Opinion ID: 2586675
Heading Depth: 3
Heading Rank: 2

Heading: Were the plaintiffs entitled to summary judgment on the question of whether the NPI created in the Unit NPI Contract survived termination of the Pinedale Unit?

Text: [¶ 21] The issue of whether the NPI created in the Unit NPI Contract was conditioned upon the continuation of the Pinedale Unit is pivotal. The defendants claim that the NPI terminated with the Pinedale Unit and the district court erred by interpreting the NPI as being a continued burden on the leases listed in the Unit NPI Contract. The plaintiffs contend that the district court properly concluded the NPI continued to encumber the leases after termination of the Pinedale Unit. [¶ 22] Resolution of this issue requires interpretation of contracts. Our primary focus in contract interpretation is the parties' intent. Carlson v. Flocchini Invs., 2005 WY 19, ¶ 15, 106 P.3d 847, 854 (Wyo. 2005). The language of the parties expressed in their contract must be given effect in accordance with the meaning which that language would convey to reasonable persons at the time and place of its use. Moncrief v. Louisiana Land Exploration Co., 861 P.2d 516, 524 (Wyo.1993). We employ common sense in interpreting contracts and ascribe the words with a rational and reasonable intent. Comet, ¶ 6, 185 P.3d at 1261; Caballo Coal Co. v. Fidelity Expl. & Prod. Co., 2004 WY 6, ¶ 11, 84 P.3d 311, 314 (Wyo.2004); Wadi Petroleum, Inc. v. Ultra Resources, Inc., 2003 WY 41, ¶¶ 10-11, 65 P.3d 703, 708 (Wyo.2003). Courts should consider the circumstances surrounding execution of the agreement to determine the parties' intention, even in reviewing unambiguous contracts. Mullinnix LLC v. HKB Royalty Trust, 2006 WY 14, ¶ 6, 126 P.3d 909, 915 (Wyo.2006); Caballo, ¶ 11, 84 P.3d at 314-15. [¶ 23] If we determine that the contract conveys a double or obscure meaning, we must conclude that it is ambiguous. Wolter, 979 P.2d at 951. The determination of whether a contract is ambiguous is a matter of law for the court to decide, regardless of whether or not the parties agree as to the contract's meaning. Id. Parol evidence of the parties' intent regarding what particular terms in their agreement mean is considered only when the contract is ambiguous. Wells Fargo Bank Wyo., N.A. v. Hodder, 2006 WY 128, ¶ 31, 144 P.3d 401, 412 (Wyo.2006). Because we use an objective approach to interpret contracts, evidence of a party's subjective intent is not admissible, regardless of whether the court determines a contract is ambiguous or clear. Omohundro v. Sullivan, 2009 WY 38, ¶ 24, 202 P.3d 1077, 1084-85 (Wyo.2009). [¶ 24] The defendants do not argue that the relevant contractual language is ambiguous or that genuine issues of material fact exist which preclude summary judgment. They argue, instead, that the district court erred as a matter of law in interpreting the contract language. [¶ 25] Although there is a dispute between the parties over which documents are properly considered in determining the meaning of the NPI, everyone agrees that the document which actually created the NPI was the Unit NPI Contract. Ferguson v. Coronado Oil Co., 884 P.2d 971, 976 (Wyo. 1994) established that the nature of a net profits interest is determined from the instrument creating the interest. We will, therefore, start with the Unit NPI Contract; however, before we parse the language of the agreement, it is helpful to understand the concepts of leasing and unitization in oil and gas exploration and production. [¶ 26] The majority of the mineral estate First Parties leased and committed to the Pinedale Unit was owned by the federal government. The primary term of most of the leases was five years. Prior to unitization, a lease could only be held after the primary term if there was hydrocarbon production on the leasehold. Formation of an oil and gas unit is a means of holding a number of leases without drilling and obtaining production on each lease. [¶ 27] The Pinedale Unit was a federal oil and gas exploration unit, governed by the Department of the Interior. After unitization, the unit operator has a certain period of time to explore for oil and gas, and, if production is obtained, a participating area is designated and each lease is considered held by production. Land located within the unit but outside a participating area does not participate in the production in the participating area, and, in accordance with the unit agreement, the boundaries of the unit typically contract to include only the acreage of participating areas, thus eliminating from the unit non-producing acreage. This has the effect of consolidating the producing, or participating areas, and releasing the leases that are not producing. In order to encourage development of the leases that are eliminated from a unit by contraction, federal leases are automatically extended by two years after such elimination. See 30 U.S.C. § 226(m) (1952). The state leases included in the Pinedale Unit apparently did not include a provision for an automatic two year extension after unit contraction. [¶ 28] Although the date for automatic contraction of the Pinedale Unit was extended at least twice, the unit finally contracted in 1977 reducing it from over 90,000 acres to just over 14,000 acres. The contraction triggered the automatic two year extension for the eliminated federal leases. When the Pinedale Unit was terminated in 1981, some of the lands that were included in the Pinedale Unit folded into the newly created New Fork and Mesa Units. The New Fork Unit terminated in 2001, but the Mesa Unit is still in operation. All in all, twenty-two of the original sixty-two leases included in the Unit NPI are still held by production, including two of the original Novi leases. [¶ 29] Keeping in mind the purposes of oil and gas leasing and unitization, we turn to the Unit NPI Contract. First, we note there is no express language in the contract which states that the NPI would terminate if the leases were no longer included in the Pinedale Unit. Nevertheless, the defendants argue the Unit NPI Contract language indicates Novi and First Parties intended that the NPI would terminate with the Pinedale Unit. [¶ 30] There are several provisions that are relevant to the determination of whether the parties intended that the NPI was dependent on the continued existence of the Pinedale Unit. In Section 1, the Net Profits Interest provision, First Parties agreed to pay to Novi 5% of the net profits resulting from operations for oil and gas by First Parties, or any of them, under those certain leases committed to that certain Unit Agreement for the Development and Operation of the Pinedale Unit Area and shown on Exhibit A attached hereto and made a part hereof, such leases being herein referred to as said leases. [¶ 31] The separate lease descriptions, referencing the sixty-two leases [7] in the Pinedale Unit which were subject to the Unit NPI Contract, were attached as Exhibit A to the Unit NPI Contract. The defendants emphasize that the Unit NPI Contract defines said leases as leases that are committed to the Pinedale Unit Agreement and shown on Exhibit A. They claim, therefore, that the contract created two conditions that must be met before the NPI was valid: the leases be committed to the Pinedale Unit and shown on Exhibit A. [¶ 32] The defendants argue that Novi and First Parties intended that the term committed to the Pinedale Unit be interpreted in accordance with its particular usage in the oil and gas trade. They claim that, because the Pinedale Unit Agreement is specifically referenced in the Unit NPI Contract, it must be considered in interpreting the Unit NPI Contract. Thus, according to the defendants, because the Pinedale Unit terminated years ago before any profits were realized, the leases were no longer committed to the unit and the NPI no longer exists. [¶ 33] We agree that Novi's and First Parties' use of the term committed to the unit has special meaning in the context of unitization in general and the Pinedale Unit specifically, and the Unit Agreement is appropriate evidence in interpreting the Unit NPI Contract. Formation of the Pinedale Unit was an important part of the parties' plan in negotiating for assignment of the Novi leases and the resulting NPI. Unitization was a means for both Novi and the First Parties to obtain more time for development of the leases, and the Unit NPI Contract would not have been executed had the unit not been approved. Obviously, the parties intended that the leases covered by the Unit NPI Agreement initially be committed to the Pinedale Unit under the terms of the Pinedale Unit Agreement approved by the federal government. That does not, however, answer the question of whether the parties intended that the leases be burdened by the NPI only so long as the unit existed. [¶ 34] The Unit NPI Contract does not provide that the NPI was tied only to unit production or that the continued existence of the Pinedale Unit was required for the NPI to remain an obligation on the leases. We do not read the clear language of the net profit provision as creating two separate conditions for paymentthe leases had to continue to be committed to the Pinedale Unit and also shown on Exhibit A. Instead, we agree with the district court and conclude that the phrase simply identifies the leases originally included in the Unit NPI Contract. Two of the leases assigned by Novi actually contained both lands to be included in the Pinedale Unit and lands outside of the unit and those leases were included on both Exhibit A and Exhibit A-1. Nothing in the Unit NPI Contract indicates the parties intended that, if the unit terminated, the NPI would cease to burden the portions of those leases originally within the unit, but continue to burden the portions outside of the unit. [¶ 35] Considering the entire transaction, which involved Novi's assignment of leases both in and out of the Pinedale Unit, it makes sense that the parties would refer to the leases committed to the unit in the Unit NPI Contract. It does not, however, mean that the continuance of the unit was required in order for the NPI to remain a burden on the leases. [¶ 36] Other provisions of the Unit NPI Contract confirm this reading of the Net Profits provision. Initially, we note that throughout the Unit NPI Contract, the parties' obligations and benefits are in reference to the leases rather than to the unit. In the Computation provision of the Unit NPI Contract, net profits were to be computed on the basis of all unit operations applicable to and allocable to the leases, not to all of the operations under the Pinedale Unit. The defendants assert that, since unit operations were referenced in computing the NPI, the parties must have intended that the NPI would terminate if the Pinedale Unit no longer existed. It is true that the Unit NPI Contract contemplated that unit operations pertaining to the leases would have to be considered in order to establish expenses and revenues and calculate the NPI. However, the fact that the unit no longer exists does not prevent computation of the NPI. The consolidated net profits applicable and allocable to the NPI leases can still be calculated whether or not any of the properties are unitized. [¶ 37] The Unit NPI Contract limits the definition of unit operations for the purposes of the NPI as all operations of any of First Parties under said leases. This is significant because the unit could, and did, contain leases other than those subject to the NPI. The Unit NPI Contract defined deductible expenses as those which are properly chargeable against the leasehold interests. This provision acknowledged that the unit existed and would incur expenses and revenues but specifically required that the NPI be calculated using only the revenues and expenses pertaining to the leases covered under the Unit NPI Contract. If First Parties and Novi had intended that the NPI be conditioned on the leases' continued inclusion in the Pinedale Unit, the NPI would have been calculated under the provisions of the Pinedale Unit Agreement, using the entire unit, rather than the Unit NPI Contract which pertained to some, but not all, of the leases included in the unit. [¶ 38] Moreover, under the Logs and Information Relating to Production and Exploratory Work provision of the Unit NPI Contract, Novi was entitled to information, not on the entire unit, but whenever the expense of any such exploratory work is chargeable as an expense in computing net profits.... In other words, Novi had the right to access information pertaining to the leases listed in Exhibit A to the Unit NPI Contract, but not to all leases within the unit. That provision reinforces the parties' intent that the NPI obligation is not dependent on the leases' continued inclusion in the Pinedale Unit. [¶ 39] The only provision of the Unit NPI Contract that speaks to termination of the NPI is the Surrender section. It is very significant that the surrender provision does not provide for termination of the NPI upon removal of the leases from the Pinedale Unit. Although the First Parties were allowed to surrender leases which could then result in termination of the NPI, the contract specifically protected Novi's interest in several ways. As to ... said leases as were acquired by First Parties from Novi, if First Parties desire at any time to surrender their ... interest in such leases, ... First Parties shall first offer ... to transfer and assign the same to Novi. Upon acceptance of such assignment, First Parties shall be relieved of any and all responsibility or liability hereunder with respect to the interest assigned.... The provision continues: Notwithstanding any surrender, release or assignment of interest under the provisions of this section, Novi's net profits interest in operations relating to lands the leasehold interest in which is not so surrendered, released or assigned shall remain a 5% net profits interest. By providing that in the event of surrender of any of the Exhibit A leases, the NPI would continue on operations relating to lands in which the leasehold interest is not so surrendered, this provision clearly attaches the NPI to the leases rather than to continuation in the unit. [¶ 40] Another part of the Surrender provision provides: In the event any lease is surrendered or released pursuant to the provisions of this section and thereafter First Parties, or any of them, obtain a lease covering lands the leasehold interest in which has been so surrendered, the interest so acquired or obtained by First Parties, or any of them, shall be subject to the provisions hereof, if such new lease is obtained within five (5) years from the date of any such surrender or release.... This is commonly known as an anti-wash provision. Such provisions prevent a lessee from washing an encumbrance from a lease by acquiring it subject to an encumbrance tied to the lease, dropping the lease and then re-leasing the same property without the encumbrance. The Surrender provision of the Unit NPI Contract indicates a clear intent that Novi's interest be protected in the face of the First Parties' right to unilaterally surrender leases which would, in effect, occur if the unit was contracted and/or terminated. The application of the surrender and anti-wash provisions is discussed in more detail in Section III.D., below. That discussion about the replacement lease demonstrates very clearly that continuation of any particular lease in the unit was a voluntary and unilateral decision belonging to the First Parties and from which Novi intended its interest to be protected. [¶ 41] These provisions reflect the reality that production units and their boundaries are temporary, whereas lease assignments are forever, and the operator, not the holder of an NPI, has control over the duration and configuration of the unit. Under the terms of the Pinedale Unit Agreement, the working interest owners could terminate the unit if 75% of them (on an acreage basis) agreed to do so; Novi had no say in that decision. If the net profits interest were contingent upon the continued existence of the Pinedale Unit, the First Parties could have terminated the unit at any time simply to wash the net profit interest. That clearly would have been contrary to the intent of the Unit NPI Contract and Novi's purpose in entering into the assignment/net profit transaction. The surrender provision would have been written much differently if the parties intended the NPI to terminate if the leases were no longer part of the Pinedale Unit. [¶ 42] Considering that unitization, contraction, lease extension and reunitization are well known and valuable tools in retaining leaseholds and encouraging production, it is unreasonable to conclude that Novi would have intended that it could lose its valuable lease rights and the NPI simply because the First Parties decided to contract or terminate the Pinedale Unit. Given that the Unit NPI Contract said nothing about termination of the Pinedale Unit leading to termination of the NPI, ascribing such intent to Novi would violate our rule against reading language into a contract and would be counter to assigning a rational and reasonable intent to contractual language. Wadi Petroleum, ¶¶ 10-11, 65 P.3d at 708. The logical view of the Unit NPI Contract is that Novi permanently gave up its leases in exchange for a permanent 5% NPI, not a temporary one. Thus, we agree with the district court's conclusion that the clear intention of the parties to the Unit NPI Contract was to encumber the leases identified in Exhibit A, regardless of whether the Pinedale Unit continued. [¶ 43] The parties disagree over what extrinsic evidence of the circumstances surrounding the Unit NPI Contract should be considered in interpreting it. This Court has, for many years, stated that courts should consider the circumstances surrounding execution of an agreement, i.e., facts showing the parties' relationship, the subject matter of the contract, and the parties' apparent purpose in making the contract, to determine the parties' intention, even when reviewing unambiguous contracts. Mullinnix, ¶ 6, 126 P.3d at 915; Moncrief, 861 P.2d at 524; Balch v. Arnold, 9 Wyo. 17, 29, 59 P. 434, 436 (1899). In Boley v. Greenough, 2001 WY 47, ¶¶ 14-22, 22 P.3d 854, 858-60 (Wyo. 2001), we recognized the importance of interpreting contracts at the time and place of execution because the term overriding royalty used in a conveyance thirty years before had a different meaning than it did at the time of interpretation. Parol evidence, which is distinguishable from extrinsic evidence, of the parties' intent is not, however, admissible if the contract is unambiguous. [8] Wells Fargo, ¶ 31, 144 P.3d at 412. [¶ 44] Although the defendants dispute the appropriateness of considering some of the other agreements, they do argue the Area NPI Contract is a relevant fact or circumstance in this dispute without explanation of how that is consistent with their position that only the language of the Unit NPI Contract (and the associated unit agreement) can be considered to determine the parties' intent. Novi and First Parties entered into the Area NPI Contract, which had the same date as the Unit NPI Contract, to cover the portions of the Novi leases that were not to be included in the Pinedale Unit Agreement. That agreement clearly ties the NPI to the leases and makes no reference to the Pinedale Unit. The defendants argue that, considering the Area NPI Contract, the parties obviously knew how to draft a lease based NPI agreement and, because the Unit NPI Contract refers to the unit in terms of calculating the NPI and identification of the leases covered under the agreement, they must have intended that the unit NPI remain only as long as the Pinedale Unit continued to exist. [¶ 45] We agree with the district court and conclude just the oppositethe Area NPI Contract provides support for the district court's interpretation of the Unit NPI Contract. The Area NPI Contract is nearly identical to the Unit NPI Contract, except there are no references to the unit and no allocation of unit revenues and expenses to particular leases in the former. That difference recognizes the reality that calculation of the NPI while the Exhibit A leases were part of the Pinedale Unit required consideration of unit operations. It would, however, be illogical to conclude that Novi and the First Parties intended that the NPI would attach permanently to the portion of the leases outside the unit but attach to the portions of the leases in the unit only so long as the First Parties unilaterally decided not to contract or terminate the unit and the defendants provide no explanation why the parties would have intended such a result. We conclude, therefore, the Area NPI Contract was properly considered as a relevant circumstance surrounding execution of the Unit NPI Contract and supports the district court's interpretation of such. [¶ 46] The defendants then argue that the district court erroneously considered the Assignment Agreement and Supplemental Accounting Agreement in interpreting the Unit NPI Contract. They claim that, since the Unit NPI Contract was unambiguous and did not expressly incorporate the Assignment Agreement or Supplemental Accounting Agreement, the district court should not have considered the other documents and they were, in fact, inadmissible parol evidence. The defendants also suggest, although with little relevant discussion, that the Assignment Agreement should not be considered because its terms provided that it would no longer be effective after the leases had been assigned and the net profits contracts had been executed. [¶ 47] We do not need to resolve the issue of whether the Assignment Agreement and Supplemental Accounting Agreement were properly considered by the district court because they simply provide further support for the plain language of the Unit NPI Contract. The Assignment Agreement provided a roadmap of the ensuing transactions, which culminated in the Unit NPI Contract, Area NPI Contract and lease assignments. It is significant that the agreement did not differentiate between the NPI that would be created in the Unit NPI Contract and the NPI that would be created in the Area NPI Contract. The Supplemental Accounting Agreement provides for accounting between First Parties on a lease by lease basis. [¶ 48] With or without consideration of the two disputed agreements, we would arrive at the same result as the district court did-the Unit NPI Contract was clear and unambiguous and the NPI continued to encumber the relevant leases after contraction and/or termination of the Pinedale Unit. [9] The district court properly granted summary judgment in the plaintiffs' favor on this issue.