Ryan v. American Natural Energy Corp.

• Decision Date: 02 March 2009
• Docket Number: No. 08-5110.,No. 08-5002.,08-5002.,08-5110.
• Citation: 557 F.3d 1152
• Parties: Christopher J. RYAN, as the Liquidation Agent for the Class 7 Claimants of the Confirmed Chapter 11 Plan of Reorganization of Couba Operating Company, Plaintiff-Appellant, v. AMERICAN NATURAL ENERGY CORPORATION, an Oklahoma corporation, Defendant-Appellee. Christopher J. Ryan, as the Liquidation Agent for the Class 7 Claimants of the Confirmed Chapter 11 Plan of Reorganization of Couba Operating Company, Plaintiff-Appellee, v. American Natural Energy Corporation, an Oklahoma corporation, Defendant-Appellant.
• Court: U.S. Court of Appeals — Tenth Circuit

557 F.3d 1152

Christopher J. RYAN, as the Liquidation Agent for the Class 7 Claimants of the Confirmed Chapter 11 Plan of Reorganization of Couba Operating Company, Plaintiff-Appellant, v. AMERICAN NATURAL ENERGY CORPORATION, an Oklahoma corporation, Defendant-Appellee.

Christopher J. Ryan, as the Liquidation Agent for the Class 7 Claimants of the Confirmed Chapter 11 Plan of Reorganization of Couba Operating Company, Plaintiff-Appellee, v. American Natural Energy Corporation, an Oklahoma corporation, Defendant-Appellant.

No. 08-5002.

No. 08-5110.

United States Court of Appeals, Tenth Circuit.

March 2, 2009.

W. David Pardue (Ronald R. Tracy, with him on the briefs) of Eagleton & Nicholson, P.C., Oklahoma City, OK, for Plaintiff.

Ira L. Edwards (Sharon K. Weaver, with him on the brief) of Riggs, Abney, Neal, Turpen, Orbison & Lewis, Inc., Tulsa, OK, for Defendant.^*

Before KELLY, HARTZ, and O'BRIEN, Circuit Judges.

PAUL KELLY, JR., Circuit Judge.

In No. 08-5002, Plaintiff-Appellant Christopher J. Ryan ("Ryan"), in his capacity as the liquidation agent for a class of creditors in a confirmed chapter 11 reorganization plan, appeals from the district court's judgment in favor of Defendant-Appellee American Natural Energy Corporation ("ANEC"). In this diversity case, the district court held a bench trial resulting in findings of fact and conclusions of law in support of the judgment awarding Ryan no relief. Ryan v. Am. Natural Energy Corp., No. 06-CV-022, 2007 WL 4285324 (N.D.Okla. Nov.30, 2007). In No. 08-5110, ANEC appeals from the district court's order denying it attorney's fees. Ryan v. Am. Natural Energy Corp., No. 06-CV-022, 2008 WL 2705462 (N.D.Okla. July 9, 2008). Our jurisdiction arises under 28 U.S.C. § 1291 and we affirm in part and reverse in part and remand on the merits; we affirm the district court's denial of attorney's fees.

Background

Ryan is the liquidation agent for the Class 7 creditors in the confirmed chapter 11 reorganization plan for the Couba Operating Co. As part of settlement negotiations in the bankruptcy case, Couba agreed to assign certain leases to ANEC. ANEC in turn conveyed to Ryan a net profits interest (NPI) and an overriding royalty interest (ORI) in a 23.5 square mile area surrounding these leases, known as the area of mutual interest or AMI. The parties settled their differences concerning the ORI. The meaning of the NPI conveyance is what remains.

Concerning the NPI, ANEC conveyed a 50% NPI to the oil and gas produced from existing wells on the leases; a 15% NPI in production from new wells on the leases; and a 6% NPI in production from new wells drilled in the AMI. Aplt.App. 358, §§ 2.2-2.4. Production periods are monthly. Aplt.App. 357 art. I ("Production Period"). Existing wells existed as of the effective date of the confirmed plan (November 16, 2001); new wells are those drilled thereafter. Aplt.App. 356-57, art. I ("Effective Date," "Existing Wells," "New Wells," "Plan"); Ryan, 2007 WL 4285324, at *2.

ANEC refurbished and restarted production on five to seven existing wells, drilled fifteen new wells on the leases, and attempted two wells on the AMI. Ryan, 2007 WL 4285324, at *2. In determining amounts due the Class 7 creditors on the NPI, Ryan contends that costs and proceeds (hence the NPI) should be calculated on a per-well basis and without any carryforward of unrecouped direct costs. ANEC argues that costs should be allocated on a system-wide basis, i.e. aggregating all costs from existing and new wells, allowing carryforward of any unrecouped costs. Aggregate costs would then be deducted from aggregate revenues, and net profit would occur only after all costs had been recouped. ANEC also maintains that $1.1 million it spent to restore existing wells and evaluate the advisability of new drilling qualifies as a direct cost borne by the NPI; Ryan contends that such costs are lease acquisition costs not properly borne by the NPI.

The district court determined that the contract (conveyance) was ambiguous because it was susceptible to different interpretations as to net profits interest. Id. at *6. Accordingly, the district court considered extrinsic evidence. Id. at *7. It also mentioned the rule of contra proferentem, and concluded that the conveyance should be construed against Ryan and the Class 7 creditors as the drafters. Id. The court determined that ANEC's interpretation of aggregating and allocating costs on a system-wide basis should obtain because (1) "direct costs" were broadly defined, (2) such costs could not be separated on a well-by-well basis, and (3) such an interpretation was consistent with the underlying negotiations—the Class 7 creditors knew that for the net profits interest to pay, substantial development was necessary, and accordingly also took an overriding royalty interest for a more direct payoff. Id. The district court also determined that ANEC's $1.1 million spent to restore old wells and evaluate drilling prospects qualified as direct costs, as there was no indication in the plan that ANEC would forego such treatment. Id. at *10.

In addition to the different NPI percentages based upon the type of well, the conveyance repeatedly distinguishes between new wells and existing wells insofar as payment and recordkeeping requirements, including a requirement of sub-accounts for costs. Aplt.App. 356, art. I ("Direct Costs Accounts"); 357, art. I ("Proceeds"); 358, § 3.2; 359, § 6.1; 360, § 6.3(ii). The district court determined that although sub-accounts were called for in the conveyance, they are only necessary in the event aggregate costs for all wells are recouped (and profit results). Ryan, 2007 WL 4285324, at *8. The sub-accounts would then be used to allocate net profits in accordance with the different percentages, 50% for existing wells on leases, 15% for new wells on leases, and 6% for new wells drilled on lands located within the AMI. Id. The district court reasoned that because the sub-accounts are tied to the definition of new wells and existing wells, the sub-accounts do not support a well-by-well calculation, with only profitable wells considered for payments. Id. The district court also explained that monthly production and payment periods did not mean that costs cannot be carried forward and aggregated because the conveyance allows for recoupment. Id.

The district court concluded that all existing and new wells whether drilled on leases or the AMI were a "net profit system" and profits only occur after ANEC recoups all system costs. Id. at *9. It then determined that the system had as of October 2006 incurred a net loss of approximately $8.65 million, after trimming the direct costs claimed by ANEC of $6.3 million related to the Couba acquisition. Id. at *9-10. Thus, ANEC has substantial costs (reflected in a net loss of $8.65 million as of October 2006) that it can recoup before paying Ryan on the NPI. On the other hand, Ryan's expert CPA, Walter Thomas, found that $1.4 million was due to Ryan based upon five profitable new wells; that calculation was based upon revenues and expenses per well, not including field start-up costs which he did not consider a direct cost. Aplt. Br. 12; Aplt.App. 167-68; 380.

After the judgment in ANEC's favor, ANEC sought attorney's fees pursuant to Okla. Stat. Ann. tit. 12, § 936, claiming that the lawsuit was a civil action to recover upon an open account or an account stated and it was a prevailing party. The district court denied the motion, holding that the conveyance was neither an open account nor an account stated. Ryan, 2008 WL 2705462, at *3-5.

As framed by Ryan, the merits appeal presents the following issues: (1) whether ANEC is allowed to recoup its entire aggregate costs of developing and operating the leases and AMI acreage prior to paying any net profits to Ryan and the Class 7 creditors; (2) whether it is not possible to separate certain expenses listed as "direct costs," i.e. marketing, transportation of oil and gas, etc., on a well-by-well basis, (3) whether ANEC was properly allowed to designate some $1.1 million as a direct cost for the restoring of existing wells to production and evaluating the advisability of new wells, under the NPI conveyance, and (4) whether the NPI conveyance should have been construed against Ryan and the Class 7 creditors. We consider issue (4) concerning ambiguity first and reach the others in turn. Thereafter, we turn to the attorney's fees appeal in which ANEC argues that the district court erred in holding that Okla. Stat. Ann. tit. 12, § 936 is inapplicable to this case given its unique facts.

Discussion

A. Standard of Review

We review the district court's legal conclusions in a bench trial de novo; findings of fact will not be set aside unless clearly erroneous. Fed.R.Civ.P. 52(a)(6); Salve Regina Coll. v. Russell, 499 U.S. 225, 232-33, 111 S.Ct. 1217, 113 L.Ed.2d 190 (1991); Anderson v. City of Bessemer City, 470 U.S. 564, 574-75, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985). The parties agree that Oklahoma law applies, and that the conveyance is ambiguous. Aplt. Br. 15-17; Aplee. Br. 9. We pay deference to the district court's findings based upon its observation of the testimony as well as documentary evidence. Anderson, 470 U.S. at 574, 105 S.Ct. 1504.

Where interpretation of an ambiguous contract is aided by extrinsic evidence, the resulting interpretation is factual and cannot be set aside unless clearly erroneous. Morrison Knudsen Corp. v. Ground Improvement Techniques, Inc., 532 F.3d 1063, 1069 n. 3 (10th Cir.2008); Valley Improvement Ass'n, Inc. v. U.S. Fid. & Guar. Corp., 129 F.3d 1108, 1115 (10th Cir.1997). A finding is clearly erroneous when the reviewing court has a definite and firm conviction that it is mistaken, even though there may be some evidence to support it. Anderson, 470 U.S. at 573, 105 S.Ct. 1504. Where there are two permissible views of the evidence, a finding adopting one of those views cannot be clearly...