Beer et al v. XTO Energy Inc
Filing
405
ORDER granting in part and denying in part 292 Plaintiffs' Motion for Partial Summary Judgment for Breach of Contract and Fiduciary Duty. Signed by Honorable Tim Leonard on 03/08/12. (jy)
IN THE UNITED STATES DISTRICT COURT FOR THE
WESTERN DISTRICT OF OKLAHOMA
BILL FANKHOUSER and TIM GODDARD, )
on behalf of themselves and all others
)
similarly situated,
)
)
Plaintiffs,
)
)
vs.
)
)
XTO ENERGY, INC. f/k/a CROSS
)
TIMBERS OIL COMPANY, a Delaware
)
Corporation (“XTO”),
)
)
Defendant.
)
Case No. CIV-07-798-L
ORDER
Plaintiffs Bill Fankhouser and Tim Goddard are royalty owners in wells
operated by defendant XTO Energy, Inc. (“XTO”).
Fankhouser owns royalty
interests in three gas wells located in Texas County, Oklahoma and one well located
in Kearny County, Kansas. Goddard owns royalty interests in two wells located in
Seward County, Kansas. The wells produce gas from the Chase formation in the
Guymon-Hugoton field.
Plaintiffs assert three claims for relief on behalf of
themselves and others similarly situated: breach of contract, breach of fiduciary
duty, and unjust enrichment. In addition, plaintiffs seek the equitable remedy of an
accounting for themselves and members of the class. On December 16, 2010, the
court certified this matter as a class action. The class consists of:
Non-governmental royalty owners who received payments
based on production from a well that is/was operated by
XTO Energy, Inc., for which the production is/was sold to
Timberland Gathering and Processing Co., Inc., and
processed at the Tyrone natural gas processing plant.
Kansas Subclass. Royalty owners encompassed
within the definition set forth above, who received
royalties from at least one well located in the State
of Kansas.
Oklahoma Subclass. Royalty owners encompassed
within the definition as set forth above, who
received royalties from at least one well located in
the State of Oklahoma.
Excluded Claims. All released claims under the settlement
agreement entered in Booth v. Cross Timbers Oil Co., No. CJ98-16 (Okla. Dist. Ct. Dewey County 2002).
Fankhouser v. XTO Energy, Inc., Case No. CIV-07-798-L, mem. op. at 15 (W.D.
Okla. Dec. 16, 2010) (Doc. No. 261).
This matter is before the court on Plaintiffs’ Motion for Partial Summary
Judgment for Breach of Contract and Fiduciary Duty (Doc. No. 292) [hereinafter
cited as “Plaintiffs’ Motion”]. Plaintiffs seek a ruling that, as a matter of law, XTO has
breached the implied covenant of marketability. In addition, plaintiffs ask the court
to rule as a matter of law that XTO owes a fiduciary duty to the class and that it has
breached that duty.
Summary judgment is appropriate if the pleadings, affidavits, and depositions
“show that there is no genuine issue as to any material fact and that the movant is
entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(c)(2). Any doubt as to
the existence of a genuine issue of material fact must be resolved against the party
2
seeking summary judgment. In addition, the inferences drawn from the facts
presented must be construed in the light most favorable to the nonmoving party.
Board of Education v. Pico, 457 U.S. 853, 863 (1982). Nonetheless, a party
opposing a motion for summary judgment may not simply allege that there are
disputed issues of fact; rather, the party must “set out specific facts showing a
genuine issue for trial.” Fed. R. Civ. P. 56(e)(2) (emphasis added). See also,
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249 (1986). “[T]here is no issue for
trial unless there is sufficient evidence favoring the nonmoving party for a jury to
return a verdict for that party.
If the evidence is merely colorable, or is not
significantly probative, summary judgment may be granted.” Anderson, 477 U.S. at
249-50 (citations omitted). In addition, “the plain language of Rule 56(c) mandates
the entry of summary judgment, after adequate time for discovery and upon motion,
against a party who fails to make a showing sufficient to establish the existence of
an element essential to that party's case, and on which that party will bear the
burden of proof at trial.” Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986).
The undisputed facts establish that XTO operates and produces raw or
unprocessed natural gas from all of the class wells. XTO sells the gas from the
class wells to its wholly owned subsidiary, Timberland Gathering and Processing
Co., Inc. (“Timberland”), at or near the wellhead. All of the raw gas from the class
wells is gathered, commingled, and compressed by Timberland into its gathering
system and transported through the Timberland gathering system to the inlet of the
3
Tyrone gas processing plant, which is also operated by Timberland. Exhibit 7 to
Plaintiffs’ Motion at 24-26, 28. For the majority of the wells, the pressure of the gas
at the wellhead is 10 pounds per square inch (“psi”) or less. Exhibit 14 to Plaintiffs’
Motion at 114. Thus, in order for Timberland to move the raw gas through its
gathering system, it must compress the raw gas using multiple off-lease
compressors in various locations on its gathering system. Exhibit 14 to Plaintiffs’
Motion at 114-15, 120-21, 125. At the plant, Timberland processes the gas to
extract natural gas liquids (“NGLs”).1 All of the gas entering the Tyrone plant from
whatever source is processed by Timberland in the same manner, without regard to
the source well, even though some wells produce gas with higher entrained NGLs
than other wells. Exhibit 7 to Plaintiffs’ Motion at 28-29. At the tailpipe of the Tyrone
plant, Timberland sells the residue gas2 to Cross Timbers Energy Services, Inc.
(“CTES”), another wholly-owned subsidiary of XTO. Exhibit 6 to Plaintiffs’ Motion at
26; Exhibit 16 to Plaintiffs’ Motion at 11. CTES – without transporting or performing
any other processing3 – then sells the residue gas to an unaffiliated company, DCP
1
NGLs are hydrocarbons that are separated from the natural gas stream in the form of
liquids and generally consist of propane, ethane, butane, isobutane, lease condensate, natural
gasoline, and liquified petroleum gases. See U.S. Energy Information Administration, Independent
Statistics & Analysis, Glossary at http://www.eia.doe.gov/glossary/index.cfm. Typically, gas with
a higher British Thermal Unit (“Btu”) content contains more NGLs than lower Btu content gas.
2
Residue gas is “[n]atural gas from which natural gas processing plant liquid products and,
in some cases, nonhydrocarbon components have been extracted.” U.S. Energy Information
Administration, Independent Statistics & Analysis, Glossary at http://www.eia.gov/tools/glossary/
index.cfm. See also Exhibit 6 to Plaintiffs’ Motion at 76 (residue gas is gas after the liquids are
removed). The principal component of residue gas is methane. Exhibit 5 to Plaintiffs’ Motion at 37.
3
Indeed, CTES does not have any employees. Exhibit 6 to Plaintiffs’ Motion at 48.
4
Midstream, formerly known as Duke Energy Field Services, LP (“Duke”). Exhibit 6
to Plaintiffs’ Motion at 74-76; Exhibit 19 to Plaintiffs’ Motion. Since December 1,
2005, Duke has paid CTES the Panhandle Eastern Index price for residue gas less
$0.01 per thousand Btu dry. Exhibit 20 to Plaintiffs’ Motion at ¶ 2.
CTES pays 100 percent of the price it receives from Duke to Timberland; in
effect, there is a straight pass-through of the monies received from Duke. Exhibit 11
to Plaintiffs’ Motion at 241; Exhibit 18 to Plaintiffs’ Motion at 9. Timberland then pays
XTO 80 or 85 percent of the monies it receives from CTES as payment for the gas
it purchases at the well. The percentage paid to XTO is spelled out in two contracts.
Under the first contract, executed on March 29, 1996, XTO is paid 80 percent of
Timberland’s weighted average residue price. Exhibit 12 to Plaintiffs’ Motion at art.
V, sec. 1. This contract governs the sale of gas from the Chase formation, from
which the majority of the wells in the class produce. The second contract was
executed on June 1, 1997. This contract, which governs sales of gas from zones
below the Chase formation, specifies that XTO receives a price equal to 85 percent
of Timberland’s weighted average sales price. Exhibit 13 to Plaintiffs’ Motion at art.
IV, sec. 1(a). Timberland’s weighted average sales price is the price Timberland
receives from CTES, which, in turn, is the price CTES receives from Duke. See
Exhibit 6 to Plaintiffs’ Motion at 73-76. Although Timberland extracts and sells NGLs
from the gas stream, it does not pay XTO any additional amount based on the endvalue of the NGLs. Thus, the price received by XTO, and upon which it bases its
5
royalty calculations, is 80 or 85 percent of the price paid by Duke to CTES for the
residue gas. See Exhibit 18 to Plaintiffs’ Motion for Class Certification at 22-23 (Doc.
No. 246-18). According to Terry Schultz, XTO’s Senior Vice President of Marketing
and an officer of CTES, Timberland’s retention of 15 to 20 percent of the monies
paid to it by CTES is to compensate Timberland for metering, gathering,
compressing, and transporting the gas to the buyer. Exhibit 14 to Plaintiffs’ Motion
at 114, 120-21, 125.
Plaintiffs charge that XTO breached the implied duty to market by charging
royalty owners for the costs incurred to put the gas into marketable condition. As the
court noted in its ruling on XTO’s motion for partial summary judgment:
Oklahoma and Kansas law recognizes in oil and gas
leases an implied duty on the lessee’s part to market
production. “[T]he implied duty to market means a duty to
get the product to the place of sale in a marketable form.”
Wood v. TXO Production Corp., 854 P.2d 880, 882 (Okla.
1993). The lessee bears the costs of putting the gas into
a marketable condition, and such costs may not be
charged to royalty owners. See Mittelstaedt v. Santa Fe
Minerals, Inc., 954 P.2d 1203, 1205 (Okla. 1998); TXO
Production Corp. v. Commissioners of Land Office, 903
P.2d 259, 262-63 (Okla. 1995); Sternberger v. Marathon
Oil Co., 894 P.2d 788, 791 (1995); Wood, 854 P.2d at
882. Oklahoma courts have held that the implied duty to
market “prohibits a lessee from deducting a proportionate
share of transportation, compression, dehydration, and
blending costs when such costs are associated with
creating a marketable product.” Mittelstaedt, 954 P.2d at
1205.
6
Fankhouser v. XTO Energy, Inc., Case No. CIV-07-798-L, ord. at 3-4 (W.D. Okla.
Feb. 23, 2012) (Doc. No. 357). Likewise, Kansas law provides that “[a]bsent a
contract providing to the contrary, a non-working interest owner is not obligated to
bear any share of production expense, such as compressing, transporting, and
processing, undertaken to transform gas into a marketable product.” Sternberger,
894 P.2d at 800.
Plaintiffs claim that gas from the class wells is not marketable at the well
because it requires dehydration, compression, gathering, and removal of impurities
– including natural gas liquids (“NGLs”). XTO counters that the gas is marketable
at the well because that is where it is bought and sold. It argues:
In interpreting a contract where the issue was whether
there was a market for gas, the Oklahoma Supreme Court
said “market” is “the opportunity for selling the commodity
(gas) from the Bertha Johnson well, that is the existence
of a commercial demand for the same.” The gas
produced from wells on the Timberland System is
marketable at the well. There is a commercial demand for
the gas as shown by Timberland’s purchase of gas
produced from wells connected to the Timberland System
from many unaffiliated third parties. Further, there is a
long history of wellhead sales of unprocessed gas in the
geographic area at issue. There are numerous midstream companies in the area that buy gas at the well in
its natural state, thus underscoring a commercial demand
for unprocessed gas. Therefore, the gathering, transportation, compression and processing performed by
Timberland enhances an already marketable product.
Defendant’s Response to Plaintiffs’ Motion for Partial Summary Judgment and Brief
in Support at 16 (Doc. No. 302) (citations omitted).
7
XTO’s argument, however, confuses market with marketable condition. The
two are not synonymous. See Naylor Farms, Inc. v. Anadarko OGC Co., Case No.
CIV-08-668-R, ord. at 7 (W.D. Okla. Oct. 14, 2011) (Doc. No. 245); Sternberger, 894
P.2d at 800 (“In the case before us, the gas is marketable at the well. The problem
is there is no market at the well”.) “[T]he implied duty to market means a duty to get
the product to the place of sale in marketable form.” Wood, 854 P.2d at 882
(emphasis added). Moreover, it is XTO’s burden to establish that the gas is in
marketable condition at the well,4 and it has not done so. Rather, the evidence
before the court demonstrates that the gas from the class wells requires
considerable compression as some wells are operating at a vacuum and others have
pressure as low as 10 psi. Exhibit 14 to Plaintiffs’ Motion at 114, 122. The contract
with Duke, however, requires the gas to be delivered at 600 psi. Exhibit 14 to
Plaintiffs’ Motion at 114; Exhibit 19 to Plaintiffs’ Motion at 1 ¶ 3. Kansas and
Oklahoma law is clear that royalty owners may not be charged with compression
costs that are necessary to put the gas into marketable condition and that a producer
may not escape its duty to market by contracting with a third party. Mittelstaedt, 954
P.2d at 1210 (“We decline to turn compression costs into costs paid by the royalty
interest merely by moving the location of the compression off the lease.”); TXO Prod.
Corp., 903 P.2d at 261 (“where there is no agreement between the lessor and lessee
4
See Mittelstaedt, 954 P.2d at 1208 (“When the gas is shown by the lessee to be in a
marketable form at the well the royalty owner may be charged a proportionate expense of
transporting that gas to the point of purchase.”) (emphasis added).
8
to share compression costs, we would not require the lessor to bear a portion of
those costs.”); Sternberger, 894 P.2d at 799 (“cost of compression which occurs
away from the mouth of the well are not deductible even where . . . the royalty is to
be paid based on market price at the mouth of the well.”). In addition to the
compression issues, the Duke contract requires the seller to “deliver gas meeting the
quality requirements and to avoid the delivery of Inferior Liquids as defined in Exhibit
A, Section A(g).”5 Exhibit 19 to Plaintiffs’ Motion at 2 ¶ 4(c). The contract also
demands the gas delivered to Duke to “be free of water and hydrocarbons in liquid
form” and limits the amount of hydrogen sulfide, oxygen, carbon dioxide, and sulfur.
Id. at A3, ¶ E.1. XTO, however, offered no evidence that the gas at the wellhead
was sufficiently free of impurities that it did not require processing before it was in
marketable condition.
Moreover, even if XTO had sustained its burden of establishing the
marketable condition of the gas at the wellhead, it has not sustained its burden
under Mittelstaedt and Sternberger. Under both Oklahoma and Kansas law, it is
defendant’s burden to show that post-production costs were reasonable, that such
costs were incurred to enhance an already marketable product, and that the royalty
revenues increased in proportion to such costs. As the Court in Mittelstaedt held,
5
Inferior Liquids are defined as “[m]ixed crude oil, slop oil, salt water, nuisance liquids, and
other liquids recovered by Buyer in its gathering system or at plant inlet receivers.” Id. at A1, ¶ A(g).
9
a royalty interest may bear post-production costs of
transporting, blending, compression, and dehydration,
when the costs are reasonable, when actual royalty
revenues increase in proportion to the costs assessed
against the royalty interest, and when the costs are
associated with transforming an already marketable
product into an enhanced product, and when the lessee
meets its burden of showing these facts.
Mittelstaedt, 954 P.2d at 1210. The Kansas Supreme Court likewise held in
Sternberger that
once a marketable product is obtained, reasonable costs
incurred to transport or enhance the value of the
marketable gas may be charged against nonworking
interest owners. The lessee has the burden of proving the
reasonableness of the costs. Absent a contract providing
to the contrary, a non-working interest owner is not
obligated to bear any share of production expense, such
as compressing, transporting, and processing, undertaken
to transform gas into a marketable product.
Sternberger, 894 P.2d at 800. XTO has not, however, presented evidence to
establish the reasonableness of the costs incurred or that royalty revenues
increased in proportion to such costs. See Naylor Farms, Inc., ord. at 5 (Doc. No.
245) (“If the gas had been in a marketable form at the well, the processes DCP
performed would either have been unnecessary and only transportation to a pipeline
would have been necessary or Defendant QEP could or would have submitted some
evidence showing that the processes performed by DCP merely enhanced an
already marketable product at a reasonable cost, resulting in proportionately higher
royalty revenues.”).
10
In addition, the court finds the gas purchase contracts between XTO and
Timberland constitute affiliate sales and therefore plaintiffs “are entitled to have their
royalty payments based on the prevailing market price or the work-back method,
whichever one results in the higher market value.” Howell v. Texaco Inc., 112 P.3d
1154, 1160 (Okla. 2004). XTO attempts to distinguish Howell on the basis that the
sales in Howell were between divisions of the same company, rather than between
separate corporate entities. The court finds that is a distinction without merit under
the facts of this case.6 XTO admits that it initially purchased the assets that were
transferred Timberland, and that Timberland was formed for this purpose. Exhibit
4 to Plaintiffs’ Reply to Defendant’s Response to Plaintiffs’ Motion for Partial
Summary Judgment for Breach of Contract and Fiduciary Duty at 25, 32 [hereinafter
cited as “Plaintiffs’ Reply”]. In addition to being wholly owned subsidiaries of XTO,
Timberland and CTES share officers and directors with XTO. Indeed, the officers
and directors of the three companies are nearly identical, the only difference being
that Terry Schultz is an officer of CTES and not of XTO or Timberland, while Nick
Dungey is an officer of XTO and Timberland, but not CTES. Plaintiffs’ Motion at 1011 n.15; Exhibit 17 to Plaintiffs’ Motion. All of Timberland’s board members are XTO
6
Moreover, Kansas law defines an affiliate as “any entity which, directly or indirectly, controls
or is controlled by, or is under common control with, the payor.” Kan. Stat. Ann. § 55-1622(a)(7).
The Oklahoma Oil and Gas Owners’ Lien Act of 2010 defines an affiliate as “any person . . . who
is controlled, directly or indirectly, by a first purchaser, or . . . who controls, directly or indirectly, a
first purchaser.” 52 O.S. § 549.2(1). Control “means the possession, directly or indirectly, of the
power to direct or cause the direction of the management and policies of a person, whether through
ownership, by contract, or otherwise.” Id.
11
employees.
Exhibit 7 to Plaintiffs’ Motion at 47.
Moreover, all Timberland
employees are employees of XTO and are paid by XTO.7 Exhibit 17 to Plaintiffs’
Motion at 44. The president of Timberland, Nick Dungey, is also XTO’s senior vice
president for natural gas operations.8 Exhibit 4 to Plaintiffs’ Reply at 14; Exhibit 11
to Plaintiffs’ Motion at 292. In both positions, he maintains one office – at XTO’s
offices in Ft. Worth, Texas. Exhibit 11 to Plaintiffs’ Motion at 292. The two
companies use the same legal staff to draft contracts. Id. at 293. The court finds the
contracts were not arms-length agreements as it is undisputed that they were not
“negotiated with an independent third party.” Tara Petroleum Corp. v. Hughey, 630
P.2d 1269, 1275 (Okla. 1981). The rule announced in Howell therefore applies.
There are, however, issues of fact as to what constitutes “the best price available.”
Howell, 112 P.3d at 1160. At trial, the parties will be permitted to present evidence
regarding whether a prevailing market price exists, and if so, what that price is. In
addition, the parties will be permitted to present evidence regarding the work-back
method, including the value of the NGLs.9 See id.; Katschor v. Eason Oil Co., 63
7
As noted earlier, CTES has no employees. See supra n.3.
8
As XTO’s senior vice president for natural gas operations, Dungey oversees “the gathering,
processing, dehydration, measurement, basically the midstream functions within XTO Energy.”
Exhibit 4 to Plaintiffs’ Reply at 14. These are precisely the functions that Timberland performs and
that Dungey therefore oversees in his position as president of Timberland.
9
Plaintiffs are entitled to royalty payments based on the value of the gas stream. See
Northern Natural Gas Co. v. Grounds, 666 F.2d 1279, 1286 (10th Cir. 1981), cert. denied, 457 U.S.
1126 (1982) (grant of gas “covered all components of the gas including helium which would entitle
the landowners-lessors to one-eighth (1/8th) of the proceeds of the helium marketed from each
well”). There is no dispute that NGLs are entrained in the gas stream. Moreover, the court notes
that in contracts XTO entered into with third parties, XTO specifically negotiated for payment to it
12
P.2d 977, 981 (Okla. 1936). The court thus grants plaintiffs’ motion for summary
judgment with respect to their breach of contract claim to the extent noted above.
The court also grants plaintiffs’ motion with respect to whether XTO owes a
fiduciary duty to the Oklahoma class. While XTO is correct that no fiduciary duty
arises solely from contracts or communitization agreements,
the Oklahoma Supreme Court has “recognized the
existence of a fiduciary duty owed by a unit to the royalty
owners and lessees who are parties to the unitization
agreement or subject to the order creating the unit. This
is not a duty created by the lease agreement, but rather by
the unitization order and agreement.” After unitization, the
leases no longer control.
Instead, the parties’
relationships are defined by statute and by Commission
order. “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 fiduciary duty of the unit operator arises not
only from the creation of field-wide units for secondary
recovery under 52 O.S. §§ 287.1 - 287.15, but also from
the creation of drilling and spacing units under 52 O.S.
Supp. 2007 § 87.1. The critical factor is the resort to the
police powers of the state on the part of a lessee in
unitization proceedings which modify and amend existing
legal rights.
Hebble v. Shell Western E&P, Inc., 238 P.3d 939, 943 (Okla. App. 2009), cert.
denied (Okla. 2010), cert. denied, 131 S. Ct. 822 (2010) (citations omitted).
The court finds that the Oklahoma class wells are subject to drilling and
spacing orders issued by the Oklahoma Corporation Commission. As early as May
of the value of the NGLs in addition to the value of the residue gas. Exhibit 5 to Plaintiffs’ Reply at
20, ¶¶ 1-2; Exhibit 6 to Plaintiffs’ Reply at 3, ¶¶ 5.2-5.3.
13
1943, the Oklahoma Corporation Commission recognized the need to establish
“rules and regulations governing the production of natural gas in the Hugoton Field
in order to prevent waste, provide for ratable taking, and fixing allowables of wells
so that production and distribution in said field would be fair and equitable”.10 The
May 1943 order was superseded by Order No. 17410 on December 27, 1944, in
which the Commission found:
That there exists in Texas County, Oklahoma, a large gas
field known as the Hugoton Field, which extends from the
Kansas line on the north to the Texas line on the south,
and approximately forty miles east and west; that said field
extends north into the State of Kansas, and at least a
short distance south into the State of Texas; that the
probable productive area in said field in the State of
Oklahoma covers most of Texas County, but the exact
boundaries and extent thereof cannot be determined with
certainty until additional wells are drilled.
Order No. 17140 at 2. Order No. 17140 was in turn superseded by Order No.
17867, issued May 31, 1945. Exhibit 2 to Plaintiffs’ Motion at 9-19. In Order No.
17867, the Commission noted that “the Guymon-Hugoton Pool constitutes one
common source of supply of gas, although there are three or more producing
horizons that are interconnected”. Id. at 10. The Commission found that drilling
units should be established for the Field and “[t]hat all of the royalty owners in a unit
10
In the Matter of the Application of Walker T. Pound, Conservation Officer, for Rules and
Regulations Governing the Ratable Taking of Gas and Allocating the Production in the HUGOTON
GAS FIELD in Texas County, Oklahoma, Order No. 17410 at 2 (Okla. Corp. Comm’n Dec. 27,
1944) located at http://imaging.occeweb.com/AP/Orders/OCC_OG_0LMG5UM_2NT6L88.pdf
[hereinafter cited as “Order No. 17410”].
14
should participate in the proceeds of any well produced in the unit in the ratio that
the acreage of the royalty owned bears to the total acreage of the unit.” Id. at 12.
The Commission noted its “intention to cover all of the productive areas of said
common source of supply, and any wells drilled into said common source of supply
outside the area described above11 shall be drilled in the manner and according to
the pattern herein described.” Id. at 14 (footnote added). On February 3, 1953, the
area spaced by Order No. 17867 was extended to also include Range 18 ECM of
Township 1.12 The Commission held that “all royalty interests within any spacing unit
shall be communitized and each royalty owner within any unit shall participate in the
royalty from the well drilled thereon in the relation that the acreage owned by him
bears to the total acreage in the unit.” Order No. 26721 at 2. Subsequent orders
issued by the Commission with respect to the Guymon-Hugoton Field recognize that
11
This area included Township 1 North, Ranges 12 to 17 East of the Cimarron Meridian
(“ECM”); Townships 2, 3, and 4 North, Ranges 12 to 18 ECM; and Townships 5 and 6 North,
Ranges 12 to 19 ECM. Id. at 14. In subsequent orders, the Commission extended the area to
relevant sections of Township 4 North, Range 19 ECM. In the Matter of Proper Drilling and Spacing
Units for the Morrow (SO. 719) by Amending Order No. 28160, as Amended; and by Establishing
Units for the Chester Underlying Sections 11, 12, 14, 23 and 24, Township 4 North, Range 18ECM,
and Sections 18 and 19, Township 4 North, Range 19ECM, Texas County, Oklahoma, Order No.
75135
(Okla.
Corp.
Comm’n
June
12,
1969),
located
at
http://imaging.occeweb.com/AP/Orders/OCC_OG_3H7SBBI_1O5G0V4.pdf; In the Matter of the
Application of Eason Oil Company for an Order Extending Morrow and Chester Spacing to Include
an Area in Township 4 North, Range 19 ECM, Texas County, Oklahoma, Order No. 92143 (Okla.
Corp. Comm’n July 18, 1972), located at http://imaging.occeweb.com/AP/Orders/OCC_OG_05V
9TKO_17KCIRK.pdf.
12
In the Matter of the Application of Stanolind Oil and Gas Company to Enlarge the Area
Covered by Order No. 17867 (CD983) to Include All of Township One (1) North, Range Eighteen
(18) East of the Cimarron Meridian, Texas County, Oklahoma, for the Development of, and the
Production of Gas From, the Guymon Hugoton Pool, Texas County, Oklahoma, Order. No. 26721
at 2 (Okla. Corp. Comm’n Feb. 3, 1953), located at http://imaging.occeweb.com/AP/Orders/OCC
_OG_30H3EJ6_1TIVBIM.pdf [hereinafter cited as “Order No. 26721”].
15
Order No. 17867 constitutes a drilling and spacing order.13 The court has conducted
an extensive review of Commission orders related to the Field14 and has found no
orders that are contrary to the Commission’s intent as articulated in 1945 “to cover
all of the productive areas of said common source of supply”.15 All of the Oklahoma
class wells produce from that common source of supply. All are subject to drilling
and spacing orders, and XTO as the operator owes a fiduciary duty “to properly
account for and distribute . . . gas proceeds from the units.” Hebble, 238 P.3d at
943.16 Whether XTO has violated that duty with respect to the Oklahoma class
remains a question of fact.
13
See Order No. 26721 at 1 (“Order No. 17867, establishing drilling and spacing units for
the production of gas from the Guymon-Hugoton Pool”); In the Matter of the Application of Plains
Natural Gas Company, a Corporation, for an Order Unitizing and Pooling All Oil and Gas Interests
and Determining the Rights and Equities of the Owners of Such Interests in the Drilling and Spacing
Unit Described as Section 25, Township 6, North, Range 18 ECM in Texas County, Oklahoma,
Order No. 24395 at 1 (Okla. Corp. Comm’n Jan. 26, 1951) (“by Order No. 17867 the Corporation
Commission established drilling and spacing units for the production of natural gas in the Guymon
Hugoton Pool”).
14
In addition to the orders attached as Exhibit 2 to Plaintiffs’ Motion, the court has also
reviewed the following orders (listed by Order No. only): 16377; 17410; 20742; 22830; 23498;
23704; 24395; 26721; 27102; 36361; 48447; 48448; 64458; 68188; 69150; 75135; 92142; 92143;
112563; 128367; 136532; 143591; 173755; and 318330. All Corporation Commission orders can
be located on the World Wide Web at http://imaging.occeweb.com/imaging/OAP.aspx.
15
Exhibit 2 to Plaintiffs’ Motion at 12.
16
XTO argues that plaintiffs “failed to cite any authority holding that a fiduciary duty existed
under § 87, which was repealed in 1947.” Defendant’s Response to Plaintiffs’ Motion for Partial
Summary Judgment and Brief in Support at 27 (Doc. No. 302). While it is true that Order No. 17867
was not issued pursuant to 52 O.S. § 87.1, that is because the order was issued prior to enactment
of § 87.1. Nonetheless, the court does not find this determinative. There is no doubt the
Commission had the authority to issue Order No. 17867 and that it was issued pursuant to “the
police powers of the state”. That is the key.
16
The law in Kansas is not so clear. Plaintiffs recognize that Kansas courts
have not have held that a fiduciary duty arises out of a unitization order, but ask the
court to find that the Kansas Supreme Court would follow Oklahoma law in this
regard. In the alternative, plaintiffs argue XTO owes the Kansas class a fiduciary
duty because Timberland receives and holds funds for the benefit of the royalty
owners. Plaintiffs contend XTO is the alter ego of Timberland and therefore is
chargeable with Timberland’s duty to properly account for and to distribute the class
funds.
The court finds plaintiffs have not demonstrated Kansas courts would follow
Oklahoma law regarding the effect of unitization orders. It is noteworthy that the
Kansas proration order governing the Hugoton Field submitted by plaintiffs permits
pooling, but does not require it. Exhibit 3 to Plaintiffs’ Motion at 10. Rather, such
action is a matter of contract as the order provides
[i]t shall be lawful for the owners of two, or more,
separately owned tracts of such land, or, of the minerals
located thereunder, by appropriate contract between such
owners to cause such lands or minerals to be consolidated
as one production unit and to apportion the royalties
accruing from the production of the well or wells, to be
divided among them as they may agree and when such
agreement shall have been made, the royalties arising
from the production of the well or wells shall be allocated
as the parties thereto may agree.
Id. (emphasis added).
17
The court also finds that plaintiffs have not established that they are entitled
to judgment as a matter of law on their alternative theory of liability. In general, a
corporation is a separate entity from its owner. Louisburg Bldg. & Dev. Co. v.
Albright, 252 P.3d 597, 608 (Kan. App. 2011). The corporate entity, however, may
be disregarded if the corporation’s owner is found to be the alter ego of the
corporation. Id. at 609.
The concept that one corporation can be found to be the
alter ego of another corporation is a well-established
doctrine in Kansas law, but examples of its application in
a parent-subsidiary corporate context are rare. . . . The
ultimate test for imposing alter ego status is whether, from
all of the facts and circumstances, it is apparent that the
relationship between the parent and subsidiary is so
dominating, and the business and assets of the two are so
mingled that recognition of the subsidiary would result in
an injustice to third parties. In addition to the factors used
to determine a corporate alter ego status, a plaintiff must
show that allowing the legal fiction of a separate corporate
structure would result in injustice toward the plaintiff.
Doughty v. CSX Transp., Inc., 905 P.2d 106, 111 (Kan. 1995). Moreover, “[m]erely
showing that some kind of injustice occurred is not sufficient – to disregard the
corporate entity . . . it must be ‘necessary to achieve equity.’” Albright, 252 P.2d at
610 (citation omitted). Whether a parent corporation is the alter ego of its subsidiary
is a question of fact,17 and the court finds there are sufficient questions with respect
17
Doughty, at 114.
18
to a number of the factors to be considered18 that plaintiffs are not entitled to
summary judgment on this issue.
In sum, Plaintiffs’ Motion for Partial Summary Judgment for Breach of Contract
and Fiduciary Duty (Doc. No. 292) is GRANTED in part and DENIED in part.
It is so ordered this 8th day of March, 2012.
18
There is no dispute with respect to a number of the ten factors to be considered. See
Doughty, 905 P.2d at 111. XTO owns all of Timberland’s stock, the corporations have common
officers and directors, XTO caused Timberland’s incorporation, XTO pays the salaries of
Timberland’s employees, and a substantial amount of Timberland’s business is with XTO and is
accomplished with assets conveyed to it by XTO. The parties, however, dispute whether
Timberland “has grossly inadequate capital”, whether Timberland is referred to as a division or
department of XTO, whether the directors or executives “do not act independently in the interest
of the subsidiary but take direction from the parent corporation”, and whether formal legal
requirements are observed. Id.
19
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