understanding with the were initiated and conducted ceedings binding upon that the value would arbitrated arbi- accept FPC refused FPC. The approved until these Under gas. as a fair reasonable trated figure 492 fair and how can be said that reasonable

circumstances figure? arbitrated is the theoretical gas Co., v. Amoco this court said: Waechter Production supra, In unregulated. of natural in interstate sales of were not Sales “The subject regulation [Natural] virtue of the Gas federal commerce became pricing 1938; however, jurisdiction over the FPC did not assume Act of (see Hugoton until 1954 Cities field of natural at the wellhead Commission, Corporation P. 2d v. 184 Kan. Service Gas Co. State regulation. 640). Prior time had state Most to that there been measure contemplated and lessor and lessee leases contained clause both the any agreed respects subject lease in all should be valid orders subject authority having jurisdiction duly of the lease. of the constituted matter private subject language in a contracts without such lease Even .are Blaisdell, (Home Bldg. Ed. & S. 78 L. of the1land L. Assn. U. laws 511.) 231). (p. 54 S. . . .” Ct. similar clauses Most of the in our case contained present leases production marketing future contemplating regulation gas. of the Chief well majority opinion, opinion Justice, an erroneous conclusion based use of what to be perceive

makes we Gas Company, v. Colorado Interstate reading Weymouth upon Corporation and M. Huber 367 F. 2d 84 1966), Cir. (5th J. Denman, The majority opinion F. Cir. (5th 1966). states, that a market “Huber thus stands value’ proposition theoretical free market payment its face calls for Chief also utilizes a .” The opinion value. Justice its conclusions. market value to arrive at free theoretical Huber, can statements, to un- only if based relate upon Such sales, the court in Huber regulated sales of for as to regulated said: Bayne Improvement [United since decision in Field Gas . . Ever the “. 466, Co., 1517] 2d S. the Oil U. S. 14 L. Ed. 85 Ct. Co. v. Continental nor Supreme it clear neither the form of the transaction Court has made that controlling determining is a peculiarities in there of state law whether

the jurisdictional regulatory Nat- ‘A statute such as the sale of Act. concepts hamstrung it were tied down technical Gas Act be if ural would 392, 400, S. S. Ct. 14 L. Ed. law.’ 381 U. local 114.) (p. .” court in Huber refused to decide effect question The fair market value and owner’s regulation upon FPC concluded: end, began, pro “Thus we we of these and consideration factors con arguable jurisdiction. demonstrate that is at there least an basis for FPC More- over, ought these factors first be evaluated FPC in the resolution of question statutory and, exist, power necessary if that is found to

implementation of that in terms of the extent to which the exercise power appropriate. misunderstood, emphasize is or be will Lest bewe we again analysis merely why primary that this to indicate we conclude jurisdic- made, tion purpose should any reference the Court all the while disclaims unsaid, by comments, express implied, what it has said or left or declaring intimating questions what its on the views are referred for initial arguments pro (p. 120.) decision and con.” In the Weymouth Colorado Interstate Gas companion case Company, supra, speaking “theoretical free market value” market, concept applied regulated to a same who wrote judge Huber said: ‘free,’ ‘willing’ buyer “So counterpart, so ‘free.’ Nor is his commodity. seller. Nor is the Nor is the business. Nor is the sale. The test capsulated then, willing willing buyer form is would a seller what subjects commodity regulation, a business which them to restriction and including long time, period agree pay commitment for a take and expectation approve price (and price a reasonable that the FPC would changes) necessary public and other terms and then issue certificate of necessity.” (p. 90.)

convenience and In our Weymouth Huber nor will neither a con- opinion support clusion the lessor in a is entitled to royalty market price based a theoretical free market value when in truth payments upon and in fact The regulated the FPC. majority adopt that conclusion erroneously. on the based lessee-producer obligated pay royalty trial it acted at the court found

best wellhead. obtainable the best good faith and sold the obtainable one-eighth market available. Under these circumstances only and the “market due under both the royalty payments entire amount same in dollars. The simply leases price” of the district court should be reversed. judgment Prager dis- join foregoing concurring JJ., Miller, senting opinion.

Case Details

Case Name: Lightcap v. Mobil Oil Corporation

Court Name: Supreme Court of Kansas

Date Published: Mar 5, 1977

Citation: 562 P.2d 1

Docket Number: 47,991

Court Abbreviation: Kan.