Court Opinion

ID: 4035628
Source: CourtListenerOpinion
Date Created: 2016-09-21 16:01:12.744218+00
Date Added: 2024-06-11T07:45:45.424218
License: Public Domain

FILED
                                                                      United States Court of Appeals
                      UNITED STATES COURT OF APPEALS                          Tenth Circuit

                             FOR THE TENTH CIRCUIT                        September 21, 2016
                         _________________________________
                                                                          Elisabeth A. Shumaker
                                                                              Clerk of Court
U.S. ENERGY DEVELOPMENT
CORPORATION,

      Plaintiff - Appellee,

and                                                   Nos. 15-6188 & 15-6215
                                                    (D.C. No. 5:14-CV-01319-C)
OSAGE EXPLORATION &                                         (W.D. Okla.)
DEVELOPMENT, INC.,

      Plaintiff,

v.

STEPHENS ENERGY GROUP, LLC,

      Defendant - Appellant.
                      _________________________________

                             ORDER AND JUDGMENT*
                         _________________________________

Before MATHESON, McKAY, and O’BRIEN, Circuit Judges.
                 _________________________________

      Stephens Energy Group, LLC (Stephens), appeals from two judgments of the

district court. The first declared Osage Exploration and Development, Inc. (Osage)

the Operator of certain wells in a project area governed by the terms of Participation

*
      After examining the briefs and appellate record, this panel has determined
unanimously to honor the parties’ request for a decision on the briefs without oral
argument. See Fed. R. App. P. 34(f); 10th Cir. R. 34.1(G). The case is therefore
submitted without oral argument. This order and judgment is not binding precedent,
except under the doctrines of law of the case, res judicata, and collateral estoppel. It
may be cited, however, for its persuasive value consistent with Fed. R. App. P. 32.1
and 10th Cir. R. 32.1.
and Operating Agreements between the parties. A second, modified judgment

substituted U.S. Energy Development Corporation (USE) for Osage as Operator.

We have consolidated the appeals for purposes of this order and judgment. We

dismiss Stephens’ appeal from the first judgment (No. 15-6188) as moot, reverse the

second judgment (in No. 15-6215), and remand for further proceedings.

                                    BACKGROUND

         In April 2011, Osage, USE, and non-party Slawson Exploration Company, Inc.

(Slawson) entered into a Participation Agreement. USE and Slawson agreed to

participate with Osage in the leasing, drilling, and development of lands in which

Osage held a leasehold interest, known as the Nemaha Ridge Project Area (Project

Area).

         Under the Participation Agreement, Slawson acquired a 45 percent working

interest and was named Operator of all wells in the Project Area. USE acquired a

30 percent working interest, and Osage a 25 percent working interest.

         The Participation Agreement provided that the drilling of each well in the

Project Area would be governed by an Operating Agreement, and “[w]here there is a

conflict between the Operating Agreement and [the Participation] Agreement, [the

Participation Agreement] will control.” Aplt. App., Vol. II at 53. The Participation

Agreement also recognized the right of each party to “assign their rights, duties, and

obligations hereunder, so long as any assignment by a Party hereto is expressly made

subject to the terms and conditions herein contained.” Id. at 56.

                                            2
      The parties attached an unsigned, preprinted form of Operating Agreement as

an exhibit to the Participation Agreement. The preprinted form contained some

alterations but the parties did not actually prepare and sign individual Operating

Agreements for individual wells or units. The form Operating Agreement, attached

to the Participation Agreement, also named Slawson as Operator and included

provisions for the Operator’s resignation or removal and the selection of a successor

Operator. It provided that if the Operator “terminates its legal existence, no longer

owns an interest hereunder in the Contract Area, or is no longer capable of serving as

Operator, Operator shall be deemed to have resigned without any action by

Non-Operators, except the selection of a successor.” Id. at 64. Another provision,

modified from the language of the standard form, provided that a “transfer of

Operator’s interest to any single subsidiary, /or parent or successor corporation shall

not be the basis for removal of Operator.” Id.

      Upon resignation or removal of the Operator, the parties were required to

select a successor Operator. The successor would be “selected by the affirmative

vote of two (2) or more parties owning a majority interest” in the Contract Area. Id.

      In December 2013, the parties entered into a written and signed Partition

Agreement, in which they agreed to terminate the Participation Agreement and

Operating Agreement as to all lands within the Project Area, except for certain Joint

Venture (JV) lands. The parties agreed that the JV lands would “remain subject to

the Participation Agreement and [the Operating Agreement].” Id. at 117.

                                           3
         In July 2014, Slawson entered into a Purchase and Sale Agreement (PSA) with

Stephens. As part of the PSA, Slawson sold all of its rights, title, and interests in the

Project Area—excluding overriding royalty interests—to Stephens. Slawson agreed

to transfer possession and physical operation of these assets to Stephens at closing,

but did not guarantee that operations could be transferred to Stephens. The PSA

provided that “transfers of operations will be subject to all necessary regulatory and

third-party approvals” and that Slawson would “use its commercially reasonable

efforts to assist [Stephens] in becoming successor operator.” Id. at 182. Slawson

subsequently executed assignments of its working interest in the units and wells

within the JV lands to Stephens, and filed a form with the Oklahoma Corporation

Commission purporting to assign to Stephens the right to operate the units and wells

within the JV lands.

         Relying on the Operating Agreement, Osage then asserted that Slawson’s

assignment of its interest in the Project Area to Stephens should be deemed

Slawson’s resignation as Operator. Osage proposed that a new Operator be selected.

On November 5, 2014, USE and Osage voted to select Osage as successor Operator.

         Stephens, successor to Slawson’s interest under the PSA, refused to turn over

possession of the units, wells, and records within the JV lands as Osage requested.

Osage and USE then filed this suit in state court, seeking a declaratory judgment that

Osage is the successor Operator and enjoining Stephens from conducting operations

of any well or unit properly operated by Osage. Stephens removed the suit to federal

court.

                                            4
      The parties filed cross-motions for summary judgment. The district court

granted summary judgment in favor of Osage and USE, denied Stephens’ motion, and

entered a judgment providing injunctive relief to Osage and USE. It determined that

the Operating Agreement had been incorporated into the Participation Agreement and

that the intent of the parties must therefore be determined from the text of both

documents. The Operating Agreement set out the terms for changing the Operator

and the district court determined that those provisions must be given effect.

Although Stephens argued that the position of Operator was an assignable right as

contemplated by the Participation Agreement, the district court opined that nothing in

the Participation Agreement indicated the parties intended to treat the position of

Operator as an assignable right, and noted that Stephens cited no law to support its

assertion. The district court concluded that the contractual documents showed that

the parties intended the term “Operator” as a position of responsibility, not an

assignable right. Finally, it determined that “Osage was properly selected as the

successor Operator by a majority interest in the Project Area, as required under the

Operating Agreement.” Id., Vol. IV at 371. Stephens appealed from the judgment,

resulting in Appeal No. 15-6188.

      Three days after the district court entered its judgment, Osage resigned as

Operator. Stephens subsequently moved for a modification of the judgment. It noted

Osage’s resignation as Operator and that USE had been elected as the new Operator.

The district court entered a modified judgment declaring USE the Operator of the

wells in the Project Area, enjoining Stephens from conducting operations of any well

                                           5
or unit properly operated by USE, and requiring Stephens to turn over to USE all

records and data necessary for USE’s performance of its duties as Operator.

Stephens then filed an amended notice of appeal, resulting in Appeal No. 15-6215.

                                    DISCUSSION

      “We review the district court’s summary judgment decisions de novo, applying

the same standard as the district court.” Digital Ally, Inc. v. Z3 Tech., LLC, 754 F.3d
802, 810 (10th Cir. 2014). “Under this standard, ‘[t]he court shall grant summary

judgment if the movant shows that there is no genuine dispute as to any material

fact and the movant is entitled to judgment as a matter of law.’” Id. (quoting

Fed. R. Civ. P. 56(a)).

      1. Appeal No. 15-6188 is Moot

      In No. 15-6188, Stephens appeals from the district court’s judgment, which

declared Osage operator of the wells “which have been drilled and which are

hereafter drilled in the Project Area pursuant to the terms of the Participation and

Operating Agreements,” and enjoined Stephens “from conducting operations or

retaining records with respect to any unit or well in which Osage is the duly elected

Operator.” Aplt. App., Vol. V at 372. The district court’s amended judgment, now

in effect, substituted USE for Osage as Operator and enjoined Stephens from

conducting operations or retaining records pertaining to units or wells operated by

USE rather than Osage.

      “We have no subject-matter jurisdiction if a case is moot.” Rio Grande Silvery

Minnow v. Bureau of Reclamation, 601 F.3d 1096, 1109 (10th Cir. 2010). “The

                                           6
crucial question is whether granting a present determination of the issues offered will

have some effect in the real world.” Id. at 1110 (internal quotation marks omitted).

      In light of the amended judgment, the parties do not argue that the superseded

judgment in favor of Osage, which ordered only prospective declaratory and

injunctive relief, has any further real-world consequences. Neither Osage nor USE

has cross-appealed from the district court’s modified judgment to challenge the

substitution of USE for Osage. Moreover, as will be explained, Osage no longer

holds an interest in the subject-matter of this appeal. Appeal No. 15-6188 is moot

and will be dismissed.

      2. Appeal No. 15-6215 Should Not be Stayed Due to Osage’s Bankruptcy

      After Stephens filed its opening brief, Osage filed its Suggestion of

Bankruptcy in this court, noting that Osage had filed a voluntary petition for relief

under Chapter 11 on February 3, 2016, and arguing this action was subject to the

automatic stay under section 362(a) of the Bankruptcy Code.

      On May 2, 2016, Osage notified this court that it no longer owned a justiciable

interest in the subject matter of this appeal—presumably because a pending sale of

Osage’s assets that were impacted by this action, which had been approved by the

bankruptcy court, was completed. See Aplee. Br. at 28 n.2 (noting pending sale of

Osage’s assets). Thus, Osage is no longer a real party in interest in this appeal and

its bankruptcy need not further delay our disposition of the case.

      Although Osage and USE suggested in their brief that it would be necessary

and appropriate to substitute the purchaser of Osage’s assets for Osage as a party

                                           7
once the sale was complete, no party has confirmed the identity of the purchaser of

Osage’s assets, no party has moved to substitute the purchaser as a party, see

Fed. R. App. P. 43(b), and no one has entered an appearance on behalf of the

purchaser. In light of the district court’s substitution of USE for Osage as Operator,

and USE’s continuing standing to assert its status as Operator, there appears to be no

further reason to stay this appeal.

      3. Stephens Did Not Waive its Right to Appeal

      The appellees argue that by calling for an election after Osage resigned as

Operator, Stephens conceded that the terms of the Operating Agreement calling for

an election upon the Operator’s resignation governed this dispute. They assert that

by its call for an election, Stephens waived its argument that the resignation and

election provisions did not control succession of the Operator after Slawson’s sale of

its interest to Stephens. This argument lacks merit.

      Stephens called for an election of a successor Operator because it believed

Osage was insolvent and unqualified to serve as Operator. Under the district court’s

injunctive order then in effect, Stephens could not have reasonably responded to

Osage’s situation by stubbornly insisting on its right to be reinstated as successor

Operator based on the assignment from Slawson. The use of an election to select a

successor Operator to Osage, which had unequivocally resigned as Operator, was a

very different set of circumstances than those that led to the current dispute on appeal

involving a purported assignment of the Operator position in connection with the sale

                                           8
of the Operator’s interest in the Project Area. Stephens did not waive its right to

appeal.

      4. Successor Operator Under the Parties’ Agreement

      The Participation Agreement provides that it will be governed by and

construed in accordance with Oklahoma law. Aplt. App., Vol. II at 56. “In

Oklahoma, as in most jurisdictions, the paramount objective of contract interpretation

is to effectuate the intent of the parties as expressed by the terms of the contract.”

Walker v. Builddirect.Com Techs., Inc., 349 P.3d 549, 552 (Okla. 2015). “Thus,

unambiguous, clear, and consistent contract terms will be enforced as written to carry

out the expressed intention of the parties.” Id.

      The district court determined that the parties’ agreement was unambiguous,

and the parties agree. The district court noted that the Operating Agreement had

been incorporated into the Participation Agreement and found that the intent of the

parties must therefore be determined from the text of both documents. The Operating

Agreement set out the terms for changing the Operator and the district court

determined that those provisions must be given effect. It reasoned as follows:

      Viewing the agreement as a whole and “each clause helping to interpret
      the others,” it is clear that the Participation Agreement and the
      Operating Agreement designate Slawson as Operator and that the
      Operating Agreement sets out the guiding terms for the changes in that
      position in the future. Defendant’s interpretation of the contract would
      render the operator resignation and selection clauses in the Operating
      Agreement meaningless. Such construction is to be avoided pursuant to
      15 Okla. Stat. § 157. Furthermore, Defendant’s argument is dependent
      on a determination that the position of Operator is an assignable right
      contemplated under the Participation Agreement. However, nothing in
      the Participation Agreement indicates an intent of the signing parties to

                                            9
      treat the position of Operator as an assignable right, and Defendant has
      provided no law supporting this assertion. Plaintiffs assert that
      Operator is a position of responsibility and not a contractual and
      assignable right. To support this argument, Plaintiffs cite 52 Okla. Stat.
      § 86.1(h), which states that “[t]he term ‘operator’ shall mean any
      producer of oil or gas who has drilled a well or wells into a common
      source of supply and is engaged in operating such well or wells for the
      purpose of producing oil or gas therefrom.” Under Oklahoma law,
      custom and usage should be considered when interpreting a contract.
      Applying the standard industry definition provided above to the term
      “Operator” in the Participation Agreement and the Operating
      Agreement, the Court finds that the parties intended the term “Operator”
      to connote a position of responsibility and not an assignable right.
      Based on the reasoning above, the Court finds that no conflict between
      the assignment clause and the operator resignation clause exists.
Aplt. App., Vol. IV at 369-70 (citations, brackets, and internal quotation marks

omitted).

               A. Plain Language of the Agreement

      The district court thus rejected Stephens’ contention that the Operator position

could be freely assigned for two reasons, neither of which can withstand scrutiny.

First, the district court found that “nothing in the Participation Agreement indicates

an intent of the signing parties to treat the position of Operator as an assignable

right,” reasoning that Stephens “has provided no law supporting this assertion.”

Id. at 369. But this analysis improperly shifted the burden on the assignability issue

to Stephens.

      Oklahoma law presumes that contractual rights and duties are assignable,

unless the parties provide otherwise in their agreement, or unless the duty is so

specialized that the identity of the performing party is material to the contract.

See, e.g., Beattie v. State ex rel. Grand River Dam Auth., 41 P.3d 377, 381

                                           10
(Okla. 2002) (“Oklahoma has long held that rights under a contract are presumed to

be assignable, unless the parties expressly provide otherwise. . . . Oklahoma case law

has also recognized that certain rights and duties are too personal in character to

permit them to be assigned.”). Appellees fail to show that either exception applies

here. Stephens cited unambiguous language in the Participation Agreement in

support of its claim that the Operator right or duty was assignable:

       Subject to the other provisions of this Agreement, this Agreement and
       all provisions hereof shall inure to the benefit of and be binding upon
       not only the Parties, but their respective heirs, successors, and assigns.
       The Parties may assign their rights, duties, and obligations hereunder,
       so long as any assignment by a Party hereto is expressly made subject
       to the terms and conditions herein contained.
Aplt. App., Vol. II at 56 (emphasis added).

       Appellees draw our attention to language in the Operating Agreement’s

resignation clause, calling for election of a new Operator when the Operator no

longer has an interest in the Project Area. Id. at 64.1 But to the extent that language

could be read to overcome the presumption of assignability by precluding Slawson

from assigning the right to serve as Operator as part of a sale of its interest in the

Project Area, it conflicts with the language in the Participation Agreement making

the parties’ rights, duties and obligations—not excluding the right to serve as

1
       Appellees also cite a provision of the Operating Agreement that specifically
struck language permitting transfer of the Operator’s interest to a successor
corporation without removal of the Operator. See Aplee. Br. at 21 (citing Aplt. App.,
Vol. II at 64). To the extent this language precludes free assignment of the right to
serve as Operator, it is further evidence of the conflict between the Participation
Agreement and the Operating Agreement, which the parties agreed would be resolved
in favor of the provisions of the Participation Agreement.

                                            11
Operator—freely assignable. Although the Participation Agreement and the

Operating Agreement must be considered together as parts of a single transaction,

see Okla. Stat. tit. 15, § 158, the parties unambiguously agreed that where a conflict

existed between the two writings constituting their agreement, the language in the

Participation Agreement would govern.2 Thus, the record fails to support the district

court’s conclusion that the plain language of the agreement made Slawson’s right to

serve as Operator unassignable.

             B. “Custom and Usage” in the Oil and Gas Industry

      The district court also cited “custom and usage” in the oil and gas industry,

which purportedly would treat the position of Operator as a “position of

responsibility” rather than an assignable right. Aplt. App., Vol. IV at 369. Leaving

aside the fact that the parties’ agreement permitted them to “assign their rights,

duties, and obligations hereunder,” id. at 56 (emphasis added)—language which

appears to include the assignment of a position of responsibility as well as a right—

we do not find the district court’s reasoning concerning custom and usage persuasive.

      Oklahoma law provides that “[t]he words of a contract are to be understood in

their ordinary and popular sense, rather than according to their strict legal meaning,

unless used by the parties in a technical sense, or unless a special meaning is given to

2
       Appellees note that any assignment of Slawson’s interest was “expressly made
subject to the terms and conditions herein contained,” Aplt. App., Vol. II at 56, and
that Slawson’s right to serve as Operator was expressly limited by the terms of their
agreement. One of these terms and conditions, of course, was that in the event of a
conflict between the Participation Agreement and the Operating Agreement, the
Participation Agreement would govern.
                                           12
them by usage, in which case the latter must be followed.” Okla. Stat. tit. 15, § 160

(emphasis added). It also provides that “[a] contract is to be interpreted according to

the law and usage of the place where it is to be performed, or, if it does not indicate a

place of performance, according to the law and usage of the place where it is made.”

Id. § 162 (emphasis added). The question is whether usage in the oil and gas industry

gives the term “Operator” a special meaning that excludes it from the general

presumption that contractual rights and duties are freely assignable. Such a usage has

not been established here.

      As evidence of industry “custom and usage,” the district court cited

Okla. Stat. tit. 52, § 86.1(h), a provision of Oklahoma’s Oil and Gas Conservation

Act defining the term “Operator.” That provision (currently renumbered as

§ 86.1(8)), reads: “‘Operator’ means any producer of oil or gas who has drilled a

well or wells into a common source of supply and is engaged in operating the well or

wells for the purpose of producing oil or gas therefrom[.]” The district court found

that this language provided evidence that an “Operator” position is not an assignable

right. But we fail to discern such a special meaning in the quoted language. To

define an Operator with reference to its duties or functions does not preclude the

assignment of the right or responsibility to serve in that capacity.

      Moreover, Oklahoma Supreme Court precedent specifically precludes use of

the definition in § 86.1(h) to establish industry custom or usage for purposes of

construing a private contract. In Pitco Production Co. v. Chaparral Energy, Inc.,

63 P.3d 541 (Okla. 2003), the Oklahoma Supreme Court discussed whether it could

                                           13
consider oil and gas industry usage to determine whether the term “Operator” used in

the parties’ operating agreement permitted the existence of multiple operators within

a single unit. The court determined for a number of reasons that it should not

consider industry usage in resolving this question.

      First—as in this case—the terms and provisions of the parties’ agreement were

unambiguous. Second, the term “Operator” carried no technical significance in the

oil and gas industry, and therefore required no evidence of industry usage to clarify

the term. The court concluded that “[b]ecause we hold the [Joint Operating

Agreement’s] terms plain and unambiguous, we cannot consider Pitco’s adduced

proof that it is common industry practice to allow more than one operator per unit

area.” Pitco, 63 P.3d at 547.

      Most significantly, in a footnote to its decision, the Oklahoma Supreme Court

cited the same statutory definition of “Operator” that the district court cited in this

case, and opined that “[t]he Oil and Gas Conservation Act, 52 Ohio St. 1991 §§ 86.1

et seq., does not affect the controversy before us because it applies to the regulatory

power of the Corporation Commission, and the dispute here is a private-law matter.

This general description of an ‘operator’ neither provides nor requires specific,

technical knowledge to further illuminate the meaning of the term.” Pitco, 63 P.3d

at 546 n.24 (emphasis added). The same reasoning precludes the district court’s

reliance on the “Operator” definition in § 86.1(8) in this case.

      We can easily distinguish the other Oklahoma cases appellees cite purporting

to show the status of Operator is not a vested and assignable right. In both Oxley v.

                                            14
General Atlantic Resources, Inc., 936 P.2d 943, 944 (Okla. 1997) and Duncan Oil

Properties, Inc. v. Vastar Resources, Inc., 16 P.3d 465, 467 (Okla. Ct. App. 2000),

the parties’ operating agreements unambiguously provided for an election for a new

Operator if the existing Operator sold his interest in the unit. That is not the case

here. Crest Resources & Exploration Corp. v. Corporation Commission, 617 P.2d
215 (Okla. 1980), is also not on point because that case concerned the Oklahoma

Corporation Commission’s use of police power in a forced pooling situation. See id.

at 217-18.

             C. Meaningfulness of Resignation and Selection Clauses

      Oklahoma law provides that a contract must be construed “so as to give effect

to every part, if reasonably practicable.” Okla. Stat. tit. 15, § 157. The district court

stated that Stephens’ interpretation of the parties’ agreement, which permitted

Slawson to assign its contractual right to serve as Operator to Stephens, would

“render the operator resignation and selection clauses in the Operating Agreement

meaningless.” Aplt. App., Vol. IV at 369. In their appellate brief, the appellees

argue strenuously that Stephens’ interpretation essentially nullifies these clauses.

See Aplee. Br. at 10; see also id. at 17 (arguing Stephens’ interpretation requires that

Slawson’s successors must be appointed Operator in perpetuity, and will remain as

Operators “forever without any mechanism to remove or replace the Operator even if

the Operator were to declare bankruptcy, sell its working interests, or commit bad

acts.”); id. at 21 (“If Stephens’ argument is correct, Non-Operators would be

                                           15
prevented from ever calling for an election.”). But these arguments misread the

parties’ agreement.

      Contrary to appellees’ contentions, giving effect to the parties’ agreement that

rights and duties under the Participation Agreement were freely assignable does not

render meaningless the provisions permitting removal of an Operator for good cause,

deeming a bankrupt or insolvent Operator to have resigned, or permitting an Operator

to voluntarily resign by giving written notice. Appellees fail to show that Stephens’

claim that Slawson possessed an assignable “right” fails merely because the

continued exercise of that right was conditioned on financial stability or good

conduct, or because Slawson could choose to forego the right by resigning. Under

the circumstances presented here, Stephens’ interpretation concerning free

assignability affects only the situation where a conflict arises because an existing

Operator sells its rights and therefore no longer owns an interest in the Contract Area.

Adopting Stephens’ interpretation does not make even the clause deeming an

Operator to have resigned when it no longer holds an interest, meaningless.

Notwithstanding the parties’ intent to permit free assignability of the Operator

position, the clause could still permit a deemed resignation, followed by an election.

For example there could be a post-resignation election in circumstances where an

Operator lost its interest in the Project Area without purporting to transfer the right to

serve as Operator to a qualified successor.

                                           16
                               CONCLUSION

      Appeal No. 15-6188 is dismissed as moot. In Appeal No. 15-6215, we reverse

the judgment of the district court and remand for further proceedings.

                                           Entered for the Court

                                           Monroe G. McKay
                                           Circuit Judge

                                          17