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Thoroughbred Assocs., L.L.C. v. Kansas City Royalty Co., L.L.C.

Supreme Court of Kansas

September 20, 2013

Thoroughbred Associates, L.L.C., et al., Appellants/Cross-appellees,
v.
Kansas City Royalty Company, L.L.C.; Robert E. Thomas Revocable Trust ; and D.D.H., L.L.C., Appellees/Cross-appellants

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[Copyrighted Material Omitted]

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Review of the judgment of the Court of Appeals in 45 Kan.App.2d 312, 248 P.3d 758 (2011).

Appeal from Comanche District Court; Van Z. Hampton, judge.

SYLLABUS

1. In the trial of a civil action, if there is a question about which party has the burden of proof, a party who assumes that burden without objection and makes no contention in the district court that the court erred in placing the burden of proof on that party may not raise allocation of the burden as an issue for the first time on appeal.

2. Summary judgment is appropriate when the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, show there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. The trial court is required to resolve all facts and inferences which may reasonably be drawn from the evidence in favor of the party against whom the ruling is sought. When opposing a motion for summary judgment, an adverse party must come forward with evidence to establish a dispute as to a material fact. In order to preclude summary judgment, the facts subject to the dispute must be material to the conclusive issues in the case. On appeal, an appellate court applies the same rules, and when it determines reasonable minds could differ as to the conclusions drawn from the evidence, summary judgment must be denied.

3. Extrinsic evidence is not admissible to contradict, alter, or vary the terms of a written instrument; but it is admissible to aid in the construction of a silent or ambiguous contract. And in certain circumstances, extrinsic evidence is also admissible to establish a mutual mistake, even when a contract is clear and unambiguous.

4. A contract is ambiguous only when the words used to express the meaning and intention of the parties are insufficient in that the contract may be understood to mean two or more possible things.

5. A contract must be construed within its four corners and all provisions considered together, not in isolation. When an ambiguity appears, the language is interpreted against the party who prepared the instrument.

6. The interpretation and legal effect of written instruments are matters of law over which appellate courts exercise unlimited review.

7. Whether any particular term of a written contract has been modified or waived by subsequent agreement is a question of fact for the trial court to determine in the first instance.

8. If a party would be entitled to appellate attorney fees under a statute or contract upon prevailing on appeal, the party must timely file a Supreme Court Rule 7.07(b) (2012 Kan. Ct. R. Annot. 66) motion to preserve the right to those fees.

9. Supreme Court Rule 7.07(b) (2012 Kan. Ct. R. Annot. 66) authorizes an appellate court to award attorney fees for services on appeal in cases in which the district court had authority to award such fees.

10. When a prevailing party seeks an award of attorney fees under a prevailing-party fee statute, the most critical factor in determining the reasonableness of a fee is the degree of success obtained because prevailing party status alone may say little about whether the expenditure of an attorney's time was reasonable in relation to the success achieved.

Jeff Kennedy, of Martin, Pringle, Oliver, Wallace & Bauer, L.L.P., of Wichita, argued the cause, and Marcia A. Wood, of the same firm, and David J. Rebein, of Rebein Bangerter, P.A., of Dodge City, were with him on the briefs for appellants/cross-appellees.

William J. Skepnek, of The Skepnek Law Firm P.A., of Lawrence, argued the cause, and David E. Pepper and Michael J. Novotny, of Hartzog Conger Cason & Neville, of Oklahoma City, Oklahoma, were with him on the briefs for appellees/cross-appellants.

Biles, J. Luckert, J., joins in the foregoing concurring and dissenting opinion.

[297 Kan. 1194] OPINION

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[297 Kan. 1195] Biles, J.

This is an oil and gas lease dispute regarding: (1) whether tracts of land could be unitized; (2) if so, what minerals were unitized; and (3) alleged drainage of the leased lands. The district court disposed of the first two questions by summary judgment and the drainage claim after a bench trial. Both parties appealed to the Court of Appeals, which affirmed the district court. Thoroughbred Assocs. v. Kansas City Royalty, Co., 45 Kan.App.2d 312, 248 P.3d 758 (2011). We disagree in part with both lower courts and reverse the summary judgment orders.

We hold the lease unambiguously sets out conditions precedent for unitization and there are no disputed material facts as to whether those prerequisites were met based on the parties' summary judgment briefs and supporting materials. But this holding does not end the case. We remand to the district court for further proceedings because disputed facts exist regarding alternative claims that have not yet been addressed--and which may need to be considered--depending on how the district court disposes of other issues. We agree the drainage claim was not proven and affirm that ruling.

Factual and Procedural History

In 1998, Thoroughbred Associates, L.L.C., drilled a prolific gas well, known as the Bird Well, in Comanche County, Kansas. Thoroughbred then began targeting other land near the Bird Well, resulting in the acquisition of leases and creation of a unit called the Thoroughbred-Rietzke Unit (Rietzke Unit). Thoroughbred is the lead plaintiff in this case. The other plaintiffs hold oil and gas interests in the Rietzke Unit. Collectively, the plaintiffs dispute whether the defendants properly belong in the Rietzke Unit.

OXY USA, Inc. owned an undivided one-third interest in the oil, gas, and other minerals underlying a tract in Comanche County near the Bird Well. In July 1998, Thoroughbred entered into an oil and gas lease with OXY for that tract. An OXY employee drafted the lease (the OXY Lease) from preprinted forms. It was recorded in August of that year. About 2 months after the OXY Lease took effect, Thoroughbred filed a " Declaration of Unitization of Oil and Gas Leases" with the Comanche County Register

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of Deeds, combining [297 Kan. 1196] the OXY Lease and numerous other leases into the 640- acre Rietzke Unit. The defendants Kansas City Royalty Company, L.L.C.; Robert E. Thomas Revocable Trust; and D.D.H., L.L.C. (collectively referred to as Kansas City Royalty) later purchased OXY's interest and became successors-in-interest to the OXY Lease.

Thoroughbred drilled several wells on the Rietzke Unit, which produced both oil and gas in varying quantities, although none were located on the land subject to the OXY Lease. But all of the wells on the Rietzke Unit qualified for what is known in the industry as a full allowable, which becomes relevant to the parties' dispute whether the OXY Lease could have been unitized. An " allowable" is " [t]he amount of oil or gas which a well, leasehold, field, pipeline system or state is permitted to produce under proration orders of a state conservation commission." 8 Williams & Meyers, Oil and Gas Law, Manual of Oil and Gas Terms, p. 40 (2012). In Kansas, state regulation provides a full allowable if: " (1) Location exceptions have been granted for manmade structures or topographic features; (2) No interference with drainage of adjacent wells can be shown by competent evidence; or (3) Actual interference is less than the reduced allowable." K.A.R. 82-3-312(f).

Once Kansas City Royalty had acquired the OXY Lease, it began inquiring whether Thoroughbred's Bird Well was draining minerals from the adjacent Rietzke Unit. The parties disagreed about what information Kansas City Royalty could receive to investigate the drainage issue and whether the Bird Well was actually draining the Rietzke Unit. Those disagreements preceded this litigation.

Thoroughbred initially submitted royalty payments accruing from the Rietzke Unit, which Kansas City Royalty accepted; but Thoroughbred stopped these payments as tensions increased. Thoroughbred soon argued the OXY Lease's terms actually prohibited Thoroughbred from including that lease's lands within the Rietzke Unit. In other words, Thoroughbred contended it had mistakenly unitized the OXY Lease lands as part of the Rietzke Unit.

[297 Kan. 1197]The OXY Lease and Declaration of Unitization

Under its terms, the OXY Lease was to remain in effect for 1 year " and as long thereafter as oil or gas, or either of them, is produced from said land, or lands unitized therewith, by the Lessee, in paying quantities." But the lease also contained what is known as a Pugh clause limiting the extent the lease could be perpetuated through production from a well elsewhere on a unit. And based on this clause, the parties also disputed whether the lease had expired below certain depths.

The fourth paragraph in the OXY Lease involves the delegation of Thoroughbred's power to pool or unitize. It is the centerpiece of Thoroughbred's claim. It states in relevant part:

" Lessee is granted the right and power to pool or unitize all, or part of the lands covered hereby with adjoining or contiguous lands in order to form a unit, or units, for the production of oil and/or gas when said units are necessary to conform with regular spacing patterns, or to produce a full allowable where such spacing pattern or allowable are established by State, Federal or other regulatory bodies. All lands so pooled into a unit or units, shall be treated for all purposes, except the payment of royalties on production from the pooled unit, as if said lands were included in the lease. If production is found on the pooled lands, it shall be treated as if production is had from this lease, whether the well, or wells be located on the lands covered by this lease or not. Any well drilled on any such units shall be considered as a well hereunder. In lieu of the royalties elsewhere herein specified, Lessor shall receive on production from a unit, only such portion of the royalties stipulated herein as a portion of the above-described lands placed in said unit bears, on an acreage basis, to the total lands so pooled or

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unitized in the particular unit involved." (Emphasis added.)

Two portions of this paragraph are particularly important. First is the condition placed on unitization--" when said units are necessary to conform with regular spacing patterns, or to produce a full allowable where such spacing pattern or allowable are established by State, Federal or other regulatory bodies." Second is that the lease allows unitization for the production of " oil and/or gas." And this second provision must be contrasted against the Declaration of Unitization filed by Thoroughbred with the register of deeds that states the intention to unitize and pool the leases

" as to the gas rights therein and thereunder so as to form the unit acreage described . . . and does declare the necessity and advisability of said pooling and [297 Kan. 1198] unitization in order to properly develop and operate said lease premises so as to promote the conservation of gas in and under and that may be produced from said premises." (Emphasis added.)

Whether the Declaration of Unitization's reference to " gas rights" unitized only the gas--but not the oil--is another disputed point. Finally, the OXY Lease requires the lessee to " drill all wells necessary to prevent drainage from offsets on adjoining lands." This provision is central to Kansas City Royalty's drainage claim.

The Litigation

In 2002, Thoroughbred sued Kansas City Royalty for a declaratory judgment that Thoroughbred had been mistaken when it included the Oxy Lease in the Rietzke Unit. Thoroughbred sought an order removing the lease from the Declaration of Unitization, a determination that Kansas City Royalty was not entitled to payments for any Rietzke Unit production, and the return of all royalties previously paid. Kansas City Royalty counterclaimed that Thoroughbred had (1) breached the OXY Lease and the Declaration of Unitization by failing to pay its share of royalties from production on the Rietzke Unit; (2) breached its duty under the OXY Lease to develop the Rietzke Unit and drill all wells necessary to protect Kansas City Royalty's land from drainage; (3) breached its duty under the OXY Lease and as the common operator of the Bird Well to protect the Rietzke Unit from drainage; (4) breached its duty under the lease to provide information on well production; and (5) unjustly enriched itself by retaining Kansas City Royalty's share of unit production revenues.

In September 2003, Thoroughbred filed its first partial summary judgment motion. In it, Thoroughbred claimed the OXY Lease's unitization provision unambiguously restricted the conditions under which the mineral interests could be unitized and that those requisites were not met when Thoroughbred filed its Declaration of Unitization. In other words, Thoroughbred argued it lacked authority to include the OXY Lease in the Rietzke Unit because unitization was unnecessary to conform to regular spacing patterns or to produce a full allowable as provided in the lease. Kansas City Royalty argued summary judgment was improper because " OXY [297 Kan. 1199] provided all necessary consents and granted Thoroughbred all power necessary to pool the Subject Lease." Highly summarized, Kansas City Royalty essentially claimed the OXY Lease was ambiguous and that parol evidence established the parties' intent that land covered by the OXY Lease was to be included in the Rietzke Unit.

In January 2005, the district court denied Thoroughbred's first partial summary judgment motion. It found " there is in fact an inherent ambiguity in the lease as is demonstrated by the actions of [Thoroughbred] when including the subject premises in the Declaration of Unitization." It further held there were disputed material facts about whether the lease's conditions regarding well spacing and " allowable" regulations were met and these facts were relevant to whether Thoroughbred intended to include the OXY Lease in the Rietzke Unit.

The litigation pressed on until April 2007, when Kansas City Royalty filed a summary

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judgment motion on Thoroughbred's claims. Its arguments at this stage are more difficult to summarize because alternative claims were presented, including: (1) the OXY Lease was ambiguous, necessitating equitable construction; (2) the OXY Lease was unambiguous and all the prerequisites to unitization were satisfied; (3) the parties entered a subsequent agreement allowing unitization; and (4) Kansas City Royalty ratified or modified the OXY Lease by its conduct, such as accepting royalty payments from the Rietzke Unit's production. Thoroughbred responded with a cross-motion for summary judgment essentially relitigating the same issue raised in its 2003 partial summary judgment motion that the OXY Lease was unambiguous and did not permit unitization under the then-existing circumstances.

At the hearing on these motions, the district court asked whether the parties' conduct could be considered and whether this conduct could modify the written agreement. Thoroughbred argued Kansas law prohibits parol or extrinsic evidence to interpret unambiguous contract language. The court responded by asking whether " parties, ever by their conduct, make a completely separate contract than what they've written and expressed to agree to?" And in what appears to be a related point, Kansas City Royalty claimed there [297 Kan. 1200] was a " ratification" or " modification" of the OXY Lease or a separate agreement entirely that the parties consummated by their conduct, stating:

" The third category . . . if your Honor is considering our position about whether you characterize our position as one of ratification, or as of modification of the existing agreement, or the consummation of a completely separate agreement, we believe it is perfectly appropriate for the Court to look at all of the circumstances surrounding the transactions. Because, in this case, we're not asking Your Honor to consider that other evidence to discern the intent of the written lease, but rather we're asking Your Honor to consider the conduct in determining whether we're right that there was a separate agreement between the parties."

The district court granted Kansas City Royalty's summary judgment motion and denied Thoroughbred's, although it did not detail its reasoning, which causes some befuddlement for an appellate court on review.

The journal entry, which was prepared by Kansas City Royalty's counsel, simply stated there was no genuine issue of material fact and that Kansas City Royalty was entitled to judgment as a matter of law. It then recited five legal conclusions: (1) The lease remained in full force and effect as it covers all rights from the surface down to the Marmaton-Altamont interval; (2) the Declaration of Unitization remained in effect as to the original 640 acres; (3) production in the Rietzke Unit must be apportioned among the mineral owners; (4) Kansas City Royalty was entitled to an accounting and apportionment of all unit production attributable to its working interest for each well producing below the base of the Marmaton-Altamont interval; and (5) Kansas City Royalty was entitled to an accounting and apportionment of all unit production attributable to its working interest from each well from the surface down to the base of the Marmaton-Altamont interval.

Thoroughbred objected to this journal entry. It alleged the journal entry decided issues not raised by the parties by granting Kansas City Royalty an interest in both oil and gas production and a working interest to all depths under the lease's Pugh clause. Kansas City Royalty countered by characterizing these issues as falling " like dominoes" once the court decided Kansas City Royalty's Oxy Lease belonged in the Rietzke Unit, although as we detail later that [297 Kan. 1201] is not the case. The district court denied Thoroughbred's objections. An interlocutory appeal was attempted on this summary judgment order, but the Court of Appeals refused to consider it. See K.S.A. 60-2102(c) (Court of Appeals has discretion to permit certain interlocutory appeals).

Kansas City Royalty's counterclaim on drainage then proceeded to trial, along with a determination of damages on the claim ...


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