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GEM Razorback LLC v. Zenergy Inc.

Supreme Court of North Dakota

February 21, 2017

GEM Razorback, LLC, Plaintiff and Appellant
v.
Zenergy, Inc., Defendant and Appellee

         Appeal from the District Court of McKenzie County, Northwest Judicial District, the Honorable Robin Ann Schmidt, Judge.

         AFFIRMED.

          Joshua A. Swanson, for plaintiff and appellant.

          Danielle M. Krause (argued) and Lawrence Bender (on brief), for defendant and appellee.

          OPINION

          VandeWalle, Chief Justice.

         [¶ 1] GEM Razorback, LLC appealed from a judgment dismissing its declaratory judgment action because GEM failed to exhaust administrative remedies, and dismissing its claim for specific performance because GEM could not establish that it was a third-party beneficiary of a contract. We affirm.

         I

         [¶ 2] GEM and Zenergy, Inc. owned working interests in two oil and gas wells located in McKenzie County. Zenergy operated the wells, but GEM had not consented to pay its share of the drilling and operating costs. GEM did not execute a joint operating agreement for the wells and consequently was assessed a risk penalty as a nonconsenting owner. See N.D.C.C. § 38-08-08(3); Gadeco, LLC v. Indus. Comm'n, 2012 ND 33, ¶¶ 4-6, 812 N.W.2d 405 (describing nonconsenting owners and risk penalties). In May 2013, GEM began requesting from Zenergy information and documents related to its interests in the wells. The information requested by GEM included the cumulative balance to payout for the wells and the costs, revenue and expenses, and production data for the wells. In September 2013, Zenergy provided GEM the cumulative balance to payout for the wells.

         [¶ 3] In October 2013, Zenergy assigned its interest in the wells to Oasis Petroleum North America LLC. The assignment conveyed all assets, including "all files, records and data maintained by" Zenergy. After the assignment, GEM requested the same information from Oasis. Oasis provided Zenergy with the requested information. However, according to Oasis, some of the requested information for the time period before the assignment was not in its possession.

         [¶ 4] Because of differences in the numbers provided by Zenergy and Oasis, GEM in May 2014 filed applications for hearing with the Industrial Commission. See N.D. Admin. Code § 43-02-03-88. The applications requested that the Commission determine the actual reasonable costs plus risk penalty for the two wells, and a hearing on the applications was held in September 2014. As a result of the hearing, Oasis agreed to allow GEM to conduct an audit of the wells. The Commission dismissed the applications without prejudice, noting "[i]n the event of any dispute as to such costs, GEM intends to file an application for the Commission to determine the proper costs." During the ensuing audit process, GEM discovered there were documents it requested that were not in Oasis' possession for the time period before the assignment when Zenergy operated the wells. GEM contacted Zenergy and requested an extensive list of 39 specific types of information regarding the wells. Zenergy refused to provide GEM with the requested information.

         [¶ 5] In April 2015, GEM commenced this declaratory judgment and specific performance action against Zenergy. GEM sought a declaration that "as a nonparticipating owner in the... wells, they have a statutory right under Chapter 38-08, N.D.C.C., to the information for the... wells that they have requested from [Zenergy], and that [Zenergy] is required to provide this information to [GEM]." GEM also sought specific performance of the assignment entered into by Zenergy and Oasis because GEM is "a third-party beneficiary" of the assignment and "has a right to receive, from Zenergy, those documents and information identified as 'Records' by" a provision in the assignment. GEM requested "an order compelling Zenergy to produce [those] documents and information."

         [¶ 6] Zenergy moved to dismiss the action under N.D.R.Civ.P. 12(b)(1) and (6). Zenergy argued the district court lacked subject matter jurisdiction over the request for declaratory relief because GEM failed to exhaust its administrative remedies with the Commission before filing the complaint. Zenergy argued the claim for specific performance failed to state a claim upon which relief can be granted because a provision of the assignment agreement specifically bars third-party beneficiary status. The court agreed with Zenergy's arguments and dismissed GEM's action.

         II

         [¶ 7] GEM argues the district court erred in ruling it lacked subject matter jurisdiction to determine whether GEM had a statutory right to obtain the specified information from Zenergy because GEM ...


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