Tyronne B. Kittleson, Trustee, Tyrone B. Kittleson Real Estate and Oil Trust, Plaintiff and Appellee
Grynberg Petroleum Company; Celeste C. Grynberg, Trustee of the Rachel Susan Grynberg Trust; Celeste C. Grynberg, Trustee of the Stephen Mark Grynberg Trust; and Celeste C. Grynberg, Trustee of the Miriam Zela Grynberg Trust, Defendants and Appellants and Grynberg Petroleum Company; Celeste C. Grynberg, Trustee of the Rachel Susan Grynberg Trust; Celeste C. Grynberg, Trustee of the Stephen Mark Grynberg Trust; and Celeste C. Grynberg, Trustee of the Miriam Zela Grynberg Trust, Third-Party Plaintiffs
Missouri River Royalty Corporation, Third-Party Defendant
Appeal from the District Court of McKenzie County, Northwest Judicial District, the Honorable David W. Nelson, Judge.
Kent A. Reierson (argued), Williston, N.D., and Aaron W. Nicholson (appeared), Bismarck, N.D., for plaintiff and appellee.
Monte L. Rogneby, Bismarck, N.D., for defendants and appellants Grynberg Petroleum Company and Celeste C. Grynberg.
Dale V. Sandstrom, Daniel J. Crothers, Lisa Fair McEvers, Douglas L. Mattson, D.J., Gerald W. VandeWalle, C.J. Opinion of the Court by Sandstrom, Justice. The Honorable Douglas L. Mattson, D.J., sitting in place of Kapsner, J., disqualified.
[¶1] The successors to the interest of the Grynberg Petroleum Company (" Grynberg" ) appeal from a judgment concluding Grynberg wrongfully deducted certain costs from gas royalties paid to Tyronne B. Kittleson, as trustee of the Tyronne B. Kittleson Real Estate and Oil Trust (" Kittleson" ), under a lease between the parties. We affirm, concluding the district court correctly interpreted the lease, the amount of damages was not clearly erroneous, and the correct statute of limitations was applied.
[¶2] In 1991, Grynberg Petroleum Company and Kittleson's predecessor in interest, Tyronne and Marilyn Kittleson, entered into an oil and gas lease. The parties also executed a separate rider that modified and amended the lease. The royalty clause of the lease provides in part:
Lessee [Grynberg] shall pay Lessor [Kittleson] the market value at the well for all gas (including all substances contained in such gas) produced from the leased premises and sold by Lessee . . . ; provided however, that there shall be no deductions from the value of Lessor's royalty of any required processing, cost of dehydration, compression, transportation, or other matter to market such gas.
[¶3] The gas produced from the well on the leased premises is a sour gas with little to no market value. To be made marketable, the gas must be compressed, treated, dehydrated, and processed. After processing, the gas has a market value and can be sold. The processing also produces additional products contained in the unprocessed sour gas that have value such as propane, butane, natural gasoline, and drip liquids.
[¶4] Grynberg does not operate the gas-producing well. The well is operated by Missouri River Royalty Corporation under a joint operating agreement with Grynberg. Missouri River entered into agreements for third parties to gather and process the gas.
[¶5] After the gas and liquids were processed and sold, Grynberg calculated Kittleson's royalty using the work-back method. Under the work-back method, market value of the gas at the well is calculated by deducting post-production costs incurred in making the sour gas a marketable product from the plant tailgate proceeds. Grynberg paid Kittleson by subtracting post-production costs from the
sales price Grynberg received for the processed gas.
[¶6] In 2005, Kittleson sued Grynberg, claiming that under the " no deductions" language in the royalty clause of the lease, Grynberg was prohibited from deducting the costs of processing the sour gas from Kittleson's royalty. Kittleson alleged Grynberg began wrongfully deducting post-production costs from Kittleson's royalties in 1997. Grynberg denied liability, claiming the royalties paid to Kittleson did not violate the terms of the lease.
[¶7] After a bench trial, the district court concluded the royalty clause of the lease did not allow Grynberg to deduct the processing costs incurred in turning the sour gas into a marketable product. The court applied the ten-year statute of limitations under N.D.C.C. § 28-01-15(2) and found Kittleson's royalties were underpaid by approximately $17,240 from 1997 to 2009. Kittleson was also awarded interest on the underpaid royalties and attorney's fees and costs for a total judgment of approximately $111,300.
[¶8] The district court had jurisdiction under N.D. Const. art. VI, § 8, and N.D.C.C. § 27-05-06. Grynberg's appeal is timely under N.D.R.App.P. 4(a). This Court has jurisdiction under N.D. Const. art. VI, ...