Matrix Production Co. v. RICKS EXPLORATION, 24,211.

• Decision Date: 26 July 2004
• Docket Number: No. 24,211.,24,211.
• Citation: 136 N.M. 593,102 P.3d 1285
• Court: Court of Appeals of New Mexico
• Parties: MATRIX PRODUCTION COMPANY, a Texas corporation, Plaintiff-Appellant, v. RICKS EXPLORATION, INC., an Oklahoma corporation, Cardinal River Farm, Inc., Enerstar Resources Oil & Gas, L.L.C., Rehoboth, Inc., Tropical Minerals, Inc., Monarch Resources, L.L.C., Eleven Sands Exploration, Inc., Discovery Exploration, Peak Investments, Claude Arnold, H.J. Freede, Joe D. Pate Trust, Joe D. Pate, Jr. Trust, J. Durwood Pate, Jr. Trust, David C. Story, Larry Fenity, Blake Arnold, Jon G. Massey, Defendants-Appellees.

102 P.3d 1285

136 N.M. 593

MATRIX PRODUCTION COMPANY, a Texas corporation, Plaintiff-Appellant, v. RICKS EXPLORATION, INC., an Oklahoma corporation, Cardinal River Farm, Inc., Enerstar Resources Oil & Gas, L.L.C., Rehoboth, Inc., Tropical Minerals, Inc., Monarch Resources, L.L.C., Eleven Sands Exploration, Inc., Discovery Exploration, Peak Investments, Claude Arnold, H.J. Freede, Joe D. Pate Trust, Joe D. Pate, Jr. Trust, J. Durwood Pate, Jr. Trust, David C. Story, Larry Fenity, Blake Arnold, Jon G. Massey, Defendants-Appellees.

No. 24,211.

Court of Appeals of New Mexico.

July 26, 2004.

Certiorari Denied December 7, 2004.

Paul R. Owen, Montgomery & Andrews, P.A., Santa Fe, NM, John Timothy Byrd Houston, TX, for Appellant.

William G. W. Shoobridge, Shoobridge Law Firm, P.C., Hobbs, NM, Bradley A. Gungoll, Julia C. Rieman, Gungoll, Jackson, Collins, Box & Devoll, P.C., Enid, OK, for Appellees.

Certiorari Denied, No. 28,857, December 7, 2004.

OPINION

FRY, Judge.

{1} This oil and gas case arises out of a model form joint operating agreement (JOA) to explore and develop minerals in Lea County, New Mexico, between the co-lessees of the mineral estate. "Form 610 Model Operating Agreement has been in use in the oil and gas industry in one form or another since 1956." John R. Reeves & J. Matthew Thompson, The Development of the Model Form Operating Agreement: An Interpretive Accounting, 54 Okla. L.Rev. 211, 213 (2001). As this Court observed in Nearburg v. Yates Petroleum Corp., 1997-NMCA-069, ¶ 2, 123 N.M. 526, 943 P.2d 560, "[o]perating agreements are commonly used in the oil and gas industry in New Mexico and other producing states to set forth the arrangement between interest owners as to exploration and development of jointly owned interests." Two clauses of the JOA are particularly significant in this case: (1) the clause requiring that any party to the agreement who wishes to propose a subsequent drilling operation give notice to the other parties, who then can decide whether they wish to participate in the operation; and (2) the clause exculpating the operator of the drilling operation from losses sustained by any other party to the JOA unless the losses result from the operator's gross negligence or willful misconduct in the drilling operation.

{2} In this case, one of the parties to the JOA, Plaintiff Matrix Production Company (Matrix) sued another party, the drilling operator, Ricks Exploration, Inc. (Ricks), and other co-lessees of the mineral estate, alleging that it did not receive the required notice of the drilling of a well called "Burrus No. 3." Matrix claimed it was entitled either to an accounting of its share of the profits from the well's production, or for damages or specific performance for breach of contract. The trial court granted summary judgment in Defendants' favor. Because we agree with the trial court that no genuine issues of material fact exist as to whether Matrix received notice, or whether the exculpatory clause applied, we affirm.

BACKGROUND

{3} The following facts are undisputed. On December 16, 1999, Matrix and Defendants entered into a JOA to explore and develop minerals in an area of Lea County, New Mexico, known as the "Contract Area." The JOA stated that an initial well would be drilled on or before March 31, 2000, at a specified location. The JOA also described the required process for drilling wells within the Contract Area subsequent to the drilling of the initial well. It provided that if a party to the agreement elected not to participate in a proposed operation, that party would be subject to what the JOA described as a non-consent penalty. This penalty prevents a non-participating party from recovering proceeds from a well until the proceeds from the sale of the party's share in the mineral estate equal 400% of the portion of the costs and expenses of the well that would have been chargeable to that party had it participated in the operation.

{4} On May 4, 2001, Defendant Ricks, the operator, gave Matrix written notice of its intention to drill a third well, Burrus No. 3, at a specified location. The notice gave Matrix the option of either participating in the operation or declining to participate and being subject to the non-consent penalty. Matrix declined to participate in the proposed operation.

{5} In January 2002, after the well had been completed, a surveyor staking new wells determined that the Burrus No. 3 well was not at the exact location where the operator had proposed to drill and which had been stated in the notice. The well had been drilled approximately 500 feet from its intended location; however, Matrix produced no evidence that Defendants knew of the mistake before that time. Matrix did introduce the testimony of the president of one of the defendants who said that he had driven past the location at some point during July 2001, and that the well appeared not to be in precisely the right place. However, this co-lessee further testified that he notified Ricks, and that after checking with field personnel, Ricks confirmed that the well was in the right place. Indeed, Defendants produced evidence that in July 2001, Ricks' production foreman went to the site and read the tag on the stake and confirmed the location with a company geologist. There was also evidence that the contractor hired to build the location for the well also checked the tag and confirmed the location.

{6} When it became clear in January 2002 that the well had in fact been drilled 500 feet from the intended location, Matrix filed suit seeking an accounting for its share in the profits and damages for breach of contract. Defendants answered and counterclaimed for a declaratory judgment. Matrix then moved for summary judgment, arguing that there was no dispute that it did not receive notice of the drilling as required by the JOA, and that Matrix was entitled to an accounting for all profits or, in the alternative, for specific performance. The trial court denied Matrix's motion on the ground that issues of material fact remained about whether misplacement of the well was intentional or resulted from excusable inadvertence. Matrix moved for leave to file a second amended complaint to add claims for gross negligence, violation of the Oil and Gas Proceeds Payment Act, and conversion. Defendants opposed this motion, arguing that no newly discovered facts had precipitated the need to amend and that adding three new causes of action would require them to reschedule depositions in two or three states after discovery had been substantially completed. Matrix did not file a request for a hearing on its motion to amend.

{7} After the completion of discovery, Defendants moved for summary judgment, arguing that it was undisputed that Matrix received notice of the proposed operation, and that the JOA's exculpatory clause precluded Matrix's claims because Matrix had produced no evidence that Ricks' mistake in drilling the well 500 feet from the intended location was grossly negligent or the result of willful misconduct. The trial court granted Defendants' motion for summary judgment, stating that there was no dispute as to the material facts: that Defendants had provided notice of the drilling of the Burrus No. 3 well in compliance with the JOA; that Matrix had declined to participate in the drilling operation; and that there was no evidence that the mistake in drilling the well 500 feet from its intended location was the result of gross negligence or willful misconduct on the part of Ricks. Thus, the trial court determined the JOA's exculpatory clause was applicable and no liability resulted from the mistake. The trial court also denied Matrix's motion to file a second amended complaint, stating that Matrix had not requested a hearing on the motion and had not brought its motion to the court's attention until ten days before trial. This appeal followed.

DISCUSSION

{8} Matrix raises four main issues on appeal: (1) that it is entitled to equitable relief because it was not given proper notice of the Burrus No. 3 well; (2) alternatively, that it is entitled to contract damages because Defendants breached the JOA and were not shielded by the exculpatory clause in the JOA; (3) that it was entitled to amend its complaint; and (4) that it is entitled to remand for consideration of the issues in the amended complaint.

{9} "Summary judgment is appropriate where there are no genuine issues of material fact and the movant is entitled to judgment as a matter of law. The issue on appeal is whether [the defendant] was entitled to [judgment] ... as a matter of law. We review these legal questions de novo." Self v. United Parcel Serv., Inc., 1998-NMSC-046, ¶ 6, 126 N.M. 396, 970 P.2d 582 (citations omitted). Summary judgment is proper where there is no evidence raising a reasonable doubt that a genuine issue of material fact exists. Cates v. Regents of the N.M. Inst. of Mining & Tech., 1998-NMSC-002, ¶ 9, 124 N.M. 633, 954 P.2d 65.

Matrix's Claim for Equitable Accounting

{10} Matrix argued below, and now on appeal, that it is entitled in equity to an accounting of its interest in the mineral estate because it never received notice of the drilling of the Burrus No. 3 well because the well was actually drilled approximately 500 feet from the intended location of the well described in the notice. Matrix contends that without notice, it had no opportunity to participate in the drilling operation and cannot be subject to the penalty provision of the JOA. See Nearburg, 1997-NMCA-069, ¶ 17, 123 N.M. 526, 943 P.2d 560 (stating that the penalty provision is a "covenant triggered by a condition precedent," namely, "the election not to participate in the proposed operation"). Defendants respond that the notice complied with the JOA and gave Matrix notice of Ricks' intent to drill. {11} The JOA describes the procedure for notifying parties to the agreement of subsequent operations as follows:

Should any

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