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Heavy Petroleum Partners, LLC, and Cherokee Wells, LLC v. Paul Atkins

January 23, 2013


The opinion of the court was delivered by: Eric F. Melgren United States District Judge


This case involves a dispute between Plaintiffs Heavy Petroleum Partners, LLC (HPP) and Cherokee Wells, LLC and Defendants Paul Atkins and J.J.R. of Kansas Limited (JJR). Before the Court is Plaintiffs' Motion for Summary Judgment (Doc. 190). The issue is whether the Court should quiet title in Plaintiffs' favor. Because the Court finds that several issues of fact preclude the granting of summary judgment, the Court denies the motion.

I. Factual and Procedural Background*fn1

In 1988, Defendant JJR's predecessor in interest, KLM Exploration Company, Inc., took an oil and gas lease from John and Sandra Zachariah in Jefferson County, Kansas. The lease covers approximately 240 acres. Through various assignments, JJR succeeded to the lessee's interest in the lease. The lease is underlain by the McClouth sandstone, a petroleum reservoir containing a very dense, heavy crude oil.

On May 19, 2006, JJR and HPP entered into a farmout agreement (the Farmout) in which HPP was given the opportunity to earn 75% of JJR's working interest in the lease. Defendant Paul Atkins, owner of JJR, signed the Farmout. Several of the relevant contractual provisions will be set forth. Paragraph 2 of the Farmout states:

Test Pod: On or before August 1, 2006, Farmoutee (HPP) shall from the Zachariah Pod # 1 (sometimes hereinafter referred to as "Test Pod"), and at its sole risk, cost and expense commence actual operations for the drilling of new wells and the reworking of existing wells to a depth of approximately 1,500 feet to inject steam into the McClouth Sandstone for the purpose of producing oil in commercial quantities. . . . Failure to commence operations as herein provided shall result in the termination of this agreement without penalty.

Paragraph 5 of the Farmout provides:

Assignment: Farmoutor (JJR) agrees that when and if Farmoutee has timely and properly prosecuted the prescribed operations on the said Test Pod and has completed same as a facility capable of producing oil in commercial quantities, and if Farmoutee has otherwise complied with all of the terms and conditions contained herein, then Farmoutor will assign to Farmoutee, subject to the reservations and conditions contained herein, a 75% Working Interest and corresponding 62.625% Net Revenue Interest in and to the Oil and Gas Lease covering the Farmout Area as to all depths and all substances. . . . Any assignment made to Farmoutee hereunder shall be effective as of the date of this Farmout Agreement. As used herein, the term "Pod" is defined as an injection well and the producing oil wells assigned thereto. Unless otherwise provided by the KCC, each producing oil well shall have a drilling and spacing unit of 2.5 acres. Farmoutee agrees to accept the foregoing assignment of the Farmout Area subject to all the terms and provisions and conditions of the Oil and Gas Lease covering the Farmout Area. Farmoutee assumes and agrees to comply fully with and to perform timely each and every duty, obligation, provision and condition contained therein, both expressed and implied, insofar as they concern the Farmout Area. . . . Furthermore, Farmoutee agree[s] to maintain all Farmouter's production facilities and equipment in a good and workman like condition.

Robert Defeo, a member of HPP and a manager of Cherokee Wells, LLC, avers that HPP undertook development of the test pod and by August 2006, the test pod was capable of producing in paying quantities. On August 23, 2006, JJR executed an assignment (the Assignment) to HPP of 75% of the working interest in the lease. The Assignment was given an effective date of May 19, 2006--the same date as the date of the Farmout's execution. Mr. Defeo avers that steam injection into the test pod of wells did not commence until sometime after October 6, 2006, when the Kansas Corporation Commission (KCC) approved the permit to commence injection.

Paragraph 15 of the Farmout provides:

If the Test Pod has been drilled and developed as hereinabove provided, Farmoutee shall have the option to contemporaneously drill and develop approximately 5,000 acres owned by Farmoutor in the area outlined . . . . Notwithstanding any of the remedies contained herein, should Farmoutee violate or fail to comply with any of the terms and provisions of this agreement, Farmoutor shall give Farmoutee written notice by certified mail of any violation of the agreement that has occurred and Farmoutee shall have thirty (30) days from the receipt of such notice in which to come into compliance with said agreement. Failure of Farmoutee to come into compliance with said agreement will result in the termination of said agreement in its entirety with all rights and interest in the Contract Area reverting to Farmoutor.

In such event, Farmoutee agrees to assign to Farmoutor, within thirty (30) days from the date of termination of the agreement, all interest theretofore earned in the Contract Area.

The Farmout also included a Model Form Operating Agreement, often referred to as a joint operating agreement (JOA).*fn2 The JOA designated Blue Jay Operating as the operator of the lease. On December 31, 2006, Blue Jay Operating assigned all its rights and interests as operator of the lease to Plaintiff Cherokee Wells.

In early January 2009, HPP noted diminished oil sales from the lease for the month of December 2008 and directed Atkins to concentrate on increasing production for the upcoming months. 300 barrels of oil from the lease sold during January, 2009. In early March 2009, HPP noticed that there were no oil sales from the lease for the month of February, 2009. Thus, HPP sent field personnel to the lease to ...

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