Thoroughbred Assocs., L.L.C. v. Kan. City Royalty Co.

• Decision Date: 20 September 2013
• Docket Number: No. 102,598.,102,598.
• Citation: 308 P.3d 1238,297 Kan. 1193
• Parties: THOROUGHBRED ASSOCIATES, L.L.C., et al., Appellants/Cross-appellees, v. KANSAS CITY ROYALTY COMPANY, L.L.C.; Robert E. Thomas Revocable Trust; and D.D.H., L.L.C., Appellees/Cross-appellants.
• Court: Kansas Supreme Court

297 Kan. 1193

308 P.3d 1238

THOROUGHBRED ASSOCIATES, L.L.C., et al., Appellants/Cross-appellees,

v.KANSAS CITY ROYALTY COMPANY, L.L.C.; Robert E. Thomas Revocable Trust; and D.D.H., L.L.C., Appellees/Cross-appellants.

No. 102,598.

Supreme Court of Kansas.

Sept. 20, 2013.

Syllabus by the Court

1. In the trial of a civil action, if there is a question about which party has the burden of proof, a party who assumes that burden without objection and makes no contention in the district court that the court erred in placing the burden of proof on that party may not raise allocation of the burden as an issue for the first time on appeal.

2. Summary judgment is appropriate when the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, show there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. The trial court is required to resolve all facts and inferences which may reasonably be drawn from the evidence in favor of the party against whom the ruling is sought. When opposing a motion for summary judgment, an adverse party must come forward with evidence to establish a dispute as to a material fact. In order to preclude summary judgment, the facts subject to the dispute must be material to the conclusive issues in the case. On appeal, an appellate court applies the same rules, and when it determines reasonable minds could differ as to the conclusions drawn from the evidence, summary judgment must be denied.

3. Extrinsic evidence is not admissible to contradict, alter, or vary the terms of a written instrument; but it is admissible to aid in the construction of a silent or ambiguous contract. And in certain circumstances, extrinsic evidence is also admissible to establish a mutual mistake, even when a contract is clear and unambiguous.

4. A contract is ambiguous only when the words used to express the meaning and intention of the parties are insufficient in that the contract may be understood to mean two or more possible things.

5. A contract must be construed within its four corners and all provisions considered together, not in isolation. When an ambiguityappears, the language is interpreted against the party who prepared the instrument.

6. The interpretation and legal effect of written instruments are matters of law over which appellate courts exercise unlimited review.

7. Whether any particular term of a written contract has been modified or waived by subsequent agreement is a question of fact for the trial court to determine in the first instance.

8. If a party would be entitled to appellate attorney fees under a statute or contract upon prevailing on appeal, the party must timely file a Supreme Court Rule 7.07(b) (2012 Kan. Ct. R. Annot. 66) motion to preserve the right to those fees.

9. Supreme Court Rule 7.07(b) (2012 Kan. Ct. R. Annot. 66) authorizes an appellate court to award attorney fees for services on appeal in cases in which the district court had authority to award such fees.

10. When a prevailing party seeks an award of attorney fees under a prevailing-party fee statute, the most critical factor in determining the reasonableness of a fee is the degree of success obtained because prevailing party status alone may say little about whether the expenditure of an attorney's time was reasonable in relation to the success achieved.

Jeff Kennedy, of Martin, Pringle, Oliver, Wallace & Bauer, L.L.P., of Wichita, argued the cause, and Marcia A. Wood, of the same firm, and David J. Rebein, of Rebein Bangerter, P.A., of Dodge City, were with him on the briefs for appellants/cross-appellees.

William J. Skepnek, of The Skepnek Law Firm P.A., of Lawrence, argued the cause, and David E. Pepper and Michael J. Novotny, of Hartzog Conger Cason & Neville, of Oklahoma City, Oklahoma, were with him on the briefs for appellees/cross-appellants.

The opinion of the court was delivered by BILES, J.:

This is an oil and gas lease dispute regarding: (1) whether tracts of land could be unitized; (2) if so, what minerals were unitized; and (3) alleged drainage of the leased lands. The district court disposed of the first two questions by summary judgment and the drainage claim after a bench trial. Both parties appealed to the Court of Appeals, which affirmed the district court. Thoroughbred Assocs. v. Kansas City Royalty, Co., 45 Kan.App.2d 312, 248 P.3d 758 (2011). We disagree in part with both lower courts and reverse the summary judgment orders.

We hold the lease unambiguously sets out conditions precedent for unitization and there are no disputed material facts as to whether those prerequisites were met based on the parties' summary judgment briefs and supporting materials. But this holding does not end the case. We remand to the district court for further proceedings because disputed facts exist regarding alternative claims that have not yet been addressed—and which may need to be considered—depending on how the district court disposes of other issues. We agree the drainage claim was not proven and affirm that ruling.

Factual and Procedural History

In 1998, Thoroughbred Associates, L.L.C., drilled a prolific gas well, known as the Bird Well, in Comanche County, Kansas. Thoroughbred then began targeting other land near the Bird Well, resulting in the acquisition of leases and creation of a unit called the Thoroughbred–Rietzke Unit (Rietzke Unit). Thoroughbred is the lead plaintiff in this case. The other plaintiffs hold oil and gas interests in the Rietzke Unit. Collectively, the plaintiffs dispute whether the defendants properly belong in the Rietzke Unit.

OXY USA, Inc. owned an undivided one-third interest in the oil, gas, and other minerals underlying a tract in Comanche County near the Bird Well. In July 1998, Thoroughbred entered into an oil and gas lease with OXY for that tract. An OXY employee drafted the lease (the OXY Lease) from preprinted forms. It was recorded in August of that year. About 2 months after the OXY Lease took effect, Thoroughbred filed a “Declaration of Unitization of Oil and Gas Leases” with the Comanche County Register of Deeds, combiningthe OXY Lease and numerous other leases into the 640–acre Rietzke Unit. The defendants Kansas City Royalty Company, L.L.C.; Robert E. Thomas Revocable Trust; and D.D.H., L.L.C. (collectively referred to as Kansas City Royalty) later purchased OXY's interest and became successors-in-interest to the OXY Lease.

Thoroughbred drilled several wells on the Rietzke Unit, which produced both oil and gas in varying quantities, although none were located on the land subject to the OXY Lease. But all of the wells on the Rietzke Unit qualified for what is known in the industry as a full allowable, which becomes relevant to the parties' dispute whether the OXY Lease could have been unitized. An “allowable” is “[t]he amount of oil or gas which a well, leasehold, field, pipeline system or state is permitted to produce under proration orders of a state conservation commission.” 8 Williams & Meyers, Oil and Gas Law, Manual of Oil and Gas Terms, p. 40 (2012). In Kansas, state regulation provides a full allowable if: “(1) Location exceptions have been granted for manmade structures or topographic features; (2) No interference with drainage of adjacent wells can be shown by competent evidence; or (3) Actual interference is less than the reduced allowable.” K.A.R. 82–3–312(f).

Once Kansas City Royalty had acquired the OXY Lease, it began inquiring whether Thoroughbred's Bird Well was draining minerals from the adjacent Rietzke Unit. The parties disagreed about what information Kansas City Royalty could receive to investigate the drainage issue and whether the Bird Well was actually draining the Rietzke Unit. Those disagreements preceded this litigation.

Thoroughbred initially submitted royalty payments accruing from the Rietzke Unit, which Kansas City Royalty accepted; but Thoroughbred stopped these payments as tensions increased. Thoroughbred soon argued the OXY Lease's terms actually prohibited Thoroughbred from including that lease's lands within the Rietzke Unit. In other words, Thoroughbred contended it had mistakenly unitized the OXY Lease lands as part of the Rietzke Unit.

The OXY Lease and Declaration of Unitization

Under its terms, the OXY Lease was to remain in effect for 1 year “and as long thereafter as oil or gas, or either of them, is produced from said land, or lands unitized therewith, by the Lessee, in paying quantities.” But the lease also contained what is known as a Pugh clause limiting the extent the lease could be perpetuated through production from a well elsewhere on a unit. And based on this clause, the parties also disputed whether the lease had expired below certain depths.

The fourth paragraph in the OXY Lease involves the delegation of Thoroughbred's power to pool or unitize. It is the centerpiece of Thoroughbred's claim. It states in relevant part:

“Lessee is granted the right and power to pool or unitize all, or part of the lands covered hereby with adjoining or contiguous lands in order to form a unit, or units, for the production of oil and/or gas when said units are necessary to conform with regular spacing patterns, or to produce a full allowable where such spacing pattern or allowable are established by State, Federal or other regulatory bodies. All lands so pooled into a unit or units, shall be treated for all purposes, except the payment of royalties on production from the pooled unit, as if said lands were included in the lease. If production is found on the pooled lands, it shall be treated as if production is had from this lease, whether the well, or wells be located on the lands covered by this lease or not. Any well drilled on any such units shall be considered as a well hereunder. In lieu of the royalties elsewhere herein specified, Lessor shall receive on production from a unit, only such portion of the royalties...