Ritter, Laber v. Koch Oil, Inc.

• Decision Date: 16 October 2007
• Docket Number: No. 20070029.,20070029.
• Parties: RITTER, LABER AND ASSOCIATES, INC.; Elizabeth Cantarine, Personal Representative of the Estate of Eugene A. Burdick; and Russell L. Kiker, Plaintiffs and Appellants v. KOCH OIL, INC., a division of Koch Industries, Inc., Defendant and Appellee.
• Court: North Dakota Supreme Court

740 N.W.2d 67

2007 ND 163

RITTER, LABER AND ASSOCIATES, INC.; Elizabeth Cantarine, Personal Representative of the Estate of Eugene A. Burdick; and Russell L. Kiker, Plaintiffs and Appellants v. KOCH OIL, INC., a division of Koch Industries, Inc., Defendant and Appellee.

No. 20070029.

Supreme Court of North Dakota.

October 16, 2007.

Ronald H. McLean (argued) and Jane L. Dynes (on brief), Serkland Law Firm, Fargo, N.D., Gary J. Gordon (argued), Rider Bennett LLP, Minneapolis, MN, and Marvin L. Kaiser (appeared), Kaiser Law Firm, Williston, N.D., for plaintiffs and appellants.

Charles F. Webber (argued) and Jerry W. Snider (on brief), Faegre & Benson, Minneapolis, MN, and John W. Morrison, Jr. (appeared), Fleck, Mather & Strutz, Bismarck, N.D., for defendant and appellee.

VANDE WALLE, Chief Justice.

[¶ 1] Ritter, Laber and Associates, Inc., Elizabeth Cantarine, as the personal representative of the estate of Eugene Burdick, and Russell Kiker appeal from a district court judgment approving a settlement in a class action and awarding attorney fees and costs to the plaintiffs and an incentive payment to the three class representatives. We affirm, concluding the court did not err in refusing to reform the parties' settlement agreement and did not abuse its discretion in awarding attorney fees and incentive payments.

I

[¶ 2] Between 1975 and 1988, Koch Oil, Inc. ("Koch") purchased oil and gas in North Dakota. For some of its purchases Koch paid the royalty and leasehold owners based upon "hand gauged" measurements at the well site. At the pipeline selling points, when Koch sold the oil to others, a volumetric meter was used to measure the oil. Because of differences in measured volume between the two methods, Koch allegedly paid the owners for less oil than it actually received.

[¶ 3] In 1986, the North Dakota State Tax Commissioner assessed gross production tax and oil extraction tax on the additional oil for tax years 1980 to 1983, and this Court upheld the assessment on appeal. See Koch Oil Co. v. Hanson, 536 N.W.2d 702, 704 (N.D.1995). Upon learning of the disputed measurements, some royalty and leasehold owners brought this class action alleging conversion and unjust enrichment and seeking an accounting. The class included all persons and entities owning royalty and leasehold interests in wells from which Koch purchased or sold oil in North Dakota from 1975 through 1988 where the oil was measured by hand gauging. The class includes approximately 6,000 owners of royalty and leasehold interests in approximately 2,300 wells in North Dakota.

[¶ 4] In three prior appeals, this Court resolved issues relating to certification of the class and summary judgment. See Ritter, Laber & Assoc., Inc. v. Koch Oil, Inc., 2004 ND 117, 680 N.W.2d 634; Ritter, Laber & Assoc., Inc. v. Koch Oil, Inc., 2001 ND 56, 623 N.W.2d 424; Ritter, Laber & Assoc., Inc. v. Koch Oil, Inc., 2000 ND 15, 605 N.W.2d 153. The case was scheduled for trial in April 2005, but the parties reached a tentative settlement agreement shortly before trial. Negotiations ultimately produced a final written settlement agreement.

[¶ 5] The settlement agreement provided for an $18 million fund, with payments to be distributed to class members based upon a mathematical formula set forth in the agreement. The settlement provided that the district court could award part of the fund for attorney fees and actual costs incurred in the litigation. The agreement also provided that Koch would retain any part of the fund which was unclaimed.

[¶ 6] In a January 31, 2006, petition, the plaintiffs requested attorney fees in the amount of $6 million, costs of $634,952, an escrow fund of $106,000 for future litigation expenses, and an incentive payment to the class representatives of $180,000. The trial court allowed attorney fees of $3,930,172, costs of $634,952, an escrow fund of $106,000, and incentive payments of $75,000 to be divided equally among the named class representatives. Subsequently, the plaintiffs filed a motion seeking reformation of the settlement agreement, alleging that one of the figures agreed to in the mathematical formula for calculating payments to individual class members did not accurately reflect the intent of the parties. The district court denied the motion to reform the agreement.

[¶ 7] The plaintiffs in their appeal from the judgment approving the settlement agreement, argue the trial court erred in failing to reform the agreement for mutual mistake and abused its discretion in awarding attorney fees and incentive payments to the class representatives.

II

[¶ 8] The parties engaged in extensive settlement negotiations over a period of several months, resulting in more than twenty separate drafts of the proposed agreement. The agreement included an $18 million settlement fund, with payments to individual claimants calculated according to a complex mathematical formula. Under the formula, each individual claimant would receive a portion of the $18 million fund, after deduction of attorney fees and incentive payments, based upon the percentage of the value of the oil sold by that individual claimant to the value of all oil purchased by Koch in North Dakota during the relevant period. The equation used by the parties in early drafts of the settlement agreement was essentially: (a ÷ b) × [18,000,000 - (c + d)] where "a" equals the amount Koch had paid to the individual claimant, "b" equals the aggregate amount Koch paid to class members during the relevant period "c" equals allowed attorney fees, and "d" equals incentive payments approved by the court.

[¶ 9] As negotiations continued, Koch suggested the parties should incorporate an actual number in place of "b" in the formula. Koch ultimately calculated the value of "b" as $4,259,377,938. Koch provided the plaintiffs with full documentation of how it had arrived at that figure, and the plaintiffs affirmatively acknowledge that Koch believed this to be the correct figure, there was no fraud involved, and the number was "based on the best information the parties had at the time." The parties' correspondence during the negotiations demonstrates that they knew the $4.2 billion figure was an approximation and not a mathematically exact determination of the value of oil purchased by Koch.

[¶ 10] The final settlement agreement adopted by the parties and approved by the court provided:

The amount of the payment to each Authorized Claimant shall be calculated according to the following mathematical formula:

                    (a ÷ b) * (18,000,000 - (c + d))
                      where
                

a = the aggregate amounts paid by Koch directly to the Authorized Claimant for oil purchased from leases in North Dakota, South Dakota, and/or Montana between January 1, 1975 and December 31, 1988, as determined by Koch's "paid crude" records (excluding purchases of natural gas and natural gas products)

                    and
                  b = 4,259,377,938
                    and
                  c = Allowed Attorneys' Fees
                    and
                  d = Allowed Incentive Payment
                

[¶ 11] After the settlement agreement was approved by the court, a claims administrator was appointed. The claims administrator ultimately calculated that the actual aggregate amount of oil purchased by Koch during the relevant period was $3,603,961,778, or $655,416,160 less than the value of "b" agreed to by the parties. Because the agreed upon $4.2 billion denominator in the equation is larger than the actual aggregate purchases, each claimant will receive less from the $18 million settlement fund than if the $3.6 billion figure had been used as the denominator. The court calculated that each claimant would receive approximately 15 percent less under the formula with the $4.2 billion denominator. The plaintiffs claim this was a mutual mistake of fact, and the court should grant equitable reformation of the parties' agreement to reflect their true intent.

[¶ 12] Reformation is an equitable remedy used to reframe written contracts to accurately reflect the real agreement between contracting parties. Biteler's Tower Serv., Inc. v. Guderian, 466 N.W.2d 141, 143 (N.D.1991) (quoting Black's Law Dictionary 1152 (5th ed.1979)). Reformation of a contract for mutual mistake is governed by N.D.C.C. § 32-04-17:

When, through fraud or mutual mistake of the parties, or a mistake of one party which the other at the time knew or suspected, a written contract does not truly express the intention of the parties, it may be revised on the application of a party aggrieved so as to express that intention so far as it can be done without prejudice to rights acquired by third persons in good faith and for value.

[¶ 13] In Ell v. Ell, 295 N.W.2d 143, 150 (N.D.1980) (citations omitted) (emphasis in original), we explained the basis for granting reformation of a written instrument on the basis of mutual mistake:

We have recognized that equity will grant remedial relief in the nature of reformation of a written instrument, resulting from a mutual mistake, when justice and conscience so dictate. However, in actions for reformation, a presumption arises from the terms of the instrument that it correctly expresses the true agreement and intention of the parties.

. . . .

Each case involving the reformation of a contract on grounds of fraud or mutual mistake must be determined upon its own particular facts and circumstances. In considering whether or not a mutual mistake exists, the court can properly look into the surrounding circumstances and take into consideration all facts which disclose the intention of the parties.

[¶ 14] A party seeking reformation has the burden to prove by clear and convincing evidence that a written agreement does not fully or truly state the agreement the parties intended to make. Dahl v. Messmer, 2006 ND 166, ¶ 9, 719 N.W.2d 341. For a mutual mistake to justify reformation of an agreement, the party seeking reformation must show that, when the agreement was executed, both parties intended to say something different from what...