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“Intrinsic Fraud” in Pooling Case Back Before Corporation Commission

An Administrative Law Judge at the Oklahoma Corporation Commission is set to hold a pooling hearing on Friday in a nearly decade old legal fight between two exploration companies that involved what the courts ruled to be “intrinsic fraud.”

It’s a fight between Denver, Colorado-based Optima Oil and Gas and Mewbourne Oil Company, a Tyler, Texas firm founded in 1965. Their fight led all the way to the U.S. 10th Circuit Court of Appeals in Denver.

The Friday pooling hearing is before ALJ Michael Porter and involves leases the two firms once shared on land (28 20N 26W) in western Oklahoma’s Ellis County.

Optima owned 85% of the oil and gas leasehold rights. Mewbourne owned the remaining 15% and went to the Oklahoma Corporation Commission seeking an order to force pool Optima’s rights and interests naming Mewbourne as the operator of the Unit.

What happened next was something of a comedy of errors. Mewbourne’s certified notice to Optima was received but the letter was not opened until a day after an OCC Administrative Law Judge recommended approval of the pooling application.

As the courts later ruled, Mewbourne knew Optima opposed the order yet did not mention it to the ALJ. By the time Optima learned of the order, it appealed. The ALJ vacated the order but the OCC rejected the recommendation.

Optima went to the Oklahoma Court of Civil Appeals where the court ruled the OCC was wrong to have designated Mewbourne as operator. The Oklahoma Supreme Court agreed.

By then, Optima had filed with the Oklahoma City federal court, claiming that Mewbourne knew the firm’s leases would expire while Optima appealed the OCC decision. Mewbourne filed to have the suit dismissed and the judge agreed, stating because of “intrinsic fraud” by Mewbourne, the case should be under the jurisdiction of the Corporation Commission.

The “intrinsic fraud” involved the knowledge by Mewbourne attorneys who were reportedly aware that Optima opposed the pooling request but did not inform the Administrative law judge. Consequently, the judge ruled without all of the facts in the case.

As Optima claimed in its appeal to the Denver courts, “Mewbourne engaged in wrongful and fraudulent conduct at the OCC designed to deny Optima the ability to commence drilling within the time necessary to preserve its leasehold interests.”

“The alleged fraudulent misrepresentations to the OCC with regard to cutting off Optima’s leasehold interests are intrinsic fraud,” ruled the 10th Circuit. “The district therefore correctly determined that it did not have jurisdiction to consider Optima’s claims.”

The ruling was based on precedent in previous cases where “a claim that a party misrepresented facts to the OCC is properly brought before the OCC.”

And that’s how it landed back before the Commission.