Central Natural Resour. v. Davis Oper. Co.

• Decision Date: 06 February 2009
• Docket Number: No. 96,463.,96,463.
• Citation: 201 P.3d 680
• Parties: CENTRAL NATURAL RESOURCES, INC., Appellant, v. DAVIS OPERATING COMPANY, et al., Appellees.
• Court: Kansas Supreme Court

201 P.3d 680

CENTRAL NATURAL RESOURCES, INC., Appellant, v. DAVIS OPERATING COMPANY, et al., Appellees.

No. 96,463.

Supreme Court of Kansas.

February 6, 2009.

Timothy E. McKee, of Triplett, Woolf & Garretson, LLC, of Wichita, argued the cause, and Paula D. Langworthy, of the same firm, David E. Pierce, of Topeka, and Richard G. Tucker, of Tucker and Markham, of Parsons, were with him on the briefs for appellant.

Charles R. Willing, of Fellers, Snider, Blankenship, Bailey & Tippens, P.C., of Tulsa, Oklahoma, argued the cause, and Steven J. Adams, of the same firm, and Edward W. Dosh, of Parsons, were with him on the brief for appellees Davis Operating Company, et al.

David E. Bengtson, of Stinson, Morrison, Hecker LLP, of Wichita, argued the cause and was on the brief for appellee Quest Cherokee, L.L.C.

The opinion of the court was delivered by JOHNSON, J.:

Central Natural Resources, Inc. (Central) appeals the district court's order denying its motion for partial summary judgment and granting the defendants' summary judgment motions in a quiet title action to determine ownership of methane gas in the coal formations of 16 tracts of Labette County land. Agreeing with the district court's determination that the warranty deeds conveying the coal to Central's predecessor in title did not convey the methane gas contained within the coal, we affirm.

FACTUAL OVERVIEW

During a period from 1924 through 1926, Central's predecessors in interest paid money to the owners of 16 separate tracts of land in Labette County, Kansas, in return for coal warranty deeds. All of the deeds recited that the landowners were conveying "all coal without reference to quality or quantity, ... together with the right to mine and remove same." The deed to one of the tracts, identified in this lawsuit as tract 12, contains a specific reservation, which recited that "it being further agreed that all rights, surface, mineral or otherwise not specifically granted herein are hereby reserved by first parties .. . together with the right to remove the same if other minerals are found." Other differences in deed language are not germane to this opinion.

Neither Central nor any of its predecessors in title have ever exercised the right to mine and remove coal from any of the tracts. Likewise, Central has never attempted to explore for or produce the natural gas that resides within the seam of coal underlying the subject land, known as coalbed methane gas (CBM).

Three-quarters of a century after the coal transfers, the defendant oil and gas companies obtained oil and gas leases on some of the tracts. Pursuant to those leases, certain defendant companies drilled for and obtained production of CBM. Thereafter, Central filed a quiet title action, claiming ownership of the CBM in all 16 tracts through the 1924-26 coal deeds, and seeking damages for trespass and conversion for the drilling and production activities.

Counterclaims and third-party petitions were filed. The district court bifurcated the action for purposes of dispositive motions and trial, first addressing the CBM ownership issue, and then, if necessary, the court would proceed to determine and resolve all remaining issues in the case. Central moved for partial summary judgment, and various defendants moved for summary judgment. Central was permitted to amend its petition.

Subsequently, the district court issued a memorandum decision and order, granting summary judgment to the defendants on the issue of CBM ownership, i.e., finding that the deeds conveying "all coal" to Central's predecessors in title did not transfer ownership of the CBM. However, the court clarified that its order was not intended to address the plaintiff's claim for trespass or for damages to the coalbed inflicted by defendants in the process of extracting CBM.

The district court also found that the CBM ownership issue was one of first impression, involving a controlling question of law as to which there is substantial ground for difference of opinion, and that an immediate appeal pursuant to K.S.A.2008 Supp. 60-2102(c) could materially advance the ultimate determination of the litigation. The Court of Appeals denied the interlocutory appeal. Upon a petition for review to this court, we granted Central's motion to docket the civil interlocutory appeal directly with the Kansas Supreme Court.

COALBED METHANE GAS

Central's arguments rely in part on the physical properties of CBM. It stresses that CBM is created during the natural process by which coal is formed. In Amoco Production Co. v. Southern Ute Indian Tribe, 526 U.S. 865, 872-73, 119 S.Ct. 1719, 144 L.Ed.2d 22 (1999), the United States Supreme Court explained that process as follows:

"We begin our discussion as the parties did, with a brief overview of the chemistry and composition of coal. Coal is a heterogeneous, noncrystalline sedimentary rock composed primarily of carbonaceous materials. See, e.g., Gorbaty & Larsen, Coal Structure and Reactivity, in 3 Encyclopedia of Physical Science and Technology 437 (R. Meyers ed.2d ed.1992). It is formed over millions of years from decaying plant material that settles on the bottom of swamps and is converted by microbiological processes into peat. D. Van Krevelen, Coal 90 (3d ed.1993). Over time, the resulting peat beds are buried by sedimentary deposits. As the beds sink deeper and deeper into the earth's crust, the peat is transformed by chemical reactions which increase the carbon content of the fossilized plant material. The process in which peat transforms into coal is referred to as coalification.

"The coalification process generates methane and other gases. R. Rogers, Coalbed Methane: Principles and Practice 148 (1994). Because coal is porous, some of that gas is retained in the coal. CBM gas exists in the coal in three basic states: as free gas; as gas dissolved in the water in coal; and as gas `adsorped' on the solid surface of the coal, that is, held to the surface by weak forces called van der Waals forces. These are the same three states or conditions in which gas is stored in other rock formations. Because of the large surface area of coal pores, however, a much higher proportion of the gas is adsorped on the surface of coal than is adsorped in other rock. When pressure on the coalbed is decreased, the gas in the coal formation escapes. As a result, CBM gas is released from coal as the coal is mined and brought to the surface."

Central further urges us to consider the historical context in which the coal deeds were executed. At that time, the parties would have been well aware that coal contained a gas, sometimes referred to as "marsh gas" or "fire damp," which posed a significant danger of explosion as the coal was being mined. Cf. Amoco, 526 U.S. at 875-76, 119 S.Ct. 1719 (in 1909-10, CBM considered a dangerous waste product of coal mining which frequently sparked explosions). Statutes and regulations of the time placed a duty upon the owner/operator of a coal mine to provide for the safety of miners, including the proper control or ventilation of the CBM. Cf. Amoco, 526 U.S. at 876, 119 S.Ct. 1719 (federal coal mine safety law of 1891 prescribed specific ventilation standards for coal mines of a certain depth to dilute and render harmless the noxious or poisonous gases).

Therefore, the context within which the coal deeds were executed was that CBM was a dangerous substance which had no economic value, but which, to the contrary, placed an additional burden and expense on the coal mine owner/operator to insure their miners' safety. Moreover, as Central conceded at oral argument, the parties could not have been privy to the current scientific knowledge as to the manner in which CBM is adsorbed within the coal and, accordingly, would have considered the CBM to be a gas that was separate and distinct from the solid coal.

APPELLANT'S ISSUES ON APPEAL

The seemingly straightforward issue presented is whether the 1924-26 deeds, conveying "all coal ... together with the right to mine and remove same," should be interpreted as also transferring ownership of the methane gas contained within the coal formation. However, Central's brief sets forth five issues.

First, Central queries "[w]hether the 1924, 1925, and 1926 warranty deeds entered into by the Defendants' predecessors in title conveyed to Plaintiff, as grantee of the entire coal estate, the methane gas within the coal." Central answers that question by arguing for our adoption of a "first severance rule," coupled with the application of the "container theory," to find, as a matter of law, that when coal is the first mineral resource severed from the fee and there is no reservation upon that initial severing conveyance, the grantee would thereafter own all and everything which is contained within the coal formation.

Central's second issue is "[w]hether K.S.A. 58-2202 operates to convey all the estate of the grantors in the granted coal, including methane gas, where the grantors in the warranty deeds failed to expressly except rights to methane gas contained within the granted coal." When the coal deeds were executed, essentially the same language now found in K.S.A. 58-2202 was set forth in R.S.1923, 67-202, which provided:

"The term `heirs,' or other words of inheritance, shall not be necessary to create or convey an estate in fee simple; and every conveyance of real estate shall pass all the estate of the grantor therein, unless the intent to pass a less estate shall expressly appear or be necessarily implied in the terms of the grant." R.S.1923, 67-202.

Central contends that the statute requires that the CBM, which is physically intertwined with the coal, will automatically pass with a conveyance of the coal, unless an intent to reserve or except the CBM expressly appears in or can be necessarily implied from the terms of the coal deed.

The next issue presented is "[w]hether the warranty deeds should be interpreted to give each deed...