The opinion of the court was delivered by: Campbell, Chief Judge.
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:
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.
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
There is no reference to a "well" in this provision. The
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."
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
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
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
2. Have defendants waived their right to object to
plaintiffs alleged failure to exhaust their
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
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.
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.
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 field. Davis, Administrative Law, Sec.
In contrast to the "exhaustion" doctrine, which is a product of
judicial self-limitation and amounts to a refusal to exercise
jurisdiction upon grounds resembling the requirements of equity
jurisdiction, the rule of exclusive preliminary administrative
jurisdiction or "primary jurisdiction" presupposes a complete
absence of judicial power because of legislative grant of
exclusive jurisdiction to an administrative body. Texas and
Pacific Railway Co. v. Abilene Cotton Oil Company,
27 S.Ct. 350, 51 L.Ed. 553.
Thus under the "primary jurisdiction" doctrine, the
administrative commission has exclusive jurisdiction over the
subject matter by virtue of legislative enactment and the courts
have no jurisdiction primarily. Under the "exhaustion" doctrine,
the courts do have jurisdiction primarily, but refuse to exercise
it for the reasons discussed above until all possible
administrative determination has been completed.
Assuming, however, that the problem here is not one of
"exhaustion of remedies" but of "primary" jurisdiction, I have
found no provision which purports to grant exclusive jurisdiction
to the Commission in cases such as the one at bar. Furthermore,
it is well known that Oklahoma has in the past zealously guarded
the jurisdiction of the courts over private disputes which may
arise under an administrative commission but which in no way
affect the public interest. Smith v. Corporation Commission,
101 Okla. 254, 225 P. 708. Also see 51 Harv.L.Rev. 1258, 1259; 8
Okla.L.Rev. 404-407. It seems well settled in Oklahoma that there
would have to be a "clear showing of adverse effect on
conservation objectives to justify interference (by the
Commission) with prior contracts" Okla.L.Rev. 389, 406.
By way of assignment, three of the present plaintiffs,
Christiana Oil Corporation, Tekoil Corporation and Schmitz Oil
Company, acquired their interests in the overriding royalties
during the pendency of this suit. Of the four original
plaintiffs, Peter Fox Brewing Company, the Northern Trust
Company, Herbert J. Schmitz and David Waller Dangler, only
Herbert J. Schmitz remains a party and his interest is limited to
35% of the overriding royalty in six of the twenty-three unit
tracts involved. In 1945, defendant Standard assigned to its
wholly-owned subsidiary, defendant Sohio Petroleum Company
(hereinafter referred to as "Sohio"), its entire interest in the
leases covered by the agreements.
During the unavoidably long pendency of this suit, I have had
occasion to exhaustively study the Oklahoma Act, the Plan and
agreements in question, as well as many of the facts and much of
the law herein set forth in the stipulation together with
exhibits and briefs of the parties. For example, on April 25,
1958, on a motion by defendants, after consideration of a prior
stipulation of facts, the exhibits and briefs of the parties, I
held, by way of memorandum, that there is nothing in the Act or
Plan which requires that a fixed per well deduction be
transmitted into a fixed per-tract deduction and that plaintiffs
were entitled to proceed with their case. On November 5, 1958,
after again considering the Act and Plan as well as further
briefs of the parties, I denied in a memorandum defendants'
motion to dismiss because of the failure of plaintiffs to exhaust
their administrative remedies.
Defendants in their first argument contend that the Plan
prohibits any change in the method of computing overriding
royalties. In support of this argument, they cite Article VII of
the Plan which provides that:
"* * * the Unit Production allocated to each
Separately Owned Tract 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 from such Separately Owned Tract, or the
proceeds thereof, had not the Unit been organized,
and with the same legal force and effect."
Defendants argue that if the per well deduction is eliminated
or reduced, defendants will not share in the unit production
allocated to the twenty-three tracts "in the same proportions" as
they would have shared in actual production from those tracts in
the absence of unitization since defendants would not receive the
first $400.00 worth of oil and gas produced from each tract
during each month and, consequently, the balance of royalties to
be shared equally with plaintiffs would result in a decreased
share for defendants. Defendants argue that this change in
proportionate shares is expressly prohibited by the Plan. I do
not agree. Plaintiffs, arguing from the Act, quote the provision
upon which Article VII of the Plan is based and contend that this
provision entitles them, according to the theory of their action,
to reformation of the agreements. It seems clear, as I broadly
indicated in my memorandum of November 5, 1958, and I so hold
now, that Article VII of the Plan does not prohibit reformation
of the agreements if plaintiffs should here prevail.
The second argument advanced by defendants is one that I
considered in my memorandum of April 25, 1958, namely, that the
Plan requires the assumption that a producing well is located on
each quarter-quarter section and that therefore, the per well
deduction is valid and justified. Though I am familiar with the
principle of assumption as it relates to the unit production of
the West Edmond Field, I am not prepared to find now, nor did I
find on April 25, 1958, that this principle of assumption extends
to the per well deduction which is the subject matter of this
action. On the contrary, I find now, as I found then, that the
principle of assumption as it relates to unit production, does
not, by virtue of the Act or Plan, transmit a fixed per well
deduction into a fixed per-tract deduction.
As to defendants' third argument, I find that plaintiffs are
not barred from this action by laches or the statute of
Although I believe it pertinent to the issues before me that
this action was commenced in April, 1954 more than ten years
after the agreements had been executed and put into effect and
six and one-half years from the time unitization became
effective, I find that the evidence does not support the defense
of laches or of the statute of limitations. However, as I
indicated in my memorandum of November 5, 1958, I am not inclined
to allow amendments urging technical defenses on the eve of trial
after many years of discovery and preparation for trial.
Accordingly, defendants' motion of November 18, 1959 to amend
defendants' answer to include the defense of the statute of
limitations is denied.
Thus disposing of these matters, I shall now consider
plaintiffs' first argument.
I find that the Oklahoma Unitization Act and basic principles
of equity do not require that the agreements be reformed to make
them compatible with unitized operation.
Plaintiffs in this regard argue in their brief at page 12 that
the agreements, by their express terms, are "conditioned upon the
competitive exploitation by defendant of the assigned leases by
means of the most speedy and intensive operation possible"; that
"all wells be operated at maximum production; that no producing
well be shut down except for the shortest time necessary for
required repairs and reconditioning; that offset wells be drilled
and that the properties be developed in compliance with the
`prudent operator' rule."
Paragraph 5 of the agreements in fact provides:
"Except for the purpose of making necessary repairs
to equipment or the performing of any reconditioning
work on any well, standard agrees that no producing
well shall, during any period so long as the same is
producing oil and/or gas in paying quantities, be
shut in unless pursuant to an order, rule or
regulation of any officer, board, or agency, state or
federal. Standard further agrees that all producing
wells hereafter drilled on the aforesaid proportion
will be operated at all times in such manner as to
produce at the maximum rate of production allowed
from time to time by the state or federal authority
It is difficult for me to understand why, in view of the
express provision above with regard to possible government
regulation of wells resulting in "shut in" wells, that the
agreements should be silent in this event as to the per well
deductions provided in paragraph 4(b) of the agreements.
Paragraph 8 of the agreements, insofar as pertinent, provides:
"* * * Standard agrees to manage and develop the
entire of the premises covered by such leases or to
cause the same to be managed and developed to the
mutual interest of both parties and in compliance at
all times with the `prudent operator' rule as well as
with due regard to the mutual interests of both
Based upon these provisions plaintiffs argue that "compulsory
unitization of the assigned tracts under the Act made competitive
exploitation illegal and rendered the agreements impossible of
performance;" that "(u)nder the common law, the agreements would
thereupon have been subject to rescission."
I find that the agreements do not contemplate "competitive
exploitation" in the sense that plaintiff here argues since
paragraph 5 expressly refers to possible government regulations.
It follows that subsequent unitization could not render
"competitive exploitation" illegal and the agreements impossible
of performance since this action is expressly contemplated in the
agreements and is incorporated into the provisions for well
production. It follows that the agreements are not subject to
rescission at common law. Furthermore, the effect of unitization
upon plaintiffs' overriding royalty interests does not render the
agreements impossible of performance since, instead of reserving
a portion of the oil and gas produced from the twenty-three
tracts, unitization has made the overriding royalties payable out
of oil and gas allocated to the twenty-three tracts so as to
actually benefit plaintiffs.
The principal contention of plaintiffs is that, based upon
certain provisions of the Act, certain Oklahoma statutes and
decisions governing the interpretation of contracts, the
agreements should be reformed in accordance with the original
intention of the parties.
Schmitz and Fox testified that it was the intention of the
parties that they receive one-half of production and bear
one-half of operating expenses. They further testified that the
monthly per well deduction provided for in the agreements was
intended to represent one-half of actual operating expenses
(transcript, pp. 12, 19, 21, 39, 43, 44, 46).
The background of these agreements is as follows: The discovery
well in which Schmitz and Fox participated was completed April
12, 1943 (stipulation S-1, par. 3). In June, 1943 they began
their discussions relating to the assignment of the leases here
in question with Standard. An agreement was drawn up and signed
in Chicago on July 2, 1943 (plaintiffs exhibits 4 and 5). No copy
of this agreement has been retained by any of the parties. It is
said to have reserved to
Schmitz and Fox a "net profits interest" which according to their
tax counsel, would not have been entitled to depletion allowance
for income tax purposes. (transcript, pp. 12, 13, 41). They
therefore contacted Standard who agreed to write a second
agreement which they felt would entitle them to depletion
consideration with the result that a final agreement was executed
on August 20, 1943. Plaintiffs' exhibit 3 represents the earliest
agreement draft. It sets forth a formal offer, detailed terms for
assignment of the leases therein and provides for acceptance by
Standard. It is dated June 25, 1943 and appears on the stationery
of Howard B. Hopps, an Oklahoma City lawyer, who was present at
the Chicago meeting which resulted in the agreement of July 2,
1943. Plaintiffs' exhibit 6 is a proposed agreement prepared by
Standard and submitted to Schmitz and Fox by letter dated August
3, 1943 (plaintiffs' exhibit 5).
The following comparisons can be made of these several drafts:
1. The Hopps draft of June 25, 1943 reserves to
Schmitz and Fox one-half of "net operating profits"
as determined by deducting from production proceeds
"operating costs" plus $50.00 per month for each
producing well (par. 4). Schmitz and Fox assumed
personal obligation to pay one-half the cost of the
third, fourth and sixth dry holes and in addition,
promised to pay one-half of the cost of additional
dry holes drilled commencing with number 8 (par. 3).
2. The draft prepared by Standard and forwarded to
Schmitz and Fox on August 3, 1943 reserves
"overriding royalty" of one-half the proceeds of
working interest production less (a) $150.00 per well
per month or $187.50 per well per month in the case
of a well making more than 10% water and (b) one-half
the actual cost of acidizing, deepening, plugging
back, shooting, or reconditioning the wells (par. 6).
Schmitz and Fox assumed personal obligation to pay
one-half the cost of the third, fourth and sixth dry
holes (par. 5).
3. The final agreement of August 20, 1943 reserved
overriding royalty "free and clear of all development
and operating expenses" of one-half of working
interest production less $200.00 per month per
producing well, or $250.00 per month in case of a
well making more than 10% water.
Based upon these comparisons defendants argue in their brief at
pages 20 and 21 as follows:
"The expression `free and clear of all development
and operating expenses' appeared in the final
agreement for the first time. The first draft, the
third draft and probably the second draft, imposed on
Schmitz and the Foxes personal obligation to bear
one-half of the cost of the third, fourth and sixth
dry holes that might be drilled by Sohio. The first
draft provided for deduction of $50.00 per well per
month in addition to operating expenses. The third
draft provided for deduction of $150.00 (or $187.50)
per well per month plus one-half the costs incurred
by Sohio in acidizing, deepening, plugging back, etc.
"The prior drafts show beyond question that the
monthly deduction of $200.00 or $250.00 per well
provided for in the final agreement was not intended
to represent one-half of actual operating expenses.
It included allowance for the extra $50.00 per well
per month provided for in the first draft, and
allowance for the cost of acidizing, deepening,
plugging back, etc. provided for in the third draft.
More important still, it included allowance for
release of Schmitz and the Foxes from obligation to
bear any part of the cost of dry holes that might be
drilled by Standard.
"This obligation represented a very real risk. As
Schmitz, Gulf Oil Corporation has previously drilled
a dry hole in the field. (Tr. Pp. 105-106) The Wagner
lease on which the discovery well was drilled became
Unit Tracts 475 and 476. (Ex. B of the Plan) As shown
by the plat attached to the Plan as Exhibit A most
of the leases assigned to Standard were far removed
from the discovery well, some being more than four
miles distant. The extent of the producing formation
was necessarily unknown when the agreement was
negotiated, and therefore there was a definite
possibility that as many as six dry holes might be
drilled by Standard. In retrospect, three of the
wells drilled by Standard actually were dry in the
Hunton Lime formation, although two of these were
completed for production from the Bartlesville
formation. (Stip. Par. 27)
"Elimination of the obligation to contribute to the
cost of dry holes could not have been anything but
detrimental to Sohio, and therefore it may be assumed
that the obligation was eliminated in the final
agreement at the insistence of Schmitz and the Foxes.
In that agreement they got what they wanted —
an overriding royalty that was entirely free of risk
and entirely free of expense of any kind. To obtain
such an overriding royalty, they agreed to the
monthly per well deduction of $200.00 or $250.00 in
lieu of the deductions provided for in previous
Plaintiffs contend in support of their argument relating to
original intention that plaintiffs relied on Standard's great
experience and knowledge in arriving at the dollar amount of the
per well deduction for the alleged operating expenses
(plaintiffs' brief, page 15); that plaintiffs were new to the oil
and gas business (plaintiffs' brief, page 3) that neither was
represented by counsel at the negotiations (plaintiffs' brief,
pp. 3, 4).
Defendants however maintain that Schmitz and Fox were in
reality shrewd businessmen; that the Foxes were experienced as
chief executives of Peter Fox Brewing Company; that Schmitz was
experienced as a manufacturer engaged in fabrication of steel;
that they engaged in negotiations for a period of two months
before executing the final agreement; that after the agreement of
August 23, 1943, they had an additional six months experience in
the operation of Hunton Lime wells in the West Edmond Field
before executing the second agreement; that Schmitz prior to
August 20, 1943 had been in the oil business for one and a half
years and had drilled ten wells in Illinois and Texas; that both
Schmitz and Fox had four months of experience in the operation of
the discovery well in the West Edmond Field before August 20,
I do not agree with defendants that by virtue of the agreement
of October, 1947 (Stipulation, par. 7) plaintiffs have
compromised and released this alleged cause of action. However,
I am of the opinion that this agreement is pertinent to the issue
of original intention as well as plaintiffs' standing in equity.
Paragraph 7 of the Stipulation provides as follows:
"On or about October 1, 1947, W.J. Fox and Schmitz
met with Earl D. Wallace, then Vice President of
Sohio, at Sohio's office in the City of Cleveland,
Ohio, to discuss demands theretofore made by them for
a reduction in the monthly per well deductions
provided for in the First Agreement and in the Second
Agreement. In the course of this discussion said
Wallace, on behalf of Sohio, offered to reduce to
$200.00 per month the per well deduction applicable
to wells producing water in excess of 10% of total
fluids produced. This offer was accepted by Schmitz
by letter dated October 7, 1947, and was accepted on
behalf of Brewing Company by letter dated October 24,
1947, copies of said letters being hereto attached,
marked Exhibits S-3 and S-4 respectively, and made
part thereof. Accordingly, from and after October 1,
1947, the monthly
per well deduction was reduced to $200.00 regardless
of the quantity of water, if any, produced during the
month by the well."
Since eight of the twenty-three wells here involved were making
more than 10% water on October 1, 1947 (stipulation, par. 6) and
were therefore subject to the monthly deduction of $250 per well,
the agreement of October, 1947 was of definite benefit to
plaintiffs. It is difficult to determine from the record of what
benefit this agreement was to defendants though there is a hint
that Sohio was interested in having plaintiffs join the
unitization of the field. However, at page 35 of the Transcript,
upon redirect examination of Schmitz, the following colloquy
"Q. Now, at that time was there any discussion by
you and by Mr. Fox with any representative of Sohio
relative to the fact that unitization, if you joined
this group, let me put it that way, there would be in
the future some reduction of your interest charges?
"A. I can't say there were any remarks made along
that line * *"
Upon all the evidence before me therefore, I cannot state with
any degree of certainty why the agreement of October, 1947 was
entered into between the parties though it does suspiciously
coincide with the effective date of unitization thus lending
credence to defendants' argument.
The fact that plaintiffs made no objections to the fixed per
well deductions upon plugged wells for several years is also, in
my opinion, pertinent to the issue of original intention as well
as to the equitable position of plaintiffs.
Plaintiffs, in this regard, contend that Fox and Schmitz did
not become aware of the discrepancies between operating expenses
and the fixed monthly deductions until the 1950's (transcript p.
Defendants' argument is as follows:
"As shown by the statements attached to the
Stipulation as Exhibit S-6, it cost Sohio an average
of $243.00 per well per month to operate the
twenty-three wells here involved during the first
nine months of 1947. Fox testified that between 1943
and 1946, the Foxes had drilled about twenty wells of
their own in the West Edmond Field. (Tr. 114) and
paid the cost of operating these wells. (Tr. 116)
Schmitz (who claims to remember so clearly
discussions that occurred in July and August of 1943)
wasn't sure whether he had drilled six or eight or
ten wells in the West Edmond Field, but admitted that
he paid operating expenses on these wells. (Tr. 109)
By October, 1947, therefore, both Schmitz and the
Foxes had had ample opportunity to learn what it cost
to operate a Hunton Lime well in the West Edmond
field. Unless they were extravagant and inefficient
operators, their operating costs could not have been
substantially more than Sohio's.
"It follows that in October, 1947, Schmitz and the
Foxes were quite aware that $200.00 represented far
more than one-half of the monthly cost of operating a
Hunton Lime well in the West Edmond Field. Moreover,
they had had enough experience to realize that the
average cost per well of operating nearly 750 wells
under a single management, and with a single labor
force, was bound to be less than the average per well
cost incurred in operating twenty-three scattered
wells. When they agreed to the settlement set forth
in Paragraph 7 of the Stipulation, they had full
knowledge of all relevant facts.
"In addition, the agreements themselves show that
Schmitz and the Foxes, when the agreements were
entered into, were aware of two critical factors: (1)
that a time would come when one-half of the working
interest production would be less than $200.00 per
well per month, and (2) that production from the
various wells would decline at varying
rates. Bearing in mind that the overriding royalty
reserved in each agreement was not to be computed
separately for each well, but by combining the
production from all of the wells, Schmitz and the
Foxes (despite their claimed ignorance and
inexperience) were astute enough to protect
themselves against the likelihood that one-half of
the working interest production from some wells would
amount to less than $200.00 per well per month sooner
than in the case of other wells. Hence, the following
provision appears in the fourth paragraph of Section
(4) of each agreement:
"`If at any time hereafter one-half of the gross
production * * * from any well shall not exceed the
amount deductible under Paragraph 4-b (i.e. $200.00
or $250.00 per well per month) * * * and such
condition continues for a period of ninety days or
more, Fox may, at his option at any time thereafter
tender to standard * * * an assignment of all of its
right, title and interest in and to the overriding
royalty reserved herein insofar as the same relates
or pertains to production from such well, and
thereafter all computations of overriding royalties
hereunder shall be made without reference to all or
any part of the production from such well.'
"This provision could not possibly be anything but
detrimental to Sohio, and therefore was designed
solely for the protection of the overriding royalty.
Undoubtedly, therefore, the provision was included in
the agreements at the instance of Schmitz and the
Foxes to guard against the inevitable circumstance
that production from some wells would decline more
rapidly than that of other wells.
"It is significant that the one and only written
complaint made either by the Foxes or by Schmitz
before the filing of this suit related only to the
continuance of the per well deduction after a well
had been abandoned, that complaint being a letter
dated April 14, 1951, from the Foxes to Sohio.
(Defs.' Ex. 1) As shown by Paragraph 10 of the
Stipulation, the earliest abandonment of a well on
one of the twenty-three tracts occurred January 18,
1951. For the following month the per well deduction
was made by Sohio for the first time on production
allocated to a tract whose well had been abandoned.
By the terms of the agreement of August 20, 1943,
payment for that month became due by the end of
March, 1951. Almost immediately thereafter the Foxes
protested this deduction by the one and only written
complaint made before this suit was filed.
"The amount involved in that complaint was only
$200.00 — a trivial sum in comparison with
plaintiffs' present demand. The Foxes, however, were
quick to make written objection. That they made no
other written complaint in convincing evidence that
they knew they had no basis for demanding a general
reduction in the monthly per well deductions provided
for in the agreements."
Plaintiffs argue in further support of their equitable position
that defendants' imposition of fixed per well deductions after
unitization has deprived plaintiffs of substantial royalties. I
would summarize their argument as follows:
(a) Prior to unitization plaintiffs and defendant shared
operating expenses in the proportions of approximately 60% and
40%, respectively (plaintiffs' exhibit 17);
(b) In the absence of unitization, the sharing of operating
expenses would have continued substantially in the foregoing
proportions throughout the productive life of the assigned
properties (plaintiffs' exhibit 19);
(c) Since unitization plaintiffs' royalty has in fact been
charged with 101.26% of allocated unit expense (plaintiffs'
(d) Consequently, after unitization plaintiffs' share of the
combined net revenues fell short of the intended 50% share by
Defendants on the other hand argue:
(a) That unitization has been of great value to overriding
(b) That the total profit to overriding royalties has been
$2,447,072 upon an investment of $24,000 while Sohio, upon an
investment of nearly $1,700,000 has realized a profit of
(c) That prior to unitization the net profit or to the
overriding royalties was 1,400 times Sohio's net profit;
(d) That the decrease in overriding royalties has been nothing
more than the inevitable result in the gradual decline in
production and not any condition brought about by unitization.
Neither the arguments of plaintiffs or of defendants seem to me
persuasive in this determination.
Based upon the evidence before me and the foregoing arguments,
plaintiffs submit that the agreements must be reformed in
accordance with (1) the requirements of the Act; (2) basic
principles of equity.
Plaintiffs refer to Section 287.3 of the Act requiring that
unitization be "fair, reasonable, equitable" and upon terms and
conditions "necessary * * * to protect, safeguard, and adjust the
respective rights and obligations of the several persons
affected * * *"
I find this provision to be a mandate to the Commission. The
order creating the unit carries out this mandate in paragraph 13
where it is expressly found that the Plan is "fair, reasonable
and equitable and contains all the terms, provisions, conditions
and requirements reasonably necessary and proper to protect,
safeguard and adjust the respective rights and obligations of the
several persons affected * * *" Since the Plan is not here under
attack this provision however, becomes irrelevant.
Plaintiff also refers to the provisions of Section 287.9 of the
Act which provides in part as follows:
"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 * * *
"The amount of the unit production allocated to
each separately-owned tract within the unit * * *
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 or proceeds thereof from
said separately-owned tract had not said unit been
organized * * *"
Article VI of the Plan provides in part:
"* * * Property rights, leases, contracts and all
other rights and obligations in respect of the Oil
and Gas Rights in and to the several Separately-Owned
Tracts within the Unit Area are hereby amended and
modified to the extent necessary to make the same
conform to the provisions and requirements of this
Plan of Unitization, but otherwise to remain in full
force and effect."
It is clear from the first paragraph, quoted above, from
Section 287.9 and from Article VI of the Plan that the amendments
and modifications referred to, are limited "to the extent
necessary" to make the agreements conform to the requirements of
the Plan which, I find, relates to changes necessary for
unitization and not adjustment of personal disputes. It is
further provided in the Plan that in all other respects contracts
are "to remain in full force and effect."
Article VII of the Plan, relied upon by defendants as
prohibiting any change in proportionate shares, is based upon the
second paragraph, quoted above, of Section 287.9 of the Act,
which plaintiffs maintain entitles them to reformation upon the
evidence. It seems fairly clear that these provisions are nothing
more than a statement of existing law and, other than this, in no
way affect this determination.
Plaintiffs refer to the following statutory provisions:
"A contract must be so interpreted as to give
effect to the mutual intention of the parties, as it
existed at the time of contracting, so far as the
same is ascertainable and lawful." 15 Okla.Stat.
Section 152 (1951).
"A contract must receive such an interpretation as
will make it lawful, operative, definite, reasonable
and capable of being carried into effect, if it can
be done without violating the intention of the
parties." 15 Okla.Stat., Section 159 (1951).
"A contract may be explained by reference to the
circumstances under which it was made, and the matter
to which it relates." 15 Okla.Stat. Section
Plaintiffs also refer to Harjo v. Harjo, 207 Okla. 73,
247 P.2d 522; Tyer v. Caldwell, 114 Okla. 13, 242 P. 760; Withington v.
Gypsy Oil Co., 68 Okla. 138, 172 P. 634, and argue that the
evidence before me, viewed in light of the above provisions and
decisions, requires that the agreements be reformed so as to
eliminate the fixed per well deduction as of October 1, 1947 and
replace it with an obligation of plaintiffs to contribute
one-half of the unit operating expenses allocated to the
twenty-three tracts in controversy.
Defendants, on the other hand, quote from the Supreme Court of
Oklahoma in Douglas v. Douglas, 176 Okla. 378, 56 P.2d 362, at
page 369, where the Court stated:
"* * * However, reformation will not be decreed
unless the proofs in favor thereof are clear,
unequivocal, and decisive. In passing upon the proof
requirements for the reformation of a written
instrument this court, in the case of American Life
Insurance Co. v. Rattcliff, et al., 168 Okla. 439,
33 P.2d 634, loc. cit. 635, had this to say: `The rule
stated by the authorities shows that in order to
justify the reformation of a deed which fails to
conform to the agreement of the parties because of
mutual mistake, the proof should be clear,
unequivocal and decisive. There must be more than a
mere preponderance of the evidence, and the evidence
must be sufficient to take the question out of the
range of reasonable controversy.'"
It was not within the powers of the trial court to make a new
and different contract for the parties.
Defendants also quote from Oklahoma Company v. O'Neil,
333 P.2d 534, at page 544 where the Supreme Court of Oklahoma stated:
"In the absence of fraud, all previous oral
discussions are merged into and superseded by the
terms of an executed written agreement and its terms
cannot be varied by parol testimony."
Defendants also cite Harley v. Magnolia Petroleum Company,
378 Ill. 19, 37 N.E.2d 760, 137 A.L.R. 900 and Zimmerman v. Schuster,
14 Ill. App.2d 535,
, and argue, that based upon the
evidence and the above cited Oklahoma and Illinois authorities,
plaintiffs are not entitled to the relief they here seek.
I am in accord with defendants' statement of the law. Likewise,
I am in accord with the statutory authorities cited by plaintiff
though I find that these case authorities are not pertinent to
the issues before me.