No. Civ.A. 00-1154-MLB
May 1, 2003
MEMORANDUM AND ORDER
Plaintiff Hunthauser Holdings is seeking a declaratory judgment, pursuant to 28 U.S.C. § 2201, confirming its ownership rights to eight oil and gas leases in Hamilton County, Kansas and declaring void any claim to the Soderstrom lease asserted by defendants David Loesch and Greg Erhard (Doc. 108). Plaintiff's rights in all but the Soderstrom lease have been resolved. Plaintiff claims that a legally permanent cessation of production terminated the Soderstrom lease (Doc. 109 at 11-12). Defendants respond that their investment and subsequent loss due to fraud established a constructive trust in the lease (Doc. 113 at 5-7). They further argue that the cessation of production was not permanent, but rather temporarily stalled by legal and regulatory proceedings (Doc. 113 at 8-10). An evidentiary hearing was held on March 20, 2003. This case is currently before the court upon plaintiff's motion for summary judgment (Doc. 108). Subject matter jurisdiction exists under 28 U.S.C. § 1332. For the reasons stated, the motion is DENIED.
Glen Soderstrom was the lessee of multiple oil and gas leases in Hamilton County, Kansas, including one from the Salvation Army (Soderstrom lease) dated August 31, 1995. By its terms, the lease would "remain in force for a term of 3 years from August 31, 1995 . . . and as long thereafter as oil, gas . . . or any of the products covered by this lease is or can be produced." Soderstrom assigned an interest in this lease to Stanco Oil and Gas (Doc. 109 ¶¶ 4-5 and Doc. 109 exh. 7.d).
Stanco received over $625,000 from defendants to purchase oil and gas leases and to fund its drilling activities. Pursuant to the assignment of the Soderstrom lease, Stanco drilled the Stanco #1 well in 1997. Defendants were to receive fractional interests in the Stanco #1 lease but did not due to fraud perpetuated by Stanco and its management (Doc. 113 ¶¶ 21-23, 26 and Doc. 116 ¶ 23).
Defendants allege that the Stanco #1 well was capable of commercial production as drilled and presented evidence at the hearing that the well produced gas in payable quantities during the three-year term of the lease and until April 1, 1999. But on that date, Soderstrom and Ricchezze Minerals, Inc., obtained a temporary restraining order precluding Stanco from producing oil and gas from several leases, including the lease encompassing the Stanco #1 well. Further, on May 12, 1999, the Kansas Corporation Commission (KCC) ordered Stanco to cease operating the Stanco #1 well due to Stanco's failure to comply with relevant regulations (Doc. 113 ¶ 25 and Doc. 114 exhs. H-I).
On February 7, 2000, plaintiff obtained a new lease (Salvation Army lease) and displaced Soderstrom as the lessee of record. On March 20, 2000, Soderstrom filed an affidavit stating that no oil or gas was produced during the prior year from the Soderstrom lease. Defendants have not received an interest in the new lease from plaintiff, nor have the parties entered into any business relationship (Doc. 109 ¶¶ 1(b), 7, 17-18 and exh. 7.a).
III. STANDARDS PERTAINING TO SUMMARY JUDGMENT
The usual and primary purpose of the summary judgment rule is to isolate and dispose of factually unsupported claims or defenses. See Celotex Corp. v. Catrett, 477 U.S. 317, 323-24 (1986). Federal Rule of Civil Procedure 56(c) directs the entry of summary judgment in favor of a party who "show[s] that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." An issue is "genuine" if sufficient evidence exists on each side "so that a rational trier of fact could resolve the issue either way" and "[a]n issue of fact is `material' if under the substantive law it is essential to the proper disposition of the claim." Adler v. Wal-Mart Stores, Inc., 144 F.3d 664, 670 (10th Cir. 1998). The mere existence of some factual dispute will not defeat an otherwise properly supported motion for summary judgment because the factual dispute must be material. See Renfro v. City of Emporia, 948 F.2d 1529, 1533 (10th Cir. 1991); see also Saucier v. Katz, 533 U.S. 194, 212 n. 3 (2001) (Ginsburg, J., concurring) (dismissing an allegation of fact that was disputed but irrelevant).
A. Moving Party's Burden
The moving party must initially show both an absence of a genuine issue of material fact, as well as entitlement to judgment as a matter of law. Adler, 144 F.3d at 670. The nature of the showing depends upon whether the movant bears the burden of proof at trial with respect to the particular claim or defense at issue in the motion. If the nonmoving party bears the burden of proof, the movant need not "support its motion with affidavits or other similar materials negating the opponent's claim." Celotex, 477 U.S. at 323. Rather, the movant can satisfy its obligation simply by pointing out the absence of evidence on an essential element of the nonmovant's claim. Adler, 144 F.3d at 670.
On the other hand, when, as here, the movant has the burden of proof on a claim or defense raised in a summary judgment motion, it must show that the undisputed facts establish every element of the claim entitling it to judgment as a matter of law. See e.g., United States v. Four Parcels of Real Property, 941 F.2d 1428, 1438 (11th Cir. 1991) (en banc); United Mo. Bank v. Gagel, 815 F. Supp. 387, 391 (D.Kan. 1993); see also Celotex Corp., 477 U.S. at 331 (Brennan, J., dissenting) ("If the moving party will bear the burden of persuasion at trial, that party must support its motion with credible evidence — using any of the materials specified in Rule 56(c) — that would entitle it to a directed verdict if not controverted at trial."). Moreover, the moving party must show the absence of genuine issues of fact regarding each of the affirmative defenses specifically reserved by the non-moving party. Gagel, 815 F. Supp. at 391. "The party moving for summary judgment must establish its entitlement beyond a reasonable doubt." Id.
The court notes that the Rule 56 summary judgment standard is identical to that of a Rule 50 judgment as a matter of law standard. See Pendleton v. Conoco, Inc., 23 F.3d 281, 286 (10th Cir. 1994). "The standard is particularly strict when such a ruling is made in favor of the party with the burden of proof." Weese v. Schukman, 98 F.3d 542, 547 (10th Cir. 1996). Under this strict test, the party bearing the burden of proof at trial earns a favorable ruling only when evidence is presented that "the jury would not be at liberty to disbelieve." Hurd v. American Hoist Derrick Co., 734 F.2d 495, 499 (10th Cir. 1984).
B. Non-Moving Party's Burden
If the moving party properly supports its motion, the burden shifts to the nonmoving party, who "`may not rest on its pleadings but must set forth specific facts showing that there is a genuine issue for trial.'" Muck v. United States, 3 F.3d 1378, 1380 (10th Cir. 1993) (quoting Applied Genetics Int'l, Inc., v. First Affiliated Sec., Inc., 912 F.2d 1238, 1241 (10th Cir. 1990)). In setting forward these specific facts, the nonmovant must identify the facts "by reference to affidavits, deposition transcripts, or specific exhibits incorporated therein." Adler, 144 F.3d at 671. If the evidence offered in opposition to summary judgment is merely colorable or is not significantly probative, summary judgment may be granted. Cone v. Longmont United Hosp. Ass'n, 14 F.3d 526, 533 (10th Cir. 1994). A party opposing summary judgment "cannot rest on ignorance of facts, on speculation, or on suspicion, and may not escape summary judgment in the mere hope that something will turn up at trial." Conaway v. Smith, 853 F.2d 789, 793 (10th Cir. 1988). Put simply, the nonmoving party must "do more than simply show that there is some metaphysical doubt as to the material facts." Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986).
In the end, when confronted with a fully briefed motion for summary judgment, the court must determine "whether there is the need for a trial — whether, in other words, there are any 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 (1986). If sufficient evidence exists on which a trier of fact could reasonably find for the defendant, summary judgment is inappropriate. See Prenalta Corp. v. Colo. Interstate Gas Co., 944 F.2d 677, 684 (10th Cir. 1991).
The interest in the Salvation Army lease claimed by plaintiff is contingent on a finding that the underlying Soderstrom lease has been terminated. As a court of equity, the court cannot extend the Soderstrom lease beyond the three-year term specified in the lease. See Reese Enters., Inc. v. Lawson, 220 Kan. 300, 309, 553 P.2d 885, 894 (1976). Once that term expired, "the right to enter and explore expire[d]." Id. at 310-11, 553 P.2d at 895. However, the Soderstrom lease included an habendum clause, conditioning the continuation of the lessee's rights beyond the primary term of the lease on the continued production of any well covered by the lease or its capability to produce oil or gas (Doc. 109 exh. 7.d).
A. Continued Production
Production of the Stanco #1 well beyond the primary term of the Soderstrom lease extends the lease until production of the well ceases. Permanent cessation of production in paying quantities, however, is the critical criterion: "`a mere temporary cessation of production because of necessary developments or operation do[es] not result in the termination of such lease or the extinguishment of rights acquired under its terms.'" Id. at 713-14, 876 P.2d at 174 (quoting Wilson v. Holm, 164 Kan. 229, 237, 188 P.2d 899, 905-06 (1948)); see also Kelwood Farms, Inc. v. Ritchie, 1 Kan. App. 2d 472, 477, 571 P.2d 338, 342 (Kan.Ct.App. 1977) ("The bottom line question here is whether the cessation of production was temporary or permanent."). Cessation of production is permanent if "the only prospect of renewed production depend[ed] upon `the successful coordination of various prospective but unassured projects and possibilities.'" Wrestler v. Colt, 7 Kan. App. 2d 553, 556, 644 P.2d 1342, 1345 (Kan.Ct.App. 1982) (quoting Kahm v. Ark. River Gas Co., 122 Kan. 786, Syl. ¶ 2, 253 P. 563, 563 (1927)). If production ceased for any reason, "`the owners of the minerals in place [were] required to move promptly and by their efforts actually establish that such cessation, regardless of its cause, is temporary, not permanent.'" Wagner v. Sunray Mid-Continent Oil Co., 182 Kan. 81, 89-90, 318 P.2d 1039, 1046 (1957) (quoting Wilson, 164 Kan. at 240, 188 P.2d at 907) (emphasis omitted).
Because Stanco violated numerous KCC regulations, the Commission prohibited it from operating the Stanco #1 well. In addition to the KCC order, a temporary restraining order (TRO) obtained by Soderstrom and Ricchezze Minerals in the District Court of Hamilton County prohibited Stanco from operating the well. While the parties have not provided the court with anything beyond the TRO, which itself does not state the basis for the TRO, the court assumes that it was brought about by the wrongful conduct of Stanco. The current status of the KCC order and the TRO is unknown. "[T]emporary cessation of production for necessary developments or operation does not terminate a lease," Wilson, 164 Kan. at 239, but the TRO and KCC order struck a far more permanent blow to the continued production of the Stanco #1 well. Neither party has cited to the court precedent addressing the effect of a regulatory or judicial prohibition against operation on the continued existence of an oil and gas lease pursuant only to its habendum clause. While Stanco's failure to comply with various regulations — in a sense a series of affirmative, voluntary acts — likely constituted a voluntary and permanent suspension of production, see Warner v. Rose Acres Oil Gas Co., 114 Kan. 118, 217 (noting that a "voluntary suspension of production" was sufficient to cancel an oil and gas lease), the court need not definitively decide whether cessation was permanent because the habendum clause additionally conditioned the lessee's rights upon the capability of the Stanco #1 well to produce beyond the primary term of the Soderstrom lease.
B. Capability of Production
"It has long been the rule in Kansas that when the primary term of an oil or gas lease has expired and the lease is being held upon the condition of continued production only, all rights under the lease terminate if and when production of oil or gas in paying quantities ceases." Eichman v. Leavell Res. Corp., 19 Kan. App. 2d 710, 713, 876 P.2d 171, 173-74 (Kan.Ct.App. 1994); see also Tate v. Stanolind Oil Gas Co., 172 Kan. 351, 355, 240 P.2d 465, 468-69 (1952) (noting that a majority of courts require actual production during the primary term of a typical oil and gas lease to extend the lease beyond its fixed term). The habendum clause of the Soderstrom lease did not condition the lease upon continued production only, however, but rather extended the lease beyond the primary term for "as long thereafter as oil [or] gas . . . is or can be produced" (Doc. 109 exh. 7.d) (emphasis added). Though Kansas courts have not dealt specifically with such language, ordinary principles of contract interpretation guide the court in interpreting the clause. See 1 David E. Pierce, Kansas Oil and Gas Handbook § 9.01 (1986) ("Kansas courts treat the oil and gas lease as a contract.").
If a contract is unambiguous, the contract should be enforced according to its terms. Language in a contract is ambiguous if the words in the contract are subject to two or more possible meanings. The court need not look beyond the four corners of the contract where the parties have reduced their agreement to written form and the document is unambiguous on its face. "Reasonable rather than unreasonable interpretations of contracts are favored and results which vitiate the purpose or reduce the terms of a contract to an absurdity should be avoided."
Thomas Well Serv., Inc. v. Williams Natural Gas Co., 873 F. Supp. 474, 484 (D.Kan. 1994) (citations omitted). The Soderstrom lease is not ambiguous. An interpretation requiring actual production would render superfluous any language beyond "is . . . produced." The language "is or can be produced" can only reasonably be interpreted to require actual production or the capability to produce and nothing within the four corners of the lease lends support to a contrary conclusion. The court finds helpful in its determination the reasoning recently expressed by the Texas Supreme Court in Anadarko Petroleum Corp. v. Thompson, 94 S.W.3d 550 (Tex. 2002). That court interpreted an oil and gas lease containing a statement that it "shall remain in force for a term of one (1) year and as long thereafter as gas is or can be produced." The court held that while Texas generally requires actual production to extend an oil and gas lease beyond its primary term, "[t]he habendum clause's plain language shows that the parties intended that a well actually produce gas, or be capable of producing gas, to sustain the lease." Id. at 555. The court interpreted "can be produced" to require for an extension of the lessee's rights that any well covered by the subject lease be "capable of producing in paying quantities without additional equipment or repairs." Id. at 558. The court further stated that its holding in no way conflicted with the general rule requiring actual production, because that rule pertained to "typical habendum clauses that sustained the lease as long as oil or gas `is produced.'" Id. at 556.
Like Texas, Kansas generally requires actual production to extend a typical oil and gas lease beyond its primary terms. See Pierce at § 9.23 ("Under the typical habendum clause extending the grant `for so long as oil or gas is produced,' there must be actual production at the end of the primary term."). But as in Anadarko, the habendum clause of the Soderstrom lease is far from ambiguous and allows the lease to continue beyond its primary term based on the capability of any well covered by the lease to produce oil or gas.
Notwithstanding the above analysis, the court refuses to stray too far from the strict adherence by Kansas courts to the general rule requiring nothing less than actual production when a typical habendum clause, containing the language "is produced," extends a lessee's rights beyond the primary term of an oil and gas lease. The court thus borrows from Anadarko in defining "can be produced" to require that the Stanco #1 well be capable of producing in paying quantities. Short of this, a well is not sufficiently capable of production so as to extend an oil and gas lease beyond its primary term. Though Kansas courts have not expressly adopted this standard, the court thinks it consistent with traditional principles of contract interpretation and Kansas law governing oil and gas leases.
Kansas courts interpret habendum clauses to implicitly include the phrase "in paying quantities." See Pray v. Premier Petroleum, Inc., 233 Kan. 351, 353, 662 P.2d 255, 257 (1983). For a discussion of what constitutes paying quantities, see generally Reese, 220 Kan. at 312-14, 553 P.2d at 896-98.
Because the court rules that termination of the Soderstrom lease is contingent upon the capability of the Stanco #1 well to produce oil or gas, and because defendants presented evidence that the well was and is now capable of immediate production, the court rules that a question of fact exists as to whether the Soderstrom lease has terminated. It is important to note at this juncture that the court expresses no opinion on the validity of any interest claimed by the defendants or any other lessor to the Soderstrom lease. The court only rules that a question of fact exists as to whether the initial Soderstrom lease terminated prior to the creation of a new lease in favor of plaintiff, thus precluding summary judgment for plaintiff.
This case was consolidated with case No. 00-1316-MLB in which defendants Erhard and Loesch brought an initial complaint. In a Journal Entry of Judgment in case No. 00-1316-MLB, the court stated that "[a]ll claims relating to the ownership of certain oil and gas leases in Hamilton County, Kansas and the validity of the leases of Hunthauser Holdings, LLC shall be reserved to and determined in" the present case (No. 00-1316-MLB, Doc. 55 at 2). Pursuant to that reservation, defendants have filed a counterclaim in this case regarding ownership of the Soderstrom lease (Doc. 105).
Defendants have not moved for summary judgment.
V. CONCLUSIONThe oil and gas lease in which defendants claim an interest was contingent on the capability of the Stanco #1 well to produce oil or gas. Defendants presented evidence that the well was capable of production at the time operations ceased and remains capable of production. As a result, the court rules that a question of fact exists as to whether the underlying lease has terminated, thus precluding the court from summarily validating the interest claimed by plaintiff. Plaintiff's motion for summary judgment is DENIED (Doc. 108).
A motion for reconsideration is neither invited nor encouraged. Any such motion shall not exceed 3 double-spaced pages and shall strictly comply with the standards enunciated by this court in Comeau v. Rupp, 810 F. Supp. 1172, 1174 (D.Kan. 1992). The response to any motion for reconsideration shall not exceed 3 double-spaced pages. No reply shall be filed.
IT IS SO ORDERED.