Nelson Energy Programs, Inc. v. Ogtf

• Decision Date: 25 August 2006
• Docket Number: No. 94,191.,94,191.
• Citation: 143 P.3d 50
• Parties: NELSON ENERGY PROGRAMS, INC., Appellant, v. OIL & GAS TECHNOLOGY FUND, INC., et al., Appellees.
• Court: Kansas Court of Appeals

Page 50

143 P.3d 50

NELSON ENERGY PROGRAMS, INC., Appellant, v. OIL & GAS TECHNOLOGY FUND, INC., et al., Appellees.

No. 94,191.

Court of Appeals of Kansas.

August 25, 2006.

COPYRIGHT MATERIAL OMITTED

John R. Horst, of John R. Horst, P.A., of Caney, and Gordon B. Stull, of Stull & Rein, L.L.C., of Pratt, for appellant.

Jeffrey A. Chubb, of Scovel, Emert, Heasty & Chubb, of Independence, for appellees.

Before BUSER, P.J., LARSON, S.J. and WAHL, S.J.

BUSER, P.J.

This appeal presents for our consideration the proper forum for a partition action wherein the plaintiff claims to own oil and gas leasehold interests in Kansas derived from an investment agreement with a forum selection clause providing for venue in Nevada. The district court dismissed the action, concluding the forum selection clause was enforceable and the plaintiff had no partitionable interest. We reverse and remand for further proceedings, concluding the Kansas venue statute and long-standing case law requiring local venue for actions affecting real property may not be superseded by agreement and the allegations of plaintiff's amended petition support a partitionable interest under Kansas law.

Factual and Procedural Background

Nelson Energy Programs, Inc. (Nelson) entered into agreements with Oil & Gas Technology Fund, Inc. (OGTF) to invest in a coalbed methane redevelopment project involving the exploration and development of 5,200 acres in Chautauqua County, Kansas, covered by oil and gas leases purportedly held by OGTF. The principal agreements between the parties were each entitled "Natural Gas Sublease Agreement" and provided in material part:

"Each of the lots and well locations therein are offered to Lessee for exploration purposes on the basis of Lessee investing 100% of the Working Interests costs associated in the drilling and or completion of each well listed ... in return for [Nelson] earning 75% of the Working Interest revenues in each well, before payout and 50% of each well following payout subject to all overriding royalties....

....

"... OGTF has agreed to convey and hereby does grant, sell and convey to [Nelson] his undivided percentage share in and only to the well bore located within subject Lots and limited to the depths drilled by the locations as set forth ... and including each successive exploratory or development well drilled and completed pursuant to the terms set forth herein this agreement."

The Sublease Agreements also contained the following provision:

"Application of Nevada Law. This agreement, and its application or interpretation, shall be governed by the laws of the United States of America and the State of Nevada. Venue for any action arising hereunder shall lie in Washoe County, Nevada."

Pursuant to the Sublease Agreements, Nelson invested $697,247 to be utilized by OGTF to pay for 100% of the costs of drilling and completing eight wells. Not all of the wells were drilled and completed, and for this and other reasons not pertinent to this appeal, Nelson came to believe that it had been defrauded in the transaction.

Nelson initially filed suit against OGTF and related parties in Chautauqua County District Court, alleging fraud and securities violations and seeking rescission, injunctive relief, and partition of the leasehold interests. Prior to responsive pleadings being filed, Nelson voluntarily dismissed the bulk of its original action and filed an amended petition seeking only partition and an accounting. The amended petition included the following allegations:

"[Nelson] is the owner of a working interest in all of the oil and gas leases more particularly described on Exhibit `A' .... [Nelson's] interests in the Oil & Gas Leases may not include each and every one of the Oil & Gas Leases but the exact nature of Plaintiff's ownership will not be known until completion of discovery herein.

....

"The Court should determine the names and ownership amounts of each owner of an interest in the Oil and Gas leaseholds.

....

"The Court should make partition of the working interest of the Oil and Gas Leases, and equipment owned in connection therewith, in accordance with the interests of all of the owners thereof as determined by the Court."

OGTF moved to dismiss the amended petition on the sole basis that the forum selection clause in the Sublease Agreements required the action to be dismissed for lack of jurisdiction and venue. The district court granted the motion to dismiss, concluding in material part:

"The Court perceives that [Nelson] seeks to avoid removal of the whole case to Washoe County, Nevada, under the agreements' forum selection clauses by in essence, asking the Court to bifurcate from the rest of the conflicted issues at least the partition action so it can proceed in Chautauqua County, Kansas, where the affected acreage lies.

"This the Court declines to do.

"Doubtless [OGTF] has not performed as [Nelson] expected pursuant to the signed agreements. Indeed it appears from the Court's limited understanding of the facts pled herein, [Nelson] very well may have been swindled.

"But it is not clear to this Court that [Nelson] has a partitionable interest in Chautauqua County, Kansas, property.

"The Court sees no reason why that question, as well as all other legal and factual questions [Nelson] wishes to litigate should not be dealt with in the forum and law selected by the parties in the agreement."

Shortly after the dismissal, OGTF filed of record in the office of the Register of Deeds of Chautauqua County, assignments purporting to convey interests in and to the well bore of the completed wells on five of its leases to Nelson and others. Although Nelson brought this fact to the district court's attention by filing a motion for reconsideration and attaching copies of the recorded assignments, the district court adhered to its order of dismissal. Nelson appeals.

Standard of Review

Although venue decisions are typically reviewed for abuse of discretion, Schmidt v. Shearer, 26 Kan.App.2d 760, 765, 995 P.2d 381 (1999), appellate review is unlimited here because the district court's decision was based on a forum selection clause. See Aylward v. Dar Ran Furniture Industries, Inc., 32 Kan.App.2d 697, 698, 87 P.3d 341 (2004) (applying standard of review for interpretation of written instruments to review of forum selection clause); K & V Scientific Co., Inc. v. Bayerische Motoren Werke, 314 F.3d 494, 497 (10th Cir.2002) (applying standard for interpretation of contractual provisions to review of forum selection clause). Appellate review is also unlimited to the extent the issue is "the district court's interpretation of the venue statute and its application." 5B Wright & Miller, Federal Practice and Procedure: Civil § 1352 (2004); see Cooper v. Werholtz, 277 Kan. 250, 252, 83 P.3d 1212 (2004) (appellate review of statutory interpretation is unlimited).

Dismissal Based Upon the Forum Selection Clause

1. Do Nelson's claims to partition arise from the Sublease Agreements?

We first consider Nelson's argument that its partition claim is "independent of any conflict or dispute arising out of the agreements between Nelson and OGTF." Although Nelson's claims may not have been "independent" of the Sublease Agreements prior to the execution and filing of record of five assignments, we agree that the execution and filing of these assignments may distance Nelson's partition claims from the forum selection clause in the Sublease Agreements under the doctrine of merger.

It is a general rule of law applicable to all contracts that prior stipulations and agreements are merged into the final formal contract or the deed, and when a deed is delivered and accepted as performance of a contract to convey property, the contract is presumed to be merged into the deed. See Palmer v. The Land & Power Co., 172 Kan. 231, Syl. ¶ 2, 239 P.2d 960 (1952). Here, the obligations of OGTF pursuant to the Sublease Agreements were finally performed when formal assignments were executed, delivered, and recorded. The assignments conveying well bore interests carved out of Kansas oil and gas leasehold interests contained no forum selection clause.

Nelson's action to partition its oil and gas leasehold interests under the assignments did not arise under the Sublease Agreements; rather, it arises by virtue of common ownership of its property interests in Kansas. The right of partition enjoyed by cotenants in Kansas is considered an incident of common ownership and based on the equitable doctrine that it is better to have the control of property in one person than in several who may entertain divergent views with respect to proper control and management. See Miller v. Miller, 222 Kan. 317, 320, 564 P.2d 524 (1977).

Once OGTF's obligations under the Sublease Agreements were performed through the conveyance to Nelson of property interests by formal assignment, the covenants of the Sublease Agreements merged into those assignments and Nelson's partition rights derived from common ownership—not from contractual rights burdened by the forum selection clause. For this reason alone, the district court erred in denying Nelson's motion for reconsideration.

2. Kansas law regarding the venue of actions affecting realty.

Kansas has long required that actions affecting real property, including partition actions, take place in the county where the real property is located. K.S.A. 60-601; see Terr. L. 1858, ch. 11, sec. 45. This rule was codified after statehood, G.S. 1868, ch. 80, sec. 46, and in 1912 the Kansas Supreme Court explained the requirement as follows:

"So strict is this requirement that if a party seeks to recover the possession of land and it consists of separate tracts in two or more counties separate actions must be brought in the counties where they are situated....

....

"A party seeking to recover land can not compel another claiming interest in or title to it to litigate the title in any county except where the...