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Greggory G. and Tommie S. Tank v. Burlington Resources Oil and Gas

June 28, 2011

GREGGORY G. AND TOMMIE S. TANK, PLAINTIFFS,
v.
BURLINGTON RESOURCES OIL AND GAS, COMPANY, LP, AND MUREX PETROLEUM CORPORATION, DEFENDANTS.



The opinion of the court was delivered by: Charles S. Miller, Jr. United States Magistrate Judge

ORDER DENYING MOTIONS FOR INTERIM RELIEF

Before the court are plaintiffs' Motions for Preliminary Injunction and Declaratory Judgment. For the reasons set forth below, the motions are denied, but the court will consider expediting the final resolution of this case.

I. BACKGROUND

Plaintiffs own mineral interests in the NW1/4 of Section 35, Township 151 North, Range 96 West, in McKenzie County, North Dakota ("Tract 1"), which they have leased to Murex Petroleum Corporation ("Murex") (the "Murex lease").*fn1 (Doc. No. 18-1). Plaintiff Greggory Tank also has a mineral interest in 16.667 acres of land located in the N1/2 SE 1/4 & E1/2 SW1/4 of Section 34 ("Tract 2") (Doc. Nos 18 & 26-1), which is unleased.

Plaintiffs commenced this action in state court in November 2010, and it was removed to this court in December 2010. In their amended complaint, plaintiffs seek monetary and equitable relief for nonpayment of royalties on oil and gas production attributable to their Tract 1 and Tract 2 mineral interests, including cancellation of the Murex lease.

On February 1, 2011, plaintiffs filed the present motions for interim relief. In the motions, plaintiffs seek a preliminary injunction requiring the defendants to pay the royalties due on the production attributable to the two tracts, along with a declaration that their receipt of the royalty with respect to Tract 1 would not constitute a waiver of their claim for cancellation of the Murex lease. Since plaintiffs' claims with respect to Tracts 1 and 2 differ, the requests for temporary relief will be addressed separately.

II. GOVERNING LAW

The burden of establishing the necessity of a preliminary injunction is on the moving party. Baker Elec. Co-op., Inc. v. Chaske, 28 F.3d 1466, 1472 (8th Cir. 1994); Modern Computer Sys., Inc. v. Modern Banking Sys., Inc., 871 F.2d 734, 737 (8th Cir. 1989). In this case, since plaintiffs are seeking affirmative relief, the burden is substantially greater than if they sought a prohibitory injunction. See Ferry Morse Seed Co. v. Food Corn, Inc., 729 F.2d 589, 593 (8th Cir. 1994).

In determining whether a preliminary injunction should be issued, the court is required to consider the factors set forth in Dataphase Sys., Inc. v. C L Sys., Inc., 640 F.2d 109 (8th Cir. 1981) (en banc). The four Dataphase factors are:

(1) the threat of irreparable harm to the movant; (2) the state of balance between this harm and the injury that granting the injunction will inflict on other parties litigant; (3) the probability that movant will succeed on the merits; and (4) the public interest.

Id. at 114; see Rogers Group, Inc. v. City of Fayetteville, Ark., 629 F.3d 784, 787 (8th Cir. 2010).

Two North Dakota statutes are particularly relevant in this case. The first is N.D.C.C. § 47-16-39.1, which provides mineral owners with statutory remedies of 18 % interest and attorney's fees when an "operator" fails to make timely payment of oil and gas royalties, as well as the possibility of lease cancellation when the equities require it.*fn2

The second is North Dakota's "forced pooling" statute codified at N.D.C.C. § 38-08-08. This statute governs the payment of royalty on unleased acreage within a spacing unit that is subject to a pooling order. In this case, it governs the payment of royalty due on Tract 2. It would also govern the amount payable on Tract 1 if the court cancels the Murex lease.*fn3

III. THE REQUEST FOR PRELIMINARY RELIEF - TRACT 1

A. Additional background Tract 1

Plaintiffs leased their mineral interests in Tract 1 to Murex in March 2003. The lease was filed for record with the McKenzie County Register of Deeds on July 2, 2003. Pursuant to the lease, Murex obtained the "working interest" to the oil and gas in Tract 1 and plaintiffs retained a 3/16 (18.75%) royalty interest. (Doc. Nos. 18, 18-1, & 19).

Tract 1 is the subject of a pooling order issued by the North Dakota Industrial Commission for the Lassen #41-26H well ("Lassen Well"). Defendant Burlington Resources Oil and Gas Company, LLC ("Burlington") is the well operator.*fn4

Burlington acknowledges that the Lassen Well was completed on October 31, 2009, and that oil and gas has been marketed from the well since November 2009. (Doc. No. 20). With respect to Tract 1, the 150-day deadline in § 47-16-39.1 for commencement of payment of royalty, before the 18% interest and the attorney's fees provisions apply, was reached at least by May 1, 2010.

Plaintiffs claim they began contacting Burlington as early as June 2010 about the status of their royalty, but, according to them, did not receive an appropriate response. When payment was not forthcoming by the beginning of August, plaintiffs served Murex with a Notice of Lease Forfeiture pursuant to N.D.C.C. § 47-16-36, demanding that Murex release its lease interest. In response, Murex served and filed a Notice of Non-Termination of Oil and Gas Lease, refusing to release its interest.*fn5

Murex states it is relying upon Burlington as the operator of the Lassen Well to make the required lease payments. In this case, it adopts Burlington's positions in terms of why the delays in the payment of royalty should be excused.

Burlington states that the delay in making royalty payments initially was because it did not receive its title opinion for the Lassen Well, which is dated June 15, 2010, until sometime after that date. Burlington states it took its outside law firm some four months to complete the 280-page opinion given its complexity. Then, after receipt of the opinion, Burlington states it identified two problems that needed to be resolved before paying any royalty to the plaintiffs. (Doc. Nos. 30-1 & 30-2).

More specifically, the title opinion notes that the Murex lease is subordinate to two outstanding mortgages. One is a 1999 Mortgage to Farm Credit Services ("FCS") and the other is a 1980 Mortgage to the Federal Land Bank of St. Paul that was later assigned to FCS.*fn6 The title examiner recommended that Burlington obtain a subordination of the FCS mortgages to the Murex lease, presumably to address the risk that the lessee could lose its interest if the mortgages were foreclosed. 4 E. Kuntz, A Treatise on the Law of Oil and Gas § 5.3 (Matthew Bender Rev. Ed.) ["Kuntz"] ("Where an oil and gas lease is granted after a mortgage has been granted on the land, a foreclosure will ordinarily destroy the rights of the lessee under the lease."). Also, the title examiner recommended that Burlington obtain clarification in writing in the form of a "division order" specifying who should be paid the royalty as between FCS and the plaintiffs with respect to the 1980 Mortgage and as between FCS and the plaintiffs and George E. Tank with respect to the 1999 Mortgage. This recommendation was made because of the language in the 1980 mortgage assigning the royalty payments to FCS and language in the 1999 Mortgage requiring payments of royalties to be made to FCS at its option. (Doc. Nos. 30-1 & 30-2).*fn7

Burlington claims that one of its landmen, William Hambright, wrote FCS in September 2010 requesting a subordination of its mortgages. And, when no response was forthcoming, another of its landmen, Paul Berlage, called Thomas Haustveit, plaintiffs' loan officer in FCS's Williston, North Dakota office, on November 11, 2010, to discuss the requested subordination. Burlington claims that Haustveit told Berlage that FCS would subordinate its mortgages so long as plaintiffs gave their consent. Burlington states that Berlage then contacted plaintiffs by telephone on November 16 and 17, 2010, to explain that Burlington required a subordination agreement from FCS and to ask plaintiffs for their consent. According to Berlage, plaintiffs were noncommital and asked what they stood to gain should they cooperate with Burlington's demands. Burlington also claims that it sent proposed subordinations to FCS along with a check in the amount of $150 for processing for the respective mortgages, but that FCS so far has refused to provide a subordination. Burlington blames plaintiffs' failure to give the consent requested by FCS for its inability to obtain a subordination. (Doc. Nos. 30-1 & 30-2).

More recently, FCS stated in an affidavit filed with the court that it did not believe that Burlington needed a subordination in order to make the necessary royalty payments. (Doc. No. 36-1). Also, plaintiffs have cited to a regulation that purportedly prohibits FCS from providing one. While the matter appears to have been in doubt previously, it appears now that a subordination from FCS will not be forthcoming.

As for the "proper payee" issue, Burlington states it received a letter from plaintiffs' attorney in January 2011 stating that FCS was willing to allow the royalty payments to be made directly to plaintiffs. Burlington states that it attempted to obtain written confirmation from FCS, but was unable to do so. (Doc. No. 30-2). Burlington states that it was not until plaintiffs filed a reply brief in connection with their present motions for preliminary relief that they tendered an affidavit from the Vice President of FCS of North Dakota. The affidavit states that it is agreeable with the checks being made payable to the plaintiffs and FCS, jointly, or only to plaintiffs. (Doc. No. 36-1).

Finally, Burlington states that plaintiffs have taken the position since last summer that the Murex lease has terminated because of the failure to make royalty payments. Burlington claims that plaintiffs' repudiation of the lease has created a hiatus in the obligation to pay royalties until the lease cancellation issue is resolved.

Plaintiffs, on the other hand, state that Burlington's claims of title defects are spurious, were asserted only after plaintiffs served their notices of lease forfeiture, and, in any event, are untimely.

Plaintiffs also dispute some of the comments attributed to them. In particular, they claim that any reluctance on their part to cooperate in the effort to obtain a subordination was because Burlington would not provide assurances that their consent would not prejudice their claim of lease cancellation. (Doc. Nos. 26-1 & 36-2).

Plaintiffs do acknowledge in their Amended Complaint that they advised an agent for Burlington on September 23, 2010, that they considered the lease terminated because of the nonpayment of royalties. (Doc. No. 18, ¶ 18). Also, in both October and November, 2010, Burlington attempted to tender royalty payments to plaintiffs. Plaintiffs refused the payments, again taking the position that the lease had been canceled.*fn8

B. The claims for preliminary relief - Tract 1

Plaintiffs appear to be making two arguments for why the defendants should be required to pay royalties on the production attributable to Tract 1 pending final resolution of this case. The first is that the merits of the lease cancellation issue weigh so heavily in their favor that the court should order payment of the minimum royalty due for unleased acreage under the "forced pooling" statute.

The second argument is somewhat different in that it is not dependent upon weighing the merits of the lease cancellation issue. Plaintiffs' argument here is that some royalty is due regardless of the how the court rules on the lease cancellation issue. They argue it will either be the amount provided for in the "forced pooling" statute if the lease is cancelled, or the lease royalty if it is not. In addition, to alleviate any concern of overpayment, plaintiffs suggest that the court order payment of the minimum royalty under the "forced pooling" statute, since that would be the least amount payable, and award monetary relief later to make any necessary adjustments.

Defendants' position is that interim relief is not warranted because monetary relief is available to satisfy any harm that plaintiffs may suffer. In addition, they argue that the two issues identified in a title opinion received by Burlington from its outside counsel need to be resolved before any royalty can be paid. Finally, defendants also appear to take the position that the lease cancellation issue needs to be resolved first.

Since it does appear that some royalty will be due under either the lease or the "forced pooling" statute, the court will focus upon defendants' arguments for why no royalty needs be paid in the interim or at least not directly to plaintiffs. Following that, plaintiffs' lease-cancellation argument will be addressed briefly.

C. "Probability of success on the merits" - ...


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