Appeal from the Circuit Court of Edwards County. No. 97-CH-6 Honorable Stephen G. Sawyer, Judge, presiding.
The opinion of the court was delivered by: Presiding Justice Chapman
Rule 23 order filed April 7, 2004; Motion to publish granted May 6, 2004.
The plaintiffs, Robert, Mary, and Frank Yokel, appeal an order striking, with prejudice, three counts of their complaint which alleged that the defendant Thomas M. Hite, who was the operator under an agreement unitizing several neighboring oil and gas leases, had breached fiduciary duties he owed to the plaintiffs. The trial court found that the counts failed to allege facts from which it could find that Hite owed the plaintiffs a fiduciary duty. We affirm the trial court's ruling.
The instant dispute involves an oil and gas lease and a unitization agreement that are more or less typical, with one somewhat unusual provision in the unitization agreement. In an oil and gas lease, the royalty interest is the portion of the proceeds that the landowner is entitled to be paid. In a typical lease, that portion is one-eighth. 38 Am. Jur. 2d Gas & Oil §215 (1999). The operator's interest-which is called the "working interest"-is that portion of the oil and gas proceeds remaining after the landowner or other royalty owners are paid their royalty interests. People ex rel. Harris v. Parrish Oil Production, Inc., 249 Ill. App. 3d 664, 666, 622 N.E.2d 810, 813-14 (1993). The working interest is typically seven-eighths. See Harris, 249 Ill. App. 3d at 666-67, 622 N.E.2d at 814. The costs of exploring, drilling, and recovering the oil or gas are deducted from the working interest (38 Am. Jur. 2d Gas & Oil §35 (1999)), which is typically seven-eighths. Because both the working interest and the royalty interest are property, portions of either may be transferred. 38 Am. Jur. 2d Gas & Oil §215 n.73 (1999). An overriding royalty interest is created when a portion of the working interest is transferred from the oil and gas operator to either the landowner or a third party. An overriding royalty, like a royalty interest, is not subject to the costs of recovering oil and gas (or the risk that none will be found). 38 Am. Jur. 2d Gas & Oil §215 (1999).
In 1979, the plaintiffs in the instant action executed an oil and gas lease permitting a company called Modern Explorations to explore and drill for oil on their property. Pursuant to the lease, the plaintiffs retained a one-eighth royalty interest in any oil recovered. At approximately the same time, Modern Explorations entered into an oil and gas lease for at least one neighboring property, which later became part of the unit created by the unitization agreement here at issue. The plaintiffs later acquired a one thirty-second overriding royalty interest under their lease.
In 1988, the plaintiffs executed a unitization agreement with several adjoining oil and gas leases to create the Yokel-Wade Unit with Midnight Holdings as the sole operator. It is not clear from the record, nor relevant for our purposes, whether Midnight Holdings acquired Modern Explorations' interests in the unitized leases prior to the unitization. Pursuant to the unitization agreement, the plaintiffs Frank and Robert Yokel, as well as several other named individuals (some of whom are defendants in the instant action), owned small shares of the working interest in the oil produced from the Yokel-Wade Unit. Although created in the manner of an overriding royalty interest, these shares were deemed shares of the working interest, and unlike the usual overriding royalty interest, they were subject to the operator's costs in producing the oil. In their brief, the plaintiffs refer to this portion of the working interest in the Yokel-Wade Unit as a "nonoperating working interest."
In 1995, Midnight Holdings transferred its interest in the Yokel-Wade Unit to the defendant Thomas M. Hite and his company, Hite Operating Company. At that time, Hite was also the operator on several oil leases adjacent to the Yokel-Wade Unit.
On May 1, 1997, the plaintiffs filed a complaint seeking a declaration that the leases in the Yokel-Wade Unit had been forfeited for nonproduction. On November 6, 1997, the plaintiffs filed an amended complaint. On November 10, 1999, they filed a motion for leave to file their second amended complaint, and the court granted leave on November 23, 1999. The second amended complaint contained 10 counts and sought the appointment of a receiver, as well as damages for a breach of express covenants in the unitization agreement, a breach of the prudent operator standard, a breach of fiduciary duties, and damage to growing crops. On December 15, 1999, the defendants filed a motion to dismiss the second amended complaint. On April 6, 2000, the trial court ruled that counts VI through VIII, which alleged a breach of fiduciary duties, failed to state a claim upon which relief could be granted, and the court ordered them stricken with prejudice. However, the court denied the defendants' motion regarding the remaining counts.
On May 6, 2002, immediately before trial, the plaintiffs made an oral motion to dismiss counts I through V and count IX of their complaint. Their motion was based on an allegation that they were unable to procure a necessary expert witness in time for trial due to the fact that only the defendants knew the witness's identity. The court initially denied the motion; however, when the plaintiffs moved to dismiss the counts with prejudice, the court granted the motion. This left only count X, seeking compensation for damage to the growing crops. The case proceeded to trial on that count alone, and the court entered a judgment for the defendants. After the trial court denied their motion to reconsider, the plaintiffs filed this appeal, seeking a review of the trial court's order striking the three counts alleging a breach of fiduciary duties. They do not appeal the judgment against them on count X.
The plaintiffs argue that the trial court erred in finding that no fiduciary relationship existed between the parties. In so arguing, they contend that (1) a fiduciary relationship between the parties arose due to the fact that Hite had sole discretion to determine where oil wells were to be drilled and which wells were to be used for production and which for injection (a process whereby water is injected into the well to move the oil under producing wells) and (2) a fiduciary relationship exists as a matter of law between an operator and the owner of a nonoperating working interest because they are involved in a joint venture. We find no merit to either of these contentions.
Illinois courts have repeatedly held that no fiduciary relationship arises as a matter of law merely due to the parties' relationship as lessors and lessees under an oil and gas lease. O'Donnell v. Snowden & McSweeny Co., 318 Ill. 374, 378, 149 N.E. 253, 255 (1925); Minerva Oil Co. v. Sohio Petroleum Co., 336 Ill. App. 372, 375, 84 N.E.2d 167, 169 (1949); Hein v. Shell Oil Co., 315 Ill. App. 297, 300, 42 N.E.2d 949, 951 (1942). However, as the plaintiffs correctly note, this does not end our inquiry. Rather, a fiduciary relationship may arise from the particular circumstances of the parties' relationship. Ransom v. A.B. Dick Co., 289 Ill. App. 3d 663, 672, 682 N.E.2d 314, 321 (1997). In determining whether the facts of a given case establish a fiduciary relationship, courts look to the following factors: (1) the disparity in age, health, mental condition, education, and business experience between the parties, (2) the degree of kinship between the parties, and (3) the extent to which one party entrusted the other with the handling of its business affairs. Ransom, 289 Ill. App. 3d at 673, 682 N.E.2d at 322. Parties to a business agreement such as that here at issue are presumed capable of guarding their own interests. Ransom, 289 Ill. App. 3d at 672, 682 N.E.2d at 322. Therefore, the party seeking to show the existence of a fiduciary duty must show that such a duty arose by clear and convincing evidence. Ransom, 289 Ill. App. 3d at 672, 682 N.E.2d at 321-22.
In the instant case, the plaintiffs contend that they were required to place complete trust in the defendants due to the fact that only Hite Operating Company was permitted by the unitization agreement to recover oil from the property. This contention is unavailing, however, because it is a basic feature of any oil and gas lease that the operator has exclusive control over oil and gas production operations. See Ohio Oil Co. v. Wright, 386 Ill. 206, 217, 53 N.E.2d 966, 971 (1944), overruled in part on other grounds by Thorpe v. Mahin, 43 Ill. 2d 36, 42, 250 N.E.2d 633, 636 (1969). Where one party to a business contract trusts the other to do no more than fulfill ...