United States District Court, D. North Dakota
ORDER GRANTING THE DEFENDANT'S MOTION FOR SUMMARY
L. Hovland, Chief United States District Judge.
the Court are Slawson Exploration Company, Inc.'s
(“Slawson Exploration”) motion for partial
summary judgment and Nine Point Energy, LLC's
(“Nine Point”) motion for summary judgment.
Slawson Exploration filed its motion for partial summary
judgment on March 2, 2018. See Doc. No. 24. Nine
Point filed its cross-motion for summary judgment on the same
date. See Doc. No. 29. The parties have fully
briefed both motions. For the following reasons, the Court
grants Nine Point's motion for summary judgment.
Exploration brought this diversity action for declaratory
judgment on May 24, 2017. Slawson Exploration is a Kansas
corporation with its principal place of business in Wichita,
Kansas. Nine Point is a Delaware limited liability company
with a single member, Nine Point Energy Holdings, Inc., which
is a Delaware corporation with its principal place of
business in Denver, Colorado. The case derives from a
decision by the United States Bankruptcy Court for the
District of Delaware to defer deciding whether a provision in
an oil and gas contract runs with the land under North Dakota
law. Slawson Exploration claims Nine Point owes it payments
based on a provision in an oil and gas development agreement
Slawson Exploration made with Nine Point's predecessor.
The parties have framed the question before the Court to be
whether the provision constitutes: (1) an interest in real
property; (2) a covenant running with the land; or (3) an
equitable servitude. Slawson Exploration estimates payments
based on the provision to total approximately $25, 100, 000.
After an exhaustive consideration of the matter, the Court
concludes the provision in question does not fall within any
of the above categories.
2010, Slawson Exploration and Triangle Petroleum Corporation
(“Triangle”) entered into a contract titled
“Exploration and Development Agreement with Area of
Mutual Interest” (“EDA”). See Doc.
No. 1-1. The EDA defined a project area, referred to as
“Project X, ” in Williams and McKenzie Counties,
North Dakota. At the time of the agreement, Slawson
Exploration held leasehold interests in the Project X area;
Triangle did not. According to the EDA's recitals,
Slawson Exploration was “seeking partners to jointly
acquire additional undeveloped leasehold interests in the
Project Area, ” and Triangle “wish[ed] to
participate with [Slawson Exploration] in evaluation,
leasing, drilling, and development of the Project
Area.” The EDA provided the terms for their venture.
The EDA was to be governed by Colorado law, “except
with respect to substantive oil and gas and real property
matters, which shall be governed and construed in accordance
with the laws of the state of North Dakota.”
See Doc. No. 1-1, p. 5.
to the EDA, Slawson Exploration agreed to sell 30% of its oil
and gas leasehold interests in the project area to Triangle.
In addition to paying a per acre price, Triangle agreed to
pay Slawson Exploration “an amount equal to 10
percent” of Triangle's share of costs to drill and
complete Project X wells for which it opted to
participate. This obligation to tender payment based on
drilling and completion costs is at the heart of the
controversy. The parties refer to it as the “Promote
Obligation” or the “10% Promote.”
also contained a provision titled “AMI, ” which
is an abbreviation for “area of mutual interest.”
This provision is expressly noted in the title of the EDA
agreement-i.e., “Exploration and Development Agreement
with Area of Mutual Interest.” The relevancy
of this provision to the dispute will become apparent later.
In short, the parties disagree as to whether the area of
mutual interest (“AMI”) provision's
inclusion, as well as the term's use in the broader
agreement's title, affect the legal classification of the
Promote Obligation. Under the AMI provision, the parties
agreed they would offer any leasehold interest they acquired
in the project area, at cost, in the proportion that each
party owned under the EDA-i.e., 70% for Slawson Exploration
and 30% for Triangle. Unlike the EDA, which was to last
“for the term of each leasehold interest and any
extension or renewal, ” the area of mutual interest
provision had a fixed two-year term.
Triangle acquired 30% of Slawson Exploration's interests
in the project area, Slawson Exploration retained title to
the interests and held them in trust for Triangle. In March
of 2011, Triangle purchased Slawson Exploration's 70%
interest in certain Project X leases in Williams County.
Slawson Exploration made two assignments to Triangle. The
first conveyed Slawson Exploration's 70% interest.
See Doc. No. 27-1. The second assignment conveyed
the 30% interest Slawson Exploration was holding in trust for
Triangle. See Doc. No. 27-2. The second assignment
stated the EDA “shall control in the event of any
inconsistency with this Assignment.” It also stated
“the covenants and conditions hereof . . . shall be
covenants running with the oil and gas leases.” Slawson
Exploration later made additional partial assignments of
Project X leasehold interests to Triangle, all of which were
subject to the EDA and contained language stating Slawson
Exploration “is entitled to and does hereby
specifically retain and reserve . . . the right to receive
from [Triangle and its] successors and assigns, an amount
equal to ten percent (10%) of the cost attributable to the
interest assigned hereunder, of the drilling and completion
costs for any and all wells drilled on the Subject
Leases.” See Doc. Nos. 27-3, 27-4, 27-5, 27-6,
April of 2012, Triangle began conveying its interests in the
Project X leases to its wholly owned subsidiary, Triangle USA
Petroleum Corporation (“TUSA”). See Doc.
No. 1-13. On June 29, 2016, TUSA filed a petition for Chapter
11 bankruptcy. Slawson Exploration filed a proof of claim
seeking payment, pursuant to the Promote Obligation, on all
wells TUSA elected to participate after TUSA filed its
bankruptcy petition. The proof of claim stated:
Debtor may owe Slawson Exploration 10% Payments for wells
that will be drilled in the future in leases subject to the
Agreements, including Debtor's planned wells, and the
estimated value of those future 10% Payments could be up to
approximately $25, 100, 000.
See Doc. No. 31-1, p. 9. Nine Point emerged from
confirmation of the bankruptcy plan. The Bankruptcy
Court's confirmation order gave Slawson Exploration leave
to commence litigation in North Dakota to determine whether
the Promote Obligation runs with the land under North Dakota
Nothing in this Confirmation Order or the Plan shall
constitute a determination of the rights and obligations of
the Debtors, the Reorganized Debtors, and Slawson Exploration
. . . pursuant to that certain Exploration Development
Agreement with Area of Mutual Interest . . . by and between
Slawson Exploration and [Triangle], including, without
limitation, whether the [Promote Obligation] constitutes a
covenant running with the land under applicable
non-bankruptcy law. . . . Slawson Exploration may commence a
declaratory-judgment action or other appropriate proceeding
in North Dakota state court or another court of competent
jurisdiction and proper venue seeking a determination whether
the Promote Obligation runs with the land. . . . In the event
a court of competent jurisdiction concludes that the Promote
Obligation constitutes an in personem Claim against
the Debtors, it shall be subject to full and final
satisfaction, settlement, release, and discharge pursuant to
. . . the Plan to the same extent as any other pre-petition
unsecured claim of the same Class.
See Doc. No. 1, pp 13-14.
Exploration brought this suit against Nine Point for
declaratory judgment on May 24, 2017. Slawson Exploration
asserts the Promote Obligation should be classified as a real
property interest that binds successors. Slawson Exploration
argues the Promote Obligation falls into at least one of the
following real property interest categories: (1) a real
covenant running with the land; (2) a free-standing real
property interest; or (3) an equitable servitude. The Court
concludes the Promote Obligation is personal in nature and
does not fall within any of these categories.
STANDARD OF REVIEW
judgment is appropriate when the evidence, viewed in a light
most favorable to the non-moving party, indicates no genuine
issues of material fact exist and the moving party is
entitled to judgment as a matter of law. Davison v. City
of Minneapolis, 490 F.3d 648, 654 (8th Cir. 2007);
see also Fed.R.Civ.P. 56(a). Summary judgment is not
appropriate if there are factual disputes that may affect the
outcome of the case under the applicable substantive law.
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248
(1986). A genuine issue of material fact is not the
“mere existence of some alleged factual dispute between
the parties.” State Auto Ins. Co. v. Lawrence,
358 F.3d 982, 985 (8th Cir. 2004). Rather, an issue of
material fact is genuine “if the evidence is such that
a reasonable jury could return a verdict for the nonmoving
party.” Anderson, 477 U.S. at 248. The moving
party always bears the burden of demonstrating the absence of
a genuine issue of material fact. Celotex Corp. v.
Catrett, 477 U.S. 317, 323 (1986). The non-moving party
may not rely merely on allegations or denials; it must set
out specific facts showing a genuine issue for trial.
Forrest v. Kraft Foods, Inc., 285 F.3d 688, 691 (8th
Cir. 2002). The court must view the facts in the light most
favorable to the non-moving party. Adickes v. S.H. Kress
& Co., 398 U.S. 144, 157 (1970).
WHETHER THE PROMOTE OBLIGATION IS ...