Hs Resources, Inc. v. Wingate

• Decision Date: 08 April 2003
• Docket Number: No. 02-40165.,02-40165.
• Citation: 327 F.3d 432
• Parties: HS RESOURCES, INC., Plaintiff-Appellant-Cross-Appellee, v. Jim R. WINGATE, Defendant-Appellee-Cross-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

327 F.3d 432

HS RESOURCES, INC., Plaintiff-Appellant-Cross-Appellee, v. Jim R. WINGATE, Defendant-Appellee-Cross-Appellant.

No. 02-40165.

United States Court of Appeals, Fifth Circuit.

April 8, 2003.

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Kerry Kilburn (argued), Kilburn, Jones, Gill & Campbell, Houston, TX, for HS Resources, Inc.

Robert Keith Wade (argued), Law Offices of Robert Keith Wade, Beaumont, TX, for Wingate.

Appeals from the United States District Court for the Eastern District of Texas.

Before BENAVIDES and DENNIS, Circuit Judges, and WALTER^*, District Judge.

DENNIS, Circuit Judge.

This declaratory judgment action concerns a dispute over royalty payments on a highly profitable natural gas well located on property owned by Jim Wingate and subleased to HS Resources, Inc. ("HSR").¹ Following a hearing on opposing dispositive motions, the district court entered final judgment. It denied Wingate's motion to dismiss and granted HSR's motion for partial summary judgment, declaring that HSR could pool Wingate's leased land with neighboring acreage and pay Wingate royalties on a pooled basis. Acting sua sponte, the court also held that HSR's past payments to Wingate calculated on a non-pooled basis had been made voluntarily and therefore could not be recaptured. It subsequently denied HSR's motions to amend the judgment and award attorney fees. Both parties appealed. We now AFFIRM the district court's final judgment in part, REVERSE it in part, and VACATE it in part. We further VACATE the court's denial of HSR's motion for attorney fees. Finally, we REMAND for further proceedings consistent with this opinion.

I.

Jim Wingate owns property in Jefferson County, Texas. On May 29, 1998, he leased his undivided oil, gas, and mineral interests in six tracts of land encompassing 728.02 acres to Interstate Oil Company ("Interstate"). Under the terms of the lease ("Lease"), Wingate is entitled to receive as a royalty 25% of the market value of the natural gas produced on the leased property. The Lease grants Interstate (or its assigns) control of the remaining 75%. On July 17, 1998, Interstate assigned 50% of its interest under the Lease to HSR, 37.5% to Aspect Resources, LLC ("Aspect"), and 12.5% to Esenjay Exploration, Inc. ("Esenjay"). HSR operates the drilling operations on the leased property.

A.

Among other terms, Paragraph 12 of the Lease expressly grants the lessee the right to pool the leased land with adjacent tracts to form "one or more drilling or production units":²

Subject to the limitations hereinafter set forth, Lessee is hereby given the power and right, ... without Lessor's joinder or further consent, to at any time ... pool and unitize the leasehold estate ... with the rights of the third parties, if any, in all of the land described herein and with any other land ... whether owned by Lessee or some other person, firm or corporation, so as to create by such pooling and unitization one or more drilling or production units, when to do so would, in the sole judgment of the Lessee, promote the conservation of oil, gas or other liquid hydrocarbons.

This right to pool is subject to a requirement that the lessee pool all leased land:

Lessee shall not be granted the right to pool any of the leased premises for the drilling of or production from any well located on the leased premises which is anticipated to be classified, or ultimately classified, as a "gas" well by the governmental entity having jurisdiction over same unless all of the leased premises is located either within the pooled unit for such well or within a unit for another gas well producing in commercially paying quantities from the same formation.

This paragraph also limits pooled units to 176 acres in size:

Each such drilling or production unit shall not exceed ... one hundred sixty (160) acres, plus an acreage tolerance not to exceed ten percent (10%) of one hundred sixty (160) acres, when created for the purposes of drilling for or producing gas from wells drilled to a depth of 10,000 feet or less.

Paragraph 5 of the Lease allows the lessee to release those portions of the leased land not included in producing units:

[D]uring the primary term only, and after the discovery and production of oil, gas or other liquid hydrocarbons in paying quantities on the leased premises, Lessee shall either (1) develop the acreage retained hereunder by the drilling of additional wells at one hundred eighty (180) day intervals as hereinafter provided, (2) release those portions of the land covered hereby not included in a producing unit or units, or (3) Lessee may in lieu of such drilling or release maintain this lease in force and effect during the primary term as to any land covered hereby which is not included in a producing unit (either oil or gas) by the payment of the proportionate part of the delay rentals provided herein as to the acreage not then included in a producing unit or units.

Finally, Paragraph 9 of the Lease allows the lessor to terminate the Lease upon thirty days notice of the lessee's failure to pay royalties "for any reason other than a good faith attack or adverse claim against the title or interest of Lessor."

B.

On March 5, 2000, HSR completed drilling a 9,925-foot well (the "Wingate No. 1 Well") on Wingate's property. On March 22, 2000, HSR filed a unit declaration creating a pooled area described as the "HS Resources-Wingate et al. Unit" ("HSR-Wingate Unit") for the purpose of gas production from the Wingate No. 1 Well.³ The HSR-Wingate Unit consists of five tracts of land encompassing 176 acres. The declaration shows that the five tracts consist of 87.09, .89, 70.25, 16.84, and .93 acres. The record evidence shows that Wingate owns 100% of the gas rights in the 87.09- and .89-acre tracts; 20% of the gas rights in the 70.25-acre tract (i.e., 14.05 net acres); 40% of the gas rights in the 16.84-acre tract (i.e., 6.74 net acres); and 0% of the .93-acre tract. Thus, although he owns 175.07 acres of the land included in the HSR-Wingate Unit, his contribution to the unit amounts to only 108.77 net acres when his gas rights in those 175.07 acres are considered. In other words, Wingate controls only 61.8% of the gas produced by the unit.⁴

On March 29, 2000, Wingate objected to the formation of the HSR-Wingate Unit, claiming it violated the terms of the Lease because it did not incorporate all his leased property. The Wingate No. 1 Well began producing gas on April 24, 2000. On May 2, 2000, HSR, Aspect, and Esenjay filed a release of all land leased from Wingate that was not included in the HSR-Wingate Unit. On the same day, HSR filed a supplemental unit declaration confirming the HSR-Wingate Unit.

On May 4, 2000, Wingate sued HSR in Texas state court ("State Lawsuit"), asserting that the formation of the HSR-Wingate Unit was invalid under the terms of the Lease. After he filed the State Lawsuit, but not as a part of it, Wingate demanded HSR pay him royalties on the Wingate No. 1 Well as if the well were not part of a pooled unit. The difference in the calculation of royalties is significant: payment on a non-pooled basis amounts to 25% of the market value of all the gas produced by the well, whereas payment on a pooled basis amounts to 25% of the gas attributed to his 61.8% stake in the HSR-Wingate Unit. Wingate threatened to terminate the Lease if HSR refused to pay him on a non-pooled basis. Faced with this threat, HSR sent Wingate a check for $1,283,309.31, which included royalties calculated on a non-pooled basis plus interest. A letter accompanying the check clearly stated that HSR was paying the amount under protest and reserved its right to sue for overpayment if the Lease was determined to allow pooling.⁵ Wingate subsequently entered into a settlement agreement and covenant not to sue with Aspect and Esenjay. Wingate voluntarily dismissed the State Lawsuit on January 2, 2001.

HSR thereafter paid Wingate royalties on a non-pooled basis as to its interest and on a pooled basis as to Aspect's and Esenjay's interests. Wingate again threatened to terminate the Lease if he was not paid solely on a non-pooled basis. HSR then began to pay royalties, again under protest, on a non-pooled basis as to the entire lease.

On May 18, 2001, HSR sued Wingate in federal court, seeking (1) a declaration that pooling was proper under the terms of the Lease, (2) the recapture of its past payments to Wingate in excess of royalties calculated on a pooled basis, and (3) attorney fees. In response to HSR's complaint, and instead of filing an answer, Wingate moved to dismiss pursuant to Rule 12(b)(1), (6), and (7) of the Federal Rules of Civil Procedure, arguing that HSR had failed to join the other parties with property interests in the HSR-Wingate Unit. HSR moved for partial summary judgment on the limited question of whether the Lease allowed pooling. Wingate responded to HSR's motion but still did not file an answer. HSR also moved for a preliminary injunction ordering Wingate to set aside the money at issue in the recapture claim.

The district court heard arguments on the parties' dispositive motions but not on HSR's motion for a preliminary injunction. It subsequently denied Wingate's motion to dismiss, concluding that "the other members of the Wingate Unit do not have a stake in this litigation, and the plaintiff is not required to join them." It simultaneously granted HSR's motion for partial summary judgment, holding that the Lease allowed for pooling and payment of royalties on a pooled basis. Acting on its own initiative, the court also held that HSR's $1,283,309.31 payment was voluntary and could not be recaptured. Finally, it dismissed HSR's preliminary injunction motion as moot based on its recapture ruling.

HSR moved the district court to amend the judgment as to its recapture claim, offering evidence supporting its argument that its payments on a non-pooled basis had been made under protest and...