Young v. West Edmond Hunton Lime Unit

275 P.2d 304

• Court: Supreme Court of Oklahoma
• Decided: October 30, 1954
• Docket: 35316
• Status: Published

Opinions

WELCH, Justice.

The facts are not in dispute.

The plaintiffs owned the mineral interest and rights in a certain one-half section and a one-quarter section of .land^,(total 480 acres). The mineral interests in these lands, in respective separate tracts, wer^leased to Sohio Petroleum Company, Stanolind Oil and Gas Company, and Peppers Refining Companyi-The said lands became productive of oil and gas, and adjoining lands also became productive of oil and gas. £\The whole area.of proven productivity (several thousand acres) thereafter became designated as the West Edmond Hunton Lime Field, and was ordered unitized by the Corporation Commission("and to be operated and produced as a single unit, by the unit organization, in accordance with a plan of unitization submitted by the lessees of the various tracts in the field., PUnder the order of the Corporation Commission, and the “unitization statutes” then existing, 52 O.S.Supp.1949, § 286.1, et seq., the West Edmond Hunton Lime Unit, a body politic and corporate, was created as such unit organization. A committee, composed of the oil and gas lessees of the various separate tracts comprising the unitized area, and acting for the body corporate, selected Sohio Petroleum Company to operate and develop and produce the unitized area for the unit. This deprived the various lessees of any further right or authority or duty to operate their respective leased premises, or to produce oil therefrom. J-'

Under the unitization plan, and according to law, a calculation was made of the potential productivity of each separate leasehold tract of land, and to each such tract there was allocated a stated per centage of all the oil to be produced by the unit, organization from the whole area included in the unitization. That percentage was then divided seven-eighths to the respective tract lessee, and one-eighth to the respective tract lessor and thus a specified per centage of the overall production of the entire unitized-'area was thereby allocated- to each lessor- and lessee in the. area, without regard to where the oil was produced in the area.

"L: Sohio Petroleum Company, Champlin Refining Company, Continental Oil Company and Phillips Petroleum Company were all purchasers of oil- from the area • at the beginning price of $2.65 per barrel.' In the second year of the unit operation of the field, and during a period from September ’ 28th to December 17th, the Phillips Petroleum Company, which had oil pipe lines or gathering lines throughout the unit area, posted a price of $3 per barrel for oil from - the area, and continuously during said period offered to buy and bought from the unit and its operator a substantial portion of the oil produced from the unit area at such posted price. During such time, however, there was sale of some oil produced-from1 the unit area to other purchasing companies and some of the unit oil was taken by the unit operator himself at and for the price of $2.65 per barrel.1 During such period of time the percentage of production of the unit operation allocated to the royalty interest of the plaintiffs amounted to 3,438 barrels, and the plaintiffs received the proceeds from such an amount of oil at a price of $2.65 per barrel.

f-The plaintiffs, in pleading, alleged, in substance, the foregoing .state of facts and averred that the defendant, as agent and trustee of the plaintiffs, and others similarly situated, violated a duty owed to the plaintiffs, and others similarly situated, in that it failed to obtain $3 per barrel por such oil as was produced from the unit and allocated to the' plaintiffs, and such others, in the certain period from September 28th to December 17th, and that plaintiffs thereby suffered a loss, damage and detriment in a sum equal to 35 jé per barrel alleged in pleading to be applied to 3,620 barrels of oil, or a total sum of $1,367, (in evidence by stipulation the above figure corrected to be 3,438 barrels), and it was alleged that the others similarly situated as the plaintiffs suffered loss of 35^ per barrel accordingly, as to, their respective interests in the production of the unit in such period.

The plaintiffs prayed that they have money judgment against the defendant and that the court enter judgment directing the defendant to account to and pay to all persons similarly situated as plaintiffs, owning royalty interests in the oil produced from the unit, the sum equal to 35 ‡ per barrel applied to their respective percentage interests in the total barrelage of oil produced from the unit _ during the said period from September 28th to December 17th..

'-The defendant, by answer, 'averred thjit it never at any time was authorized to market any unit production; that the manner- and method of sale and disposition of1 ‘ the plaintiffs’ part of the production from the lands. within the unit was governed and controlled by the terms of oil and gas leases and division orders executed -by the plaintiffs prior to unitization, and that plaintiffs have been paid for all production purchased from them .under the terms of said leases and previous division, orders;^ that the rights of other owners of mineral interests within the unit are.not identical, and plaintiffs were without right ,to -maintain the action as a class action.

In the oil and gas leases executed by the plaintiffs prior to unitization the' lessees covenanted: •

“To deliver to the cerdit of lessor, free of cost, in the. pipe line to which lessee may connect wells on said land, the equal one-eighth part of all oil produced and saved from the leased premises.”

Prior to unitization the plaintiffs and their lessees, and assigns of their lessees, signed division orders addressed to an oil purchasing company wherein they each warranted their ownership in respective proportions of all of the oil produced from the said certain described lands, and wherein they authorized. the oil purchaser company, until further notice, to receive their individual oil from the said certain premises for purchase from the said parties severally in the proportions named. The plaintiffs were named as owners of a one-eighth of the total production from the described lands.

S^At the close of all the evidence in the case a motion of the defendant for judgment was sustained, and judgment was entered for the defendant.

The plaintiffs contend thát the division orders signed by the royalty owners before the unit was created did not cover the royalty owners’ fractional interest in the common pool or source of supply, and that the defendant as the producer of the oil from the common pool, and in the absence of express directions from the plaintiffs as to a disposition of their share of the unit production, was bound to take or sell the plaintiffs’ share, and account to the plaintiffs therefor on a basis of a price per barrel of not less than the market price available at the time the oil was run or produced, which is to say, at the highest market price available.

The defendant contends that it was not at any time under any obligation to the plaintiffs to market the plaintiffs’ share of the oil produced from the unit area. That in any event, it could not be held responsible to the plaintiffs for the price paid and received for the plaintiffs’ share of the production in the circumstance that the plaintiffs had designated a particular purchaser for their share of the oil produced from their own land by the division orders signed by the plaintiffs before unitization.

Obviously, an authorization to receive individually owned oil for purchase from wells located on a particular tract of land by the owners of the oil produced therefrom is not an authorization to receive other oil elsewhere produced.

After unitization the plaintiffs were no longer entitled to one-eighth of the oil produced by their lessee from their 480 acres of land. Instead, they were entitled to receive the fixed and stated percentage (allocated to them) of all the oil produced by the unit operator from the entire unit of several thousand acres. This might have been more, or might have been less than the one-eighth of the oil produced from their 480 acres, but at any rate, it was different from the oil they were entitled to receive under their original oil leases, and its sale was not governed by the original division orders which obtained while oil was produced wholly and solely from plaintiffs’ land by plaintiffs’ lessee.

Under the statutes, supra, authorizing unitized management of common sources of supply of oil, the owners of the mineral rights and interests in a particular tract of land are compelled to surrender all right to produce and take oil from the particular tract, and in lieu thereof they become entitled to a share in the total production by the unit organization from the common source of supply of which the particular tract is a part. Palmer Oil Corp. v. Phillips Pet. Co., 204 Okl. 543, 231 P.2d 997. And upon unitization the landowner lessors lost their right to have their contracted lessees develop and produce their individually owned acreage for the joint benefit of lessor and lessee, and instead the lessors looked to the unit organization to produce all acreage together as a single unit and to account to lessors for their allocated percentage of the aggregate unit production. Thus by statute when a tract of land becomes a part of a field brought under unitized management the owners of the mineral rights and interests in such particular tract lose the right to produce or control the disposition of the production from the particular tract and that right passes exclusively to the unit organization. It follows that any prior authorization as to receiving oil for purchase from the particular tract becomes a nullity.

The statutes under which the instant unitized management of a common source of supply was created provide that there be an apportionment of the unit production among the separately owned tracts within the unit. The statute provides in part as follows:

Sec. 286.9 provides:

“Each unit created under the provisions of this Act shall be a body politic and corporate, capable of suing, being sued and contracting as such in .its own name. Each such unit shall be authorized on behalf and for the account of all the owners of the oil and gas rights within the unit area, without profit to the unit, to supervise, manage and conduct the further development and operations for the production of oil and gas from the unit area * * *.

******

“A one-eighth (y8) part of the unit production allocated to each separately-owned tract shall in all events be regarded as royalty to be distributed to and among, or the proceeds thereof paid to, the royalty owners free and clear of all unit expense and free of any lien therefor.”

The plan of unitization herein adopted provides the unit expense is to be paid from the share of the unit production- that would otherwise go to the various lessees of the separately owned tracts within the unit. The plan of unitization contains a provision as follows:

“To the extent that any person entitled to take and receive in kind any portion of the Unit Production shall fail to take and receive the same currently as and when produced, the Unit Operator, as agent and for the account and at the expense of such person, is authorized to market and sell or itself purchase, at not less than the market price prevailing at the time of such sale, the portion of Unit Production not so taken in kind by the person entitled to take and receive the same. Proceeds of the Unit Production so sold, or purchased by the Unit Operator, shall be paid by the Unit Operator to the person or persons for whose account the same is so -marketed.” (Emphasis added.)

The unit organization with its operator stands in a position similar to that of a trustee for all who are interested in the oil production either as lessees or royalty owners. The law applicable to this unit-ization required no notice to royalty owners, and afforded them no voice in the organization or management of the unit or in the selection of the unit operator.

In Magruder v. Drury, 235 U.S. 106, 120, 35 S.Ct. 77, 82, 59 L.Ed. 151, 156, it was said:

“It is a well-settled rule that a trustee can make no profit out of his trust. The rule in such cases springs from -his duty to protect the interests of the estate, and not to permit his personal interest to in any wise conflict with his dirty in that respect. The intention is to provide against any possible selfish interest exercising an influence which can interfere with the faithful discharge of the duty which is owing in a fiduciary capacity. ‘It therefore pror hibits a party from purchasing on his own account that which his duty or trust required him to sell on account of another, and from purchasing on account of another that which he sells on his own account. In effect, he is not allowed to unite the two opposite characters of buyer and seller, because his interests, when he is the seller or buyer on his own account, are directly conflicting with those of the person on whose account he buys or sells.’ Mi-choud v. Girod, 4 How. 503, 555, 11 L. Ed. 1076, 1099.”

In Bruun v. Hanson, 9 Cir., 103 F.2d 685, 698, it was said:

“Among various duties of trustees, there is a general one described in 65 C.J. 652, § 520, as follows,: ‘In administering the trust, the trustee must act for the beneficiaries, and not for -himself in antagonism to the interests of the beneficiaries; he is prohibited from using the advantage of his position to gain any benefit for himself at the expense of the cestui que trustent, and from placing himself in any position where his self-interest will, or may, conflict with his duties as trustee, as a trustee is required to protect at all hazards, even to his own personal loss or disadvantage, the estate under his administration where his personal and individual interests conflict with those of the trust estate; and where a trustee uses trust property for his own personal advantage, plenary relief may 'be granted * * * ’.

“One of the commonest illustrations where a conflict of interests appears, is a sale of trust property to the trustee individually. In such situations, the trustee should be attempting to sell the property for’ as much as possible to benefit the trust estaté, ‘ while at the same time, as an individual, he probably-would be attempting to buy the property for as little as possible. * * *”

In many instances by these rules a trustee is positively forbidden to buy the trust property. In the case at bar we have seen by the- quoted statute that the trustee is specifically authorized to purchase oil produced, but surely 'his duty to the royalty owríers requires that he act with the highest fidelity when he' purchases the oil1 as he did here.' ■'

It is fairly shown, and as we understand, is not denied that the unit operator and the unit operating committee knew that the price of,$3 per barrel was fully available and that various royalty owners were paid at that rate, while the oil interests of these involved, royalty owners were purportedly purchased and they were paid at the" rate of $2.65 per barrel. . With this knowledge by the trustees, these royalty owners were "riot notified of this higher price available. Surely these acts were not in keeping with the duty of the trustee, and fell far short of the high duty owed by the trustee, and resulted in unconscionable gain to the trustee at the direct loss to the royalty owners affected.

We hold the statutes require the operator of -the unit, in this case, the defendant, to account to all the owners of oil rights within the unit area for their respective portions or percentages of the unit production at the highest market price available at the time of such production under the circumstances that- such owners have not received in kind their share of such production, or have not expressly authorized the unit or the operator for the unit to deliver same to a particular purchaser.

Under the circumstances in proof herein, and undisputed, we hold the plaintiffs are entitled to a recovery against the defendant in the amount of $1,203.30, and costs of this action.

The plaintiffs contend they are entitled to maintain this action for the use and benefit of all .other owners of oil royalty rights within the unit and similarly situated as:the plaintiffs.

It was stipulated by the plaintiffs and the defendant that only the usual lessor’s or landowner’s ⅛⅛ royalty on oil produced from the unit tracts is involved in this controversy. It was demonstrated in the evidence that there are several hundred royalty owners in similar situations as the plaintiffs. That they were' entitled to an allocated percentage share of the production from the unit area during the period that Phillips Petroleum Company was buying and offering to, buy oil from the unit area at, $3 per barrel. They, too, were only paid ",at the rate of $2.65 per barrel, and, like the: plaintiffs here, they had not authorized the uriit to deliver their percentage 'share of the unit oil to any certain -purchaser of oil.

12 O.S.1951 § 233, provides:

“When the question is one of common or general interest of many persons, or when the parties are very numerous, and it may be impracticable to bring them all before the court, one or more may sue or defend for the benefit of all.”

In State ex rel. Tharel v. Board of County Com’rs of Creek County, 188 Okl. 184, 107 P.2d 542, 545, with reference to the statute, supra, this court held that a class action was proper against certain tax payers, “because of their number, the similarity of their situation, and their common interest in the questions involved and in the result of the action.”

Herein, there appears to be a complete similarity of the situation of the plaintiffs, royalty owners, and numerous others, owners of royalty interests within the unit. The legal questions raised in this action are of common or general interest to the many owners of royalty interests within the unit, and the character of the relief sought appears to be applicable to all. In these circumstances we hold the case is one falling within the provisions of the statute, supra, authorizing one to sue for the benefit of all.

For reasons hereinabove stated, the judgment of the trial court is reversed. The cause is remanded, and the trial court is directed to enter judgment for the plaintiffs and against the defendant for the sum of $1,203.30, and to enter judgment directing the defendant to account to and pay all persons owning royalty interests on oil produced from the unit tracts involved herein during the time period involved herein, from September 28th to December 17th, such sums, respectively, that each of said royalty owners shall have received in proceeds for their percentage of the oil produced in said period a sum equal to $3 per barrel for said oil.

JOHNSON, V. C. J., and CORN, ARNOLD and O’NEAL, JJ., concur. HALLEY, C. J., and WILLIAMS and BLACKBIRD, JJ., dissent.