Zelda Walls v. Petrohawk Properties, LP , 812 F.3d 621 ( 2015 )

United States Court of Appeals
For the Eighth Circuit
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No. 14-2734
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Zelda Walls, Individually, and as surviving spouse of Arlie Walls
lllllllllllllllllllll Plaintiff - Appellant
v.
Petrohawk Properties, LP; Exxon Mobil Corporation
lllllllllllllllllllll Defendants - Appellees
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Appeal from United States District Court
for the Eastern District of Arkansas - Little Rock
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Submitted: September 23, 2015
Filed: December 28, 2015
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Before MURPHY, MELLOY, and SMITH, Circuit Judges.
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SMITH, Circuit Judge.
Zelda Walls, individually and as surviving spouse of Arlie Walls, appeals the
district court's1 grant of partial summary judgment as to the material breach claims in
favor of Petrohawk Properties, LP. Walls also appeals the district court's later
1
The Honorable James M. Moody Jr., United States District Court for the
Eastern District of Arkansas.
judgment that held Petrohawk did not owe Walls additional royalties dating from a
previous Lessee's tenure and was not subject to the penalty under Arkansas Code
Annotated § 15-74-602. We affirm.
I. Background
Zelda Walls and her now-deceased husband, Arlie Walls, entered into an oil
and gas lease with Griffith Land Services in August 2005. Under the lease, Walls was
to receive bonus payments and royalties (3/16ths gross) based upon the production
and marketing of oil and gas from the property. The lease contained an assignment
provision stating that "Lessee shall obtain written consent from Lessor before
assigning lease to a third party which consent shall not be unreasonably withheld."
Subsequently, Griffith assigned the lease to Alta Resources, LLC; Alta
assigned the lease to Petrohawk Properties, LP; thereafter, Petrohawk assigned the
lease to Exxon Mobil. All of these assignments occurred without Walls's written
consent.
Throughout the lease assignments, the lessees failed to pay Walls the full
royalties due under the lease. In May 2010, Walls's attorney sent Petrohawk—the
lessee at the time—a letter seeking collection of the prescribed royalty payments plus
statutory interest. In the letter, the attorney stated it was his understanding that
although Walls had initially leased with Griffith, the leases were currently assigned
to Petrohawk. The letter requested that Petrohawk look into the matter and
compensate Walls accordingly.
Petrohawk conducted an internal audit and determined that Walls indeed had
not received the proper amount of royalty payments. In October 2010, Petrohawk paid
Walls more than $200,000 in additional royalties, which Walls received and cashed.
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At the beginning of December 2010, Petrohawk sought Walls's consent to
assign the lease to Exxon. Petrohawk sent Walls a letter seeking consent to assign the
lease, but no consent was given. Instead, counsel for Walls responded in a letter on
December 15th, noting that a proper legal description of the land was missing,
asserting that previous assignments constituted breaches of the lease, and asking for
"detailed information as to why it would be in the best interest of Mrs. Walls to agree
to the assignment." The next day, on December 16th, Walls filed suit against
Petrohawk claiming material breach of the lease based upon miscalculation of the
royalties and failure to obtain consent for the assignment to Exxon. Petrohawk did not
respond to Walls's December 15th letter and on December 27th assigned the lease to
Exxon.
Walls's complaint alleged that Petrohawk owed her additional compensation
based on its status and Alta's prior status as assignees of the lease. Also, Walls
contended Petrohawk is subject to a statutory penalty of 14% per annum. Petrohawk
stipulated to the additional amount owed under its assignment but disputed liability
for the amount owed by Alta, the prior assignee. Petrohawk further denied it was
subject to the statutory penalty.
Petrohawk moved for partial summary judgment on the two claims of material
breach. The district court granted the motion, finding that the failure to pay royalties
did not constitute a material breach because any technical breach by Petrohawk was
cured when Petrohawk paid Walls for the past, miscalculated royalties. The court also
found that Walls waived any breach by accepting payment from Petrohawk. With
respect to Walls's claim that the assignments constituted a material breach, the court
held that Walls waived the breaches prior to Petrohawk's assignment to Exxon.
Finally, the court found the assignment by Petrohawk to Exxon was not a material
breach because Walls unreasonably withheld her consent.
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Following the order granting partial summary judgment, Petrohawk stipulated
to the additional compensation owed under its assignment. The court still had to
decide whether Petrohawk was liable for Alta's unpaid royalty debt and the statutory
penalty. The court found that Petrohawk was not liable for the nonpayment of
royalties that occurred under Alta's tenure as assignee. As to the statutory penalty, the
court found that Walls not only failed to give Petrohawk notice as required by the
statute, but she also failed to show that Petrohawk willfully or in bad faith withheld
payment as the statute required.
II. Discussion
On appeal, Walls argues that the district court erred by (1) granting summary
judgment in favor of Petrohawk on Walls's claims of material breach for nonpayment
of royalties and failure to obtain consent, (2) finding Petrohawk not liable for Alta's
breaches under the lease, and (3) concluding Walls was not entitled to the statutory
penalty under Arkansas Code Annotated § 15-74-602.
We review a district court's grant of summary judgment de novo. Oxy USA, Inc.
v. Hartford Ins. Grp., 58 F.3d 380, 381 (8th Cir. 1995) (citation omitted). Summary
judgment involves the "threshold inquiry of determining whether there is a need for
trial—whether, in other words, there are 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). "Summary
judgment is not appropriate if the nonmoving party can set forth specific facts, by
affidavit, deposition, or otherwise, showing the existence of a genuine issue for trial."
Grey v. City of Oak Grove, Mo., 396 F.3d 1031, 1034 (8th Cir. 2005). Factual
disputes alone are insufficient to bar summary judgment; "rather, the dispute must be
outcome determinative under prevailing law." Id. Although the materiality of a breach
is generally a question of fact, summary judgment is appropriate where no reasonable
fact finder could find that the breach was material. See Reuter v. Jax Ltd., Inc., 711
F.3d 918, 921 (8th Cir. 2013) (upholding summary judgment because the breach was
not material).
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A. Failure to Pay Royalties
Walls first argues that Petrohawk's failure to pay royalties timely under the
lease constituted a material breach, which would provide a basis for cancellation of
the lease. Under Arkansas law, a breach is "material" where there "is a failure to
perform an essential term or condition that substantially defeats the purpose of the
contract for the other party." Roberts Contracting Co. v. Valentine-Wooten Rd. Pub.
Facility Bd., 320 S.W.3d 1, 7 (Ark. Ct. App. 2009) (citation omitted). Arkansas courts
have generally not considered nonpayment of royalties a material breach. See, e.g.,
Schaffer v. Tenneco Oil Co., 647 S.W.2d 446 (Ark. 1983) (refusing to cancel lease
even though lessee failed to make royalty payments for five years).
In Schaffer, the Supreme Court of Arkansas noted that "Louisiana is the only
jurisdiction that has consistently been willing to decree cancellation for a lessee's
unexcused failure to pay pursuant to an oil and gas lease." Id. at 447. Arkansas, on
the other hand, has determined that "[w]here there is no cessation of marketing of oil
and gas for a substantial period but only the nonpayment of royalties, the lessors
generally have a plain, speedy, and adequate remedy at law for damages." Id. (citation
omitted). Applying Schaffer, Walls's remedy for nonpayment of royalties is legal not
equitable. Unquestionably, Petrohawk failed to pay the royalties owed to Walls;
however, that failure did not substantially defeat the purpose of the contract.
Understandably, payment for the extracted minerals is important to Walls. But the
payment is secondary to the extraction, development, and marketing of minerals on
Walls's property. Throughout the period of the lease, Petrohawk continued to extract,
develop, and market the minerals from Walls's land. Given that the Supreme Court
of Arkansas did not consider five years of royalty nonpayments a material breach, see
id., we decline to conclude that the instant facts constitute a material breach.2
2
Even were we to consider Petrohawk's breach material, Walls waived the
breach by accepting the $200,000 payment from Petrohawk and continuing with the
lease. Arkansas law considers it "elemental that one party to a contract who, with
knowledge of a breach by the other party, continues to accept benefits under the
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B. Failure to Obtain Consent to Assign
Walls also argues the lease should be canceled because it was materially
breached by the various assignments that were executed without her consent. Here,
too, Walls waived the breaches with respect to all of the assignments except the
Petrohawk-Exxon assignment. In a letter dated May 21, 2010, Walls's attorney stated,
"Arlie Walls and Zelda Walls initially leased with Griffith Land Services, Inc. and it
is my understanding that those leases have been assigned to Petrohawk. Mrs. Walls
has retained our firm to assist her in collecting the proper amount of royalties on these
leases." By writing the letter and taking payment from Petrohawk, Walls waived any
breaches resulting from assignments up to that point. See Clear Creek, 255 S.W. at
8 (holding that "one party to a contract who, with knowledge of a breach by the other
party, continues to accept benefits under the contract, and suffers the other party to
continue in performance thereof, waives the right to insist on the breach" (citations
omitted)).
There remains, however, the assignment from Petrohawk to Exxon. This
assignment was executed without receiving Walls's consent and took place after the
May 21 letter was sent and after Walls accepted payment. Petrohawk argues this
assignment was not prohibited because Walls unreasonably withheld her consent. The
lease permitted assignments if written consent were obtained, which would "not be
unreasonably withheld." In Warmack v. Merchants National Bank of Fort Smith, 612
S.W.2d 733, 735 (Ark. 1981), the Supreme Court of Arkansas expressly adopted §
15.2 of the Restatement (Second) of Property, which states:
contract, and suffers the other party to continue in performance thereof, waives the
right to insist on the breach." Clear Creek Oil & Gas Co. v. Brunk, 255 S.W. 7, 8
(Ark. 1923) (citation omitted). Walls cannot now insist on the breach after she has
accepted payment by Petrohawk. Walls has waived any breach by Petrohawk.
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A restraint on alienation without the consent of the landlord of the
tenant's interest in the leased property is valid, but the landlord's consent
to an alienation by the tenant cannot be withheld unreasonably, unless
a freely negotiated provision in the lease gives the landlord an absolute
right to withhold consent.
Restatement (Second) of Property: Land. & Ten. § 15.2 (1977). In Warmack, the
court explained that "unreasonable" is a term of art meaning "without fair, solid and
substantial cause or reason." Warmack, 612 S.W.2d at 735 (quotation and citation
omitted). Here, Walls's letter to Petrohawk did not give a "fair, solid and substantial
cause or reason" for not consenting to the assignment. Instead, Walls asked why it
was in her best interests to consent. Then, before waiting to receive a response from
Petrohawk, Walls filed suit against Petrohawk the very next day. We find no error in
the district court's conclusion that Walls unreasonably withheld consent.
C. Alta's Breaches
Walls next argues that the lease holds Petrohawk liable for breaches of
previous assignees, specifically Alta. The lease requires that "[a]ll obligations of
Lease shall be binding upon assignee." Further, an assignor is only "relieved of all
obligations with respect to the assigned portion or portions arising subsequent to the
date of assignment." Unless otherwise contracted, "successive assignees are only
liable for the breaches of covenants of the lease that occur during their period of
tenure." 3 Summers Oil & Gas Law § 29:7 (3d ed. 2008).
The language of the lease does not support Walls's argument. The lease
relieved Alta of obligations arising subsequent to the date of assignment. Any
obligations arising before the date of assignment remained with Alta. The unpaid
royalties from Alta's tenure constitute an "obligation" that arose prior, not subsequent,
to the date of assignment. See Black's Law Dictionary 1104 (8th ed. 2004) (defining
"obligation" as "a formal, binding agreement or acknowledgment of a liability to pay
a certain amount or to do a certain thing for a particular person or set of persons; esp.,
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a duty arising by contract"). Petrohawk is only liable for obligations arising
subsequent to the date of assignment, and it is not liable for Alta's nonpayment of
royalties.
D. Statutory Penalty
Finally, Walls argues that Petrohawk is subject to the statutory penalty
provided under Arkansas Code Annotated § 15-74-602. If payments are willfully
withheld
without just cause or through bad faith from persons legally entitled to
the proceeds from production, the court may award, . . . a penalty in an
amount not to exceed simple interest at a rate of fourteen percent (14%)
per annum on the amount of the unpaid proceeds . . . and a reasonable
attorney's fee.
Ark. Code Ann. § 15-74-602(a). Walls further argues that the notice required in § 15-
74-603(b) only requires notice of intent to seek payment of oil or gas proceeds, but
it does not require notice of the intent to seek the statutory penalty. Thus, Walls
asserts the district court should have permitted a jury to determine whether Petrohawk
willfully withheld payments without just cause or in bad faith.
Although we review a trial court's interpretation of a statute de novo, Myers v.
Raynor (In re Raynor), 617 F.3d 1065, 1069 (8th Cir. 2010), a trial court's decision
whether to award statutory penalties "will not be reversed on appeal unless the trial
court's decision is clearly erroneous." McHalffey v. Nationwide Mutual Fire Ins. Co.,
61 S.W.3d 231, 233 (Ark. Ct. App. 2001).
The statutory notice provision provides,
(b) If persons legally entitled to the proceeds seek relief for the failure
of the purchaser to make timely payment of proceeds from the sale of oil
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or gas or interest thereon as required in §§ 15-74-601 and 15-74-602, the
first purchaser or the owner of the right to produce under an oil or gas
lease or force pooling order shall be furnished with written notice of the
failure as a prerequisite to commencing judicial action for the
nonpayment.
Ark. Code Ann. § 15-74-603(b). When considered in isolation, paragraph (b) could
be read to support Walls's argument. However, when paragraphs (c) and (d) are
considered in conjunction with (b), it becomes evident that written notice of the intent
to seek the statutory penalty is a prerequisite to commencing judicial action.
Paragraph (c) states that "[t]he first purchaser shall have thirty (30) days after receipt
of the required notice within which to pay proceeds or to respond in writing with a
reasonable basis for nonpayment." Id. § 15-74-603(c). A reasonable basis for
nonpayment is required because the statutory penalty applies if payments are willfully
withheld "without just cause or through bad faith." Id. § 15-74-602(a). Then,
paragraph (d) states that the statutory penalty provision of § 15-74-602(a) shall not
apply "[i]f the court is satisfied that payments have not been willfully withheld
without just cause or through bad faith." Id. § 15-74-603(d). Written notice triggers
the statutory duty to pay or explain nonpayment. When written notice is furnished to
the nonpaying party, the nonpaying party has an opportunity to explain its basis for
nonpayment. If the nonpaying party provides a reasonable basis—a basis that satisfies
the court that payments were not willfully withheld without just cause or through bad
faith—the statutory penalty provision will not apply.
The district court found that Walls failed to make factual allegations of
Petrohawk's willfulness or bad faith. We agree. Assuming Walls had furnished
Petrohawk with the requisite notice, Walls still failed to plead any facts that would
support a finding that Petrohawk willfully withheld payments without just cause or
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in bad faith. The district court's finding was not clearly erroneous. Walls is not
entitled to the penalty provided by § 15-74-602.3
III. Conclusion
Accordingly, we affirm the decision of the district court.
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3
We find it unnecessary to address Petrohawk's argument that Walls failed to
adequately plead special damages as required by Rule 9(g) of the Federal Rules of
Civil Procedure because we decide the case based on the text of the statute.
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