006 Cabot Corp. v. Brown

Wednesday, September 2nd, 2015

CASE OF THE MONTH

Richard F. Brown

The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.
 
Cabot Corporation v. Brown, S.W.2d , 31 Tex. S. Ct. J. 116 (Text Dec. 9, 1987). Brown, as lessor and royalty owner, sued Cabot, as lessee and operator, for breach of the implied covenant to reasonably market gas from the Kelln Gas Well #1 in Lipscomb County under a 1967 oil and gas lease. Cabot sold the gas under an admittedly good interstate gas exchange contract in 1967. Because the gas was sold off the leased premises, the “market value” royalty clause applied. Brown executed division orders which obligated Cabot to pay royalties based on the price determined by the FPC “if such sale be subject to the FPC.” In 1974, Cabot obtained a “Henshaw exemption” to FPC pricing and began selling the gas on the intrastate market at prices higher than the ceiling established by federal regulations. Because this price exceeded the price upon which royalties were paid, Brown sued Cabot in 1981 for breach of the duty to market during the four years preceding the filing of suit. Brown contended either the gas was not dedicated to interstate commerce, or, alternatively, Cabot should have gotten an abandonment. Brown got a favorable jury finding that Cabot had breached the duty to market and a judgment for $424,000 plus $44,000 in attorney’s fees. The Court of Appeals affirmed the judgment for Brown, holding that the gas was not dedicated to interstate commerce and that the division orders did not relieve Cabot of its duty to market.
 
The Supreme Court reversed and held that Cabot was not liable to Brown for failure to reasonably market the gas during the time the division orders were in effect. The Court refused to address the dedication question and held simply that if royalty owners execute division orders that obligate the lessee to pay royalties at lower rates than those provided in the lease, then the division orders are binding until revoked. For so long as the division orders were in effect, Cabot was relieved of its duty to reasonably market the gas. The division orders were-not revoked prior to the filing of suit, and recovery for the time prior to the filing of suit is barred.
 
Although the case goes off on division orders, and Brown presumably lost much of the value of her judgment by accepting payment under the division orders, the case is most significant because it defines the duty of the lessee to market the gas and gives a clear example as to how the exercise of that duty will be tested at the courthouse. The Court recites that the duty is two-pronged: the lessee must market the production with due diligence and obtain the best price reasonably possible. Under a “market value” lease, the lessee has an obligation to obtain the best current price reasonably available. The Court approved of a single broad form submission of the controlling issue to the jury as follows:
 
Did Cabot fail to reasonably market the Kelln gas during the period from September, 1974 to December 1, 1978?
 
The term “to reasonably market” means to undertake such actions in marketing the Kelln gas as would a reasonably prudent operator under the same or similar circumstances, having due regard both for the interest of Cabot and plaintiffs.
 
Answer: “Yes” or “No” Answer: