United States District Court, D. North Dakota, Northwestern Division
Marcia R. Sickler as Trustee of the Marcia R. Sickler Mineral Trust Plaintiff,
LoneTree Energy & Associates, LLC and Hess Corporation, Defendants.
FINDINGS OF FACT, CONCLUSIONS OF LAW, AND ORDER FOR JUDGMENT
CHARLES S. MILLER, Jr., Magistrate Judge.
This is an action by Marcia R. Sickler in her capacity as trustee of the Marcia R. Sickler Mineral Trust ("Sickler Trust" or "Trust"). Marcia Sickler is suing on behalf of the Trust to recover from defendants LoneTree Energy & Associates, LLC ("LoneTree") and Hess Corporation a $404, 757.60 bonus payment the Trust alleges defendants were obligated to pay under the terms of an oil and gas lease agreement. The court denied defendants' motion for summary judgment on August 23, 2013, concluding that the agreement was ambiguous. Marcia R. Sickler Mineral Trust v. LoneTree Energy & Associates, LLC, No. 4:12-cv-077, 2013 WL 4508429, 2013 U.S. Dist. LEXIS 120079 (D.N.D. Aug. 23, 2013) ("Marcia R. Sickler Mineral Trust").
The court conducted a half-day bench trial on December 10, 2013. What follows are the court's Findings of Fact, Conclusions of Law, and Order for Judgment.
II. FINDINGS OF FACT
1.0 The Sickler Trust owns mineral acres in several different sections of land including Sections 14 and 23, Township 146 North, Range 97 West, Dunn County, North Dakota ("Subject Lands"). Marcia R. Sickler is the trustee of the Sickler Trust.
2.0 Two oil and gas leases covering the Trust's mineral interests in the Subject Lands are relevant in this case. One is an oil and gas lease between the Sickler Trust and Hess dated September 30, 2011, ("Hess Lease") covering just the Subject Lands. The second is an earlier oil and gas lease between the Trust and Continental Resources, Inc. dated July 16, 2007 ("Continental Lease") that covers the Trust's mineral interests in the Subject Lands as well as Sections 13 and 24, Township 146 North, Range 97 West.
3.0 The Continental Lease was effective for a four-year term beginning on July 16, 2007. Among other things, the Continental Lease included:
A "continuous drilling" provision, which provided that following the four-year primary term, the lease would remain in effect for "as long thereafter as oil or gas of whatsoever nature or kind is produced from said leased premises or on acreage pooled therewith, or drilling operations are continued as hereinafter provided...."
A "Pugh Clause, " which provided that the lease would terminate at the end of the primary term as to all lands not within a "producing or spacing unit... on which is located a well producing or capable of producing oil and/or gas or on which lessee is engaged in drilling or reworking operations."
A "continuous operations" provision, which provided that the lease would not terminate so long as drilling or reworking operations were being continuously prosecuted, meaning no more than one year shall elapse between the completion of one well and the beginning of operations of another well.
4.0 On August 1, 2011, Marcia Sickler, as trustee for the Sickler Trust, and Continental executed an "Extension of Oil and Gas Lease" that: (a) referenced the Continental Lease and described it as covering Sections 14 and 23, Township 146 North, Range 97 West; (b) stated in the recitals that the lease expired on August 15, 2011, in the absence of drilling operations, and that the desire of the parties was to extend the primary terms of the lease; (c) extended the term of the lease for a period of ninety days from August 15, 2011; and (d) increased the royalty from the one-sixth (16.67 percent) to a three-sixteenths (18.75 percent) "for any well commenced subsequent to the expiration of the original primary term and subsequent to the expiration of any additional time earned under the continuous drilling provision of this lease."
5.0 In late August or early September 2011, Marcia Sickler and her husband Galen began questioning whether the Continental Lease was validly extended because the Trust had not yet received payment from Continental for the extension. They got their son, Klint Sickler, involved and it was decided that Klint would approach Hess, with whom they had other leases, to see if Hess might be interested in leasing the Subject Lands. Klint contacted Hess and Hess directed him to its leasing agent LoneTree, which, in turn, directed one its of land persons, Cliff Wehrman, to work with the Sicklers.
6.0 Marcia Sickler and her trust had been involved several prior lease transactions. While Klint Sickler did not have any interest in his mother's trust, he would at times act in an advisory capacity since he had prior experience in oil and gas leasing matters and had his own interest in a separate children's trust. Also, it was clear from Klint Sickler's testimony and other record evidence that he was knowledgeable about oil and gas leases specifically and business matters generally. Sickler had graduated from college with a double major in business and communications and from there had gone on to obtain master's degrees in business and IT management.
7.0 Soon after Klint Sickler approached Hess, Wehrman made contact with him. Sickler advised Wehrman of the situation with respect to the Continental Lease, including the Trust's position that the lease may have expired for nonpayment for the extension. Sickler emailed Wehrman copies of the Continental Lease and the lease extension.
8.0 Wehrman, in turn, passed the information on to his superior at LoneTree and the information found its way to Michael Allen, a land manager for Hess in Texas, for a decision as to whether to offer anything to the Sickler Trust for a lease.
9.0 On September 20, 2011, the Trust recorded in Dunn County an "Affidavit of Non-Payment" stating that the Trust had not received payment for the extension of the Continental Lease, that the time for payment for the extension had lapsed, and that the Continental Lease had expired as of July 16, 2011. The fact that the Sickler Trust made this filing confirming what it had earlier advised Hess was made known to land manager Allen.
10.0 In addition to relying upon the information provided by the Sicklers, land manager Allen had a surface inspection made of the Subject Lands to confirm that Continental had not engaged in any onsite activity. This site inspection was performed because one of Hess's concerns was that, if Continental's extension for ninety days after August 15, 2011 was good, the Continental Lease might still continue as to the Subject Lands that the Trust was proposing to lease to Hess if "drilling operations" occurred on them prior to the extended expiration of the primary term within the meaning of the Pugh Clause. LoneTree conducted the surface inspection on September 21, 2011, and documented it with photographs. The inspection revealed that no surface activity had yet taken place, although there was information from the North Dakota Industrial Commission that Continental was planning on drilling a well in the SW¼SE¼ of Section 23, which would be known as the Edward 1-23H well, on a 1, 280 acre spacing unit compromised of the Subject Lands.
10.0 Based on the situation then existing, land manager Allen authorized LoneTree to make an offer to the Trust for a lease covering the subject lands with terms that would include a 20% royalty and payment of $1, 500 per net mineral acre in bonus, with 20% of the bonus being paid upfront on a 5-day draft and with the remaining 80% of the bonus to paid in a second installment within 30 business days upon approval of title. The Hess land manager testified that the reason why he split the payment of the bonus was because of the uncertainties regarding the Continental Lease.
11.0 Wehrman communicated Hess's offer to Klint Sickler, who generally found it to be acceptable. Sickler did request, however, that the second bonus installment be due on a fixed date rather than 30 business days after execution of the lease. Consequently, the written package of lease documents forwarded to Marcia Sickler provided that the second installment of 80% of the bonus was to be paid on November 11, 2011, which was approximately 30 business days from when it was anticipated the lease would be signed.
12.0 The initial package of lease documents was provided to the Sicklers under cover of a letter to Marcia Sickler dated September 28, 2011. The Sicklers then consulted with their attorney who recommended several changes in the draft lease with no changes to the other documents compromising the transaction. Klint Sickler advised Wehrman of some of the changes in an email on September 29, 2011. Wehrman, in turn, caused a new package of lease documents to be prepared that included the lease revisions suggested by the Sickler's attorney and these were presented to the Sicklers under cover of a new letter to Marcia Sickler dated September 30, 2011, and were executed the same day at a restaurant in Dickinson, North Dakota. Present when the documents were signed were Wehrman, acting on behalf of Hess, and Marcia Sickler, her husband, and her son Klint.
13.0 The final agreement that was reached is comprised of four separate documents: a letter agreement dated September 30, 2011; two Orders for Payment - one for 20% of the bonus and the second for the remaining 80% of the bonus; and the Hess Lease.
13.1 Letter Agreement. The following is the full text of the letter agreement:
Dear Ms. Sickler,
Enclosed you will find an Oil and Gas Lease and Memorandum of Oil and Gas Lease covering the above captioned lands, two Orders of Payment, and one copy of each (so marked for your records). The Orders of Payment are documents stating that the Marcia R. Sickler ...