Newfield Exploration Company v. State , 2022 ND 166 ( 2022 )

FILED
IN THE OFFICE OF THE
CLERK OF SUPREME COURT
SEPTEMBER 1, 2022
STATE OF NORTH DAKOTA
IN THE SUPREME COURT
STATE OF NORTH DAKOTA
2022 ND 166Newfield Exploration Company, Newfield
Production Company, and Newfield RMI LLC, Plaintiffs and Appellees
v.
State of North Dakota, ex rel. the North
Dakota Board of University and School Lands,
and the Office of the Commissioner of
University and School Lands, a/k/a the North
Dakota Department of Trust Lands, Defendants and Appellants
No. 20220022
Appeal from the District Court of McKenzie County, Northwest Judicial
District, the Honorable Robin A. Schmidt, Judge.
REVERSED AND REMANDED.
Opinion of the Court by Crothers, Justice.
Michelle P. Scheffler (argued), Garrett S. Martin (appeared), and Ryan P. Pitts
(appeared), Houston, TX, and Lawrence Bender (appeared), Bismarck, ND, for
plaintiffs and appellees.
David P. Garner, Assistant Attorney General, Bismarck, ND, for defendants
and appellants.
Newfield Exploration Company, et al. v. State, et al.
No. 20220022
Crothers, Justice.
[¶1] The State of North Dakota, ex rel. the North Dakota Board of University
and School Lands, and the Office of the Commissioner of University and School
Lands, a/k/a the North Dakota Department of Trust Lands appeals from a
judgment dismissing its claim against Newfield Exploration Company relating
to the underpayment of gas royalties. The State claims Newfield’s
underpayment of royalties violated N.D.C.C. § 47-16-39.1, which obligates a
well operator to pay royalties. We reverse and remand.
I
[¶2] Newfield operates numerous oil and gas wells on property that includes
State-owned minerals and leases. In 2016, the State audited certain wells
operated by Newfield. In January 2017, the State informed Newfield it
underpaid gas royalties because the “royalty payments were being calculated
on gross proceeds less deductions.” The State claimed that under its standard
lease, “deductions are not allowed to be subtracted from gross proceeds in the
calculation of . . . royalty payments.” The letter to Newfield stated applicable
interest and penalties may be assessed on late royalty payments under
N.D.C.C. § 47-16-39.1 and the Board’s oil and gas lease rules. In response,
Newfield denied it underpaid gas royalties to the State.
[¶3] In March 2018, Newfield sued the State seeking court confirmation that
it properly calculated royalties under the State’s leases based on the proceeds
Newfield received for selling the gas. Newfield sought a judgment declaring
that royalty payments to the State were properly calculated under the terms
of the leases. The State counterclaimed, alleging Newfield underpaid gas
royalties by improperly deducting expenses. The State alleged a breach of
contract, claiming it was entitled to penalties and interest under its
administrative rules and N.D.C.C. § 47-16-39.1. The State also sought an
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accounting from Newfield. Newfield denied the State’s allegations and raised
the affirmative defenses of waiver, estoppel, and laches.
[¶4] Both parties moved for summary judgment on the “interpretation of the
gas royalty provisions of the Newfield Leases entered into between [Newfield]
and [the State] on certain property.” Newfield claimed the lease language
allowed it to calculate the State’s gas royalty as a percentage of the proceeds
Newfield received from its third-party purchaser. The State asserted the
proceeds Newfield received from its third-party purchaser were reduced to
account for expenses incurred by the purchaser to make the gas marketable.
The State argued Newfield’s deduction for processing expenses and resulting
reduction of the royalty was contrary to the lease. The district court granted
Newfield’s motion, concluding Newfield properly calculated the State’s gas
royalty under the lease. The court entered a judgment dismissing the State’s
counterclaim.
[¶5] This Court reversed, concluding, “Gross proceeds from which the royalty
payments under the leases are calculated may not be reduced by an amount
that either directly or indirectly accounts for post-production costs incurred to
make the gas marketable.” Newfield Expl. Co. v. State ex rel. N. Dakota Bd. of
Univ. & Sch. Lands, 2019 ND 193, ¶ 12, 931 N.W.2d 478. We held the
calculation of the State’s gas royalty “based on an amount that has been
reduced to account for expenses incurred to make the gas marketable, even
though the cost to make the gas marketable only indirectly benefits Newfield,
is contrary to the leases.” Id. at ¶ 11. We reversed the district court’s judgment
in favor of Newfield and remanded for additional proceedings. Id. at ¶ 12.
[¶6] On remand, both parties moved for summary judgment. The State
argued it was entitled to the relief sought in its counterclaim based on this
Court’s decision in Newfield, 2019 ND 193. Newfield asserted that if the State
succeeded on its claim to recover unpaid royalties, it may only recover from
production occurring on or after August 1, 2013. In its order for partial
summary judgment, the district court dismissed the State’s claim for an
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accounting and concluded August 1, 2013 was the date from which the State
could seek damages for unpaid royalties.
[¶7] At an October 2021 bench trial the State submitted evidence identifying
the leases covered by Newfield’s wells. The State also introduced royalty
statements and a summary showing the State’s calculation of Newfield’s
underpayment of royalties, along with penalties and interest. Newfield
submitted evidence related to estoppel and laches. The district court found the
State failed to establish a breach of contract because it could not prove a
contract, lease or other obligation existed between the parties. The court
entered judgment dismissing the State’s counterclaim against Newfield. The
State timely appeals.
II
[¶8] Our standard of review in an appeal from 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.”
Sproule v. Johnson, 2022 ND 51, ¶ 9, 971 N.W.2d 854.
III
[¶9] The State argues the district court erred by dismissing its counterclaim
against Newfield based on a failure to introduce the leases between the parties.
The State argues Newfield, as a well operator, has a statutory obligation to pay
royalties according to the State’s leases.
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[¶10] As an initial matter, we address Newfield’s characterization of the
parties’ relationship. As mentioned, Newfield operates several gas producing
wells on property that includes minerals leased by the State. However,
throughout much of the litigation, Newfield also portrayed itself as a lessee of
the State. In its March 2018 complaint, Newfield stated, “The oil and gas lease
agreements entered into between the [State] and Newfield (collectively, the
‘Newfield Leases’) were drafted by the [State] based on the Form Lease.”
Newfield’s August 2018 summary judgment brief stated as an undisputed fact
that “Newfield has an interest” in the State’s “oil and gas lease agreements.”
Newfield used its self-defined term “Newfield Leases” throughout its brief.
[¶11] After prevailing on summary judgment, the district court ordered
Newfield to prepare a judgment, which provided, “The claims asserted in
Newfield’s Complaint concern a number of oil and gas leases currently in effect
between Newfield and Defendants, the terms of which are derived from a
standard lease form utilized by Defendants.” In the parties’ first appeal, this
Court said, “Newfield has entered into leases with the State. . . .” Newfield,
2019 ND 193, ¶ 2. On remand, Newfield’s July 2021 summary judgment brief
reiterated, “It is undisputed that [Newfield] is lessee and the [State] is
lessor . . . under a number of oil and gas leases.”
[¶12] Before trial on the State’s breach of contract counterclaim on remand,
Newfield changed course. Despite consistently characterizing itself as a lessee
of the State, Newfield stated in its pretrial statement, “the Court must
determine if the State has proven that Newfield and the State are parties to
any executed 1979 form leases and that the wells subject to those leases have
produced natural gas in the relevant years.” Newfield admitted it pays
royalties to the State, but only as an operator under a spacing unit: “Newfield
pays the State royalties on leases between third parties and the State on wells
that Newfield merely operates. Such third-party leases belong to acreage
pooled under a ‘Spacing Unit’ and for which Newfield serves as operator.” At
trial, Newfield’s Director of Revenue testified Newfield pays the State royalties
as a well operator.
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[¶13] The district court agreed with Newfield’s argument that the State must
prove the existence of contracts that Newfield breached. In dismissing the
State’s claim, the court concluded, “This court is not able to assume the
existence of a contract. Nor is this court able to assume a legal obligation if the
State does not provide one to the court.”
[¶14] Under N.D.C.C. § 9-01-05, “[a]n obligation arises from: (1) [t]he contract
of the parties; or (2) [t]he operation of law.” “An obligation arising from
operation of law may be enforced in the manner provided by law or by civil
action or proceeding.” Id.
[¶15] The State titled one of its counterclaims as “Breach of Contract.” The
substance of the claim relates to Newfield’s alleged underpayment of royalties
on the gas produced from the Newfield operated wells. In addition to the breach
of contract label, the claim alleged the State was entitled to interest and
penalties under N.D.C.C. § 47-16-39.1 and N.D. Admin. Code § 85-06-06-10 as
a result of Newfield’s underpayment of royalties.
[¶16] Section 47-16-39.1,1 N.D.C.C., requires a lessee or well operator to pay
royalties under an oil and gas lease. If an operator fails to pay royalties to a
mineral owner, the operator “shall pay interest on the unpaid royalties.” Id.
The statute requires an operator to pay royalties to a mineral interest owner
whether the interest is leased or unleased. Id. An action to enforce an
operator’s violation of N.D.C.C. § 47-16-39.1 must be brought in the district
court for the county where the well is located.
1Section 47-16-39.1, N.D.C.C., was amended August 1, 2021. The obligation to
pay the State royalties was moved from N.D.C.C. § 47-16-39.1 to N.D.C.C. § 15-
05-10. 2021 N.D. Sess. Laws ch. 119, §§ 1-2. For purposes of this appeal, we
refer to the earlier version of N.D.C.C. § 47-16-39.1. See White v. Altru Health
Sys., 2008 ND 48, ¶¶ 10-11, 746 N.W.2d 173 (stating the version of a statute in
effect on the date the cause of action accrued applies, because statutes
generally do not apply retroactively).
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[¶17] The district court concluded the State did not establish a legal obligation
owed by Newfield. However, the State pled N.D.C.C. § 47-16-39.1 in its
counterclaim, which the court recognized at trial. The State brought the action
in the county where Newfield operated its wells as required by N.D.C.C. § 47-
16-39.1. See N.D.C.C. § 9-01-05 (providing a legal obligation may be enforced
in the manner provided by law). Because the State satisfied both the pleading
and the proof requirements of N.D.C.C. § 47-16-39.1, the district court erred in
concluding the State did not prove Newfield owed it a legal obligation to pay
additional royalties. Rather, as the well operator, Newfield owed the State an
obligation under N.D.C.C. § 47-16-39.1 to pay royalties according to the State’s
leases. The court failed to recognize Newfield’s legal obligations as a well
operator under N.D.C.C. § 47-16-39.1.
[¶18] In Newfield, 2019 ND 193, ¶ 11, we held Newfield’s calculation of the
State’s gas royalty was “contrary to the leases.” The parties acknowledged the
State has been using the same form lease with the same royalty provisions
since 1979. The district court’s first judgment, prepared by Newfield, stated
the claims involved in the action “concern a number of oil and gas leases”
between the parties, “the terms of which are derived from a standard lease form
utilized by [the State].” (Emphasis added). Because the leases’ royalty
provisions are the same, the trial on remand should have focused on the State’s
damages and Newfield’s affirmative defenses, not whether the State could
prove a breach of each lease involved in this action.
[¶19] At trial, the State introduced evidence of its damages from August 1,
2013 through testimony and by documents, including royalty statements, a list
of Newfield wells and the corresponding State leases covered by each well, and
a summary showing deductions, interest and penalties. Newfield presented
evidence on its defenses of estoppel and laches. Although the parties presented
evidence on their damages and defenses, the district court did not make any
findings on these issues because it ruled the State failed to establish a contract
existed between the parties. The court erred in dismissing the State’s
counterclaim; therefore, we reverse and remand for findings related to the
State’s damages and Newfield’s affirmative defenses.
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IV
[¶20] The parties’ remaining arguments have been considered and are either
without merit or not necessary to our decision. The judgment is reversed and
remanded.
[¶21] Jon J. Jensen, C.J.
Gerald W. VandeWalle
Daniel J. Crothers
Lisa Fair McEvers
Jerod E. Tufte
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