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PETER FOX BREWING CO. v. SOHIO PETROLEUM CO.

April 25, 1958

PETER FOX BREWING COMPANY, PLAINTIFF,
v.
SOHIO PETROLEUM COMPANY, DEFENDANT.



The opinion of the court was delivered by: Campbell, Chief Judge.

  It is clear from the complaint, from the copious briefs filed by both parties, and from the argument of counsel, that the legal issues presented by this case are of considerable complexity.

In Count I of their complaint in equity, plaintiffs pray that the agreement of August 20, 1943, be modified and altered, as of October 1, 1947, to eliminate the fixed per-well deduction as to all wells whether operating or not. They also pray for such other relief as in equity shall deem meet.

In Count II, at law, plaintiffs pray that judgment be entered in their favor in the amount of $28,520, representing fixed per-well deductions retained by defendants in respect of wells which had been plugged.

The parties have filed a stipulation of fact, with the declared intention of submitting certain issues of law for determination at this stage.

I have read the stipulation and I have read the briefs, and I confess that I am at a loss to see just what issues of law have been submitted for my determination at this stage.

Plaintiff, Tek Oil Corporation, states those issues to be:

    (a) That the compulsory unitization of the assigned
  properties pursuant to the Oklahoma Statute has, by
  operation of law, modified the agreements between the
  parties to the extent necessary to make them
  compatible with the conditions of unitized operation;
    (b) That the provision for monthly per-well
  deductions contained in the Agreements is
  incompatible with unitized operation and, therefore,
  became inapplicable upon the creation of the Unit;
  and
    (c) That the plaintiffs are, therefore entitled to
  the recovery of the amounts of all the monthly
  per-well deductions made by the defendant

  since the effective date of unitization, and to the
  reformation of the Agreements in accordance with the
  intent of the Oklahoma statute.

Plaintiffs Schmitz, Northern Trust Company, and Dangler state:

    "The main question to be determined is whether or
  not Section 4(b) of the Agreement of August 20, 1943,
  and a similar provision in the Agreement of February
  15, 1944, providing for deduction from the overriding
  royalty interest has been superseded by the creation
  and the operation of the West Edmond Hunton Lime
  unit * * *."

The defendants, on the other hand, say that:

  "the parties hereto have filed a stipulation of facts
  so that the Court may make a determination of the
  preliminary question whether the plan of unitization
  signed by the plaintiffs or their predecessors
  precludes them from maintaining this action."

Whether defendants' statement of the issue presented at this stage is accurate or not, (and I should say here that in view of the length and complexity of the arguments presented in the brief I would be inclined to doubt this), the fact remains that, on the stipulation of facts filed in this case, that issue and that issue alone can be determined at this time. There is not enough before me in your stipulation to determine any of the other things referred to.

The stipulation of fact barely recites the salient features of the agreements of August 20, 1943, and February 15, 1944; it states the history which brings the various parties into the case; it states that a plan of unitization involving plaintiff's leasehold interest became effective October 1, 1947; and finally, the stipulation states that since October 1, 1947, Sohio Petroleum Company has computed payments accruing to the overriding royalty interest now owned by the plaintiffs on the basis of the quantities of oil and gas allocated, in accordance with the plan, to the tracts of land that are subject to said overriding royalty interest, by deducting $200 per month for each quarter-quarter section or tract of approximately forty acres and that the computation was continued as to those tracts on which wells have been abandoned.

On the basis of this stipulation and on a reading of the Oklahoma statute and of the plan adopted thereunder, I am prepared to hold:

That there is nothing in the statute or the plan which requires that a fixed per-well deduction be transmuted in a fixed per-tract deduction. The first paragraph of Section 287.9 of the statute (Title 52, Oklahoma Statutes, 1951), provides:

    "Property rights, leases, contracts, and all other
  rights and obligations shall be regarded as amended
  and modified to the extent necessary to conform to
  the provisions and requirements of this Act and to
  any valid and applicable plan of unitization or order
  of the Commission made and adopted pursuant hereto,
  but otherwise to remain in full force and effect."

Defendants argue that this provision requires that a fixed per-well deduction be transmuted into a fixed per-tract deduction when read with the following paragraphs of Section 287.9.

Paragraph 4:

    "Operations carried on under and in accordance with
  the plan of unitization shall be regarded and
  considered as a fulfillment of and compliance with
  all of the provisions, covenants, and conditions,
  express or implied, of the several oil and gas mining
  leases upon lands included with the unit area, or
  other contracts pertaining to the development
  thereof, insofar as said leases or other contracts
  may relate to the common source of supply or portion
  thereof included in the unit area. Wells drilled or
  operated on any part of the unit area no matter where
  located shall for all purposes be regarded as wells
  drilled on each separately-owned

  tract within such unit area."

This provision is clearly intended to relieve the person whose duty it is to drill wells from forfeiture for failure to perform a pre-unitization obligation to drill. To interpret this provision as requiring that a pre-unitization fixed per-well deduction be transmuted into a per-tract deduction is in my opinion absurd.

With reference to the last portion of this provision, defendants say:

    "Realizing the importance of wells in applying the
  provisions of leases and other contracts (such as the
  agreement under which plaintiffs' claim) the
  Legislature further provided that so long as wells
  are being drilled or operated anywhere within the
  unit area, each tract within the unit area shall be
  deemed conclusively to have a well located thereon."

There is no reference to a "well" in this provision. The provision says:

    "Wells driven or operated on any part of the unit
  area * * * shall be regarded as wells drilled on each
  separately-owned tract."

It seems to me that the Legislature of Oklahoma at least intended that each tract should be deemed to have as many wells drilled thereon as is necessary to discharge the obligations of the lessee. The obligations of the lessee might be to drill two or more wells in each tract.

Obviously, to protect him effectively, this provision must envisage that as many wells will be deemed to have been drilled on the tract as it is his obligation to drill. In fact, the wording of the provision is that all the wells drilled elsewhere in the unit will be deemed to have been drilled on the tract. Once it is admitted that, under this provision, more than one well might be deemed to have been drilled on a tract, it is impossible to say that it lends support to defendants' contentions for it would then equally support the contention that one empty tract is subject to as many fixed per-well deductions as it might have been defendants' duty to drill on the tract or, (on a literal reading of the provision), as many fixed per-well deductions as there are wells in the unit.

Moreover, the provision speaks of wells deemed to have been "drilled," not of "producing wells." The fixed per-well deduction here involved is due on "each producing well," and not on "each well which is drilled."

Paragraph 3:

    "The amount of the unit production allocated to
  each separately-owned tract within the unit, and only
  that amount, regardless of the well or wells in the
  unit area from which it may be produced, and
  regardless of whether it be more or less than the
  amount of the production from the well or wells, if
  any, on any such separately-owned tract, shall for
  all intents, uses and purposes be regarded and
  considered as production from such separately-owned
  tract, and, except as may be otherwise authorized in
  this Act, or in the plan of unitization approved by
  the Commission, shall be distributed among or the
  proceeds thereof paid to the several persons entitled
  to share in the production from such separately-owned
  tract in the same manner, in the same proportions,
  and upon the same conditions that they would have
  participated and shared in the production of proceeds
  thereof from such separately-owned tract had not said
  unit been organized, and with the same legal force
  and effect."

I do not see how this provision requires that a fixed per-well deduction be transmuted into a fixed per-tract deduction, since a fixed per-well deduction cannot be described as the "same condition" as a fixed per-tract deduction. Whether the two are in fact the same is one of the questions that will have to be determined in this case on proper proof. Certainly the stipulation is insufficient for this purpose. Prima facie a fixed per-well deduction is not the same thing as a fixed per-tract deduction.

It is conceded by all parties that the plan follows the statute insofar as it has a bearing on the question I am discussing.

Accordingly, I hold that there is nothing in the Statute or the plan which requires that a fixed per-well deduction be transmuted into a fixed per-tract deduction. This being so, the plaintiffs are obviously entitled to proceed with their case.

Plaintiffs suggest that I should order an accounting to secure the information missing in the stipulation. I must first determine that an accounting is due, and I must determine from whom it is due and to whom it is due. I cannot order an accounting merely because I find it difficult to tell who is right in this controversy, on the limited stipulation that you have filed here. The plaintiffs must show that they are entitled to relief, and in this they have the aid of this Court's discovery procedures. Moreover, defendants state in their brief that they intend to assert the defense of laches and to rely upon an agreement of compromise as to which the stipulation is silent.

Accordingly, I am unable to go further at this time than to say that plaintiffs may proceed with their case. I might add that I am disappointed that the lengthy pre-trial conferences and the many conferences which I know you counsel have been holding back and forth in your various offices, have produced so small a result in the stipulation.

Memorandum and Order

Plaintiffs are the owners of specific "overriding royalty" interests in certain oil and gas leases covering lands in what is known as the "West Edmond" oil field in the State of Oklahoma. These interests were created by two agreements made by plaintiffs and their predecessors in interest with the Standard Oil Company (Ohio). In 1944, Standard Oil Company transferred its interest to the defendant Sohio Petroleum Company. In December, 1954, the Christiana Oil Corporation acquired the interest of the Peter Fox Brewing Company, while on November 8, 1956, the Tekoil Corporation became a party plaintiff by reason of its purchase of the Christiana interest.

The relief sought by plaintiffs is based on alleged changes in and modifications of their rights in respect to their overriding royalty interests through the creation of the West Edmond Hunton Lime Unit. This unit was created by order of the Corporation Commission (An administrative agency of the State of Oklahoma) dated July 29, 1947. In creating the unit, the Commission prescribed a "plan of unitization." The unit and plan were pursuant to a "Unitization Statute" enacted in 1945 and re-enacted in 1951.

The original agreement entered into between the parties reserved an overriding royalty, free of cost, one half of seven-eights of the oil and gas produced from the lands covered by the agreement, after deducting from such one-half that quantity of oil and gas equal in value to $200 per month for each producing well, except that in the case of a well producing water amounting to more than 10% of the total fluid produced, the deduction was to be $250 per month. However, since October 1, 1947, when unitization became effective, the deduction has been limited to $200 per month to each tract. Since January 1, 1951, six wells have been plugged but the defendants have still charged $200 per tract although the well thereon was plugged.

In Count I of their complaint in equity, plaintiffs pray that the agreement of August 20, 1943, be modified and altered, as of October 1, 1947, to eliminate the fixed per-well deduction as to all wells whether operating or not. They also pray for such other relief as in equity shall deem meet. In Count II, plaintiffs pray that judgment be entered in their favor in the amount of $28,520, representing fixed per-well deductions retained by defendants in respect of wells which had been plugged.

On April 25, 1958, on a motion by defendants, after considering a Stipulation of Facts and voluminous briefs filed by the parties, I ruled that there is nothing in the Statute or the Plan which requires that a fixed per-well deduction be transmuted into a fixed per-tract deduction and that therefore, plaintiffs were entitled to proceed with their case.

On June 20, 1958, plaintiff moved for an order to require defendants to produce certain documents. Defendants on June 30, 1958, interposed through a motion to dismiss an additional defense raising the issue of whether plaintiffs had exhausted their alleged administrative remedies.

The plaintiffs' motion for discovery and defendants' motion to dismiss raise the following issues:

    1. Should the complaint be dismissed because
  plaintiffs allegedly "have not pursued the
  administrative remedies afforded them by the State of
  Oklahoma?"
    2. Have defendants waived their right to object to
  plaintiffs alleged failure to exhaust their
  administrative remedies?
    3. Is plaintiff entitled to the discovery of the
  documents designated in its motion?

The defendants state that "the precise question presented by this motion to dismiss" is that the "plaintiffs have not exhausted their administrative remedies." (Defendant's brief, p. 8) The defendants also refer to the doctrine of "primary jurisdiction" (Defendants' brief, pp. 18, 19). The interchange of these different concepts in support of the motion to dismiss presents some difficulty in the understanding of the issues presented.

The doctrine that administrative remedies must be exhausted before resort is had to Federal courts is as old as Federal administrative law and is said to rest on the disinclination of the judiciary to interfere with the exercise of legislative power. See 48 Yale L.Rev. 981, 983. The development of the doctrine has been shaped by various factors:

    1. The need for orderly procedure. United States v.
  Sing Tuck, 194 U.S. 161, 168, 24 S.Ct. 621, 48 L.Ed.
  917;
    2. The requirements of comity. Railroad and
  Warehouse Commission of Minnesota v. Duluth St.
  Railway, 273 U.S. 625, 628, 47 S.Ct. 489, 71 L.Ed.
  807;
    3. The tendency to assimilate the doctrine to the
  rule that a litigant has no standing in equity where
  he has an adequate remedy at law. Elliott v. El Paso
  Electric Co., 5 Cir., 88 F.2d 505, 506. The
  exhaustion rule also applies to suits at law.
  Anniston Mfg. Co. v. Davis, 301 U.S. 337, 343, 57
  S.Ct. 816, 81 L.Ed. 1143;
    4. Premature judicial intervention may defeat the
  basic legislative intent that full use be made of the
  agency's specialized understanding within the
  particular ...

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