Walls v. Petrohawk Props., LP

• Decision Date: 28 December 2015
• Docket Number: No. 14–2734.,14–2734.
• Citation: 812 F.3d 621
• Parties: Zelda WALLS, Individually, and as surviving spouse of Arlie Walls, Plaintiff–Appellant v. PETROHAWK PROPERTIES, LP ; Exxon Mobil Corporation, Defendants–Appellees.
• Court: U.S. Court of Appeals — Eighth Circuit

812 F.3d 621

Zelda WALLS, Individually, and as surviving spouse of Arlie Walls, Plaintiff–Appellant

v.PETROHAWK PROPERTIES, LP ; Exxon Mobil Corporation, Defendants–Appellees.

No. 14–2734.

United States Court of Appeals, Eighth Circuit.

Submitted: Sept. 23, 2015.

Filed: Dec. 28, 2015.

Matthew Douglas Campbell, argued, Little Rock, AR, for Appellant.

Julie DeWoody Greathouse, argued, Kimberly D. Logue, on the brief, Little Rock, AR, for Appellee.

Before MURPHY, MELLOY, and SMITH, Circuit Judges.

SMITH, Circuit Judge.

Zelda Walls, individually and as surviving spouse of Arlie Walls, appeals the district court's¹ grant of partial summary judgment as to the material breach claims in favor of Petrohawk Properties, LP. Walls also appeals the district court's later judgment that held Petrohawk did not owe Walls additional royalties dating from a previous Lessee's tenure and was not subject to the penalty under Arkansas Code Annotated § 15–74–602. We affirm.

I. Background

Zelda Walls and her now-deceased husband, Arlie Walls, entered into an oil and gas lease with Griffith Land Services in August 2005. Under the lease, Walls was to receive bonus payments and royalties (3/16ths gross) based upon the production and marketing of oil and gas from the property. The lease contained an assignment provision stating that "Lessee shall obtain written consent from Lessor before assigning lease to a third party which consent shall not be unreasonably withheld."

Subsequently, Griffith assigned the lease to Alta Resources, LLC; Alta assigned the lease to Petrohawk Properties, LP; thereafter, Petrohawk assigned the lease to Exxon Mobil. All of these assignments occurred without Walls's written consent.

Throughout the lease assignments, the lessees failed to pay Walls the full royalties due under the lease. In May 2010, Walls's attorney sent Petrohawk—the lessee at the time—a letter seeking collection of the prescribed royalty payments plus statutory interest. In the letter, the attorney stated it was his understanding that although Walls had initially leased with Griffith, the leases were currently assigned to Petrohawk. The letter requested that Petrohawk look into the matter and compensate Walls accordingly.

Petrohawk conducted an internal audit and determined that Walls indeed had not received the proper amount of royalty payments. In October 2010, Petrohawk paid Walls more than $200,000 in additional royalties, which Walls received and cashed.

At the beginning of December 2010, Petrohawk sought Walls's consent to assign the lease to Exxon. Petrohawk sent Walls a letter seeking consent to assign the lease, but no consent was given. Instead, counsel for Walls responded in a letter on December 15th, noting that a proper legal description of the land was missing, asserting that previous assignments constituted breaches of the lease, and asking for "detailed information as to why it would be in the best interest of Mrs. Walls to agree to the assignment." The next day, on December 16th, Walls filed suit against Petrohawk claiming material breach of the lease based upon miscalculation of the royalties and failure to obtain consent for the assignment to Exxon. Petrohawk did not respond to Walls's December 15th letter and on December 27th assigned the lease to Exxon.

Walls's complaint alleged that Petrohawk owed her additional compensation based on its status and Alta's prior status as assignees of the lease. Also, Walls contended Petrohawk is subject to a statutory penalty of 14% per annum. Petrohawk stipulated to the additional amount owed under its assignment but disputed liability for the amount owed by Alta, the prior assignee. Petrohawk further denied it was subject to the statutory penalty.

Petrohawk moved for partial summary judgment on the two claims of material breach. The district court granted the motion, finding that the failure to pay royalties did not constitute a material breach because any technical breach by Petrohawk was cured when Petrohawk paid Walls for the past, miscalculated royalties. The court also found that Walls waived any breach by accepting payment from Petrohawk. With respect to Walls's claim that the assignments constituted a material breach, the court held that Walls waived the breaches prior to Petrohawk's assignment to Exxon. Finally, the court found the assignment by Petrohawk to Exxon was not a material breach because Walls unreasonably withheld her consent.

Following the order granting partial summary judgment, Petrohawk stipulated to the additional compensation owed under its assignment. The court still had to decide whether Petrohawk was liable for Alta's unpaid royalty debt and the statutory penalty. The court found that Petrohawk was not liable for the nonpayment of royalties that occurred under Alta's tenure as assignee. As to the statutory penalty, the court found that Walls not only failed to give Petrohawk notice as required by the statute, but she also failed to show that Petrohawk willfully or in bad faith withheld payment as the statute required.

II. Discussion

On appeal, Walls argues that the district court erred by (1) granting summary judgment in favor of Petrohawk on Walls's claims of material breach for nonpayment of royalties and failure to obtain consent, (2) finding Petrohawk not liable for Alta's breaches under the lease, and (3) concluding Walls was not entitled to the statutory penalty under Arkansas Code Annotated § 15–74–602.

We review a district court's grant of summary judgment de novo. Oxy USA, Inc. v. Hartford Ins. Grp., 58 F.3d 380, 381 (8th Cir.1995) (citation omitted). Summary judgment involves the "threshold inquiry of determining whether there is a need for trial—whether, in other words, there are genuine factual issues that properly can be resolved only by a finder of fact because they may reasonably be resolved in favor of either party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). "Summary judgment is not appropriate if the nonmoving party can set forth specific facts, by affidavit, deposition, or otherwise, showing the existence of a genuine issue for trial." Grey v. City of Oak Grove, Mo., 396 F.3d 1031, 1034 (8th Cir.2005). Factual disputes alone are insufficient to bar summary judgment; "rather, the dispute must be outcome determinative under prevailing law." Id. Although the materiality of a breach is generally a question of fact, summary judgment is appropriate where no reasonable fact finder could find that the breach was material. See Reuter v. Jax Ltd., Inc., 711 F.3d 918, 921 (8th Cir.2013) (upholding summary judgment because the breach was not material).

A. Failure to Pay Royalties

Walls first argues that Petrohawk's failure to pay royalties timely under the lease constituted a material breach, which would provide a basis for cancellation of the lease. Under Arkansas law, a breach is "material" where there "is a failure to perform an essential term or condition that substantially defeats the purpose of the contract for the other party." Roberts Contracting Co. v. Valentine–Wooten Rd. Pub. Facility Bd., 2009 Ark. App. 437, 320 S.W.3d 1, 7 (2009) (citation omitted). Arkansas courts have generally not considered nonpayment of royalties a material breach. See, e.g., Schaffer v. Tenneco Oil Co., 278 Ark. 511, 647 S.W.2d 446 (1983) (refusing to cancel lease even though lessee failed to make royalty payments for five years).

In Schaffer, the Supreme Court of Arkansas noted that "Louisiana is the only jurisdiction that has consistently been willing to decree cancellation for a lessee's unexcused failure to pay pursuant to an oil and gas lease." Id. at 447. Arkansas, on the other hand, has determined that "[w]here there is no cessation of marketing of oil and gas for a substantial period but only the nonpayment of royalties, the lessors generally have a plain, speedy, and adequate remedy at law for damages." Id. (citation omitted). Applying Schaffer, Walls's remedy for nonpayment of royalties is legal not equitable. Unquestionably, Petrohawk failed to pay the royalties owed to Walls; however, that failure did not substantially defeat the purpose of the contract. Understandably, payment for the extracted minerals is important to Walls. But the payment is secondary to the extraction, development, and marketing of minerals on Walls's property. Throughout the period of the lease, Petrohawk continued to extract, develop, and market the minerals from Walls's land. Given that the Supreme Court of Arkansas did not consider five years of royalty nonpayments a material breach, see id., we decline to conclude that the instant facts constitute a material breach.²

B. Failure to Obtain Consent to Assign

Walls also argues the lease should be canceled because it was materially breached by the various assignments that were executed without her consent. Here, too, Walls waived the breaches with respect to all of the assignments except the Petrohawk–Exxon assignment. In a letter dated May 21, 2010, Walls's attorney stated, "Arlie Walls and Zelda Walls initially leased with Griffith Land Services, Inc. and it is my understanding that those leases have been assigned to Petrohawk. Mrs. Walls has retained our firm to assist her in collecting the proper amount of royalties on these leases." By writing the letter and taking payment from Petrohawk, Walls waived any breaches resulting from assignments up to that point. See Clear Creek, 255 S.W. at 8 (holding that "one party to a contract who, with knowledge of a breach by the other party, continues to accept benefits under the contract, and suffers the other party to continue in performance thereof, waives the right to insist on the breach" (citations omitted)).

There remains, however, the assignment from Petrohawk to Exxon. This assignment was executed without receiving Walls's consent and took place after the May 21 letter was sent and after Walls accepted payment. Petrohawk argues this assignment was not...