Payment Made to Royalty Owners in Global Settlement of Crude Oil Posted Price Litigation Found to Be a One-Time Bonus or Premium and Not Additional Proceeds from Past Production
Submitted by Mark D. Christiansen, Crowe & Dunlevy

The underlying facts in the case of State of Oklahoma ex rel. Oklahoma Tax Commission v. Sun Company, Inc. (R&M), 78 O.B.J. 1658 and 2146 (Okla. App. 2007 - #103,776) (Not for Publication), as described by the Oklahoma Court of Appeals in its opinion, involved Sun's participation in a global settlement of a series of consolidated lawsuits in various states (referred to collectively as "MDL-1206," and also as the "crude oil posted price litigation"). The plaintiffs in the lawsuits complained that the payment of royalties by the defendants on the basis of crude oil "posted prices" (which were alleged to be non-reflective of fair market value at the lease) had resulted in royalty underpayments. The defendants denied the claims and asserted that royalties had been paid on the full and proper values for the oil.

A global settlement was reached in MDL-1206 providing for a release of claims for a defined release period. The Oklahoma Tax Commission ("OTC") took the position that the MDL-1206 global settlement payment included an admission by Sun that the Oklahoma portion of the global settlement payment was attributable to past crude oil production in the State of Oklahoma. The OTC alleged that Sun had failed to file an amended gross production tax return to account for the new payments made for that prior oil production.

Sun, in contrast, asserted that the payment it made in connection with the global settlement was a payment of a one-time bonus or premium to the royalty interest owners. Sun pointed to the fact that the Settlement Administrator in the case had subsequently paid to the OTC all gross production taxes due on that bonus or premium.

The Oklahoma Court of Appeals affirmed the trial court's ruling which held that Sun never admitted that any additional royalties were owed on past production. To the contrary, Sun denied all assertions of liability when it reached the global settlement. The appellate court affirmed the trial court's finding that the settlement payment made by Sun was a one-time payment of a premium to the royalty owners, and that Sun had no duty to file an amended gross production tax return for prior years.

The OTC additionally alleged that Sun, as a crude oil purchaser, had participated in certain barrel-back transactions and had failed to report and pay gross production taxes on the value received by the producer upon re-sale of the crude oil at the trading center in Cushing. As to this claim, the appellate court affirmed the trial court's ruling that the purchaser was not required to report and pay gross production taxes on the price received by the producer upon the subsequent sale of the oil at the trading center. The trial court's entry of summary judgment in favor of Sun was affirmed by the Court of Appeals.