Mallon Oil Co. v. Bowen/Edwards Associates, Inc., 97SC150

• Decision Date: 14 September 1998
• Docket Number: No. 97SC150,97SC150
• Citation: 965 P.2d 105
• Parties: 98 CJ C.A.R. 4924 MALLON OIL COMPANY, Petitioner, v. BOWEN/EDWARDS ASSOCIATES, INC., a dissolved Colorado corporation; J. Keith Edwards; Michael J. Bowen; Bradford C. Boyce; Bowen Gas Corporation, a Colorado corporation; and Edwards Energy Corporation, a Colorado corporation, Respondents.
• Court: Colorado Supreme Court

Page 105

965 P.2d 105

98 CJ C.A.R. 4924

MALLON OIL COMPANY, Petitioner, v. BOWEN/EDWARDS ASSOCIATES, INC., a dissolved Colorado corporation; J. Keith Edwards; Michael J. Bowen; Bradford C. Boyce; Bowen Gas Corporation, a Colorado corporation and Edwards Energy Corporation, a Colorado corporation, Respondents.

No. 97SC150.

Supreme Court of Colorado En Banc.

Sept. 14, 1998.

Holme Roberts & Owen, LLP, Spencer T. Denison, Martin D. Litt, Denver, Walter H. Sargent, a Professional Corporation, Walter H. Sargent, Colorado Springs, for Petitioner.

Astrella & Rice, P.C., Lance Astrella, T.R. Rice, Denver, for Bowen/Edwards Associates, Inc.; J. Keith Edwards; Michael J. Bowen; Bowen Gas Corporation; and Edwards Energy Corporation.

John F. Head, P.C., John S. Pfeiffer, Denver, for Bradford C. Boyce.

Justice BENDER delivered the Opinion of the Court.

This case requires us to determine whether an employee of the Southern Ute Indian Tribe committed geophysical trespass when he conducted coal bed methane gas tests on the Tribe's property during the term of an oil and gas lease between the Tribe and Mallon Oil Company. We hold that unlawful geophysical trespass did not occur. We also hold that when the employee went to work for a competitor of Mallon, the employee and the competitor had no duty to Mallon to disclose geophysical information the employee learned while working for the Tribe.

The Tribe granted Mallon a lease, including the exclusive right to explore for oil and gas reserves on the Tribe's property. The Tribe retained the right to explore for coal. During the term of the lease, Bradford Boyce, a geologist working for the Tribe, conducted tests and discovered that the land potentially contained a high volume of coal bed methane gas. Later, Boyce left his position with the Tribe and secured a new job with Bowen/Edwards Associates, Inc. (BEA), an oil and gas company that was in competition with Mallon. Boyce informed BEA that he believed that the Tribe's land contained substantial coal bed methane gas reserves. BEA purchased Mallon's rights from Mallon without disclosing its knowledge of the land's coal bed methane gas reserves. Mallon then instituted this action against BEA and Boyce for unauthorized geophysical trespass, fraudulent concealment, and civil conspiracy.

The court of appeals held that Boyce did not commit the tort of unauthorized geophysical trespass because he did not acquire the information regarding the potential gas reserves through "improper means." Mallon Oil Co. v. Bowen/Edwards Assocs., 940 P.2d 1055, 1062 (Colo.App.1996). The court of appeals further held that neither Boyce nor BEA had a duty to Mallon under Restatement (Second) of Torts § 551(2)(e) (1977) to disclose their knowledge of the land's potential gas reserves. See id. at 1061.

We agree. The district court determined that the Tribe retained the right to explore for coal, and found that the coal bed methane gas discovery was incidental to that exploration. Giving deference to the district court's findings of fact, we hold that Boyce did not commit geophysical trespass when he conducted the desorption tests. The Tribe had the right to explore for coal but did not trespass on Mallon's right to explore for oil and gas when it incidentally acquired coal bed methane gas information by virtue of its coal exploration. We also hold that neither Boyce nor BEA had a duty to disclose the results of the tests to Mallon.

I. FACTS

In December of 1987, Mallon Oil Company entered into a Mineral Exploration and Development Agreement (the MEDA) with the Southern Ute Indian Tribe. The MEDA granted Mallon the exclusive right to explore for oil and gas--including hydrocarbons--on approximately 5000 acres of the Tribe's land located in La Plata County. ¹ This acreage included portions of the Fruitland coal formation, one of the many oil and gas producing geologic formations in the San Juan Basin. In previous years, studies conducted on the Fruitland coal formation in this vicinity revealed that the land contained potentially high volumes of coal bed methane gas--a hydrocarbon and a gaseous byproduct of coal. Respondent Boyce, a geologist and the Tribe's Manager of Exploration and Production, participated in the negotiation and drafting of the MEDA on behalf of the Tribe.

The MEDA required Mallon to disclose oil and gas information to the Tribe, but it contained no corresponding obligation by the Tribe to share information with Mallon. All of the parties agree that the Tribe retained the right to explore for coal. In May and September of 1988, in accordance with the MEDA, Mallon drilled two wells in the Fruitland coal formation but found no indication of significant gas deposits.

During this time, the Tribe was engaged in a broad program designed to assess its mineral resources including oil, gas, and coal reserves. In furtherance of this assessment program, the Tribe entered into numerous mineral assessment contracts with various entities. The Tribe entered into one such contract with the United States Geological Survey (U.S.G.S.) for the U.S.G.S. to conduct a coal assessment evaluation of the Fruitland coal formation, including the section of the Fruitland formation running through the Mallon lands. The purpose of the U.S.G.S. evaluation was to test for coal mineability by conducting "coal and hydrocarbon research and drilling" on the Tribe's lands, including the acreage subject to the MEDA. The Tribe entered into the U.S.G.S. agreement approximately six months after the Tribe entered into the MEDA. Boyce again acted as the Tribe's representative in setting the terms of the agreement.

Pursuant to its agreement with the Tribe, the U.S.G.S. drilled test holes in 1988 along the Fruitland coal formation; approximately one-half were located on the land subject to the MEDA. For each test hole, the U.S.G.S. noted the depth and thickness of the coal beds located below the surface and recorded this data in geophysical logs. During the drilling process, the U.S.G.S. encountered evidence of significant amounts of coal bed methane gas in many of the test holes. For example, many of the core samples that the U.S.G.S. extracted from the test holes emitted gas bubbles. In addition, the U.S.G.S. observed gas kicks and water discharge, which indicate the existence of a significant volume of gas.

Although the results of this program would eventually become public information as required by 43 U.S.C. § 31 (1994), at the Tribe's request the U.S.G.S. agreed to delay publication of the test results until after the Tribe had exclusive access to the information for a period of time.

As the drilling progressed, the U.S.G.S. apprised Boyce of all of its findings, including the gas bubbles, gas kicks, and water discharge that suggested the presence of a large volume of gas. It was not the first time Boyce had encountered evidence of gas in this vicinity. The previous year, Boyce conducted tests on the Tribe's lands approximately eight miles from the Mallon lands and discovered high volumes of coal bed methane gas in the shallow areas of the Fruitland coal formation.

Boyce instructed the U.S.G.S. staff to procure core samples of the coal and to deliver these samples to him. He received four samples: two from the lands subject to the MEDA and two from lands adjacent to the Mallon property. He conducted rudimentary desorption tests ² on the samples to determine whether the coals contained a sufficient amount of gas to make the land commercially productive for gas development. The tests revealed that some of the samples contained a large volume of coal bed methane gas. However, it is unknown whether the samples taken from the Mallon lands were the ones that contained substantial volumes of gas. Boyce took no notes of the tests. At trial he did not recall the test results.

Based on the U.S.G.S. findings and the results of the desorption tests, Boyce concluded that the Fruitland coal formation contained "potentially large volumes" of coal bed methane gas. Boyce informed the Tribe of this conclusion. The Tribe did not share this information with Mallon.

Boyce terminated his employment with the Tribe on July 1, 1989, and accepted a position with respondent BEA. Boyce persuaded BEA that it should attempt to acquire Mallon's rights to portions of the Fruitland coal formation, and he contacted Mallon on behalf of BEA to inquire whether Mallon was interested in selling its rights. In September of 1989, the U.S.G.S. published the results of its assessment of coal mineability. On October 30, 1989, BEA purchased Mallon's rights under the MEDA.

After Mallon expressed an interest in the sale but before the sale occurred, Boyce engaged in further investigation of the land leased by Mallon to determine whether it contained commercially retrievable volumes of coal bed methane gas. Boyce entered the Mallon lands and examined monitoring wells for signs of gas. He returned to the offices of the Tribe and obtained copies of the geophysical logs generated by the U.S.G.S. Although the logs were unpublished at this time, the Tribe provided the information to Boyce upon his request and made no effort to prevent his access to the logs. Using the logs, Boyce created an isopach map ³ that displayed the thickness and depth of the coal on the MEDA lands. Boyce and BEA used this map and the U.S.G.S. logs to evaluate the commercial potential of the land for the extraction of coal bed methane gas and to solicit investors for the funds necessary to purchase Mallon's interest. ⁴ In evaluating the land's potential for coal bed methane gas, BEA did not rely on the results of the desorption tests since Boyce did not disclose the test results to BEA.

Before the sale occurred, neither Boyce nor BEA told Mallon about Boyce's desorption tests or the geophysical information learned by the U.S.G.S. about the Fruitland coal formation.

More than a year after the sale to BEA, Mallon learned of the U....