West v. Alpar Resources, Inc.

• Citation: 298 N.W.2d 484
• Decision Date: 27 October 1980
• Docket Number: No. 9794,9794
• Parties: Dorothea C. WEST, Roger West, Jason West, and Stephanie West, Plaintiffs and Appellants, v. ALPAR RESOURCES, INC., Defendants and Appellees. Civ.
• Court: United States State Supreme Court of North Dakota

Page 484

298 N.W.2d 484

Dorothea C. WEST, Roger West, Jason West, and Stephanie West, Plaintiffs and Appellants, v. ALPAR RESOURCES, INC., Defendants and Appellees.

Civ. No. 9794.

Supreme Court of North Dakota.

Oct. 27, 1980.

Wegner, Fraase & Nordeng, Fargo, for plaintiffs and appellants; argued by Mervin Nordeng, Fargo.

Fleck, Mather, Strutz & Mayer, Bismarck, for defendants and appellees; appearance by Jane Fleck Romanov, Bismarck; argued by Russell R. Mather, Bismarck.

Bickle, Coles & Snyder, Bismarck, and Michael C. Smith, Tulsa, Okl., for Gulf Oil Corp., amicus curiae.

Owen L. Anderson, Asst. Atty. Gen., UND School of Law, Grand Forks, and John W. Morrison, Jr., Bismarck, Counsel, State Land Dept. for State of North Dakota, by and through the Board of University and School Lands, amicus curiae.

ERICKSTAD, Chief Justice.

This is an appeal by the plaintiffs, Dorothea C. West, Roger West, Jason West, and Stephanie West (hereinafter the Wests) from the partial summary judgment of the McKenzie County District Court entered April 15, 1980, dismissing, with prejudice, counts I and II of the Wests' action against the defendant, Alpar Resources, Inc. (hereinafter Alpar). Pursuant to Rule 54(b) of the North Dakota Rules of Civil Procedure, the district court made an express determination that there was no just reason for delay of decision on counts I and II and ordered that judgment be entered dismissing those counts with prejudice. In view of such determination by the court under Rule 54(b), N.D.R.Civ.P., the partial summary judgment is appealable to this Court at this time prior to a final adjudication of the remaining issues raised in the complaint.

On September 30, 1969, an oil and gas lease was executed between the Wests' predecessors in interest, as lessor, and Alpar's predecessor in interest, as lessee. The lease involved property within a 320-acre pooling unit upon which is located Alpar's Peterson No. 1 gas well. Gas production from that well has entitled the Wests to receive royalties pursuant to the following clause in the lease "The lessee shall pay lessor, as royalty, one-eighth of the proceeds from the sale of the gas, as such, for gas from wells where gas only is found and where not sold shall pay Fifty ($50.00) Dollars per annum as royalty from each such well, and while such royalty is so paid, such well shall be held to be a producing well."

Prior to making royalty payments, Alpar requested the Wests to sign a division order which provided in pertinent part:

"Settlements for all Gas sold from the Lease ... will be based on the net proceeds received by Alpar from each sale thereof.... As used herein, net proceeds means the actual proceeds received by Alpar from each sale of gas, less dehydration, gathering, compressing, treating and any other actual costs and expenses required to make the gas marketable and transport same to the point or points of delivery to the purchaser."

The Wests refused to sign Alpar's division order because in their view the lease required Alpar to make royalty payments to them based upon one-eighth of the gross proceeds without deduction of expenses. However, the Wests did sign a division order prepared by their counsel which provided for royalty payments on the basis of gross proceeds received by Alpar from the sale of the gas. Such division order was unacceptable to Alpar, and royalty payments were not made to the Wests.

On October 30, 1979, the Wests filed an action against Alpar in the McKenzie County District Court. In count I of the complaint, the Wests requested the court to award them royalty payments under the lease based upon one-eighth of the gross proceeds received by Alpar from the sale of the gas. In count II of the complaint, the Wests requested the court to declare the lease terminated by its own terms, or in the alternative, to declare the lease cancelled under Section 47-16-39.1, N.D.C.C., based upon Alpar's failure to make royalty payments to the Wests. In count III of the complaint, the Wests requested exemplary damages for Alpar's refusal to make any royalty payments to them unless they would sign Alpar's proposed division order. Subsequent to the filing of the complaint, Alpar tendered, and the Wests accepted, royalty payments based upon one-eighth of the "net proceeds" from the sale of the gas derived by deducting certain expenses according to Alpar's interpretation of the lease. Both parties understood that such payments were received by the Wests subject to their claim for additional royalty payments based upon gross proceeds, and, thus, it is undisputed that acceptance of such royalty payments did not constitute a waiver of the Wests' claim.

The Wests and Alpar filed a written stipulation before the district court stating that counts I and II of the complaint involved issues of law appropriate for disposition by summary judgment. Subsequent to the filing of the stipulation, Alpar filed a motion for partial summary judgment requesting that counts I and II be dismissed. A hearing on the motion was held on April 7, 1980, at which neither party attempted to introduce testimony of the intent of the original parties upon executing the oil and gas lease or of custom or usage relating to the interpretation of such lease. Based upon the trial briefs and the affidavits and oral argument of counsel, the district court determined that the costs Alpar deducted from the royalty payments were properly deductible under the lease as processing costs to be shared by both parties. The district court further determined that the lease had not terminated upon its own terms and that equity would not permit the court to cancel the lease under Section 47-16-39.1, N.D.C.C., for Alpar's failure to make royalty payments, because the amount of such payments were genuinely disputed between the parties. Accordingly, the district court dismissed counts I and II of the complaint with prejudice and ordered partial summary judgment thereupon.

On appeal, the Wests assert that the district court erroneously interpreted the oil and gas lease and ask this Court to interpret the lease with respect to the following three issues:

(1) Whether or not Alpar is entitled to deduct from the royalty payments a proportionate share of expenses incurred by Alpar;

(2) Whether or not the oil and gas lease terminated by its own terms upon Alpar's failure to make royalty payments to the Wests prior to the commencement of their lawsuit; and

(3) Whether or not the district court erred in refusing to cancel the lease pursuant to Section 47-16-39.1, N.D.C.C.

Deduction of Expenses From Royalty Payments

A brief iteration of additional facts is necessary for a clear understanding of the first issue. The gas obtained from the well on the lease premises contains hydrogen sulfide which is known in the oil and gas industry as "dirty" or "sour" gas. In order to obtain "clean" or "sweet" gas which is a usable and marketable product it is necessary to extract the hydrogen sulfide from the sour gas. That process requires an amine plant facility, and Alpar decided to construct such a facility on the lease premises. The sweet gas was then sold by Alpar to Montana-Dakota Utilities Company. The construction of the amine plant and the removal of the hyrdrogen sulfide was a relatively expensive undertaking, and Alpar asserts that, under the lease, it is entitled to deduct a proportionate share of such costs from the royalty payments owed to the Wests. The Wests assert that the lease entitles them to royalty based upon one-eighth of the gross proceeds received from the sale of the gas without deduction for the costs of extracting hydrogen sulfide or for other costs incurred by Alpar prior to the sale of the gas.

The royalty clause provides that the lessor is to receive "one-eighth of the proceeds from the sale of the gas." There is no additional language in the lease to describe the amount of royalty to be paid or the manner in which the royalty is to be computed. The district court construed the royalty clause as allowing a deduction from the royalty payments of a proportionate share of the processing costs necessary to make the gas saleable.

This Court is requested to construe the written lease by the language used therein without the benefit of extrinsic evidence of the parties' intentions or of evidence showing custom and usage in the oil and gas industry relating to the interpretation of such leases. However, both parties have cited a number of case decisions in other jurisdictions which they assert support their interpretation of the royalty clause in the instant case.

In its appellate brief, Alpar cites a number of cases allegedly supporting its position that, under the lease, it is entitled to deduct a proportionate share of the costs of extracting hydrogen sulfide as well as a proportionate share of other "processing costs" from the royalty payments made to the Wests. Freeland v. Sun Oil Company, 277 F.2d 154 (5th Cir. 1960); Matzen v. Hugoton Production Company, 182 Kan. 456, 321 P.2d 576 (1958); State v. Cities Service Oil Company, 317 P.2d 722 (Okl. 1957); Le Cuno Oil Company v. Smith, 306 S.W.2d 190 (Tex.Civ.App. 1957); Phillips Petroleum Co. v. Record, 146 F.2d 485 (5th Cir. 1944); and Danciger Oil & Refineries v. Hamill Drilling Co., 141 Tex. 153, 171 S.W.2d 321 (1943). Our examination of these cases reveals that each is distinguishable from the instant case either in that it involved a royalty clause different from the one in the instant case or that it involved different factual circumstances or legal issues than are involved in the instant case.

Of those cases cited by Alpar, Matzen is perhaps the most applicable because the lease therein contained a royalty clause identical to the one in the instant case providing that the lessor was to receive "one-eighth of the proceeds from the sale of the gas." In Matzen, the Kansas Supreme Court did state that the lessee was entitled to...