Title: DOUBLE EAGLE PETROLEUM & MINING CORPORATION v. QUESTAR EXPLORATION & PRODUCTION

State: wyoming

Issuer: Wyoming Supreme Court

Document:

DOUBLE EAGLE PETROLEUM & MINING CORPORATION v. QUESTAR EXPLORATION & PRODUCTION2003 WY 13978 P.3d 679Case Number: 02-265Decided: 10/30/2003
October Term, A.D. 2003

 

 

DOUBLE 
EAGLE PETROLEUM & MINING

CORPORATION, 
a Wyoming corporation; and

WIND 
RIVER RESOURCES, INC., a Wyoming

Corporation,

 

Appellants(Plaintiffs),

 

v.

                                                                                                

QUESTAR 
EXPLORATION & PRODUCTION

COMPANY, 
a Texas corporation; WEXPRO

COMPANY, 
a Utah corporation; LANCE OIL

& 
GAS COMPANY, INC., a Delaware corporation;

and 
ULTRA RESOURCES, INC., a Wyoming

corporation,

 

Appellees(Defendants) 
.

 

 

 

Appeal 
from the District Court of Sublette County

The 
Honorable Gary P. Hartman, Judge

 

Representing 
Appellant:

Mark 
W.Gifford and Craig, Newman, Casper,WY.

 

Representing 
Appellee:

Mr. 
Thomas Reese of Brown, Drew & Massey, LLP, Casper, WY for Questar 
Explo­ration & Production Co. & Wexpro Co.; Mr. R. Michael Mullikin 
of Mullikin, Larson & Swift, Jackson, WY and Gary C. Davenport of McGloin, 
Davenport, Severson & Snow, Denver, CO for Lance Oil & Gas Co.; and Mr. 
Gerald Mason of Mason & Mason, P.C., Pinedale, WY and George W. Mueller of 
Burns, Wall, Smith & Mueller, P.C., Denver, CO for Ultra 
Resources.

 

Before 
HILL, C.J., and GOLDEN, LEHMAN, and VOIGT, JJ., and BROOKS, 
D.J.

 

 

LEHMAN, 
Justice.

 

[¶1]      At issue in this 
case is the meaning and effect of two assignments of federal oil and gas 
leases.  The assignments both carved 
out and reserved a 3.125 percent overriding royalty interest in the leases.  At trial, the district court found that 
the assignments were ambiguous and, therefore, considered extrinsic evidence of 
the parties' intent when entering into the assignments.   Ultimately, the district court 
found that the parties intended the 3.125 percent overriding royalty interest in 
the leases to be proportionately reduced to reflect that at the time the 
assignments were made the assignor was the owner of a 20 percent working 
interest in the leases.  Thus, only 
a .625 percent overriding royalty interest in the leases was effec­tively 
assigned.  We 
affirm.  

 

 

ISSUES

 

[¶2]      Appellants, 
Double Eagle Petroleum & Mining Corporation and Wind River Resources, Inc., 
set forth the following issues:

 

1.  Is 
there any ambiguity in written assignments of oil and gas leases that reserve to 
the assignor a "3-1/8% of 8/8ths" overrid­ing royalty 
interest?

 

2.  Under 
the doctrine of merger, was it error for the trial court to use a collateral 
agreement to structure an ambiguity in the written 
assignments?

 

3.  Did 
the trial court err when it utilized expert testimony to structure an ambiguity 
in the written assignments?

 

4.  Did 
the trial court err when it gleaned the parties' intent from documents generated 
years after the written assignments?

 

5.  Did 
the trial court err when, in the absence of any claim under the Wyoming 
Recording Act, it found that Appellants had notice of title problems regarding 
the overriding royalty inter­ests at issue?

 

 

FACTS 
AND HISTORICAL BACKGROUND

 

[¶3]      Prior to 1978, 
Hondo Oil and Gas Company (Hondo) became the owner of a 20 per­cent carried 
working interest in the subject oil and gas leases.  In 1978, Hondo and El Paso Natural Gas 
Company (El Paso) entered into an agreement which in part conveyed the involved 
leases but reserved to Hondo certain overriding royalty interests.  Pursuant to the 1978 agreement, Hondo 
provided separate assignments for each lease at issue.  These assignments on Bureau of Land 
Management forms state that Hondo, "as owner of 20 per­cent of record title" 
in each lease, "hereby transfers and assigns" to El Paso its interests in the 
leases, reserving to Hondo an overriding royalty of "3 1/8% of 8/8ths." 

 

[¶4]      In 1980, a Unit 
Agreement for the development and operation of the Mesa Unit, which encompasses 
the lands described in the leases, was executed naming Mountain Fuel Supply 
Company (Mountain Fuel) as operator.  
Mountain Fuel then changed its name to Wexpro Company (Wexpro).  Hondo was then merged into its parent 
company, Atlantic Richfield Company (ARCO).  In 1991, Double Eagle Petroleum & 
Mining Corporation (Double Eagle) acquired an assignment from ARCO of its 
interest in the leases.  In 1997, 
Double Eagle conveyed one-half of its interest in the leases to Wind River 
Resources, Inc. (Wind River).1  

 

[¶5]      A dispute then 
arose between appellants and Wexpro as to the amount of overriding 
royalty interest in the leases held by appellants, which resulted in the instant 
litigation being filed.  Upon trial concerning solely those 
claims involving declaratory relief, the district court ruled that appellants' 
overriding royalty interest in the leases was proportionally reduced to .625 
percent by the 20 percent interest out of which it was created.  This appeal followed.  

 

 

STANDARD 
OF REVIEW

 

[¶6]      After trial, the 
district court issued specific findings of fact and conclusions of law.  In Ahearn v. Hollon, 2002 WY 125, 
¶15, 53 P.3d 87, ¶15 (Wyo. 2002) (quoting Hutchings v. Krachun, 2002 WY 
98, ¶10, 49 P.3d 176, ¶10 (Wyo. 2002)), this court reiterated our 
appli­cable standard of review:

 

The 
purpose of specific findings of fact is to inform the appel­late court of 
the underlying facts supporting the trial court's conclusions of law and 
disposition of the issues. Hopper v. All Pet Animal Clinic, Inc., 861 P.2d 531, 538 (Wyo. 1993). While the findings of fact made by a trial court are 
presumptively cor­rect, we examine all of the properly admissible evidence 
in the record.  Because this court 
does not weigh the evidence de novo, findings may not be set aside because we 
would have reached a different result.  
Rather, the appellant has the burden of per­suading the appellate 
court that the finding is erroneous.  
Id.  See also 
Maycock v. Maycock, 2001 WY 103, ¶11, 33 P.3d 1114, ¶11 (Wyo. 2001). 
Findings of fact are not set aside unless inconsistent with the evidence, 
clearly erroneous, or contrary to the great weight of the evidence.  The definitive test of when a finding of 
fact is clearly erroneous is when, although there is evidence to support it, the 
reviewing court on the entire evi­dence is left with the definite and firm 
conviction that a mistake has been committed.  A determination that a finding is 
against the great weight of the evidence means that a finding will be set aside 
even if supported by substantial evidence. Id.  See also Mathis v. 
Wendling, 962 P.2d 160, 163 (Wyo. 1998). Conclu­sions of law made by the 
trial court are not binding on this court and are reviewed de novo.  Maycock, 
¶12.

 

[¶7]      We have also 
stated:

 

In 
contract litigation, when the terms of the agreement are unambiguous, the 
interpretation is a question of law . . . . Examination 
Management Services, Inc. v. Kirschbaum, 927 P.2d 686, 689 (Wyo. 1996); 
Union Pacific Resources Co. v. Texaco, Inc., 882 P.2d 212, 218-19 (Wyo. 
1994).  Whether a contract is 
ambiguous is a question of law for the reviewing court. Prudential Preferred 
Properties v. J and J Ventures, Inc., 859 P.2d 1267, 1271 (Wyo. 1993).  We review questions of law de novo 
without affording deference to the decision of the dis­trict court. 
Hermreck v. United Parcel Service, Inc., 938 P.2d 863, 866 (Wyo. 1997); 
Griess v. Office of the Atty. Gen., Div. of Criminal Investigation, 932 P.2d 734, 736 (Wyo. 1997).

 

            
According to our established standards for interpretation of contracts, 
the words used in the contract are afforded the plain meaning that a reasonable 
person would give to them.  
Doctors' Co. v. Insurance Corp. of America, 864 P.2d 1018, 1023 
(Wyo. 1993).  When the provisions in 
the contract are clear and unambiguous, the court looks only to the "four 
cor­ners" of the document in arriving at the intent of the parties.  Union Pacific Resources Co., 882 P.2d  at 220; Prudential Preferred Properties, 859 P.2d  at 1271.  In the absence of any ambiguity, the 
contract will be enforced according to its terms because no construction is 
appropriate. Sinclair Oil Corp. v. Republic Ins. Co., 929 P.2d 535, 539 
(Wyo. 1996); Prudential Preferred Properties, 859 P.2d  at 
1271.

 

Amoco 
Prod. Co.  v.  EM Nominee Partnership 
Co., 
2 P.3d 534, 540 (Wyo. 2000).

 

[¶8]      We add this 
supplementation of that standard of review:

 

            
Our primary focus in construing or interpreting a contract is to 
determine the parties' intent, and our initial inquiry centers on whether the 
language of the contract is clear and unambiguous.  If the language of the contract is clear 
and unambiguous, then we secure the parties' intent from the words of the 
agreement as they are expressed within the four corners of the contract.  Common sense and good faith are leading 
precepts of contract construc­tion, and the interpretation and construction 
of contracts is a matter of law for the courts.  Reed, ¶10, 18 P.3d 1161.   We have also recognized that the 
language of a contract is to be construed within the context in which it was 
written, and the court may look to the surrounding circumstances, the subject 
matter, and the purpose of the contract to ascertain the intent of the parties 
at the time the agreement was made.  
Polo Ranch Company v. City of Cheyenne, 969 P.2d 132, 136 (Wyo. 
1998).

 

Williams 
Gas ProcessingWamsutter Company v. Union Pacific Resources 
Company, 
2001 WY 57, ¶12, 25 P.3d 1064, ¶12 (Wyo. 2001); also see Boley v. 
Greenough, 2001 WY 47, ¶11, 22 P.3d 854, ¶11 (Wyo. 2001) ("In interpreting 
unambigu­ous contracts involving mineral interests, we have consistently 
looked to surrounding circumstances, facts showing the rela­tions of the 
parties, the subject matter of the contract, and the apparent purpose of making 
the contract."); and Newman v. RAG Wyoming Land Company, 2002 WY 132, 
¶¶11-12, 53 P.3d 540, ¶¶11-12 (Wyo. 2002).

 

            
However, if the meaning of a contract is ambiguous or not apparent, it 
may be necessary to use evidence in addition to the contract itself in order to 
determine the intention of the par­ties.  In such instances, interpretation of the 
contract becomes a mixed question of law and fact.  Wilder v. Cody Country Chamber of 
Commerce, 868 P.2d 211, 216 (Wyo. 1994); Alexander v. Phillips Oil 
Company, 707 P.2d 1385, 1387 (Wyo. 1985):

 

            
If the contract is ambiguous, the intent of the par­ties may be 
determined by resort to extrinsic evidence.  Rouse, 658 P.2d  at 78; 
Mountain Fuel Supply Co. v. Central Engineering & Equipment Co., 611 P.2d 863 (Wyo. 1980).  An ambiguous 
contract is one "which is obscure in its meaning because of indefiniteness of 
expression or because of a double meaning being present."  Farr, 746 P.2d  at 433.   See also Bulis, 565 P.2d  at 
490. The existence of ambiguity is a question of law.  Hensley v. Williams, 726 P.2d 90 
(Wyo. 1986); Amoco Production Co., 612 P.2d  at 465.

 

True 
Oil Company v. Sinclair Oil Corporation, 
771 P.2d 781, 790 (Wyo. 1989).

 

Wadi 
Petroleum, Inc. v. Ultra Resources, Inc., 
2003 WY 41, ¶¶11-12, 65 P.3d 703, ¶¶11-12 (Wyo. 2003).

 

 

DISCUSSION

 

[¶9]      The crux of 
appellants' argument is that the district court erroneously concluded that the 
two subject assignments of federal gas leases were ambiguous and then improperly 
util­ized extrinsic evidence to determine the intent of the parties in 
interpreting those assignments.  
Specifically, appellants assert: 1) the assignments are clear and 
unambiguous, making it unnecessary to resort to extrinsic evidence in 
interpreting them, 2) under 
the doctrine of merger, it was error to use a collateral agreement to structure 
an ambiguity in the assignments, 3) utilizing expert testimony to structure an 
ambiguity in the assignments was improper, 4) gleaning the parties' intent from 
documents generated years after the assign­ments was incorrect, and 5) in 
the absence of any claim under the Wyoming Recording Act, it was inappropriate 
to find that appellants had notice of title problems regarding the 
over­riding royalty interests at issue.

 

[¶10]   Both the factual and legal issues 
presented to this court in the case of Wadi Petro­leum, 2003 WY 41, 
are similar to this case.  In 
Wadi, Wadi purchased the same disputed overriding royalty interests in 
two of the same six oil and gas leases at issue in this case.  In addition, the assignments in this 
case are the same assignments involved in Wadi involving the same leases 
and lands.  In Wadi, this 
court held that 
the district court was correct, as a matter of law, in determining that the 
disputed assignments were ambiguous and that, because the assignments were 
ambiguous, the district court properly examined extrinsic evi­dence in order 
to resolve the ambiguity.  

 

[¶11]   In rendering that holding, this 
court said at ¶¶13-14 (emphasis added):  

 

In 
his treatise on oil and gas law, Richard Hemingway includes this discussion 
which is especially apropos to the issue we must resolve in this 
case:

 

 

(A)    
Definition 
of Fraction

 

            
As in the case of all interests carved out of the lessee's interest, care 
must be used in defining the frac­tion or quantum interest.  Pure Oil Co. assigns to A an overriding 
royalty of 1/16.  Consider the 
following statements of interest:

 

(a)  1/16 out of the lessee's 7/8 
interest;

(b)  1/16 out of 7/8;

(c)  1/16 out of 7/8 working 
interest;

(d)  1/16 out of 7/8 
leasehold.

 

In 
each instance the statement of the interest is ambigu­ous.  In all four cases the interest is 
susceptible of two constructions:  
(1) that the interest is a full 1/16 interest (or 8/128) and is merely 
payable out of the lessee's inter­est; or (2) that the quantum of the 
interest is of the lessee's interest under the lease, and not of full 
produc­tion, i.e., 1/16 x 7/8 = 7/128.  
In both (c) and (d), an additional interpretation may be made that the 
interest is equal to 1/16 x 7/8 x 7/8 = 49/1008.  This is due to the fact that the terms 
"working interest" and "leasehold estate" have a common meaning as the right to 
7/8 of production.  Since the 
fraction 7/8 and the particular phrase both appear in the clause it might be 
assumed by some that both be given effect.  
Therefore, it is necessary that the draftsman define the fraction 
precisely.  If it is the intent that 
a full 1/16 interest be created the clause should read, "1/16 of 8/8 of 
production," or "1/16 of gross production."  If the lesser interest, the phrase may 
read, "1/16 of 7/8 of 8/8 of production," or "1/16 of 7/8 of gross 
production."

 

            
An additional problem will occur where the lease from which the 
non-cost-bearing interest is created does not cover the full interest in the 
minerals.  In the above illustration 
assume that the lease of Pure Oil Company covers only a one-half interest in the 
minerals. Two con­structional problems occur.  The first is whether the proportionate 
reduction clause in the lease applies to reduce the overriding royalty or 
production payment in proportion to the interest under lease.  However, by the lease terms the 
proportionate reduction clause applies only to interests created under the 
lease.

 

            
The second problem is just the converse of the first.  Where the non-cost-bearing interest is 
created under the ½ interest lease of Pure above, will it be auto­matically 
reduced in amount, due to the drafting of the assignment?  It is the normal practice to tie the 
non-cost-bearing interest to the lease from which it is created.  In the above illustration Pure drafts 
the following clause:

 

". . . 
an overriding royalty of 1/16 of 7/8 of 8/8 of all of the oil, gas and other 
minerals pro­duced and saved under and by virtue of said 
lease."

 

Query:  As the lease covers only half of the 
minerals, does the non-cost-bearing interest refer only to the half mineral 
interest under the lease?  Under 
some authority it would seem that the answer is yes, and that the 
overrid­ing royalty interest created is only a 1/32.

 

            
To protect against either undesired result a clause should be inserted 
into the instrument providing that the non-cost-bearing interest will or will 
not be reduced, regardless of the interest under lease.  Also a further provision may be inserted 
to deal with the effect of fail­ure of title to the lease 
interest:

 

            
"Although it is believed that the net min­eral interest in the said 
lease owned by the Assignor amounts to not less than a 0.875000 working 
interest, if by reason of failure of title in whole or in part, or for any other 
reason, the net mineral leasehold interest actually acquired by Assignor in said 
lease should be less than the interests hereinbefore set forth, then the 
overrid­ing royalty interest herein assigned to Assignee shall not be 
reduced in amount as hereinabove set forth."

 

Where 
it is desired that the overriding royalty be reduced the phrase may be changed 
to read, "then the overriding royalty interest herein assigned to Assignee shall 
bear its proportionate part of such loss and shall be reduced 
pro­portionately."  Where a 
partial interest lease is assigned and it is desired that the interest not be 
reduced due to title loss, recitations in the above clause should be changed 
appropriately.  [Footnote 
omitted.]

 

Richard 
W. Hemingway, Law of Oil and Gas, § 9.9(A), at 635-637 (3rd ed. 1991); also see 2 Howard R. 
Williams, Charles J. Meyers, Oil and Gas Law, § 411.1(c) and (d), at 
308-13 (see esp. p. 312, "The assignment instrument may and should 
expressly provide for or against proportionate reduction.") (2002); 4 Howard R. 
Williams, Charles J. Meyers, Oil and Gas Law, § 686.2, at 432-457 
(see esp. p. 447, "It would be prefer­able under such circumstances 
to treat the instrument as ambiguous and to admit parol evidence to assist the 
fact finder in resolving this ambiguity [where proportionate reduction clause is 
lacking].").

 

            
Relying on this authority, we hold that the district court correctly 
concluded that the reservations of the overriding roy­alty interests were 
ambiguous due to a lack of clarity and incompleteness of expression.  Therefore, we need not directly respond 
to this argument. Because the assignments did not make that point clear, 
they were ambiguous and it was neces­sary for the district court to consider 
extrinsic evidence, which properly included the opinions of experts in oil and 
gas law, in order to resolve the ambiguity which arose on the face of the 
assignments.  The ambiguity was not 
structured by those opinions.  They 
were merely used by the district court in resolving the pre-existing 
ambiguity.  This readily 
distinguishes this case from Amoco Production v. EM Nominee Partnership, 
2 P.3d 534, 541 (Wyo. 2000) wherein we held:

 

            
Nothing in the language of Article 11 of the Unit Agreement addresses the 
repayment of leasehold royal­ties previously paid.  Its plain language is concerned only 
with the potential of retroactive adjustment of royalties for production that 
had occurred prior to the effective date of the revision of the participating 
area.  Amoco's endeavor to invoke 
the testimony of experts with respect to industry custom and practice in 
applying this language inverts our rule with respect to extrinsic evidence.  Instead of relying upon the extrinsic 
evidence to resolve an ambiguity, Amoco seeks to invoke the extrinsic 
evi­dence to structure an ambiguity.  
This would amount to this Court writing a new contract for the parties, 
and we are foreclosed from that endeavor. Union Pacific Resources Co., 
882 P.2d  at 220; Prudential Preferred Properties, 859 P.2d  at 
1271.

 

In 
the instant case the ambiguity is inherent in the assign­ments, and the 
extrinsic evidence is used only to assist the trial court in resolving the 
ambiguity.

 

Accordingly, 
relying on this same analysis, it was appropriate for the district court in this 
case to conclude that the assignments were ambiguous and that the utilization of 
extrinsic evidence including expert testimony was necessary to interpret the 
intent of the parties when entering into the assignments.

 

[¶12]   This court further addressed the 
same merger issue asserted by appellants in this case in Wadi, at ¶15 
(emphasis added), stating:

 

            
In this argument, Wadi asserts that Ultra and Questar pro­mote a 
theory that the original assignments "imply" propor­tionate reduction, and 
that the silence of the 1978 agreement with respect to proportionate reduction 
also "implies" that proportionate reduction should apply.  Relying in part on our decision in EM 
Nominee, Wadi contends that "silence" does not create ambiguity. Again, 
EM Nominee is distinguishable in this regard. The authorities we 
have cited and relied upon empha­size that in an instance such as this, 
silence leaves open the question of proportionate reduction, whereas that line 
of reasoning was not applicable to the "silence" with which we were concerned in 
EM Nominee.  In addition, 
Wadi recites this passage from 40 North Corporation v. Morrell, 964 P.2d 423, 426 (Wyo. 1998) to advance an argument that the relevant title documents 
"merged" so as to render them unambiguous:

 

40 
North accepted a warranty deed to the property in exchange for a promissory note 
and mortgage. While the executory contract for sale stated that the resulting 
mort­gage would have a subordination clause, the final agree­ment did 
not include such a clause.  At the 
time of delivery and acceptance of the deed, the executory contract for sale 
merged into the deed, mortgage and promissory note.  40 North can only assert breach of 
contract against the Morrells based upon the covenants in the deed, mortgage, 
and promissory note.  Since there is 
no subordination clause in the mortgage, 40 North has no basis for asserting 
breach of contract.

 

Comparing 
the circumstances of the 40 North case to those of the instant case, we are 
simply unable to see the applicability of the "merger" theory propounded by 
Wadi.

 

[¶13]   Finally, the court in Wadi, 
¶¶16-18 (emphasis added), addressed the utilization of other documents by 
the district court in rendering its ruling concerning the intent of the 
parties:  

 

            
Wadi contends that the only documents that may be consid­ered are the 
assignments themselves and the 1978 agree­ment.  Wadi contends that the district court 
could not consider a March 15, 1984 Division Order, which indicated that Wadi's 
predecessors in interest, Hondo, owned a .625% ORRI.  Wadi contends that use of a division 
order in such a fashion is prohib­ited by Wyo. Stat. Ann. § 30-5-305(a) 
(LexisNexis 2001):

 

§ 30-5-305.  Collection; 
reporting and remittance of royalties.

            
(a) Unless otherwise expressly provided for by specific language in an 
executed written agreement, "royalty", "overriding royalty", "other nonworking 
inter­ests" and "working interests" shall be interpreted as defined in W.S. 
30-5-304.  A division order may not 
alter or amend the terms of an oil or gas lease or other con­tractual 
agreement.  A division order that 
alters or amends the terms of an oil and gas lease or other contractual 
agreement is invalid to the extent of the alteration or amendment and the terms 
of the oil and gas lease or other contractual agreement shall take 
prece­dence.

 

            
The flaw in this argument is that the division order was not used 
to "alter or amend" the terms of the assignments but only to assist the trial 
court in resolving the inherent ambigu­ity in the 
assignments.

 

            
Finally, Wadi maintains that there are many other docu­ments which 
were created both before and after the creation of the division order that 
indicate Wadi's ORRI should be 3.125% and, therefore, there is no need to look 
at the division order.  We have 
carefully reviewed those documents, and we are convinced that they do nothing 
more than perpetuate the ambiguity, which originated in the disputed 
assignments.

 

[¶14]   We find the reasoning expressed in 
Wadi detailed above to be dispositive in this case.  Therefore, we conclude that the district 
court in this case was likewise correct, as a matter of law, in determining that 
the disputed assignments were ambiguous.  
Similarly, because the assignments were ambiguous, the district court 
properly examined extrinsic evidence including expert testimony in order to 
resolve the ambiguity.  We further 
agree with the dis­trict court's evaluation of the evidence that produced 
the conclusion that appellants' interest was proportionately reduced to .625 
percent.  

 

 

CONCLUSION

 

[¶15]   Upon our review and analysis, we 
affirm the judgment the district court.  

 

FOOTNOTES

 

1Questar 
Exploration & Production Company is the lessee burdened by appellants' 
overriding royalty interests, while Lance Oil & Gas Company, Inc. and Ultra 
Resources, Inc. hold interests in the involved lands.