Title: State v. Moncrief

State: wyoming

Issuer: Wyoming Supreme Court

Document:

State v. Moncrief1986 WY 127720 P.2d 470Case Number: 85-283Decided: 06/03/1986Supreme Court of Wyoming
The STATE of Wyoming, Ed Herschler, 
Thyra Thomson, James B. Griffith, Stan Smith, and Lynn Simons, as members of the 
Board of Land Commissioners, James B. Griffith, as State Auditor, and Howard M. 
Schrinar, as Commissioner of Public Lands, Appellants 
(Defendants),

v.

W.A. MONCRIEF, Jr., Texaco Oil 
Company, Monsanto Oil Company, nka BHP Petroleum Company, Inc., ANR Production 
Company, Coastal Oil and Gas Corporation, Sohio Petroleum Company, Grace 
Petroleum Corp. and C.B. Moncrief, Appellees (Plaintiffs).

Appeal from District Court, 
LaramieCounty, Gary P. Hartman, 
J.

A.G. McClintock, Atty. 
Gen., Michael L. Hubbard, Senior Asst. Atty. Gen., Michael R. O'Donnell and 
Clinton D. Beaver, Asst. Attys. Gen., for appellants.

Morris R. Massey and 
William H. Brown of Brown, Drew, Apostolos, Massey & Sullivan, Casper, for appellees W.A. Moncrief, Jr. and C.B. 
Moncrief.

Marvin G. Twenhafel, 
Denver, Colorado; and Richard L. Williams of Williams, Porter, Day & 
Neville, P.C., Casper, for appellee 
Texaco Oil Co.

William T. Schwartz of 
Schwartz, Bon, McCrary & Walker, Casper, Bruce F. Kiely, Thomas J. Eastment, 
and Peter A. Moir of Baker & Botts, Washington, D.C., and Kenneth R. 
Satterly, Houston, Tex., for 
appellee Monsanto Oil Co. nka BHP 
Petroleum Co., Inc.

Houston G. Williams of 
Williams, Porter, Day & Neville, P.C., Casper, for appellee ANR Production 
Co.

H. Vincent Draa, III, 
Houston, Tex., 
and Thomas A. Nicholas of Hirst & Applegate, Cheyenne, for appellee Coastal Oil and Gas 
Corp.

John S. Carr, Houston, 
Tex., Warren J. Ludlow, Dallas, Tex., and Paul B. Godfrey and John A. Sundahl of 
Godfrey & Sundahl, Cheyenne, for 
appellee Sohio Petroleum Co.

Robert C. Hawley and 
Gretchen VanderWerf of Hawley & VanderWerf, Denver, Colo., 
for appellee Grace Petroleum 
Corp.

Before THOMAS, C.J., and BROWN, CARDINE, URBIGKIT 
and MACY, JJ.

MACY, Justice.

[¶1.]      This case 
involves the interpretation and construction of the royalty clauses contained in 
six oil and gas leases on common school and state law library lands. The 
district court entered partial summary judgment in favor of the lessees. The 
State has appealed.

[¶2.]      We 
reverse.

[¶3.]      The State raises 
the following issues:

"I. DID THE DISTRICT COURT ERR IN 
ITS INTERPRETATION OF THE LEASES WHEN IT RENDERED PORTIONS OF THE ROYALTY CLAUSE 
MEANINGLESS?

"II. DID THE DISTRICT COURT ERR BY 
APPLYING THE SCHOOLLAND TRUST IMPROPERLY IN THE CONSTRUCTION 
OF THE ROYALTY CLAUSE?"

[¶4.]      The facts were 
stipulated to by all of the parties1 and include the following. The 
six leases which are the subject of this dispute were executed from 1967 to 1976 
and cover common school and state law library lands in FremontCounty. In 1976, these leased lands were 
made part of the Long Butte Unit Area, which produces substantial quantities of 
natural gas. Each lessee's respective share of the gas produced is sold pursuant 
to a contract between the lessee and its purchaser.

[¶5.]      Since December 
1979, gas has been sold by the lessees, and royalties have been paid to the 
State based on the amount realized from the sales. In May of 1983, as a result 
of an audit conducted by the Natural Resources Production Audit Group, the state 
auditor issued a demand letter to the lessees in which he alleged that the State 
had not received all of the royalties due. According to the state auditor, the 
royalties should have been calculated on the basis of the highest price received 
by any working interest owner in the Long Butte Unit. The lessees disputed this 
interpretation of the leases and filed a declaratory judgment action in the 
district court.

[¶6.]      The lessees' 
complaint requested a declaratory judgment that, under the terms of the leases, 
"[r]oyalties payable to the State are to be computed and paid on the basis of 
the amounts realized by each lessee from the sale of its gas at the wells." The 
State responded by asserting that (1) the trust nature of common school and 
state law library lands requires that the gas be sold at current fair market 
value; (2) the leases require that the value of gas for royalty purposes be 
approved by the lessor; and (3) the leases require that state royalties be paid 
on gas at no less than the price received by the United States for its 
royalties. The parties agreed to limit the legal issue before the district court 
to "`the legal basis for determining the royalty amounts payable to the State 
for gas produced and sold from the State leases in the Long Butte Unit.'" The 
parties filed motions for summary judgment. Finding the amount realized to be 
the proper basis for computing royalty payments, the district court denied the 
State's motion and entered summary judgment in favor of lessees. The question is 
now before this Court pursuant to a Rule 54(b), W.R.C.P., determination that 
there is no just reason for delay.

[¶7.]      The disputed 
royalty provisions contained in the six leases, drafted by the State, are 
identical and state in part:

"(d) ROYALTIES. The royalties to be 
paid by lessee are: (i) on oil, one-eighth of that produced, saved, and sold 
from said land, the same to be delivered at the wells or to the credit of lessor 
into the pipe line to which the wells may be connected; (ii) on gas, including 
casinghead gas or other hydrocarbon substance, produced from said land saved and 
sold or used off the premises or in the manufacture of gasoline or other 
products therefrom, the market value at 
the well of one-eighth of the gas so sold or used, provided that on gas sold at 
the wells the royalty shall be one-eighth of the amount realized from such 
sale.

* * * * * *

"ON OTHER KINDRED HYDROCARBONS AND 
SUBSTANCES: On all other hydrocarbons of value and gaseous substances and 
elements produced or extracted, including propane, butane, sulphur, nitrogen, 
carbon dioxide, and helium, at such royalty as shall be mutually determined to 
be fair and reasonable. "For royalty 
purposes on gas and natural gasoline the value shall be as approved by the 
lessor, and in the determination of the value of natural gasoline the fair 
cost of extraction shall be considered as a deductible item; provided, however, 
that the allowance for the cost of extraction may exceed two-thirds of the 
amount or value only on approval of the lessor and in no event shall the price for gas, or 
natural gasoline, be less than that received by the United States of America for 
its royalties from the same field.

"In cases where natural gas is 
produced and the natural-gas gasoline extracted therefrom only one royalty shall 
be paid, except in the event the residue or dry gas shall be marketed it shall 
then constitute a separate commodity and a royalty shall be paid thereon as 
above provided.

"Natural gas and oil actually used 
for operating purposes upon the land and, except as to the ultimate sale 
thereof, gas or liquid hydrocarbons returned to the sand for stimulating the 
production of oil or secondary recovery purposes shall be royalty free." 
(Emphasis added.)

For convenience, the 
provision under subsection (d)(ii) of the leases will be referred to in this 
opinion as the market-value/amount-realized provision. The provision stating 
that "the value shall be as approved by the lessor" will be referred to as the 
lessor-approval provision. Finally, the clause beginning "in no event" will be 
referred to as the federal-floor provision.

[¶8.]      Upon reviewing 
the royalty provisions quoted above, the district court determined that the 
leases were ambiguous. The court, therefore, looked to extrinsic evidence to aid 
its interpretation and construction. The district court's examination of the 
evidence disclosed that the lessor-approval and federal-floor provisions were 
part of the leases as originally drafted. The market-value/amount-realized 
provision, however, was added later. Despite the retention of the 
lessor-approval and federal-floor provisions, the district court concluded that 
the addition of the market-value/amount-realized provision had the effect of 
"superseding" the lessor-approval and federal-floor 
provisions.

[¶9.]      The State 
contends before this Court that in reading the lessor-approval and federal-floor 
provisions out of the leases, the district court in effect rewrote the leases 
contrary to the parties' intent and the law. In contrast, lessees claim that the 
court merely "reconciled" what were clearly conflicting provisions of the 
leases.

[¶10.]    An oil and gas lease is a 
contract and must be construed under the doctrines applicable to contracts. 
Kuehne v. Samedan Oil Corporation, Wyo., 626 P.2d 1035 (1981). In Amoco 
Production Company v. Stauffer Chemical Company of Wyoming, Wyo., 612 P.2d 463, 465 (1980), we stated the 
general rules for contract interpretation:

"Our basic purpose in construing or 
interpreting a contract is to determine the intention and understanding of the 
parties. [Citations.] If the contract is in writing and the language is clear 
and unambiguous, the intention is to be secured from the words of the contract. 
[Citations.] And the contract as a whole should be considered, with each part 
being read in light of all other parts. [Citations.] The interpretation and 
construction [are] done by the court as a matter of law. 
[Citations.]

"If the contract is ambiguous, 
resort may be had to extrinsic evidence. [Citations.] An ambiguous contract `is 
an agreement which is obscure in its meaning, because of indefiniteness of 
expression, or because a double meaning is present.' Bulis v. Wells, [Wyo.], 565 P.2d [487,] 
490 [(1977)]. Ambiguity justifying extraneous evidence is not generated by the 
subsequent disagreement of the parties concerning its meaning. 
[Citation.]

"* * * Whether ambiguity exists is a 
question of law. [Citations.] We are, therefore, at liberty to make a 
determination as to the existence of ambiguity whether or not the parties here 
agree thereto one way or the other, and whether or not the trial court has 
reached a conclusion thereon one way or the other."

[¶11.]    As indicated above, in the 
present case the district court found the leases to be ambiguous and, therefore, 
looked to extrinsic evidence to discover their meaning. We do not find the 
leases ambiguous and, therefore, limit our review to the language of the leases 
themselves.

[¶12.]    When interpreting the 
language of a contract, we must attempt, where possible, to give each provision 
meaning in light of the parties' purpose and intent. Sunburst Exploration, Inc. 
v. Jensen, Wyo., 635 P.2d 822 (1981). A construction 
neutralizing or annulling one provision should not be adopted if the contract 
can be construed so as to give effect to all of its provisions. Rossi v. 
Percifield, Wyo., 527 P.2d 819 (1974). If possible, 
provisions which appear to be conflicting must be reconciled before the court 
nullifies any provision. Shepard v. Top Hat Land & Cattle Co., Wyo., 560 P.2d 730 
(1977). Because we find that each of the provisions in the leases in the present 
case can be read in a manner consistent with the others, we hold that the 
district court erred in interpreting the leases so as to render the 
federal-floor and lessor-approval provisions meaningless.

[¶13.]    We consider first the 
lessor-approval provision. The district court found that interpreting the 
provision so as to give the board of land commissioners the authority to set the 
value of gas for royalty purposes was unacceptable, because such an 
interpretation would nullify the market-value/amount-realized provision. The 
State contends that the lessor-approval clause merely provides a check on 
lessees' otherwise unrestricted capacity to determine market value. That is, the 
lessor-approval clause provides a mechanism by which the State may request an 
accounting of the objective standards used by lessees in arriving at market 
value.

[¶14.]    Constrained as we are to 
adopt a meaning for the lessor-approval clause which is consistent with other 
provisions of the leases, we find the State's position to be correct. 
Interpreted in the manner suggested by the State, the lessor-approval clause 
does not render the market-value/amount-realized provision meaningless. The 
value of the gas for royalty purposes must still be based on market value or the 
amount realized. However, pursuant to the lessor-approval clause, lessees must 
be able to demonstrate that the amount paid under these standards is neither 
arbitrary nor capricious.

[¶15.]    Our holding does not mean 
that the board of land commissioners may demand royalties on the basis of the 
highest price paid for gas in the field. Under the lease provisions, the board 
of land commissioners must accept royalties on the basis of either the market 
value/amount realized or, as we will see, the federal 
floor.

[¶16.]    We turn next to consideration 
of whether the federal-floor provision creates an ambiguity in the leases. We 
find that it does not. The federal-floor provision, like the lessor-approval 
clause, can be read together with the market-value/amount-realized provision in 
a manner which is not inconsistent. As indicated above, the value of gas for 
royalty purposes is to be based on market value or the amount realized. However, 
the language that "in no event shall the price for gas, or natural gasoline, be 
less than that received by the United States" clearly indicates that 
the market-value/amount-realized provision was intended to be controlled by the 
federal-floor provision. If the market value or amount realized is higher than 
the federal floor, royalties must be paid on the basis of market value or amount 
realized. Conversely, if the amount realized or market value is lower than the 
federal floor, royalties must be paid on the basis of the federal floor. 
Consistent with the rules of contract interpretation stated above, this holding 
gives meaning to both the market-value/amount-realized provision and the 
federal-floor provision.

[¶17.]    Our holding also gives 
greater meaning to the lessor-approval clause. If, for example, a lessee offers 
royalties on the basis of federal floor when in fact a higher price was received 
for the gas on the basis of either market value or the amount realized, the 
board of land commissioners may then demand an accounting pursuant to the 
lessor-approval clause.

[¶18.]    The State makes a forceful 
argument, both here and before the district court, that it is important to 
recognize that the lands in question are held in trust by the State. 
SeeState ex rel. Huckfeldt v. State Board of School Land 
Commissioners, 20 Wyo. 162, 122 P. 94 (1912); 
Mayor v. Board of County Commissioners, 64 Wyo. 409, 192 P.2d 403, reh. denied 64 
Wyo. 430, 195 P.2d 752 (1948). The board of land commissioners acts as trustee over these 
lands and may lease them for the benefit of the public schools subject to the 
limitation that "the largest possible proceeds" must be realized. Article 18, § 
3, Wyoming 
Constitution. According to the State, "[t]he existence of the trust goes to the 
question of the parties['] intent in entering this contract." In other words, 
the board of land commissioners' duty to realize the largest possible proceeds 
is a surrounding circumstance which must be considered when interpreting these 
leases.

[¶19.]    The district court concluded 
that the effect of the provisions of the leases is dictated by their terms and 
the intention of the parties as determined by applicable contract law and that 
the trust argument could not force an inconsistent interpretation. We find that 
the language of the leases is unambiguous and must control. Therefore, we need 
not consider the proposition relied on by the State that:

"`A lease of school lands 
constitutes a contract between the state and the lessee, which vitally affects 
the public interest, and should be construed liberally in favor of the public. * 
* *' [73A] C.J.S. Public Lands, Section 95 [at] 549 
(1983)."

If it were necessary in 
this case to go beyond the plain meaning of the words of the contract to 
determine the parties' intent, then the existence of the trust and the 
corresponding duties of the trustees could be helpful. This is not such a 
case.

[¶20.]    For all of the reasons stated 
above, we find that the district court erred in its interpretation of the 
leases. Therefore, the partial summary judgment granted in favor of lessees is 
reversed, and the cause is remanded for entry of summary judgment in favor of 
the State in a manner consistent with this opinion.

FOOTNOTES

1 Because the parties stipulated to 
all of the material facts, we need not consider whether there exists a genuine 
issue of material fact precluding summary judgment. Upon their stipulation, the 
question became one of law for the district court to decide.