N. Oil & Gas, Inc. v. Moen

• Decision Date: 10 December 2015
• Docket Number: No. 14–3836.,14–3836.
• Citation: 808 F.3d 373
• Parties: NORTHERN OIL AND GAS, INC., Plaintiff–Appellee v. Carol Kay MOEN; Orville A. Moen, Defendant Third Party Plaintiffs–Appellants v. Limsco Limited Partnership, Third Party Defendant–Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

808 F.3d 373

NORTHERN OIL AND GAS, INC., Plaintiff–Appellee

v.Carol Kay MOEN; Orville A. Moen, Defendant Third Party Plaintiffs–Appellants

v.Limsco Limited Partnership, Third Party Defendant–Appellee.

No. 14–3836.

United States Court of Appeals, Eighth Circuit.

Submitted: Sept. 10, 2015.

Filed: Dec. 10, 2015.

Bryan Van Grinsven, argued, Minot, ND, for Plaintiff–Appellee.

Michael David Schoepf, Bismarck, ND, Joshua A. Swanson, of Fargo, ND, argued, (Lawrence Bender, Bismarck, ND, Robert B. Stock, Fargo, ND, on the brief), for Plaintiffs–Appellants.

Before LOKEN, MELLOY, and GRUENDER, Circuit Judges.

GRUENDER, Circuit Judge.

The parties in this case dispute the continued validity of an oil and gas lease covering land in Williams County, North Dakota. Northern Oil and Gas, Inc., ("Northern Oil") and Limsco Limited Partnership ("Limsco") sought judgment declaring that the lease remained valid and quieting title in their respective interests in the lease. Carol Kay Moen and Orville A. Moen (collectively, "the Moens") sought declaratory judgment finding that the lease had expired as to the disputed land. The district court¹ granted Northern Oil's and Limsco's motions for summary judgment, and the Moens appealed. We affirm.

I.

In 1984, the Moens' predecessors in interest entered into an agreement to lease oil and gas interests to Northern Oil and Limsco's predecessor. The lease applies to five sections of land in Williams County, North Dakota, described as follows:

Township 155 North, Range 99 West

Section 2: Lots 3 (39.99), 4 (39.91), S/2NW/4

Section 3: Lots 1 (39.89) ... 3 (39.95), 4 (39.99), S1/2N1/2, SW1/4

Section 4: E1/2SE1/4, SW1/4SE1/2, SE1/2SW1/2

Section 9: E1/2NE1/3 ...

Section 10: SW1/4NE1/4 ...

The lease describes the land using the Public Land Survey System ("PLSS"), a rectangular survey system used to subdivide and describe public land in the western United States. The Public Land Survey System, U.S. Geological Survey, http://nationalatlas.gov/articles/boundaries/a_plss.html (last visited Dec. 4, 2015). The PLSS divides land into six-square-mile townships. Id. These townships are further divided into thirty-six sections, which each span one square mile. Id. Each township is assigned a number, based on how far north or south the township is located from the survey's starting point, and a range, based on the township's distance east or west of that same point. Id. Each section within the township is also assigned a number, one through thirty-six. Id. Thus, the PLSS assigns a unique three-number combination—township, range, and section—to describe the exact location of every one-square-mile section of land under the survey. This dispute involves a 160–acre plot of land constituting the southwest quarter of Section 3, Township 155 North, Range 99 West.

Interpreting the lease requires understanding the concepts of spacing and pooling. A spacing unit is an administratively created boundary used "to prevent waste, to avoid the drilling of unnecessary wells, [and] to protect correlative rights." N.D.C.C. § 38–08–07(1). The North Dakota Industrial Commission ("NDIC") assigns a spacing unit to each well "for drilling, producing, and proration purposes." See id. (granting the NDIC authority to set spacing units); N.D. Admin. Code § 43–02–03–01(46) (defining spacing units). When multiple parties own land within a spacing unit, they must combine, or "pool," their separate interests in the land and divide between them all profits from production within the spacing unit. See N.D.C.C. § 38–08–08(1).

The lease at issue provides for a primary term of five years, beginning on July 5, 1984, and extends "thereafter as long as oil and gas is [sic] produced from said land or Lessee is engaged in drilling or reworking operations thereon." Under this clause, production from any land under the lease would be sufficient to continue the lease beyond its primary term with respect to all land covered by the lease. However, the lease also contains a "Pugh clause," a special provision designed to "protect the lessor from the anomaly of having the entire property held under a lease by production from a very small portion." Sandefer Oil & Gas, Inc. v. Duhon, 961 F.2d 1207, 1209 (5th Cir.1992). The Pugh clause here provides, in relevant part:

This lease shall terminate at the end of the primary term as to all of the leased lands except those lands located within the same section of a production unit² or spacing unit prescribed by law or administrative authority on which is located a well producing or capable of producing oil or gas in commercial quantities....

At the end of the lease's primary term, Section 3 contained two active wells: one well was assigned a 160–acre spacing unit comprised of the northwest quarter of Section 3, and the other well was assigned a 160–acre spacing unit comprised of the northeast quarter of Section 3. However, the southwest quarter, the land at issue here, was not included within any spacing unit with an active well at that time.

The parties dispute whether the Pugh clause divides the lease at spacing-unit boundaries or section boundaries. The Moens claim that the Pugh clause divides the lease at spacing-unit boundaries such that the lease expired as to the disputed land because the land did not fall within a spacing unit with an active well at the end of the lease's primary term. Under their interpretation, the wells on the northeast and northwest quarters of Section 3 maintained the lease only as to those quarter sections. In turn, Northern Oil and Limsco claim that the Pugh clause divides the lease at section boundaries such that production anywhere within a one-square-mile section of land maintains the lease as to that entire section. Under their reading, production elsewhere on Section 3 maintained the lease as to the disputed land.

Northern Oil filed its complaint in this matter, and the Moens filed an answer, a counterclaim against Northern Oil, and a third-party complaint against Limsco. After all parties moved for summary judgment, the district court referred each of the summary-judgment motions to the magistrate judge for a report and recommendation. The magistrate judge recommended that the lease be found valid and enforceable as to the southwest quarter of Section 3, that Northern Oil's and Limsco's motions for summary judgment be granted, and that the Moens' motion for summary judgment be denied. The district court issued an order adopting the magistrate judge's report and recommendation, granting Northern Oil's and Limsco's motions for summary judgment, and denying the Moens' motion for summary judgment. The Moens timely appealed.

II.

We review the district court's grant of summary judgment de novo. Hackett v. Standard Ins. Co., 559 F.3d 825, 829 (8th Cir.2009). Summary judgment is appropriate only when there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c) ; Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986).

In a diversity suit, this court applies the substantive law of the forum state, here North Dakota. See Urban Hotel Dev. Co., Inc. v. President Dev. Group, L.C., 535 F.3d 874, 877 (8th Cir.2008). Under North Dakota law, a contract's language will "govern its interpretation if the language is clear and explicit and does not involve an absurdity." Deckert v. McCormick, 857 N.W.2d 355, 359 (N.D.2014) (quoting N.D.C.C. § 9–07–02 ). North Dakota courts construe words in their ordinary and popular sense unless the parties use them in a technical sense. Grynberg v. Dome Petroleum Corp., 599 N.W.2d 261, 265 (N.D.1999) (citing N.D.C.C. § 9–07–09 ). "A contract must be construed as a whole to give effect to each provision, if reasonably possible." Johnson v. Shield, 868 N.W.2d 368, 371 (N.D.2015) (citing N.D.C.C. § 9–07–06 ).

North Dakota courts presume that oil and gas leases are indivisible such that production on any part of the land will maintain the lease beyond the primary term for all land covered by the lease.

Tank v. Citation Oil & Gas Corp., 848 N.W.2d 691, 696 (N.D.2014) (citing Egeland v. Cont'l Res., Inc., 616 N.W.2d 861, 866 (N.D.2000) ). "A Pugh clause generally provides for a severance of the lease where less than all of the leasehold is included in a single [spacing] unit, but it can vary widely in form." Id. at 697. In order to overcome the presumption that an oil and gas lease is indivisible, a Pugh clause must "clearly and explicitly direct a division of the lease into several parts." Egeland, 616 N.W.2d at 867.

The parties in this case dispute the meaning of the phrase "the same section of" in the lease's Pugh clause, which states, in relevant part:

This lease shall terminate at the end of the primary term as to all of the leased lands except those lands located within the same section of a production unit or spacing unit prescribed by law or administrative authority on which is located a well producing or capable of producing oil or gas in commercial quantities....

Northern Oil and Limsco argue that the term "section" in the Pugh clause refers to the PLSS definition, i.e., a one-square-mile tract of land. They claim that the Pugh clause severs the lease at section boundaries such that production from any part of a one-square-mile section extends the lease as to that entire section. The Moens, in contrast, claim that the Pugh clause divides the lease at spacing-unit boundaries, not section boundaries. They argue that the definition of the term "section" is irrelevant, and they instead focus on the preposition—the same section "of" a spacing unit. Since the Pugh clause uses "of," the Moens assert that whatever "section" means, the "section" must be part "of" the spacing unit. Thus, because the disputed land did not fall within any spacing unit, the Moens argue that the land could not have fallen within a "section" of a spacing unit, either.

At the outset, we note that neither side has proposed an...