Mitchell Energy Corporation, Maurice Sherman Bliss, Intervenors v. Samson Resources Company
Docket: 95-40204
Court: Court of Appeals for the Fifth Circuit; January 11, 1996; Federal Appellate Court
Samson Resources Company (Samson) was found liable for conversion and fraud by a jury due to its failure to disclose and pay amounts owed to Mitchell Energy Corporation (Mitchell) and intervenors Maurice Sherman Bliss, et al., resulting from gas production from a well operated by Samson. The jury awarded approximately $3 million in actual damages and $50 million in punitive damages. The court highlighted that Texas law does not support tort actions for conversion or fraud under these circumstances, leading to a partial reversal and modification of the district court's judgment, ultimately rendering a judgment in favor of Mitchell and the intervenors.
Samson, as lessee and operator of the well, held several oil and gas leases covering the Samson Trammel Trust Gas Unit, which spans 704 acres in Polk County, Texas. Despite acquiring leases from Exxon and Republic National Bank, Samson failed to secure leases for about 5% of the mineral interests within the Unit. From 1981, when the well began production, until 1994, the Unit generated over $15 million in gross revenue, but Samson did not pay royalties to the intervenors or share profits with Mitchell, an unleased cotenant. Mitchell demanded an accounting from Samson in February 1991, leading to a state court action for accounting and damages, which was subsequently removed to federal court. The intervenors later joined the lawsuit, alleging breaches of their leases and claims of fraud and conversion against Samson.
Samson and its opponents presented conflicting narratives regarding Samson's motives and actions concerning unpaid royalties for mineral estates. Samson argued that payments were withheld due to unclear ownership of the minerals, supported by title opinions. In contrast, Mitchell and the Intervenors provided expert testimony asserting that no title dispute existed in 1980, the year Samson commenced work on the well, and claimed that Samson had sufficient information to ascertain ownership. Samson did not segregate the funds owed to the alleged unknown owners, instead using them for its own business, including distributions to affiliated working interest owners, without proper accounting for the suspended funds. The jury ruled against Samson on claims of conversion and fraud, awarding actual damages of $1,354,752.11 to Mitchell and $1,664,222.80 to the Intervenors, along with punitive damages of $10 million and $40 million, respectively. Additionally, the court ordered Samson to pay 100% of future mineral percentages to Mitchell and the Intervenors without expense deductions and granted Mitchell attorneys' fees of $65,718.75. Samson's motions for judgment as a matter of law and for a new trial were denied, leading to an appeal.
The legal relationships between the parties were clarified: Mitchell's predecessors had not leased mineral interests to Samson, making Mitchell an unleased cotenant. The Intervenors had leased their interests to Samson, but the jury found that Samson had repudiated these leases. The court treated the Intervenors as unleased cotenants, which Samson contested. Under Texas law, an oil and gas lease grants the lessee a fee simple determinable in the mineral estate, and nonpayment of royalties does not terminate a lease unless specified in the lease. The leases in question did not contain such a termination clause, and all conditions for Samson to maintain its fee were met. Thus, even if Samson's nonpayment was intentional, it could not legally result in the termination of its mineral estate.
Intervenors incorrectly assert that Texas law allows for the repudiation of an oil and gas lease under the circumstances presented, relying on the doctrine of repudiation, which states that a lessor may be estopped from claiming lease termination due to the lessee's nonperformance if the lessor contributed to that nonperformance. This doctrine protects the lessee from operational obligations while the lease's validity is disputed. However, it does not support Intervenors' claim that lessee Samson has repudiated the leases. Additionally, the cases cited by Intervenors relate to ordinary contracts, not oil and gas leases, making them irrelevant. As a result, it is legally concluded that Samson’s oil and gas leases have not terminated, and Intervenors must be regarded as lessors.
Regarding conversion, Texas law defines conversion as the wrongful dominion over personal property belonging to another. The right to payment for severed minerals is treated as personal property. Mitchell and Intervenors argue that Samson is liable for conversion due to nonpayment, but this claim is rejected on the grounds that Texas law does not support conversion actions for mineral production proceeds in these circumstances. Mitchell and Samson are cotenants in the mineral interests, allowing each cotenant to extract minerals without the other's consent, provided they account for the other’s share of the value and expenses. Although Samson did not convert gas by producing it, the core issue is whether it can be liable for converting the proceeds of gas sales due to nonpayment. The conclusion is that no conversion action exists in this context.
Mitchell has not identified any Texas case holding a cotenant liable for conversion based on nonpayment of another cotenant’s share. Instead, Texas law provides the nonconsenting cotenant with the right to an accounting, which may include recovery of interest and attorneys' fees, but does not constitute a tort remedy eligible for punitive damages. The authorities cited by Mitchell do not support the conversion claim, as prior cases involved trespassers lacking legal rights to the minerals, unlike cotenants who possess such rights. Therefore, these precedents do not apply to the current situation, nor does the cited Gardner Machinery case, which dealt with conversion by an agent regarding machinery owned by a principal.
Texas law permits a cotenant to pursue a conversion action against another cotenant only in limited situations, specifically when one cotenant appropriates the entire property owned in common. In the case referenced, the common property involved was machinery, which makes the precedent inapplicable to the current scenario, where only proceeds from production have been appropriated, not the entire mineral estate.
Texas jurisprudence allows money to be the subject of conversion only when it is a specific chattel or when it is delivered for safekeeping with the expectation that it will be returned as an intact fund. The right to profits from common property does not equate to a right to a specific portion of the proceeds, as Mitchell's claim is to a share of the value of gas produced rather than identifiable funds. Consequently, the obligation owed to Mitchell resembles a general obligation to pay money, not a conversion claim.
Mitchell's argument referencing Texas Property Code section 75.102, which pertains to abandoned property and does not apply to cotenant rights, is also dismissed. The mention of "convert" in this context does not create a tort cause of action where none exists. During oral arguments, Mitchell acknowledged that typically, the remedy in such situations is an action for accounting, but argued that Samson's failure to document the funds in suspense or to escrow them alters this. The court found this argument unpersuasive, concluding that such omissions do not elevate the right to an accounting to a conversion claim.
Similarly, the Intervenors, who are recognized as Samson's lessors rather than cotenants, can only pursue claims based on contract, not tort. Thus, both Mitchell and the Intervenors lack a valid conversion claim against Samson for recovering their respective shares of profits from the mineral estate.
Samson was found by the jury to have committed fraud by failing to disclose material facts regarding debts owed to Mitchell and Intervenors from gas production. However, Texas law does not recognize a duty to disclose information as fraud unless a fiduciary or confidential relationship exists. In this case, no such relationship was established between Samson and either Mitchell or Intervenors. The relationships of cotenancy or lessor/lessee do not inherently create fiduciary duties under Texas law. Mitchell's claim that Samson had a fiduciary duty to disclose information was unsupported by legal authority, as it attempted to wrongly equate the right to an accounting with a duty to disclose. Furthermore, reliance on a single Texas case regarding cotenants holding rents and profits in trust was deemed misplaced, as it did not substantiate a breach of fiduciary duty leading to fraud. Consequently, Samson had no duty to disclose information regarding production from the Well, and thus no actionable fraud occurred.
Additionally, Samson acknowledged that Mitchell is entitled to an accounting for its share of production proceeds and that Intervenors are owed royalty payments per their lease agreements. The court determined that the evidence was sufficient to calculate these payments without remanding the case for further judgment. However, the district court erred in calculating Mitchell's actual damages by not deducting operating expenses and taxes from the gross revenues produced by the Well. Under Texas law, a producing cotenant must account to nonproducing cotenants based on the value of minerals taken, minus reasonable production and marketing costs. Therefore, Mitchell's actual damages must account for its share of these expenses.
Mitchell contends that Samson is a willful and deliberate converter, arguing against recovery of production costs based on Mayfield v. de Benavides, which states that bad faith trespassers cannot recover such costs. Since no finding established Samson as a bad faith trespasser and due to valid leases with Exxon and Republic National Bank, the damage calculation for Mitchell must exclude his share of drilling and operating costs. Actual damages owed to Mitchell, calculated through September 30, 1994, amount to $424,999.82.
For the Intervenors, the district court awarded damages as if they were unleased cotenants rather than royalty owners, based on a jury finding that Samson repudiated their leases. However, nonpayment of royalties cannot support a finding of repudiation, so their damages should reflect their royalty interests, not the gross proceeds attributable to their ownership, irrespective of production costs. The amount of royalty payments due to the Intervenors through September 30, 1994, is $109,035.17.
The district court incorrectly calculated prejudgment interest by applying a T-bill rate and then adding 10% per annum, resulting in a double interest award. Texas law dictates that the proper prejudgment interest rate is 10% per annum, and the damage award should reflect only one recovery for the time value of money. Therefore, the judgment for actual damages is modified accordingly.
Post-judgment interest is governed by 28 U.S.C. § 1961, which stipulates that the judgment of $977,886, plus costs, shall earn interest at 7.03%, compounded annually, starting February 3, 1995, the day the judgment was signed.
Lastly, Texas law necessitates an independent tort for punitive damages, which are not justified here as the claims stem from accounting and breach of contract actions, not torts. Consequently, the punitive damages award is reversed and vacated.
The district court ordered Samson Resources Company to pay Mitchell Energy Corporation and Intervenors 100% of their mineral interests based on future production from a well, without deducting expenses. However, this order was deemed incorrect, as Mitchell is entitled to its proportionate share of production proceeds minus reasonable operating expenses, while Intervenors should receive royalty payments according to their lease agreements. The court reversed and vacated the "additional relief" aspect of the judgment, noting that the parties have adequate legal remedies.
Additionally, the district court awarded Mitchell $65,718.75 in attorneys' fees, based on a letter from Mitchell that it claimed was an "offer of judgment" under the Eastern District of Texas Civil Justice and Delay Reduction Plan. Samson contested this, arguing that the letter was merely a settlement proposal. The letter outlined a request for $246,093.06 for past production and pre-judgment interest, alongside offers for a sale of interests or an operating agreement. The letter lacked explicit language indicating an offer of judgment and did not specify a clear deadline, which are necessary under the Eastern District Plan. As such, the court concluded that Mitchell's letter did not constitute an "offer of judgment," resulting in the vacating of the attorneys' fees award.
Samson failed to pay amounts owed to Mitchell and the Intervenors from gas production at the Well. As a cotenant, Mitchell can seek an accounting for its share of profits, calculated as the gas value minus expenses. The Intervenors, as lessors, have a breach of contract claim for unpaid royalties under their lease agreements. Texas law affirms that Samson retains the mineral estate from these leases, and neither Mitchell nor the Intervenors can pursue tort claims for conversion or fraud in this context, which precludes punitive damages absent an independent tort. The court determined that sufficient evidence exists to calculate damages owed by Samson, leading to a judgment that is partially reversed, modified, and rendered. Specifically, Samson is ordered to pay Mitchell $766,719 plus court costs and interest, and to pay the Intervenors $206,167 plus court costs and interest. Additionally, it is noted that Mitchell is an "unleased cotenant," and the ownership of the mineral interests is detailed, with a total percentage of 98.64284 accounted for among various parties, leaving 1.35716% unidentified.
Various legal cases and statutes are referenced, highlighting significant judicial principles relevant to recovery and fiduciary relationships under Texas law. Key cases include Gardner Machinery Corp. v. U.C. Leasing, which illustrates precedent on conversion claims, and Gronberg v. York, which establishes that an employee cannot claim conversion without seeking the return of specific funds. The excerpt cites Texas Property Code and discusses cotenancy law, indicating that no fiduciary relationship exists between cotenants unless established by agreement, as noted in Hurd Enterprise v. Bruni and Cambridge Oil Co. v. Huggins. It highlights the allocation of actual damages among intervenors, detailing specific amounts awarded to each party that total $109,035.17, alongside additional damages awarded by the district court amounting to $972,886.00, with individual interests similarly itemized. The excerpt emphasizes the need for specific claims in conversion cases and the lack of fiduciary duties unless agreed upon by the parties involved.
In Nissho-Iwai Co. v. Occidental Crude Sales, the court addressed the awarding of post-judgment interest, affirming that it applies to the total judgment amount, including prejudgment interest as seen in Fuchs v. Lifetime Doors, Inc. The Eastern District of Texas Civil Justice and Delay Reduction Plan permits parties to make a written offer of judgment at the Management Conference or thereafter. If the offer is not accepted and the final judgment is at least 10% more favorable to the offer-making party, the rejecting party must cover litigation costs incurred post-offer rejection. In cases involving personal injury and civil rights with contingent attorney fees, litigation costs awarded cannot exceed the final judgment amount. The court retains discretion to reduce these costs to avoid undue hardship. The offeror must specify a reasonable deadline for acceptance; failure to respond in writing by this deadline results in automatic rejection of the offer. Litigation costs encompass expenses related to trial preparation and execution, including reasonable attorney fees, deposition costs, and expert witness fees.
