Moncrief v. Williston Basin Interstate Pipeline Co.

Decision Date20 April 1999
Docket Number97-8088,Nos. 97-8087,s. 97-8087
Parties1999 CJ C.A.R. 2459 W.A. MONCRIEF, Jr., as independent executor and personal representative of the Estate of W.A. Moncrief, deceased; W.A. Moncrief, Jr., individually, as Trustee for the Lee Wiley Moncrief Trust, as Trustee for the Tom O. Moncrief 1967 Trust, and as Trustee for the William Alvin Moncrief III Trust; Charles B. Moncrief, individually and as independent executor and personal representative of the Estate of W.A. Moncrief, deceased; Richard W. Moncrief, as independent executor and personal representative of the Estate of W.A. Moncrief, deceased, and as Trustee for the RWM 1988 Trust; Michael J. Moncrief, individually and as Trustee for the Michael J. Moncrief Grantor's Trust; Richard Barto Moncrief, individually, and Wade W. Wiley, Jr., as Trustee for the Richard Barto Moncrief 1988 Trust; Plaintiffs-Appellants/Cross-Appellees, v. WILLISTON BASIN INTERSTATE PIPELINE COMPANY; and MDU Resources Group, Inc., Defendants-Appellees/Cross-Appellants.
CourtU.S. Court of Appeals — Tenth Circuit

William Pannill, Pannill, Moser & Barnes, L.L.P., Houston, Texas (Roy L. Barnes, Pannill, Moser & Barnes, L.L.P., Houston, Texas, and Craig Newman, Casper, Wyoming, with him on the briefs) for Appellants/Cross-Appellees.

Daniel S. Kuntz, Zuger, Kirmis & Smith, Bismarck, North Dakota (James S. Hill, Rebecca S. Thiem, Zuger, Kirmis & Smith, Bismarck, North Dakota, and Frank D. Neville, Casper, Wyoming, with him on the briefs) for Appellees/Cross-Appellants.

Before PORFILIO, McWILLIAMS, and ANDERSON, Circuit Judges.

STEPHEN H. ANDERSON, Circuit Judge.

This is a diversity action alleging breach of a 20-year contract (July 7, 1976--July 6, 1996) for the purchase of natural gas under leases on properties located in Converse County, Wyoming. 1 The plaintiffs' complaint seeks, inter alia: (1) damages for alleged underpayment for delivered gas and for the defendants' refusal to buy gas after November 1993; (2) a declaratory judgment that following deregulation of natural gas prices the contract continued to obligate the defendants to pay for gas at the highest rate prescribed or permitted by Congress during regulation; and (3) a declaratory judgment that in addition to "native" gas produced from the plaintiffs' wells, the defendants were required to take and pay for "makeup" gas--that is, gas purchased by the sellers from outside sources, injected into the field to maintain pressure for oil production, and then extracted from the field along with "native" gas and delivered to the defendants.

The district court held that the defendants breached and wrongfully repudiated the contract in 1993, that the plaintiffs are entitled to damages from August 13, 1993, through the end of the contract term on July 6, 1996, and that the defendants were obligated to purchase makeup and all other gas, up to the contract limit of twelve million cubic feet per day, delivered by the sellers from August 1993 to the end of the contract term. However, the district court rejected the plaintiffs' theory that the highest rates prescribed or permitted by Congress during periods of price regulation lived on after deregulation as the applicable contract price. Instead, the court determined sua sponte that the favored nations clause issue had been tried by implied consent, and held that the favored nations clause of the contract applied to set the contract price after August 1993. On its own motion, the court reopened the case for the introduction at a later date of evidence of damages under the favored nations clause. Following the subsequent reopened trial, the court ruled that the contract price for gas from August 13, 1993, through July 6, 1996, was set by reference to prices charged under two contracts introduced into evidence by the plaintiffs after the first trial. Applying those prices to the types and quantities of gas covered by rulings described above, and after subtracting amounts the plaintiffs actually received, the court awarded the plaintiffs damages in the amount of On appeal and cross-appeal, the parties, respectively, do not challenge the district court's rulings that the plaintiffs are not entitled to damages for any period prior to August 13, 1993, 2 and that the defendants wrongfully repudiated the contract in 1993, entitling the plaintiffs to damages for the remaining approximately two and a half years of the 20-year contract. All the other rulings are variously contested by one party or the other.

$15,551,455.00, plus costs. The court declined to award prejudgment interest.

After full consideration of the record, and for the reasons stated below, we affirm the district court's rulings that the defendants breached and wrongfully repudiated the contract in 1993, and that the plaintiffs are entitled to damages from August 13, 1993, to July 7, 1996. We also affirm the district court's ruling that the last, highest prices under government regulation did not survive deregulation as applicable prices for gas under the contract. We reverse the district court's rulings that the favored nations clause of the contract applies and establishes damages, and that the defendants were obligated to purchase gas not attributable to lands committed to the contract by the plaintiffs, including "makeup gas." Accordingly, we vacate the judgment, and remand the case for a determination, on evidence in the record prior to the court's reopening order, of damages from August 13, 1993, to July 7, 1996. Furthermore, because the district court's conclusion that prejudgment interest was not warranted in this case was premised on its determination that plaintiffs' damages were to be computed by reference to the favored nations clause, a determination we hold to be improper, we vacate the district court's prejudgment interest determination and remand to the district court for a determination regarding whether prejudgment interest is warranted in light of our treatment of the case.

BACKGROUND

The district court thoroughly laid out the facts of this case, and the course of government regulation of interstate and intrastate natural gas prices under the Natural Gas Policy Act (NGPA), 15 U.S.C. §§ 3301-3432 (1982) (§§ 3311-3348 repealed 1989), in its published opinion on the parties' cross-motions for summary judgment, Moncrief v. Williston Basin Interstate Pipeline Co., 880 F.Supp. 1495 (D.Wyo.1995), and in its Findings of Fact and Conclusions of Law issued on August 16, 1996, 3 J.A. 1170. We restate, summarize and add to those opinions only those facts and references to the NGPA which are necessary to our decision.

W.A. Moncrief and Tex Moncrief were professional oil and gas businessmen, based in the Moncrief Building in Fort Worth, Texas, whose joint ventures in that business began in 1945 and eventually covered at least five states. In 1974, they joined with Woods Petroleum Co. ("Woods") to drill 12 wells in the Powder River Basin in eastern Wyoming. One of those wells discovered an oil field which was designated as the Powell II Unit. The field was a retrograde gas-condensate field, that is, oil and gas existed in a gaseous state in the reservoir. The land overlying the reservoir was owned by other parties, to whom the Moncriefs and the other working interest owners paid production royalties.

In 1976 the Moncriefs and Woods, which acted as the Moncriefs' agent, entered into a 20-year contract with the Montana-Dakota Utilities Company (later named MDU Resources, Inc.) (hereinafter "MDU") for

the sale of natural gas produced from the Powell II Unit, with interests in specified sections in Townships 39 and 40 North, in Converse County, Wyoming. Interests in additional lands in Converse County were added to the contract by amendment in 1978 and 1979. MDU later formed Williston Basin Interstate Pipeline Company (WBIPC) as a wholly-owned subsidiary, and assigned its gas contracts to it in 1985. 3

I. Price

The contract was entered into at a time of supply shortage and, therefore, in a seller's market. Also, since intrastate sales of gas were unregulated at the time, Woods and Moncrief favored contracting with MDU since the sales could be for the intrastate Wyoming market and could command a higher price than was available for interstate sales.

The pricing provisions of the contract reflect these circumstances. The contract provided what, for ease of reference, can be called a base price (pp 7.1 and 7.2); two price escalator provisions--a regulated "area rate" clause (p 7.4) and a "favored nations" clause (p 7.6); and a clause providing for the renegotiation, at the seller's option, of prices once government regulation of interstate gas prices ceased (p 7.5). Those provisions, in relevant part, are as follows:

ARTICLE VII

Price

Buyer shall pay Seller for the gas delivered hereunder in accordance with the following schedule:

7.1 For the period commencing on the date of initial delivery of gas hereunder, until January 1, 1978, a price of $1 per million Btu.

7.2 The price shall be increased 1.5cents per million Btu on January 1, 1978 and on each subsequent January 1 during the term hereof.

....

7.4 If the Federal Power Commission, or any successor or other governmental authority having jurisdiction in the premises, shall at any time hereafter prescribe or permit, for the pricing area in which the properties are located, a higher just and reasonable area rate including all adjustments for the same type of gas as committed hereunder than the price herein provided to be paid, then the price hereunder shall be increased, effective as of the date such higher price is prescribed, to equal such higher rate.

7.5 In the event the regulation of the price at which natural gas is sold in interstate commerce ceases, then Seller shall have the right to request a redetermination of the prices at which natural gas is to be sold hereunder. Buyer shall notify Seller of the date of deregulation in...

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