Ludey v. Pure Oil Co. , 157 Okla. 1 ( 1931 )

I dissent from the conclusions reached by the majority in this case with reference to the rights of the plaintiff in error, Ludey, who is defendant in error in the cross-petition. In the court below, there was sharp conflict between the views held by the attorneys for Mr. Ludey and the views held by the attorneys for the Pure Oil Company. Mr. Ludey insisted through his attorneys that he was entitled to one-third of all casinghead gas, without deduction of any kind for the expense of production. In one breath he claimed that the relation between himself and the lessee was one of trust and confidence under the contract. His recovery, however, as allowed, is on the basis of unintentional tort. On the other hand, the lessee insisted that for the casinghead gas, he was entitled to one-third royalty in accordance with the division stipulated for oil and the customary royalty. During all the time that the controversy was going on between Mr. Ludey and the operating company, the gentlemen who owned the other two-thirds interest in the land were accepting royalties for the casinghead gas converted into gasoline on the basis of the one-eighth, the proportion that was called for in the lease.

The casinghead gas originally was a by-product, little thought of, and little cared for. However, by virtue of the extension of the field and of other fields, instead of allowing it to go to waste as it had been, it was found practical, by combining the small amounts of gas that accumulated in all oil wells, and conducting it to a common reservoir and applying a system of pressure and cooling, to get a valuable product known to the market as casinghead gasoline, which is a little more volatile than the gasoline that, by distillation, is extracted from ordinary crude oil, the value of which in large measure is determined by its gasoline content.

Under those conditions, the operator undoubtedly, on the principle of natural justice, owed a duty to the owner of the land to save this product as far as possible. The plaintiff, owner of one-third of the land, who bought subject to the lease, had no right to explore for this product by sinking wells, and he had two co-owners whose rights were to be considered also.

In the present case, the oil and gas lease was made before Mr. Ludey bought and was in operation, and at that time a market had not developed for this casinghead gas, and so far as he was concerned, and his predecessor in title was concerned, there was no value to it. At the same time, the contract that was actually made by his predecessor did not require in express terms that the oil operator save this gas, but one would naturally conclude, viewing the relations of the parties, that there would be an implied obligation, on the part of the one who took the risk and spent his means in the development, to save everything that could be saved, and look to the general terms of the lease as a standard for his compensation, measured by human experience and the principles of common right.

This court has, in my judgment, in the present case and some preceding cases, by reason of following a formula that will not fit, gotten itself into a series of quagmires from which it is difficult to find a way out. To reconcile all the cases that have heretofore been decided by this court, and to apply the standard laid down therein, as applied to the case then being decided, as well as other cases later to come up, would be a task that no conscious man would undertake. Take the cases, cited by the majority in this case, and the reason cited for the conclusion in this case, and compare them, and it will be found that they do not measure each with the other, or contain anything in common that one could rely on as a safe and sure measure. We might as well revert to the olden times, when the King's foot was the standard.

The majority in this case adopts a formula, "casinghead gas is not oil." To say it is a liquid and would flow along the ground as distinguished from flowing in the air near the ground, it might be classed as not being oil, but with a slight condensation casinghead gas, charged with oil contents, will soon make gasoline that will flow along the ground, though giving off vapor that will flow in the air above the ground at the same time. To adopt a formula that it is neither oil nor gas, would not help in the solution in the present case, and as applied to another, would not help very much in the solution, for the simple reason that it is largely a mixture and composed of the same thing that oil ordinarily is composed of, and composed of the same thing that natural gas is composed of, though a complete chemical analysis of two samples taken from the well at different times would scarcely show identity. However, we can, with abiding assurance, say that the product, no matter what we call it, is a product of the labor of the man who developed the land of the man who owned the land, and both on principles of natural justice should be considered. Whether we figure its fugacious character, and go into speculation as to whether the oil that was actually produced, or the gas that came up with it, was within the confines of the area of ground owned by the landowner at the time of making the lease, or had developed by virtue of outside pressure, would be immaterial as to the rights of the parties, viewed from a common sense standpoint. Natural justice would dictate that the laborer should have pay for his work, and that the landowner should receive compensation for having furnished the land, out of which the lessee by development secured this mixed matter.

It appears that, in the search for "liquid gold," when the stakes get a little high, the lawyer sometimes loses his sense of proportion, and the court its sense of direction, and when the words "lien claimed" are indorsed on the back of the complaint, that everybody gets excited, though at the same time, if it were a controversy over some corn or oats, arising from the labor of the tenant with the land of the landlord, we would not get very much excited as to whether or not the corn raised was of one variety or another. Take the case of a landlord and an ordinary share cropper, who in the spring agree that the cropper should plant corn of the "Bloody Butcher" variety, and should pay the landlord the usual one-third, and it turned out that the tenant did not or could not get that variety, and planted instead "Boone County White," or "Hickory King," or "Long John," would it require very much legal discrimination to hold that the tenant would be entitled to two-thirds of the crop produced and the landowner one-third? Of course, nobody knows when the development work starts as to whether oil and gas will be found separate or together, but in any event the lease in this case was a lease for oil and gas purposes, carrying with it the right to extract the oil and gas, which are the ordinary terms for what perhaps the chemist might call the hydro-carbons in the land.

By virtue of applying a formula, fixed and unyielding, just a few weeks back, this court fell into two most inconsistent positions, as it seems to the writer. There was a controversy between two operating companies on a set of facts presented to the court in March, 1931. This court, with only two dissents, gave to the Mid-Continent Petroleum Corporation all of the drip gasoline, amounting to several hundred thousand gallons, that came from some land in a nearby county. One Justice dissented, the writer of this was marked absent, and a decision was rendered in March, 1931. Rehearing was asked and a new opinion prepared. That opinion gave to the Blackwell Oil Gas Company all of the drip gasoline. The second opinion in the matter was filed in this court on July 7, 1931, the style of the case being Mid-Continent Petroleum Corporation v. Blackwell Oil Gas Company, decided July 7, 1931 (pending on rehearing), and is reported in the Oklahoma Appellate Court Reporter, vol. 59, page 11. In neither one of the majority opinions is the right of the landowner thought of. The majority opinion in the latter case was prepared by the same Justice who has prepared the majority opinion in the instant case. In that case, it seems to me, that by adopting a formula and trying to classify, the court evidently dropped into the same quagmire that I think the court is in now.

A review of the cases that are cited in the opinion of the majority, as a foundation for the conclusion in this case, that gasoline obtained from gas is not oil, or that casinghead gas producing gasoline does not contain oil, shows that they are not harmonious as amongst themselves, much less with general principles. There are two of the Mullendore Cases that are referred to in the opinion of the majority, the last one of which is the foundation of the opinion of the court below. Evidently the Mullendore Cases were the same case, though one would scarcely recognize it, except that the lawyers were the same in large measure, though in the last case one party brought in reinforcements. The latter one of the cases is found in 114 Okla. 251, 246 P. 837. The bedrock of that case is that the man who, for the protection of his landlord and to save something under his contract for both of them, and pursuant to duty, saved it by extra labor, was guilty of conversion. The slightest reference to the law of conversion, as laid down by the text-books, is sufficient to convince anyone who will think, that the foundation of the two Mullendore opinions, namely that of conversion, is scarcely consistent with the right of the producer and the duties owed by the man who had in charge the development of the land for oil and gas, as in this case.

The latter opinion by a member of the court, has the same number, 14061, as the first, which is a commissioner's opinion. One would scarcely recognize from the opinion by Vice Chief Justice Branson that it was the same case that was being reviewed, much less a rehearing. The opinion of the commissioner was filed on the 12th of November, 1924. Rehearing was denied on February 24, 1925. The opinion by the court was filed on April 13, 1926, and rehearing was denied on May 11, 1926. The attorneys as put down the first time for the defendant in error, Oklahoma Petroleum Gasoline Company, were McGuire Marshall and W. Hubert Courtney. Mr. C.H. Rosenstein represented the Minnehoma Oil Company. Messrs. Ames, Lowe, Richardson Cochran were added on behalf of the plaintiffs in error in the last opinion, and there were eleven amici curiae added on the last opinion. After the opinions are reviewed, there does not appear to be very much that would warrant the conclusion of the court in the present case, as I see it.

The latter Mullendore opinion referred to the case of Mussellem v. Magnolia Petroleum Co., 107 Okla. 183,231 P. 526. If that case decides anything, it is based on the theory of a pure conversion, but there are none of the elements of conversion in the present case. However, reverting to the parent case that all seem to refer to, Hammett Oil Co. v. Gypsy Oil Co., 95, Okla. 235, 218 P. 501, it appears that the controversy waxed warm and strong. One of the divided forces of the court was headed by Justice McNeill, who succeeded in convincing four other members of the soundness of the logic of his opinion and the force of his argument. However, there was a very strong dissent in that case, fairly well reasoned too, by Justice Kennamer, who succeeded in getting three of the Justices to concur with him. That was a case between an original lessee and some sublessees and it originated over some casinghead gas. The Gypsy Oil Company set up three defenses, the first being that the casinghead gas was not oil, either chemically or physically speaking, but an entirely different thing. Second; that the casinghead gas is gas and no gasoline was extracted from the oil, but was extracted from the gas. And the third defense was that regardless of the chemical and physical properties, the gasoline was not oil to be delivered in a pipe line within plaintiff's contract, and if it was different from either oil or gas so that it would not pass to the lessee, then it belonged to the fee owner, and the Gypsy Oil Company contracted with the owner regarding the same. The court held that the question was not whether gasoline manufactured from casinghead gas was oil in a technical sense, but whether it was oil in its ordinary and popular sense, and whether it was so understood by the parties to the original oil and gas lease, and provided for a royalty of one-eighth of the oil within the pipe line. Wolf v. Blackwell Oil Gas Company was cited, and especially Wemple v. Producers Oil Co. (La.) 83 So. 232, and it was stated in the opinion that in that case the landowner brought suit against the lessee, because the lessee was manufacturing gasoline from the casinghead gas, and was paying no royalty, and the landowner was contending that, if it was not oil, it was a mineral, not embraced within the contract and the landowner was the owner. Various extracts are set out from the opinion relied on, rendered by the Louisiana court, about construing contracts, and evidently this court, in the case of Hammett Oil Co. v. Gypsy Oil Co., did not notice this feature in the Louisiana case:

"We conclude, then, plaintiff is entitled to recover upon a basis of an allowance of one-eighth interest in the casinghead gasoline produced."

The language of the court later on in the Hammett Case is that the court, which it was relying on, held that this was a reasonable royalty. It will thus be seen that the very foundation of everything Justice McNeill might have said, as to whether or not this was oil or gas, in getting his deduction from this Louisiana case, was swept from under the doctrine by the actual judgment of the Louisiana case, because, in the case quoted from and relied on, the court applied the equitable rule of giving the landlord one-eighth and the lessee seven-eighths.

Justice Kennamer dissented and he cited a case from the federal authority after dismissing what the majority had said. At page 243 of 95 Okla., he used the following language:

"In the case of Genet v. Delaware Hudson Canal Co.,163 N.Y. 173, 19 L. R. A. 127, note, we read:

" 'The tendency of courts to do justice between the parties to a contract by an equitable, rather than a technical, construction of its provisions, even to the extent of completing the agreement by implied provisions, is exceptionally well illustrated in the above case, in which the rules governing such implications are clearly expressed.'

"Elliott on Contracts, sec. 1521, announces the rule as follows:

" 'It will not be construed so as to render it oppressive or inequitable as to either party, or so as to place one of the parties at the mercy of the other, unless it is clear that such was the manifest intention at the time the agreement was made.' "

He quotes from the case of Twin-Hills Gasoline Co. v. Bradford Oil Corp., 264 Fed. 440, in an endeavor to establish the fact that casinghead gas is a component part of oil. In that case the court gave to the landlord only one-eighth of the casinghead gas.

The case of Mussellem v. Magnolia Petroleum Co.,107 Okla. 183, 231 P. 526, is cited, but will not help along much towards the conclusions reached, if analyzed. The case referred to was a case in which the opinion was prepared by Justice Branson. The plaintiffs evidently were the landlords in that case, and the lease was silent on the subject of casinghead gas and the landowner asked for one-eighth, but the court held that there was a third clause in the lease that would reach casinghead gas, and cites a Kansas case, and holds that the third clause in the lease cut off the one-eighth idea, and that for years the parties themselves had so interpreted the contract. The court concluded that the $50 per year provision in the lease was the standard of the rights of the parties. The Hammett Oil Co. v. Gypsy Oil Co. case was cited therein, but the court said it had no bearing.

The case of Wolf v. Blackwell Oil Gas Co., 77 Okla. 81,186 P. 484, is a decision prepared by Justice Owen. In that case, notwithstanding that there was a clause to pay $100 for each gas well a year, nevertheless when gasoline was extracted from this gas the lessor received one-tenth of the gasoline. The latter part of the discussion is as follows:

" Nothing appears in the record to even indicate that the parties contemplated the production of gasoline, and section 958 of chapter 12 of the statute, supra, provides that, however broad may be the terms of a contract, it extends only to those things concerning which it appears the parties intended to contract. It might be said that the term 'other minerals,' following the word 'oil,' includes gasoline oil. But it is unnecessary for us to determine that, for the reason it appears from the petition that lessors received one-tenth of the value of the gasoline oil produced. The controversy is as to one-tenth of the gas produced from the well from which the gasoline oil came. The judgment of the trial court is therefore affirmed."

The opinion in George v. Curtain, 108 Okla. 281, 236 P. 876, comes nearer being decisive as bearing out the contention here than any of them, but it is not reasoned, it merely follows copy, and follows the Mullendore v. Minnehoma Oil Co. case decided November 12, 1924, and bases the case on Hammett Oil Co. v. Gypsy Oil Co., above referred to.

To attempt to reconcile these various opinions would be a fruitless task. Under the circumstances, it seems to me that we should apply the rule of common right to this case. Had a landlord rented his place to a tenant for one-third of the product, and it had turned out that the variety of the corn that was contracted for could not be had by the tenant, but he got some other corn and planted it and produced a crop, scarcely no one would contend that, because the variety of corn was not what the landlord expected, in any wise would the landlord's share be varied, or would he get it all because the product raised was different from what he thought at the time of making the crop.

In the present case, neither party would know what would be found. It was largely a venture based largely on the skill, perseverance, and financial risk of the lessee. The product found partook of the nature of both oil and gas, it being what is classed as a hydro-carbon. To apply a different rule because the stakes are larger, and a different rule every time, as would be indicated by the various rulings, is strongly indicative of the fact that the word "oil," ordinarily a lubricant, which spread on the water makes for easy sailing, in a great many cases has been a ruffling agent.

Perhaps the best rule in following cases would be not to follow them at all blindly, but follow the scriptures, holding fast to that which is good and rejecting that which is bad, after diligent search. That is the rule of ordinary every-day life, and applying those rules to this case, it would be manifestly unjust that the plaintiff below should have all the casinghead gas, when we are bound to know that the casinghead gas is composed largely of the same material as ordinary crude oil, and its production and preservation in the present case was the result of the enterprise, financial risk, and labor of the lessee.

There appears in the record in this case the regulations of the Secretary of the Interior, found on page 75, and casinghead gas is defined there as used in the regulations:

"Casinghead Gas: The gas from an oil well coming thru the casing with the oil from oil-producing strata."

And casinghead gasoline is defined as follows:

"Casinghead Gasoline: The petroleum product obtained from casinghead gas."

The case of Locke v. Russell, decided by the Supreme Court of West Virginia, reported in 84 S.E. 948, is fairly in point, and discusses in some measure facts here pertinent. In fact, the rules of equity and a large part of the doctrines of the common law are but basic principles of common right.

Regardless of the technical finding as to whether the product in this case is either oil or gas or both or neither, I think that the court has laid too much stress upon the definition as made by itself, and it has forgotten the rights of the parties in its search after a man-made formula, and I therefore register this dissent, believing as I do that the rights of those who developed the property and made it valuable by this decision are being violated.

Note. — See under (1) R. C. L. Perm. Supp. P. 4587 (2) 7 R. C. L. 853.