Case Title: BHP PETROLEUM, INC. v. TEXACO EXPLORATION & PROD.

Citation: 

Docket Number: 

State: wyoming

Court: Wyoming Supreme Court

Date: 2000-03-31T00:00:00Z

Document:
BHP PETROLEUM, INC. v. TEXACO EXPLORATION & PROD.2000 WY 631 P.3d 1253Case Number: 98-117Decided: 03/31/2000Supreme Court of Wyoming
 
BHP PETROLEUM (AMERICAS), 
INC., a Delaware corporation, Appellant (Plaintiff), v.TEXACO EXPLORATION AND 
PRODUCTION, INC., a Delaware corporation, Appellee (Defendant).

Appeal from the District 
Court of Natrona County The Honorable Dan Spangler, 
Judge

Representing 
Appellee:David F. Evans and 
Richard D. Bush of Hickey, Mackey, Evans, Walker & Stewart, Cheyenne, 
Wyoming. Representing Appellant:Richard E. Day and Scott W. 
Skavdahl of Williams, Porter, Day & Neville, Casper, Wyoming; and Dennis 
Cameron of Gable & Gotwals, Inc., Tulsa, Oklahoma.

Before 
LEHMAN, C.J., and THOMAS, MACY, GOLDEN, and TAYLOR,* 
JJ.

* Retired November 2, 
1998.

THOMAS, 
Justice.

[¶1] The issue 
presented in this case is where, as a matter of law, did a cause of action on a 
claim for breach of contract arise. In granting a motion for summary judgment in 
favor of Texaco Exploration and Production, Inc. (Texaco), the district court 
ruled that the cause of action arose in Colorado, and it invoked the Colorado 
statute of limitations pursuant to Wyo. Stat. Ann. § 1-3-117 (Lexis 1999). A 
collateral issue is raised of waiver of the defense of the statute of 
limitations by the failure to plead it as an affirmative defense in the answer. 
We conclude that the district court correctly determined on the undisputed facts 
that the claim for breach of contract was a cause of action that arose in 
Colorado, and it correctly applied the Colorado statute of limitations in 
granting summary judgment. We also hold that the defense of the statute of 
limitations was not waived by the failure to plead it as an affirmative defense 
in the answer. The Summary Judgment entered in the district court is 
affirmed.

[¶2] The issues, 
as they are articulated in the Brief of Appellant BHP Petroleum, Inc., 
are:

I. Does the Colorado 
statute of limitations apply to bar a breach of contract action for the payment 
of royalties on Wyoming oil & gas production from the Madden Deep 
Unit?

II. Can the statute of 
limitations be raised for the first time on summary 
judgment?

[¶3] As stated 
in the Brief of Appellee Texaco Exploration & Production Inc., the issues 
are:

1. Did the District Court 
correctly apply the Wyoming Borrowing Statute in finding that BHP's breach of 
contract action arose in Colorado and was, therefore, time barred by the 
Colorado Statute of Limitation?

2. Was the Statute of 
Limitation defense timely raised by Texaco and if not, was BHP prejudiced by 
Texaco's raising it in its Motion for Summary Judgment in November of 
1998?

[¶4] BHP 
Petroleum (Americas), Inc. (BHP) and Texaco both owned working interests in the 
Madden Deep Unit (Madden Unit), a large federal oil and gas unit that is located 
in the northeastern corner of the Windriver Basin in Fremont and Natrona 
Counties.1 BHP was also the operator of the 
Madden Unit. At the time material to this dispute, there were twenty-one working 
interest owners in the unit and 160 royalty owners. The diverse ownership made 
calculation of royalty payments complex. Disagreement arose among several of the 
working interest owners with respect to the appropriate calculations, and BHP 
sought to change the method of paying royalties from the existing "entitlement 
method" to the Unit Allocation Method (UAM).2 Pursuant to the UAM, BHP would have 
been responsible for the payment of royalty to all royalty owners in the Madden 
Unit, and Texaco then would reimburse BHP for Texaco's portion of the royalties 
paid. 

[¶5] The Madden 
Unit is a federal unit, and the Minerals Management Service, United States 
Department of Interior (MMS), has supervisory authority with respect to the 
valuation and payment of the royalties on all of the federal leases in the 
Madden Unit. The Madden Unit encompasses eight participating areas, including 
the Cody Formation Participating Area (Cody PA). Texaco's interest in the Madden 
Unit was 2.5% of the Cody PA. The Cody PA is comprised of 57.26% federal land, 
7.59% state land, and 35.15% patented land. MMS has no jurisdiction with respect 
to any matters relating to the payment of royalties on any private 
leases.

[¶6] Pursuing 
the effort to change the method of royalty payment from the "entitlement method" 
to the UAM, BHP formally submitted an application to change the royalty 
calculation method to the UAM to the Colorado office of MMS in April of 1988. 
The application was not intended to amend the Madden Deep Operating Agreement, 
Unit Agreement, or any other agreements relating to the Madden Unit, because the 
operating agreement did not specifically address the payment of royalties. 
Following the application, correspondence was exchanged between MMS and a former 
operator of the Madden Unit who at that time was regional land manager for BHP 
in its Denver, Colorado, office and was charged with the responsibility of the 
Madden Unit and the application to MMS for implementation of the UAM. A letter 
from MMS stated:

[¶7] Any action 
by MMS regarding BHP's Unit Allocation Method will only affect the valuation for 
royalty payment purposes of that portion of net production attributable to 
Federal leases within the Madden Deep Unit. The value of other production 
subject to internal balancing agreements and various independent contractual 
requirements is an issue to be settled by the royalty interest owners and their 
respective lessees.

[¶8] The shift 
in royalty payment methodology required BHP to pay royalties on unit sales to 
all royalty owners including Texaco's royalty obligation to its lessor. The 
payment to royalty owners in the Cody PA would be made from BHP's home office in 
Texas and the reimbursements would be made by the Texas office of 
Texaco.

[¶9] The 
application to change the royalty payment method was prepared, executed, and 
filed in the Colorado office of MMS. After submitting the application to MMS, 
BHP instituted discussions with respect to the royalty payment method with an 
attorney for Texaco, who was located in the Colorado office of Texaco. The 
Texaco attorney submitted a letter to MMS, sent from the office in Colorado, 
expressing concern about the UAM for the Madden Unit as well as about uniformity 
in the method of allocations and valuations for royalty payments for its federal 
leases. This letter was sent in August of 1988, and included the statement that 
Texaco "will cooperate with BHP in implementing the Unit Allocation Method * * * 
for the payment of all royalties in the subject unit." With respect to the 
merits of this litigation, BHP claims that its application to MMS constituted an 
offer to Texaco to participate in the UAM and that the August letter from Texaco 
to MMS constituted an acceptance of BHP's offer. The application and the Texaco 
letter created the alleged contract between BHP and 
Texaco.

[¶10] On 
September 19, 1988, some six weeks after Texaco sent its letter to MMS, the 
Colorado office of BHP wrote to the Texas office of Texaco specifically 
requesting assistance in implementing the UAM. In that letter, BHP stated that 
it was "anxious to secure Texaco's cooperation in implementing the Unit 
Allocation Method of paying royalties to all royalty owners in the Madden Deep 
Unit * * *." BHP recognized that historically Texaco had paid its own royalties, 
and it pointed out that if Texaco desired to continue with that method, the UAM 
would require Texaco to distribute royalties to over 100 royalty owners 
participating in the Madden Unit. BHP proposed that Texaco allow BHP as unit 
operator to pay royalties on its behalf and then be reimbursed by 
Texaco.

[¶11] The Texas 
office of Texaco did not respond to the suggestion of BHP until April 28, 1989. 
Writing to the Colorado office of BHP, Texaco's manager of operations advised 
that "Texaco hereby advises that it shall not participate in this [UAM] method 
for payment of royalties. Texaco shall continue to pay its royalty owners * * 
*." BHP's theory in bringing its action was that this letter constituted a 
breach of the contract earlier formed. BHP alleges that Texaco had begun 
nominating volumes of gas greatly in excess of its ownership percentage in the 
Madden Unit, forcing BHP, as operator, to pay the remaining royalty owners under 
the UAM for the excess production attributable to Texaco between 1988 and 1990. 
BHP alleges that acting in accordance with the UAM, it paid in excess of 
$1,000,000.00 on Texaco's behalf, and the action that led to this appeal was 
brought to recover damages resulting from the breach of contract from 
Texaco.

[¶12] BHP 
commenced this action against Texaco in the Wyoming state court on February 22, 
1996. On November 14, 1997, following discovery, Texaco filed a motion for 
summary judgment asserting that the action was barred by the applicable Colorado 
statute of limitations. The district court agreed that the Colorado statute of 
limitations was applicable pursuant to Wyoming's borrowing statute, Wyo. Stat. 
Ann. § 1-3-117, and on February 25, 1998, it granted Texaco's motion. BHP 
appeals from the Summary Judgment entered in the district 
court.

[¶13] Summary 
judgment is appropriate when no genuine issue of material fact exists and the 
moving party is entitled to judgment as a matter of law. Estate of Noell v. 
Norwest Bank Wyoming, N.A., 960 P.2d 499, 500 (Wyo. 1998). On appeal, we examine 
the record ourselves to determine if the trial court erred in concluding that 
there were no genuine issues of material fact and that judgment as a matter of 
law is appropriate. Krier v. Safeway Stores 46, Inc., 943 P.2d 405, 408 (Wyo. 
1997). In this instance, whatever factual issues exist with respect to the 
merits of the breach of contract case, there is no difference between the 
parties with respect to the date on which the action was commenced and the date 
on which the alleged breach was committed. These are the only material facts for 
purposes of invoking the statute of limitations.

[¶14] The 
resolution of this case is controlled by the determination of where the cause of 
action arose. This is so because of our borrowing statute, Wyo. Stat. Ann. § 
1-3-117, which provides:

If by the laws of the 
state or country where the cause of action arose the action is barred, it is 
also barred in this state.

[¶15] BHP 
contends that the cause of action arose in Wyoming, and, therefore, the 
applicable statute of limitations allows it ten years to file its complaint. 
Texaco supports the determination of the district court, asserting that the 
breach of the contract occurred in Colorado and that marks the accrual of the 
cause of action. Texaco invokes the borrowing statute and argues that the 
applicable statute of limitations is that of Colorado pursuant to which BHP's 
claim would have to be brought within six years.

[¶16] The thread 
of the argument presented by BHP is tenuous. The essential premise is that in 
Stanbury v. Larsen, 803 P.2d 349, 355 (Wyo. 1990), this Court adopted 
Restatement (Second) Conflict of Laws § 188 (1971). BHP then contends that since 
that provision utilizes the "most significant relationship" test, the cause of 
action arose in Wyoming because the subject matter of the contract is Wyoming 
minerals. The elements articulated in the "most significant relationship" test 
include "(a) the place of contracting, (b) the place of negotiation of the 
contract, (c) the place of performance, (d) the location of the subject matter 
of the contract, and (e) the domicil, residence, nationality, place of 
incorporation and place of business of the parties." Restatement (Second) 
Conflict of Laws § 188 at 575. In its argument, BHP focuses upon the location of 
the subject matter of the contract. The best way to demonstrate the context of 
the citation of Restatement (Second) of Conflict of Laws § 188 in Stanbury is to 
quote from that opinion:

The borrowing statute 
does not apply to a cause of action which arose in Wyoming. Hamilton v. General 
Motors Corp., 490 F.2d 223 (7th Cir. 1973); Restatement (Second) Conflicts of 
Law § 188 (1971).

[¶17] Stanbury, 
803 P.2d  at 355. It is clear that the citation to Restatement (Second) Conflict 
of Laws § 188 is in support of a textual statement which assumes that the place 
where the cause of action arose was determined to be Wyoming before invoking the 
Restatement.

[¶18] We are 
satisfied that the decision of the district court must be tested by our 
decisions in Stanbury, Cherry Creek Dodge, Inc. v. Carter, 733 P.2d 1024 (Wyo. 
1987), and Cantonwine v. Fehling, 582 P.2d 592 (Wyo. 1978). In the first of 
those cases, Cantonwine, the action was brought to recover payment on demand 
promissory notes. We identified factors in making the determination as to where 
such a cause of action arises, stating:

Generally, in making a 
determination as to where a cause of action on a promissory note arises, the 
courts consider such factors as the place of execution and delivery and the 
place of payment. Western Soils Company v. Skolness, N.D. Iowa, 370 F. Supp. 831, 833. When, however, the promissory notes in question are demand 
instruments, further matters must be considered within the context of these 
general factors.

[¶19] The cause 
of action on a demand note arises immediately upon its execution and delivery, 
which-in-turn-determines where the cause of action accrues for purposes of 
applying statute-of-limitation provisions. * * * Since the time when a cause of 
action accrues is related directly to the place where the cause of action 
accrues, we hold that the cause of action herein arose in 
Wyoming.

[¶20] 
Cantonwine, 582 P.2d  at 597-98 (emphasis in original). Similar factors were 
invoked in Cherry Creek Dodge, Inc., which we identified as "negotiations, 
delivery and payment * * *." Cherry Creek Dodge, Inc., 733 P.2d  at 1027. In that 
case, there is an indication that we were relying upon Restatement (Second) 
Conflict of Laws § 188 to identify those factors, but the case was decided on 
its merits under the applicable provisions of the Uniform Commercial Code. 
Cherry Creek Dodge, Inc., 733 P.2d  at 1027-28. In Stanbury, Cantonwine was 
distinguished, but similar factors were invoked by the ruling of the district 
court, which was affirmed by this Court. We noted that the Stanbury note was 
executed in California, but delivered in Wyoming. The note was payable in 
Wyoming, and the Wyoming statute of limitations was applied. Stanbury, 803 P.2d  
at 355. In this instance, Texaco argues the same approach in making the 
determination as to the place where the cause of action 
arose.

[¶21] The 
factors that we have invoked in connection with promissory notes are readily 
transferable to an executory contract. BHP reads too much into Stanbury, and by 
association Cherry Creek Dodge, Inc. We do not understand that this Court 
adopted the "most significant relationship" test of Restatement (Second) 
Conflict of Laws § 188. Our analysis persuades us that we invoked the 
Restatement provision only as containing examples of factors to be considered in 
making the determination as to where the cause of action arose. The argument by 
Texaco is more accurate in pointing out that we did not change our approach to 
reaching a determination as to where a cause of action arose in 
Stanbury.

[¶22] As we 
analyze the undisputed facts in this case in light of our prior cases, it is 
clear that the contract was formed in Colorado where BHP submitted its 
application to MMS to change the royalty payment method and where the Texaco 
letter of August 2, 1988, which BHP points to as acceptance, was mailed to the 
Colorado MMS office. The contract was negotiated and made in Colorado, and the 
requisite instruments were delivered there.

[¶23] If we look 
to the place of payment or performance, we necessarily must consider the 
application of Texas law. Texas law would require that the action be filed in 
four years. Tex. Civ. Prac. & Rem. Code Ann. § 16.004 (Vernon 1986 & 
Cum.Supp. 2000). The execution of this contract would require BHP, as the 
operator, to pay all the royalty interest owners, and then charge the individual 
working interest owners for their pro-rata share of such royalty payments based 
upon the production allocated to them individually. Those payments to royalty 
owners were to be made from the Texas office of BHP. The invoices for 
reimbursement would be sent from the Texas office of BHP to the Texas office of 
Texaco and the payments made from that office.

[¶24] BHP's 
argument first focuses upon the adoption of Restatement (Second) of Conflict of 
Laws § 188 and then focuses upon only one of the factors set forth in the 
Restatement. We are satisfied that even the Restatement assumes that all factors 
will be considered, and we note that the complaint filed by BHP follows the 
general rule "that a cause of action for a breach of contract accrues at the 
time of the breach." Moncrief v. Sohio Petroleum Co., 775 P.2d 1021, 1028 (Wyo. 
1989), Thomas, J., concurring. This factor, relied upon by Texaco, would lead to 
a conclusion that the letter of April 28, 1989 in which Texaco informed BHP that 
Texaco would not participate in the UAM demonstrated the breach. That letter was 
sent from Texas to the Colorado office of BHP, arriving there on May 8, 1989. We 
agree that the breach occurred in Colorado where BHP received the 
letter.

[¶25] Analyzing 
the factors that we have previously recognized, we are satisfied that this cause 
of action arose in Colorado, and under Wyoming's borrowing statute the secure 
statute of limitations found in Colo. Rev. Stat. § 13-80-108(6) (1999) controls. 
The contract was made in Colorado and the documents were delivered there. Texas 
conceptually was the place of performance, but the breach that is alleged 
clearly occurred in Colorado. The location of the mineral production in Wyoming, 
the subject matter of the contract, is only one factor not the paramount factor 
that demonstrates the most significant relationship of the parties. With respect 
to the transaction which is the subject matter of this action, far more occurred 
out of Wyoming than in Wyoming. We, therefore, agree with the district court 
that the cause of action was barred in the place where it arose and is barred 
pursuant to Wyoming's borrowing statute.

[¶26] The second 
issue presented by BHP relates to the fact that Texaco did not plead the statute 
of limitations as an affirmative defense and, for that reason, Texaco is 
foreclosed from claiming it as a basis for summary judgment. We addressed this 
issue in Loftus v. Romsa Const., Inc., 913 P.2d 856, 862 (Wyo. 1996), in which 
we said "[t]he presentation of affirmative defenses by motion will depend upon a 
conclusion that there is no prejudice to the opposing party." In the Loftus 
case, we found guidance and persuasive authority from other jurisdictions in 
which the policy considerations that permit a party to amend its pleadings under 
W.R.C.P. 15 or move for summary judgment were weighed. Loftus, 913 P.2d  at 861. 
Both of these procedural devices permit a party to raise an affirmative defense 
by a summary judgment motion even if it was not pleaded in the answer. We 
resolved that question and established our precedent by saying "the assertion of 
an affirmative defense in a motion for summary judgment is not only appropriate, 
but is just." Id. at 862.

[¶27] The record 
demonstrates that BHP had ample opportunity to respond to the motion for summary 
judgment presented by Texaco, and it did not demonstrate any prejudice. To hold 
that Texaco was precluded from presenting the statute of limitations in its 
motion for summary judgment would be unjust. As we said in Loftus, 913 P.2d  at 
862, "[a] party should not be deprived of his right to prevail on the merits by 
some technical failure in the pleadings." That resolution was further supported 
by reliance upon W.R.C.P. 15 pursuant to which a court in Wyoming is permitted 
to amend the pleadings of the parties based on the issues and evidence presented 
at trial and there appears no valid reason why they cannot be deemed amended to 
reflect the issues and evidence presented in a motion for summary judgment. 
Loftus, 913 P.2d  at 861. Without question, Texaco could have amended its answer 
prior to any trial and could have presented the affirmative defense of the 
statute of limitations. BHP could not have prevented such an amendment if the 
district court chose to allow it, and we hold that the district court correctly 
permitted Texaco to raise the statute of limitations for the first time in its 
summary judgment motion.

[¶28] To 
summarize briefly, we are satisfied that this cause of action arose in Colorado 
where the alleged contract was made and allegedly was breached. That conclusion 
invokes our borrowing statue which requires us to apply the Colorado statue of 
limitations barring BHP's claim because it was filed seven years after it 
accrued. Restatement (Second) of Conflict of Laws § 188 does not foreclose or 
change our application of the cases we have cited, and we are satisfied that 
they represent the law in Wyoming. Texaco was not estopped from raising the 
defense of the statute of limitations in its motion for summary 
judgment.

[¶29] The 
district court's summary judgment entered on February 25, 1998, reflecting the 
reasoning articulated in the judge's decision letter of February 6, 1998, is 
affirmed.

Footnotes

1 The Madden 
Unit is "one of the major oil and gas production units presently operating in 
Wyoming * * *." BHP Petroleum Co., Inc. v. State, 784 P.2d 621, 623 n.3 (Wyo. 
1989). After the Madden Unit was developed, the unit was created in 1968, and 
consists of 69,253.20 acres of which 83.79% is federal land, with the balance 
belonging either to the state or patented mineral 
owners.

2 The 
"entitlement method" refers to a method by which the total volumes of production 
from a given participating area would be allocated back to each tract on the 
basis of that tract's relative percentage of ownership in the participating 
area. The royalty owners in that tract would be accounted to for the production 
allocated to that tract valued at the contract price that the working interest 
owners or the lessees of that tract were entitled to receive under their 
particular gas sales contract. Under the UAM, the volume of production 
accounted/attributed to each royalty owner is based upon the volumes that would 
be deemed to be allocated/attributed to their respective tracts. That production 
is then valued at the weighted average price received by all of the working 
interest owners within the unit.