Continental Resources v. Armstrong , 2021 ND 171 ( 2021 )

FILED
IN THE OFFICE OF THE
CLERK OF SUPREME COURT
SEPTEMBER 30, 2021
STATE OF NORTH DAKOTA
IN THE SUPREME COURT
STATE OF NORTH DAKOTA
2021 ND 171Continental Resources, Inc., Plaintiff and Appellee
v.
Phillip Armstrong, Defendant and Appellant
and
Citation 2002 Investment
Limited Partnership, Defendant and Appellee
and
Paragon Oil & Gas, LLC,
Poplar Energy Company, LLC, Grandhaven
Energy, LLC, Goldline Creek, LLC, Dakota
Ventures I, LLC, and Geo Resource
Management, LLC, Defendants
No. 20210060
Appeal from the District Court of Dunn County, Southwest Judicial District,
the Honorable William A. Herauf, Judge.
AFFIRMED IN PART, REVERSED IN PART, AND VACATED IN PART.
Opinion of the Court by McEvers, Justice.
Spencer D. Ptacek (argued) and Lawrence Bender (on brief), Bismarck, ND, for
plaintiff and appellee.
Phillip D. Armstrong, self-represented, Minot, ND, defendant and appellant.
Joshua A. Swanson, Fargo, ND, for defendant and appellee.
Continental Resources v. Armstrong
No. 20210060
McEvers, Justice.
[¶1] Phillip Armstrong appeals from a judgment adjudicating ownership of
interests in an oil and gas lease and the parties’ claims to revenue proceeds
from production on those interests. We affirm the judgment to the extent it
determines ownership of the disputed interests and dismisses Armstrong’s
claims against Continental Resources, Inc. We reverse and vacate the
judgment to the extent it orders Armstrong to pay Citation 2002 Investment
Limited Partnership restitution for unjust enrichment.
I
[¶2] Continental Resources operates wells located on lands covered by the
lease. When Continental learned of competing claims to the leasehold interests
in question, it began holding production royalties in suspense and recouping
amounts it had paid on the wells. Continental sued Armstrong alleging it had
overpaid him. Continental later amended its complaint to add the other
defendants and request interpleader relief. Continental requested the district
court determine ownership of the interests and the amount of revenue proceeds
to which each defendant is entitled on production from wells the parties refer
to as the Hartman Wells. The defendants filed various crossclaims and
counterclaims.
[¶3] As relevant to this appeal, Armstrong filed claims against Continental
alleging underpayment of revenue proceeds from the Hartman Wells and other
wells located on lands covered by the lease, which the parties refer to as the
Meadowlark Wells, the Skachenko Wells, and the Bice-Dolezal Wells. Citation
2002 Investment Limited Partnership filed a claim for unjust enrichment
against the other defendants alleging they improperly retained proceeds that
Citation is entitled to from production on the Hartman Wells.
[¶4] The oil and gas interests at issue arise from a lease executed by Frank
and Marie Skachenko to C.E. Beck in 1972 covering lands in Dunn County.
The Skachenkos reserved a 1/8 royalty on production under the lease.
1
Successors to Beck’s interest assigned an overriding royalty that was
ultimately acquired by the Apache Corporation. Apache conveyed various
interests, “together with all overriding royalty interests,” to Key Production
Company. Apache and Key subsequently filed a correction instrument, which
noted “the Original Assignment has been misinterpreted” and provided
instructions on how to calculate the interests.
[¶5] At the heart of the dispute is the proper interpretation of the Apache-
Key conveyance and correction. Armstrong acquired a portion of Key’s
interests; Citation acquired Apache’s interests. Armstrong claims the
correction instrument relieves his working interest in the lease from all
burdens. Armstrong also claims Key acquired, and he succeeded to a portion
of, the entire overriding royalty based on the “together with all overriding
royalty interests” language in the original conveyance. Citation claims Apache
acquired the majority of the overriding royalty based on the calculation set out
in the correction instrument. Continental does not claim ownership of the
disputed interests; it agrees with Citation’s stance on title.
[¶6] The district court denied cross-motions for summary judgment finding
the language in the conveyances is ambiguous. The court held a bifurcated
bench trial. After the first trial, the court entered an order determining the
correction instrument vested Apache with 97.82% of the overriding royalty and
Key with 2.18%. The court also ordered Continental to provide an accounting
of the revenue amounts each defendant was entitled to on production from the
Hartman Wells. After the second trial, the court awarded Citation restitution
for its unjust enrichment claim against the other defendants and dismissed
Armstrong’s counterclaims against Continental. On November 4, 2020, the
court entered an order for judgment with findings of fact and conclusions of
law. Final judgment was entered January 8, 2021.
II
[¶7] On appeal, Armstrong challenges the district court’s title determination,
the court’s dismissal of his claims against Continental for underpayment of
revenue proceeds, and the court’s award of restitution to Citation for its unjust
2
enrichment claim. Aside from Citation, the other defendants hold interests
that are consistent with Armstrong’s chain of title. They have not appealed.
[¶8] Our standard of review for appeals from a judgment entered after a
bench trial is well established:
In an appeal from a bench trial, the district court’s findings of fact
are reviewed under the clearly erroneous standard of review, and
its conclusions of law are fully reviewable. A finding of fact is
clearly erroneous if it is induced by an erroneous view of the law,
if there is no evidence to support it, or if, after reviewing all of the
evidence, this Court is convinced a mistake has been made. In a
bench trial, the district court is the determiner of credibility issues
and we will not second-guess the district court on its credibility
determinations. Findings of the trial court are presumptively
correct.
Great Plains Royalty Corp. v. Earl Schwartz Co., 2021 ND 62, ¶ 10, 958 N.W.2d
128 (quoting McCarvel v. Perhus, 2020 ND 267, ¶ 9, 952 N.W.2d 86).
III
[¶9] As a threshold matter, Armstrong asserts Citation’s claim to the disputed
interests is barred by the twenty-year statute of limitations under N.D.C.C. §
28-01-04 for actions to recover or possess real property.
[¶10] Section 28-01-04, N.D.C.C., provides:
No action for the recovery of real property or for the possession
thereof may be maintained, unless the plaintiff, or the plaintiff ’s
ancestor, predecessor, or grantor, was seized or possessed of the
premises in question within twenty years before the
commencement of such action.
“Generally, a defense based on the statute of limitations in a civil proceeding
is an affirmative defense, and the party relying on the statute of limitations
has the burden of proving the action is barred.” D.E. v. K.F., 2012 ND 253, ¶
11, 825 N.W.2d 832.
3
[¶11] The district court summarily rejected Armstrong’s argument. Our
review of the record shows Armstrong asserted N.D.C.C. § 28-01-04 applied in
a conclusory fashion unsupported by analysis or relevant authority. “A party
must do more than submit bare assertions, and an argument is without merit
if the party does not provide supportive reasoning or citations to relevant
authorities.” Gaede v. Bertsch, 2017 ND 69, ¶ 18, 891 N.W.2d 760; see also
Kautzman v. Kautzman, 2003 ND 140, ¶ 15, 668 N.W.2d 59. We conclude the
district court did not err when it rejected Armstrong’s argument that N.D.C.C.
§ 28-01-04 barred Citation’s claim.
IV
[¶12] Armstrong claims the district court misinterpreted the correction
instrument. He asserts the misinterpretation resulted in an erroneous
overriding royalty ownership determination and an incorrect conclusion that
his working interest in the lease is burdened by other interests.
[¶13] The general rules that apply to the interpretation of contracts apply to
instruments conveying oil and gas interests. Nichols v. Goughnour, 2012 ND
178, ¶ 12, 820 N.W.2d 740.
The construction of a written contract to determine its legal effect
is a question of law. Lire, Inc. v. Bob’s Pizza Inn Restaurants, Inc.,
541 N.W.2d 432, 433 (N.D. 1995). Contracts are construed to give
effect to the mutual intention of the parties at the time of
contracting. N.D.C.C. § 9-07-03; Lire, at 433-34. The parties’
intention must be ascertained from the writing alone, if possible.
N.D.C.C. § 9-07-04; Lire, at 434. A contract must be construed as a
whole to give effect to each provision if reasonably practicable.
N.D.C.C. § 9-07-06; Lire, at 434.
Hess Bakken Invs. II, LLC v. AgriBank, FCB, 2020 ND 172, ¶ 8, 946 N.W.2d
746 (quoting Grynberg v. Dome Petroleum Corp., 1999 ND 167, ¶ 10, 599
N.W.2d 261). The district court concluded the language in the correction
instrument is ambiguous. That holding has not been challenged on appeal.
“When ambiguity exists, the parties’ intent becomes a question of fact requiring
a factual finding based on extrinsic evidence.” Hess Bakken Invs., at ¶ 13.
4
[¶14] The original conveyance from Apache to Key, which was made effective
January 1, 1993, and titled “Quitclaim Assignment and Bill of Sale,” conveyed:
The leasehold estates created by the leases, licenses, permits and
other agreements described in Exhibit A, INSOFAR BUT ONLY
INSOFAR as they cover and relate to the land . . . described in
Exhibit A . . . together with all overriding royalty interests,
production payments and other payments described in Exhibit A
out of or measured by the value of oil and gas production[.]
(Emphasis added.) Exhibit A describes tracts of land along with Key’s working
interest in decimal form.
[¶15] The correction instrument, which is titled “Correction Instrument and
Quit Claim Assignment of Additional Interests” was dated August 1, 1995, but
made effective January 1, 1993. It states:
Assignor and Assignee have subsequently determined that the
Original Assignment has been misinterpreted and that Exhibits A
and B to the Original Agreement contained certain incorrect or
misleading information. Assignor and Assignee desire to correct
and amend the Original Assignment and to replace Exhibits A and
B thereto. Assignor also desires to quitclaim additional interests
to Assignee and to quitclaim the remainder to Apache Corporation.
The document identifies Apache as the assignor and Key as the assignee. The
following language, appearing in a section titled “Correction Assignment and
Bill of Sale,” states the parties’ correction to the original conveyance as follows:
Partial Assignment of Undivided Working Interests in
Leases. An undivided interest equal to the “Key Working
Interest” multiplied by the “Lease Net Acres” shown for each of the
leases, orders, licenses, permits, or other documents described in
Exhibit A attached hereto, INSOFAR AND ONLY INSOFAR as
they cover and relate to the land . . . described in Exhibit A . . .
together with a like percentage of all overriding royalty interests,
production payments, and other payments described in Exhibit A
out of or measured by the value of oil and gas production. To
calculate the interest in each lease assigned to Assignee, multiply
5
the “Key Working Interest” (decimal number) by the “Lease Net
Acres” for each lease.
(Emphasis added.) Exhibit A, attached to the correction instrument, describes
tracts of land along with Key’s working interest in decimal form; some values
are different from those in the attachment to the original conveyance. None of
the parties challenge the district court’s holding that the correction instrument
“validly amended” the original conveyance.
A
[¶16] Armstrong claims the correction instrument “caused no change” in the
disputed overriding royalty interests. Armstrong’s claim to ownership relies
on the “together with all overriding royalty interests” language in the original
conveyance. He claims the correction instrument “ratified and confirmed” the
original conveyance and “[t]he percentage of override assigned does not require
calculation.”
[¶17] The district court rejected Armstrong’s proffered interpretation. It found
a Citation title analyst’s testimony was persuasive. The title analyst testified
concerning the meaning of the language in the correction instrument:
Q. [D]oes that language say that whatever working interest that
Key or Apache got, their overriding royalty interest should be the
exact same?
A. No.
Q. What does it say?
A. It would be a like percentage, being that that one percent in
exhibit A times the . . . proportionally reduced override.
The title analyst testified as to her methodology for determining the
appropriate amount of “lease net acres” to calculate Key’s working interest as
required by the correction instrument.
[¶18] The district court considered the title analyst’s methodology instructive
and held:
6
Apache and Key intended for Apache to convey to Key a percentage
of Apache’s then-existing overriding royalty interest in the
Skachenko Lease. This percentage must be equal to the
percentage of Apache’s then-existing working interest in the
Skachenko Lease calculated by multiplying the “Key Working
Interest” by the “lease Net Acres” for the Skachenko Lease as set
forth in Exhibit A to the Correction Instrument.
[¶19] Armstrong claims the district court erred as a matter of law because it
misunderstood the nature of working interests and royalty interests. He
asserts the court “conflated” the two in its calculations. He argues: “[t]he
override isn’t measured by Apache’s working interest, it’s measured by the
value of oil and gas produced by the working interest.”
[¶20] Armstrong is correct that the revenue generated by an overriding royalty
interest is based on production.
An overriding royalty interest is an interest in oil and gas
production that is carved out of the working interest created in an
oil and gas lease. The working interest in an oil and gas lease gives
its owner the right to export minerals from the land; it is an
interest that is burdened by the costs of production. An overriding
royalty interest is an interest in oil and gas that has been
produced, and it is free of the costs of production.
El Petron Enters., LLC v. Whiting Res. Corp., No. 1:16-cv-090, 2018 WL
1322391, at *3 (D.N.D. Mar. 14, 2018).
[¶21] However, the district court did not include the working interests in its
overriding royalty calculation based on a misunderstanding of the nature of
mineral interests. Rather, under the court’s interpretation of the correction
instrument, inclusion of the working interests in the calculation is necessary
to arrive at an overriding royalty that is in “like percentage” to the working
interest conveyed. The court’s interpretation is supported by the language in
the instrument and testimony concerning the parties’ intent. We conclude the
court’s finding concerning the parties’ overriding royalty ownership is not
clearly erroneous.
7
B
[¶22] Armstrong argues the district court erred when it determined his
working interest in the lease was burdened by the 1/8 production royalty
originally reserved by the Skachenkos as well as the overriding royalty interest
discussed above. Armstrong asserts the parties to the correction instrument
intended for Key’s working interest to be unburdened by prior reservations and
assignments in the chain of title. He argues:
The parties saw fit to assign working interests to Key in a way to
be paid without burdens. Their purpose was accomplished with
the language of the Correction Instrument wherein working
interests and overrides were conveyed in like percentage. Again,
to be in like percentage with [the] override, working interests
aren’t to be paid burdened.
[¶23] Armstrong’s argument is unpersuasive. He reads the language in the
correction instrument as describing how revenues are “to be paid.” He confuses
a net revenue interest with ownership interests. A net revenue interest is “a
share of the working interest” and is subject to satisfaction “of all royalty,
overriding royalty, oil payments, or other nonoperating interests.” Minex Res.,
Inc. v. Morland, 467 N.W.2d 691, 695 n.2 (N.D. 1991) (quoting 8 H. Williams
and C. Meyers, Oil and Gas Law Manual of Oil and Gas Terms, at pp. 601-602
(1987)). The district court found Armstrong had not identified anything in his
chain of title to support his assertion that he should not bear the burdens his
predecessors carved from their interests. The court’s finding is supported by
the evidence. We conclude the district court’s finding concerning Armstrong’s
working interest ownership is not clearly erroneous.
V
[¶24] Armstrong argues the district court erred when it dismissed his
counterclaims against Continental for underpayment of revenue proceeds. His
claims against Continental are premised on various causes of action, including
conversion and breach of contract. As to proceeds from the Hartman Wells, he
argues dismissal was improper based on his interpretation of title. Because
8
we have upheld the district court’s rejection of his title arguments, we conclude
the district court did not err.
[¶25] As to the other wells, Armstrong claims the district court’s findings of
fact and conclusions of law do not support dismissal. He asserts the court’s
analysis “dealt only with [the] Hartman override, but the judgment dismissed
claims for underpayment on all the overrides plus working interests on all of
Armstrong’s well properties.” However, when asked about the basis for his
claims concerning the other wells, Armstrong testified:
A. My position—well, that’s a hard question to answer. My
position is that I was underpaid according to record title and
according to the division orders for the Bice and Dolezal.
So far as Skachenko and Meadowlark, my position is that I
was underpaid according to the terms of the correction instrument.
Q. The terms of the instrument as interpreted by this Court?
A. No. My reading and my understanding of the correction
instrument.
Aside from his arguments concerning title, which we have rejected, Armstrong
has not offered any other theories for why the payments he received are
inadequate or provided any evidence to support an alternative recovery theory.
We conclude the court did not err when it dismissed Armstrong’s claims against
Continental.
VI
[¶26] Armstrong argues Citation failed to prove it is entitled to equitable relief
for unjust enrichment because it has a remedy at law against Continental.
[¶27] Unjust enrichment is an equitable doctrine based upon a contract
implied by law to prevent someone from being unjustly enriched at the expense
of another:
Unjust enrichment requires: (1) an enrichment; (2) an
impoverishment; (3) a connection between the enrichment and the
impoverishment; (4) an absence of justification for the enrichment
9
and impoverishment; and (5) an absence of remedy provided by
law.
Ritter, Laber & Assocs., Inc. v. Koch Oil, Inc., 2004 ND 117, ¶ 26, 680 N.W.2d
634. “For a complainant to recover, it is sufficient if another ‘has, without
justification, obtained a benefit at the direct expense of the [complainant], who
then has no legal means of retrieving it.’” Apache Corp. v. MDU Res. Grp., Inc.,
1999 ND 247, ¶ 14, 603 N.W.2d 891 (quoting Midland Diesel Svc. & Engine Co.
v. Sivertson, 307 N.W.2d 555, 557 (N.D. 1981)). A determination of unjust
enrichment holds that “a certain state of facts is contrary to equity,” which is a
conclusion of law that is fully reviewable on appeal. Twete v. Mullin, 2019 ND
184, ¶ 35, 931 N.W.2d 198.
[¶28] Armstrong argued below, and he maintains on appeal, that Citation has
a legal remedy against Continental. He asserts Citation can bring a breach of
contract action against Continental for underpayments that were inconsistent
with a division order Citation signed. Or Citation can sue Continental to
recover amounts that were paid according to revised and unsigned division
orders. Armstrong argues Citation is not entitled to the equitable remedy of
unjust enrichment because Citation has a legal means of recovering the
proceeds it is due.
[¶29] The district court rejected Armstrong’s argument and, relying on Golden
v. SM Energy Co., 2013 ND 17, 826 N.W.2d 610, held Citation has no remedy
at law:
[I]n a situation where a royalty owner is overpaid at the expense
of another royalty owner, the underpaid royalty owner’s remedy is
recovery of overpaid amounts from the overpaid royalty owner
under a theory of unjust enrichment. The North Dakota Supreme
Court has not previously recognized a remedy at law available to
an underpaid royalty owner against an overpaid royalty owner,
and the Court concludes that one likewise does not exist in this
case.
[¶30] We conclude the district court misapplied the law. In Golden, we upheld
a district court’s decision that an underpaid interest owner could recover from
10
an operator despite the fact that the operator made the underpayments
according to a binding division order. 2013 ND 17, ¶¶ 25-26. The operator in
that case was also the overpaid party. Id. at ¶ 25. We explained that under
those circumstances the operator was “unjustly enriched by retaining the
benefits of the erroneous division order and receiving the payments to which
Golden was entitled.” Id. at ¶ 25. We held the district court correctly ruled as
a matter of law that the operator owed the underpaid party retroactive royalty
payments. Id. at ¶ 26. We did not hold an underpaid royalty owner always
has an unjust enrichment claim against overpaid royalty owners.
[¶31] We addressed the question of whether a royalty owner can seek legal
recourse against an operator for underpayment of royalty proceeds in a line of
cases beginning with Acoma Oil Corp. v. Wilson, 471 N.W.2d 476 (N.D. 1991).
We have explained the answer depends on whether the underpayments were
made in accordance with a binding division order. Maragos v. Newfield Prod.
Co., 2017 ND 191, ¶ 9, 900 N.W.2d 44. A division order is an instrument
executed by an operator and royalty owners directing purchasers to pay for
production in the proportions set out in the instrument. N.D.C.C. § 47-16-39.3.
[¶32] In Acoma, two royalty owners claimed an operator underpaid them. 471
N.W.2d at 484. One had executed a division order; the other had not. Id. We
explained the different status of the royalty owners “vis-à-vis executed division
orders requires a different analysis of the ultimate responsibility for their
claims.” Id.
We held that the party who executed a division order with the oil
company should not be able to recover from the oil company
because the oil company had detrimentally relied upon the order
and it would subject them to double liability. [Acoma,] at 484-85.
As to the party who had not executed a division order, we found
the oil company’s reliance on the title opinion could not absolve it
of all liability as to the underpayments and that party could
recover the underpayments from the oil company. Id. at 486.
Maragos, 2017 ND 191, ¶ 9.
11
[¶33] Our rule is that when an operator has relied to its detriment on a division
order signed by an underpaid royalty owner, the underpaid owner is estopped
from recovering the underpayments from the operator and must seek recovery
from the overpaid royalty owners. Acoma, 471 N.W.2d at 485-86. “The basis
for the recovery is unjust enrichment; the overpaid royalty owner is not
entitled to the royalties.” Id. at 486 (quoting Gavenda v. Strata Energy, Inc.,
705 S.W.2d 690, 692 (Tex. 1986)). However, when an operator has not
“detrimentally relied” on a division order, there is no basis for estopping an
underpaid party’s attempt to recover from the operator. Maragos, 2017 ND
191, ¶ 9. Thus, when the underpayments are not made according to a signed
division order, the underpaid party “can seek payments from the oil company.”
Id. at ¶ 10.
[¶34] In the present case, the district court received a division order into
evidence that was signed by a Citation representative and stated Citation held
interests in the disputed property. Although Continental initially made
payments to Citation, Citation’s director of operations accounting testified
Continental recouped all of the payments it made:
Q. . . . Did Continental recoup the entirety of the interest paid
to Citation for the overriding royalty interests in the Hartman
wells that is in dispute?
A. To my knowledge, they have taken the full recoupment of all
monies paid to Citation.
Q. Okay. And that knowledge is based on your review of the
monthly statements that Continental provided to Citation?
A. Correct.
Q. Okay. After Continental has taken these recoupments back,
taken the money back from Citation, has Continental ever paid
Citation for the overriding royalty interests that are in dispute for
the Hartman wells?
A. Not to my knowledge.
12
[¶35] The undisputed evidence, proffered by Citation, is that Continental
recouped all of the payments it made to Citation. In Citation’s words, it has
“never been paid” for its interests and “Armstrong and the [other defendants]
were instead paid for Citation’s interest.” This is not a situation where an
operator will be subject to double liability because it relied to its detriment on
a binding division order. The estoppel rule expressed in Acoma and our
subsequent cases does not apply. Citation has a remedy at law; it may seek
recovery from Continental. Citation therefore has not met its burden of
proving it is entitled to restitution for unjust enrichment. We conclude the
district court erred when it ordered Armstrong to pay Citation restitution for
revenues Continental owed Citation but never paid.
VII
[¶36] We have considered the remaining issues and arguments raised by the
parties and conclude they are either unnecessary to our decision or are without
merit.
VIII
[¶37] We affirm the judgment to the extent it adjudicates ownership of the
disputed interests and dismisses Armstrong’s claims against Continental. We
reverse and vacate the judgment to the extent it orders Armstrong to pay
Citation 2002 Investment Limited Partnership restitution for unjust
enrichment.
[¶38] Jon J. Jensen, C.J.
Daniel J. Crothers
Lisa Fair McEvers
Jerod E. Tufte
Carol Ronning Kapsner, S.J.
[¶39] The Honorable Carol Ronning Kapsner, S.J., sitting in place of
VandeWalle, J., disqualified.
13