1.6M LATE PAYMENTS
Sunoco has been ordered to pay $155 million in interest and punitive damages to 53,000 royalty owners in wells throughout Oklahoma, because of nearly 1.6 million late payments the company made over a span of seven-and-a-half years.
Perry Cline filed the lawsuit against Sunoco in Seminole County District Court in July 2017. Sunoco had the case transferred to Oklahoma’s Eastern District federal court the next month. In mid-July 2019 the case was assigned to a visiting judge, John A. Gibney Jr. from Virginia’s Eastern District federal court.
Sunoco is a “first purchaser” of crude oil; it buys oil produced from numerous wells in Oklahoma “and distributes proceeds from the oil to well owners,” Gibney wrote.
Based on documents and testimony introduced during a four-day trial in Muskogee in December 2019, Gibney ruled that Sunoco routinely “decided not to pay interest” on late royalty payments.
OIL/GAS INDUSTRY ‘RIFE WITH ABUSE’
Cline is a Kingfisher County farmer who has royalty interests in three wells, court records reflect.
He sued Sunoco over its “willful and ongoing violations” of Oklahoma’s Production Revenue Standards Act (PRSA), which became law in 1992. The PRSA “imposes an obligation to include interest on Untimely Payments,” Cline asserted.
The oil and gas industry “has historically been rife with abuse by lessees, operators, and entities responsible for paying O&G proceeds,” Cline charged. “Such companies routinely delay and/ or suspend payments to [royalty] owners to, among other things, obtain interest-free loans at the expense of owners.”
The Oklahoma Legislature enacted a prompt-payment rule “because of abusive practices by the oil industry, which frequently withheld payments from owners for a long time,” Judge Gibney wrote.
In late 2019 the judge certified the lawsuit as a class action. The class included individuals or entities who received from Sunoco late payments, without interest, on oil proceeds from Oklahoma wells between 7 July 2012 and the start of the four-day trial in federal court on 16 December 2019. The class members “own interests in those wells.” Excluded from the class were state and federal agencies, and publicly traded oil and gas companies and their affiliates.
SUNOCO MADE NEARLY 1.6M LATE PAYMENTS
A recognized expert, professional accountant Barbara Ley of Oklahoma City, reviewed Sunoco records and determined that Sunoco made almost 1.6 million late payments to approximately 53,000 royalty owners during that nearly eight-year period. Ms. Ley reached her conclusion using data that was supplied by Sunoco, and a witness for the company was able to refute only one instance where she made an error – and that was for 69¢ – Cline’s attorneys pointed out.
Gibney announced on 17 August 2020 that Sunoco “breached its obligation under the PRSA to pay ... interest on late payments it made on oil proceeds.” He awarded Cline and other members of the class $80.69 million in actual damages and $75 million in punitive damages.
Sunoco Inc. and Sunoco Partners Marketing & Terminals filed a notice of appeal to the 10th Circuit U.S. Court of Appeals on 9 December 2020.
That same day, Judge Gibney denied Sunoco’s motion for a new trial and refused to amend the judgment he handed down almost four months earlier.
State law requires a first purchaser to pay owners who are owed royalty proceeds from oil or gas “promptly”: within six months of the date of the first sale, Gibney noted. If the purchaser pays late, “it must pay interest to the owner of the well that produced the oil,” the judge wrote.
The PRSA statute provides for different interest rates on late payments, depending upon why those payments were tardy. As a general rule, “that portion not timely paid shall earn interest at the rate of 12%” compounded annually, the statute provides.
Courts have acknowledged that the 12% interest fee “acts to compel compliance with the statute’s requirement that proceeds be paid” to the individuals who are entitled to it, the judge wrote.
COMPANY ‘KNEW IT OWED INTEREST’
Sunoco admitted “it is liable for interest when it makes late payments,” but contended the PRSA “does not require it to pay that interest at the same time it makes the late payments.” Gibney, though, declared the “plain language” of the state statute “imposes an obligation to include interest on late payments.”
Sunoco’s interpretation of the statute would allow the company to delay paying the interest indefinitely, which would render that provision of the law “meaningless,” the judge wrote.
The company “cannot seriously dispute that it waits to pay statutory interest until it receives a request from the interest owner,” the judge wrote, because the company “has consistently admitted that it often waits until an owner makes a demand for interest” before it pays that interest.
Sunoco “knew it owed interest to royalty owners for late payments,” the judge wrote. And emails introduced as evidence in the lawsuit “established Sunoco’s awareness of its legal obligation to pay interest and its intent to keep the interest absent a demand, thereby depriving owners of the interest” that was owed to them. “It amounts to millions of dollars each year.”
The PRSA “does not require interest owners to demand payment to receive” their royalty proceeds, Gibney said. The state law requires a first purchaser to pay interest on late payments “at the same time it makes those payments,” he ruled.
Sunoco was indifferent to its legal obligation to pay interest on late payments, the judge declared. The company “simply keeps the money for its own use, knowing two things:”
• since most well owners do not know they are entitled to the payment, “few request their interest...”;
• eventually the owners’ potential claims will die at the hands of the statute of limitations. “And when that happens, Sunoco will have irrevocably pocketed the money.”
DAMAGES AWARD COULD’VE BEEN HIGHER
Sunoco complained that the $75 million punitive damages award was “excessive” and that the ratio of compensatory to punitive damages was “unconstitutionally high”.
Gibney responded that Sunoco’s practice of paying statutory interest only after the royalty owner demanded it “amounted to an enormous loss for the public.” It enabled the company to retain “millions of dollars that belonged to others.”
He also noted that the ratio between the compensatory damages ($80.69 million) and the punitive damages ($75 million) was less than 1-to-1. In fact, the 10th Circuit Court of Appeals indicated that a ratio of 9:1 might be acceptable in some cases, Gibney wrote.
Despite Sunoco’s “willful action in reckless and wanton disregard of the rights of others – specifically keeping other people’s money,” Gibney said he was reluctant to double the amount of the compensatory damages, even though the law allows it. The $75 million in punitive damages was “approximately equal to the actual damages” sustained by the class of plaintiffs, he wrote.
“Generally, Sunoco does a good job of paying proceeds to owners on time, at a better rate than the petroleum industry as a whole,” the judge wrote. “While it bungled its system for paying interest on late payments, an award of double the amount of compensatory damages goes a bit too far.”
Sunoco is a limited partnership organized in Delaware, headquartered in Dallas, and controlled by Energy Transfer Partners. Energy Transfer is a diversified midstream energy company that has more than 90,000 miles of pipelines across 38 states, transporting oil and gas products. Evidence presented during the lawsuit indicated ETP is worth approximately $30 billion, Gibney wrote.