Heiman v. Atlantic Richfield Co.

891 P.2d 1252, 1995 WL 92833

• Court: Supreme Court of Oklahoma
• Decided: March 14, 1995
• Docket: 70739
• Status: Published

Opinions

SUMMERS, Justice.

The issue is whether the trial court correctly held that Appellants ARCO & ANR (ARCO) are liable for the payment of interest at the rate of 12% for the period from May 3, 1983 until January 20, 1988 on gas proceeds for Appellees’ (Heiman’s) ratable share of gas produced and sold during the period from April 5, 1982 to May 3, 1983. We affirm the trial court’s judgment that Heiman is entitled to prejudgment interest on the proceeds from May 3,1983 until January 20,1988, but reverse as to the rate of the interest, and hold that interest at 6% is proper.

Heiman filed this action on September 14, 1984, seeking an accounting and cash-balancing payment for its pro rata share of proceeds from gas produced and sold from the Petree No. 1-35 well in Dewey County from April 5, 1982, to May 3, 1983, together with all interest accrued and accruing. The parties filed a joint stipulation of facts, which they stipulated were in connection with and in addition to the undisputed facts set forth in Heiman’s summary judgment motion and ARCO’s response brief. The parties stipulated that 'Heiman’s pro rata share of the subject gas proceeds is $535,496.23, and that on or before January 28, 1988, ARCO would pay that amount. The only remaining issue was whether interest was recoverable and if so, when it would start and at what rate, all agreeing that January 20, 1988 would be the cutoff date for any interest calculation.

The trial court granted summary judgment in favor of Heiman and against ARCO in the amount of $303,164.09 for interest on the principal sum, calculated at the rate of 12% per annum from May 3, 1983 to January 20, 1988, citing 23 O.S.1981, § 6 and Beren v. Harper Oil Co., 546 P.2d 1356 (Okla.App.1975), (released for publication by Court of Appeals and published as corrected on limited grant of certiorari from the Supreme Court). ARCO timely appealed the summary judgment. The Court of Appeals dismissed the appeal. We vacated the dismissal opinion of the Court of Appeals, and re-transferred the appeal to the assigned division of the Court of Appeals for review on the merits. Heiman v. Atlantic Richfield Co., 807 P.2d 257 (Okla.1991). Relying upon Rule 6-104(F) of the Oklahoma Corporation Commission, and noting that Seal v. Corporation Commission, 725 P.2d 278, 298 (Okla. 1986) did not specifically invalidate the “without interest” portion of Rule 6-104(F), the Court of Appeals reversed the summary judgment.

The relevant facts are that Heiman and ARCO were working interest owners in the Petree No. 1-35 well. Production commenced on April 5, 1982 and ceased on March 31, 1987. The parties designated ARCO as operator of the well. The operating agreement provided that each party may take in kind or separately dispose of the gas, and that the operator may elect to sell another party’s share of gas. There is no provision in the operating agreement for the balancing of gas production interests should an imbalance occur.

Beginning with the first production in April, 1982, ARCO produced, sold and received revenue for 100 per cent of the allowable production from the Petree Well. Hei-man did not make arrangements to take in kind. Heiman attempted to dispose of the gas by its own contract with ARCO’s gas purchaser, Michigan-Wisconsin, but ARCO withheld its approval of the contract, and Michigan-Wisconsin declined to buy without ARCO’s approval. After the start of production Heiman made repeated demands on ARCO for their proportionate share of proceeds, but ARCO refused to distribute any gas-proceeds to Heiman. After one year of production, on May 3, 1983 the “Sweetheart Gas Act”¹ went into effect requiring ratable sharing of revenues from gas production. ARCO distributed production revenue to Heiman for the production months of May, 1983 through depletion of the Petree Well No. 1-35 on March 31, 1987. ARCO refused to make distribution to Heiman for the production revenue for the sales occurring between April 5, 1982, and May 3, 1983. Hei-man filed this action in September, 1984 and sought a cash-balancing prior to depletion. In January, 1988, ARCO stipulated that Hei-man’s proportionate share of the revenue for gas produced from April 5, 1982 until May 3, 1983 equals $535,496.23, without interest.

The parties argue over Oklahoma Corporation Commission’s Rule 6-104(F) and the application of prejudgment interest under 23 O.S.1981, § 6. Heiman contends that a right to cash-balancing vested on the effective date of the “Sweetheart Gas Act” on May 3, 1983, and therefore ARCO is liable for interest under 23 O.S.1981, § 6. ARCO responds that the 12% interest provision in 52 O.S.Supp.1980, § 540 was superseded by Rule 6-104(F) of the Oklahoma Corporation Commission, and thus no interest accrued. ARCO also asserts that Heiman’s right to its share of the gas revenues did not vest until depletion in March, 1987, and that Heiman is not entitled to prejudgment interest calculated from May 3, 1983.

Rule 6-104(F), relied upon by ARCO, required cash balancing, without interest, on well depletion for wells commencing production prior to May 3, 1983. Seal v. Corporation Commission, 725 P.2d at 296 n. 40. But there are two impediments to its application in this case.

First, this rule was held invalid in Seal as contrary to the payment provisions of the Sweetheart Gas Act, and no language of that opinion leaves the rule intact for other purposes. Seal v. Corporation Commission, 725 P.2d at 296. Secondly, this rule was adopted to administer the provisions of the Sweetheart Act with an effective date for the rule of January 1, 1984. Seal, 725 P.2d at 292-293. In our case the parties stipulated that Heiman had a right to a certain sum due for his share of the production prior to May 3, 1983. Heiman’s right did not arise, from the Sweetheart Gas Act. It was based on pre-Act production, and in Seal we declared that Act to operate prospectively, i.e. from May 3,1983 and after. Seal, 725 P.2d at 294. We reject ARCO’s position that the rule operated retroactively and independently of the Act.² Neither the Sweetheart Act nor an invalid rule adopted to implement that Act apply to this pre-Act production revenue.

The parties also argue over whether 52 O.S.1981 § 540 applies here.³ The language of the statute shows its nonapplicability. Section 540 applies when a sale occurs and a person is entitled to share in the proceeds of that sale when the sale occurs. This section states that the proceeds of sale of production “shall be paid to persons legally entitled thereto, commencing no later than six (6) months after the date of first sale, and thereafter no later than sixty (60) days after the end of the calendar month within which subsequent production is sold.” During the period between April 5, 1982, and May 3, 1983 was Heiman “legally entitled” to a portion of the sale proceeds at the time of these sales?

In Seal we explained why the Sweetheart Act came into being, and said that prior to the Act (as is the case here) under gas balancing contracts the non-selling owners were denied the use of funds from the sales, balancing of rights occurred upon well depletion, and “there was no guaranty that the selling owners who received more than their pro rata share of proceeds would be capable, regardless of the obligation, to satisfy their liabilities after balancing of rights.” Seal, 725 P.2d at 285. The Sweetheart Act was to remedy this by requiring revenue distribution upon sale. This means that, in the absence of an agreement to the contrary, a pre-Act sale such as this was not the sale of gas belonging to the underpro-duced party. Our opinions are consistent with this view. See Anderson v. Dyco Petroleum, 782 P.2d 1367, 1372 (Okla.1989) where we explained remedies for interest owners, and the rights of each cotenant to develop and market production. This summarizes the general rule that pre-depletion cash-balancing was not required for every well prior to the Sweetheart Act. Pursuant to this rule ARCO did not sell gas to which Heiman was legally entitled between April 5, 1982, and May 3, 1983. Section 540 does not apply because Heiman was not legally entitled to share in the sale proceeds on the dates of sale occurring between April 5, 1982, and May 3, 1983.

The trial court awarded interest, and stated its reliance upon 23 O.S.1981, § 6 and Beren v. Harper Oil Co., supra. Beren is an exception to the pre-Act general rule, and explains that a court may order predepletion cash-balancing, and that such an order is one in equity based upon the circumstances of the particular case before the court. Beren, 546 P.2d at 1359-1360. See also Anderson v. Dyco Petroleum, 782 P.2d at 1373; United Petroleum Exploration v. Premier Resources, 511 F.Supp. 127,130-131 (W.D.Okla. 1980). Cf. Doheny v. Wexpro Company, 974 F.2d 130, 133 (10th Cir.1992), (balancing in kind is the preferred method of balancing unless the equities dictate otherwise). By its reliance upon Beren and awarding prejudgment interest from May 3, 1983 the trial court made the determination that Plaintiffs were entitled to a predepletion periodic cash-balancing because the equities called for this balancing on May 3, 1983.

ARCO disputes whether an equitable proceeding for pre-depletion cash-balancing was cognizable. In Anderson v. Dyco Petroleum, supra, we described the three methods of balancing as industry practices recognized by the courts, including periodic cash-balancing. Pre-depletion cash-balancing as industry custom and usage is incorporated into the joint operating agreement (JOA).⁴ The JOA’s silence on periodic equitable cash-balancing does not strip a party of that equitable remedy incorporated into the agreement.⁵ Additionally, we note that we have previously rejected an argument claiming that an action for an accounting was premature when brought prior to well depletion. Frost v. Ponca City, 541 P.2d 1321, 1324 (Okla.1975). We thus reject ARCO’s argument that prior to the Sweetheart Act the sole remedy for the underproduced interest owners was a proceeding for an accounting upon well depletion.

The imbalance in production between ARCO and Heiman ended on May 3, 1983, with no foreseeable imbalances for these parties. Periodic cash-balancing was not the only remedy recognized for such imbalance, and Heiman could have taken in kind or waited for well depletion to seek such balancing. Anderson v. Dyco Petroleum, supra. Heiman stated that prior to May 3, 1983, it had made repeated demands upon ARCO to allow Heiman to contract with Michigan-Wisconsin and for periodic cash-balancing payments. ARCO was notified that Heiman selected periodic cash payments for balancing and would not wait for well depletion. ARCO also knew of the inability of Heiman to make-up the imbalance through sales of gas. The trial court’s judgment stated that interest began to run from May 3, 1983, and this necessarily includes a finding that the equities supported cash-balancing on that date. See Archer v. Archer, 813 P.2d 1059, 1062 (Okla.App.1991) (approved for publication by order of Supreme Court.)

Generally, prejudgment interest is not awarded in the absence of statutory authority. Dyco Petroleum Corp. v. Smith, 771 P.2d 1006, 1009 (Okla.1989). Interest may run from the date that the claim was both certain and the party had a right to the principal. 23 O.S.1981 § 6; Champlin Refining Co. v. Phillips Petroleum Co., 269 P.2d 993, 996 (Okla.1954). The statute relied on by the trial court, 23 O.S. § 6, only applies to claims for ascertainable or liquidated amounts.⁶

Heiman showed that ARCO kept track of the monthly sales prior to May 3, 1983. ARCO did not directly contradict this assertion. The claim for underpayment of revenues was capable of being made certain by calculation on May 3, 1983, and interest was proper under 23 O.S.1981 § 6. This result is consistent with our recent opinion in Shanb-our v. Phillips 66 Natural Gas Co., 864 P.2d 815 (Okla.1993).

ARCO argued in the trial court that if an interest rate did apply the 6% rate of 15 O.S.1981 § 266 was proper.⁷ Heiman argued for a greater rate because of market conditions. Heiman’s argument is not persuasive. Carter v. City of Oklahoma City, 862 P.2d 77, 81 (Okla.1993). The JOA does not provide an interest rate, and we agree with ARCO that the rate of 6% provided by § 266 applies to these Plaintiffs.

Certiorari is granted and the opinion of the Court of Appeals is vacated. The judgment of the District Court is affirmed in part and reversed in part, and the cause remanded for entry of judgment consistent with this writing.

HODGES, LAVENDER, SIMMS, HARGRAVE, SUMMERS and WATT, JJ., concur. KAUGER, V.C.J., and OPALA, J., concur in part, dissent in part. ALMA WILSON, C.J., dissents.

1 . 52 O.S.Supp.1983, §§ 541-547. We note that since this controversy arose two statutory schemes have been enacted relevant to proceeds from production, the Production Revenue Standards Act, 52 O.S.Supp.1994 § 570.1 — § 570.15, and the Natural Gas Market Sharing Act, 52 O.S.Supp.1994 §§ 581.1 — 581.10. See Maxwell v. Samson Resources Company, 848 P.2d 1166, 1170 (Okla.1993). Our holding herein does not rely upon these Acts.

2 . ARCO argues that while the Act is not retroactive a Commission Rule created under the authority of the Act is retroactive. Such an argument requires an examination of the express provisions of the statutes to determine if administrative authority to create such a rule was granted. See Good Samaritan Hospital v. Shalala,-U.S. -, 113 S.Ct. 2151, 124 L.Ed.2d 368 (1993); Bowen v. Georgetown University Hospital, 488 U.S. 204, 109 S.Ct. 468, 102 L.Ed.2d 493 (1988). ARCO has not drawn our attention to any express language in the Sweetheart Act granting authority to the Commission to make retroactive rules. An agency's authority to make rules under statutory authority is limited to the authority granted by those statutes, and such rules may not be contrary to those statutes. Northwest Datsun v. Oklahoma Motor Vehicle Commission, 736 P.2d 516, 520 (Okla.1987); Adams v. Professional Practices Commission, 524 P.2d 932, 934 (Okla.1974). In light of Seal v. Corporation Commission, supra, and ARCO's failure to point to specific language of the Act we need not address this argument further.

3 . Section 540 is discussed in Fleet v. Sanguine, Ltd., 854 P.2d 892 (Okla.1993).

4 . See Hull v. Sun Refining and Marketing Co., 789 P.2d 1272, 1278 (Okla.1989), (custom and usage is part of the common law); Buckles v. Wil-Mc Oil Corp., 585 P.2d 1360, 1362 (Okla.1978), (the applicable law is a part of every contract); LaVelle v. Fair Oil Company, 388 P.2d 13, 16 (Okla.1963), (the applicable law part of every contract includes custom and usage incorporated into the common law).

5 .Silence on an issue of applicable law in an agreement will not negate that law; rather a contractual adjustment of rights contrary to law must be clearly expressed in the agreement before applicable law will not apply. Founders Bank and Trust Co. v. Upsher, 830 P.2d 1355, 1364 n. 32 (Okla.1992). Exceptions to incorporating custom and usage into the agreement via the common law are not before us and we need not explain their application. But see, Hull v. Sun Refining and Marketing Co., 789 P.2d at 1279; Seal v. Corporation Commission, 725 P.2d at 291; Tenneco Oil Company v. El Paso Natural Gas Company, 687 P.2d 1049, 1054 (Okla.1984).

6 . 23 O.S. § 6 states:

Any person who is entitled to recover damages certain, or capable of being made certain by calculation, and the right to recover which is vested in him upon a particular day, is entitled also to recover interest thereon from that day, except during such time as the debtor is prevented by law, or by the act of the creditor from paying the debt.

7 . Section 266 states:

The legal rate of interest shall be six percent (6%) in the absence of any contract as to the rate of interest, and by contract the parties may agree to any rate as may be authorized by law, now. in effect or hereinafter enacted.