Pennaco Energy, Inc. v. KD Co.
| Decision Date | 02 December 2015 |
| Docket Number | Nos. S–15–0019,S–15–0020.,s. S–15–0019 |
| Citation | 363 P.3d 18 |
| Parties | PENNACO ENERGY, INC., Appellant (Defendant), v. KD COMPANY LLC, a Wyoming close limited liability company, Appellee (Plaintiff). Pennaco Energy, Inc., Appellant (Defendant), v. First Northern Bank of Wyoming, Buffalo, Wyoming, as Trustee of the Credit Shelter Trust Established on January 16, 2005, under the Leo M. Hollcroft Revocable Trust, Dated April 12, 2002; and First Northern Bank of Wyoming, Buffalo, Wyoming, as Trustee of the Claire B. Hollcroft Revocable Trust, Dated April 12, 2001, Appellees (Plaintiffs). |
| Court | Wyoming Supreme Court |
Representing Appellant: Marie R. Yeates and Michael A. Heidler of Vinson & Elkins, L.L.P., Houston, Texas; Mark R. Ruppert and Isaac N. Sutphin of Holland & Hart, LLP, Cheyenne, Wyoming. Argument by Ms. Yeates.
Representing Appellees: Kendal R. Hoopes of Yonkee & Toner, LLP, Sheridan, Wyoming.
Representing Petroleum Association of Wyoming, Amicus Curiae in Support of Pennaco Energy Inc.: Thomas F. Reese, Ryan J. Schwartz, William E. Reese, and Kyle A. Ridgeway of Williams, Porter, Day & Neville, P.C., Casper, Wyoming.
Representing Texas Oil & Gas Association, Amicus Curiae in Support of Pennaco Energy Inc.: Timothy M. Stubson of Crowley Fleck PLLP, Casper, Wyoming.
Before BURKE, C.J., and HILL, DAVIS, FOX, and KAUTZ, JJ.
[¶ 1] Pennaco Energy, Inc. (Pennaco) obtained oil and gas leases in northeastern Wyoming. Pennaco then made contracts with the surface landowners, who were predecessors of Appellees. These agreements granted Pennaco access to and use of the landowners' land during exploration and production under the mineral leases. In the agreements, Pennaco committed to pay for damages and for use of the land and, when operations ceased, to restore the land as nearly as possible to its prior condition. Pennaco developed its coalbed methane operation, drilling for and producing gas, and made the required payments for several years. It then assigned its interest in the operations and agreements to CEP–M Purchase, LLC (CEP–M), which re-assigned those interests to High Plains Gas, Inc. (High Plains Gas). Since Pennaco's assignment, neither Pennaco nor the assignees have made any of the payments required under the agreements, nor have they reclaimed any of the land.
[¶ 2] Appellees (referred to as landowners jointly, and individually as KD or Hollcroft) sued Pennaco, CEP–M and High Plains Gas for breach of the agreements. CEP–M and High Plains Gas defaulted. The district court granted summary judgment in favor of the landowners, concluding that Pennaco remained liable under the agreements even after assignment.
[¶ 3] Pennaco appeals, claiming the district court erred in applying contract law to find that it remained liable under the agreements. Pennaco contends the agreements created covenants running with the land, which can only be enforced against someone in privity of estate with the landowners. Upon assigning the agreements and leases to CEP–M, Pennaco asserts, it ceased to have privity of estate with the landowners and cannot be held liable under the agreements. We conclude the district court correctly ruled Pennaco remains liable under the agreements, and affirm the judgments.
[¶ 4] The issues for our determination are:
1. Whether the district court correctly ruled that Pennaco remains liable for performing the obligations under the agreements after assigning a portion of its interest under those agreements to a third party.
2. Whether the district court properly awarded costs and attorney fees to the landowners.
[¶ 5] The ranch lands at issue in these cases are located in the Powder River Basin in Sheridan County and Johnson County, Wyoming. During the 1990s, Pennaco acquired interests in oil and gas leases for the mineral estate underlying the ranch lands. Pennaco then made contracts with the surface owners, who were predecessors of KD and Hollcroft. In those contracts, the surface owners granted Pennaco the right to enter the lands for purposes of drilling, completing and producing gas wells, constructing and maintaining access roads and power lines, and installing pipelines to transport gas and water produced from gas wells drilled on the lands. In exchange, Pennaco agreed to make annual payments to the surface owners for use of the land and to compensate them for damages caused by its operations. Pennaco agreed to restore all impacted land when the use ended.
[¶ 6] In addition to the surface use agreements, Pennaco and the landowners entered into agreements concerning the disposal of water produced during the operations. Those agreements required Pennaco to make annual payments and, when operations ceased, either restore the land or make the areas suitable for the landowners' use as water wells or reservoirs.
[¶ 7] After signing the agreements, Pennaco began coalbed methane operations on the lands drilling numerous wells, constructing roads, building reservoirs for storing water produced from the wells, and installing underground pipelines and other infrastructure. As required by the agreements, Pennaco made the annual surface damage and reservoir payments through 2010. In 2009, Pennaco and Hollcroft signed agreements which required Pennaco to replace two of Hollcrofts' water wells and to pay for electricity to operate those wells.
[¶ 8] In July 2010, Pennaco sold a portion of its oil and gas interests in the Powder River Basin to CEP–M. The sale included part of Pennaco's interest in the leases underlying the ranch lands at issue and its rights under the surface agreements. However, the sale expressly reserved Pennaco's interest in the "deep rights" covered by the leases and the rights of access to and use of the ranch property in order to explore and develop the deep rights.1 Pennaco also excluded monitoring wells and wells subject to a 2010 plugging and abandonment program along with surface access and other rights necessary to complete plugging and abandoning those wells. Finally, Pennaco retained a right to complete, plug and abandon wells and restore the sites at CEP–M's expense if CEP–M failed to do so.
[¶ 9] CEP–M then assigned its interests to High Plains Gas. High Plains Gas began operating the wells, producing gas and discharging water into the reservoirs on the ranch lands. No one, however, made any payments required under the contracts after Pennaco's assignments.
[¶ 10] By the time of the assignments, Pennaco had reclaimed a number of the wells it drilled on the ranch lands and reclaimed some of the roads it constructed. No one has reclaimed any wells, roads or reservoirs since the assignments. Annual payments required under the surface and damage agreements were not made after 2010. The annual payments required under the water storage agreements were not made after 2011. No one made electricity payments to the Hollcrofts as required by the water well replacement agreements after mid 2012.
[¶ 11] In 2012 and 2013, the landowners gave Pennaco, CEP–M and High Plains Gas notice that they were in default under the surface, damage and water storage agreements. When they did not cure the default, the landowners filed complaints against them in district court in Sheridan County2 and in Johnson County3 for breach of the agreements. Landowners sought judgment for all amounts due under the agreements. High Plains and CEP–M failed to answer the complaints and the district court entered default against them in both cases. The landowners and Pennaco then filed motions for summary judgment.
[¶ 12] Relying on well established principles of contract law, the landowners asserted that Pennaco remained liable under the contracts even after the assignments. Pennaco argued the landowners' analysis was not applicable because the parties to the agreements intended to create covenants running with the land, which could only be enforced against someone in privity of estate with the landowners. Pennaco claimed that upon assigning the agreements, it ceased to have privity of estate with the landowners. The district court determined that Pennaco remained liable under the contracts and granted judgments against Pennaco for past due payments of $63,864.90, plus interest, in the case filed in Sheridan County and $71,508.60, plus interest, in the Johnson County case. The district court also awarded the landowners attorney fees and costs. Pennaco timely appealed from the district court's judgments.
[¶ 13] Pennaco then filed a motion in this Court to consolidate the appeals involving KD and the Hollcrofts. KD and the Hollcrofts opposed consolidation for briefing purposes but agreed the cases should be consolidated for purposes of oral argument and this Court's decision. We entered an order granting the motion to consolidate for purposes of argument and decision. There are some differences between the KD contracts and the Hollcroft contracts, listed below, but much of the analysis of those contracts is the same. Consequently, this decision primarily addresses the agreements together. The Petroleum Association of Wyoming (PAW) and Texas Oil and Gas Association (TOGA) filed motions requesting an order allowing them to file amicus briefs. We granted the motions.
[¶ 14] Pennaco appeals from district court orders granting summary judgment to KD and the Hollcrofts. Summary judgment is governed by W.R.C.P. 56(c), which states:
The judgment sought shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.
We review a summary judgment de novo, using the same materials and following the same standards as the district court and examining the record from the vantage point most favorable to the party opposing the motion, giving that party the benefit of all favorable inferences which may fairly be drawn from the...
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