Federal judge orders Sunoco Logistics to pay $155 million for owed interest, penalties on late payments for oil purchases
A federal judge ordered Sunoco Logistics to pay interest and punitive damages totaling about $155 million on nearly 1.6 million late payments it made over a period of about eight years to 53,000 royalty owners in wells across Oklahoma.
The ruling was handed down this week in a lawsuit brought by Perry Cline, an Oklahoma farmer who asserted the company wasn’t paying customers what they were owed.
The judge concluded Sunoco decided not to pay owed interest on late payments for oil purchases involving well owners, unless each customer specifically requested to receive the compensation.
“Since most well owners do not know they can get the payment, few request their interest and Sunoco keeps the money. It amounts to millions of dollars each year,” wrote U.S. District Judge John A. Gibney, Jr.
The judge also wrote that Sunoco’s indifference to that obligation extended far beyond not paying what it should, noting the oil purchaser never bothered to figure out exactly how much interest it owed to those customers, even after being sued.
Sunoco, he wrote, simply kept the money for its own use, knowing two things: that most owners would not request interest on late payments, and that most potential claims eventually would die at the hands of the statute of limitations. “And when that happens, Sunoco will have irrevocably pocketed the money.”
Sunoco, which merged with Energy Transfer Partners in 2017, plans to appeal the ruling.
“We respectfully disagree with the court’s opinions on this matter and intend to pursue all avenues of appeal,” said Vicki Granado, vice president of corporate communications at Energy Transfer.
Gibney concluded Oklahoma’s Production Revenue Standards Act requires oil purchasers like Sunoco pay owed interest when a late payment is made and that a company cannot wait for a request from the owner before paying that interest.
The law requires a “first purchaser” to pay owners owed proceeds within six months from the date of first sale.
It also requires purchasers provide oil owners receiving a payment with identifying information about the lease or well, the month and year of production covered by the payment, the total amount of product involved, the price for the product at the time, the amount withheld for severance and other production taxes, a numerical representation of the owner’s interest in the production and the owner’s share of the product's sale value.
The law also sets different interest rates on late payments, depending on why those payments were tardily made.
In most cases, the required interest is 12% (for non marketable titles, the interest rate had been 6% until state law changed that in November 2018 to the prime interest rate reported in the Wall Street Journal).
The law also requires that the interest rate on late payments compound on an annual basis.
About the case
Cline, a farmer who owns royalty interest in three wells, also accused Sunoco of committing fraud by failing to disclose that it owed interest on those payments. However, Judge Gibney turned away that claim.
As for the class-action plaintiffs, Judge Gibney included all persons or entities who received late payments without interest from Sunoco on oil proceeds from Oklahoma wells on or after July 7, 2012, and before the trial’s 2019 start in December.
Parties barred from joining the lawsuit as class action members included state and federal agencies and publicly traded oil and gas companies and their affiliates.
Barbara Ley, a certified public accountant who has extensive experience with oil and gas industry accounting, testified for plaintiffs that she had reviewed Sunoco-provided records and had determined that the company had made 1,596,945 late payments to approximately 53,000 class members between July 2012 and the end of 2019.
Ley testified she estimated the company owed those owners about $74.1 million in interest that hadn't been paid.
The judge, who noted that late payments amounted to about 1% of Sunoco’s total payments over that time period, accepted Ley’s estimate and ordered it be paid, plus added 12% compounded interest to her estimate from the start of the trial date through Monday, bringing the total amount class action members are owed to about $80 million.
Plus, he ordered the company to pay $75 million in punitive damages.
Energy Transfer, which moved the case from state district court to federal court after it was filed, attempted to argue Cline had lost standing in the case when he refused to cash a check the company had sent him to settle his complaint. Judge Gibney dismissed that argument.
Energy Transfer also appealed Gibney’s decision to create a certified class in the case to the federal Tenth Circuit Court of Appeals, arguing each owner should address his or her claim individually. That too, was turned away.
Company officials attributed late payments to various reasons, including the failure of an owner to return a division order, to provide accurate contact information, to produce a marketable title to the oil or because of an IRS lien over the proceeds.
But the judge noted company representatives during the trial admitted it did not try to identify every instance of a late payment in Oklahoma since 2012 and hadn’t determined how much interest it owed.
“The trial testimony established that Sunoco followed a practice of not paying interest until it received a request from an owner,” Gibney wrote. “In reality, Sunoco ignored its files for years because it never intended to pay much interest, and let this case sit around for three years without getting its evidence together.”
Gibney wrote that while he agreed to include the $75 million in punitive damages in his decision — about half of what Cline’s legal team requested — he was reluctant to go further, noting that “generally, Sunoco does a good job of paying proceeds to owners on time.”
Sunoco, however, no longer is engaged in making payments to royalty owners, and is instead making deals with well operators and other third-party vendors to undertake that work.
Cline and his co-plaintiffs in the case were represented by Drew Pate and Brad Beckworth of Nix Patterson and attorneys Patrick and Jason Ryan of Ryan, Whaley, Coldiron, Jantzen, Peters & Webber, among others.
Sunoco was represented in the case by Daniel M. McClure of Norton Rose Fulbright, Emma W. Perry of Yetter Coleman, Kevin W. Yankowsky of Norton Rose Fulbright and Mark D. Christiansen of McAfee & Taft, plus others.
Judge Gibney, seated in the U.S. District Court for the Eastern District of Virginia, heard the Oklahoma case in Muskogee as a visiting federal judge.
On Wednesday, Beckworth said the case demonstrates how something as minor as choosing not to pay owed interest on late payments can snowball into a big issue for an operator like Sunoco.
He said this case was similar to one he tried a few years ago involving Cimarex, where a ruling was handed down that said a company that owes you money is obligated to pay you, regardless of whether you ask. He noted that case law already has been upheld by Oklahoma’s Supreme Court.
As for Sunoco’s decision to change up how payments are handled to royalty owners, he said that is another indication of its attitude toward the issue.
“Rather than take the time and spend the money to pay people properly, they just transferred that responsibility to a third party,” he said.