R.A. Ramming v. Natural Gas Pipeline Company Of AmericaR.A. Ramming v. Natural Gas Pipeline Company Of America
Maston C. Courtney, Courtney, Countiss, Brian & Bailey, Amarillo, TX, Raymond B. Roush, Chesapeake Operation Inc., Oklahoma City, OK, for Defendants-Appellants.
Appeal from the United States District Court for the Northern District of Texas.
PER CURIAM:
In this diversity action, Chesapeake Panhandle Limited Partnership and Chesapeake Operating Inc. (collectively Chesapeake) appeal the district court‘s awarding of summary judgment for the plaintiffs and the district court‘s modification of the parties’
FACTUAL AND PROCEDURAL BACKGROUND
This claim concerns two leases (collectively the “Ramming leases“) covering 640 acres in Carson County, Texas. The first lease is a 1930 lease from William Ramming covering 560 acres. The second lease is a 1937 lease from Bertha Ramming covering the remaining 80 acres. The plaintiffs in this action have succeeded to the original lessors’ interests under those oil and gas leases, and the defendant on appeal is the current operator and seller of natural gas produced from them.
The 1930 lease states royalties are to be paid on the basis of 1/8 of net proceeds from sales at the mouth of the well. The 1937 lease states royalties are to be paid on the basis of 1/8 of the market value, at the well, of gas sold or used on the basis set out in a division order executed by lessor to lessee.
The plaintiffs initiated the underlying suit against the former and current owners and operators of an active gas well subject to said lease. The claims against the prior owners and operators of the well, and certain other matters, were all settled. The remaining claims before the district court were breach of contract claims in which the plaintiffs allege that defendant-appellant Chesapeake, the current owner and operator, breached the lease by underpaying gas royalties, by improperly deducting gathering and other post-production charges from the royalty owners’ payments, and by failing to provide free gas for the household attached to the subject lease.
On August 26, 2003, the District Court granted summary judgment as to the issue of liability in favor of the plaintiffs on all of their claims. On September 8, 2003, the parties filed a
DISCUSSION
On appeal, Chesapeake argues that the district court erred in failing to enter their form of judgment and in not granting their Motion to Amend Judgment. Chesapeake also appeals only that part of the August 26, 2003 summary judgment order that found they improperly deducted post-production charges from the payments of the royalty owners.
I. Rule 68 Offer of Judgment
We review an interpretation of
Federal Rule of Civil Procedure 68 provides, in relevant part:
At any time more than 10 days before the trial begins, a party defending against a claim may serve upon the adverse party an offer to allow judgment to be taken against the defending party . . . If within 10 days after the service of the offer the adverse party serves written notice that the offer is accepted, either party may then file the offer and notice of acceptance together with proof of service thereof and thereupon the clerk shall enter judgment.
If the plaintiff accepts the offer, either party may file the offer and acceptance with the clerk of the court, who shall then enter judgment.
The district court erred in refusing to sign the parties’ Offer of Judgment and in denying the defendant‘s Motion to Amend Judgment. The district court did not assign any reason for its refusal to sign the Offer of Judgment or its denial of defendant‘s Motion to Amend Judgment. The plaintiffs in this case are not certified as a class nor do they make a claim for injunctive relief. Pursuant to
This Court reviews the grant of summary judgment de novo, applying the same legal standards as the district court applied to determine whether summary judgment was appropriate. Flock v. Scripto-Tokai Corp., 319 F.3d 231, 236 (5th Cir. 2003) (citing Ramirez v. City of San Antonio, 312 F.3d 178, 181 (5th Cir. 2002)). A summary judgment motion is properly granted only when, viewing the evidence in the light most favorable to the nonmoving party, the record indicates that there is “no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.”
Chesapeake argues that the district court erred as a matter of law in granting summary judgment for the plaintiffs. It is undisputed that the contractual agreements at issue are not ambiguous and there is no doubt as to the meaning and intent of the parties to the agreement. Ramming v. Natural Gas Pipeline Co. of America, No. CA 2:01-CV-354-J at 5, 2003 WL 22016944 (N.D. Tex. Aug. 26, 2003). This Court‘s jurisdiction is based upon diversity of citizenship, therefore, we must look to the law of Texas in determining the proper construction of the gas royalty provisions before us. Erie Railroad Co. v. Tompkins, 304 U.S. 64, 58 S. Ct. 817, 82 L. Ed. 1188 (1938).
Royalty is defined as the landowner‘s share of production, free of expenses of production. Heritage Resources, Inc. v. NationsBank, 939 S.W.2d 118, 121-22 (Tex. Sup. Ct. 1996). Absent language in a contractual agreement to the contrary, royalty is subject to costs incurred after production, e.g., gathering taxes, costs of rendering product marketable, transportation costs. Id. at 131; Martin v. Glass, 571 F. Supp. 1406, 1413-1414 (N.D. Tex. 1983) (cited with approval in Heritage Resources, Inc. v. NationsBank, 939 S.W.2d 118 (Tex. Sup. Ct. 1996)); Texas Oil & Gas Corp. v. Hagen, 683 S.W.2d 24, 28 (Tex. App. 1984) judgment set aside 760 S.W.2d 960 (Tex. 1988); See generally Le Cuno Oil v. Smith, 306 S.W.2d 190 (Tex. Civ. App. 1957); WILLIAMS & MYERS, MANUAL OF OIL & GAS TERMS 959 (11 ed. 2000).
The royalty provisions in the Ramming lease call for payment to be made based on the “net proceeds from sale at the mouth of the well” and based on the “market value at the well.” The phrase “net proceeds” is by definition the sum remaining from gross proceeds of sale minus payment of expenses. Martin, 571 F. Supp. at 1411. Therefore, it follows that net proceeds from the mouth of the well allows for deduction of expenses prior to payment of royalty. Id. A royalty clause based on net proceeds should be interpreted as excluding costs incurred prior to production, but “costs incurred subsequent to production (those necessary to render the gas marketable) are to be borne on a pro rata basis between operating and nonoperating interests.” Id. at 1411-1412.
“Market value at the well” is an established term in oil and gas lexicon. Heritage, 939 S.W.2d at 122. There are two methods used to determine “market value at the well“. First, the most desired method is comparable sales, i.e. sales comparable in time, quality, quantity and availability of market outlets. Id. The second method, used only when comparable sales are not available, is to subtract reasonable post-production marketing costs from the market value at the point of sale. Id. Reasonable post-production costs include transporting the gas to the market and those expenses incurred to make the gas marketable. Id. In other words, “all increase in the ultimate sales value attributable to the expenses incurred in transporting and processing the commodity must be deducted... because that is the way ... [to] arrive[s] at the value of the gas at the moment it escapes from the wellhead.” Martin, 571 F. Supp. at 1414 (citation omitted) (quoting Freeland v. Sun Oil Co., 277 F.2d 154, 159 (5th Cir. 1960)). The plaintiff has the burden of proving “market value at the well.” Heritage, 939 S.W.2d at 122.
The plaintiffs contend4 that the prior operators and sellers under the lease — including MC Panhandle and MidCon Gas — never deducted these post-production expenses from the plaintiffs’ royalty payments. They argue that since sales were made at the wellhead by Chesapeake to MidCon Gas, any expenses incurred after the gas changed hands at the wellhead were not to be deducted from the royalty owners’ share. They maintain that the gathering and transportation charges being deducted are post-wellhead charges and therefore not properly chargeable against their royalties.
The district court ruled that the deduction of post-wellhead gathering and transportation fees and expenses by Chesapeake constituted a breach of the royalty clause of the Ramming leases. Specifically, the court held that the 1997 Gas Sales and Purchase Agreement, which sets out the charges, was a sham transaction that does not provide a proper basis for calculation of royalties.
The district court relied on Texas Oil & Gas Corp. v. Hagen in finding that a sham transaction occurred in this case. 683 S.W.2d 24. In Texas Oil, the defendant executed a gas purchase agreement with its wholly owned subsidiary which was the basis for the gas sales made on the leasehold. Id. at 28. The court found that the sale of the gas between the defendant and its subsidiary was a sham and created to deprive the plaintiffs of their royalty interests. As evidence of a sham transaction, the court looked to whether the wholly owned subsidiary was merely the alter ego of the defendant, its parent corporation. The court found that both companies have the same officers, directors, and office and field personnel; the defendant paid the payroll and directly controlled its subsidiary‘s expenses, income and capital; both companies filed consolidated income tax returns, filed a single SEC registration and financial statement; the defendant owned all of its subsidiary‘s stock; the defendant acted as its subsidiary‘s representative for gas sales agreements with other corporations; and all benefits earned by the subsidiary are direct benefits realized by the defendant. Id. Based on this evidence the court determined that the subsidiary was merely an alter ego for the defendant and the gas sale transaction involved in the case was a sham.
A thorough review of the arguments and the record in this case indicates that the district court erred in finding that the post-production charges were the result of a sham transaction. Here, there is no evidence to suggest that the relationship between MidCon Gas and MC Panhandle was such that the subsidiary was an alter ego i.e. simply a name or a conduit through which the parent conducts its business. In fact, there is no evidence in the record regarding the relationship between MidCon Gas and MC Panhandle at all, save for the fact that the latter was the former‘s subsidiary. As the court in Texas Oil emphasized, “the mere fact a subsidiary is wholly owned by the parent and there is an identity of management does not justify” finding that any transaction between the two is a sham. Id.
Moreover, drawing all reasonable inferences in favor of the non-moving party, Celotex Corp., 477 U.S. at 322, 106 S. Ct. 2548, the gathering and transportation charges in this case are permissible post-production deduction. WILLIAMS & MYERS, MANUAL OF OIL & GAS TERMS 959 (11 ed. 2000). Although the plaintiffs contend that no further deductions should be made from the wellhead purchase price, the evidence suggests that the purpose of the deductions was “to arrive at a wellhead purchase price.” 102 FERC 61,299 at 6. Although under Texas law any post-production costs deducted from the market value must be reasonable, Heritage, 939 S.W.2d at 123, the defendants concede that the gathering charge was a high gathering component. Ramming v. Natural Gas Pipeline Co. of America, No. CA 2:01-CV-354-J, at 10 n. 3, 2003 WL 22016944 (N.D. Tex. Aug. 26, 2003). However, the burden is on the plaintiffs to prove market value, including the reasonableness or unreasonableness of any post-production deductions. See Heritage, 939 S.W.2d at 122. Here, the plaintiffs offer no evidence of comparable sales or evidence that the gathering charge deducted was not reasonable.
We conclude that the district court erred as a matter of law in not entering the Offer of Judgment pursuant to the mandatory language of
VACATED, REVERSED, and REMANDED.