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Northern Natural Gas v. Oneok Field Services

March 15, 2013

NORTHERN NATURAL GAS COMPANY, APPELLANT,
v.
ONEOK FIELD SERVICES COMPANY, L.L.C.; ONEOK MIDSTREAM GAS SUPPLY, L.L.C.; LUMEN ENERGY CORPORATION; AND LUMEN MIDSTREAM PARTNERSHIP, LLC, APPELLEES,
v.
NASH OIL & GAS, INC. AND L.D. DRILLING, INC., APPELLEES.



Appeal from Pratt District Court; ROBERT J. SCHMISSEUR, judge.

SYLLABUS BY THE COURT

SYLLABUS BY THE COURT 1. In Kansas, standing is jurisdictional. An appellate court has a duty to question jurisdiction on its own initiative and, when the record discloses a lack of jurisdiction, the appellate court has a duty to dismiss the appeal. Whether jurisdiction exists is a question of law subject to unlimited review. 2. As a general rule, a party seeking to appeal must be aggrieved by the judgment or order from which the appeal is taken. However, a party ordinarily has no standing to appeal from a judgment or order that dismisses a claim to which it was not a party.

3. The most fundamental rule of statutory construction is that the intent of the legislature governs if that intent can be ascertained. We first attempt to ascertain legislative intent by reading the plain language of the statutes and giving common words their ordinary meanings. 4. When a statute is plain and unambiguous, an appellate court does not speculate as to the legislative intent behind it and will not read into the statute something not readily found in it. But when the statute's language or text is unclear or ambiguous, an appellate court may employ canons of construction, legislative history, or other background considerations to divine the legislature's intent and construe the statute accordingly. 5. Even if the language of the statute is clear, an appellate court must still consider various provisions of an act in pari materia with a view of reconciling and bringing those provisions into workable harmony if possible. Additionally, an appellate court must construe statutes to avoid unreasonable or absurd results and must presume the legislature does not intend to enact useless or meaningless legislation. 6. K.S.A. 55-1210(a) gives an injector title to gas injected into its legally recognized storage area. By its plain terms, however, section (a) does not apply to gas that has migrated outside the injector's certificated storage area. 7. K.S.A. 55-1210(a) and (b) govern ownership rights to previously injected storage gas that remains within a designated underground storage area.

8. The phrase "such gas" in K.S.A. 55-1210(b) refers to the gas described in K.S.A. 55-1210(a), and the gas described in section (a) does not include gas which has migrated beyond the certificated boundaries of the storage site. 9. K.S.A. 55-1210(c) specifically addresses ownership of storage gas that has migrated outside the designated underground storage area. 10. K.S.A. 55-1210(c) preserves the rule of capture except as to gas that has migrated horizontally within a stratum to adjoining property or vertically to a stratum or portion thereof not leased or condemned by the injector. 11. K.S.A. 55-1210(c)'s preservation of the rule of capture makes no exception for gas that has migrated beyond adjoining property based on some nonnatural means or as a result of some affirmative action by the ultimate producer of such gas. 12. The body of caselaw that has applied the rule of capture to extinguish ownership rights in previously injected storage gas that has migrated to adjoining property developed without regard to whether the injector intended to "abandon" migrating gas. 13. An issue of fact is not genuine unless it has legal controlling force as to the controlling issue. A disputed question of fact which is immaterial to the issue does not preclude summary judgment. Stated another way, if the disputed fact, however resolved, could not affect the judgment, it does not present a genuine issue of material fact. 14. Ordinarily, summary judgment should not be granted until discovery is complete. However, if the facts pertinent to the material issues are not controverted, summary judgment may be appropriate even when discovery is unfinished. 15. An appellate court reviews a district court's refusal to permit additional discovery under K.S.A. 2012 Supp. 60-256(f) for an abuse of discretion. 16. A judicial action constitutes an abuse of discretion if the action (1) is arbitrary, fanciful, or unreasonable; (2) is based on an error of law; or (3) is based on an error of fact. The party asserting an abuse of discretion bears the burden of showing such an abuse of discretion. 17. An appellate court reviews the denial of a motion seeking relief from judgment under an abuse of discretion standard. 18. An appellate court exercises de novo review over questions of federal preemption. 19. Absent an express statement by Congress that state law is preempted, federal preemption occurs when (1) there is an actual conflict between federal and state law; (2) compliance with both federal and state law is, in effect, physically impossible; (3) Congress has occupied the entire field of regulation and leaves no room for states to supplement federal law; or (4) state law stands as an obstacle to the accomplishment and execution of the full objectives of Congress.

The opinion of the court was delivered by: Moritz, J.

Affirmed in part and remanded with directions.

The opinion of the court was delivered by MORITZ, J.:

In this conversion action, Northern Natural Gas Company (Northern) claims ONEOK Field Services Company, L.L.C., ONEOK Midstream Gas Supply, L.L.C. (collectively ONEOK), Lumen Energy Corporation, and Lumen Midstream Partnership, LLC (collectively Lumen) wrongfully converted natural gas by purchasing gas from two producers, Nash Oil & Gas, Inc. (Nash) and L.D. Drilling, Inc. (L.D.), which operated wells on land near Northern's underground natural gas storage field. Northern claims that Nash and L.D. were producing and selling Northern's previously injected storage gas and that ONEOK and Lumen unlawfully converted such gas when they purchased it from Nash and L.D. ONEOK and Lumen filed third-party indemnification claims against Nash and L.D. In turn, Nash and L.D. asserted various claims against Northern, ONEOK, and Lumen.

In granting summary judgment in favor of Nash and L.D. on the third-party indemnification claims, the district court determined that K.S.A. 55-1210(c) preserved the common-law rule of capture as to injected storage gas that migrates horizontally beyond property adjoining the certificated boundaries of a gas storage field. Because the wells at issue here were located beyond property adjoining the certificated boundaries of Northern's gas storage field, the district court concluded Northern lost title to its migrating storage gas. Thus, the court concluded Nash and L.D. had title to the gas produced by those wells and purchased by ONEOK and Lumen.

After the district court issued its memorandum decision and order granting summary judgment in favor of Nash and L.D., but before the court journalized its order, Northern received authorization to expand the certificated boundaries of its storage field, thus bringing the wells at issue within the expansion area or onto property adjoining the expansion area. Northern moved the district court to modify its summary judgment ruling in light of the boundary change. In denying that motion, the district court acknowledged the change in circumstances and effectively limited its summary judgment ruling to matters prior to June 2, 2010. The court certified its Order as a final judgment and ordered ONEOK and Lumen to "hold all runs" pending further order of the court.

In this appeal of that summary judgment ruling, Northern primarily challenges the district court's interpretation of K.S.A. 55-1210. Focusing on subsections (a) and (b) of the statute, Northern contends the legislature intended to abolish the common-law rule of capture as to all previously injected storage gas, regardless of how far that gas migrates beyond the certificated boundaries of an injector's gas storage field. But we conclude, as did the district court, that Northern's reading of K.S.A. 55-1210 renders meaningless subsection (c) of the statute, which preserves title in the injector to "natural gas that has migrated to adjoining property or to a stratum, or portion thereof . . . ." Further, Northern's interpretation of the statute ignores the caselaw precipitating enactment of the statute as well as subsequent caselaw interpreting the statute.

We conclude K.S.A. 55-1210 abolished the rule of capture as to natural gas which migrates horizontally within a stratum to adjoining property or vertically to a different stratum, but preserved that rule as to natural gas which migrates beyond those boundaries. Because the natural gas at issue here allegedly migrated horizontally beyond property adjoining Northern's certified storage field, Northern lost title to that gas and it became subject to the rule of capture. By application of the rule of capture, Nash and L.D. possessed title to the gas produced from their wells before June 2, 2010. Therefore, we hold the district court properly dismissed ONEOK's and Lumen's indemnification claims against Nash and L.D and granted summary judgment in favor of Nash and L.D. regarding any alleged acts of conversion occurring before June 2, 2010. As more fully explained below, we remand this case to the district court for any further proceedings necessary to finally resolve this litigation.

FACTUAL AND PROCEDURAL BACKGROUND

Northern owns and operates an underground natural gas storage facility in Pratt and Kingman counties known as the Cunningham Storage Field (the Field). In the late 1970's, Northern obtained certification from the Kansas Corporation Commission (KCC) and the Federal Energy Regulatory Commission (FERC) to inject and store natural gas in the Viola formation, a geological stratum underlying the Field. In 1996, Northern obtained certification from the KCC and FERC to inject and store natural gas in a second stratum underlying the Field, the Simpson formation.

As of March 2007, the certificated boundaries of the Field encompassed 26,240 acres. In October 2008, FERC authorized Northern to expand the Field by approximately 1,760 acres. FERC specifically indicated its authorization did not permit Northern to inject storage gas in the expansion area; rather, the expansion permitted Northern to address "gas migration problems."

Nash and L.D., Kansas corporations engaged in mineral exploration and production, both operate several oil and gas wells in Pratt County. All of the wells at issue are located approximately 2 to 6 miles and more than a full section beyond the Field's northern certificated boundary as that boundary existed prior to June 2, 2010.

Pursuant to purchase agreements executed in 2005 and 2009, ONEOK purchased natural gas produced by Nash from these wells. Similarly, in 2008, Lumen entered into a gas purchase contract with L.D. and began purchasing natural gas produced from L.D.'s wells in this area.

In December 2008, Northern filed suit in federal court against L.D., Nash, and Val Energy, Inc., alleging all three companies had caused Northern's storage gas to migrate beyond the certificated boundaries of the Field by creating "pressure sinks." Specifically, Northern argued the companies pumped atypical quantities of groundwater at their wells, thereby creating artificial pressure sinks which caused Northern's storage gas to migrate away from the Field and toward the wells.

Northern further alleged all three defendant companies were producing and selling Northern's previously injected storage gas as their own. Northern sought a declaratory judgment as to title and ownership of the migrated storage gas and/or injunctive relief pursuant to K.S.A. 55-1210 and stated claims for conversion, unjust enrichment, nuisance, tortious interference with a business relationship, and civil conspiracy. See Northern Natural Gas Co. v. L.D. Drilling, Inc., No. 08-1405-WEB, 2009 WL 3739735, at *5 (D. Kan. 2009) (parallel federal litigation).

In September 2009, Northern requested authorization from FERC to expand the Field by an additional 14,420 acres based on Northern's concern that third-party operators, including Nash and L.D., were producing Northern's previously injected storage gas from wells in the proposed expansion area.

While the parallel federal litigation against Nash, L.D., and Val Energy remained pending, Northern filed this action in Pratt County District Court in December 2009 against ONEOK and Lumen alleging they indirectly converted Northern's gas. Specifically, Northern contended Nash and L.D. caused or contributed to the migration of Northern's previously injected storage gas; that Nash and L.D. produced and sold Northern's storage gas to the exclusion of Northern's ownership interests; and that ONEOK and Lumen bought, transported, and/or resold Northern's storage gas without authorization. In response, defendants ONEOK and Lumen admitted they purchased gas from Nash and L.D., denied Northern's allegations of conversion, claimed various defenses, and asserted third-party indemnification claims against Nash and L.D.

In response to the defendants' third-party indemnification claims, L.D. admitted that if either ONEOK or Lumen purchased gas owned by Northern from L.D., L.D. would be obligated to indemnify the defendants. However, L.D. denied Northern possessed or had any right to the gas L.D. sold to ONEOK or Lumen. L.D. also asserted various affirmative defenses to the third-party claims and asserted its own third-party claims against Northern for tortious interference with a business relationship, trespass, nuisance, slander of title, inverse condemnation, abuse of process, unjust enrichment, and lost production.

Similarly, Nash denied ONEOK's third-party indemnification allegations, asserted two affirmative defenses and third-party crossclaims against ONEOK and Lumen, and sought a declaratory judgment pursuant to K.S.A. 60-1701 et seq. to determine the parties' rights to natural gas which had migrated outside Northern's storage field and beyond property adjacent to that field. Nash also asserted a third-party counterclaim against Northern for tortious interference with a business relationship.

Nash and L.D. jointly moved for summary judgment on ONEOK and Lumen's third-party indemnification claims, citing the Underground Storage of Natural Gas Act, K.S.A. 55-1201 et seq. In particular, Nash and L.D. relied upon K.S.A. 55-1210(c), which provides that injectors of natural gas do not lose title to gas that has "migrated to adjoining property or to a stratum, or portion thereof, which has not been condemned as allowed by law or otherwise purchased." Nash and L.D. reasoned that because their wells were located beyond property "adjoining" Northern's certificated storage area, Northern lost title to any gas that migrated to Nash's and L.D.'s wells and the common-law "rule of capture" applied to give Nash and L.D. title to any such gas produced from their wells. Further, Nash and L.D. contended that because Northern did not own the gas Nash and L.D. produced and sold to ONEOK and Lumen, Northern's conversion claim against ONEOK and Lumen failed. Consequently, ONEOK and Lumen's third-party indemnification claims against Nash and L.D. failed, and Nash and L.D. were entitled to summary judgment.

In response, Northern argued it had title to or ownership rights in any migrating storage gas under K.S.A. 55-1210. Northern reasoned that under K.S.A. 55-1210(a) and

(b), Northern maintained title to its previously injected storage gas regardless of how far the gas migrated. Alternatively, Northern argued even if the district court determined Northern lacked title to the gas, genuine issues of material fact precluded summary judgment.

The district court issued a comprehensive opinion and order (Order) on April 15, 2010, granting summary judgment in favor of Nash and L.D. "as to all the gas purchased by ONEOK and/or Lumen from any of the Nash or L.D. wells identified by Northern." The court agreed with the interpretation of K.S.A. 55-1210(c) suggested by Nash and

L.D. and found that Northern lost title to any storage gas which migrated beyond property adjoining Northern's certified boundaries. Further, the district court held that the rule of capture gave Nash and L.D. title to any such migrating gas.

In so holding, the district court rejected Northern's argument that Nash and L.D. had "interfered" with Northern's ownership rights to the storage gas within the boundaries of the Field in violation of K.S.A. 55-1210(b) by allegedly causing a breach in the storage field's containment features. Further, the district court pointed out that Northern's interpretation of the statute would render section (c) of the statute superfluous. The district court certified the Order as a final judgment under K.S.A. 2010 Supp. 60-254(b), and Northern immediately appealed to the Court of Appeals.

After filing its notice of appeal, Northern filed a motion in district court to clarify or amend the Order, suggesting the district court's rejection of Northern's allegation that Nash and L.D. "interfered" with storage gas within the Field rendered the Order void as contrary to and preempted by the Natural Gas Act, 15 U.S.C. § 717 et seq. (2006). On May 6, 2010, Northern docketed the appeal in the Court of Appeals and moved to transfer the appeal to this court pursuant to K.S.A. 20-3017.

On June 2, 2010, FERC issued an order (the FERC Order) authorizing Northern to expand the Field by 12,320 acres. As a result, since June 2, 2010, all but two of the wells operated by Nash and L.D. are located either in the expansion area or within 1 mile of that area. Citing the FERC Order, Northern moved for relief from judgment in this case, challenging the district court's factual findings regarding the location of the wells. Northern also subsequently filed a "Complaint in Condemnation" in the United States District Court for the District of Kansas seeking to confirm its legal right to condemn the expansion area authorized in the FERC Order. Northern Natural Gas v. 9117.53 Acres in Pratt, 781 F. Supp. 2d 1155, 1158-59 (D. Kan. 2011).

In this case, the district court conducted a hearing on June 30, 2010, to settle the journal entry related to the Order and to address Northern's post-ruling motions. At the hearing, Northern argued the summary judgment ruling should be certified only as a final judgment regarding the conversion claim as it existed prior to June 2, 2010, i.e.,before the FERC Order changed the certificated boundaries.

The district court declined to modify the Order regarding "matters prior to June 2nd." In its journal entry, the court (1) indicated the April 15, 2010 order, including the K.S.A. 60-254(b) certification, would serve as the journal entry, (2) ordered ONEOK and Lumen "to hold all runs," i.e., to suspend payments to Nash and L.D. for gas produced from Nash and L.D.'s wells, pending further order of the court, and (3) indicated that all pleadings, documents, and evidence filed in the case were considered as part of the summary judgment record.

We granted Northern's motion to transfer the appeal to this court, and Northern amended its notice of appeal to include "rulings, orders, and judgments made by the District Court up to, and including, June 30, 2010."

On appeal Northern claims the district court erred in granting summary judgment to Nash and L.D. because it: (1) erroneously interpreted K.S.A. 55-1210 to find that Northern lost title to gas that migrated beyond adjoining property, (2) abused its discretion by refusing to allow Northern further time for discovery, and (3) abused its discretion by denying Northern's motion to modify the summary judgment ruling. Northern further argues the district court's ruling resulted in an unconstitutional taking of Northern's property without just compensation and that the order granting summary judgment is void because it conflicts with and is preempted by the Natural Gas Act, 15 U.S.C. § 717 et seq. NORTHERN HAS STANDING TO INVOKE APPELLATE JURISDICTION

Before turning to the merits of Northern's claims, we initially address the parties' responses to the show cause order issued by this court requesting the parties address whether Northern has standing to invoke appellate jurisdiction.

In Kansas, standing is jurisdictional. Mid-Continent Specialists, Inc. v. Capital Homes, 279 Kan. 178, 185, 106 P.3d 483 (2005). We have a duty to question jurisdiction on our own initiative and, when the record discloses a lack of jurisdiction, we have a duty to dismiss the appeal. State v. Gill, 287 Kan. 289, 294, 196 P.3d 369 (2008). Whether jurisdiction exists is a question of law subject to unlimited review. Harsch v. Miller, 288 Kan. 280, 286, 200 P.3d 467 (2009).

As a general rule, a party seeking to appeal must be aggrieved by the judgment or order from which the appeal is taken. See, e.g., Thomas v. Metropolitan Life Ins. Co., 631 F.3d 1153, 1159 (10th Cir. 2011); City of Cleveland v. Ohio, 508 F.3d 827, 836-37 (6th Cir. 2007); St. Paul Fire Ins. v. Univ. Builders Supply, 409 F.3d 73, 83 (2nd Cir. 2005). However, a party ordinarily has no standing to appeal from a judgment or order that dismisses a claim to which it was not a party. City of Cleveland, 508 F.3d at 836; St. Paul Fire, 409 F.3d at 83.

Here, Northern appeals from the district court's grant of summary judgment in favor of third-party defendants Nash and L.D. on ONEOK's and Lumen's third-party indemnification claims against them. After oral arguments, we issued a show cause order requesting the parties address whether Northern, as plaintiff, has standing to appeal from the Order dismissing ONEOK's and Lumen's third-party indemnification claims even though the Order did not explicitly dismiss Northern's conversion claim against ONEOK and Lumen.

After reviewing the record and considering the parties' responses to the show cause order and oral argument as to this issue, we are persuaded that Northern is sufficiently "aggrieved by" the district court's summary judgment ruling to appeal that ruling. Specifically, we are persuaded that the district court's ruling primarily was based on its determination that Northern had no ownership rights in the gas produced by Nash and L.D. As the parties suggest, although the district court failed to explicitly dismiss Northern's conversion claim against ONEOK and Lumen when it granted summary judgment in favor of Nash and L.D. on ONEOK and Lumen's third-party indemnification claims, that was the practical effect of the court's ruling. Accordingly, we conclude Northern has standing to appeal.

THE DISTRICT COURT PROPERLY GRANTED SUMMARY JUDGMENT IN FAVOR OF NASH AND L.D.

In this appeal, Northern primarily challenges the district court's interpretation of K.S.A. 55-1210, maintaining its argument that the statute abolished the rule of capture as to all previously injected storage gas regardless of how far that gas migrates beyond the boundaries of a certificated underground storage field.

In contrast, Nash, L.D., and Lumen contend K.S.A. 55-1210 abolished the rule of capture regarding storage gas that remains within the certificated boundaries of an underground storage field or migrates to an adjoining property or to a stratum or portion thereof, but retained the rule of capture as to storage gas that migrates outside of those limitations.

Northern's primary argument requires interpretation of K.S.A. 55-1210.

Thus, the primary issue we must resolve is whether K.S.A. 55-1210 abolished the common-law rule of capture as to previously injected storage gas that migrates beyond property adjoining an underground storage field or to a stratum or portion thereof. Resolution of this question requires statutory interpretation and, to some extent, consideration and application of prior caselaw. Accordingly, our review is unlimited. Johnson v. Brooks Plumbing, 281 Kan. 1212, 1213-14, 135 P.3d 1203 (2006). Nonetheless, our review is guided by several well-established principles of statutory construction.

Rules of statutory construction.

The most fundamental rule of statutory construction is that the intent of the legislature governs if that intent can be ascertained. Bergstrom v. Spears Manufacturing Co., 289 Kan. 605, 607, 214 P.3d 676 (2009). We first attempt to ascertain legislative intent by reading the plain language of the statutes and giving common words their ordinary meanings. Padron v. Lopez, 289 Kan. 1089, 1097, 220 P.3d 345 (2009). When a statute is plain and unambiguous, we do not speculate as to the legislative intent behind it and will not read into the statute something not readily found in it. But when the statute's language or text is unclear or ambiguous, we "employ canons of construction, legislative history, or other background considerations to divine the legislature's intent and construe the statute accordingly." Stewart Title of the Midwest v. Reece & Nichols Realtors, 294 Kan. 553, 564-65, 276 P.3d 188 (2012).

However, even if the language of the statute is clear, we must still consider various provisions of an act in pari materia with a view of reconciling and bringing those provisions into workable harmony if possible. Southwestern Bell Tel. Co. v. Beachner Constr. Co., 289 Kan. 1262, 1270, 221 P.3d 588 (2009). Additionally, we must construe statutes to avoid unreasonable or absurd results, and we presume the legislature does not intend to ...


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