Twin City Technical LLC v. Williams County

Filed 5/16/19 by Clerk of Supreme Court
IN THE SUPREME COURT
STATE OF NORTH DAKOTA
2019 ND 128
Twin City Technical LLC, Three Horns Energy, LLC,
Prairie of the South LLC, and Irish Oil & Gas, Inc., Plaintiffs and Appellees
v.
Williams County and
Williams County Commission, Defendants and Appellants
No. 20180264
Appeal from the District Court of Williams County, Northwest Judicial
District, the Honorable Benjamen J. Johnson, Judge.
AFFIRMED IN PART, REVERSED IN PART, AND REMANDED.
Opinion of the Court by Jensen, Justice.
Spencer D. Ptacek (argued) and Lawrence Bender (appeared), Bismarck, ND,
for plaintiffs and appellees.
Scott K. Porsborg (argued) and Sarah E. Wall (appeared), Bismarck, ND, for
defendants and appellants.
Twin City Technical LLC v. Williams County
No. 20180264
Jensen, Justice.
[¶1] Williams County appeals from a judgment following the district court’s
determination that its oil and gas leases with Twin City Technical LLC, Three Horns
Energy, LLC, Prairie of the South LLC, and Irish Oil & Gas Inc. (“Lessees”), were
void because the County failed to comply with the public advertising requirements for
the lease of public land as provided in N.D.C.C. ch. 38-09. We affirm in part, reverse
in part, and remand for consideration of the parties’ equitable arguments relating to
the lease bonus payments.
I
[¶2] In February 2012, the County executed four oil and gas leases with Twin City
and Irish Oil & Gas. The leases were executed after the County’s auditor received
bids from various oil and gas entities. The County received over $1.3 million in
bonus payments for the leases. Through assignments made by Twin City and Irish
Oil, Three Horns and Prairie of the South became parties to the leases.
[¶3] In September 2015, after learning the County may not own all of the subject
minerals, the Lessees sued the County seeking rescission of the leases on the basis of
mistake of fact, fraud, and failure of consideration. In November 2016, the Lessees
amended the complaint and sought declaratory relief alleging that no valid contract
was formed because the County did not publicly advertise the leasing of the oil and
gas as required by N.D.C.C. § 38-09-16 before executing the leases. The Lessees
alleged the County was unjustly enriched and sought restitution of the bonus
payments made to the County.
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[¶4] Both parties moved for summary judgment. The County argued the leases
were valid because they were exempt from statutory advertising requirements. The
district court granted the Lessees’ motion, holding the leases were void because the
County failed to comply with the statutory notice and bidding requirements of
N.D.C.C. § 38-09-16 and that none of the exceptions to the notice and bidding
requirements applied. The court also ordered repayment of the lease bonus payments,
dismissing the County’s laches defense.
II
[¶5] This Court’s standard of review for a district court’s grant of summary
judgment is well established:
Summary judgment is a procedural device for the prompt resolution of
a controversy on the merits without a trial if there are no genuine issues
of material fact or inferences that can reasonably be drawn from
undisputed facts, or if the only issues to be resolved are questions of
law. A party moving for summary judgment has the burden of showing
there are no genuine issues of material fact and the moving party is
entitled to judgment as a matter of law. In determining whether
summary judgment was appropriately granted, we must view the
evidence in the light most favorable to the party opposing the motion,
and that party will be given the benefit of all favorable inferences
which can reasonably be drawn from the record. On appeal, this Court
decides whether the information available to the district court precluded
the existence of a genuine issue of material fact and entitled the moving
party to judgment as a matter of law. Whether the district court
properly granted summary judgment is a question of law which we
review de novo on the entire record.
Hallin v. Inland Oil & Gas Corp., 2017 ND 254, ¶ 6, 903 N.W.2d 61 (quoting THR
Minerals, LLC v. Robinson, 2017 ND 78, ¶ 6, 892 N.W.2d 193).
[¶6] A board of county commissioners may lease mineral interests owned by a
county. N.D.C.C. § 38-09-11. Section 38-09-16, N.D.C.C., provides that “[b]efore
leasing any lands or interest therein or any mineral rights reserved in any conveyance
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thereof, any county or other political subdivisions thereof shall advertise the same in
like manner as provided in section 38-09-15.” Section 38-09-15, N.D.C.C., requires
that notice be given “in accordance with the rules of the board of university and
school lands.” The rules require notice of the lease to be published in the official
newspaper of the county where the lease lands are located. N.D. Admin. Code § 85-
06-06-03. The County concedes that it did not publish notice of the leases as required
by N.D.C.C. § 38-09-16.
[¶7] Under N.D.C.C. § 38-09-19:
No lease of public land for exploration or development of oil and gas
production is valid unless advertised and let as hereinbefore provided,
except:
1. Where the acreage or mineral rights owned by the state or its
departments and agencies or political subdivisions is less than
the minimum drilling unit under well spacing regulations,
nonoperative oil and gas leases may be executed through private
negotiation . . . .
Thus, under N.D.C.C. § 38-09-19(1), a county may lease minerals without publication
only if the leases are nonoperative and less than the minimum drilling unit under well
spacing regulations. If no exceptions apply, a county’s lease of minerals in violation
of N.D.C.C. § 38-09-16 is invalid.
[¶8] Although the County did not publish notice of the leases, it argues the leases
are valid. The County contends publication was not required because each lease was
for less than the minimum drilling unit and were nonoperative based on the land they
covered.
[¶9] The district court concluded the leases were operative:
It is a “well-settled rule that where the mineral estate is severed
from the surface estate, the mineral estate is dominant.” Hunt Oil Co.
v. Kerbaugh, 283 N.W.2d 131, 135 (N.D. 1979). “A mineral interest
is a property interest created after an oil and gas severance from the
surface and generally includes the right to sell all or part of the estate,
the right to explore and develop the estate, the right to execute oil and
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gas leases, and the right to create fractional shares of the mineral
estate.” Acoma Oil Corp. v. Wilson, 471 N.W.2d 476, 481 (N.D. 1991).
When a mineral lease is executed the lessee “has an implied obligation
to the lessor to do everything that a reasonably prudent operator should
do in operating, developing and protecting the property with due
consideration being given to the interests of both the lessor and lessee,
if there is no express clause in the lease relieving the lessee of this
implied duty.” Feland v. Placid Oil Co., 171 N.W.2d 829, 835 (N.D.
1969). As Feland imposes upon the lessee an implied duty to operate,
develop and protect, a mineral lease can only be “nonoperative” by the
express terms of the lease.
The leases at issue in this matter do not expressly prohibit
surface operations. All of the leases at issue in this matter expressly
grant the Lessee “the right of mining, exploring by geophysical or other
methods, and operating for and producing therefrom oil and gas.” See
docket numbers 16, 18, 19 and 20. The leases, by their express terms,
are “operating” leases.
[¶10] The district court addressed a 1953 Attorney General opinion that discusses a
county’s lease of minerals. See N.D. Att’y Gen. No. 53-96 (Sept. 29, 1953). The
opinion interprets language identical to N.D.C.C. § 38-09-19(1) and states “[w]e
understand this [provision] to mean that a county . . . may lease tracts of land smaller
than the minimum forty-acre drilling unit through private negotiation so long as the
lease contains a non-drilling or non-development clause.” Id. The opinion notes there
was little authority on the term “non-operative,” but states “this term has a commonly
accepted definition in the oil and gas industry and this is synonymous with
non-drilling or non-development.” Id.
[¶11] Professors Williams and Meyers define a “non-development lease” as “[a]
lease that prohibits the use of the surface for drilling and other drilling-related
activities including access.” 8 Patrick H. Martin & Bruce M. Kramer, Williams &
Meyers Oil and Gas Law, Manual of Terms 665 (LexisNexis Matthew Bender 2018).
A “nondrilling lease” is “[a] lease which grants the lessee the usual rights relative to
oil or gas under described premises but which provides that a well shall not be
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surfaced on the premises.” Id. The leases here do not include language prohibiting
drilling or development. The district court did not err in concluding the leases are
operative.
[¶12] This Court has discussed the validity of public contracts executed in violation
of competitive bidding statutes. In Northwestern Sheet & Iron Works v. Sioux Cty.,
76 N.D. 451, 459-60, 36 N.W.2d 605, 609-10 (N.D. 1949), this Court stated:
In State ex rel. Diebold Safe & Lock Co. v. Getchell, 3 N.D. 243,
55 N.W. 585, the plaintiff sought a writ of mandamus to compel the
county auditor of Eddy County to certify and attest a warrant ordered
to be drawn by the Board of County Commissioners in payment for jail
cells and a corridor that had been furnished to the county. The contract
for the purchase of this material was held to be void because the
question of making the expenditure was never submitted to a vote of
the people of the county as required by statute. It was further held that
the illegal contract could not be ratified by the Board of County
Commissioners because the board lacked power in the first instance to
make such contract, that power being vested in the people. It was
pointed out that this was not a case where there had been some
irregularity in the exercise of power vested in the board. In Bayne v.
Thorson, 37 N.D. 187, 163 N.W. 822, the Board of County
Commissioners entered into a contract for the construction of a bridge
without attempting to comply with the statute which required them to
obtain plans and specifications for the proposed bridge and to advertise
for sealed bids thereon. At the beginning of the opinion the court states
that the action is upon contract for non-payment and not for the
reasonable worth of materials and labor. This contract was held to be
illegal and void and no recovery could be had thereunder. St. Paul
Foundry Co. v. Burnstad School District No. 31, 67 N.D. 61, 269 N.W.
738, is cited and relied upon by the defendant county. The school
board had purchased from plaintiff certain materials used in the
construction of a gymnasium without advertising for bids. A warrant
was issued for payment of the materials so purchased. Later the
payment of the warrant was refused and the plaintiff brought suit
thereon. This court pointed out that the question was not as to whether
the plaintiff could recover the property or the reasonable value thereof,
and that the suit was on a warrant which created no greater liability than
the debt it represented. The debt being based on contract and the
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contract having been made without compliance with a statute requiring
advertisement for bids recovery on the warrant was denied. These
cases lead us to the conclusion that contracts for the sale of goods or
material to a public corporation based upon procedures which contain
major violations of mandatory statutes providing for competitive
bidding are unenforceable in strictly legal actions.
(Emphasis added.)
[¶13] The Lessees sought a declaratory judgment challenging the validity of the
leases under N.D.C.C. § 38-09-19 because the County leased the minerals in violation
of N.D.C.C. § 38-09-16. Under the declaratory judgment statutes, “[a]ny person
interested under a deed, will, written contract . . . or whose rights, status, or other
legal relations are affected by a statute, municipal ordinance, contract, or franchise,
may have determined any question of construction or validity arising under the
instrument, statute, ordinance, contract, or franchise and may obtain a declaration of
rights, status, or other legal relations thereunder.” N.D.C.C. § 32-23-02.
[¶14] Section 38-09-19, N.D.C.C., plainly states “[n]o lease of public land for
exploration or development of oil and gas production is valid unless advertised and
let as hereinbefore provided.” The County executed the leases in violation of
N.D.C.C. § 38-09-16, and none of the exceptions to N.D.C.C. § 38-09-19 apply. We
conclude the leases are invalid as a matter of law. We affirm that part of the district
court’s judgment holding the leases are invalid.
III
[¶15] The County challenges the district court’s decision concluding the Lessees
were entitled to a return of the bonus payments relating to the leases. The court held
the County was unjustly enriched, and the County’s affirmative defense of laches
failed.
[¶16] In Stenehjem ex rel. State v. Nat’l Audubon Soc’y, Inc., 2014 ND 71, ¶ 12, 844
N.W.2d 892, this Court discussed the equitable defense of laches:
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A “stale claim” may be barred by the equitable defense of
laches. Sall v. Sall, 2011 ND 202, ¶ 14, 804 N.W.2d 378. “Laches is
a delay or lapse of time in commencing an action that works a
disadvantage or prejudice to the adverse party because of a change in
conditions during the delay.” Johnson v. State, 2006 ND 122, ¶ 8, 714
N.W.2d 832. “[L]aches does not arise from a delay or lapse of time
alone, but is a delay in enforcing one’s rights which works a
disadvantage to another.” Sall, 2011 ND 202, ¶ 14, 804 N.W.2d 378.
“The party against whom laches is sought to be invoked must be
actually or presumptively aware of his rights and must fail to assert
them against a party who in good faith permitted his position to become
so changed that he could not be restored to his former state.” Bakken
v. Duchscher, 2013 ND 33, ¶ 19, 827 N.W.2d 17. “The party invoking
laches has the burden of proving he was prejudiced because his position
has become so changed during the delay that he cannot be restored to
the status quo.” Id.
Whether laches applies to bar a claim is a fact intensive inquiry and must be
determined by examining the underlying facts and circumstances of each particular
case. Nat’l Audubon Soc’y, Inc., at ¶ 13.
[¶17] The County argues it was disadvantaged by the Lessees’ delay in bringing the
lawsuit and seeking repayment of the bonuses related to the leases. The district court
concluded as a matter of law laches did not apply. The court concluded the two-year
delay between the Lessees’ knowledge of potential issues with the County’s mineral
ownership and the start of the lawsuit “does not seem out of [the] ordinary.” The
court also concluded the County’s evidence “in support of their claim of laches is
minimal.”
[¶18] The Lessees sued the County in September 2015, about three and a half years
after executing the leases. The record shows the Lessees received a June 2013 letter
informing them of potential issues with the County’s mineral ownership. The Lessees
contacted the County about the ownership issues by letter in April 2015. The County
submitted an affidavit from its auditor stating the bonus payments had already been
spent and repayment would cause great hardship. Viewing the evidence and
7
reasonable inferences drawn from the evidence in a light favorable to the County, we
conclude there are genuine issues of material fact as to whether laches applies to bar
the Lessees’ claim for repayment of the bonuses. We reverse that part of the
judgment and remand for proceedings related to whether the Lessees’ delay in
bringing their lawsuit was unreasonable, and whether the County was prejudiced by
the delay.
IV
[¶19] The parties’ remaining arguments are either unnecessary to our decision or
without merit. The judgment is affirmed in part, reversed in part, and remanded for
proceedings consistent with this opinion.
[¶20] Jon J. Jensen
Jerod E. Tufte
Daniel J. Crothers
Lisa Fair McEvers
Gerald W. VandeWalle, C.J.
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