Pursue Energy Corp. v. Abernathy, et al.
| Docket Number: | 2009-CA-01794-SCT Linked Case(s): 2009-CA-01794-SCT |
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| Supreme Court: | Opinion Link Opinion Date: 10-13-2011 Opinion Author: King, J. Holding: Affirmed in part, reversed and remanded in part. |
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| Additional Case Information: |
Topic: Accounting of capital-investment charges - Reasonableness of processing fees charged to royalty owners - Res judicata - Fiduciary relationship - Punitive damages - Section 11-1-65(1)(a) - Prejudgment interest - Section 53-3-39 - Simple interest - Statute of limitations - Section 15-1-67 Judge(s) Concurring: Waller, C.J., Carlson, P.J., Randolph, Kitchens, Chandler and Pierce, JJ. Concurs in Result Only: Dickinson, P.J., and Lamar, J., Concur in Result Only Without Separate Written Opinion Nature of the Case: CIVIL - OTHER |
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| Trial Court: |
Date of Trial Judgment: 10-01-2009 Appealed from: Simpson County Chancery Court Judge: J. Larry Buffington Disposition: Held that reasonable processing and investment costs may be deducted from royalty owners’ payments. Case Number: 2000-0525 |
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| Party Name: | Attorney Name: | Brief(s) Available: | ||
| Appellant: | Pursue Energy Corporation |
PAUL STEPHENSON
WILLIAM F. RAY
G. DAVID GARNER |
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| Appellee: | Nancy Carol Garrett Abernathy, Nancy G. Abernathy, Anne M. Ballantyne, Stephen P. Ballantyne, Black Warrior Minerals, Inc., Erma Boyd, John L. Burwell, Jr., John L. Burwell, Jr. Children's Trust, Laura Jean Garrett Butler, Mark C. Butler, Ralph C. Butler, Barbara Ann White O'Connell Byrd Trust, Doris F. Callender, Mary Mortimer Campbell Children's Trust #2, Chainco, Inc., Homer Cummings, Sid Davis, Marie I. Fairchild LIT, Marie I. Fairchild Trust, W.R. Fairchild Construction, W.R. Fairchild Construction, LLC, Wiley Fairchild, Harrison S. Ford, Gary Darwin Garrett, Georgia L. Jenkins Glisson, Barbara Ann Cooper Haley, Erin Hargroder, Chris Hemeter Life Estate, W. D. Hilton, Carroll Ingram, Mary C. Jenkins, Velma R. Jenkins, Janet White Johnston, James T. Kendall, W. Baldwin Lloyd, A. W. Magruder, A. W. Magruder, Jr., J.D. Mashburn and Wife, James D. Mashburn, Marie McKay Mashburn, Edwin D. Moore, Glenn G. Mortimer, Glenn G. Mortimer, Jr. L/E, Mortimer Group, Piney Woods School, Robert S. Pirtle, Lottie Dent Potter, Mary Helen Garrett Shealy, R. H. Sims, Jr., Rudy H. Sims, Jr. and Larry A. Sims, James B. Sykes, Jr., Barbara Walters Thompson, MD, Grady Hamilton Vaughn, Miriam H. Whitsett and Wirt A. Yerger | C. VICTOR WELSH, III CRIMES G. PITTMAN MARCUS M. WILSON CHARLES FRANK FAIR BARBOUR ERNEST G. TAYLOR, JR. | ||
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| Topic: | Accounting of capital-investment charges - Reasonableness of processing fees charged to royalty owners - Res judicata - Fiduciary relationship - Punitive damages - Section 11-1-65(1)(a) - Prejudgment interest - Section 53-3-39 - Simple interest - Statute of limitations - Section 15-1-67 |
| Summary of the Facts: | In the 1960s, Shell Oil Company built the Thomasville Gas Plant, at a cost of $41 million, to process “sour” gas and turn it into marketable “sweet” gas and its by-product, marketable sulfur. In order to recover the costs of operation and its investment, Shell developed and implemented an equation that contained two primary components. The first component consisted of the actual capital investment combined with a return on that investment, and the second component represented the cost per day of operating the plant. Using this formula, Shell charged all royalty owners with a proportionate share of processing and investment costs by deducting a fee from the royalty owners’ checks. In 1974, royalty owners challenged the use of the formula in district court. The district court found for Shell, and the plaintiffs appealed. On appeal, the Fifth Circuit determined that the royalty owners could be taxed with costs of processing their gas as long as the fees were reasonable. The Fifth Circuit remanded the case to the district court to address the reasonableness of Shell’s costs. The district court found the costs to be reasonable, thus approving Shell’s formula. Shell completed recovery of the $41 million capital investment in 1990. In 1978, Pursue commenced sour gas development activities in Thomasville. In 1979, Pursue built its own gas processing plant. The Pursue plant was built at a cost of $53 million, which was recovered from its royalty owners. By December 1995, Pursue had recovered the full amount of investment for its Thomasville plant. In early 1996, Pursue purchased Shell’s plant, the associated wells, reserves and related facilities for $28,130,000. As a result of the purchase, Pursue decided to use the Shell plant for all production and dismantled its own plant. In 1996, Pursue moved into the Shell plant and began using the Shell gas processing formula to deduct costs from the royalty owners. Although Pursue had paid only $28,130,000 for Shell’s processing plant, associated wells, reserves, and related facilities, Pursue continued to use the Shell $41 million capital investment as part of the formula for recovery of the cost of production. In December 2000, James Sykes and thirty-six other plaintiffs filed an action requesting that the court order an accounting of capital-investment charges withheld since Pursue had assumed ownership and determine whether the amount of capital investment was assessed correctly. While the parties were awaiting the chancellor’s decision, Pursue filed a voluntary petition for relief under Title 11 of the United States Bankruptcy Code in the Southern District of Mississippi. The filing of the bankruptcy petition automatically stayed the chancery-court case and prevented the chancellor from entering a final judgment. On June 16, 2003, the bankruptcy court lifted the stay and allowed the chancery court to rule on the case, providing any judgment would not be final and the appeal time would be tolled pending further order of the bankruptcy court. The chancellor found that the capital investment costs of the Shell plant had been previously recovered. The chancellor held that Pursue was unreasonable in requiring the Sykes plaintiffs to pay for their share repetitively. Therefore, the Sykes plaintiffs were entitled to damages equal to their pro rata share of the capital-investment charges deducted by Pursue that duplicated the capital investment previously recovered by Shell. The chancellor relied on Pursue’s records, which valued the reserves purchased from Shell at $58,901,000, to determine that the Shell plant was a non-cost item and should have been valued at zero instead of $41 million. Thus, the chancellor held that Pursue could continue to deduct daily plant-operating expenses, but that the Sykes plaintiffs were entitled to relief for any amount charged above and beyond operating expenses, or their pro rata share of $42,482,919.47. In 2004, the bankruptcy court lifted the stay a second time for the chancery court to rule on the issue of punitive damages. The chancellor found that a fiduciary relationship existed between Pursue and the Sykes plaintiffs, and that Pursue’s conduct in using Shell’s investment number to deduct unreasonable capital-investment charges could warrant punitive damages. The chancellor entered his ruling denying punitive damages but granting attorneys’ fees and costs. The chancellor awarded the Sykes plaintiffs attorneys’ fees at forty percent of actual damages, together with expenses. In 2009, the bankruptcy court lifted the stay a third time, allowing the chancery court to enter a final judgment on all issues without further order of the bankruptcy court. The chancellor entered a final judgment awarding the Sykes plaintiffs actual damages of $684,717.13, their pro rata share of $42,482,919.47, prejudgment interest on actual damages at six percent simple interest, attorneys’ fees based on forty percent of actual damages, litigation expenses and interest on all amounts from the date of judgment at six percent per annum. Pursue appeals. |
| Summary of Opinion Analysis: | Issue 1: Reasonableness Pursue argues that the chancellor erred in finding the processing fees charged to royalty owners to be unreasonable. Pursue argues that, because its processing fees are less than the market rate, the processing fees are reasonable. The oil and gas leases do not expressly provide that the oil company may deduct any processing charges. An oil company can deduct reasonable processing and investment costs from the payments made to royalty owners. Further, it is unreasonable for the Sykes plaintiffs to pay for their share of investment costs repetitively. Therefore, the chancellor’s determination is affirmed. Issue 2: Res judicata Pursue argues that the threshold issue of this appeal has been conclusively resolved, and the claims of the Sykes plaintiffs are barred by res judicata. Four requirements that must be present before the doctrine of res judicata will be applicable include identity of the subject matter of the action, identity of the cause of action, identity of the parties to the cause of action, and identity of the quality or character of a person against whom the claim is made. Where these four identities are present, the parties will be prevented from re-litigating all issues tried in the prior lawsuit, as well as all matters which should have been litigated and decided in the prior suit. Here, the identity of the subject matter of the cause of action has not been satisfied. In the prior case, the issue was whether an oil and gas lessee could recover capital costs from royalty owners. In the present case, the question is whether the same cost can be twice recovered. Issue 3: Fiduciary relationship Pursue argues that the chancellor erred in finding the relationship between the plaintiffs as mineral lessors and Pursue as mineral lessee to be fiduciary. The relationship that arises under an oil and gas lease between a mineral lessee and royalty owner is contractual. Thus, the chancellor erred in holding that a fiduciary relationship arose between the Sykes plaintiffs and Pursue. Issue 4: Punitive damages Pursue argues that the Sykes plaintiffs failed to prove that they were entitled to punitive damages by clear and convincing evidence. Section 11-1-65(1)(a) provides that punitive damages are awarded only if the Sykes plaintiffs proved by clear and convincing evidence that Pursue acted with actual malice, fraud, or gross negligence/reckless disregard for the rights of others. In a breach-of-contract case, a plaintiff must prove that the breach was the result of an intentional wrong or that a defendant acted maliciously or with reckless disregard of the plaintiff's rights. The chancellor found that Pursue never informed the royalty owners that the $41 million capital investment expenditure previously had been recovered. In addition, because the record indicated that Pursue negotiated with people who were in the oil and gas business for a lesser amount, the chancellor held that Pursue’s conduct was willful, malicious and intentional. There was no error in the chancellor’s award of punitive damages. The chancellor awarded attorneys’ fees in lieu of punitive damages. The Supreme Court has previously held that attorneys’ fees may be awarded instead of punitive damages. Issue 5: Prejudgment interest The chancellor awarded six percent simple interest from 1996 through 2001, the dates of the Sykes plaintiffs’ actual damages; six percent interest compounded annually from 2001, the date the complaint was filed, through date of entry of the final judgment, and six percent simple interest from the date of entry of his final judgment on October 1, 2009. Pursue argues that prejudgment interest should not have been awarded because the complaint is a contract dispute and there is no evidence that Pursue acted in bad faith. Pursue also argues that the award should be simple rather than compound interest. In order to recover the costs of operation and its investment, Pursue implemented an equation that contained two primary components. Using this formula, Pursue deducted processing costs from its royalty owners’ checks. Thus, Pursue actually received the revenue that the chancellor held to be unreasonable. Because the revenue was received by Pursue, Pursue did not underpay the royalty owners but withheld royalty payments. Therefore, section 53-3-39 is applicable, and the award of prejudgment interest from 1996 through the date of entry of the final judgment should be affirmed. However, pursuant to section 53-3-39, the chancellor erred in assessing the interest rate at six percent. The statute specifically requires that the rate of interest shall be eight percent per annum. With regard to interest, the common law rule is that when interest is allowable, it is to be computed on a simple rather than compound basis in the absence of an express authorization otherwise. Any interest awarded under section 53-2-39 should be simple interest only. Section 53-3-39 states that the “rate of interest shall be 8% per annum.” There is no provision for calculation “according to the actuarial method.” Thus, the statute requires that any award of interest is to be calculated using the simple method. Issue 6: Statute of limitations Pursue argues that the Sykes plaintiffs’ claims, in part, are barred by the three-year statute of limitations. The Sykes plaintiffs argue that the statute of limitations was tolled by section 15-1-67. Section 15-1-67 requires proof that some affirmative act or conduct was done and prevented discovery of a claim, and due diligence was performed on their part to discover it. The record indicates that both requirements were satisfied. Accordingly, the chancellor was correct in declining to apply the statute of limitations to claims accruing more than three years prior to the filing of the complaint and amended complaint. |
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