Wadi Petroleum, Inc. v. Ultra Resources

• Decision Date: 26 March 2003
• Docket Number: No. 02-22.,02-22.
• Citation: 65 P.3d 703,2003 WY 41
• Parties: WADI PETROLEUM, INC., a Texas corporation Appellant, (Plaintiff), v. ULTRA RESOURCES, INC., a Wyoming corporation; and Questar Exploration & Production Company, a Texas corporation, Appellees, (Defendants).
• Court: Wyoming Supreme Court

65 P.3d 703

2003 WY 41

WADI PETROLEUM, INC., a Texas corporation Appellant, (Plaintiff), v. ULTRA RESOURCES, INC., a Wyoming corporation; and Questar Exploration & Production Company, a Texas corporation, Appellees, (Defendants).

No. 02-22.

Supreme Court of Wyoming.

March 26, 2003.

Terry W. Mackey and David Evans of Hickey, Mackey, Evans & Walker, Cheyenne, Wyoming, Representing Appellant. Argument by Mr. Mackey.

Gerald Mason of Mason & Mason, P.C., Pinedale, Wyoming; and George W. Mueller of Burns, Wall, Smith & Mueller, P.C., Denver, Colorado, Representing Appellee Ultra Resources, Inc. Argument by Mr. Mason.

Thomas Reese of Brown, Drew & Massey, LLP, Casper, Wyoming; and Brad W. Breslau of Grund & Breslau, P.C., Denver, Colorado, Representing Appellee Questar Exploration & Production Company. Argument by Mr. Reese.

Before HILL, C.J., and GOLDEN, LEHMAN, and VOIGT, JJ, and BURKE, DJ.

HILL, Chief Justice.

[¶ 1] Appellant, Wadi Petroleum, Inc. (Wadi), seeks review of the district court's order granting a partial summary judgment¹ in favor of Appellees, Ultra Resources, Inc. (Ultra) and Questar Exploration & Production, Inc. (Questar). The parties disagreed about the meaning of language used in an assignment of an oil and gas lease concerning the quantum of an overriding royalty interest. The district court heard and relied on extrinsic evidence in order to resolve what it considered an inherent ambiguity in the language used in the assignments. It is the district court's reliance on such extrinsic evidence, rather than only looking at the four corners of the assignment, which is the central issue in this appeal. Wadi asserts that the plain language of the assignment is unambiguous, whereas Ultra and Questar contend that the language used is incomplete and indefinite, and its precise meaning cannot be ascertained with certainty unless extrinsic evidence is considered.

[¶ 2] We will affirm.

[¶ 3] Wadi proposes these as the issues to be decided:

I. Can an assignment filed of record transferring oil and gas interests be rendered ambiguous via the testimony of experts regarding industry custom and practice?

II. Is an executory contract of sale of a real property interest merged into the transfer document filed of record?

III. Is the most persuasive extrinsic evidence used in determining the intent of the parties documents authored by the parties contemporaneous to the assignment in question? Can a division order alter or amend an agreement or title documents?

Ultra and Questar filed a combined brief, but did not include a statement of the issues. We glean this summary of the issues from headings used within their brief:

I. The quantum of the overriding royalty interest conveyed by the BLM assignments was indefinite, unclear and not apparent thereby necessitating the introduction of extrinsic evidence.

A. Nature of ambiguity and lack of clarity.

1. [Wadi] takes inconsistent positions regarding whether the BLM assignments are silent as to proportionate reduction.

2. Silence can create ambiguity where the omitted term would naturally be present.

3. To avoid ambiguity regarding proportionate reduction, the parties must state explicitly the intention to reduce or not to reduce.

4. The BLM assignments are ambiguous on their face[s].

B. Admission of extrinsic evidence regarding proportionate reduction is appropriate where the instrument is not clear on its face.

C. [Wadi] concedes [that] extrinsic evidence is necessary for the trial court to interpret the BLM assignments.

1. [Wadi's] previous counsel agreed that extrinsic evidence was necessary to interpret the BLM assignments.

2. [Wadi's] acquisition manager would have inquired further had he seen the BLM assignments.

3. The testimony of William Schwartz, [Wadi's] expert witness, supported the need for extrinsic evidence to determine the quantum of interest reserved by Hondo.

II. Prior to this litigation, all attorneys examining title concluded that the BLM assignments were indefinite, unclear and not apparent.

III. The BLM assignments placed Wadi on inquiry notice with respect to whether proportionate reduction was intended.

IV. Extrinsic evidence indicates that the overriding royalty interests now owned by [Wadi] were intended to be proportionately reduced.

A. The 1978 agreement indicates that Hondo and EPNG intended the overriding royalty interest to be proportionately reduced absent specific language to the contrary.

B. The division orders signed by Hondo reflect an intention to proportionately reduce the reserved overriding royalty interest.

1. The documents offered by [Wadi] as extrinsic evidence are silent as to proportionate reduction.

2. The extrinsic evidence offered by [Wadi] is subsequent to the 1978 transaction and therefore entitled to no greater weight than other extrinsic evidence.

3. The division orders signed by Hondo merely clarify [its] intent regarding proportionate reduction and do not alter or amend any contractual agreement.

C. EPNG, the other party to the transaction in 1978, agreed that it was the intention of the parties that Hondo's reserved overriding royalty interest was to be proportionately reduced.

D. [Ultra's and Questar's] title experts opined that proportionate reduction of the reserved Hondo interest was likely intended by the BLM assignments.

V. The decision of this Court in Amoco Production Company v. EM Nominee Partnership Company is consistent with the trial court's ruling in this case.

VI. [Wadi's] interest can be no greater than the interest of its predecessors in interest.

FACTS

[¶ 4] The properties at issue in this case are included in a federal oil and gas unit (the Mesa Unit, formerly known as the Pinedale Unit) located in Sublette County, southwest of Pinedale. Significant new drilling and production commenced in the unit during 1997-98, which is the event that precipitated the controversy at hand, i.e., there was additional revenue to be divided up among the several interest holders. Ultra and Questar are two of the three working interest owners with respect to the leases at issue (the third working interest owner is not a party to this litigation). Questar is the operator of the unit. The six leases at issue have a lengthy title history, but it suffices to note here that, during late 1993 and early 1994, they were acquired by Wadi. Wadi claimed that it acquired a 3.125% overriding royalty interest (ORRI) in those leases, and Ultra and Questar claimed that Wadi only acquired a .625% interest because Wadi's predecessors in interest held only a 20% working interest (therefore, Wadi's interest was 20% of 3.125% = .625%). The six leases at issue are these:

Lease # Wadi's claimed ORRI Conceded ORRI WY - 08589 3.125% .625% WY - 08592 3.125% .625% WY - 08593 3.125% .625% WY - 015315 3.125% .625% WY - 015317 3.125% .625% WY - 016167 3.125% + 1% .625% + 1% previously owned

[¶ 5] On Bureau of Land Management forms designed to accommodate the assignment of such interests, Wadi's predecessors in interest indicated that the overriding royalty or production payments reserved were 3-1/8% of 8/8, as shown above. In another more-or-less contemporaneous document (which is referred to as the "1978 agreement") relating to these same properties, this language was used by Wadi's predecessors in interest:

... and reserving, however, unto Hondo, and El Paso does hereby, as may be necessary assign unto Hondo, an undivided 1/16th of 8/8ths overriding royalty interest as to the lands and leases shown on exhibit B below the above-described depth limitation, which overriding royalty shall not be proportionately reduced if El Paso owns less than the entire leasehold interest; and further reserving unto Hondo all rights and interests of Hondo above said above depth limitation.

El Paso hereby agrees that El Paso shall assume any and all obligations, if any, of Hondo attendant to the interests of Hondo released or assign [sic] hereby and further acknowledges that Hondo shall by separate assignments transfer unto El Paso all of the record title of Hondo within the Pinedale Unit as constituted prior to the September 12, 1977 contraction, except those lands and leases shown on Exhibit B, reserving unto Hondo a 3-1/8% overriding royalty interest in addition to any existing leasehold burdens.

[¶ 6] There are two items in the above-quoted passage that contribute to the controversy at hand. First, with respect to the 1/16 of 8/8 royalty on exhibit B lands, the document specifically provides that it is not to be proportionately reduced. With respect to the 3-1/8% overriding royalty on other lands, which is the provision that affects the leases at issue herein, the document is silent as to proportionate reduction. Wadi contends that the document is clear that no proportionate reduction was intended with respect to any of the interests included in that document. On the other hand, Ultra and Questar contend that the document suggests that proportionate reduction was intended because of the silence; however, at a minimum, the silence creates an ambiguity which requires reference to evidence outside the four corners of the principal documents.

[¶ 7] The district court made detailed findings, and we will summarize the pivotal facts it included in those findings. As we embark on this summary, we take note that the record includes more than 1,000 pages of exhibits and more than 600 pages of testimony. It is conceded by all parties that Wadi owned whatever interests were owned by its predecessors in interest and, stated in other terms, there was nothing about the transaction which resulted in Wadi obtaining an interest which was either greater than or lesser than the interest which was created when the leases came into being. The six leases at issue here were purchased by Wadi as part of an agreement, which gave them an interest in some 900 wells and 300 fields. Those properties were divided into two categories, A and B properties. The six...