Phillip Armstrong v. Berco Resources, LLC , 752 F.3d 716 ( 2014 )

United States Court of Appeals
For the Eighth Circuit
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No. 12-3062
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Phillip D. Armstrong; Leila R. Armstrong; Filco Incorporated,
lllllllllllllllllllll Plaintiffs - Appellants,
v.
Berco Resources, LLC; Encore Acquisition Company, doing business as Encore
Operating LP,
lllllllllllllllllllll Defendants - Appellees.
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Appeal from United States District Court
for the District of North Dakota - Bismarck
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Submitted: October 23, 2013
Filed: May 15, 2014
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Before RILEY, Chief Judge, COLLOTON and KELLY, Circuit Judges.
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COLLOTON, Circuit Judge.
Phillip D. Armstrong, Leila R. Armstrong, and Filco Incorporated sought a
declaratory judgment quieting title to an interest in the Bakken formation that Phillip
Armstrong purchased from Berco Resources, LLC.1 Armstrong also sued Encore
Operating LP for breaching a Letter Offer—under which Encore offered to purchase
Armstrong’s interest in the Bakken formation—and for trespassing on, and
converting the oil and gas attributable to, Armstrong’s interest. Berco
counterclaimed, seeking a declaration that the recorded Assignment and Bill of Sale
under which Armstrong received his Bakken interest from Berco was null and void
because Armstrong altered it before he recorded it. The district court2 granted
summary judgment for Encore on Armstrong’s breach of contract claim and for Berco
on its counterclaim. After a trial, the district court dismissed Armstrong’s quiet title,
trespass, and conversion claims because the court found that Armstrong received a
wellbore-only interest from Berco. Armstrong appeals, and we affirm.
I.
In March 2001, Armstrong contacted Berco and offered to purchase Berco’s
interest in two wells, the Thompson 8-34 (the “Thompson well”) and the USA-
Yttredahl 33-43 (the “Yttredahl well”).3 On May 3, 2001, Berco replied with a
Purchase and Sale Agreement (“Purchase Agreement”), which offered to sell
Armstrong Berco’s “captioned wells” for $50,000. The Purchase Agreement
provided that “Berco will convey the interests using an Assignment and Bill of Sale
form.” Armstrong signed the agreement and returned it to Berco.
1
Phillip Armstrong later conveyed one-half of his interest in the property he
received from Berco to Filco Incorporated and the other half to himself and his wife,
Leila Armstrong, as joint tenants. For ease of explication, we refer to Phillip
Armstrong individually and the appellants jointly as “Armstrong.”
2
The Honorable Daniel L. Hovland, United States District Judge for the District
of North Dakota.
3
The parties refer to this well as “Ytterdahl,” “Ytteredahl,” and “Yttredahl,” and
number it as “33-34” and “33-43.” The parties do not dispute that all references are
to the same well. For clarity, we use “Yttredahl” and “33-43.”
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On May 23, 2001, Berco sent Armstrong executed copies of the referenced
Assignment and Bill of Sale (“Assignment”). This document provided that it was
“subject to the provisions of the [Purchase Agreement] dated May 3, 2001 between
Phillip D. Armstrong and Berco.” Armstrong signed the Assignment and sent one
copy to Berco.
Although Berco’s May 23 letter to Armstrong indicated that Berco would
record the Assignment with the Office of the Register of Deeds, the document was
never recorded. Instead, on May 31, Armstrong recorded the copy of the Assignment
that he retained. Before recording that copy, Armstrong altered it by adding a
description of the property on which the Thompson and Yttredahl wells are located.
In January 2002, Berco assigned its right, title, and interest in all oil and gas
properties it held—including whatever interest it retained after the transfer to
Armstrong—to Westport Oil and Gas Company, L.P. Encore Operating LP is the
successor in interest to Westport.
In March 2008, Encore sent Armstrong a Letter Offer. In the letter, Encore
made a “non-binding offer to acquire all right, title and interest in and to the USA-
Yttredahl # 34-43 . . . and all leasehold interests . . . owned by Phillip D. Armstrong
. . . in the NW/4—Sec. 34.” In exchange, Encore offered to grant Armstrong a one-
percent overriding royalty in the spacing unit on which Encore planned to drill a well.
The Letter Offer provided that it was “subject to title review.” Armstrong signed and
returned the Letter Offer.
In May 2008, Encore received a title opinion that raised questions about
Armstrong’s ownership interest in the land on which the Yttredahl well is located.
In September 2008, Encore began to drill a horizontal well, as described in the Letter
Offer. That well, the Charlson 14X-35H (the “Charlson well”), was completed in
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October 2008. The Charlson well produces from a spacing unit that encompasses
Section 34, the section on which the Yttredahl well is located.
In November 2008, Armstrong sent a letter to Encore with an executed
assignment of his ownership interest in the Yttredahl well. Armstrong also requested
that Encore assign him the one-percent overriding royalty, as allegedly agreed to in
the Letter Offer. Encore responded that it could not assign Armstrong the overriding
royalty because Encore was unable to “tie the pertinent leases (leasehold) back to
[Armstrong’s] ownership.” The letter informed Armstrong that the assignment he
received from Berco “could be interpreted as a wellbore (only) assignment—limited
to Bakken production from the [Yttredahl] well.” Encore advised Armstrong that to
receive the overriding royalty, he must clear up the “ambiguities and inconsistencies
. . . in order to establish leasehold title.” Armstrong contacted Berco and the federal
Bureau of Land Management, but both informed him that his transaction with Berco
transferred a wellbore-only interest, and did not include a transfer of a leasehold
interest.
In February 2010, Armstrong sued Berco and Encore. He sought a declaration
quieting title to a leasehold interest in the Bakken formation, not limited to the two
wellbores. He argued that Encore breached the Letter Offer by failing to assign him
the one-percent overriding royalty in the spacing unit from which the Charlson well
produced. Armstrong further alleged that Encore trespassed on, and converted the oil
and gas attributable to, his interest in the property underlying the Yttredahl well.
Encore answered that the failure of a condition precedent—receipt of a satisfactory
title opinion—prevented the Letter Offer from becoming an enforceable contract.
Berco counterclaimed, seeking a declaration that the altered Assignment that
Armstrong recorded was null and void. All parties moved for summary judgment.
The district court granted summary judgment for Encore on the Letter Offer
breach-of-contract claim, reasoning that the “offer was ‘subject to’ or contingent on
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a title review,” which “was a condition precedent to the formation of a contract.”
Concluding it was undisputed that Armstrong unilaterally altered the Assignment
prior to recording it, the district court granted summary judgment for Berco, ruling
that “the modified [Assignment] as recorded by Armstrong . . . is null and void on its
face.” The court denied summary judgment on Armstrong’s quiet title, trespass, and
conversion claims because “an ambiguity exists concerning the conveyance
documents and the intention of the parties at the time the agreements were entered
into.”
After a bench trial, the district court ruled that Armstrong failed to meet his
burden of proving that the Purchase Agreement and the Assignment conveyed to him
an interest in the underlying oil and gas leases. The court found that “[c]ustom and
usage, along with Berco’s stated intention to convey only an interest in the two
wellbores, demonstrate[s] that the [assignment from Berco] was intended as a
wellbore-only assignment.” The court also ruled that Armstrong’s trespass and
conversion claims were without merit because Armstrong was unable to demonstrate
that he had an interest in the properties beyond the wellbores.
II.
A.
The parties appear to agree that this diversity case is governed by North Dakota
law, given that the contracts at issue were made in North Dakota, transferred property
interests located in North Dakota, and were to be performed in North Dakota. See
Am. Prairie Constr. Co. v. Hoich, 560 F.3d 780, 791 n.3 (8th Cir. 2009). In North
Dakota, “deeds that convey mineral interests are subject to the general rules
governing contract interpretation.” Gawryluk v. Poynter, 654 N.W.2d 400, 403 (N.D.
2002). “When the language of a deed is plain and unambiguous and the parties’
intentions can be ascertained from the writing alone, extrinsic evidence is
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inadmissible to alter, vary, explain, or change the deed.” Id. “A contract is
ambiguous when rational arguments can be made for different interpretations.” Id.
at 404. Under North Dakota law, “[s]everal contracts relating to the same matters
between the same parties and made as parts of substantially one transaction are to be
taken together.” N.D. Cent. Code § 9-07-07.
The principal dispute in this case is whether the Purchase Agreement and the
Assignment, taken together, transferred to Armstrong (1) a leasehold interest in the
property on which the Thompson and Yttredahl wells are located, or (2) a wellbore-
only interest. If Armstrong took a leasehold interest, then he would have the
exclusive right to exploit the minerals on the land underlying the Thompson and
Yttredahl wells. See Howard R. Williams & Charles J. Meyers, Manual of Oil and
Gas Terms 569, 575, 1225 (9th ed. 1994). If, on the other hand, he took a wellbore-
only interest, he would have the exclusive right to only the wellbores—the physical
holes in the ground—and the production of minerals through those wellbores. See
id. at 1207.
1.
The Purchase Agreement’s granting clause states that “[t]his transaction will
only cover all of Berco’s interest in the two wellbores, associated equipment and
production from the Bakken formation as described on Exhibit ‘A’.” R. Doc. 48-4,
at 1. Exhibit A to the Purchase Agreement provides:
Working Net Revenue
Well Name Interest % Interest %
G L Thompson 8-34 91.6667 76.04167*
USA Ytteredahl 33-34 100.0000 87.5000*
*limited to the Bakken formation found in both wellbores at footage
depths between 9,800' and 10,350' only.
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R. Doc. 48-4, at 3. The Purchase Agreement’s reservation clause provides that
“Berco expressly reserves and excepts all interests in the associated leasehold,
contracts and easements including the right to develop and/or drill through the
Bakken formation to produce oil and gas from other formations.” R. Doc. 48-4, at 1.
The natural reading of the Purchase Agreement’s granting clause, reservation clause,
and Exhibit A is that the parties intended to transfer only the wellbores.
The Assignment, however, contains different language. Its granting clause
states that “[Berco] hereby assigns, grants, bargains, sells and conveys to [Armstrong]
all of [Berco’s] right, title and interest in and to the assets, properties, and production
described on Exhibit ‘A’.” R. Doc. 48-6, at 1. Exhibit A to the Assignment provides:
Working Net Revenue
Well Name Interest % Interest %
G L Thompson 8-34 91.6667 76.04167*
USA Yttredahl 33-34 100.0000 87.5000*
Yttredahl 33-34 Minnelusa 100.0000 N/A
(unrestored location)
*limited to the wellbores, associated equipment and production from the
Bakken formation found at footage depths between 9,800 feet and
10,350 feet only.
R. Doc. 48-6, at 3 (emphasis added). The Assignment’s reservation clause provides
that “[Berco] expressly reserves and excepts from this conveyance all interests in the
associated leasehold, other than the interests in the Bakken formation conveyed
hereunder and contracts and easements, including the right to develop and/or drill
through the Bakken formation to produce oil and gas from other formations.” R. Doc.
48-6, at 1 (emphasis added).
The limiting language from Exhibit A to the Assignment is ambiguous.
Although it clearly conveys an interest in the two wellbores and their associated
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equipment, the reference to “production from the Bakken formation” could mean
either (1) all oil and gas produced from the Bakken underlying the property on which
the two wells are located, regardless of whether it is produced through those two
wells or through other wells (i.e., a leasehold interest) or (2) the oil and gas produced
from the Bakken through only those two wellbores (i.e., a wellbore-only interest).
The “other than” phrase in the Assignment’s reservation clause—which provides that
Berco reserves “all interests in the associated leasehold, other than the interests in the
Bakken formation conveyed hereunder”—likewise does not make clear whether that
nonreserved interest is limited to production through the two wellbores.
In sum, the combination of (1) the “other than” phrase from the Assignment’s
reservation clause (which does not appear in the Purchase Agreement’s reservation
clause) and (2) the limiting language of the Assignment’s Exhibit A create an
ambiguity. It is thus unclear from the face of the Purchase Agreement and the
Assignment whether Berco conveyed to Armstrong only a wellbore interest or an
interest in the underlying leaseholds as well.
Armstrong argues that the documents are not ambiguous. He highlights the
Supreme Court of North Dakota’s statement in Miller v. Schwartz, 354 N.W.2d 685
(N.D. 1984), that “it appears that the term ‘working interest,’ as commonly used in
the oil industry, is generally synonymous with the term ‘leasehold interest.’” Id. at
689. Armstrong argues that the presence of the phrase “Working Interest %” in
Exhibit A to both the Purchase Agreement and the Assignment makes clear that he
received a leasehold interest.
Armstrong reads too much into Miller. Miller did not hold as a matter of law
that “working interest” means “leasehold interest,” but rather commented that the
terms are “generally synonymous.” Id. Miller concerned a document entitled
“Assignment of Working Interest,” which referred to a working interest in two wells.
The issue in Miller was whether the assignment unambiguously transferred a
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leasehold interest when the “working interest” at issue was “more particularly set
forth and described” by cross-reference to a previously recorded document. Id. at
687. It was undisputed that the cross-referenced document was the oil and gas lease
that covered the property on which the two wells were drilled. Id. The North Dakota
court ruled that the use of the term “working interest” with reference to the two wells
did not, in itself, limit the conveyance to a wellbore interest when the rest of the
relevant documents showed that the assignment transferred the assignor’s entire
interest in the lease. Id. at 689.
In this case, the term “working interest” is used in a different context. Other
aspects of the relevant documents tend to show that the parties agreed to transfer only
a wellbore interest. Even if the term working interest “generally” means leasehold
interest, we do not think the North Dakota court meant to declare as a matter of law
that parties to a contract necessarily use the term in that way, especially when other
evidence suggests the contrary. Indeed, the North Dakota court itself acknowledged
seven years after Miller that a deed conveying a “Grantor’s working interest . . . in six
producing oil and gas wells” was “ambiguous as to the specific nature of the interest
. . . conveyed.” Minex Res., Inc. v. Morland, 467 N.W.2d 691, 694, 696 (N.D. 1991);
cf. Plano Petroleum, LLC v. GHK Exploration, L.P., 250 P.3d 328, 329–32 (Okla.
2011). The district court thus did not contravene North Dakota law by concluding
that the agreements between Armstrong and Berco were ambiguous.
2.
If a contract is ambiguous, extrinsic evidence is admissible to clarify the
intentions of the parties. Gawryluk, 654 N.W.2d at 403–04. The district court made
findings of fact after a bench trial, and we review those findings for clear error.
Thompson v. Thompson, 391 N.W.2d 608, 611 (N.D. 1986).
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The district court heard testimony from Armstrong and Rockne Mullens,
Berco’s Vice President of Exploration and Production, regarding their intentions.
Mullens testified that Berco intended to convey only a wellbore interest. Had Berco
intended to convey a leasehold interest, Mullens testified, the Purchase Agreement
and Assignment would have been drafted differently. Both Exhibit As would have
described the leases and the real estate covered by those leases, and Exhibit Bs would
have been included to describe the transferred wells. Mullens also testified that the
“Working Interest %” columns were intended to clarify Berco’s interest in the two
wellbores. Mullens said that Berco sold both wells because they were marginal
producers and that the purchase price was equivalent to the cost of plugging,
abandoning, and reclaiming the well sites. Armstrong testified that he had no oral
discussions with anyone at Berco. He also testified that he believed the reference to
“Working Interest %” meant “leasehold interest,” but admitted that he never
conveyed this understanding to anyone at Berco.
The district court also heard testimony regarding custom and usage from expert
witnesses for both parties. The court noted that both experts agreed that
the well-established custom and usage in the oil and gas industry
indicates that if the parties intended to convey an interest in an oil and
gas lease or leases, there would be not only a mention of the leases, but
an adequate legal description of the property subject to the leases.
The district court found that “[c]ustom and usage, along with Berco’s stated
intention to convey only an interest in the two wellbores, demonstrate[s] that the”
assignment from Berco to Armstrong “was intended as a wellbore-only assignment.”
This finding is not clearly erroneous; it was adequately supported by evidence in the
record. We therefore affirm the dismissal of Armstrong’s quiet-title claim, based on
district court’s conclusion that the Purchase Agreement and Assignment, taken
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together, conveyed to Armstrong the “[w]ellbores, associated equipment, and
production from the Bakken formation through the . . . [w]ellbores only.”
B.
1.
To succeed on a trespass claim under North Dakota law, “the plaintiff must
establish the defendant intentionally entered the land of another, or caused a thing or
third person to do so, without the consent of the landowner.” Knutson v. City of
Fargo, 714 N.W.2d 44, 50 (N.D. 2006). “While actual harm is not one of the
requisite elements to a claim for trespass, actual interference with another’s property
is.” Tibert v. Slominski, 692 N.W.2d 133, 137 (N.D. 2005).
Armstrong showed only that he has an interest in the wellbores. He failed to
show that he has any other interest in the minerals in and under the land on which the
Yttredahl and Thompson wells are located. Because Armstrong does not assert that
Encore interfered with his use of the two wellbores, his trespass claim was properly
dismissed.
2.
Under North Dakota law, “[c]onversion consists of a tortious detention or
destruction of personal property, or a wrongful exercise of dominion or control over
the property inconsistent with or in defiance of the rights of the owner.” Ritter, Laber
& Assocs., Inc. v. Koch Oil, Inc., 680 N.W.2d 634, 638 (N.D. 2004). Armstrong’s
conversion claim fails because he did not show that he had any interest in the oil and
gas revenues from Encore’s Charlson well. There was no evidence that the Charlson
well produces oil or gas through the Thompson or Yttredahl wellbores. Because
Armstrong has an interest in only the Thompson and Yttredahl wellbores, the
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equipment associated with those wellbores, and the production through those two
wellbores, the district court properly dismissed his conversion claim.
III.
Armstrong contends that Encore breached the Letter Offer by refusing to assign
to him a one-percent overriding royalty in the spacing unit from which Encore’s
Charlson well produces. He argues that the district court erred in ruling that the
failure of one of the Letter Offer’s conditions precedent—title review—precluded the
creation of a contract between Armstrong and Encore.
Under North Dakota law, “[a] condition precedent may be a prerequisite to the
existence of a contract.” Airport Inn Enters., Inc. v. Ramage, 679 N.W.2d 269, 272
(N.D. 2004). “A condition precedent is a condition which is to be performed before
some right dependent thereon accrues or some act dependent thereon is performed.”
N.D. Cent. Code § 9-01-11. “The failure of [a] condition precedent is fatal to the
existence of an enforceable contract for sale of the property.” United Bank of
Bismarck v. Trout, 480 N.W.2d 742, 748 (N.D. 1992).
Encore’s Letter Offer expressly provided that it was “subject to title review.”
The phrase “subject to” is sufficient to create a condition precedent. Kruger v.
Soreide, 246 N.W.2d 764, 768–69 (N.D. 1976). A title opinion is a “statement of
opinion by an attorney . . . as to the state of the title to land, mineral, royalty or
working interests.” Williams & Meyers, supra, at 1144. “The opinion will often
recommend that curative instruments be obtained before the property interest is
purchased, drilled on, or otherwise dealt with.” Id. As the district court put it, “a
satisfactory title review was a condition precedent to the formation of a contract.”
Armstrong contends that he satisfied any condition precedent because the title
opinion procured by Encore never said that he did not receive a leasehold interest
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from Berco. The title opinion, however, identified numerous “ambiguities and
inconsistencies” regarding Armstrong’s claim of title, and then merely “assumed” for
purposes of its remaining analysis that Armstrong purchased “the entire leasehold
working interest.” The opinion plainly raised doubt about whether Armstrong
received a leasehold interest from Berco, prompting Encore to state that it was unable
to “tie the pertinent leases (leasehold) back to [Armstrong’s] ownership,” and that the
Assignment “could be interpreted as a wellbore (only) assignment—limited to
Bakken production from the [Yttredahl] well.” To resolve the “ambiguities and
inconsistencies,” in Armstrong’s claim, the title opinion called for Armstrong to take
two curative measures: (1) provide Encore an assignment from Berco to Armstrong
that clearly conveyed a leasehold interest in the NW/4 of Section 34 and (2) submit
that assignment to the federal Bureau of Land Management for its approval. Encore’s
title review was therefore not satisfactory until Armstrong took the required curative
measures.
Armstrong contacted Berco in an attempt to clarify that his interest in Section
34 was not limited to the Yttredahl wellbore. Berco responded that its agreement
with Armstrong “was a wellbore assignment only.” Armstrong also contacted the
federal Bureau of Land Management, but the agency concluded that Armstrong
received a wellbore-only interest. Armstrong’s inability to undertake successfully the
curative measures required by the title opinion resulted in the failure of the condition
precedent.
Armstrong argues finally that because the Letter Offer calls for him to transfer
whatever right, title, and leasehold interest he held to the NW/4 of Section 34, he
complied with its terms by transferring his wellbore-only interest in the Yttredahl
well. The Letter Offer viewed as a whole, however, makes clear that the document
required Armstrong to transfer both his “right, title and interest in and to the USA-
Yttredahl # 33-43” and his “leasehold interests . . . in the NW/4—Sec. 34.” That is,
the Letter Offer required Armstrong to transfer both an interest in the Yttredahl well
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and a leasehold interest in the NW/4 of Section 34. Because Armstrong had no
leasehold interest to transfer, he could not comply with the Letter Offer. The district
court correctly dismissed the breach of contract claim.
IV.
Armstrong’s final argument is that the district court erred by declaring the
altered, recorded Assignment null and void. It is undisputed that before Armstrong
recorded the Assignment, he amended Exhibit A by adding a fourth column. The new
column provided a description of the properties on which the Thompson and
Yttredahl wells were located. The recorded Exhibit A provided:
Well Name Working Net Revenue McKenzie
Interest % Interest % County, ND
G L Thompson 8-34 91.6667 76.04167* SE/4 8-153-95
USA Yttredahl 33-34 100.0000 87.5000* NW/4 34-154-95
Yttredahl 33-34 Minnelusa 100.0000 N/A
(unrestored location)
*limited to the wellbores, associated equipment and production from the
Bakken formation found at footage depths between 9,800 feet and
10,350 feet only.
R. Doc. 48-7, at 3 (boldface added). Armstrong asserts that his amendment was
justified because it was necessary for proper indexing of the Assignment and was
anticipated by the parties. He also contends that the amendment was harmless
because he could not have succeeded to any greater interest than what Berco held
before the assignment.
Under North Dakota law, a grantor of property must subscribe to the grant and
acknowledge the execution before the deed is recorded. N.D. Cent. Code §§ 47-19-
03, 47-10-01. The failure of a grantor to re-sign and re-acknowledge a deed that has
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been altered by the grantee renders that deed null and void on its face. Johnson v.
Hovland, 795 N.W.2d 294, 301 (N.D. 2011). The parties do not dispute that
Armstrong unilaterally altered the exhibit without Berco’s consent. Neither
Armstrong’s proffered justifications for altering the exhibit, nor the alteration’s
purported harmlessness, excuse Armstrong’s noncompliance with the rules governing
grantors. Therefore, the district court correctly ruled that Armstrong’s unilateral
alteration of Exhibit A before recording it rendered the recorded Assignment null and
void.
* * *
The judgment of the district court is affirmed.
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