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Tank v. Citation Oil & Gas Corp.

Supreme Court of North Dakota

June 24, 2014

Greggory G. Tank, Plaintiff and Appellee
v.
Citation Oil & Gas Corp., Citation 2004 Investment Limited Partnership, Northern Oil and Gas, Inc., Otter Creek, LLC, G.G. Rose, LLC, Ralph Cuellar and Sylvia Cuellar, DJB Investment Company, LLC, Kevin P. Doyle, Cyan Brakhage, Barbara Boaz, Margaret Sumter, Petro-Hunt, L.L.C., Pillar Energy, LLC, Sasrana Oil and Gas, Howard Gray, Linda Goldner, Scot Farber, Paladin, Inc., Thomas Family Limited Partnership, BB Management, LLC, Magic Merlin Energy Investments, LLC, Blue Ridge Energy, LLC, BF Energy, LLC, M Code, LLC, J and J Energy, LLC, Jim Whitehead Oil & Gas, LLC, and other persons/companies " John Doe" whose interest does not appear of record, Defendants, Citation Oil & Gas Corp., Citation 2004 Investment Limited Partnership, Northern Oil and Gas, Inc., Otter Creek LLC, G.G. Rose, LLC, Ralph Cuellar and Sylvia Cuellar, DJB Investment Company, LLC, Kevin P. Doyle, Cyan Brakhage, Barbara Boaz, Margaret Sumter, Sasrana Oil and Gas, Howard Gray, Linda Goldner, Scot Farber, Paladin, Inc., Thomas Family Limited Partnership, BB Management, LLC, Magic Merlin Energy Investments, LLC, Blue Ridge Energy, LLC, BF Energy, LLC, M Code, LLC, J and J Energy, LLC, and Jim Whitehead Oil & Gas, LLC, Petro-Hunt, L.L.C. and Pillar Energy, LLC, Appellants

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[Copyrighted Material Omitted]

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Appeal from the District Court of McKenzie County, Northwest Judicial District, the Honorable Joshua B. Rustad, Judge.

AFFIRMED.

Ariston E. Johnson (argued) and Dennis E. Johnson (appeared), Watford City, N.D., for plaintiff and appellee.

Jillian R. Rupnow (argued), Amy DeKok (appeared), and Lawrence Bender (on brief), Bismarck, N.D., for defendants and appellants Citation Oil & Gas Corp., Citation 2004 Investment Limited Partnership, Northern Oil and Gas, Inc., Otter Creek, LLC, G.G. Rose, LLC, Ralph Cuellar and Sylvia Cuellar, DJB Investment Company, LLC, Kevin P. Doyle, Cyan Brakhage, Barbara Boaz, Margaret Sumter, Sasrana Oil and Gas, Howard Gray, Linda Goldner, Scot Farber, Paladin, Inc., Thomas Family Limited Partnership, BB Management, LLC, Magic Merlin Energy Investments LLC, Blue Ridge Energy, LLC, BF Energy, LLC, M Code, LLC, J and J Energy, LLC, Jim Whitehead Oil & Gas, LLC.

John W. Morrison, Jr. (on brief) and Paul J. Forster (on brief), Bismarck, N.D., for defendants and appellants Petro-Hunt, L.L.C. and Pillar Energy, LLC.

Gerald W. VandeWalle, C.J., Carol Ronning Kapsner, Lisa Fair McEvers, Daniel J. Crothers. Opinion of the Court by VandeWalle, Chief Justice. Sandstrom, Justice, dissenting.

OPINION

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VandeWalle, Chief Justice.

[¶1] Citation Oil & Gas Corp., Petro-Hunt LLC, and other working interest owners (collectively " defendants" ) appealed from a district court summary judgment quieting title to an oil and gas lease in Greggory Tank. We affirm, concluding as a matter of law the lease expired on a portion of the property under the facts of this case.

I

[¶2] In 1982, George and Phyllis Tank executed an oil and gas lease in favor of Petro-Lewis Funds, Inc., covering property in McKenzie County described as the northwest quarter and south half of section 10, township 151 north, range 96 west. The lease had a three-year primary term expiring in September 1986. In July 1986, George and Phyllis Tank executed a Ratification of Oil and Gas Lease, Settlement Agreement, and Stipulation, agreeing to ratify, adopt, and confirm the lease. The parties agreed to extend the primary term of the lease for three more years, ending July 15, 1989.

[¶3] In May 1983, the Tank 3-10 well was spudded in the northwest quarter. The well produced until October 1996. In June 1998, the Tank 3-10R well was spudded and replaced the Tank 3-10 well in the northwest quarter of the property. The Tank 3-10R well continues to produce oil or gas.

[¶4] In June 1988, the Tank 13-10 well was spudded in the southwest quarter. The well continuously produced oil or gas until October 2008, and intermittently produced oil or gas until January 2012.

[¶5] On November 21, 2008, the North Dakota Industrial Commission granted an application filed by Petro-Hunt to create a 1280-acre spacing unit encompassing sections 3 and 10 of township 151 north, range 96 west. The spacing unit includes all of the leased property. On October 30, 2009, Petro Hunt's application for a permit to drill a horizontal well in the 1280-acre spacing unit was approved. In February 2010, the Jonsrud 151-96-3B-10-2H well was spudded in section 3. The Jonsrud well is currently producing. In October 2010, the George Tank 151-96-10C-3-3H well was spudded in section 10 and is currently producing.

[¶6] Tank is the successor in interest to George and Phyllis Tank and is the owner of minerals in the southwest quarter of section 10. In September 2011, Tank sued the defendants, seeking to cancel the oil and gas lease to the extent it covers the southwest quarter. The defendants moved for summary judgment, seeking dismissal of all of Tank's claims. The defendants argued the continued drilling and operation of oil and gas wells on the leased property maintained the lease beyond the primary term and the lease remains in full force and effect. Tank responded and filed a cross-motion for summary judgment, arguing the lease expired on the southwest quarter of the property under the Pugh clause in the lease due to a lack of continued production on that quarter.

[¶7] The district court denied the defendants' motion for summary judgment, ruling the lease had expired and was no longer valid on the southwest quarter. The court determined summary judgment was appropriate because there were only

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issues of law to resolve, including the interpretation of an unambiguous contract and the application of undisputed facts. The court concluded the Pugh clause applied for subsequent and successive one-year periods after the primary term expired, it clearly and explicitly directed a division of the lease into several parts, and it directed that production on pooled portions would not apply to non-pooled non-producing portions. The court also concluded that lands not included in a producing unit were separate and distinct from other lands described in the lease and that non-producing lands must have drilling operations conducted on undeveloped portions of that land during each one-year period to avoid expiration of the lease on those lands. The court further concluded each producing division is separate and distinct and must be considered separately when deciding whether the lease continued. The court determined production on the Tank 13-10 well in the southwest quarter ceased on October 1, 2008, and October 30, 2009, was the earliest date drilling could have commenced in the new spacing unit that included the southwest quarter. The court ruled none of the savings clauses in the lease extended the lease until October 30, 2009, when drilling operations began on the new spacing unit, and none of the clauses prevented the lease from expiring on the southwest quarter. Judgment was entered quieting title to the lease on the southwest quarter in favor of Tank.

II

[¶8] Our standard for reviewing a district court's decision granting summary judgment under N.D.R.Civ.P. 56 is well-established:

Summary judgment is a procedural device for the prompt resolution of a controversy on the merits without a trial if there are no genuine issues of material fact or inferences that can reasonably be drawn from undisputed facts, or if the only issues to be resolved are questions of law. A party moving for summary judgment has the burden of showing there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. . . .Whether the district court properly granted summary judgment is a question of law which we review de novo on the entire record.

Estate of Christeson v. Gilstad, 2013 ND 50, ¶ 6, 829 N.W.2d 453 (quoting Golden v. SM Energy Co., 2013 ND 17, ¶ 7, 826 N.W.2d 610).

[¶9] There are no disputed issues of material fact in this case. The sole question on appeal involves the interpretation of the lease. The general rules governing interpretation of contractual agreements apply to the interpretation of oil and gas leases. Egeland v. Continental Res., Inc., 2000 ND 169, ¶ 10, 616 N.W.2d 861. " The construction of a written contract to determine its legal effect is a question of law for the court to decide, and on appeal, this Court will independently examine and construe the contract to determine if the [district] court erred in its interpretation of it." Id.

[¶10] Contracts, including oil and gas leases, are interpreted to give effect to the parties' mutual intent at the time of contracting. N.D.C.C. § 9-07-03. The parties' intent is ascertained from the writing alone if possible. N.D.C.C. § 9-07-04. " The language of a contract is to govern its interpretation if the language is clear and explicit and does not involve an absurdity." N.D.C.C. § 9-07-02. Words in a contract are construed in the ordinary and popular sense, unless the parties use the words ...


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