Coral Prod. Corp. v. Central Resources

• Citation: 273 Neb. 379,730 N.W.2d 357
• Decision Date: 20 April 2007
• Docket Number: No. S-05-564.,S-05-564.
• Parties: CORAL PRODUCTION CORPORATION, a Colorado corporation, and KJJ Corp., a Wyoming corporation, Plaintiffs and Third-Party Defendants, Appellants, v. CENTRAL RESOURCES, INC., Defendant and Third-Party Plaintiff, EXCO Resources, Inc., a Texas corporation, and Paul Zecchi, an individual person, Defendants, and James P. Chonka, Inc., a dissolved Colorado corporation, et al., Third-Party Defendants, Appellees.
• Court: Supreme Court of Nebraska

730 N.W.2d 357

273 Neb. 379

CORAL PRODUCTION CORPORATION, a Colorado corporation, and KJJ Corp., a Wyoming corporation, Plaintiffs and Third-Party Defendants, Appellants, v. CENTRAL RESOURCES, INC., Defendant and Third-Party Plaintiff, EXCO Resources, Inc., a Texas corporation, and Paul Zecchi, an individual person, Defendants, and James P. Chonka, Inc., a dissolved Colorado corporation, et al., Third-Party Defendants, Appellees.

No. S-05-564.

Supreme Court of Nebraska.

April 20, 2007.

R.K. O'Donnell, of McGinley, O'Donnell, Reynolds & Edwards, P.C., L.L.O., Ogallala, and Steven F. Mattoon, of Matzke, Mattoon & Miller, Sidney, for appellants.

Scot W. Anderson and Andrea Wang, of Davis, Graham & Stubbs, L.L.P., Denver, CO, for appellees Central Resources, Inc., and Paul Zecchi.

Richard P. Marshall, Jr., of Scott, Douglass & McConnico, L.L.P., Austin, TX, for appellee EXCO Resources, Inc.

Donald J. Tedesco, Sidney, for appellees Central Resources, Inc., Paul Zecchi, and EXCO Resources, Inc.

HEAVICAN, C.J., WRIGHT, CONNOLLY, GERRARD, STEPHAN, McCORMACK, and MILLER-LERMAN, JJ.

HEAVICAN, C.J.

NATURE OF CASE

This action arises out of disputes between oil and gas companies that were or are fractional working interest owners of oil and gas assets in Nebraska under a joint operating agreement (JOA). When Central Resources, Inc. (Central), the operator under the JOA, put all of its oil and gas assets up for sale, Coral Production Corporation (Coral) claimed it had a preferential right under the JOA to purchase Central's Nebraska assets. Central disputed this claim and sold 70 percent of its total assets, including its Nebraska assets, to EXCO Resources, Inc. (EXCO), without offering Coral an opportunity to purchase the Nebraska assets. All of Central's remaining assets had been sold 18 days earlier to a different company. EXCO later transferred overriding royalty interests in the Nebraska assets to Paul Zecchi, Central's chief executive officer.

Coral and KJJ Corp. (KJJ), which owned one-third of Coral's interests in the JOA, filed an action against Central, EXCO, and Zecchi to quiet title to Coral and KJJ's interests. Coral and KJJ alleged claims of breach of contract, fraud, and tortious interference, and claimed that their disputes were governed by Nebraska law.

The district court determined the parties agreed in the JOA that Texas law would govern their disputes and granted summary judgment to Central, EXCO, and Zecchi on Coral and KJJ's claims of fraud, breach of contract, and tortious interference. It also determined that the JOA did not apply to EXCO's transfer of overriding royalty interests to Zecchi.

We determine that Central's sale of all of its oil and gas assets fell within the parties' typewritten exception to the preferential-right-to-purchase provision of the preprinted JOA. However, we conclude that the district court erred in determining Coral's preferential right to purchase did not apply to overriding royalty interests. We reverse on that sole issue and affirm the district court's order of summary judgment in all other respects.

FACTUAL BACKGROUND

Zecchi was president and chief executive officer of Central. Coral was formed by James P. Chonka, Lawrence B. Conyers, and James R. Weber. In 1993 or 1994, Conyers left Coral, and his one-third interest in Coral was transferred to another corporation, KJJ, that Conyers had started.

JOINT OPERATING AGREEMENT

In 1988, Central and Coral entered into a joint venture agreement to purchase Nebraska oil and gas interests from Marathon Oil Company (Marathon). Coral agreed to furnish engineering and economic data to Central to arrive at a competitive bid, and Central agreed to use its resources to obtain partners and financing for the purchase.

In April 1989, Central closed on its purchase from Marathon. On the same day, Central entered into the JOA with Coral and two other corporate parties.

The JOA was the 1977 version of the model form 610 operating agreement developed by the American Association of Petroleum Landmen.¹ Form 610 has been used widely in the oil and gas industry since 1956.² The JOA designated Central as the operator of the properties with full control of all operations at properties covered by the JOA. Coral and the other two parties were designated as nonoperators. Central held a 30-percent "before payout" interest, and the other two parties held 45-percent and 25-percent "before payout" interests. Coral held a 10-percent "after payout" interest, which percentage was taken from Central's 30-percent interest.

An interlineation to the JOA provided that "where the interests of the Operator in the joint properties are sold, transferred, merged or consolidated into a non-affiliated third party, then the selection of a successor operator" was to be made by two or more nonoperators with a 65-percent interest in the assets covered by the JOA.

Article VIII, paragraph G, of the model form provided a preferential purchase right and exceptions to the right:

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 sale, which shall include the name and address of the prospective purchaser (who must be ready, willing and able to purchase), the purchase price, 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 receipt of the notice, to purchase on the same terms and conditions the interest which the other party proposes to sell . . . . However, there shall be no preferential right to purchase in those cases where any party wishes to mortgage its interests, or to dispose of its interests by merger, reorganization, consolidation, or sale of all or substantially all of its assets to a subsidiary or parent company or to a subsidiary of a parent company, or to any company in which any one party owns a majority of the stock, or substantially all of the assets and/or stock of the selling party is sold to a non-affiliated third party. Refer to Article XV G. for additional provisions.

The italicized language is the parties' typewritten interlineation to the model form. The exception to the preferential right to purchase in article XV, paragraph G, is not relevant to the arguments raised by the parties in this appeal.

Article I of the model form defines terms, and this portion of the form was not altered. Article I ends with this statement: "Unless the context otherwise clearly indicates, words used in the singular include the plural, the plural includes the singular . . . ." The model form portion of the JOA also provided that the governing law for any disputes under the JOA would be "the law of the state in which the Contract Area is located." However, article XV, paragraph E, of the added provisions provided that Texas law would govern any disputes between the parties.

In July 1989, Central and Coral entered into a "Purchase and Sale Agreement" that was intended to clarify the rights and obligations of both parties. The sale agreement stated facts leading up to the JOA and was retroactive to the date the JOA was executed. The sale agreement provided that Coral had assisted in the acquisition of the Nebraska properties and that Central desired to sell approximately 70 percent of its interests in the Nebraska properties to third parties. Central promised that its remaining 30-percent interest would be divided with Coral under one of two plans.

Under "Plan A," Coral could pay Central $515,755 for 15 percent of Central's remaining interests. If Coral had not elected plan A by August 15, 1989, then Coral elected, by default, to exercise "Plan B." Under plan B, Central would assign 10 percent of its remaining interests to Coral and provide the collateral and security necessary to finance its entire interest until "payout." Payout was defined as the date that Central repaid its principal loan obligations and obligations to third parties. Central's assignment to Coral was effective within 120 days of the agreement but was conditioned upon the release of bank loans and the repayment of fees.

Central agreed to apply proceeds from the assets to its obligations in accordance with a prioritized list. The parties agreed that Central would be the operator of record and that Coral would be the contract pumper and field supervisor. Central also agreed that if Coral elected plan B, it would make good faith efforts to assist Coral to become the successor operator of specified properties within 60 days of payout and to cast its vote affirmatively for Coral.

At least by April 1990, the parties began having disputes. Coral questioned Central's low production and performance of operator duties, while Central questioned Coral's performance of field operations. In October 1990, Central removed Coral as the contract operator.

AMENDMENT

In November 1990, the parties executed an instrument entitled "Amendment to Agreements." It provided that Central had acquired "oil and gas interests including (but not limited to working interests, overriding royalty interests, and mineral interests) from Marathon." It also specifically listed the property rights Central had acquired, including: "1. Producing oil and gas leases [and] 2. Mineral, royalty and overriding royalty interests."

Central agreed in the amendment that although payout had not occurred, it would immediately assign to Coral 10 percent of its remaining 30-percent interest in the Marathon properties for a purchase price of $162,842.66. The parties confirmed that they intended to be bound by the JOA and that the JOA was amended only to the extent that Central agreed to convey 10 percent of its interests to Coral before "payout" in exchange for the purchase price.

Coral exercised its option to purchase 10 percent of Central's interests. Over the next...