Textana, Inc. v. Klabzuba Oil & Gas, DA 08-0243.

• Citation: 2009 MT 401,222 P.3d 580,353 Mont. 442
• Decision Date: 24 November 2009
• Docket Number: No. DA 08-0243.,DA 08-0243.
• Parties: TEXTANA, INC., Sandtana, Inc., and Sandra Lee Brown, Plaintiffs and Appellants, Cross-Appellees, v. KLABZUBA OIL & GAS, a limited family partnership and Klabzuba Oil & Gas, Incorporated, Defendants, Appellees, and Cross-Appellants.
• Court: United States State Supreme Court of Montana

222 P.3d 580

2009 MT 401

353 Mont. 442

TEXTANA, INC., Sandtana, Inc., and Sandra Lee Brown, Plaintiffs and Appellants, Cross-Appellees, v. KLABZUBA OIL & GAS, a limited family partnership and Klabzuba Oil & Gas, Incorporated, Defendants, Appellees, and Cross-Appellants.

No. DA 08-0243.

Supreme Court of Montana.

Submitted on Briefs June 17, 2009.

Decided November 24, 2009.

Rehearing Denied January 13, 2010.

For Appellants: James H. Goetz; Goetz, Gallik & Baldwin, P.C.; Bozeman, Montana, John D. Stephenson; Jardine, Stephenson, Blewett & Weaver, P.C.; Great Falls, Montana.

For Appellees: Danielle V. Wiletsky and Keith D. Tooley; Welborn, Sullivan, Meck & Tooley, P.C.; Denver, Colorado, Matthew Hutchison; Kaufman, Vidal, Hileman & Ramlow, P.C.; Kalispell, Montana.

Justice BRIAN MORRIS delivered the Opinion of the Court.

¶ 1 Textana, Inc., Sandtana, Inc., and Sandra Lee Brown, the executor for the estate of John O. Brown (collectively Browns), appeal the judgment and related orders of the Twelfth Judicial District Court, Hill County, in favor of Klabzuba Oil & Gas and Klabzuba Oil & Gas, Inc. (collectively Klabzubas). Klabzubas cross-appeal the court's decision to reduce sanctions against Browns from $1.4 million to $94,000.

¶ 2 This appeal represents the second trip for these parties to this Court. The parties litigated the first suit on very similar issues in 2000 before then District Court Judge John Warner (Browns I). We affirmed the district court's imposition of a constructive trust on Browns. Textana v. Klabzuba, 2003 MT 157N, 316 Mont. 532, 77 P.3d 551, 2003 WL 21279525. We now affirm in part and reverse in part.

¶ 3 The parties left few stones unturned in scouring the record for appealable issues. We review the following ten issues:

¶ 4 Did the District Court properly refuse to dismiss Klabzubas' counterclaims regarding the Starcher claims based on statute of limitations grounds?

¶ 5 Did the District Court properly award a 12.5 percent interest in the Starcher claims to a non-party?

¶ 6 Did the District Court properly refuse Browns' evidence of their costs in developing the Starcher claims?

¶ 7 Did the District Court properly instruct the jury on punitive damages?

¶ 8 Did the District Court properly dismiss Browns' 2 percent ORR claims as barred by res judicata?

¶ 9 Did the District Court properly dismiss Browns' interest claims where Klabzubas withheld, but later paid, production revenues due to Browns?

¶ 10 Did the District Court properly deny sanctions against Klabzubas based on alleged false statements by their counsel?

¶ 11 Did the District Court properly award attorney fees against Browns without first holding a hearing?

¶ 12 Did the District Court properly allow Klabzubas to double-count interest on the judgment?

¶ 13 Should the District Court's first sanctions order be reinstated and the cause remanded for entry of additional attorney fees to Klabzubas?

FACTUAL AND PROCEDURAL BACKGROUND

¶ 14 J. Burns Brown and his son, John O. Brown, worked together in the oil and gas industry in north central Montana. J. Burns Brown and Robert Klabzuba began collaborating in 1974 to lease and develop oil and gas fields. John O. Brown and Robert Klabzuba entered into a written contract for professional services (PSC) in 1976 with a primary term of one year. John O. Brown agreed to perform landman and other services in support of Robert Klabzubas' business of exploring oil and gas reserves, drilling wells, and producing oil and gas. John O. Brown received a salary and expenses.

¶ 15 The PSC required John O. Brown to investigate opportunities in the Havre area and to present the opportunities to Robert Klabzuba. The PSC required John O. Brown to assign to Robert Klabzuba a 75 percent interest in all leases. The PSC further provided that John O. Brown and his father, J. Burns Brown, had the option to participate up to 25 percent by paying a proportionate share of the acquisition costs for the land and development costs of the wells. The PSC also entitled Browns to a 2 percent overriding royalty (ORR) on production revenues on all oil and gas leases obtained by Browns and assigned to Klabzubas. The parties entered into a similar PSC each year through 1997.

¶ 16 Klabzubas, who were headquartered in Texas, would conduct the geological analysis and identify areas desirable for oil and gas leasing. Klabzubas provided their confidential analysis of the results to Browns, who would then negotiate and obtain leases, check titles, and make public land recordings. Klabzubas relied on Browns to function as their land office in Montana. Browns owed fiduciary duties to the Klabzubas, including the duty to report and inform on available opportunities.

¶ 17 Browns operated most of the wells in which the parties shared an interest through their operating company, J. Burns Operating Company (JBBO). John O. Brown and his wife, Sandra Brown, owned and operated JBBO. John O. Brown and his siblings also owned and operated another oil company, 5B Company (5B). J. Burns Brown created 5B in 1981 for the purpose of participating in various leasing opportunities.

¶ 18 Klabzubas came to Havre on November 17, 1997, to inform Browns that they planned to terminate the business relationship. The final PSC expired on January 1, 1998. The parties continued to co-own shares in existing leases and gas wells, but the operation of the wells transferred from Browns to Klabzubas in April of 1998.

¶ 19 Browns and Klabzubas have engaged in protracted and complicated litigation since the expiration of the final PSC. Browns filed a declaratory judgment action in Hill County regarding Browns' rights to prospect and explore for oil and gas in north central Montana after the termination of the final PSC. Klabzubas responded with a number of counterclaims in the action that we describe as Browns I.

¶ 20 Browns I went to trial in the fall of 2000. The district court determined that the final PSC had terminated on January 1, 1998. From about 1993 to 1998, Klabzubas had identified 940 sections, over 601,000 acres of land, as desirable for oil and gas leases. The court imposed a constructive trust on 201 of these sections. The court required Browns to "account for and disgorge" 75 percent of the profits received after January 1, 1998, on these 201 sections. The court required Klabzubas to pay for 75 percent of the costs of developing the wells on the 201 sections. The court further determined that Browns "shall not have a 2 percent overriding royalty in said lease and mineral interests" in the constructive trust lands for those leases acquired after the termination of the PSC in 1998. This Court affirmed Judge Warner's final judgment. Textana, ¶ 6.

¶ 21 Klabzubas withheld ORR and production payments for all of the leases held jointly by Browns after the final judgment in Browns I. Browns filed an action in Hill County in December of 2002 to collect the unpaid ORR and production revenues on leases located on sections not covered by Judge Warner's constructive trust order.

¶ 22 District Judge Marc G. Buyske assumed jurisdiction over this second action. The District Court dismissed with prejudice Browns' claims for unpaid ORR on 546 jointly-owned wells based on res judicata. The court determined that the parties had litigated the ORR issue in Browns I and that the district court in Browns I had dismissed Browns' claims to the ORR on all properties jointly owned by Browns and Klabzubas.

¶ 23 Klabzubas periodically sent delinquent production payments to Browns between April of 2002 and 2006, so that by the time of the jury trial in May of 2006, Klabzubas no longer owed Browns the principal amounts on the production payments. Klabzubas refused to pay interest to Browns on the delinquent production payments. The District Court determined before trial that Browns were not entitled to accrued interest on the overdue production payments, except for one well — the State-4 well. The parties disputed ownership to the State-4 well. Browns argued that Klabzubas owed $302,284.31 in production revenues on the State-4 well. Klabzubas agreed to deposit the $302,284.31 in the registry of the court while the parties resolved a title dispute to the State-4 well.

¶ 24 Klabzubas asserted a counterclaim in which they alleged that they had learned for the first time of a productive well that Browns had developed on land obtained by Browns in 1983 (Starcher claim). Klabzubas claimed that John O. Brown in 1983 wrongfully had concealed from Robert O. Klabzuba his acquisition of the Starcher claim in violation of the PSC. Klabzubas argued that Browns had a duty to acquire the Starcher lease on behalf of Klabzubas.

¶ 25 Browns moved for summary judgment on the Starcher counterclaim based on the eight-year statute of limitations for breach of a written contract. Browns argued that they had disclosed their interest in the Starcher claims in numerous public documents and through documents submitted to Klabzubas over the years. The District Court denied Browns' summary judgment motion in May of 2005.

¶ 26 The Starcher counterclaim went to trial in May of 2006. John O. Brown testified that he had informed Robert Klabzuba in 1983 about Browns' acquisition of the Starcher claims. John O. Brown testified that Robert Klabzuba was not interested in participating. Robert O. Klabzuba had died by the time of the trial. Mainly through the testimony of Stephen Frazier (Klabzubas' vice president), Klabzubas maintained that Robert O. Klabzuba never would have declined an interest in the Starcher claims. Klabzubas further claimed that John O. Brown never had disclosed his interest in the Starcher claims to Robert Klabzuba or Frazier. Browns argued alternatively that Klabzubas should be obligated to pay their share of the costs in developing and operating the Starcher wells if the court determined that Klabzubas were entitled to a 75 percent share.

¶ 27 The District Court sent ...