Flowers v. Diamond Shamrock Corp.
693 F.2d 1146 (1982)
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Rule of Law:
Under Texas law, a creditor's endorsement of a check with 'full settlement' language does not create an accord and satisfaction unless there is a bona fide dispute known to both parties and the creditor understands the payment is a conditional offer to settle that specific dispute. Additionally, the 'market value' of natural gas for royalty calculation purposes is capped by the maximum lawful price established by federal regulations for the sale of that gas.
Facts:
- The Flowers family (lessors) leased mineral rights to Diamond Shamrock Corporation (lessee) under an agreement requiring Shamrock to pay royalties based on the 'market value' of the natural gas produced.
- In 1965, Shamrock entered into a 20-year sales contract with Southwestern Public Service Company, establishing a fixed price for the gas that was significantly lower than later market values.
- Shamrock began paying royalties to the Flowers based on the lower price set in its 1965 sales contract, rather than the prevailing market value at the time of production.
- Each monthly royalty check Shamrock sent to the Flowers contained fine print on the back stating, 'This check is issued in full settlement of the account stated and the payee accepts it as such by his endorsement.'
- The Flowers endorsed and cashed these checks for several years.
- In 1974, Shamrock sent a letter to royalty owners, including the Flowers, offering to increase royalty payments if they would amend their leases to be based on contract proceeds instead of market value.
- Marvin Flowers responded by letter on behalf of the family, declining to amend the lease and requesting payment of 'deficit funds,' but took no further action at the time.
- In February 1977, the Flowers stopped endorsing and cashing the royalty checks.
Procedural Posture:
- The Flowers (plaintiffs) sued Diamond Shamrock Corporation (defendant) in U.S. District Court for underpayment of royalties.
- The case was tried before a jury, which returned a verdict in favor of the Flowers, finding against Shamrock's defense of accord and satisfaction.
- Shamrock moved for a judgment notwithstanding the verdict (JNOV).
- The district court granted the JNOV in part, ruling as a matter of law that an accord and satisfaction had occurred for checks cashed before February 1977, and that federal law capped the market value after December 1, 1978.
- The Flowers, as appellants, appealed the district court's JNOV to the U.S. Court of Appeals for the Fifth Circuit, with Shamrock as the appellee.
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Issue:
Does a lessor's endorsement of royalty checks containing 'full settlement' language constitute an accord and satisfaction as a matter of law, thereby extinguishing the lessor's claim for higher royalties based on market value, when there is no evidence the lessor knew a bona fide dispute existed at the time of endorsement?
Opinions:
Majority - Tate, J.
No. A lessor's endorsement of royalty checks with 'full settlement' language does not create an accord and satisfaction as a matter of law where there is no known bona fide dispute between the parties. An accord and satisfaction is a new contract requiring a meeting of the minds to settle a known dispute. The creditor must receive unequivocal notice that the tender of a lesser sum is conditioned upon its acceptance as full satisfaction of a disputed obligation. Here, the evidence permitted a jury to reasonably find that the Flowers were not aware of a bona fide dispute concerning their right to market value royalties under Texas law (specifically the precedent set in Vela) when they endorsed the checks. The boilerplate language on the back of the check was insufficient to establish as a matter of law that the Flowers understood they were relinquishing their claim to higher royalties. However, the court affirmed that after the Natural Gas Policy Act of 1978 established a federal price ceiling, the 'market value' for royalty purposes could not exceed that regulated maximum price, as market value must account for the legal characteristics of the gas being sold.
Analysis:
This decision reinforces the high evidentiary burden for proving an accord and satisfaction defense under Texas law, especially in contexts with unequal bargaining power or knowledge, such as between mineral lessors and lessees. It clarifies that boilerplate 'full settlement' language on a check, without more, is insufficient to extinguish a claim if the creditor is not aware a bona fide dispute exists. The ruling protects less-sophisticated parties from inadvertently waiving significant legal rights. Concurrently, the decision solidifies the principle that federal price regulations effectively create a ceiling for 'market value' as defined in private contracts, subordinating state-law contract interpretations to the constraints of federal law.
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