David P. TAYLOR, individually and as Administrator of the
Estate of Jeta Taylor, Appellant,
v.
ARKANSAS LOUISIANA GAS COMPANY, Arkansas Louisiana
Exploration Company, Arkla, Inc., Arkla Exploration Company,
Arkansas Western Gas Company, Seeco, Inc., J.T. Stephens
d/b/a/ Stephens Production Company and Stephens Production
Company, Appellees.
No. 85-1447.
United States Court of Appeals,
Eighth Circuit.
Submitted Feb. 13, 1986.
Decided June 6, 1986.
Rehearing Denied July 1, 1986.
Priscilla Karen Pope, Fayetteville, Ark., for appellant.
E.J. Ball, Fayetteville, Ark., for Arkansas Western Gas Co., Seeco and Stephens.
Jerry Lee Canfield, Ft. Smith, Ark., for Arkla, Inc.
Before LAY, Chief Judge, and ROSS and WOLLMAN, Circuit Judges.
LAY, Chief Judge.
David P. Taylor appeals from the district court's1 order granting summary judgment in favor of the defendant gas producers, whom Taylor alleges underpaid the royalties due him under certаin oil and gas leases. We affirm the judgment of the district court.
The essential facts were stipulated to by the parties. Taylor is a citizen of New York and the owner of and successor in title and interest to certain oil and gas leases located in Franklin County, Arkansas. Defendants are three groups of gas producers who are the successors in title and interest to all mineral rights in the leases. Taylor brought suit against the lessee-producers, alleging that under the terms of the leases' royalty clauses he is entitled to additional royalty payments. On cross-motions for summary judgment, the district court granted summary judgment in favor of the defendant lessees and dismissed Taylor's complaint with prejudice.2 This appeal followed.
Market Price Royalty Clauses
Arkansas Louisiana Gas Company, Arkansas Louisiana Exploration Company, Arkla Exploration Company, and Arkla, Inc. ("Arkla") and J.T. Stephens d/b/a Stephens Production Company and Stephens Production Company ("Stephens") jointly own four wells and Stephens solely owns two additional wells on land leased from Taylor. These leases contain a royalty provision which states: "The Lessee shall pay Lessor as royalty for gas the equal [of] one-eighth ( 1/8) of the value of such gas calculated at the rate of the prevailing market price at [the] well per thousand cubic feet while the same is being sold or used off the premises" (emphasis added). In 1973 and 1974, Arkla and Stephens entered into long-term gas purchase contracts in which Stephens agreed to sell all of its working interest in the produсtion of these six wells to Arkla. In computing the royalties due Taylor under these leases, both Stephens and Arkla used as the measure of the "prevailing market price at the well" the price Stephens received under the long-term gas sales contract. Taylor contends that the pricе recited in the long-term gas sales contract between Arkla and Stephens is not an accurate measure of prevailing market price at the well as is meant by the lease terms, and that it is unfair to calculate his royalties based on a price established in a contract to which he was not a party.
In a diversity case, decisions of the state's highest court are to be accepted as defining state law unless the state court "has later given clear and persuasive indication that its pronouncement will be modified, limited, or restricted." Gillette Dairy, Inc. v. Mallard Manufacturing Corp.,
when a producer's lease calls for a royalty on gas based on the market price at the well and the producer enters into an arm's-length, good faith gas purchase contract with the best price and term available to thе producer at the time, that price is the "market price" and will discharge the producer's gas royalty obligation.
Hillard,
In applying this rule, the Arkansas Court placed on the lessor the burden to prove that the gas purchase contract entered into by the lessee-producer, who is bound tо sell the gas produced at the price fixed by the contract, was unfair or unreasonable at the time it was entered into. Hillard,
On appeal, Taylor urges that a later decision of the Arkansas Supreme Court, Diamond Shamrock Corp. v. Harris,
Taylor argues that even if Hillard is controlling as to Stephens' royalty obligations under the market price clauses, the same measure of prevailing market price should not be made applicable to Arkla's royalty calculations for its undivided intеrest in the same leases. Taylor argues that Arkla is a buyer under the long-term gas purchase contracts and not a seller like Stephens, and that Arkla has entered into no other long-term contracts which obligate it to sell at a fixed price. Noting that Arkla as a producer on its leases еnters all gas produced into intrastate pipelines for direct sale to consumers, Taylor argues that it is unfair to tie his royalty under the Arkla leases to the price to which only Stephens is bound as seller under the long-term gas contracts.
It is true that the Arkansas Supreme Court's reasoning in Hillard is not direсtly applicable to leases where the producer has not executed a long-term contract to sell to a buyer under a fixed price. The Hillard court recognized that past industry custom and necessity compelled lessees to enter into long-term contracts to fulfill their immediate obligation to the lessor to effectively and efficiently market the gas produced. Hillard,
We think this result follows for several reasons. First and foremost, the Arkansas Supreme Court has provided in Hillard the legal standard applicable to measure prevailing market price for comparаble leases. Second, the leases in issue were executed with Arkla and Stephens as co-lessees and recognize that each lessee owns an undivided half-interest in the gas sold at the well site. There is nothing in the record which demonstrates that it was contemplated at the time the leases were executed that Stephens and Arkla would pay different royalties on the same production under the same terms set out in the same leases. See Hillard,
In conclusion, we are obligated to follow Arkansas law as set forth in Hillard for the determination of a reasonable measure of prevailing market price at the well for royalty purposes. Whether a different rule should apply to leases when the lessee-producer itself markets the gas produced directly to consumers is a matter best left to the Arkansas legislature or courts. For the time being and under the circumstances present here, we think it would be highly incongruous to apply different measures of royalty value to the sаme contract term within the same lease agreement based solely on the use of the gas by its producer.
We therefore affirm the district court's ruling that Taylor is not entitled to any additional royalties from Arkla or Stephens under the market price clauses.
Fixed price royalty clauses
All three groups of lessee-prоducers--Arkla, Stephens, and Arkansas Western Gas Co. and Seeco, Inc. ("AWG")--executed leases with Taylor that contain fixed royalty clauses. Though the fixed amount on which royalty calculations are based differs under the individual leases, all the clauses provide that "[t]he Lessee shall pay Lessor, as royalty for gas from each well where gas is found, the equal [of] one-eighth ( 1/8) of the value of such calculated at the rate of [ ] cents per thousand cubic feet, * * * while the same is being sold or used off the premises." Taylor asserts that, contrary to the district court's finding, the fixed price rоyalty clauses violate Ark.Stat.Ann. Sec. 53-511 (1971)6 and are converted by that statute into proceeds clauses.7
This issue has also been resolved by the Arkansas Supreme Court in Hillard v. Stephens, and Hillard compels us to reject Taylor's argument here. See Hillard,
For the reasons stated above, the decision of the district court is affirmed.
Notes
The Honorable H. Franklin Waters, United States District Judge for the Western District of Arkansas, presiding
The district court's memorandum opinion and order are reproduced at Taylor v. Arkansas Louisiana Gas Co.,
The stipulated facts also show that Jeta Taylor, David Taylor's father and his prеdecessor in title and interest in these leases, was Stephens' attorney for many years and performed services for Stephens in the acquisition and drafting of oil and gas leases
In Diamond Shamrock, the lessee-producer entered into a long-term gas sales contract before it еntered into the lease. The lessor purchased the leased property and executed the lease without actual notice of that long-term gas contract. Finding that the lessee had a duty to advise the lessor of the long-term gas contract's existence, the Arkansas Supreme Cоurt affirmed the district court's refusal to apply the long-term gas contract price as the prevailing market price for royalty calculation purposes. See Diamond Shamrock,
We agree with the district court's refusal to accept Taylor's submission of the "fair field price" as competent proof of prevailing market price for royalty calculation purposes. Under Arkansas law, the fair field price is a measure of operating expense which natural gas utility companies are allowed by the Arkansas Public Service Commission, under its rate-setting powers, to chаrge customers. See Ark.Stat.Ann. Sec. 73-1903 (1979). Because the fair field price serves an essentially regulatory function, it takes into account a variety of factors which are not relevant here and is not analogous to "prevailing market price at the well" for royalty computations as contemplated by the lease terms
Ark.Stat.Ann. Sec. 53-511 reads:
It shall be the duty of both the lessee, or his assignee, and any pipe line company, corporation or individual contracting for the purchase of oil or gas under any oil, gas or mineral lease to protect the royalty or lessors [sic] interеst by paying to such lessor or his assignees the same price including such premiums, steaming charges, and bonuses of whatsoever name, for royalty or gas that is paid such operator or lessee under such lease for the working interest thereunder.
Under a proceeds clause, the royalty duе a lessor is calculated based on the actual proceeds received by the lessee-producer from the sale of gas produced on the leased premises
Taylor also argued before the district court that he had been underpaid royalties due from AWG under leases containing proceeds clauses. The district court found in favor of AWG. Though Taylor's brief recites facts underlying this claim for additional royalties, he advanced no arguments here in support of his position either in the briefs or in oral argument. We therefore consider the issue waived on appeal and do not treat it further here