Questar Exploration & Prod. Co. v. Rocky Mountain Resources, LLC

• Decision Date: 01 February 2017
• Docket Number: S-16-0026
• Citation: 2017 WY 10,388 P.3d 523
• Parties: Questar Exploration and Production Company, now known as QEP Energy Company, a Texas corporation; Wexpro Company, a Utah corporation; Appellants (Defendants), v. Rocky Mountain Resources, LLC, Appellee (Plaintiff).
• Court: Wyoming Supreme Court

388 P.3d 523
2017 WY 10

Questar Exploration and Production Company, now known as QEP Energy Company, a Texas corporation; Wexpro Company, a Utah corporation; Appellants (Defendants),
v.
Rocky Mountain Resources, LLC, Appellee (Plaintiff).

S-16-0026

Supreme Court of Wyoming.

February 1, 2017

Representing Appellants: Shawn T. Welch, Holland & Hart, LLP, Salt Lake City, Utah; Jere C. (Trey) Overdyke, III, and Susan L. Combs, Holland & Hart, LLP, Jackson, Wyoming. Argument by Mr. Welch.

Representing Appellee: Steven F. Freudenthal, Freudenthal & Bonds, PC, Cheyenne, Wyoming; Greg Weisz, Pence and MacMillan, LLC, Laramie, Wyoming; Paul F. Simpson, McGinnis, Lochridge & Kilgore, LLP, Houston, Texas; Patton G. Lochridge and J. Derrick Price, McGinnis, Lochridge & Kilgore, LLP, Austin, Texas. Argument by Mr. Simpson.

Representing Wyoming Office of State Lands and Investments, Amicus Curiae in Support of QEP Energy Company: Peter K. Michael, Attorney General; Ryan T. Schelhaas, Deputy Attorney General; Mackenzie Williams, Senior Assistant Attorney General; Megan L. Nicholas, Senior Assistant Attorney General.

Before BURKE, C.J., and HILL, DAVIS, and KAUTZ, JJ., and FENN, D.J.

FENN, District Judge.

¶1] Appellants, QEP Energy Company ("QEP") and Wexpro Company ("Wexpro") appeal the district court's decision on cross summary judgment motions, the verdict and final judgment that found them liable for more than thirty million dollars in unpaid royalties, and the district court's denial of their motion for a new trial. We reverse and remand.

ISSUES

[¶2] Appellants phrase the issues as follows:

1. Whether the district court erred in concluding as a matter of law that the State of Wyoming's oil and gas lease assignment form contains an anti-washout clause that vested a past state lessee with title to an overriding royalty in a future state lease sold by public auction.

2. Whether the district court erred in concluding as a matter of law that the State of Wyoming did not have to approve an overriding royalty to be valid in a state oil and gas lease even though state approval is required under law.

3. Whether the district court erred in concluding as a matter of law that Wyoming's rule against perpetuities did not bar plaintiff's claim to an overriding royalty interest in a future state oil and gas lease.

4. Whether the district court's Jury Instruction No. 8 improperly instructed the jury without legal or evidentiary support and prejudiced the defense at trial.

5. Whether the district court abused its discretion in denying a motion for a new trial including where the jury verdict determined the causes of action accrued on the date the complaint was filed.

Appellee phrases the issues as follows:

1. Did a 4% overriding royalty interest reserved in assignments of oil and gas leases that extended it to "any renewal lease, substitute lease, or new lease issued in lieu thereof," extend as a matter of law to a subsequent lease covering the same land, issued within weeks after the original leases were surrendered, and promptly acquired by the same working interest owner that surrendered the prior leases?

2. Did the State Land Board have to approve that 4% overriding royalty a second time for it to apply to a subsequent lease under the extension clause in the initial assignment that the Board had already approved?

3. Does a 4% overriding royalty that extends to a future lease under an anti-washout clause violate the Rule against Perpetuities, as a matter of law?

4. Did Jury Instruction No. 8 improperly instruct the jury?

a. If so, was it an abuse of discretion that prejudiced QEP/Wexpro's statute of frauds defense?

[388 P.3d 526

b. If so, was it an abuse of discretion that prejudiced QEP/Wexpro's bona fide purchaser defense?

c. If so, was it an abuse of discretion that prejudiced QEP/Wexpro's limitations defense?

5. Were the jury's findings as to when Rocky Mountain Resources and Robert Floyd knew or reasonably should have known that they had a right to sue to enforce the rights to the 4% overriding royalty unsupported by the evidence or contrary to law?

Our resolution of this case makes it unnecessary for us to consider all of the issues presented. We rephrase the issues presented by the parties into a single dispositive issue:

1. Was the Ribbe Lease a "renewal lease, substitute lease, or new lease issued in lieu of" the 505 and 529 Leases?

FACTS

¶3] In 1951, the State of Wyoming issued two oil and gas leases covering land in Section 16, Township 32 North, Range 109 West, 6th P.M. ("Section 16") in Sublette County, Wyoming. One of these leases, Lease 0-11505 (the "505 Lease"), covered 160 acres and was issued to Gwen Keif. The other lease, Lease 0-11529 (the "529 Lease"), covered 480 acres and was issued to Walter Davis. Each of these leases had an initial primary term of ten years or as long as oil and gas was produced in paying quantities. The leases also required annual rental payments of $.25 per acre and required drilling to commence within two years unless the State granted a waiver of the drilling obligation. The leases also provided that they could not be assigned without the consent of the State, and any overriding royalty interests had to be approved by the Wyoming State Board of Land Commissioners ("State Land Board") and recorded with the lease.

[¶4] Gwen Keif assigned the 505 Lease to Walter Davis in 1952. In 1953, Mr. Davis assigned both the 505 Lease and the 529 Lease to Continental Oil Company ("Continental"), and he reserved a four percent (4%) overriding royalty interest in both leases.¹ These assignments were made on the State Land Board's standard assignment form, which contained the following language:

TO HAVE AND TO HOLD unto the said Continental Oil Company, its successors and assigns, subject to the terms and conditions of said lease; the grants and reservations herein contained extending to any renewal lease, substitute lease or new lease issued in lieu thereof with full effect.²

[¶5] On the same day that the State Land Board approved Mr. Davis's assignment of the leases to Continental, it also approved Continental's assignment of the 505 and 529 Leases to Malco Refineries, Inc. ("Malco").³

[¶6] Continental and Malco had previously entered into an agreement to develop oil and

[388 P.3d 527

gas interests in the Pinedale Area. Continental, Malco, and El Paso Natural Gas Company ("El Paso") subsequently entered into multiple agreements regarding other oil and gas leaseholds in the Pinedale area.

¶7] In 1954, these three companies applied to the United States Geological Survey ("USGS") to approve the formation of the Pinedale Unit. The State Land Board approved the inclusion of the 505 and 529 Leases in the Pinedale Unit, and Mr. Davis also ratified the formation of the Pinedale Unit. The Pinedale Unit Agreement provided for the contraction of the unit if the operator failed to commence appropriate activity by January 1, 1975. Any leases that were outside of a participating area when the contraction occurred would be automatically eliminated from the Pinedale Unit. The formation of the Pinedale Unit extended the term of the 505 and 529 Leases until the unit terminated or contracted.

[¶8] As part of the effort to form the Pinedale Unit, El Paso, Malco, and Continental entered into several contracts with Novi Oil Company ("Novi"). These agreements provided that Novi would assign several of its oil and gas leases to El Paso, Malco, and Continental in exchange for five percent (5%) of the net profits from sixty-two (62) oil and gas leases that were to be included in the Pinedale Unit. These four companies entered into a Unit NPI Contract, which provided that the net profits would be calculated after deducting operating expenses from gross revenue. Gross revenue would be calculated after deducting sums required to pay the overriding royalties that were listed on an exhibit to the agreement. Mr. Davis was not a party to the Unit NPI Contract, but his previously reserved overriding royalty interests in the 505 and 529 Leases were included in the list of permissible deductions from gross revenue.

[¶9] In 1955, Malco, Continental, and El Paso all became lessees of the 505 and 529 Leases through various assignments. These assignments were again approved by the State Land Board.

[¶10] In 1963, Malco's successor, Hondo Oil and Gas, Continental, and El Paso entered into a Farmout Agreement with Mountain Fuel Supply Company ("Mountain Fuel Supply"). Under this agreement, Mountain Fuel Supply would become a fifty percent (50%) working interest owner in the 505 and 529 Leases by drilling a test well in Section 16. Mountain Fuel Supply drilled the Pinedale 8 well pursuant to the Farmout Agreement, and it was assigned a fifty percent working interest in the leases. The assignment to Mountain Fuel Supply was approved by the State Land Board.⁴ As with the seven previous wells that had been drilled in Section 16 by other companies, the Pinedale 8 well confirmed the presence of natural gas in the area, but production was marginal because of the low permeability of the reservoir rock.

[¶11] Over the next several years, El Paso served as the operator of the Pinedale Unit. In 1974, El Paso obtained government approval to extend the Pinedale Unit's automatic elimination provision to allow further investigation into hydraulic fracturing technology....