84 P.3d 626 (Kan.App. 2004), 89,949, Larson Operating Co. v. Petroleum, Inc.

Docket Nº:89,949.
Citation:84 P.3d 626, 32 Kan.App.2d 460
Opinion Judge:[21] The opinion of the court was delivered by: Greene, J.
Party Name:LARSON OPERATING COMPANY, a Division of Larson Engineering, Inc., as an Owner and as Representative of other Working Interest Owners, Appellee/Cross-appellee, v. PETROLEUM, INC., Appellant, and American Warrior, Inc., Appellee/Cross-appellant.
Attorney:[17] Robert J. O'Connor and David E. Bengtson, of Stinson, Morrison, Hecker, L.L.P., of Wichita, for appellant. [18] Timothy E. McKee and Rachael K. Pirner, of Triplett, Woolf & Garretson, L.L.P., of Wichita, for appellee/cross-appellee. [19] Robert T. Cornwell, of Wichita, for appellee/cross-app...
Case Date:February 20, 2004
Court:Court of Appeals of Kansas

Page 626

84 P.3d 626 (Kan.App. 2004)

32 Kan.App.2d 460

LARSON OPERATING COMPANY, a Division of Larson Engineering, Inc., as an Owner and as Representative of other Working Interest Owners, Appellee/Cross-appellee,

v.

PETROLEUM, INC., Appellant,

and

American Warrior, Inc., Appellee/Cross-appellant.

No. 89,949.

Court of Appeals of Kansas

February 20, 2004.

Page 627

Syllabus by the Court

1. Operating agreements are common in the oil and gas business and can be indispensable to the conduct of such business when there is more than one working interest owner. The operating agreement is designed to coordinate development of the property by designating an "operator" and by specifying each working interest owner's rights and obligations. Such agreements

Page 628

generally address the authority of the operator to act on behalf of the nonoperators.

2. The real party in interest is the person who possesses the right sought to be enforced and is not necessarily the person who ultimately benefits from the recovery.

3. We conclude under the unique facts of this case that the operator of oil and gas leasehold interests was a real party in interest to enforce preferential rights of working interest owners where: (i) the preferential rights, although in the nature of property rights, were created by the operating agreement and were not unrelated to operational benefits; (ii) the express language of the operating agreement, although ambiguous as to precise extent, generally supports authority in the operator for suits to enforce defaults in its provisions; and (iii) the written consent forms signed by interest owners serve as "ratification of commencement of the action" so as to satisfy K.S.A. 60-217(a).

4. If a possible cloud on the seller's title appears, the prospective purchaser must either clear the cloud or proceed at the purchaser's own risk.

5. Where actual notice of potential title defect is provided by purchaser, buyer does not qualify for bona fide purchaser status where absolutely no investigation whatsoever is undertaken.

[32 Kan.App.2d 461] 6. The Uniform Statutory Rule Against Perpetuities, K.S.A. 59-3401 et seq., supercedes the common-law rule and exempts from the rule nonvested interests created by commercial nondonative agreements.

7. K.S.A. 59-3401 et seq. does not violate Kan. Const. art. 2, § 16, because the subject matter of the bill of enactment did not embrace "dissimilar and discordant subjects" but rather embraced a singular purpose: amendment and enactment of certain uniform acts in an attempt to adopt or to harmonize such acts with Kansas legislative intent. Joinder of enactments and amendments of uniform laws in a singular enactment did not offend the constitution, since there was no obvious intent to tie a matter of legislative merit to an unworthy matter.

8. A court has certain inherent powers it may exercise as reasonably necessary for the administration of justice, provided these powers in no way contravene or are inconsistent with substantive statutory law. Such inherent powers may be exercised as a means of enforcing obedience to a law which the court is called on to administer, including discovery rules and procedure.

9. Where a party rather than counsel is sanctioned for discovery abuse pursuant to the inherent power of the courts, no express finding of bad faith is required, but such sanctions must be exercised with restraint and caution and may be imposed only after proper notice and an opportunity for a hearing.

Robert J. O'Connor and David E. Bengtson, of Stinson, Morrison, Hecker, L.L.P., of Wichita, for appellant.

Timothy E. McKee and Rachael K. Pirner, of Triplett, Woolf & Garretson, L.L.P., of Wichita, for appellee/cross-appellee.

Robert T. Cornwell, of Wichita, for appellee/cross-appellant.

Before GREENE, P.J., ELLIOTT, J., and KNUDSON, S.J.

GREENE, P.J.

This appeal frames numerous issues among three parties (buyer, seller, and operator on behalf of those with preferential rights) after oil and gas leasehold interests that were purportedly subject to preferential rights to purchase were sold in [32 Kan.App.2d 462] breach of such rights. The district court concluded that the buyer was a bona fide purchaser entitled to dismissal from the suit and then awarded judgment for damages against seller to those with preferential rights. On this issue we reverse, concluding that the buyer was not a bona fide purchaser. We affirm the district court on issues of the operator's standing to sue, the enforceability of the preferential rights provision, and the award of discovery sanctions.

Factual and Procedural Overview

Petroleum, Inc. (PetInc) owned a 25% working interest in the Merrill 1-8 and 2-8 gas units in Finney County. The units were

Page 629

operated by Larson Operating Company (Larson), which owned no interest in either unit. The operating agreement included the following provision regarding preferential rights to purchase among working interest owners:

"Should any party desire to sell all or any part of its interests under this agreement, or its rights and interests in the Contract Area, it shall promptly give written notice to the other parties, with full information concerning its proposed disposition, which shall include the name and address of the prospective transferee (who must be ready, willing and able to purchase), the purchase price, a legal description sufficient to identify the property, and all other terms of the offer. The other parties shall then have an optional prior right, for a period of ten (10) days after the notice is delivered, to purchase for the stated consideration on the same terms and conditions the interest which the other party proposes to sell; and, if this optional right is exercised, the purchasing parties shall share the purchased interest in the proportions that the interest of each bears to the total interest of all purchasing parties. However, there shall be no preferential right to purchase in those cases where any party wishes to mortgage its interests, or to transfer title to it interests to its mortgagee in lieu of or pursuant to foreclosure of a mortgage of its interests, or to dispose of its interests by merger, reorganization, consolidation, or by sale of all or substantially all of its Oil and Gas assets to any party, or by transfer of its interests to a subsidiary or parent company or to a subsidiary of a parent company, or to any company in which such party owns a majority of the stock."

In offering its working interests for sale at auction, PetInc completed a "Property Information Form" for each interest offered by marking in the affirmative the inquiry, "Is the Property subject to any preferential rights?" PetInc then completed the "detailed explanation" [32 Kan.App.2d 463] portion of the form for the Merrill 2-8 interest by including the following:

"Pref right to purchase under JOA dtd. 5-1-94, 'however, there shall be no preferential right by sale of all or substantially all of its oil and gas assets--Note: same for Merrill 1-8-.' "

The "detailed explanation" portion of the form for the Merrill 1-8 interest stated: "Pref right to purchase under J.O.A. dtd. 5-1-94".

On June 7, 2000, PetInc sold its Merrill interests to...

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