Title: Golden v. SM Energy Company

State: north-dakota

Issuer: North Dakota Supreme Court

Document:

IN
THE SUPREME COURT STATE OF NORTH DAKOTA 2013 ND
17A.G. Golden; Paul E. Nordstog; Cooper B. Land;  Solveig K. Land;
Howard D. Armentrout and Delores K. Armentrout, as Co-Trustees of the Armentrout Family
Revocable Living Trust dated May 24, 2005; Craig L. Bolenbaugh, and Joseph Michael
Bolenbaugh, Peter Francis Bolenbaugh, and James Patrick Bolenbaugh, as joint tenants; and
Royalty Interest Partnership, LP, Plaintiffs and Appelleesv. SM Energy Company, a Delaware corporation, Defendant and
AppellantNo. 20120265Appeal from the District
Court of McKenzie County, Northwest Judicial District,
the Honorable David W. Nelson, Judge.AFFIRMED IN PART, REVERSED IN PART, AND
REMANDED.Opinion of the Court by VandeWalle, Chief Justice.Amy L. De Kok (argued), Jillian R. Rupnow (appeared), and Lawrence Bender (on brief), P.O. Box 1855, Bismarck,
N.D. 58502-1855, for plaintiffs and appellees.David R. Hammond (argued), and Natalie
West (on brief), 1550 17th Street, Suite 500, Denver, Colo. 80202; and H. Malcolm Pippin (appeared), P.O. Box 1525, Williston
N.D. 58802-1525, for defendant and appellant.Golden v. SM Energy CompanyNo.
20120265VandeWalle, Chief
Justice.[¶1] SM Energy Company appealed from a
summary judgment declaring that A.G. Golden and other plaintiffs are entitled to a four percent
overriding royalty interest in leases and lands covered by a 1970 letter agreement and ordering
SM to pay amounts due to Golden and the other plaintiffs for these interests, and from an order
denying SM's motion to amend or for relief from the judgment. We conclude the district court
erred in ruling as a matter of law that SM, through its predecessors in interest, expressly assumed
an "area of mutual interest" clause in the 1970 letter agreement and in expanding the judgment to
include unpled and unlitigated properties within the area of mutual interest. We further conclude
the court correctly ruled as a matter of law that SM owes Golden and the other plaintiffs
retroactive royalty payments on production from a certain well located on the subject property.
We affirm in part, reverse in part, and remand for further proceedings.I[¶2] Golden owned oil and gas leases covering
property located in McKenzie County. On July 15, 1970, Golden entered into a letter agreement
with Universal Resources Corporation in which he sold Universal his "entire interest in these
lands" for $15,000 "subject to my retention of four percent (4%) overriding royalty." The letter
agreement also created a "joint area of interest":A joint area of interest is
designated between the parties hereto and is described as All of Sections 19, 20, 29, 30, 31 and
32 in Township 153 North, Range 95 West and All of Section 2 in Township 152 North, Range
96 West. It is agreed that should A.G. Golden purchase any leasehold interest within the above
descirbed [sic] area, he will offer it at cost to Universal Resources Corporation, subject to a
reservation of four per cent (4%) overriding royalty. Should Universal Resources Corporation
purchase any leasehold interest in the joint area of interest, they will assign a four percent (4%)
overriding royalty to A.G. Golden without cost. Said joint area of interest is shown by Exhibit "B"
(attached hereto and made a part hereof). . . . Should production be
encountered on any acreage owned or controlled by Universal Resources Corporation in the joint
area of interest, the obligations of the parties hereto shall continue to each other for so long as
production continues. . . . The terms of this paragraph shall extend to all new
lease purchases, lease renewals lease extensions of any nature whatsoever.
The letter agreement further provided that "[a]ny assignment of this agreement made by you
[Universal] shall recite that same is made pursuant and subject to the terms and conditions of this
Agreement." During the early 1980s, Universal acquired several leases within the geographic area
defined in the letter agreement, including what the parties refer to as the "Thompson lease," and
assigned to Golden a four percent overriding royalty interest in that lease and other leases in the
joint area of interest.[¶3] On April 29, 1993, Universal sold and
assigned to Tipperary Petroleum Company its interest in the leases and lands covered by the 1970
letter agreement. The assignment and bill of sale included a provision that Universal was assigning
"all right, title and interest of Assignor in and to . . . all operating agreements,
joint venture agreements, partnership agreements, and other contracts, to the extent that they
relate to any of the Assets." A few months later, Tipperary acquired through an assignment from
Texaco Exploration and Production, Inc., all of Texaco's interest in what the parties refer to as
the "Federal lease." Effective March 1, 2000, Tipperary sold and assigned all of its interest in the
leases and lands subject to the letter agreement, including the Thompson lease and the Federal
lease, and its contract rights and obligations in the letter agreement, to Nance Petroleum
Corporation. The assignment and bill of sale provided that Nance "assumes all of Assignor's
duties, liabilities and obligations relating to the Assets to which Assignor was a party or by which
it was bound on and after the date hereof." Nance was later merged into SM. All of the relevant
documents in this case were duly recorded.[¶4] SM is the current
operator of the "Thompson-Federal" well and the "Wilson" well. The drill site spacing unit for the
Thompson-Federal well includes the Thompson lease and the Federal lease. The Wilson well is
located within the joint area of interest. SM has paid Golden and the other plaintiffs royalties on
production from the Thompson-Federal well attributable to the Thompson lease, but has not paid
royalties on production attributable to the Federal lease. SM has paid Golden and the other
plaintiffs a four percent overriding royalty on production from the Wilson well since January
2009, but has refused to pay them the four percent royalty for earlier periods because SM's
previous smaller payments were made under executed division orders. Golden and the other
plaintiffs brought this declaratory judgment action to determine the parties' rights, to quiet title to
interests in the land, and for an accounting.[¶5] The district court
granted summary judgment in favor of Golden and the other plaintiffs and denied SM's
cross-motion for summary judgment in its favor. The court ruled as a matter of law that SM,
through its predecessors in interest, expressly assumed Universal's rights and obligations under the
1970 letter agreement. The court's judgment also expanded the scope of the ruling beyond the
pleadings to include all leases and wells in the joint area of interest described in the letter
agreement. The court further ruled as a matter of law that SM owes Golden and the other
plaintiffs retroactive royalty payments on production from the Wilson well. The court denied SM's
post-judgment motion to amend and for relief from the judgment.II[¶6] SM argues the district court erred in
granting summary judgment in favor of Golden and the other plaintiffs (collectively "Golden").
SM contends summary judgment should have been granted in its favor.[¶7] The standard for reviewing summary judgments is well
established:Summary judgment is a procedural device for the prompt
resolution of a controversy on the merits without a trial if there are no genuine issues of material
fact or inferences that can reasonably be drawn from undisputed facts, or if the only issues to be
resolved are questions of law. A party moving for summary judgment has the burden of showing
there are no genuine issues of material fact and the moving party is entitled to judgment as a
matter of law. In determining whether summary judgment was appropriately granted, we must
view the evidence in the light most favorable to the party opposing the motion, and that party will
be given the benefit of all favorable inferences which can reasonably be drawn from the record.
On appeal, this Court decides whether the information available to the district court precluded the
existence of a genuine issue of material fact and entitled the moving party to judgment as a matter
of law. Whether the district court properly granted summary judgment is a question of law which
we review de novo on the entire record. Hamilton v. Woll, 2012 ND 238, ¶ 9 (quoting Wenco v. EOG Resources, Inc., 2012 ND 219,
¶ 8, 822 N.W.2d 701).A[¶8] SM argues the district court erred in
granting summary judgment in favor of Golden because, as a matter of law, neither SM nor its
predecessors in interest assumed the "joint area of interest" clause in the 1970 letter
agreement.[¶9] The "joint area of interest" clause in the 1970 letter
agreement is commonly referred to in the oil and gas industry as an area of mutual interest or
AMI agreement, which has been defined as an "agreement by which the parties attempt to
describe a geographical area within which they agree to share certain additional leases or other
interests acquired by any of them in the future." 8 P. Martin & B. Kramer, Williams
& Meyers Oil and Gas Law, Manual of Oil and Gas Terms 54 (2012); see also
A. Himebaugh, An Overview of Oil and Gas Contracts in the Williston Basin, 59 N.D. L.
Rev. 7, 32-33 (1983). The parties in this case agree that the AMI clause is not a covenant that
runs with the land, but is a personal covenant that is enforceable only between the original parties
to the agreement. See generally Beeter v.
Sawyer Disposal LLC, 2009 ND 153, ¶ 10, 771 N.W.2d 282;
compare Mountain West Mines, Inc. v. Cleveland-Cliffs Iron Co., 376 F. Supp. 2d 1298, 1304-08 (D. Wyo. 2005), aff'd in part and rev'd in part on other grounds, 470 F.3d 947 (10th Cir. 2006) (AMI clause was not intended by the parties to be a covenant running
with the land). Consequently, the parties agree that SM and its predecessors in interest must have
agreed to be bound by the AMI clause under the law of assignments.[¶10] Assignment agreements may not only assign rights, but may also delegate
duties to the assignee. See Rosenberg v. Son,
Inc., 491 N.W.2d 71, 73 n.1 (N.D.
1992). An assignment is an expression of intention by the assignor that his duty shall immediately
pass to the assignee, and the benefitted party's consent to the transfer can be manifested either
expressly or by implication. Estate of
Murphy, 554 N.W.2d 432, 436 (N.D.
1996). An assignee is responsible only for the obligations of the assignor which the assignee
contracts to undertake. See Collection
Ctr., Inc. v. Bydal, 2011 ND 63, ¶ 16, 795 N.W.2d 667; Skinner
v. Scholes, 59 N.D. 181, 188, 229 N.W. 114, 116 (1930); see also Mountain W.
Mines, Inc., 470 F.3d  at 953 (generally, a party is not liable for an obligation under a contract
except by his consent); Grimes v. Walsh & Watts, Inc., 649 S.W.2d 724, 727 (Tex.
Ct. App. 1983) (purported assignees must voluntarily agree to assume the burden represented by
an area of interest covenant). As explained in 6A C.J.S. Assignments § 94,
485-86 (2004) (footnotes omitted):An assignment of contractual rights
does not necessarily carry with it a delegation of contractual duties, even if the assigned contract
specified that it was binding on the assigns of the parties to the contract. Where an assignee of a
contract makes it known to the assignor that he or she did not intend by accepting the assignment
to assume the assignor's duties and obligations under the contact, the duties and obligations are
not delegated and the assignee makes no implied promise to perform them. The mere assignment
of a bilateral executory contract may not be interpreted as a promise by the assignee to assume the
performance of the assignor's duty. However, where it is clearly the intent of the parties, the
assignee also succeeds to the obligations of the contract. This intent may be manifested by the
parties' conduct, the subject matter of the contract, the language of the assignment, or the
surrounding circumstances. The court will consider the totality of the fact situation. An
assumption of obligations may be implied from an acceptance of benefits or the performance of
duties under the contract.[¶11] The general
rules of contract law governing assignments also apply to AMI clauses:If
an assignee takes an interest in oil and gas leases and the document of conveyance states that it is
specifically subject to the terms of a contract wherein the area of mutual interest was created, and
the assignee operates under the agreement or attempts to use or enforce the terms of that
contract, it is submitted that the assignee has assumed the obligations of the area of mutual
interest and it is enforceable against him. Whether or not these obligations were assumed by a
party acquiring oil and gas leases subject to an area of mutual interest clause is a question of
intent, and all the surrounding circumstances must be evaluated to determine that
intent. D. Zarlengo, Area of Mutual Interest Clauses Regarding Oil and
Gas Properties: Analysis, Drafting, and Procedure, 28 Rocky Mtn. Min. L. Inst. 837, 859-60
(1983). The interpretation of assignments, like the interpretation of contract terms generally, is a
question of the intent of the parties and is typically a question of fact for the trier of fact.
See Orion Tire Corp. v. Goodyear Tire & Rubber Co., 268 F.3d 1133,
1138 (9th Cr. 2001). However, where an assignment is memorialized in a clear and unambiguous
writing, a court should not look to extrinsic evidence to ascertain intent. See Knott
v. McDonald's Corp., 147 F.3d 1065, 1067 (9th Cir. 1998).[¶12] In analyzing the issue, the parties and the district court focused on the 1993
assignment from Universal to Tipperary, which provided in relevant part that
"Assignor . . . does hereby grant, sell, assign, convey, and deliver unto
Assignee, all right, title and interest of Assignor in and to . . . all operating
agreements, joint venture agreements, partnership agreements, and other contracts, to the extent
that they relate to any of the Assets." Golden argues this provision unambiguously establishes that
SM assumed the AMI clause because Tipperary acknowledged when it acquired the leases from
Universal that the acquisition was subject to the terms of "other contracts" that "relate to" the
conveyed leases; that the "other contracts" included the 1970 letter agreement; and therefore the
letter agreement, including the AMI clause, "relate[s] to" the assets conveyed under Universal's
assignment. SM argues this provision unambiguously establishes that no assumption of the AMI
clause occurred because the assignment "reflects the parties' intent to carefully limit the
assignment of any agreement 'to the extent' that it related to one of the leases being assigned," and
that the AMI clause did not "relate to" properties Universal had previously acquired and was
assigning to Tipperary, but only to properties "that Universal might acquire in the
future." The court adopted the interpretation offered by Golden, concluding the "Letter
Agreement is a contract that 'relates' to the leases and lands covered by the Assignment from
Universal to Tipperary and therefore, the rights and obligations under the Letter Agreement were
transferred from Universal to Tipperary." The court did not address the "to the extent" language
relied upon by SM.[¶13] A contract is ambiguous when rational
arguments can be made for different interpretations. Nichols v. Goughnour, 2012 ND 178, ¶ 12, 820 N.W.2d 740. If a contract
is ambiguous, extrinsic evidence may be considered to clarify the parties' intentions. Gawryluk v. Poynter, 2002 ND 205, ¶ 9, 654 N.W.2d 400. Whether a
contract is ambiguous is a question of law for the court to decide, and on appeal we independently
review a contract to determine if it is ambiguous. Nichols, at ¶ 12. Here, the parties have made
rational arguments in support of their contrary positions as to the meaning of the language in
question. We conclude the contested provisions of the 1993 assignment are ambiguous and the
district court erred in interpreting the provisions as a matter of law. The resolution of the parties'
intent is a question of fact, which is inappropriate for summary judgment. See Langer v. Bartholomay, 2008 ND 40, ¶ 12, 745 N.W.2d 649.[¶14] The district court also concluded that summary
judgment in favor of Golden was proper because the letter agreement was duly recorded, and
therefore, Tipperary "had constructive knowledge of its existence and its terms" when Universal
and Tipperary executed the assignment. Although Tipperary may have had constructive notice of
the letter agreement, the inquiry here is whether SM, through its predecessor, Tipperary, agreed
to be bound by the terms of the letter agreement. Tipperary's constructive notice of the letter
agreement does not establish that it agreed to be bound by its terms. Compare
Grimes 649 S.W.2d  at 727 ("While it is true that reference made in
the . . . agreement to the Plaintiff's agreement with Lovelady put the
Defendants upon notice of the interest acquired by Lovelady, we fail to see that the Defendants
voluntarily agreed to assume the burden represented by the area of interest
covenant.")[¶15] The district court further ruled that Tipperary
was bound by all of the obligations imposed by the letter agreement under N.D.C.C.
§ 9-03-25, which provides that "[a] voluntary acceptance of the benefit of a
transaction is equivalent to a consent to all the obligations arising from it so far as the facts are
known or ought to be known to the person accepting." The court
reasoned:Universal assigned the benefits of the Letter Agreement to
Tipperary in 1993. Since the Letter Agreement, with both of its Exhibits, was of record in
McKenzie County long before the Assignment from Universal to Tipperary, the "facts" of the
Letter Agreement and its "obligations" would have been known, or ought to have been known, by
Tipperary when it accepted the assignment of leases and contracts from Universal.By
accepting the benefits of the Letter Agreement, Tipperary also consented to "all the obligations
arising from" the Letter Agreement--including the obligation to convey an overriding royalty to
Golden on any leases it acquired in the joint area of interest.[¶16] The district court adopted Golden's argument that Tipperary's execution of
the 1993 assignment from Universal is the act that constituted Tipperary's voluntary acceptance of
the benefit of a transaction. The court's conclusion that the mere act of entering into a transaction
itself is the voluntary acceptance of the benefit of the transaction turns the law of assignments on
its head. This construction of the statute turns the AMI clause, as well as any other personal
covenant, into a covenant that runs with the land and obliterates the requirement that an assignee
consent to be responsible for the obligations of the assignor. See, e.g., Bydal, 2011 ND 63, ¶ 16, 795 N.W.2d 667. Statutes are
not to be read in isolation or applied in a vacuum, and we must consider the practical effects of a
particular construction and avoid absurd or ludicrous results. D & P Terminal, Inc. v. City of Fargo, 2012
ND 149, ¶ 17, 819 N.W.2d 491.
Section 9-03-25, N.D.C.C., by referring to "facts" that "are known or ought to be known to the
person accepting," obviously contemplates extrinsic evidence of conduct after completion of the
transaction that suggests a voluntary acceptance of the benefit of the transaction. See,
e.g., Westby v. Schmidt, 2010 ND
44, ¶ 24, 779 N.W.2d 681
(corporation knowingly and voluntarily accepted benefits of contract where it "billed Westby for
the work on the house and accepted his payments under the contract"). Neither the court nor
Golden has pointed to any evidence of conduct on the part of SM that is inconsistent with its
interpretation of the assignment. The court's analysis begs the question of assignment rather than
resolves it.[¶17] Moreover, whether one has voluntarily accepted
a benefit of a transaction under N.D.C.C. § 9-03-25 is a question better suited for
trial before a trier of fact than for summary judgment disposition. See Westby, 2010 ND 44, ¶ 24, 779 N.W.2d 681 (jury trial);
B.J. Kadrmas, Inc. v. Oxbow Energy,
LLC, 2007 ND 12, ¶¶ 13-1 8, 727 N.W.2d 270
(bench trial); Lonesome Dove Petroleum, Inc. v.
Nelson, 2000 ND 104, ¶¶ 24-26, 611 N.W.2d 154
(bench trial). As suggested in 6A C.J.S. Assignments § 94, 485-86 (2004),
and D. Zarlengo, Area of Mutual Interest Clauses Regarding Oil and Gas Properties:
Analysis, Drafting, and Procedure, 28 Rocky Mtn. Min. L. Inst. 837, 859-60 (1983), the
principle enunciated in N.D.C.C. § 9-03-25 is simply part of the totality of
circumstances to be considered by the court in deciding the parties' intentions.[¶18] Summary judgment should not be used to conduct mini-trials of factual
issues. See Hamilton, 2012 ND
238, ¶ 13. Because the disputed
provision of the 1993 assignment permits reasonable differing interpretations, we conclude the
district court erred in granting summary judgment on the question and we remand for trial where
the court may consider extrinsic evidence to clarify the relevant parties' intentions. If no further
evidence can be produced at trial that was not already before the court, the parties may provide a
stipulation of facts and exhibits, together with any argument permitted, for trial based on the
record submitted. See Hamilton,
at ¶ 20 (Crothers, J., concurring
specially).B[¶19] SM argues the district court
erred in granting Golden relief as to other lease interests and properties that were not the subject
of this litigation.[¶20] Contrary to the district court's instructions,
Golden prepared the judgment in this case and expanded the scope of the court's decision to
include wells within the entire area of mutual interest which were not pled in the complaint. In its
order denying SM's motion to amend and for relief from the judgment, the court acknowledged
that Golden and the other plaintiffs had not followed its instructions and instead expanded the
scope of the ruling, making it "broader than the case as filed." The court nevertheless approved
the expanded judgment, reasoning "it simply makes no sense to say that the Plaintiff must
relinquish this exact issue for each and every well."[¶21] A
district court cannot grant relief based on issues that are neither pleaded nor voluntarily litigated.
Soby Constr., Inc. v. Skjonsby Truck Line,
Inc., 275 N.W.2d 336, 340 (N.D.
1979), overruled on other grounds in Shark v.
Thompson, 373 N.W.2d 859 (N.D. 1985). Here, the court recognized that the legal
status of the additional lease interests and wells were not voluntarily litigated by the consent of the
parties. Moreover, this case involves property interests and the complaint sought quiet title relief.
The expanded judgment would not be binding on any persons having interests in the additional
lease interests and wells belatedly added to the judgment who were not made parties to the action.
See Nord v. Herrman, 2001 ND
11, ¶ 14, 621 N.W.2d 332;
Woodland v. Woodland, 147 N.W.2d 590, 602 (N.D. 1966).[¶22] We conclude the district court erred in expanding the judgment to include
unpled and unlitigated properties within the area of mutual interest.C[¶23] SM argues the district court erred in
awarding Golden retroactive royalty payments on production from the Wilson well. SM does not
contest its obligation to pay Golden royalties on the Wilson well, nor does SM deny that Golden
was underpaid. Rather, SM argues this Court's decision in Acoma Oil Corp. v. Wilson, 471 N.W.2d 476 (N.D.
1991) ("Acoma"), stands for the proposition
that "a working interest owner is not required to compensate royalty owners for underpayments
if, as here, they executed a division order stating the percentage upon which they were
paid."[¶24] Acoma involved a situation in which a well operator
overpaid some and underpaid other working interest owners, but had paid out 100 percent of the
well proceeds under a title opinion and division orders executed by the working interest owners.
471 N.W.2d  at 484. The well operator
contended that it was not liable for the underpayments because it had received no benefit and had
not been unjustly enriched, and argued the underpaid working interest owners' remedy was
against the overpaid party. Id. This
Court agreed with the well operator's position:"Detrimental reliance
explains why purchasers and operators are usually protected by the rule that division orders are
binding until revoked. In the typical case, purchasers and operators following division orders pay
out the correct total of proceeds owed, but err in the distribution, overpaying some royalty
owners and underpaying others. If underpaid royalty owners' suits against purchasers and
operators were not estopped, purchasers and operators would pay the amount of the overpayment
twice--once to the overpaid royalty owner under the division order and again to the underpaid
royalty owner through his suit. They would have double liability for the amount of the
overpayment. . . . Exposing purchasers and operators to double liability is
unfair, because they have relied upon the division order's representations and have not personally
benefited from the errors."Generally, the underpaid royalty owners, however, have a remedy:
they can recover from the overpaid royalty owners. . . . The basis for recovery is unjust
enrichment; the overpaid royalty owner is not entitled to the royalties. . . ."
[Citations omitted]. Id.
at 484-85 (quoting Gavenda v. Strata
Energy, Inc., 705 S.W.2d 690, 692 (Tex. 1986)).[¶25]
Acoma does not hold that a well operator is
automatically insulated from liability for underpayment of royalties simply because the incorrect
payments were made in accordance with an executed division order. See N.D.C.C.
§ 47-16-39.3 ("A division order that varies the terms of the oil and gas lease is
invalid to the extent of the variance and the terms of the oil and gas lease take precedence.").
Rather, the right to recovery depends upon the equitable principles of detrimental reliance and
unjust enrichment. Acoma, 471 N.W.2d  at
484-85. Acoma is distinguishable from this case. Here, it is
undisputed that SM is the well operator that prepared the division order and SM is also the
overpaid working interest owner. Because Golden was underpaid during the relevant time period
and SM was overpaid, Golden has suffered harm and SM has been unjustly enriched by retaining
the benefits of the erroneous division order and receiving the payments to which Golden was
entitled.[¶26] We conclude the district court correctly ruled as a
matter of law that SM owes Golden retroactive royalty payments on production from the Wilson
well.III[¶27] We do not address other
arguments raised because they either are unnecessary to the decision or are without merit. We
affirm the summary judgment in part, reverse in part, and remand for further
proceedings.[¶28] Gerald W. VandeWalle, C.J.Carol Ronning
KapsnerMary Muehlen MaringWilliam F. Hodny, S.J.Lisa K. Fair McEvers, D.J.[¶29] The Honorable Lisa K. Fair McEvers,
D.J., and the Honorable William F. Hodny, S.J.,
sitting in place of Crothers, J., and Sandstrom, J., disqualified.