Elm Ridge Exploration Co. v. Counterclaim

• Decision Date: 09 July 2013
• Docket Number: 12–2017,12–2109.,Nos. 11–2192,s. 11–2192
• Citation: 721 F.3d 1199
• Parties: ELM RIDGE EXPLORATION COMPANY, LLC, Plaintiff/Counterclaim Defendant–Appellee/Cross–Appellant, v. Fred ENGLE, Defendant/Counterclaimant/Third–Party Plaintiff–Appellant/Cross–Appellee, v. Central Resources, Inc., Third–Party Defendant–Appellee, and Giant Exploration and Production Company, Third–Party Defendant.
• Court: U.S. Court of Appeals — Tenth Circuit

721 F.3d 1199

ELM RIDGE EXPLORATION COMPANY, LLC, Plaintiff/Counterclaim Defendant–Appellee/Cross–Appellant,

v.Fred ENGLE, Defendant/Counterclaimant/Third–Party Plaintiff–Appellant/Cross–Appellee,

v.Central Resources, Inc., Third–Party Defendant–Appellee,andGiant Exploration and Production Company, Third–Party Defendant.

Nos. 11–2192, 12–2017, 12–2109.

United States Court of Appeals,Tenth Circuit.

July 9, 2013.

Michael Newell (Lewis C. Cox, III, with him on the briefs), Heidel, Samberson, Newell, Cox & McMahon, Lovington, NM, appearing for Appellant/Cross–Appellee Fred Engle.

William E. Zimsky, Abadie & Schill, PC, Durango, CO, appearing for Appellee Central Resources, Inc., and Appellee/Cross–Appellant Elm Ridge Exploration Company, LLC.

Before LUCERO, MURPHY, and MATHESON, Circuit Judges.

MATHESON, Circuit Judge.

This case concerns a dispute between Elm Ridge Exploration Company, LLC (“Elm Ridge”), the operator of certain oil and gas leases in New Mexico, and Fred Engle, the majority owner of the leases. An operating agreement (the “Operating Agreement” or “Agreement”) governs their relationship. Elm Ridge seeks to recover costs it incurred in drilling a well on the leasehold property (the West Bisti 22–1T well or “1T” well). Mr. Engle contends, among other things, that he should not have to pay for unauthorized expenses that Elm Ridge incurred.

Their dispute became a diversity action in which Elm Ridge sought to recover drilling expenses by foreclosing on Mr. Engle's lease interests. Mr. Engle counterclaimed, alleging that (1) Elm Ridge had no authority to be the operator (“Count 1”); (2) Elm Ridge conspired to conceal an earlier violation of his right to choose the operator (“Count 2”); and (3) he should receive damages for Elm Ridge's breach of its contractual and fiduciary duties (“Count 3”). Mr. Engle also filed a third-party complaint on the conspiracy counterclaim against the previous operators—Central Resources, Inc. (“Central”) and Giant Exploration & Production Company (“Giant”)—as well as Giant's parent company, Giant Industries. The parties later stipulated to the dismissal of Giant Industries, which the district court granted. Giant Industries is not a party to these appeals. Elm Ridge is the successor in interest to Giant.

In response to Elm Ridge's motion for summary judgment and Central's motion to dismiss, the district court dismissed Counterclaim Counts 1 and 2 and the third-party complaint on statute of limitations grounds. After a three-day trial on Counterclaim Count 3, a jury found that Elm Ridge had breached the Operating Agreement and could not recover the costs attributable to the breach from Mr. Engle. The jury found that Mr. Engle still owed Elm Ridge for other drilling costs. Relying on the jury's findings, the district court calculated Mr. Engle's share of the costs not attributable to the breach and held that Elm Ridge was entitled to a foreclosure order. Both parties appeal.

On appeal, Mr. Engle argues that the district court erred in (A) granting Elm Ridge's and Central's motions for summary judgment and dismissal of CounterclaimCounts 1 and 2 and the third-party complaint; (B) not excusing his share of the drilling costs despite Elm Ridge's breach of the Operating Agreement; and (C) excluding other acts evidence regarding Elm Ridge.

On cross-appeal, Elm Ridge argues that the district court erred in (D) denying its Rule 50(a), 59(a), and 59(e) motions under the Federal Rules of Civil Procedure regarding Counterclaim Count 3; and (E) submitting the damages issue of Counterclaim Count 3 to a jury rather than deciding it from the bench.

Exercising jurisdiction under 28 U.S.C. § 1291, we affirm.

I

.

BACKGROUND

A. Factual Background

1. Leasehold Interests

Elm Ridge and Mr. Engle own working interests in federal oil and gas leases in New Mexico. A working interest owner has the right to explore and develop the lease for oil and gas and generally pays the costs of drilling and completing a well. See Ryan v. Am. Natural Energy Corp., 557 F.3d 1152, 1163 (10th Cir.2009); Strata Prod. Co. v. Mercury Exploration Co., 121 N.M. 622, 916 P.2d 822, 825 n. 1 (1996). By contrast, a royalty interest owner does not have the right to explore or develop the lease, does not pay for oil and gas production costs, and receives royalty payments as a percentage of oil and gas production. See Atlantic Ref. Co. v. Beach, 78 N.M. 634, 436 P.2d 107, 111 (1968).

When there are two or more working interest owners of a lease, one of the owners may propose a new well in the leasehold area, and the other(s) may elect to participate (“consenting owner(s)”) or not to participate (“non-consenting owner(s)”). See San Juan Basin Consortium, Ltd. v. EnerVest San Juan Acquisition Ltd. P'ship, 67 F.Supp.2d 1213, 1214 (D.Colo.1999). The consenting owners, because they pay the costs of completing the new well, receive the non-consenting owners' share of production from the new well until they have recovered a contractually determined percentage of the costs, here 200 percent.

2. Agreement with Giant

On November 2, 1992, Mr. Engle and Giant entered into an oil and gas Operating Agreement that combined two oil and gas leases owned by Mr. Engle and two leases owned by Giant into a single contract area in San Juan County, New Mexico. Mr. Engle owned 62.5 percent of the working interest in the contract area, and Giant owned the other 37.5 percent. Under the Agreement, Giant was designated as the operator—the party who would operate the leases and any wells drilled on the land.

The Operating Agreement provided that the

Operator may resign at any time by giving written notice thereof to Non–Operators. If Operator terminates its legal existence, no longer owns an interest hereunder in the Contract Area, or is no longer capable of serving as Operator, Operator shall be deemed to have resigned without any action by Non–Operators, except the selection of a successor....

Upon the resignation or removal of Operator, a successor Operator shall be selected by the parties. The successor Operator shall be selected from the parties owning an interest in the Contract Area at the time such successor Operator is selected. The successor Operator shall be selected by the affirmative vote of two (2) or more parties owning a majority interest....

Aplt. Appx. at 405.

Pursuant to the Agreement, Giant drilled and completed the first well, known as the West Bisti 22 Coal 22–1 well (the “22–1” well), within the contract area.

3. Purchase by Central

On August 30, 1996, Giant sent a letter to Mr. Engle, stating:

Re: Notice of Contract Operating Agreement

Ladies and Gentlemen:

... Giant has entered into a contract operating agreement ... with Central ... in connection with [the properties described in an attached exhibit]. In accordance with the Contract Operating Agreement, Central will perform (on behalf of Giant) Giant's obligations as operator.... Giant hereby requests and authorizes you to submit all correspondence, payments and other information to Central that you are presently submitting to Giant pursuant to the governing operating agreement.

Aplt. App. at 210.

That same day, Central filed a notice with the Bureau of Land Management (“BLM”) that Giant had resigned as operator and that the working interest owners—who were Mr. Engle and Central—had designated Central as operator.

On September 30, 1996, Central sent Mr. Engle a letter about Central's revenue distribution policies. The letter stated:

Dear Working Interest and/or Royalty Owner:

Effective April 1, 1996, Central Resources, Inc. (“Central”) purchased certain oil and gas properties in Colorado, Kansas, New Mexico, Oklahoma and Utah owned by Giant Exploration and Production and assumed operatorship of those properties on September 1, 1996.

Aplt. Appx. at 214.

4. Purchase by Elm Ridge

On September 29, 2000, Central bought all of Giant's issued and outstanding stock from Giant Industries. The same day, Central assigned and transferred all the Giant stock, including its interests in the contract area, to Elm Ridge.¹

Central sent a letter, dated September 29, 2000, to Mr. Engle, stating the change of ownership and operatorship:

TO: JOINT WORKING INTEREST OWNERS

NOTICE OF CHANGE OF OPERATORSHIP/OWNERSHIP

Ladies and Gentlemen:

Our records indicate that you currently own a working interest in each of the properties described on the attached Exhibit (the “Properties”), which Properties were operated by Central Resources, Inc. Effective June 1, 2000 ..., Central transferred its interest in the Properties to Elm Ridge.... Effective October 1, 2000 ..., Central resigns as Operator and Elm Ridge assumes operatorship of the Properties.

Aplt. Appx. at 253 (emphasis added). An attached exhibit identified Mr. Engle as a working interest owner of the affected property.

On October 1, 2000, Elm Ridge sent a notice to the BLM stating that Central had resigned as operator and that the working interest owners—which included Mr. Engle—had designated Elm Ridge as successor operator.

5. Drilling the 1T Well

In June 2005, Elm Ridge sent Mr. Engle written notice of its intent to drill the 1T well. Mr. Engle elected to participate and signed the cost estimate (“authorization of expenditure”) on June 14, 2005. The Operating Agreement required that Elm Ridge begin drilling the well within 90 days or it would have to seek Mr. Engle's consent again. Elm Ridge needed a permit from the BLM because Mr. Engle's and Elm Ridge's leases were federal leases, and it needed a permit from the Navajo Nation because it owned the surface where the well was to be drilled. Elm Ridge did not obtain the permits within 90 days of Mr. Engle's consent, but it continued to pursue the permits.

By certified letter dated July 8, 2008, Elm Ridge notified Mr. Engle that it was proposing again to drill the new well after a lengthy permitting process. It attached a new authorization for expenditure and asked Mr. Engle to elect whether he...