Egeland v. Continental Resources, Inc.

• Decision Date: 14 September 2000
• Docket Number: No. 20000042.,20000042.
• Citation: 2000 ND 169,616 N.W.2d 861
• Court: North Dakota Supreme Court
• Parties: Mary M. EGELAND, Plaintiff and Appellant, v. CONTINENTAL RESOURCES, INC.; Flying J Oil & Gas, Inc.; Big West Oil & Gas, Inc.; Samedan Oil Corporation; and M.J. Armstrong, Defendants and Appellees.

616 N.W.2d 861
2000 ND 169

Mary M. EGELAND, Plaintiff and Appellant,
v.
CONTINENTAL RESOURCES, INC.; Flying J Oil & Gas, Inc.; Big West Oil & Gas, Inc.; Samedan Oil Corporation; and M.J. Armstrong, Defendants and Appellees

No. 20000042.

Supreme Court of North Dakota.

September 14, 2000.

616 N.W.2d 862

Michael J. Maus, Hardy, Maus & Nordsven, Dickinson, N.D., for plaintiff and appellant

Lawrence Bender, Pearce & Durick, Bismarck, N.D., for defendants and appellees.

NEUMANN, Justice.

[¶ 1] Mary M. Egeland appealed from a summary judgment quieting title to two oil and gas leases in Continental Resources, Inc.; Flying J Oil & Gas, Inc.; Big West Oil & Gas, Inc.; Samedan Oil Corporation; and M.J. Armstrong ("the defendants"). We conclude, as a matter of law, the defendants did not breach the leases under the circumstances of this case, and we affirm.

I

[¶ 2] On March 8, 1991, Egeland entered into an oil and gas lease with Farmers Union Central Exchange, Inc. ("Cenex"), covering about 472 acres of Bowman County property. On the same date, Egeland and Donna Schaefer, individually and as trustees of the Monte A. Egeland Residuary Trust, entered into an oil and gas lease with Cenex covering another 465 acres of Bowman County property. Through various assignments, the defendants became owners of the leasehold estate under both of the Cenex leases.

[¶ 3] Both leases contained the following habendum¹ and continuous drilling operations²

616 N.W.2d 863

clauses

It is agreed that this lease shall remain in force for a term of FIVE (5) years from this date, and as long thereafter as oil, gas, casinghead gas, casinghead gasoline and other hydrocarbon substance or any of them is produced from said leased premises, or drilling operations are continued as hereinafter provided. If, at the expiration of the primary term of this lease, oil or gas is not being produced on the leased premises but lessee is then engaged in drilling operations, then this lease shall continue in force so long as drilling operations are being continuously prosecuted on the leased premises; and drilling operations shall be considered to be continuously prosecuted if not more than sixty days shall elapse between the completion or abandonment of one well and the beginning of operations for the drilling of a subsequent well. If oil or gas shall be discovered and produced from any such well or wells drilled or being drilled at or after the expiration of the primary term of this lease, this lease shall continue in force so long as oil or gas shall be produced from the leased premises.

[¶ 4] Both leases also contained an "Exhibit A", which included a clause nullifying a preprinted "unitization clause"³ and a form of a Pugh clause⁴:

Notwithstanding anything contained herein to the contrary, no part or portion of the lands covered by this lease shall be committed to any unit plan of development or operation without the prior express written consent of the Lessor, her successors or assigns[.]

A producing well, or well capable of production, will perpetuate this lease beyond its Primary Term ONLY as to those lands as are located within, or committed to, a producing or spacing unit established by Government authority having jurisdiction.

[¶ 5] The property covered by the Cenex leases is within an area designated by the Industrial Commission on June 1, 1995, as the Cedar Hills-Red River "B" Pool. The Commission established this pool for the exclusive purpose of drilling horizontal wells. Under the Commission's order, the property covered by the Cenex leases was included in five separate spacing units, and the number of horizontal wells which could be drilled on each 640-acre unit was restricted to two. Because each of the five spacing units consisted of fractional tracts, Continental Resources, Inc. ("Continental"), applied for and obtained compulsory pooling orders from the Commission for each of the five spacing units. Egeland did not consent to any of the pooling orders.

[¶ 6] Before the primary term of the Cenex leases expired on March 8, 1996, the Commission issued permits and authorized Continental to drill one well in each of the five spacing units. The Skull Creek # 1-13 well was spudded on December 19, 1995, and was completed on February 17, 1996. The Rocky # 1-18F well was spudded on February 23, 1996, and was completed

616 N.W.2d 864

on April 13, 1996. The Schaefer # 1-24F well was spudded on March 29, 1996, and was completed on May 19, 1996. The Monte # 1-19F well was spudded on February 3, 1996, and was completed on March 19, 1996. The Clayton # 1-7 well was spudded on March 6, 1996, and was completed on April 23, 1996. The Skull Creek, Rocky and Schaefer wells were drilled on land covered by the Egeland-Cenex lease. The Monte and Clayton wells were drilled on land covered by the Residuary Trust-Cenex lease

[¶ 7] In October 1998, Egeland sued the defendants, alleging the Cenex leases were void or should be canceled because they were either breached by the defendants or expired before producing wells on the property were drilled. The defendants counterclaimed, seeking to quiet title. The trial court denied Egeland's motion for partial summary judgment, granted the defendant's cross motion for summary judgment, dismissed Egeland's complaint in its entirety, and quieted title in the leases in the defendants. The court reasoned:

[T]he habendum clause, the continuous drilling operations clause and the Pugh clause in each lease reveal that there is no conflict between the operation provisions of the Cenex leases. Rather, each of these clauses operates in harmony with the others. Moreover, it appears to me that Defendant[ ]s have performed all that was required or expected under the leases and that everyone has received precisely what they bargained for, no more and no less.

Egeland appealed.

II

[¶ 8] Summary judgment under N.D.R.Civ.P. 56 is a procedural device for properly disposing of a lawsuit without trial if, after viewing the evidence in the light most favorable to the non-moving party, there are no genuine issues of material fact or conflicting inferences which can reasonably be drawn from undisputed facts, or if the only issues to be resolved are questions of law. Dan Nelson Construction, Inc. v. Nodland & Dickson, 2000 ND 61, ¶ 13, 608 N.W.2d 267. A party seeking summary judgment has the burden of clearly demonstrating there is no genuine issue of material fact. Dinger ex rel. Dinger v. Strata Corp., 2000 ND 41, ¶ 14, 607 N.W.2d 886.

A

[¶ 9] Egeland contends the trial court erred in granting summary judgment in the defendants' favor because the defendants breached the Cenex leases by applying to the Commission to force pool the property without Egeland's prior written consent, which she argues constitutes committing the lands to "any unit plan of development or operation" in violation of Exhibit A of the leases.

[¶ 10] The same general rules that govern interpretation of contractual agreements apply to oil and gas leases. Johnson v. Mineral Estate, Inc., 343 N.W.2d 778, 780 (N.D.1984). The construction of a written contract to determine its legal effect is a question of law for the court to decide, and on appeal, this Court will independently examine and construe the contract to determine if the trial court erred in its interpretation of it. West v. Alpar Resources, Inc., 298 N.W.2d 484, 490 (N.D.1980). Words in a contract are construed in their ordinary and popular sense, unless used by the parties in a technical sense or given a special meaning by the parties. Grynberg v. Dome Petroleum Corp., 1999 ND 167, ¶ 10, 599 N.W.2d 261. We also construe contracts in light of existing statutes, which become part of and are read into the contract as if those provisions were included in it. Reed v. University of North Dakota, 1999 ND 25, ¶ 22 n. 4, 589 N.W.2d 880. A contract must be read and considered in its entirety so that all of its provisions are taken into consideration to determine the true intent of the parties. Miller v. Schwartz, 354 N.W.2d 685, 688 (N.D.1984).

616 N.W.2d 865

[¶ 11] At the time the Cenex leases were executed, the Commission had the statutory authority to set spacing units for a pool⁵ "[w]hen necessary to prevent waste, to avoid the drilling of unnecessary wells, or to protect correlative rights...." N.D.C.C. § 38-08-07(1). The Commission's statutory authority is designed to further this state's policy "to foster, to encourage, and to promote the development, production, and utilization of natural resources of oil and gas ... to the end that the landowners, the royalty owners, the producers, and the general public realize and enjoy the greatest possible good from these vital natural resources." N.D.C.C. § 38-08-01. The Act for the Control of Gas and Oil Resources, N.D.C.C. ch. 38-08, grants the Commission comprehensive powers to regulate oil and gas development in the state, and this Court has upheld as valid exercises of the state's police powers various Commission orders spacing or compelling pooling. See, e.g., Continental Resources, Inc. v. Farrar Oil Co., 1997 ND 31, ¶ 17, 559 N.W.2d 841; Texaco Inc. v. Industrial Commission, 448 N.W.2d 621, 624 (N.D.1989); Hystad v. Industrial Commission, 389 N.W.2d 590, 594 (N.D. 1986); Slawson v. North Dakota Industrial Commission, 339 N.W.2d 772, 777 (N.D. 1983). The Commission's powers are continuous, Amoco Production Co., 307 N.W.2d at 843, and are exclusive. Hystad v. Mid-Con Exploration Co.-Exeter, 489 N.W.2d 571, 574 (N.D.1992).

[¶ 12] Pooling is authorized by N.D.C.C. § 38-08-08(1):

When two or more separately owned tracts are embraced within a spacing unit, or when there are separately owned interests in all or a part of the spacing unit, then the owners and royalty owners thereof may pool their interests for the development and operation of the spacing unit. In the absence of voluntary pooling, the commission upon the application of any interested

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