Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-88-01765/USCOURTS-ca10-88-01765-0/pdf.json

Parties Involved:
Charles S. Hertz
Appellant
Pacific Enterprises Oil Company
Appellee

Document Text:

PUBLISH 

UNITED STATES COURT OF APPEALS 

TENTH CIRCUIT 

PACIFIC ENTERPRISES OIL COMPANY, a 

California Corporation, 

Plaintiff-Appellee, 

v. 

CHARLES S. HERTZ, 

Defendant-Appellant. 

F l LED ~kitd States C'JLtrt of Appeals 

·rentb C~r·'}]i: 

J.L\N l 0 19SO 

ROBERT L. HOECKER 

Clerk 

No. 88-1765 

APPEAL FROM THE UNITED STATES DISTRICT COURT 

FOR THE DISTRICT OF COLORADO 

(D.C. No. 86-C-2346) 

Stephen H. Glickman (David A. Hickerson, of Zuckerman, Spaeder, 

Goldstein, Taylor & Kolker, of Washington, D.C., with him on the 

briefs), of Zuckerman, Spaeder, Goldstein, Taylor & Kolker, of 

Washington, D.C., for Defendant-Appellant. 

Robert C. Hawley (Kathleen M. Kulasza, of Hawley & VanderWerf, of 

Denver, Colorado; and William H. Everett, III, General Counsel, 

Terra Resources, Inc., of Tulsa, Oklahoma, with him on the brief), 

of Hawley & VanderWerf, of Denver, Colorado, for PlaintiffAppellee. 

Before HOLLOWAy, Chief Judge, TACHA, Circuit Judge, and WINDER, 

District Judge. 

TACHA, Circuit Judge. 

* Honorable David K. Winder, United States District Judge for 

the District of Utah, sitting by designation. 

Appellate Case: 88-1765 Document: 01019297247 Date Filed: 01/10/1990 Page: 1 
This is an appeal from the district court's grant of summary 

judgment in favor of Terra Resources, Inc., which had initiated a 

declaratory judgment action to determine its rights and 

obligations under a contract to assign an oil and gas lease. We 

arrlrm. 

I. 

Defendant Charles S. Hertz, a Pennsylvania resident, applied 

for an oil and gas lease under section 17 of the Mineral Leasing 

AcL of 1920, 30 U.S.C. §§ 181-263. The Colorado office of the 

Burc2.!Ll cf Land Management ("BLM") accepted Hertz's application and 

1ssue,J oil and gas lease number C-30483 on.July 22, 1981. The 

leas~ became effective on August 1, 1981. 

On August 21, Hertz entered into a lease assignment agreement 

with Terra Resources, a Delaware corporation with its principal 

place of business in Tulsa, Oklahoma. Under the terms of the 

lease, Hertz agreed to assign the lease approximately 53 weeks 

after its effective date. Terra Resources, in turn, agreed to 

accept assignment of the lease and to pay approximately $700,000 

to Hertz. In consideration for making this agreement, Hertz paid 

Terra Resources $500 on August 21, 1981. The agreement contained 

no express warranty of marketable title. 

On December 3, 1981, several months after the parties entered 

tne agreement to assign the lease, but prior to the date set for 

actual assignment, the BLM cancelled Hertz's lease. The BLM found 

t~al Hertz's original lease application had been defective. Hertz 

appealed this decision to the Interior Board of Land Appeals 

("IBLA''), which affirmed the BLM on March 10, 1982. 

-2-

Appellate Case: 88-1765 Document: 01019297247 Date Filed: 01/10/1990 Page: 2 
On August 9, 1982, 53 weeks and one day after the effective 

date of assignment, Hertz executed an assignment of the lease. On 

August 13, Terra Resources informed Hertz that it would not accept 

tn8 3ttempted lease assignment because Hertz did not have a 

leascnolJ title to assign. Terra Resources also stated that it 

had both actual and constructive notice of the lease's title 

detect and that it, therefore, failed to qualify for protections 

extended by law to bona fide purchasers of subsequently cancelled 

leases. See Bona Fide Purchaser Amendment to the Mineral Leasing 

Act, 30 U.S.C. §l84(h)(2) [hereinafter "Bona Fide Purchaser 

Amendment" or "Amendment"]. 

Hertz threatened to file suit against Terra Resources for 

breach of contract. In response, Terra Resources initiated this 

action in the United States District Court for the District of 

Colorado, seeking a declaratory judgment under 28 U.S.C. § 2201 to 

determine its rights and obligations under the lease agreement. 

1'er r a Resources filed a motion for summary judgment, and Hertz 

co~nterclaimed, requesting damages for Terra Resources' alleged 

Lre~ch of contract. The district court granted Terra Resources' 

motion for summary judgment and denied Hertz's claim for damages. 

Hertz filed this appeal. 

While this appeal was pending, Hertz also appealed the IBLA's 

ae~ision to cancel his lease to the United States District Court 

r ~. rne District of Columbia. On March 11, _1986, the district 

cwurt ruled that the BLM's cancellation of the lease constituted 

an abuse of discretion. The BLM then vacated part of its earlier 

decision and reissued the original lease to Hertz. Hertz 

-3-

Appellate Case: 88-1765 Document: 01019297247 Date Filed: 01/10/1990 Page: 3 
petitioned the IBLA for a new lease that would extend the term of 

the original lease five years, so that the lease would expire in 

1996. In support of his request, Hertz argued that he could 

neither assign the lease nor conduct operations for much of the 

time that litigation was pending in this matter. 

Hertz next filed suit against the United States in United 

States Claims Court, which returned a verdict in Hertz's favor on 

February 18, 1988. The claims court awarded Hertz $750,000 for 

the loss of the lease and ordered Hertz to reduce his counterclaim 

in this action by the same amount. 

II. 

Hertz argues that Terra Resources had no legal justification 

tor refusing to perform under the lease agreement because the Bona 

Fide Purchaser Amendment, 30 U.S.C. S 184(h)(2), shielded Terra 

Resources from any possible adverse consequences arising from the 

BLM's cancellation of Hertz's lease. Hertz also contends that 

tr.i~ case involves genuine issues of material fact that preclude 

suilLI•.:~ry judgment. Terra Resources counters with four arguments: 

1 L1 cllat the district court lacked subject matter jurisdiction 

over this case because Hertz failed to demonstrate an injury in 

fact;_ (2) that Hertz lacks standing to invoke the Bona Fide 

Purchaser Amendment on behalf of Terra Resources; (3) that Terra 

Resources does not qualify as a bona fide purchaser under the Bona 

Fide Purchaser Amendment and therefore lacked protection from any 

adverse consequences that might have arisen from the BLM's 

cancellation of Hertz's lease; and (4) that Terra Resources was 

not required to accept Hertz's assignment because Colorado law 

requires that the seller convey marketable title. 

-4-

Appellate Case: 88-1765 Document: 01019297247 Date Filed: 01/10/1990 Page: 4 
III. 

We first determine if Hertz has suffered an injury sufficient 

to establish subject matter jurisdiction over this case. This is 

a legal question, which we review de novo. Carey v. United States 

~~~!:.211 §_erv., 812 F.2d 621, 623 (lOth Cir. 1987). Article III of 

tne United States Constitution limits the judicial power of the 

rederal courts to the resolution of "cases" or "controversies." 

u.s. Const. art. III. A case or controversy does not exist unless 

a plaintiff can show, at a minimum, that he or she has suffered 

"some actual or threatened injury." Valley Forge Christian 

f~li~ge ~ Americans United for Separation of Church ~ State, 

~:>:~· .JS4 U.S. 464, 472 (1982). Terra Resources argues that Hertz 

, ..... : ~: show the requisite injury because the claims court fully 

compensated Hertz for any injuries resulting from the cancellation 

of the lease. We disagree. 

Hertz seeks $701,669.50, the amount allegedly due under the 

lease agreement, as well as interest at the rate of eight percent 

per year. Colorado law permits a claimant to recover eight 

percent interest from the time a payment is wrongfully withheld to 

either the date of payment or the date judgment is entered. See 

Colo. Rev. Stat. § 5-12-l02(l)(b) (Supp. 1988); Mesa Sand~ Gravel 

Co. ~Landfill, Inc., 776 P.2d 362, 364-66 (Colo. 1989) (holding 

that mere breach of contract is sufficient to trigger the § 5-12-

lu :.c 1 ~ 1 ( t:,) allowance for recQvery of interest on amounts 

"\iU,;i.grully vlithheld"); see also Casto v. Arkansas-Louisiana Gas 

Co., 562 F.2d 622, 625 (lOth Cir. 1977) (state law governs the 

award of prejudgment interest on a state law claim in federal 

-5-

Appellate Case: 88-1765 Document: 01019297247 Date Filed: 01/10/1990 Page: 5 
co11rt). If Hertz can show that Terra Resources wrongfully 

breached the lease agreement, he will be entitled to recover 

annual interest payments of eight percent of $701,669.50 or 

approximately $56,000 a year, for the five and a half years 

b~c·~een the time of the alleged breach and the date that the court 

.Laitns paid Hertz $750,000. The sum of these interest payments 

.:L~ amount to approximately $308,000. Because the sum of 

$308,000 and $701,669.50 is well in excess of the $750,000 that 

Hertz has already received, it is clear that Hertz has adequately 

alleged that he suffers from uncompensated financial injury. We 

hold that proper subject matter jurisdiction exists over this 

case. 

IV. 

We next address Terra Resources' argument that, even if it 

did qualify as a bona fide purchaser under the Bona Fide Purchaser 

Amendment, it still was not required to accept Hertz's assignment 

because Colorado law implies a warranty of marketable title in a 

contract to assign an oil and gas lease. We review this question 

cE 15\1 de novo. Carey, 812 F.2d at 623. The Colorado Supreme 

Court has not yet ruled on this issue, so we must predict how that 

court would decide the question if faced with it. To guide us in 

this inquiry, we consider all the resources available to us, 

including Colorado and federal case law, decisions from other 

jurisdictions, and the weight and trend of authority. Farmers 

Alliance Mutual Ins. Co. v. Bakke, 619 F.2d 885, 888 (lOth Cir. 

1980). 

-6-

Appellate Case: 88-1765 Document: 01019297247 Date Filed: 01/10/1990 Page: 6 
We first examine any Colorado caselaw that is related to the 

issues in this case. It is settled law in Colorado that 

agreements to convey real property, unless they provide otherwise, 

contain an implied warranty that the conveyance of title will be 

"free from lien or encumbrance." Micheli ~Taylor, 159 P.2d 912, 

914 (Colo. 1945) (en bane); see Tilbury~ Osmundson, 352 P.2d 

102, 105 (Colo. 1960) (purchaser of land is not required to accept 

title which invites or exposes him to litigation); Heaton v. 

Nelson, 194 P. 614 (Colo. 1920); W.T. Craft Realty Co. ~ 

Livernash, 146 P. 121, 123 (Colo. Ct. App. 1915) (citing Price v. 

Immel, 109 P. 941 (Colo. 1910)). However, the actual conveyance, 

unlik~ the agreement to convey, contains no implied warranty, see 

~1ic~eli, lS~ P.2d at 914, because prior negotiations and 

agreements to convey merge into the deed, which then determines 

the rights of the parties, see Reed~ Dudley, 533 P.2d 507, 508 

(Colo. Ct. App. 1975) (citations omitted). 

The substantial weight of authority indicates that there is 

little reason to expect that the Colorado Supreme Court would 

tre~t oil and gas leases differently than real property. "The 

majority rule in other states holds that ·a lessee's interest in a 

gas and oil lease is an interest in real estate. Colorado seems 

to favor the general rule." Hagood v. Heckers, 502 P.2d 961, 963 

(Colo. Ct. App. 1972) (citations omitted); see also Brice v. Pugh, 

354 P.2d 102_4 (Colo. 1960) (per curiam) (treating an oil and gas 

l2~se as an interest in real estate for purposes of mortgage 

.recording requirements). 

-7-

Appellate Case: 88-1765 Document: 01019297247 Date Filed: 01/10/1990 Page: 7 
The commentators are in accord that a warranty of marketable 

title is implied by law in a contract to assign an oil and gas 

lease, even though no such warranty is implied in the actual 

assignment. For example, one treatise writer has noted: 

\Vith respect to ordinary land transactions, it is well 

established that in the absence of a specific provision 

on the subject, it is implied in every executory 

contract for the sale of land that the vendor must 

provide merchantable or marketable title. The same is 

true in the instance of contracts for the execution or 

assignment of an oil and gas lease. 

2 E. Kuntz, ~Treatise on the Law of Oil-and Gas§ 19.11, at 38 

(1989) (footnotes omitted) [hereinafter E. Kuntz]. Another writer 

has observed: 

A contract to assign an oil and gas lease carries with 

it an implied covenant of quiet enjoyment, although it 

contains no express warranty. In an assignment 

of a lease, on the other hand, as distinguished from a 

contract to assign, there is no implied warranty of 

title, where the law as to the conveyance of land is 

followed. 

2 A. Casner, American Law of Property, § 10.88, at 707 (1952) 

(footnotes omitted) (citing Sunset Oil Co. ~ Whistleman, 237 P. 

1116 (Colo. 1925}, for the proposition that, in contrast to 

contracts to assign, there is no implied warranty of title in the 

executed assignment} [hereinafter A. Casner]; see 3 W. Summers, 

The Law of Oil and Gas§ 544, at 524-29 (1958); see also O'Kane ~ 

Walker, 561 F.2d 207, 212 (lOth Cir. 1977) (effect of absence of 

warranty of title in executed assignment in the New Mexico oil and 

gas industry is that no warranty exists). 

In Sunset Oil Co.~ Whistleman, 237 P. 1116 (Colo. 1925), 

the Colorado Supreme Court followed the settled trend that no 

;.~lranty of title should be implied into an assignemnt of an oil 

-8-

Appellate Case: 88-1765 Document: 01019297247 Date Filed: 01/10/1990 Page: 8 
and ;as lease. The court rejected the argument that the defendant 

assignor was liable for a breach of contract due to a failure of 

title in the oil and gas lease: 

there being no covenants of warranty in the assignment 

between the parties, nor any promise or agreement broken 

by the defendants, as far as the record discloses: 

hence no basis for an action. If the parties had so 

intended, they could have easily inserted such provision 

in the contract. 

Id. at 1116. 

We interpret the Sunset Oil Co. court's reference to a 

"promise or agreement" to be applicable only to subsequent 

agreements and not prior unexecuted agreements, such as a contract 

to assign. Ordinarily, when an assignment is completed, the 

contract to assign is considered executed and the transaction is 

Ht~rged into the assignment. The parties must then look to the 

~xpress or implied provisions of the assignment rather than the 

contract to assign. E. Kuntz § 19.11, at 44-45. Sunset Oil Co~ 

involved an executed assignment. Thus, we read the holding of the 

case to apply only to actual assignments and subsequent 

agreements. This interpretation is the only one in accordance 

with well-settled law. See A. Casner §10.88, at 707, n.3 & 

~cccmpanying text. 

We conclude that the contract between Terra Resources and 

Hertz to assign the oil and gas lease in question contained an 

implied warranty of marketable title. Because Hertz did not have 

title in the lease at the time set for performance, we hold that 

Terra Resources was under no duty to accept the assignment. 

Finally, we address Hertz's argument that the district 

court's grant of summary judgment was inappropriate in this case. 

-9-

Appellate Case: 88-1765 Document: 01019297247 Date Filed: 01/10/1990 Page: 9 
Hertz argues that summary judgment was improper because the trial 

court should have resolved, as a factual matter, whether it can be 

inferred from the practice of the Colorado oil and gas industry 

that in "the absence of an express warranty of marketable title in 

a contract to purchase a federal oil and gas lease . . no such 

W6rranty is to be implied." We disagree. Hertz's argument 

presents no material issue since in the absence of an express 

warranty of marketable title in an agreement to assign an oil and 

gas lease, Colorado implies the warranty into the contract, as a 

matter of law. We conclude that no genuine issue of material fact 

exists, see Baker~ Penn Mut. Life Ins. Co., 788 F.2d 650, 653 

(lOth Cir. 1986), and that the grant of summary judgment was 

apprc-priate. 

v. 

We do not reach the other issues raised on appeal and express 

no cpinion as to their proper resolution. The judgment of the 

district court is AFFIRMED. 

-10-

Appellate Case: 88-1765 Document: 01019297247 Date Filed: 01/10/1990 Page: 10