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Williston Hunter Nd, LLC and Magnum Hunter Resources Corporation v. Eagle Operating

January 24, 2012

WILLISTON HUNTER ND, LLC AND MAGNUM HUNTER RESOURCES CORPORATION, PLAINTIFFS,
v.
EAGLE OPERATING, INC., DEFENDANTS. EAGLE OPERATING, INC., PLAINTIFF AND COUNTER-DEFENDANT WILLISTON HUNTER ND, LLC AND MAGNUM HUNTER RESOURCES CORPORATION, DEFENDANTS AND COUNTER-CLAIMANTS,



The opinion of the court was delivered by: Daniel L. Hovland, District Judge United States District Court

ORDER GRANTING DEFENDANT'S MOTION TO STAY PENDING COMPLETION OF ARBITRATION
ORDER GRANTING PLAINTIFF'S MOTION TO STAY COUNTERCLAIMS v. PENDING COMPLETION OF ARBITRATION

Before the Court are two motions filed by Eagle Operating, Inc. ("Eagle Operating") in the above-captioned cases. On September 12, 2011, Eagle Operating filed a "Motion to Dismiss, or in the Alternative Stay Pending Completion of Arbitration" in Williston Hunter ND, LLC v. Eagle Operating, Inc., Case No. 4:11-cv-066. See Docket No. 6. On October 4, 2011, Eagle Operating filed a "Motion to Dismiss, or in the Alternative Stay Counterclaims Pending Completion of Arbitration" in Eagle Operating, Inc. v. Williston Hunter ND, LLC, Case No. 4:11-cv-067. See Docket No. 4. Williston Hunter ND, LLC and Magnum Hunter Resources Corporation filed a response in opposition to the motions on October 4, 2011, and October 27, 2011, respectively. See Case No. 4:11-cv-066, Docket No. 13; Case No. 4:11-cv-067, Docket No. 9. Eagle Operating filed reply briefs on October 17, 2011, and November 7, 2011. See Case No. 4:11-cv-066, Docket No. 16; Case No. 4:11-cv-067, Docket No. 10. A hearing was held on January 6, 2012. For the reasons set forth below, the Court grants Eagle Operating's separate motions to stay all claims pending the completion of arbitration.

I. BACKGROUND

Eagle Operating is a corporation formed under the laws of the State of North Dakota, with its principal office in Kenmare, North Dakota. Williston Hunter ND ("Williston Hunter") is a limited liability company formed under the laws of the State of Delaware, with its principal place of business in Denver, Colorado. Magnum Hunter Resources Corporation ("Magnum Hunter") is a corporation formed under the laws of the State of Delaware, with its principal place of business in Houston, Texas. Magnum Hunter is the parent company of Williston Hunter. The Court will refer to these two entities collectively as "Magnum Hunter."

In December 2006, Magnum Hunter purchased an undivided 50% of Eagle Operating's right, title, and interest in certain oil and gas properties in the Williston Basin of western North Dakota for the sum of $10 million cash and $10 million of Magnum Hunter's common stock. In January 2007, Magnum Hunter and Eagle Operating also entered into a joint venture for the development and recovery of oil and gas.

A dispute arose between the parties and on April 21, 2010, Magnum Hunter filed a complaint against Eagle Operating. See Magnum Hunter Resources Corporation v. Eagle Operating, Inc., Case No. 4:10-cv-0030, Docket No. 1. Magnum Hunter alleged that the joint venture contract required both parties' consent to drill wells, and that Eagle Operating breached the contract when it completed one oil well and began drilling another in the East Flaxton Madison Unit ("EFMU") of the Williston Basin without Magnum Hunter's consent. On April 21, 2010, Magnum Hunter moved for a temporary restraining order to stop Eagle Operating's further development of wells in the EFMU. See Docket No. 3. On April 28, 2010, the Court granted the temporary restraining order. See Docket No. 5. On May 5, 2010, Magnum Hunter and Eagle Operating stipulated to amending the temporary restraining order to a preliminary injunction. See Docket No. 14. The Court then issued an order for a preliminary injunction. See Docket No. 15.

Thereafter, the parties participated in an informal dispute resolution process. On August 4, 2011, the parties reached a settlement of the lawsuit and, as part of the settlement, the parties entered into a Purchase and Sale Agreement. See Case No. 4:11-cv-066, Docket No. 8-1. Under the Purchase and Sale Agreement, Magnum Hunter, through Williston Hunter, agreed to purchase Eagle Operating's interest in certain properties for $55 million in cash ("cash consideration") and $2 million in Magnum Hunter's common stock. In addition, Eagle Operating agreed to release Magnum Hunter from all claims and liability related to the EFMU wells, which included "any cost or expense related thereto." See Docket No. 15, p. 61.

The Purchase and Sale Agreement contained a provision that allowed the purchase price to be adjusted before the closing of the settlement. The sale of the properties was effective on April 1, 2011, but the closing of the transaction was to occur on April 18, 2011. See Case No. 4:11-cv-066, Docket No. 8-1, pp. 10, 27. Due to the delay between the effective date of the sale and closing, the agreement provides for an adjustment of the cash consideration to account for certain expenses and income derived from oil production activity. See Docket No. 8-1, pp. 22-23. Eagle Operating was required to prepare and deliver, three days prior to the closing, a description of proposed adjustments to the cash consideration, referred to as the "Preliminary Settlement Statement". See Docket No. 8-1, p. 24. The record reveals that on August 15, 2011, Eagle Operating delivered the Preliminary Settlement Statement to Magnum Hunter which proposed an upward adjustment of approximately $6 million. See Docket Nos. 8 and 8-2. In the adjustment, Eagle Operating included unpaid expenses related to the drilling of oil wells in the EFMU in the amount of $5.9 million. See Docket No. 8-2.

On August 17, 2011, Magnum Hunter sent an objection to Eagle Operating. See Case No. 4:11-cv-066, Docket No. 8-3. Magnum Hunter claimed that Eagle Operating had agreed to release it from paying expenses related to the EFMU wells and, therefore, breached the Purchase and Sale Agreement when it included the EFMU expenses in the Preliminary Settlement Statement. See Docket Nos. 8-3; 8-4; and 15, p. 61. The parties failed to close the sale.

The parties then initiated the above-entitled lawsuits against each other. On August 19, 2011, Magnum Hunter filed a complaint in federal court alleging that (1) Eagle Operating agreed to release Magnum Hunter from all claims, including expenses and costs, related to the EFMU wells and (2) Eagle Operating breached the Purchase and Sale Agreement when it included expenses of $5.9 million related to the EFMU wells in the Preliminary Settlement Statement. See Case No. 4:11-cv-066, Docket No. 1. Magnum Hunter also asserted that Eagle Operating acted in bad faith and intentionally breached the contract when it included the EFMU well expenses in the settlement documents.

On August 19, 2011, Eagle Operating filed a complaint and alleged that Magnum Hunter breached the Purchase and Sale Agreement because they did not transfer the cash consideration necessary to close the transaction. See Case No. 4:11-cv-067, Docket No. 1. Eagle Operating contends that the Purchase and Sale Agreement required the parties to close the sale even if there was a dispute concerning any proposed adjustments to the cash consideration. On September 13, 2011, Magnum Hunter filed an "Original Answer, Affirmative Defenses and Counterclaims" in which it re-alleged that Eagle Operating breached the settlement agreement when Eagle Operating included expenses related to the EFMU wells in the Preliminary Settlement Statement. See Docket No. 3.

On September 12, 2011, Eagle Operating filed a motion to dismiss, or in the alternative, stay the claims alleged pending arbitration. See Case No. 4:11-cv-066, Docket No. 6. On October 3, 2011, Eagle Operating also filed a motion to dismiss, or in the alternative, stay the counterclaims filed by Magnum Hunter pending the completion of arbitration. See Case No. 4:11-cv-067, Docket No. 4. Eagle Operating contends that Magnum ...


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