Burk v. Nance Petroleum Corp., 92-2642

• Decision Date: 12 November 1993
• Docket Number: No. 92-2642,92-2642
• Citation: 10 F.3d 539
• Parties: David C. BURK, Willard Burk, Plaintiffs-Appellants, v. NANCE PETROLEUM CORPORATION, a foreign corporation, Defendant-Appellee, v. U.S. COMPANIES, INC., Baytide Petroleum, Inc., Third Party-Defendants.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 539

10 F.3d 539

David C. BURK, Willard Burk, Plaintiffs-Appellants, v. NANCE PETROLEUM CORPORATION, a foreign corporation, Defendant-Appellee, v. U.S. COMPANIES, INC., Baytide Petroleum, Inc., Third Party-Defendants.

No. 92-2642.

United States Court of Appeals Eighth Circuit.

Submitted May 14, 1993.

Decided Nov. 12, 1993.

Charles LaVern Neff, Williston, ND, argued for plaintiffs-appellants.

Brian R. Bjella, Bismarck, ND, argued for defendant-appellee.

Before LOKEN, Circuit Judge, ROSS, Senior Circuit Judge, and MORRIS SHEPPARD ARNOLD, Circuit Judge.

LOKEN, Circuit Judge.

This is a diversity case arising out of a complex oil and gas leasing arrangement covering land in McKenzie County, North Dakota. Plaintiffs David and Willard Burk appeal the district court's ¹ grant of summary judgment dismissing their contract and fraud claims against defendant Nance Petroleum Corporation. Having concluded that the "net revenue interest" sharing agreement at issue is unambiguous and was correctly construed by the district court, we affirm.

I.

On October 17, 1975, the Burk family leased their mineral interest in "Farm Unit Seven" to R.E. Puckett for oil and gas development (the "Puckett Lease"). Farm Unit Seven is a 131-acre tract located within Section Three of Township 153 North, Range 101 West, in McKenzie County. The lease provided a standard 12.5% royalty to the Burks as lessors and expired after ten years if no oil or gas production or drilling was commenced within that time.

In April 1985, with no drilling or production yet undertaken by the Puckett Lease lessee, the Burks "top leased" ² Farm Unit Seven to Nance for a 17.5% royalty. At about this time, Nance also acquired interests in other nearby properties, including a lease from the Heen family to Farm Unit Eight, another tract in Section Three (the "Heen Lease").

Just before the Puckett Lease was to expire, the successor lessee, Basic Earth Science Systems, Inc. ("Basic Earth"), commenced directional drilling ³ from adjacent land. Basic Earth claimed that this drilling prevented the Puckett Lease from expiring because it reached the Farm Unit Seven area before October 17, 1985. Shortly after the October 17 deadline, however, Nance sued Basic Earth claiming that the drilling failed to extend the Puckett Lease and seeking a declaration of its rights under the top lease. The Burks joined with Nance in this lawsuit, no doubt hoping to capture the higher royalty due them under the top lease.

On June 1, 1986, Basic Earth and Nance agreed to settle this and other disputes. As part of their complex arrangement, the developers agreed that the Puckett Lease would remain in force, and that Basic Earth would transfer to Nance its "Deep Well Rights" in 32 acres of Farm Unit Seven in exchange for Nance transferring its "Shallow Rights" in 30 acres of Farm Unit Eight to Basic Earth. This settlement required consent of the Burks because they were Nance's co-plaintiffs in the suit against Basic Earth and the lessors under the Puckett Lease. Nance therefore urged the Burks to join in dismissing the Basic Earth lawsuit and in acknowledging the continued validity of the Puckett Lease.

The Burks resisted, demanding compensation from Nance for relinquishing the higher royalty they would have received under the top lease of Farm Unit Seven. To bring the Burks on board, Nance offered to share with them its net revenue interest in any deep well production. The Burks agreed, and the agreement was reduced to writing in a July 24, 1986, "Agreement Regarding Net Revenue Interest" (the "NRI Agreement") that is the subject of this lawsuit.

Some understanding of oil and gas development practices is needed to frame the parties' dispute in this case. Under North Dakota law, the Industrial Commission establishes drilling or spacing units to prevent the drilling of unnecessary wells and ensure the efficient and economical development of each pool of oil. See N.D.Cent.Code Sec. 38-08-07. A drilling unit is intended to accommodate a single well, unless an additional well is specifically authorized by the Commission. See N.D.Cent.Code Sec. 38-08-07(3), (4). When two or more separately owned tracts fall within a single drilling unit, their owners may pool their interests and share proportionally in the well's production. See N.D.Cent.Code Sec. 38-08-08; Whelan v. Manziel, 314 S.W.2d 126, 133-34 (Tex.Civ.App.1958). The Puckett Lease, for example, contained standard provisions allowing the lessee to pool this tract with others, in which case the lessor and the lessee would share in the pool's revenues on a surface acreage basis.

After the settlement, Basic Earth drilled a productive deep well in a drilling unit consisting of the entire South 1/2 ("S/2") of Section 3, an area which included, among other tracts, portions of Farm Units Seven and Eight. Nance's interest in any deep well in the S/2 thus derived from two sources, the 32 acres of Farm Unit Seven it acquired from Basic Earth in the settlement, and the interest in Farm Unit Eight Nance previously acquired through the Heen Lease. Pursuant to a "Farmout Agreement" between Nance and Basic Earth, Nance conveyed its entire interest in the S/2 to Basic Earth in exchange for a royalty convertible to a "30 percent working interest at payout."

The parties agree that the NRI Agreement entitles the Burks to some portion of Nance's "30 percent working interest" in this deep well's revenues. They disagree as to what portion. Two paragraphs of the NRI Agreement are the basis of the dispute. The Burks contend that the NRI Agreement grants them one-sixth of Nance's entire interest in the well's net revenues, that is, the interest Nance derived from Farm Unit Eight as well as Farm Unit Seven. The Burks rely on numbered paragraph 1 of the NRI Agreement:

1.) Nance shall, upon receipt of appropriate assignments, assign to Burk an interest equal to one-sixth ( 1/6th) of the net revenue interest received by Nance in any well drilled which has as its drilling unit the S/2 of Section 3, Township 153 North, Range 101 West....

On the other hand, Nance contends that the NRI Agreement limits the Burks to one-sixth of the portion of Nance's 30 percent working interest that is derived from its interest in Farm Unit Seven alone, the interest Nance acquired in the settlement. Nance relies on a portion of the introductory paragraph of the NRI Agreement:

This Agreement refers only to interests owned and interests entitled to by virtue of that certain Oil and Gas Lease dated the 17th day of October, 1975, by and between Walter O. Burk and Caroline E. Burk and R.E. Puckett.

Some time after the deep well began producing, when the Burks learned that Nance intended to pay them one-sixth of the smaller amounts, they commenced this action. Following substantial discovery, the Burks moved for partial summary judgment on their contract claim. Nance moved for summary judgment dismissing both the contract and fraud claims. The district court granted Nance's motion, rejecting the Burks' contract claim on the ground that the opening paragraph of the NRI Agreement unambiguously limits their interest to one-sixth of the income Nance receives by virtue of its interest in the Puckett Lease. The court dismissed the fraud claim without discussion.

On appeal, the Burks argue that the district court erred in granting summary judgment on their contract claim because the NRI Agreement is ambiguous, and therefore the court erred in refusing to consider extrinsic evidence of the parties' intent. That extrinsic evidence would show, they claim, that the NRI Agreement's negotiators understood that the Burks would receive one-sixth of Nance's entire net revenue interest in any deep well drilled in the S/2 of Section 3. The Burks further argue that issues of fact preclude summary judgment on their fraud claim. We review the grant of summary judgment de novo. See United States ex rel. Glass v. Medtronic, Inc., 957 F.2d 605, 607 (8th Cir.1992).

II.

At the outset we must determine whether, as the Burks argue, we are required to consider extrinsic evidence in determining whether the NRI Agreement is ambiguous. In support, the Burks cite Sun Oil Co. v. Vickers Ref. Co., 414 F.2d 383 (8th Cir.1969), and St. Clair v. Exeter Exploration Co., 671 F.2d 1091 (8th Cir.1982). Though this may be the majority view, North Dakota law is controlling here. In North Dakota, "[w]hen a contract is reduced to writing, the intention of the parties is to be ascertained from the writing alone if possible." N.D.Cent.Code Sec. 9-07-04. "Extrinsic evidence is properly considered only if the language of the agreement is ambiguous and the parties' intentions cannot be determined from the writing alone." Miller v. Schwartz, 354 N.W.2d 685, 689 (N.D.1984). Therefore, we must decide whether the NRI Agreement is ambiguous from the four corners of that document. ⁴

Whether a contract is ambiguous is a question of law for the court. See Minex Resources, Inc. v. Morland, 467 N.W.2d 691, 696 (N.D.1991); Oakes Farming Ass'n v. Martinson Bros., 318 N.W.2d 897, 908 (N.D.1982). Contracts conveying oil and gas interests are subject to the same rules that govern the interpretation of contracts generally. See Holman v. State, 438 N.W.2d 534, 537-38 (N.D.1989). A contract is ambiguous "when rational arguments can be made in support of contrary positions as to the meaning of the language in question." Johnson v. Mineral Estate, Inc., 343 N.W.2d 778, 780 (N.D.1984). The Burks...