Prairie Oil & Gas Co. v. Allen
40 A.L.R. 1389, 2 F.2d 566, 1924 U.S. App. LEXIS 2113 (1924)
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Rule of Law:
When tenants in common own oil and gas interests in land, one cotenant has the right to develop and operate the common property for oil and gas without the consent of the other cotenants, and is only obligated to account for the market value of the production less reasonable and necessary costs of development and extraction.
Facts:
- On May 9, 1911, the Good Land Company conveyed specific real property to J. C. Trout, reserving nine-tenths of all oil, gas, and minerals, along with the full right to enter and use the surface for operations.
- On November 21, 1912, J. C. Trout and Rozella Trout conveyed this same property to Lizzie Allen.
- The Good Land Company subsequently assigned its reserved mineral interest and surface use rights to Kay-Wagoner Oil & Gas Company, which in turn assigned an interest to Skelly Oil Company; these agreements acknowledged Lizzie Allen's one-tenth undivided interest.
- Beginning June 15, 1920, Skelly Oil Company peaceably entered the land with Lizzie Allen's full knowledge and proceeded to drill and continuously produce oil wells.
- Skelly Oil Company, acknowledging Lizzie Allen's one-tenth interest, informed her by letter in February 1921 that she would be credited with one-tenth of gross oil proceeds but charged for one-tenth of development and operating costs, and would receive statements of net proceeds.
- On May 7, 1921, Lizzie Allen notified Skelly Oil Company in writing that she objected to their taking oil and gas, and on May 12, 1921, she demanded from Prairie Oil & Gas Company (which was purchasing the oil from Skelly) her one-tenth share.
- Prairie Oil & Gas Company refused Lizzie Allen's demand.
- The parties stipulated that Lizzie Allen owned an undivided one-tenth interest in the oil, gas, and mineral in and under the land.
Procedural Posture:
- Lizzie Allen initiated an action in state court against Prairie Oil & Gas Company, seeking damages for alleged conversion of oil.
- The case was properly removed to the United States District Court.
- Skelly Oil Company was subsequently joined as a party defendant upon motion by Prairie Oil & Gas Company.
- The parties waived a jury trial and submitted an agreed statement of facts to the District Court.
- The District Court found that Skelly Company had the right to develop and sell nine-tenths of the oil, but that Lizzie Allen was entitled to her one-tenth interest free of any costs and expenses of development.
- The District Court entered judgment awarding Lizzie Allen $2,737.19 from Prairie Company and $5,758.68 from Prairie Company and Skelly Company.
- Skelly Oil Company and Prairie Oil & Gas Company sued out a writ of error to the United States Circuit Court of Appeals (this court).
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Issue:
Does an operating cotenant with the right to develop oil and gas interests in common property, without the express consent of another cotenant, have the right to produce oil and gas and account to the non-consenting cotenant only for their proportionate share of the net profits (market value less reasonable development and production expenses), or for the gross value of the production?
Opinions:
Majority - Phillips, District Judge
Yes, an operating cotenant with the right to develop oil and gas interests in common property has the right to produce oil and gas without the express consent of another cotenant and is only obligated to account to the non-consenting cotenant for their proportionate share of the net profits, meaning the market value of the production less reasonable and necessary costs of development, extraction, and marketing. The court established that Good Land Company and, by extension, Lizzie Allen, were tenants in common of the oil and gas interests. Under the deed to Trout, Good Land Company retained ownership of nine-tenths of the oil and gas and the right to use the surface for operations. As a tenant in common, Good Land Company would have had the right to develop the land for oil and produce it without Allen's consent, because removing minerals from a mine or oil from a well is considered a 'use' rather than a 'destruction' of the common estate. This principle is especially pertinent for 'fugitive' substances like oil that can be drained by adjacent operations, necessitating prompt extraction. The court clarified that the Oklahoma Supreme Court's Howard v. Manning case, which stated a lease by one cotenant could make the lessee a trespasser, applied to leases of the entire common property to the exclusion of other cotenants, not to a lease of an undivided interest. Skelly Company, as the assignee of Good Land Company's undivided interest, therefore became a cotenant with Lizzie Allen and was not a trespasser. Consequently, the appropriate accounting method for an operating cotenant is for the net profits, which includes deducting all reasonable and legitimate expenses for development and operation from the market value of the gross production. The court specifically stated that the royalty paid by Skelly Company to Good Land Company is not a part of the cost of production and should not be deducted from Allen's share.
Analysis:
This case clarifies crucial aspects of mineral rights and cotenancy, particularly in jurisdictions like Oklahoma where oil and gas are considered property interests in place. It establishes that a cotenant is not a trespasser when developing shared mineral property, even without the explicit consent of other cotenants, reinforcing the 'use, not destruction' principle for extractive resources. The ruling promotes development of fugitive mineral resources by defining a clear net-profits accounting standard, which prevents non-operating cotenants from unduly hindering operations or unfairly benefiting from all costs being borne by the operating cotenant. This framework incentivizes investment in exploration and production while ensuring equitable distribution of proceeds, preventing arbitrary blockage by small interest holders.
