Mike Golden, Inc. v. Tenneco Oil Co.

• Decision Date: 18 January 1990
• Docket Number: No. 890057,890057
• Parties: MIKE GOLDEN, INC., Plaintiff and Appellee, v. TENNECO OIL COMPANY, Defendant and Appellant. Civ.
• Court: North Dakota Supreme Court

Page 716

450 N.W.2d 716

MIKE GOLDEN, INC., Plaintiff and Appellee, v. TENNECO OIL COMPANY, Defendant and Appellant.

Civ. No. 890057.

Supreme Court of North Dakota.

Jan. 18, 1990.

Charles L. Donlin (argued), Bismarck, for plaintiff and appellee.

Fleck, Mather, Strutz & Mayer, P.C., Bismarck, for defendant and appellant; argued by Craig C. Smith. Appearance by Brian R. Bjella.

MESCHKE, Justice.

Tenneco Oil Co. appealed from a judgment awarding damages to Mike Golden, Inc. for breach of a reassignment clause in four assignments of oil and gas leases. We reverse and remand for further proceedings.

On July 21, 1980, Golden assigned to Tenneco four oil and gas leases (Bottom Leases) on a 160 acre tract in Bowman County. The Bottom Leases were for a primary term of five years from June 19, 1980, and as long thereafter as oil or gas was produced. The assignments contained reassignment clauses:

It is further agreed and understood that ninety (90) days prior to the expiration of the primary term of the assigned lease, if there is no well on said land producing oil or gas in paying quantities, and no well for oil or gas is being drilled thereon, Assignee shall notify the Assignor at the address hereinbefore designated, and shall immediately and without cost, reassign to said Assignor the oil and gas leasehold estate herein assigned.

Tenneco did not reassign the Bottom Leases to Golden on March 21, 1985, as the reassignment clauses required.

Unaware of the reassignment clauses, Tenneco agreed to sell the Bottom Leases to Koch Exploration Company on April 4, 1985, for $12,800, or $80 per net mineral acre. Koch was considering the formation of a secondary recovery unit known as the Medicine Pole Hills Enhanced Oil Recovery Unit (the Unit), which would include the tract covered by the Bottom Leases. Golden purchased new oil and gas leases (Top Leases) covering the same tract as the Bottom Leases on May 6, 1985, for $12,000, or $75 per net mineral acre. The Top Leases had a primary term of one year to begin June 19, 1985. The Unit did not become effective until after the Bottom Leases expired and the Top Leases began.

Golden sued Tenneco for damages for breaching the reassignment clauses. The trial court granted summary judgment to Golden on the issue of liability and dismissed Tenneco's counterclaim. After trial on damages, the trial court awarded Golden damages of $60,902. On appeal from the judgment, Tenneco argued that the trial court erred (1) in determining that the lost Bottom Leases were to be valued as of June 19, 1985; (2) in determining that Golden was not required to mitigate its damages; and (3) in determining the amount of damages.

In its decision, the trial court stated: "The fundamental question is the value of [Golden's] leasehold interest on June 19, 1985, the date of the breach of Tenneco's promise to reconvey the bottom leases." Tenneco pointed out that the breach occurred 90 days before expiration of the Bottom Leases, and argued that we should therefore reverse and direct the trial court "to determine the value of [Golden's] leasehold interest on March 21, 1985, and not June 19, 1985." Golden sought damages as of 90 days before expiration of the Bottom Leases. The witnesses testifying about the value of the lost Bottom Leases did so with reference to March 21. The witness whose valuation the trial court adopted made his calculations as of March 20. By itself, the trial court's emphasis on the date that the Bottom Leases expired was clearly inadvertent and harmless.

The trial court recognized that Golden's activities in securing the Top Leases were "to regain his lost position--in effect, a roundabout attempt at a form of mitigation." But, the trial court determined that "the mitigation requirement is not applicable." Tenneco contended that the trial court's determination that mitigation did not apply was erroneous. Artfully conceding that it did not "contest that Golden mitigated his damages in terms of acquiring the top leases," Tenneco contended that the trial court's damage award gave Golden "a significantly greater recovery than that which would have been gained by Tenneco's performance."

One injured by another's wrongful act, whether tort or breach of contract, must make reasonable efforts to minimize the resulting damages. Fargo Women's Health Organization, Inc. v. FM Women's Help and Caring Connection, 444 N.W.2d 683 (N.D.1989); Nicola v. Meisner, 84 N.W.2d 702 (N.D.1957). NDCC 32-03-36 declares that one may not ordinarily "recover a greater amount in damages for the breach of an obligation than he could have gained by the full performance thereof on both sides." We are not convinced that the trial court made a mistake in factually determining that, in this case, the doctrine of mitigation of damages did not require a reduction in the amount of damages otherwise recoverable by Golden. Golden's purchase of the Top Leases was a transaction distinct from any rights to the Bottom Leases, leases for a different period of time. We see no reason why Tenneco should benefit from Golden's additional effort and investment in a separate transaction.

Testifying for Golden, Cooper B. Land, a geologist and independent oil and gas operator, valued the lost Bottom Leases by calculating the estimated reserves of oil and gas, or, as he put it, the future earning power of the leased property through production and sale of oil and gas. Tenneco objected to Land's testimony, arguing that "the proper test for measuring damages or determining damages is willing buyer/willing seller," and that "the testimony is not relevant, it's speculative, it's conjectural."

Using technical information from Koch about the proposed Unit, Land calculated that there were "9744 barrels of oil attributable to the leasehold interest." Land fixed the worth of the unproduced oil reserves in the ground at $9 per barrel. Using figures from Koch, Land calculated that "approximately $2.75 for each barrel of oil ... would have to be expended as a capital cost." Land summed up his opinion:

So I've taken the value of $9 a barrel for the oil in the ground, subtracted $2.75 a barrel for the anticipated capital cost of drilling additional wells and equipping the enhanced oil recovery unit, I've multiplied that by the 9744 barrels of oil attributable to Tract No. 41, and in that way arrived at the value of $60,902.

Land's income evaluation equalled $380 per net mineral acre.

On cross-examination, Land acknowledged (1) that he purchased leasehold interests in the Top Leases from Golden for $100 an acre in July 1985, and (2) that of 15 unit projects within his experience in North Dakota, "[a]pproximately a third have been totally unsuccessful by anybody's standards" and that "a third have had some measure of success." Land did not know of or consider any provision for additional capital costs for existing wells in the Unit.

Betsy Spomer Maynard, a Tenneco "landman," testified that by April 1, 1985, Tenneco had agreed to sell the Bottom Leases to Koch for $80 per acre. Maynard also testified that the unit operating agreement contained a capital adjustment provision attributing a cash value of 60% of $750,000 to the owners of each of 13 existing wells in the Unit and that:

we felt we were going to be--you know, we were never going to see payout on the capital adjustment, much less any future expenditures, under Koch's plan of operations. So right upfront we were so far in the red that we didn't see this as a paying proposition for Tenneco.

It is plain that terms and conditions of the proposed Unit affected value.

Lynn Moser, a petroleum "landman" who negotiated leases for Koch in the proposed Unit area, testified that "[w]e took a little over 50 leases for Koch in their Medicine Pole Hills...