Dorothy J. Stryker, et al. v. Phillips Petroleum Company

Fraud, negligence, wantonness, trespass, conversion, nuisance, and breach of implied lease covenants - The Chatom Unit is a parcel of property drilled for oil and gas
by Phillips; it is an amalgamation of several parcels of land
combined into one "unit" under the authority of the State of
Alabama Oil and Gas Board for the purpose of creating a
"secondary recovery" operation on the property. See Ala. Code
1975, § 9-17-13, regarding secondary recovery operations. The
Board created the Chatom Unit on April 22, 1976, after being
petitioned to do so by Phillips. Secondary recovery, in the
context of this case, occurs when a company, such as Phillips,
injects dry gas into the ground to stimulate an increase in the
underground pressure, which in turn increases the amount of oil
and gas that can be recovered from the property. A secondary
recovery unit is formed by the Oil and Gas Board when it grants a
petition from a party, such as Phillips, requesting the
consolidation of certain property for the purpose of placing
secondary recovery operations on that property ("unitization.")

The petitioner for the unit provides the Oil and Gas Board with
information concerning the property the petitioner requests to be
placed inside the unit; then a public hearing is held on the
proposed unitization. At least 75% of the royalty owners of the
property within the proposed boundaries of the unit must agree to
the unitization of the properties. 9-17-84. The owners of the
various properties share in royalties obtained from the drilling
of the unit, and the ensuing pressure buildup from the secondary
recovery operation benefits all of the property in the unit. The
Oil and Gas Board's purpose in creating a unit is to prevent the
waste of oil and gas and to prevent the drilling of unnecessary
wells. See § 9-17-13 (b) ("The board, in order to prevent
waste and avoid the drilling of unnecessary wells, . . . is also
authorized to permit or require the introduction of gas or other
substance into an oil or gas reservoir for the purpose of
repressuring such reservoir, maintaining pressure or carrying on
secondary recovery operations.").

In its 1976 order creating the Chatom Unit, the Board
authorized the unit as necessary to prevent the waste of the oil
and gas. In creating the unit, the Board established the
boundaries of the unit and the manner in which the unit
production would be divided among Phillips and the owners of
interests in the unit. Since 1976, the Chatom unit has been
producing gas and gas condensate and Phillips has been
distributing royalties to the owners of the properties within the
unit.

The plaintiffs own interests in properties lying outside the
Chatom Unit; the properties are in Sections 19 and 30.[fn2] When
the unit was formed, Phillips held leases on Sections 19 and 30.
The plaintiffs' claims against Phillips were based upon their
allegations that Phillips had committed fraud by withholding from
the Board information that would indicate that Sections 19 and 30
were productive; that Phillips had wrongfully drained their
property; that Phillips had committed waste in its operation of
the Chatom Unit by failing to recover all of the gas that lies
under their property; and that Phillips's injection of gas into
the ground constituted a trespass onto their property. Phillips
argued that, when the unit was formed, it considered Sections 19
and 30 to be unproductive, and that the inclusion of those
sections would have diluted the royalties stemming from the
productive properties.

In 1975, before the unitization in question, several of the
plaintiffs, including Mr. and Mrs. Stryker and Mr. and Mrs. Brown
, employed an attorney to attempt to persuade
Phillips to release its leases on Sections 19 and 30, which had
been executed in 1969 and 1970. In a letter to Phillips, the
attorney specifically noted that his clients had received
materials concerning the proposed unitization of Chatom Field,
and he declared that Sections 19 and 30 were being drained by
Phillips's Chatom Field wells.

Phillips did not agree to release the leases until 1982.
Beginning at that time, the plaintiffs were able to lease their
properties or to drill their property for oil and gas. In 1983,
some of the plaintiffs formed a company in an attempt to start
drilling on Sections 19 and 30. They requested that Phillips
"farm out" (in oil and gas vernacular, to allow some of its
leased land to be drilled by a second company) some of its
property near the property in which they were interested in
drilling, so that they could form a 460-acre drilling unit, but
Phillips refused to do so. No further development arose from this
attempt. In 1985, the plaintiffs executed new leases on their
property to Gulf States Land Services, which asked Phillips to
farm out some of its property; Phillips initially declined, but
later agreed. Gulf States was unable to find investors for its
drilling project. In 1987 Gulf States again requested Phillips to
farm out acreage in order that it could place a new well drilled
660 feet from the Chatom Unit, rather than 1,320 feet as required
by the Board, and Phillips did not agree with Gulf States'
proposals regarding the project. Phillips was also unwilling to
share with Gulf States its seismic research, a very expensive
research usually treated as a trade secret. No drilling was ever
done by Gulf States.

In 1990, Hickox Oil Company became interested in drilling
Section 19, and it requested Phillips to farm out some of its
nearby acreage; Phillips declined to do so. Hickox never drilled
on the property. No drilling from any company occurred on the
plaintiffs' property. It should be noted that Phillips had no
contractual or legal duty to farm out its property for the
drilling purposes of other companies or individuals.

In general, as noted above, the plaintiffs' claims alleged that
Phillips had improperly drained their land of gas and gas
condensate; that Phillips caused a waste of condensate; and that
Phillips had acted fraudulently in failing to disclose the extent
to which their property was being drained. According to the
plaintiffs, Phillips had withheld data from the Board indicating
a common pool of oil and gas shared by Sections 19 and 30 with
the property included in the unit. Phillips also failed to file
annual reports regarding pressure readings from the wells drilled
in the Chatom unit in 1989, 1990, and 1991; the reports were
finally submitted to the Board in 1992.

Phillips maintained that no improper drainage had occurred,
because of the "rule of capture": it maintained that no waste was
caused; and it denied withholding information from the Board. It
admitted having failed to supply the Board with the pressure
reports, but it pointed out that it caught up on its reports by
filing them later, and it denied that any fraud had occurred.
Phillips also argued that the plaintiffs had had the right to ask
the Board to place their properties

within the confines of the Chatom Unit when it was formed, but
failed to do so. Phillips contended that the plaintiffs had
failed to exhaust their administrative remedies and that their
action was an impermissible collateral attack on the Board's
order creating the Chatom Unit.

The jury returned averdict in favor of Phillips on the plaintiffs' claims allegingwantonness and breach of implied lease covenants. The juryreturned four verdicts of $4,197,439.07 each on the fraud,nuisance, conversion, and negligence claims. It awarded$8,755,420.64 on the trespass claim and $16,519,661.40 inpunitive damages for all of the claims. The plaintiffs requestedthat the court reduce the amount of compensatory damages, statingthat the damages awarded on some of the claims were duplicative.Acceding to the plaintiffs' request, the trial court entered ajudgment of $26,852,223.94. The trial court denied Phillips'smotion for a JNOV or a new trial, and refused to order aremittitur of the punitive damages.

Unknown

Unknown

Reversed and remanded by the Supreme Court of Alabama which held that owners of parcels of land outside a secondary recovery unit engaged in an improper collateral attack on the an order of the State Oil and Gas Board creating the unit. See: 723 So.2d 585 (Ala. 1998). The date shown above is the date of the supreme court decision and not the trial date.