Kansas Baptist Convention v. Mesa Operating Ltd. Partnership

• Decision Date: 29 October 1993
• Docket Number: No. 68597,68597
• Citation: 864 P.2d 204,253 Kan. 717
• Parties: The KANSAS BAPTIST CONVENTION and Hugoton Energy Corporation, Appellees/Cross-Appellants, v. MESA OPERATING LIMITED PARTNERSHIP, Appellant/Cross- Appellee.
• Court: Kansas Supreme Court

Page 204

864 P.2d 204

253 Kan. 717

The KANSAS BAPTIST CONVENTION and Hugoton Energy Corporation, Appellees/Cross-Appellants, v. MESA OPERATING LIMITED PARTNERSHIP, Appellant/Cross- Appellee.

No. 68597.

Supreme Court of Kansas.

Oct. 29, 1993.

Syllabus by the Court

1. The construction of a written contract is a question of law and, irrespective of the district court's interpretation, a contract may be construed and its legal effect determined by an appellate court.

2. The court may reform the provisions of a contract where the enforcement of the contract would be unconscionable in that it would cause undue hardship and injustice not contemplated or reasonably foreseeable by the parties at the time the contract was entered.

3. The record is examined in an action brought by the plaintiffs to avoid or reform a 1952 contract for the unitization and operation of a gas unit and for damages for breach of the contract, and it is held that the district court did not err in finding (1) that the defendant, Mesa Operating Limited Partnership, breached the contract based upon the drilling of an infill well on May 25, 1988; (2) that plaintiffs, The Kansas Baptist Convention and Hugoton Energy Corporation, had standing to bring this action; and (3) that plaintiffs are not barred by waiver or estoppel from bringing this action. The district court did err in terminating rather than reforming the contract, and the case is remanded for the district court to reform the contract and redetermine damages for breach of the contract.

Donald W. Bostwick, of Adams, Jones, Robinson and Malone Chartered, Wichita, argued the cause, and Michael P. Dreiling, of Neubauer, Sharp, McQueen, Dreiling and Morain, P.A., Liberal, was with him, on the briefs, for appellant/cross-appellee.

Richard D. Greene, of Morris, Laing, Evans, Brock & Kennedy, Chartered, Wichita, argued the cause, and Robert W. Coykendall, of the same firm, was on the briefs, for appellees/cross-appellants.

ALLEGRUCCI, Justice:

The plaintiffs, The Kansas Baptist Convention (Baptists) and Hugoton Energy Corporation (Hugoton Energy), brought this action against the defendant, Mesa Operating Limited Partnership (Mesa), to avoid or reform a 1952 contract for the unitization and operation of a 640-acre gas unit in Grant County. On a stipulated record, the district court terminated the contract as of May 25, 1988, and entered a judgment against Mesa for $185,220.86, representing plaintiffs' interest in gas sale proceeds from the termination date, minus operating costs and plus prejudgment interest. Mesa appealed. The Baptists and Hugoton Energy cross-appealed from the district court's determination of the amount of their recovery. The case was transferred to this court from the Court of Appeals pursuant to K.S.A. 20-3018(c).

The section of Grant County land at issue was devised to the Baptists by Otto Fischer upon his death in 1951. Fischer's heirs contested the will. An agreement was reached, and the Baptists conveyed one-half of the property to Fischer's heirs. Magnolia Petroleum Company (Magnolia) owned a portion of the minerals in several of the quarter sections. Magnolia leased its minerals to Panhandle Eastern Pipeline Company, which assigned the leases to Hugoton Production Company (Hugoton Production). According to Mesa, in 1969 it succeeded to all rights of Hugoton Production by virtue of a merger.

In 1952, the Baptists, Fischer's heirs, and Hugoton Production negotiated an agreement for development of the property. The Baptists were represented by an attorney, Robert S. Johnson, in the negotiations. On July 18, 1952, Hugoton Production sent Johnson a proposed contract. It was modified according to Johnson's suggestions, and, on July 21, 1952, the Baptists, Fisher's heirs, and Hugoton Production entered into the agreement which is the subject of this action.

The contract provided for creation of a 640-acre unit for natural gas production. It provided that Hugoton Production would obtain Magnolia's consent to the unitization. It provided that the "agreement shall extend for a term commencing on the date hereof and extending for such period of time as natural gas is or can be produced from the Unitized Area or operations for the development and production of natural gas are being conducted thereon."

The contract made Hugoton Production the sole operator of the unit. It required Hugoton Production "to produce the unitized area with reasonable diligence for the life of this agreement." It provided that Hugoton Production would "drill such additional well or wells on the Unitized Area as it should deem necessary" and would charge the other parties their proportionate shares of the costs and expenses incurred on the basis of the accounting procedure which was attached to the contract as Exhibit B and incorporated into it.

Ownership of the land and the minerals is described in the contract as follows:

                Baptists     surface and 1/2 minerals in two quarter sections, 1/4 minerals in
                               a third quarter section
                Fischer's    surface and minerals in one quarter section, surface and 1/4
                  heirs        minerals in a second quarter section
                Magnolia     1/2 minerals in three quarter sections
                

The agreement provided that the parties owned the benefits of gas production in the following proportions, which differ from land and mineral ownership proportions:

                Baptists            5/16
                Fischer's heirs     5/16 ; and
                Hugoton Production  6/16.
                

It also provided that the Baptists and Fischer's heirs would sell and Hugoton Production would buy any natural gas produced. The price was fixed at "10cents per MCF [thousand cubic feet], measured at a pressure base of 16.4 pounds per square inch absolute [p.s.i.a.], with an assumed flowing temperature of sixty degrees (60? ) Fahrenheit."

It provided that costs and expenses were to be borne by the parties in proportions equal to their proportions of gas ownership. Alternative methods were provided for satisfying the obligations for costs and expenses. The Baptists and Fischer's heirs could pay their proportionate shares of costs and expenses, or Hugoton could withhold gas purchase payments until reimbursed for costs plus interest.

Production from the first well on the unit (Baptist-Fischer 1-14) began in October 1953. The cost of the first well was $24,500. This is a district court finding which is cited on appeal by Mesa and is not disputed by the other parties.

In 1971, Mesa acquired the mineral interests of the Fischer heirs. Since then, Mesa has received 11/16 of the revenue from the unit.

A second well (Baptist-Fischer 2-14) was drilled in 1972 at a cost of $43,000. At that time Mesa anticipated that the Baptists' share of the costs would have been recovered from their share of the income within a year.

In 1986, the Kansas Corporation Commission (KCC) issued orders which permitted the drilling of an additional well (sometimes referred to as an infill well) on each unit in the Hugoton gas field. This court upheld the KCC decision in Southwest Kan. Royalty Owners Ass'n v. Kansas Corporation Comm'n, 244 Kan. 157, 769 P.2d 1 (1989). In 1988, a third well was drilled at a cost of $174,100.

Like the drilling costs, operating costs have increased. In March 1987, before the third well was drilled, Mesa informed the Baptists that the overhead rates had changed from $30 to $340 per well per month. During the first three months of 1990, the average monthly charge to the Baptists was $982.75.

The market price of natural gas also has increased. "In October 1948 ... the prevailing price for the gas in the [Hugoton] field was approximately five and one-half cents per M.c.f. based on 16.4 pounds p.s.i.a." Matzen v. Hugoton Production Co., 182 Kan. 456, 458, 321 P.2d 576 (1958). Pan American Petroleum Corporation v. Cities Service Gas Co., 191 Kan. 511, 512, 382 P.2d 645 (1963), involved a gas purchase contract in which the price was set at 8.4cents/Mcf until June 1961, when the price would increase to not less than 12cents/Mcf. The plaintiff contended that the fair and reasonable price as of June 1961 was 19cents/Mcf at 14.65 p.s.i.a.; the defendant contended it was 12cents/Mcf at 16.4 p.s.i.a. 191 Kan. at 512-13, 382 P.2d 645. This court affirmed the district court's decision that 14.5cents/Mcf at 14.65 p.s.i.a. was a reasonable price for the five-year period beginning in June 1961. 191 Kan. at 513, 522, 382 P.2d 645. The parties have stipulated that, "[i]n 1990, the average weighted market price of natural gas produced from the unitized area including the Baptist-Fischer wells and received by Mesa was $1.52/Mcf."

The current operating expenses plus the drilling costs and interest of the third well will never be recovered by the 10cents/Mcf gas purchase price provided in the 1952 agreement.

In March 1987, Mesa sent to the Baptists an Authorization for Expenditure in the amount of $169,800 for the drilling of the third well (Baptist-Fischer 3-14). In May 1988, Mesa revised the Authorization for Expenditure to $174,100. The first gas was sold from the third well on August 19, 1988.

In 1986, a Mesa internal memorandum concluded that the combination of lower well production, contemplated adjustment in operating expenses charges, and contemplated third well costs would make the Baptists' ownership worthless. In 1987, before the third well was drilled, a Mesa representative wrote to the Baptists about the loss which the Baptists could anticipate "[b]ecause of the economics of the existing contracts" and offered $5,000 for their interest. In March 1988, Mesa offered $10,000 for the Baptists' interest.

On May 20, 1988, the Baptists sold their entire interest to Hugoton Energy for $15,000. On August 3, 1988, Hugoton Energy sent a demand letter to Mesa in which it took the position that the 1952 agreement had terminated due to commercial impracticability. In September 1988, a "Corrected Mineral Deed" was signed by the Baptists...