Kenai Oil and Gas, Inc. v. Grace Petroleum Corp.
| Decision Date | 31 July 1987 |
| Citation | 512 So.2d 1347 |
| Parties | KENAI OIL AND GAS, INC. v. GRACE PETROLEUM CORPORATION. 86-407. |
| Court | Alabama Supreme Court |
Michael C. Quillen and Scott A. Spear of Cabaniss, Johnston, Gardner, Dumas & O'Neal, Birmingham, for appellant.
Norton W. Brooker, Jr., of Lyons, Pipes & Cook, Mobile, and Louis P. Moore of Holder, Moore & Grocholski, Fayette, for appellee.
This is an appeal from a partial summary judgment made final pursuant to Rule 54(b), A.R.Civ.P. We reverse and remand.
Detailed statements of both the case and the facts are necessary for an understanding of the dispositive issue here presented.
On January 23, 1984, Kenai Oil and Gas, Inc. ("Kenai"), filed this civil action against Grace Petroleum Corporation ("Grace"). The complaint alleged 1) that Kenai and Grace entered into an "Operating Agreement and Authority for Expenditure Agreement" on or about July 22, 1981, which set out the terms under which exploration for oil and gas would be undertaken; 2) that the Operating Agreement provided that Kenai was to have a 9.375 per cent working interest in the exploration effort and that Grace, as operator, would be responsible for obtaining title opinions with respect to the lease interests of those who were parties to the Operating Agreement; 3) that at the time of the Operating Agreement's execution Grace knew or should have known that Kenai's title to mineral interests was apparently defective and that Grace had obtained competing mineral leases or the right to obtain such leases; 4) that Grace obtained a second title opinion by the end of 1981 which declared Kenai's interest void, and that the existence of this title opinion was not disclosed to Kenai until after Grace had disclosed that a third title opinion, prepared after the well had been successfully drilled and was producing, showed no interest belonging to Kenai; 5) that Grace charged and collected from Kenai a share of exploration expenses while concealing Grace's knowledge of the apparent title defect and the existence of the second title opinion; and 6) that Grace's early knowledge of the problem and the second title opinion continued to be concealed from Kenai both after Grace's disclosure of the opinion expressed in the third title opinion and during an effort to persuade Kenai to accept from Grace a refund of exploration and well costs.
Based on these factual allegations, Kenai charged Grace with eight counts of culpable conduct: 1) breach of contract; 2) breach of fiduciary duty; 3) gross negligence; 4) misrepresentation made willfully to deceive or recklessly without knowledge; 5) misrepresentation of material fact by mistake or innocently; 6) suppression of material facts which Grace was under obligation to communicate; 7) deceit; and 8) concealment and misrepresentation operating to estop Grace from denying Kenai certain gas well revenues. By amendment to that complaint, Kenai sought a declaration of its rights with respect to the mineral interests.
Grace's motion for partial summary judgment, claiming that counts two, four, five, six, and seven were barred by the one-year statute of limitations, 1 was granted and expressly made final. All of the statements of Kenai's claims sought damages for fraud and deceit. Kenai alleges error only with respect to its claims for fraud and deceit.
On May 12, 1981, Kenai and Browning & Welch, Inc., entered into a natural gas exploration and development contract. Pursuant to the terms of that agreement, Browning & Welch agreed to purchase mineral interests in the Black Warrior Basin (to be paid for by Kenai) and to assign three-fourths of the acquired mineral interests to Kenai.
On June 19, 1981, Browning & Welch leased from U.S. Pipe & Foundry Company interests covering 12,066 acres of land, including a tract described as the north one-half of the south one-half of the southeast quarter of section two, township 14 south, range 12 west, in Fayette County, Alabama. This same property had previously been leased from U.S. Pipe by Grace or by its predecessor, Cleary Petroleum.
On July 10, 1981, George Cox, a landman employed by Grace, wrote a letter to Kenai soliciting Kenai's participation in a well-drilling project. Cox's letter stated that a preliminary check of working interests revealed that Kenai owned the mineral interests in 9.375 per cent of the spacing unit which was proposed by Grace. Cox, on behalf of Grace, requested that Kenai confirm its proposed working interest and enclosed with the letter a preliminary drilling opinion prepared by Jack Fine. This title opinion reflected that Kenai and Browning & Welch had good and valid title to the mineral interests in the 40-acre tract leased by Browning & Welch for itself and Kenai.
In response to the letter from Cox/Grace, Kenai executed an authorization for expenditure ("AFE") which indicated Kenai's willingness to pay for its proportionate share of the drilling and exploration costs of the proposed well. An operating agreement dated July 22, 1981, was also signed, setting out the working interest owned by Kenai at 9.375 per cent and listing the responsibilities of the operator, Grace, as well as the rights and obligations of the non-operating working interest owners.
Among the obligations of Grace, as operator, was the securing of title opinions. Pursuant to the operating agreement, Grace agreed:
Drilling of the well, which became known as Laningham 2-15, began on November 5, 1981, and the well was completed on January 18, 1982. Kenai paid the 1982 and 1983 invoices for drilling expenses and operating expenses both by check and by Grace's offsetting income otherwise payable to Kenai from another well being operated by Grace.
On December 9, 1982, in response to a December 1 inquiry from Kenai, Grace wrote a letter to Kenai informing Kenai that the recent division order title opinion written by Grace's attorney did not disclose Kenai as having an interest in the Laningham 2-15 well. In response to the Grace letter concerning Kenai's mineral interests, Kenai employees attempted to determine the status of Kenai's title. According to a December 30, 1982, memorandum (prepared by Kenai employee Bill Long), Fleming Browning of Browning & Welch was asked by telephone on December 29 if he knew the basis for Grace's assertion that it owned the mineral interests at issue. That memorandum reflected that either Mr Kenai personnel made an effort to obtain title opinions from Grace in the latter part of 1982. Correspondence reveals that title opinions were apparently forwarded to Kenai by Grace in March of 1983. Other documents earlier prepared by or received by Browning & Welch were also forwarded to Kenai on March 21, 1983. Some of these documents forwarded by Browning & Welch bore a "received" stamp indicating the date on which they were received by Browning & Welch. Although Browning & Welch's receipt stamp indicates that Browning & Welch received some of the documents in October and November of 1982, a March 21, 1983, cover letter reflects that they were not made available to Kenai until that later date.
Long or Mr. Browning speculated that Grace had purchased the mineral interests after a division order title opinion had been issued which might have shown the mineral interests as being leased.
Kenai allegedly became aware of the fact that three title opinions had been prepared for or received by Grace when the three title opinions were sent to Kenai by Grace in March of 1983. These three title opinions were prepared as follows: 1) a preliminary title opinion dated March 30, 1981, by Jack Fine; 2) a supplemental drilling opinion from the law firm of Patterson & Patterson, dated December 18, 1981; and 3) a division order title opinion prepared by Jack Fine, dated September 7, 1982.
After March of 1983, Kenai discovered that a landman...
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