Pennaco Energy, Inc. v. Kd Company Llc, a Wyoming Close Limited Liability Company

IN THE SUPREME COURT, STATE OF WYOMING
2015 WY 152
OCTOBER TERM, A.D. 2015
December 2, 2015
PENNACO ENERGY, INC.,
Appellant
(Defendant),
v.
S-15-0019
KD COMPANY LLC, a Wyoming close
limited liability company,
Appellee
(Plaintiff).
PENNACO ENERGY, INC.,
Appellant
(Defendant),
S-15-0020
v.
FIRST NORTHERN BANK OF
WYOMING, BUFFALO, WYOMING,
AS TRUSTEE OF THE CREDIT
SHELTER TRUST ESTABLISHED ON
JANUARY 16, 2005, UNDER THE LEO
M. HOLLCROFT REVOCABLE TRUST,
DATED APRIL 12, 2002; and FIRST
NORTHERN BANK OF WYOMING,
BUFFALO, WYOMING, AS TRUSTEE
OF THE CLAIRE B. HOLLCROFT
REVOCABLE TRUST, DATED APRIL
12, 2001,
Appellees
(Plaintiffs).
Appeals from the District Courts of Sheridan and Johnson Counties
The Honorable William J. Edelman, Judge
Representing Appellant:
Marie R. Yeates and Michael A. Heidler of Vinson & Elkins, L.L.P., Houston,
Texas; Mark R. Ruppert and Isaac N. Sutphin of Holland & Hart, LLP, Cheyenne,
Wyoming. Argument by Ms. Yeates.
Representing Appellees:
Kendal R. Hoopes of Yonkee & Toner, LLP, Sheridan, Wyoming.
Representing Petroleum Association of Wyoming, Amicus Curiae in Support of
Pennaco Energy Inc.:
Thomas F. Reese, Ryan J. Schwartz, William E. Reese, and Kyle A. Ridgeway of
Williams, Porter, Day & Neville, P.C., Casper, Wyoming.
Representing Texas Oil & Gas Association, Amicus Curiae in Support of Pennaco
Energy Inc.:
Timothy M. Stubson of Crowley Fleck PLLP, Casper, Wyoming.
Before BURKE, C.J., and HILL, DAVIS, FOX, and KAUTZ, JJ.
NOTICE: This opinion is subject to formal revision before publication in Pacific Reporter Third.
Readers are requested to notify the Clerk of the Supreme Court, Supreme Court Building,
Cheyenne, Wyoming 82002, of typographical or other formal errors so correction may be made
before final publication in the permanent volume.
KAUTZ, Justice.
[¶1] Pennaco Energy, Inc. (Pennaco) obtained oil and gas leases in northeastern
Wyoming. Pennaco then made contracts with the surface landowners, who were
predecessors of Appellees. These agreements granted Pennaco access to and use of the
landowners’ land during exploration and production under the mineral leases. In the
agreements, Pennaco committed to pay for damages and for use of the land and, when
operations ceased, to restore the land as nearly as possible to its prior condition. Pennaco
developed its coalbed methane operation, drilling for and producing gas, and made the
required payments for several years. It then assigned its interest in the operations and
agreements to CEP-M Purchase, LLC (CEP-M), which re-assigned those interests to
High Plains Gas, Inc. (High Plains Gas). Since Pennaco’s assignment, neither Pennaco
nor the assignees have made any of the payments required under the agreements, nor
have they reclaimed any of the land.
[¶2] Appellees (referred to as landowners jointly, and individually as KD or Hollcroft)
sued Pennaco, CEP-M and High Plains Gas for breach of the agreements. CEP-M and
High Plains Gas defaulted. The district court granted summary judgment in favor of the
landowners, concluding that Pennaco remained liable under the agreements even after
assignment.
[¶3] Pennaco appeals, claiming the district court erred in applying contract law to find
that it remained liable under the agreements. Pennaco contends the agreements created
covenants running with the land, which can only be enforced against someone in privity
of estate with the landowners. Upon assigning the agreements and leases to CEP-M,
Pennaco asserts, it ceased to have privity of estate with the landowners and cannot be
held liable under the agreements. We conclude the district court correctly ruled Pennaco
remains liable under the agreements, and affirm the judgments.
ISSUES
[¶4] The issues for our determination are:
1. Whether the district court correctly ruled that Pennaco remains liable for
performing the obligations under the agreements after assigning a portion of its interest
under those agreements to a third party.
2. Whether the district court properly awarded costs and attorney fees to the
landowners.
FACTS
1
[¶5] The ranch lands at issue in these cases are located in the Powder River Basin in
Sheridan County and Johnson County, Wyoming. During the 1990s, Pennaco acquired
interests in oil and gas leases for the mineral estate underlying the ranch lands. Pennaco
then made contracts with the surface owners, who were predecessors of KD and
Hollcroft. In those contracts, the surface owners granted Pennaco the right to enter the
lands for purposes of drilling, completing and producing gas wells, constructing and
maintaining access roads and power lines, and installing pipelines to transport gas and
water produced from gas wells drilled on the lands. In exchange, Pennaco agreed to
make annual payments to the surface owners for use of the land and to compensate them
for damages caused by its operations. Pennaco agreed to restore all impacted land when
the use ended.
[¶6] In addition to the surface use agreements, Pennaco and the landowners entered into
agreements concerning the disposal of water produced during the operations. Those
agreements required Pennaco to make annual payments and, when operations ceased,
either restore the land or make the areas suitable for the landowners’ use as water wells or
reservoirs.
[¶7] After signing the agreements, Pennaco began coalbed methane operations on the
lands drilling numerous wells, constructing roads, building reservoirs for storing water
produced from the wells, and installing underground pipelines and other infrastructure.
As required by the agreements, Pennaco made the annual surface damage and reservoir
payments through 2010. In 2009, Pennaco and Hollcroft signed agreements which
required Pennaco to replace two of Hollcrofts’ water wells and to pay for electricity to
operate those wells.
[¶8] In July 2010, Pennaco sold a portion of its oil and gas interests in the Powder River
Basin to CEP-M. The sale included part of Pennaco’s interest in the leases underlying
the ranch lands at issue and its rights under the surface agreements. However, the sale
expressly reserved Pennaco’s interest in the “deep rights” covered by the leases and the
rights of access to and use of the ranch property in order to explore and develop the deep
rights.1 Pennaco also excluded monitoring wells and wells subject to a 2010 plugging
and abandonment program along with surface access and other rights necessary to
complete plugging and abandoning those wells. Finally, Pennaco retained a right to
complete, plug and abandon wells and restore the sites at CEP-M’s expense if CEP-M
failed to do so.
[¶9] CEP-M then assigned its interests to High Plains Gas. High Plains Gas began
operating the wells, producing gas and discharging water into the reservoirs on the ranch
1
The “deep rights” are those below the Tertiary Paleocene Ft. Union formation.
2
lands. No one, however, made any payments required under the contracts after
Pennaco’s assignments.
[¶10] By the time of the assignments, Pennaco had reclaimed a number of the wells it
drilled on the ranch lands and reclaimed some of the roads it constructed. No one has
reclaimed any wells, roads or reservoirs since the assignments. Annual payments
required under the surface and damage agreements were not made after 2010. The
annual payments required under the water storage agreements were not made after 2011.
No one made electricity payments to the Hollcrofts as required by the water well
replacement agreements after mid 2012.
[¶11] In 2012 and 2013, the landowners gave Pennaco, CEP-M and High Plains Gas
notice that they were in default under the surface, damage and water storage agreements.
When they did not cure the default, the landowners filed complaints against them in
district court in Sheridan County2 and in Johnson County3 for breach of the agreements.
Landowners sought judgment for all amounts due under the agreements. High Plains and
CEP-M failed to answer the complaints and the district court entered default against them
in both cases. The landowners and Pennaco then filed motions for summary judgment.
[¶12] Relying on well established principles of contract law, the landowners asserted that
Pennaco remained liable under the contracts even after the assignments. Pennaco argued
the landowners’ analysis was not applicable because the parties to the agreements
intended to create covenants running with the land, which could only be enforced against
someone in privity of estate with the landowners. Pennaco claimed that upon assigning
the agreements, it ceased to have privity of estate with the landowners. The district court
determined that Pennaco remained liable under the contracts and granted judgments
against Pennaco for past due payments of $63,864.90, plus interest, in the case filed in
Sheridan County and $71,508.60, plus interest, in the Johnson County case. The district
court also awarded the landowners attorney fees and costs. Pennaco timely appealed
from the district court’s judgments.
[¶13] Pennaco then filed a motion in this Court to consolidate the appeals involving KD
and the Hollcrofts. KD and the Hollcrofts opposed consolidation for briefing purposes
but agreed the cases should be consolidated for purposes of oral argument and this
Court’s decision. We entered an order granting the motion to consolidate for purposes of
argument and decision. There are some differences between the KD contracts and the
Hollcroft contracts, listed below, but much of the analysis of those contracts is the same.
Consequently, this decision primarily addresses the agreements together. The Petroleum
2
The lands of Appellee KD Company, LLC (KD) are in Sheridan County, so it filed its case there.
3
The lands of Appellee First Northern Bank as Trustee of the Hollcroft Trusts (Hollcrofts) are in Johnson
County.
3
Association of Wyoming (PAW) and Texas Oil and Gas Association (TOGA) filed
motions requesting an order allowing them to file amicus briefs. We granted the motions.
STANDARD OF REVIEW
[¶14] Pennaco appeals from district court orders granting summary judgment to KD and
the Hollcrofts. Summary judgment is governed by W.R.C.P. 56(c), which states:
The judgment sought shall be rendered forthwith if the
pleadings, depositions, answers to interrogatories, and
admissions on file, together with the affidavits, if any, show
that there is no genuine issue as to any material fact and that
the moving party is entitled to a judgment as a matter of law.
We review a summary judgment de novo, using the same materials and following the
same standards as the district court and examining the record from the vantage point most
favorable to the party opposing the motion, giving that party the benefit of all favorable
inferences which may fairly be drawn from the record. Baker v. Speaks, 2014 WY 117, ¶
9, 334 P.3d 1215, 1219 (Wyo. 2014). The parties agree that there is no genuine issue as
to any material fact. Each side asserts that it is entitled to a judgment as a matter of law
based on the undisputed facts.
[¶15] Pennaco also appeals the district court judgments awarding KD and the Hollcrofts
attorney fees and costs.
The question of whether there is legal authority to
award attorney fees is one of law, which we review de novo.
See, Thorkildsen v. Belden, 2011 WY 26, ¶ 8, 247 P.3d 60, 62
(Wyo. 2011); Ultra Resources, Inc. v. Hartman, 2010 WY 36,
¶ 149, 226 P.3d 889, 935 (Wyo. 2010); Breitenstine v.
Breitenstine, 2006 WY 48, ¶ 12, 132 P.3d 189, 193 (Wyo.
2006). The final attorney fee award is, however, reviewed
for abuse of discretion. Mueller v. Zimmer, 2007 WY 195, ¶
11, 173 P.3d 361, 364 (Wyo.2007).
Evans v. Moyer, 2012 WY 111, ¶ 37, 282 P.3d 1203, 1214 (Wyo. 2012).
DISCUSSION
1. The Law of Contract Assignment Delegation, and of Covenants Running
With the Land
4
[¶16] The key issue in this case is whether the relationship between Pennaco and the
landowners, as established by their written agreements, is primarily a contractual
relationship or one based on privity of estate involving covenants running with the land.
As we begin our analysis, it is appropriate to provide a brief review of the law about the
effect of assignments of contractual obligations and of covenants which run with the land.
[¶17] Well established principles of contract law dictate that a party who
assigns/delegates a contractual duty remains responsible for performance of that duty.
Rights are assigned; duties are delegated. When a right is
assigned, the assignor ordinarily no longer has any interest in
the claim. When a duty is delegated, however, the delegating
party (delegant) continues to remain liable. If this was not so,
every solvent person could obtain freedom from debts by
delegating them to an insolvent. Delegation involves the
appointment by the obligor-delegant of another to render
performance on the obligor’s behalf. It does not free the
obligor-delegant from the duty to see to it that performance is
rendered, unless there is a novation.
Joseph M. Perillo, Contracts, § 18.25, 665-666 (7th ed. 2014). See also Arthur L. Corbin,
Corbin on Contracts, § 49.6, 206 (revised ed. 2007) (“If a party assigns his right and
delegates his duty under a contract, he no longer has any right, but he remains liable as a
surety for the performance of the duty.”); E. Allan Farnsworth, Farnsworth on Contracts,
§ 11.10, 127 (3rd ed. 2004) (“a delegation of a performance does not relieve the
delegating party of ‘any duty to perform’ or of any ‘liability for breach.’”); Samuel
Williston, Williston on Contracts, § 74.27, 412-413 (4th ed. 2003) (“one who owes
money or is bound to any performance whatsoever cannot by its own act, or by any act in
agreement with anyone else … divest itself of the duty and substitute the duty of
another.”); Restatement (Second) Contracts, § 318(3), 19 (“Unless the obligee agrees
otherwise, neither delegation of performance nor a contract to assume the duty made with
the obligor by the person delegated discharges any duty or liability of the delegating
obligor.”).
[¶18] The same principle applies to oil and gas leases.
Another important area of concern for a lessee is whether the
assignment of its rights and obligations under a lease to
another party absolves it of all responsibility under the lease,
or whether there are ongoing duties for which it may bear
continued responsibility. It is broadly understood that
when an oil and gas lease is assigned, the assignee becomes
responsible for all of the covenants in the lease (although,
5
as seen below, this does not automatically extinguish all
obligations owed to the original lessor by the original
lessee). The responsibility for the observance of covenants in
the lease passes through to an assignee under the doctrine of
privity of estate because they are covenants that run with the
land. Consequently, if an assignee in turn assigns the lease to
yet another party, privity of estate is destroyed as to the prior
assignee and it is no longer responsible to the original lessor
for those covenants.
Absent an express clause that terminates its obligations,
the original lessee-assignor will continue to be responsible
to the lessor for covenants in the lease under the doctrine
of privity of contract. Many oil and gas leases contain
clauses eliminating contractual liability of this nature, but
some do not. Where they do not, the courts are nearly
universal in their finding that the original lessee-assignor
retains obligations to the lessor with respect to at least
some of the covenants under the lease.
62-4 CAIL Annual Institute on Oil and Gas Law § 4.03 (Institute for Energy Law of the
Center for American and International Law’s 56th Annual Institute on Oil & Gas, 2015)
(emphasis added). See also 6-49 Thompson on Real Property, Thomas Editions § 49-62
(“Neither an assignment nor sublease will release the lessee from liability on the express
covenants of the lease because the lessee is in privity of contract with the lessor.”);
Williams& Meyers Oil & Gas Law § 403.1 (“The original lessee continues [to be] liable
to the lessor for a breach of an express covenant of the lease occurring after his
assignment of the lease unless the lease contains a clause excusing him from further
liability after assignment.”); 5-64 Eugene O. Kuntz, Law of Oil and Gas § 64.6 (“Under
traditional landlord-tenant law, a landlord can hold both the original tenant and the
tenant’s assignee liable for breach of a lease covenant that runs with the estate. The
original tenant is liable under the initial contractual agreement (privity of contract) with
the lessor, and the assignee is liable because it has accepted the benefit of the leasehold
estate and must accept its attached burdens as well.”).
[¶19] Among the covenants the original lessee-assignor retains after assignment of its
interest are those requiring payments of rentals and/or royalties and restoration of the
surface to its original condition once production activities have ceased.
[1] Delay Rentals
In many leases there is an express covenant that the lessee
either must drill a well within a specified time period or pay
6
delay rentals to the lessor. If the lessee fails to do so the lease
is not terminated but the lessee is liable for the lessor for the
unpaid rentals. As noted above, once the lease is assigned,
this duty to drill or pay rentals primarily falls on the assignee.
Nevertheless, courts have held that if the assignee fails to pay
rentals, the lessor may bring an action directly against the
original lessee-assignor for the collection of rentals. Of
course, the original lessee-assignor, being in privity of
contract with the offending assignee, may bring a suit against
the assignee to recover these rentals or for other damages is
may have suffered because of the failure to pay rentals.
[2] Royalties
There is an express covenant in oil and gas leases requiring
the payment of royalties to the lessor out of production under
the lease. If the assignee fails to pay such royalties the lessor
may sue the original lessee for them.
[3] Restoration of Surface
Another obligation that may remain with the original lessee is
the responsibility to restore the surface to its original
condition once the production activities have ceased. Many
leases contain such a requirement. In these cases, as with
rentals and royalties due under the lease, the lessee may be
held responsibile for restoration of the surface even if it did
not conduct the operations at issue.
62-4 CAIL Annual Institute on Oil and Gas Law § 4.03.
[¶20] However, when the relationship between the parties is based on privity of estate,
such as adjoining landowners where one has an access easement across his neighbor, the
standard contract rule that one who delegates a duty remains responsible for performance
may not apply. Duties requiring or prohibiting certain activity on the land, may “run with
the land” and only obligate the party who is “in privity of estate,” or connected to that
land (unless the parties specify otherwise). In such a circumstance, the transfer of the
land connected with the duty carries that duty to the assignee, and relieves the assignor of
future responsibility. An example of such a circumstance is found in the Restatement
(First) of Property §538, cmt. c:
A conveys Blackacre to B. B promises in behalf of himself,
his executors, heirs and assigns that he will maintain a dam
7
upon the premises conveyed which dam will have the effect of
maintaining a pond or lake on land retained by A at a specified
level. Upon these facts it is proper to hold that upon
conveyance of Blackacre by B his liability for future
maintenance of the dam will cease.
An example more closely resembling the arguments of Pennaco follows: The owner of
tract A obtains an access easement across tract B for the benefit of tract A, and promises
to annually maintain the access easement for the benefit of both tract A and tract B.
When the owner then transfers tract A to a third party, the easement and the maintenance
obligation transfer with tract A. Then the original owner of tract A is no longer
responsible for the annual maintenance of the easement.
[¶21] Obligations and rights which run with the land are known as servitudes.
Restatement (Third) of Property (Servitudes) § 1.1. The principle that an original obligor
on a servitude may not have continued responsibility for performance after transferring
the related land is stated in the Restatement (Third) of Property (Servitudes) as follows:
§ 4.4. Duration of Original Parties’ and Successors’
Obligations and Enjoyment of Rights
If no duration is stated and the servitude has not
terminated under Chapter 7, the duration of a party’s
obligation under, or right to enjoy the benefit of, a servitude,
is as follows:
(1) An original party or successor to a servitude burden
that runs with an interest in property incurs liability on
account of the servitude burden only for obligations that
accrue during the time the party or successor holds the
burdened property interest.
[¶22] As we pointed out above, this servitude rule does not apply to obligations found in
leases, including mineral leases. Comment b. to § 4.4 explains:
The difference results from the likely difference in the
expectations of parties to leases and parties to covenants
among fee owners. In the lease transaction, the duration of
the tenant’s liability is limited by the duration of the lease
term, and the landlord is thought to have relied on the tenant’s
creditworthiness in determining to enter into the lease. By
contrast, servitudes created by fee owners generally have an
indeterminate or perpetual duration and neither party is likely
8
to have expected the other to be liable after transfer of the
burdened interest.
Similarly, other types of obligations may be such that neither party likely expected the
other to be liable after transfer of the burdened interest, or, as with a mineral lease, they
may be obligations logically connected to the original obligor. Some burdens are
obviously connected solely with use or possession of land. Others may be capable of
being performed separately from possession or use of land, or are related to the original
obligor. Amicus Curiae TOGA points out that “one can often infer from the nature of the
act promised whether the parties intended for the promisor to be released of his
obligations upon the transfer of the land,” citing Restatement (First) of Property § 538,
cmt. c.
[¶23] In summary, obligations based on a contract relationship continue to bind the
original obligor even after the obligor assigns its interest in the contract. This principle
recognizes that contracting parties should not be permitted to avoid contractual
obligations simply by assigning them. It also recognizes that contracting parties expect
each other to perform the contract unless they specify otherwise. On the other hand,
obligations which are connected solely to ownership or use of an interest in land and
which have no stated duration likely are based only on the ownership/use of the burdened
property. In that situation, the parties likely intended that whoever held the interest or the
burdened property would be responsible for performance, and did not intend the original
obligor to be bound after it transferred its interests.
2. The Contract Language
[¶24] The core question with respect to these contracts is whether the parties intended to
create contractual obligations which obligated Pennaco even after assignment, or whether
they intended to create real estate servitudes which the parties would not have expected
Pennaco to fulfill after assignment.
[¶25] The agreements in these cases are clearly contracts which contain covenants about
the use of land as well as obligations which are not directly related to the use of any
particular parcel of real estate. We interpret contracts and covenants in accordance with
principles of contract law. Stevens v. Elk Run Homeowners’ Assoc., 2004 WY 63, ¶ 13,
90 P.3d 1162, 1166 (Wyo. 2004). (A covenant is a contract and is, therefore, construed
in accordance with principles of contract law.) Our primary purpose is to determine the
true intent and understanding of the parties at the time and place the agreement was
made. Stone v. Devon Energy Prod. Co., L.P., 2008 WY 49, ¶ 18, 181 P.3d 936, 942
(Wyo. 2008), citing Wells Fargo Bank Wyo., N.A. v. Hodder, 2006 WY 128, ¶ 21, 144
P.3d 401, 409 (Wyo. 2006). See also Mathisen v. Thunder Basin Coal Co., LLC, 2007
WY 161, 169 P.3d 61 (Wyo. 2007). We begin by considering de novo the plain language
of the agreements. Id.
9
When the language is clear and unambiguous, we limit our
inquiry to the four corners of the document, giving the words
contained therein their ordinary meaning. The parties are free
to incorporate within their agreement whatever lawful terms
they desire, and we are not at liberty, under the guise of
judicial construction, to rewrite the agreement. It is only
when a contract is ambiguous that we construe the document
by resorting to rules of construction. A contract is ambiguous
if indefiniteness of expression or double meaning obscures
the parties' intent.
Davidson Land Co., LLC v. Davidson, 2011 WY 29, ¶ 14, 247 P.3d 67, 71 (Wyo. 2011),
citing Christensen v. Christensen, 2008 WY 10, ¶ 13, 176 P.3d 626, 629 (Wyo. 2008)
and Cathcart v. State Farm Mut. Auto. Ins. Co., 2005 WY 154, ¶ 18, 123 P.3d 579, 587
(Wyo. 2005).
[¶26] We construe the language used in written agreements in the context in which it was
written, looking to the surrounding circumstances, the subject matter, and the purpose of
the agreements to ascertain the intent of the parties at the time the agreements were made.
Stone, ¶ 18, 181 P.3d at 942. Extrinsic evidence can be considered in interpreting an
unambiguous contract to the extent it involves facts and circumstances surrounding
execution of the contract. Wells Fargo, ¶ 31, 144 P.3d at 412, citing Hickman v. Groves,
2003 WY 76, ¶ 11, 71 P.3d 256, 259-60 (Wyo. 2003); Mullinnix LLC v. HKB Royalty
Trust, 2006 WY 14, ¶ 6, 126 P.3d 909, 915 (Wyo. 2006). We look to parol evidence to
understand the parties’ intent only upon finding the document is ambiguous. Wells
Fargo, id.
a. KD/Pennaco Surface and Damage, and Disposal of Produced Water
Agreements.
[¶27] The KD surface and damage agreement provides in relevant part that it is made
and entered into between KD’s predecessor in interest as “Owner” and Pennaco as
“Operator.” It states owner owns the surface of the lands and the lands are subject to oil
and gas leases “either now held or hereafter acquired” by Pennaco. In the agreement,
owner grants to Pennaco, “its employees and designated agents, a private right of way” to
enter upon and use the lands to drill, complete and produce gas wells, construct and
maintain access roads and power lines, and install pipelines to transport gas and water
produced from the wells.
[¶28] The contract requires Pennaco to make payments to the owner as damages,
including annual rental payments of $500.00 per year for each well drilled. This
10
obligation to pay continues beyond the time any well has ceased production until
reclamation is complete. The agreement states:
This annual payment shall be made on the anniversary date of
this agreement in each and every year until the well has been
plugged and abandoned and the location of any roads and
pipelines constructed in connection therewith have been
reclaimed as provided herein.
In this contract Pennaco promises to make annual payments of specified amounts for the
use of new and existing roads on the lands, compression stations located on the lands and
lands taken out of hay and crop production as a result of the coalbed methane operations.
The rights granted to Pennaco by the surface owner terminate when Pennaco’s right to
explore for and develop gas from the land terminates or in the event of Pennaco’s default.
[¶29] This surface and damage agreement requires Pennaco to rehabilitate and restore all
areas disturbed by the coalbed methane operations as nearly as possible to their original
condition. It states:
Upon final termination of Operator’s rights under this
agreement and unless otherwise agreed by Owner, Operator
shall return all roads and other rights of way or sites, as near
as practical to the condition which they were in prior to the
execution of this agreement, reseed all areas disturbed by
Operator’s activities, and remove all above ground facilities
and render all pipelines and power lines environmentally safe
and fit for abandonment in place and provide Owner with
evidence that such lines have been made environmentally safe
and fit for abandonment in place.
The contract specifies it is binding upon the successors and assigns of the parties.
[¶30] Like the surface and damage agreement, the disposal of produced water agreement
identifies KD’s predecessor in interest as “Owner” and Pennaco as “Operator.” This
contract requires Pennaco to pipe any produced water (except water re-injected into
underground formations or piped underground to the Powder River) underground to
reservoirs at locations designated by the landowner. The reservoirs must be permitted in
the owner’s name, but are constructed, operated and maintained at Pennaco’s expense.
Pennaco must make annual payments to the landowner for upgraded or new reservoirs. If
requested by the landowner, Pennaco must remove the reservoirs and restore the property
as nearly as possible to its original condition after produced water is no longer being
discharged. The produced water storage agreement provides that it “shall be binding
upon and inure to the benefit of the successors and assigns of the parties.”
11
b. Hollcrofts/Pennaco Surface Use and Water Agreements
[¶31] The Hollcroft surface use agreement describes “Hollcroft & Company and its
successors,” as “Owner,” and “Pennaco and its successors and assigns,” as “Operator.” It
states the Hollcrofts own the surface and Pennaco owns operating rights and an interest in
gas leases covering portions of the lands. In the agreement, Hollcrofts grant and convey
to Pennaco an “easement of right-of-way,” to perform operations necessary to the
production of coalbed methane. In exchange, Pennaco covenants to compensate
Hollcrofts for damages occasioned by its activities on the land including user fees and
specified annual fees for each well, use of the roads, compressor station facilities and
pipelines. Pennaco also covenants to clean up and restore all abandoned wells and roads
at its expense. Unlike the KD surface agreement, the Hollcroft surface contract provided
that the obligation to pay specific fees for well and roads ended when the well
permanently ceases production or the Operator has permanently ceased to use the road.
[¶32] The Hollcroft surface use agreement also contains these provisions:
9
The Owner agrees to notify Operator of any change in the
party to be identified as Owner under this Agreement, which
change might be caused by any conveyances or descent from
the original Owner … It is understood and agreed that the
covenants made by Operator to owner under this Agreement
are covenants running with the surface ownership of the
subject lands, and that said rights must pass with said
ownership and are not subject to retention by the party
identified herein as Owner in the event of such a change in
surface ownership.
10
The right-of-way as granted hereunder to the Operator shall
be non-exclusive and the Operator is granted the non-
exclusive use of said private roads, whether existing or newly
built by Operator or other parties, to be used by the Operator,
its agents, servants, employees, other working interest
owners, and successors in interest of ingress and egress across
the lands of the owner to the specific wells as contemplated in
Article 2 hereunder for as long as the payments required
herein are timely made and the above referenced Gas Lease(s)
shall continue to be valid and in full force and effect.
....
12
23
This agreement shall be binding upon and shall inure to the
benefit of the parties hereto and to their respective heirs,
devisees, legal representatives, successors and assigns.
[¶33] The Hollcroft surface use agreement originally provided that upon generating
water from its operations, Pennaco could use produced water free of charge, working
with the Hollcrofts to determine the best locations for surface discharge of water. By an
undated amendment, these provisions were removed and replaced with “the attached
Agreement Concerning Disposal of Produced Water.” No such agreement appears in the
record. However, the record contains a second amendment dated October 10, 2003. The
amendment states it is entered into between “Hollcroft & Company”, “as Owner,” and
“Pennaco” as “Operator”. It allows Pennaco to discharge produced water only under the
terms of the agreement and in specified circumstances. The amendment also requires
Pennaco to clean up and restore any production wells the Hollcrofts choose not to
continue operating as water wells after coalbed methane operations cease.
[¶34] All the surface and water agreements require Pennaco to make payments on an
annual basis. The contracts indicate that such payments are installments on damages,
even though they are paid on an annual basis. The Hollcroft surface contract states “the
compensation to be paid by the Operator to the owner hereunder shall be for the right-of-
way … and in payment of damages … .” The KD agreements state “the payments herein
provided are … for damages … .”
[¶35] Looking at the plain language of both the KD and Hollcroft agreements, it is clear
the landowners intended to grant Pennaco, “its employees and agents” the right to enter
and use the lands described for coalbed methane operations in the manner permitted by
the agreements. In exchange for the rights granted, Pennaco assumed obligations,
including the obligations to make annual payments, plug and abandon wells when
operations ceased, and reclaim the land. The KD contract provides that Pennaco’s rights
end when its right to explore and produce gas from the lands terminates or in the event it
defaults. The Hollcroft contract states that Pennaco’s rights end when its rights under the
gas leases end. Neither surface use contract states that Pennaco’s obligations ended
when its rights terminated.
[¶36] The KD surface agreement required Pennaco, upon final termination of its rights
under the agreement, to reclaim all surface areas disturbed by its operations, remove all
facilities associated with those operations and provide proof that pipelines and power
lines are environmentally safe for abandonment. The Hollcroft surface agreement
required Pennaco to restore all abandoned well sites and applicable roads. Pennaco
assigned its operations under the agreement to CEP-M and did not, therefore, fulfill those
obligations at the time its rights terminated. Nothing in these agreements suggests that
13
the parties intended Pennaco to be relieved of these obligations merely by assigning them
to a third party. The obligations to reclaim and to pay until reclamation is complete
presume an ability and willingness to perform after production ends. These are not the
type of obligations that the parties would expect to be performed only by the last assignee
of Pennaco. These obligations are not only, or even primarily, related to the last
assignee’s “ownership” of the gas leases. The obligations can be performed apart from
any gas production by the last assignee. They are logically connected to Pennaco, its
financial ability, and its initial creation of the gas operation, rather than to whatever the
last assignee may have done.
[¶37] Although both the KD surface and water agreements and the Hollcroft surface
contract state they are binding on the parties’ successors and assigns, neither agreement
states an assignment terminates Pennaco’s obligations. To the contrary, the KD
agreement clearly provides that Pennaco was obligated to make the annual payments until
the lands are reclaimed. The Hollcroft agreement requires payments until wells are
abandoned. To read the agreements as providing that Pennaco’s obligations terminate
upon assignment would require writing words into the agreement the parties themselves
did not include, something this Court is not at liberty to do. Cheek v. Jackson Wax
Museum, Inc., 2009 WY 151, ¶ 23, 220 P.3d 1288, 1293 (Wyo. 2009), citing City of
Gillette v. Hladky Constr., Inc., 2008 WY 134, ¶ 46, 196 P.3d 184, 200 (Wyo. 2008) and
Mathisen, ¶ 12, 169 P.3d at 65.
[¶38] The Hollcroft surface agreement contains a provision not found in Pennaco’s KD
surface contract. Section 9 of the agreement between Pennaco and the Hollcrofts requires
the Hollcrofts to notify the operator if ownership of the surface changes. It also describes
the covenants made by the operator as “covenants running with the surface ownership”
which pass with ownership of the surface such that the original surface owner retains no
rights to the promises made in those covenants. The agreement does not, however, state
the covenants made by the operator pass with ownership of the mineral interest such that
the original mineral owner’s obligation to perform the covenants terminates upon
assignment. If the parties intended the agreement to have the effect of passing both the
surface owner’s rights and the mineral owner’s obligations upon transfer, we presume
they would have included language to that effect in their agreement. The fact that the
agreement expressly states the surface owner retains no rights upon transfer of ownership
and does not say the mineral owner retains no obligations upon transfer supports the
conclusion that the parties did not intend Pennaco’s obligations to terminate upon
assignment.4
4
By this analysis we do not determine that a clause stating Pennaco’s obligations were “covenants
running with” its mineral leases would have indicated intent that Pennaco was no longer responsible after
assignment of the leases and agreements. An exculpatory clause must expressly terminate the assignor’s
obligations upon assignment.
14
[¶39] Pennaco maintains the Hollcroft surface use agreement is clear that the obligations
it imposes are to be performed by the lessee of the lands, i.e. the person with possession
and use of the land for mineral exploration. The agreement contains no language
imposing performance of the obligations on “the lessee of the lands” or the “person with
possession and use of the land for mineral exploration.” Rather, the agreement imposes
the obligations on Pennaco and its successors and assigns. There is simply no language
in the agreement referencing the “lessee of the lands” or “the person with possession and
use of the lands for mineral exploration.” Again, we will not rewrite the parties’
agreements.
[¶40] Each of these contracts identifies when Pennaco’s rights end and when Pennaco’s
obligations end. Each contains obligations based on Pennaco’s promises and the benefits
Pennaco received, rather than on any privity of estate. Under the plain and unambiguous
language of both the KD and Hollcroft surface use agreements, Pennaco remains
obligated to make the annual payments until the wells are plugged and abandoned and the
lands are reclaimed. Under the plain language of both the KD and Hollcroft water
agreements/amendment, Pennaco remains obligated to make the annual payments until
discharge of produced water ceases.
[¶41] Based on the agreements themselves, we find the contracts Pennaco made with the
landowners indicate an intent that Pennaco remain responsible for its promises to make
damage payments and to perform reclamation. Factors indicating such intent are:
a. Pennaco’s rights and obligations are time limited. Each obligation and right
has a specific ending event, unlike fee ownership.
b. No agreement contains any language indicating Pennaco’s obligations end
upon assignment.
c. Pennaco’s interest in the lands is based on mineral leases, and the nature and
extent of Pennaco’s use of the lands depends on leases. Well established law
recognizes that obligations under leases continue to bind the original lessee
even after an assignment. The interests and obligations of Pennaco under the
surface use agreements are analogous to mineral leases, not real property
servitudes.
d. The nature of Pennaco’s obligations to make annual payments toward damages
and to reclaim are logically connected with the entire contract and project.
They are not logically connected with only the last assignee’s use of the land.
e. The obligation to reclaim, in particular, is an obligation that accrued from the
very beginning of this project. Reclamation is not connected with gas
production obtained by High Plains or any assignee, but is connected with all
the work occurring during the project.
f. Both the obligation to make damages payments and to reclaim the land are
logically connected to the obligor’s financial ability and willingness to fulfill
those responsibilities. It is not reasonable to infer that the parties intended that
15
Pennaco could absolve itself of these obligations by assignment to an entity
with an unknown financial ability and which may have no intention or
motivation to fulfill the obligations.
g. Pennaco is identified as the “operator,” not as a landowner. This term implies
a personal obligation rather than one based on privity of estate.
h. With respect to the KD agreements, Pennaco’s obligation to pay damages
continues after production ceases and until reclamation occurs. This is not the
type of obligation naturally connected with possession of the lands by the last
assignee of Pennaco.
i. With respect to the Hollcroft agreement, the parties specified that the benefits
to Hollcroft ran with the land and did not provide personal benefit to the
landowner. However, the parties omitted any corresponding statement
regarding Pennaco’s obligations.
3. Supporting Case Law
[¶42] Other courts have concluded the assignment by a party of its obligations under a
mineral production contract related to a mineral lease does not relieve the assignor of
liability when the assignee fails to perform the obligations. In Seagull Energy E&P, Inc.
v. Eland Energy, Inc., 207 S.W.3d 342 (Tex. 2006), Eland assigned to Nor-Tex Gas
Corporation its interest in two offshore leases along with its rights and obligations under
two joint operating agreements (JOAs) involving the leases. Id. at 344. Nor-Tex failed
to pay its share of the operating costs under one of the JOAs and Seagull, as operator,
brought suit against Nor-Tex and Eland for breach of the JOA. Id. Eland asserted it had
no obligations under the JOA because it had assigned those obligations and its interest in
the leases to Nor-Tex. Id. at 345. Finding that Seagull did not expressly release Eland
following the assignment of its working interest and the JOA did not contain an express
clause stating that Eland’s obligations would cease if it assigned its interest to another
party, the Texas Supreme Court held Eland was still liable to Seagull under the JOA
despite the assignment to Nor-Tex. Id. at 347. In reaching that result, the Court relied on
general principles of contract law:
Generally speaking, a party cannot escape its obligations
under a contract merely by assigning the contract to a third
party. [citation omitted] Thus, as a general rule, a party who
assigns its contractual rights and duties to a third party
remains liable unless expressly or impliedly released by the
other party to the contract.
Id. at 346-47.
[¶43] Pennaco and its amicus curiae, TOGA, contend Seagull does not apply under the
circumstances presented in this case. They assert the court in Seagull applied principles
16
of general contract law only because Eland did not argue those principles were
inapplicable but claimed instead that the contract expressly stated its obligations ended
upon assignment. Pennaco and TOGA point to the court’s reference in Seagull to
Restatement of Property: Servitudes § 538 (now Restatement of Property: Servitudes
(Third) § 4.4), which provides: “Whether a promise respecting the use of land of the
promisor will continue to bind the promisor after he has ceased to have an interest in the
land with respect to which the promise was made depends upon the intention manifested
in the making of the promise.” Id. They argue that the court in Seagull left open the
question of whether application of § 4.4 or other principles concerning covenants running
with the land would have led to a different result. Because the essence of Pennaco’s
argument in this case is that the agreements create covenants running with the land,
Pennaco and TOGA assert Seagull is not applicable. They ask this Court to apply § 4.4
of the Restatement and conclude the intention manifested in the agreements at issue was
to release Pennaco after its interest in the coalbed methane operations ceased.
[¶44] We have concluded the agreements at issue here do not manifest any intent to
release Pennaco of its obligations upon assigning its interest. Therefore, application of §
4.4 of the Restatement does not lead to a different result than the application of general
principles of contract law. Further, § 4.4 by its terms applies to servitudes where no
duration is stated. The obligations to make damage payments and to reclaim in the
contracts in this case have stated durations. Section 4.4(1) indicates that an original
party, like Pennaco, is liable for a servitude obligation which accrues during the time the
party holds the burdened property interest. As we pointed out above, the obligations here
accrued during the entire project, and not just during the time High Plains held the
mineral leases.
[¶45] In their amici briefs, PAW and TOGA urge this Court not to apply Seagull. PAW
argues first that Seagull has been criticized by oil and gas scholars and commentators.
PAW is correct that Seagull has been the subject of discussion and concern has been
expressed, particularly in the context of joint operating agreements, that parties who have
long since transferred their interest in an oil and gas operation might find themselves
liable for a subsequent assignee’s failure to perform. Preston R. Mundt, The Assignor
Giveth and the Operator Taketh Away: Oil and Gas Interest Owners Beware of
Continuing Liability, 40 Tex. Tech. L. Rev. 419 (Winter 2008); Christopher S. Kulander,
David W. Lauitzen, A Flock of Trouble: Liability Under Oil and Gas Joint Operating
Agreements after Seagull v. Eland, 14 Tex. Wesleyan L. Rev. 217 (Spring 2008).
Whether that concern is or is not justified, we simply are not at liberty to re-write parties’
agreements. Absent an express provision stating a party’s obligations end upon
assignment of a surface use agreement like the ones in this case or a release by the
surface owner, the party originally obligated under the agreement remains liable.
[¶46] PAW also argues Seagull is distinguishable because it involved a joint operating
agreement rather than a surface use agreement. PAW asserts joint operating agreements
17
between oil and gas companies require operators to give notice to other owners before
initiating significant operations so that each owner can elect whether or not to consent to
and pay its share of the cost of the proposed activity. In that context, PAW contends, it
makes sense for a consenting owner who assigns its interest to have continuing liability
for its agreement to pay if the assignee defaults. PAW contends a surface use agreement
is different because an operator who assigns its interest has not been given notice of or
consented to pay for the assignee’s operations. Again, our task is to interpret the parties’
agreement. In these agreements, Pennaco promised to make annual payments until
operations cease and the land is reclaimed. Pennaco promised to perform that
reclamation. PAW would have this Court ignore the plain language of the parties’
agreements and interpret it to mean something different than what it says. We decline to
do so.
[¶47] PAW also contends this Court was presented with the opportunity to adopt Seagull
in Windsor Energy Group, LLC v. Noble Energy Inc., 2014 WY 96, 330 P.3d 285 (Wyo.
2014) and declined to do so. J.M. Huber Corporation (Huber), as operator, and Suncor
Energy (Suncor), as non-operator, entered into a joint operating agreement (JOA) for oil
and gas development. Windsor, ¶ 4, 330 P.3d at 287. The agreement required the
operator to bill the non-operator for its share of expenses. Huber assigned its interest to
Windsor Energy Group, LLC (Windsor) and Suncor assigned its interest to Dolphin
Energy Corporation (Dolphin). Id., ¶ 5, 330 P.3d at 287. When Dolphin failed to pay its
share of expenses, Windsor sued Suncor. Id., ¶ 6, 330 P.3d at 287. The district court
held that, as a matter of law, Suncor remained liable to Windsor because it did not obtain
a release from either Huber or Windsor, and the JOA did not contain a provision
releasing Suncor from continued liability after the assignment.” Id., ¶ 7, 330 P.3d at 288.
After a trial, however, the district court ruled that Windsor’s claim against Suncor was
barred by laches. Id., ¶ 8, 330 P.3d at 288.
[¶48] Suncor appealed the ruling that it remained liable under the JOA. Windsor
appealed the ruling that its claim was barred by laches. This Court affirmed the district
court’s ruling that laches barred Windsor’ claim and did not address the issue of whether
Suncor remained liable under the JOA after assigning its interest. PAW contends,
however, that in upholding the laches ruling the Court recognized the problems
associated with an assignor’s continued liability under an agreement involving oil and gas
interests, such as the assignor’s inability to correct an assignee’s actions post-assignment.
The difficulties presented for an assignor by its continued liability post-assignment are
precisely the reason for including a provision releasing the assignor. Windsor does not
provide support for a ruling that Pennaco was not bound by the surface use agreement
after assigning its interest to CEP-M.
[¶49] As in Seagull, other courts have applied general principles of contract law to
conclude an assignment does not relieve the assignor of obligations assumed in an
agreement. In Wold v. Diamond Resources, Inc., 2001 U.S. Dist. LEXIS 115118 (D.
18
N.D. 2011), owners of mineral rights in North Dakota entered into oil and gas leases with
Diamond Resources, Inc. (Diamond). Id. at 2. Diamond later assigned its interest to
Zavanna. The mineral owners filed complaints in state court against Diamond and
Zavanna seeking an order holding that the leases had lapsed, quieting title in their name
and cancelling the leases on the ground that royalties had not been paid. Id. at 3.
Diamond and Zavanna removed the case to federal court. They acknowledged that
Diamond was a non-diverse party, but alleged that after the assignment it had no interest
in the case and should be dismissed.
[¶50] The U.S. District Court for the District of North Dakota said:
North Dakota follows the “well-established principle in the
law of contract that a contracting party cannot escape its
liability on the contract by merely assigning its duties and
rights under the contract to a third party.” Rosenberg v. Son,
Inc., 491 N.W.2d 71, 74, (N.D. 1992); see also Estate of
Murphy v. Murphy, 554 N.W.2d at 437 (“Even where there is
an effective assignment of a contractual obligation, the
assignor’s ‘duty remain absolutely unchanged.’”) (quoting 4
Corbin on Contracts § 866). Under North Dakota law, this
principle applies to all categories of contracts, including the
oil and gas leases at issue here. Cf. Holman v. State, 438
N.W.2d 534, 537 (N.D. 1989) (“[D]ocuments conveying oil
and gas interests are subject to the same general rules that
govern interpretation of contractual agreements.”) see
generally 5-64 E. Kuntz, A Treatise on the Law of Oil and
Gas § 64.7 (Matthew Binder rev. ed. 2011) [“Kuntz”]; 2-4 P.
Martin & B. Kramer, Williams & Meyers, Oil and Gas Law §
403.1 (Matthew Bender 2010) (“William & Meyers”). The
only manner in which Diamond could have been discharged
from its lease obligations is if there was a novation whereby
plaintiffs expressly or impliedly consented to the discharge.
See Estate of Murphy, 554 N.W.2d at 437; Rosenberg, 491
N.W.2d at 75.
Id. at 5-6. Finding a North Dakota court could conclude the assignment did not discharge
Diamond, the federal court remanded the case to state court based on lack of diversity of
citizenship.
[¶51] This Court applied the same principles in Ultra Resources, Inc. v. Hartman, 2010
WY 36, 226 P.3d 889 (Wyo. 2010). The contract at issue there required First Parties to
pay net profit interest on amounts realized from oil and gas operations. Id., ¶ 99, 226
P.3d at 923. Operators and non-operators were successors to the First Parties. Id.
19
Another provision of the contract placed the responsibility for handling the accounting of
the net profit and remitting payment on the operators. Id. Based on the latter provision,
the non-operators argued they did not have the duty to pay net profit interest. Id., ¶ 100,
226 P.3d at 923-924. The district court rejected the non-operators’ position stating that,
while the clerical responsibilities for handling the accounting and actually remitting the
payments were delegated to the operators under the contract, the ultimate obligation to
pay had not been delegated. Id. Citing the rule that the performance of a duty can be
delegated, but such delegation does not discharge the obligor, the district court held the
non-operators were obligated to pay the net profit interest. Id. This Court agreed with
the district court’s interpretation and affirmed. Id., ¶ 101, 226 P.3d at 924.
[¶52] Other courts have applied similar principles when considering whether an
assignment relieves the original lessee-assignee from obligations under an agreement
relating to mineral development. Whale v. Rice, 49 P.2d 737, 741 (Okla. 1935) (noting
that although the rentals and royalties became due and payable after the original lessee
had assigned the lease, the assignment did not relieve him of the obligation to pay unpaid
rentals and royalties falling due under the lease); Kintner v. Harr, 408 P.2d 487 (Mont.
1965) (holding that an assignment of a lease terminated privity of estate between the
lessor and lessee, but privity of contract remained so the lessee was not released from his
obligation or liability under the lease by the assignment). Applying the foregoing cases
and authorities to the agreements at issue here, Pennaco remains liable to KD under the
surface and water agreements despite having assigned its interest to CEP-M.
4. The Arguments of Pennaco and Amici
[¶53] Pennaco asserts that the above analysis overlooks property law principles
applicable when contracting parties enter into an agreement affecting the use of land that
contains covenants running with the land. It maintains when an agreement containing
covenants running with the land is assigned, the assignee assumes, and the assignor is
relieved of, liability under the agreements. Pennaco further asserts when a contract
affects the use of land, courts must look to the nature and circumstances of the contract to
determine whether an assignment of the contract releases the obligor. When the contract
regulates and facilitates the obligor’s possession and use of the land, Pennaco maintains,
courts presume the parties intended the obligor to be released upon transfer. We begin
our analysis of Pennaco’s arguments with its claim that the agreements at issue here
contain covenants running with the land such that Pennaco was released from its
obligations upon assigning the operations to a third party.
[¶54] Pennaco cites two Wyoming cases as support for its assertion that the agreements
here contain covenants running with the land such that, upon the assignment to CEP-M,
Pennaco was relieved of its obligations. Mathisen, id., and Jacobs Ranch Coal Co. v.
Thunder Basin Coal Co., LLC, 2008 WY 101, 191 P.3d 125 (Wyo. 2008). In Mathisen, ¶
14, 169 P.3d at 65, this Court addressed the question of whether a surface royalty
20
provision in a deed constituted a covenant running with the land such that successors in
interest to the party originally obligated to pay the royalty were bound to make the
payment. There, Mathisen’s predecessor in interest conveyed land to Consolidation Coal
Company (Consol). The federal government owned the coal underlying the property and
Consol did not have the right to mine it. Even so, the deed conveying the land stated:
“As further consideration for the sale and conveyance of said lands by Owner to Consol,
Consol shall pay to Owner a surface royalty for all coal mined, removed and sold by
Consol” from the property. Consol never acquired the right to mine the coal and
subsequently sold the property. Thunder Basin Coal Company (TBCC) later leased the
coal from the federal government and the property from Consol’s successor in interest
and began mining the coal. Mathisen was not paid royalties for the mined coal and
brought an action against Consol and its successors in interest seeking payment.
[¶55] This Court concluded first that because the plain language of the deed required
Consol to pay the royalty for “coal mined, removed and sold by Consol from said lands,”
Consol was not obligated to pay the royalty because it never mined any coal. The Court
then considered whether the royalty provision in the deed was a covenant running with
the land such that TBCC was obligated to pay the royalties.
[¶56] The Court said a covenant that runs with the land is considered to be “appurtenant”
to the land and “inures to the benefit of, or must be fulfilled by, whatever party holds the
land at the time when fulfillment is due.” Id. citing Lingle Water Users’ Ass’n v.
Occidental Bldg. & Loan Ass’n, 43 Wyo. 41, 97 P. 385, 387 (Wyo. 1931). We said:
A party seeking to establish that a covenant runs with the land
must demonstrate: 1) the original covenant is enforceable; 2)
the parties to the original covenant intended that the covenant
run with the land; 3) the covenant touches and concerns the
land; and 4) there is privity of estate between the parties to
the dispute.
Id. Finding the second element determinative, we concluded the landowner had not
demonstrated the parties intended the royalty provision to be a covenant running with the
land because: 1) the provision stated the royalty was to be paid to the “owner” by Consol
specifically and did not refer to either the owner’s or Consol’s successors or assigns; 2)
other provisions of the deed contained “successors and assigns” language, indicating the
parties deliberately omitted those words in the royalty clause; and 3) the royalty clause
stated the obligation was “further consideration” for the sale of the land “by Owner to
Consol,” indicating the royalty payment was personal to the parties to the transaction and
did not run with the land. Id., ¶¶ 15-17, 169 P.3d at 66.
[¶57] In Jacobs Ranch, ¶ 3, 191 P.3d at 128, a case involving some of the same parties as
Mathisen, the landowner conveyed two parcels to Consol by deeds containing a royalty
21
clause providing that as further consideration for the sale and conveyance of the land by
“Grantor to Grantee, Grantee shall pay to Grantor a surface royalty for all coal mined,
removed and sold by Grantee, its heirs, successors in interest and assigns…” Id. As in
Mathisen, Consol never mined the coal underlying the lands, and conveyed the parcels to
Jacobs Ranch and TBCC respectively. TBCC subsequently mined the coal and the
question was whether it was liable for paying royalties to the landowner.
[¶58] We analyzed the surface royalty language and concluded the surface royalty
provision was not a covenant running with the land so as to obligate TBCC to pay the
royalty. We said:
This surface royalty provision, like the one in Mathisen,
specifies that Consol as “Grantee shall pay” the surface
royalty. As in Mathisen, there is no language indicating that
Consol’s successors in interest or assigns would be bound by
the provision. There is no language expressing the parties’
intent that the obligation was a covenant running with the
land. We therefore hold, as we did in Mathisen, that this
surface royalty provision creates an obligation personal to
Consol, and not a covenant running with the land.
Id., ¶ 13, 191 P.3d at 130.
[¶59] In both Mathisen and Jacobs Ranch the party originally bound by the covenant,
Consol, was only required to pay the surface royalty for coal it mined. Because Consol
did not mine the coal before transferring the land, it was not bound by the covenant. The
Court did not address the question of whether Consol would have been bound to pay the
surface royalty after the transfer if it had mined the coal before transferring its interest.
Because Mathisen and Jacobs Ranch did not address that question, those cases provide
no support for Pennaco’s assertion that it is not bound by the covenants contained in the
agreements at issue here. Pennaco, the party originally bound by the covenants, did
produce coalbed methane before assigning its interest to CEP-M.
[¶60] The Court also found in Mathisen, ¶ 17, 169 P.3d at 66, and Jacobs Ranch, ¶ 21,
191 P.3d at 132, that the surface royalty provision contained in the deeds was not a
covenant running with the land; therefore, TBCC, the party to whom the deed was
transferred, was not liable for the royalty payments. The Court reached that result by
looking at the royalty provision and concluding it did not suggest the parties intended it
to be a covenant running with the land. Among the factors the Court considered were: 1)
the provision stated “Consol” was to pay the royalty, not “Consol, its successors or
assigns;” and 2) there was no language expressing the parties’ intent that the obligation
was a covenant running with the land. Mathisen, ¶ 16, 169 P.3d at 66; Jacobs Ranch, ¶
13, 191 P.3d 130. Like the surface royalty provision in those cases, the agreements at
22
issue here state that “operator” (identified earlier in the agreement as Pennaco), and not
“operator, its successors or assigns,” is to pay the annual fees until the lands are
reclaimed. Like the provisions in Mathisen and Jacobs Ranch, there is no language
stating the obligations imposed upon Pennaco were covenants running with the land.
[¶61] Pennaco asserts the parties’ intent to create covenants running with the land is
demonstrated by the general provision stating that the agreement is binding on the
parties’ successors and assigns. Again, citing Mathisen and Jacobs Ranch, Pennaco
contends when a contract concerning land contains “succession” language, that language
creates a presumption that the parties intended the agreement to contain covenants
running with the land. Given the succession language in the agreements at issue here,
Pennaco argues, this Court must presume the parties intended to create covenants running
with the land. As indicated above, we note that the Hollcroft water well replacement
agreement does not contain such language.
[¶62] Pennaco overstates what was said in Mathisen. We said: “Although not
dispositive in determining the intent of the parties, the use of words of succession
suggests that the provision runs with the land, while omission of such words may suggest
the intent that the obligation is personal rather than appurtenant.” Mathisen, ¶ 15, 169
P.3d at 66. (Emphasis added). Contrary to Pennaco’s assertion, the fact that the
agreements between Pennaco and KD’s predecessor provide they are binding on the
parties’ successors and assigns is not dispositive of the parties’ intent.
[¶63] When interpreting contracts, “we consider the contract as a whole, reading each
part in light of all the other parts.” Fremont Homes, Inc. v. Elmer, 975 P.2d 952, 956
(Wyo. 1999), citing Examination Management Servs., Inc. v. Kirschbaum, 927 P.2d 686,
690 (Wyo. 1996). Read in context with other language in the agreements, the provisions
binding the parties’ successors do not support the conclusion that the parties intended to
create covenants running with the land such that Pennaco was released of its obligations
under the agreements upon its unilateral assignment of the coalbed methane operations.
[¶64] To reiterate, the surface agreement states Pennaco’s rights terminate upon its
default or when its right to produce gas on the land terminates. The agreement does not
state, however, that Pennaco’s obligations end when its rights terminate. In fact, upon
final termination of Pennaco’s right to produce gas on the lands, the surface agreement
expressly requires Pennaco to perform its obligations to reclaim the lands. Similarly,
when Pennaco ceases discharging produced water, the disposal of produced water
agreement requires Pennaco, upon the surface owner’s request, to remove the reservoirs
and restore the lands. Additionally, both agreements provide that Pennaco’s payment
obligations continue until reclamation is complete. The surface agreement states that
Pennaco’s obligation to make the annual payments on all producing wells continues
“each and every year until the well has been plugged and abandoned and the … roads and
pipelines constructed in connection therewith have been reclaimed….” The discharge of
23
produced water agreement provides that Pennaco shall make the annual payments for
each reservoir on the same date as the first payment “in each year thereafter” until
produced water is no longer being discharged. Considering the agreements as a whole
and reading the succession language in light of the provisions expressly stating Pennaco’s
obligations continue after its rights terminate, any presumption that might otherwise have
arisen is not sustainable. The plain language of the agreements does not demonstrate the
parties intended Pennaco to be relieved of its obligations upon assigning its interests to
CEP-M.
[¶65] Pennaco and its amicus TOGA argue at some length that the parties’ intent to
release it from the obligations of the contract must be inferred from the fact that the
contract required certain acts to be performed upon the land and prohibited others.
Pennaco references provisions of the agreements requiring the operator to keep well sites,
roads and other areas used by the operator safe and in good order; rehabilitate and restore
areas disturbed by the operations within twelve months after disturbance; test the
produced water every six months; and keep cattle guards and fences in clean and good
repair. Pennaco argues that once it assigned the operations, it was not in the position to
perform these obligations and should not be held liable now for subsequent assignees’
failure to perform them. In support of its argument, Pennaco cites Restatement (Third) of
Property (Servitudes) § 4.4, which is set out above.
[¶66] First, the obligation at issue in this action is the obligation to make annual
payments until coalbed methane operations cease and the land is reclaimed, an obligation
Pennaco expressly undertook to perform in the agreements it entered into with the
landowner. The question is not whether Pennaco was in a position to keep well sites safe
or test water produced or make the annual payments when they came due or perform any
other act once operations were assigned to CEP-M or High Plains Gas. The question is
whether, upon the assignee’s failure to make the payments, the landowners could bring
an action directly against Pennaco. The answer to that question is “yes.” 62-4 CAIL
Annual Institute on Oil and Gas Law § 4.03.
[¶67] Second, we question whether the above Restatement applies to these agreements
given that their duration is not unstated—the agreements terminate upon cessation of
coalbed methane operations and reclamation of the land. Additionally, as KD points out,
§ 1.1(2) of the Restatement states in pertinent part:
To the extent that special rules and considerations apply to
the following servitudes, they are not within the scope of this
Restatement:
(a) covenants in leases;
....
(c) profits for the removal of timber, oil, gas, and
minerals.
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Comment e. further states:
Servitudes are used in several specialized areas where the
rules and considerations governing their operation are
different from those ordinarily applied to the servitudes
covered in this Restatement. Landlord-tenant law, real-
property security law, oil and gas law, timber law, and the
law governing extraction of other minerals are such
specialized areas. No attempt has been made in this
Restatement to take account of the special rules and
considerations governing servitudes used in those contexts.
[¶68] This section of the Restatement recognizes that landlord tenant law has a different
result. Comment b to § 404 points out that with leases, the original tenant generally
remains liable on the covenants in the lease after assignment. The parties’ relationship
here is much more similar to a lease or standard contract than it is to unending covenants
based on land ownership.
[¶69] As in the case of a lease transaction, the duration of Pennaco’s liability under the
surface agreement is limited by its terms to the completion of coalbed methane operations
and reclamation. Like the parties to a lease transaction, the landowners here likely relied
on Pennaco’s creditworthiness in determining to enter into the surface agreement. We
simply are not persuaded that the principles relating to servitudes apply to the obligations
Pennaco assumed under the agreements at issue here. Even if we were to conclude they
did apply, § 4.7 addresses the delegability and transfer of servitudes burdens as follows:
(1) The person obligated to perform a duty imposed by a
servitude can delegate the duty to another unless the
delegation is contrary to public policy, or, unless the holder of
the benefit of the servitude has a substantial interest in having
the person burdened by the servitude perform or control the
acts required by the servitude.
(Emphasis added). The landowners here likely had a substantial interest in having
Pennaco, the entity with which they entered into the surface use agreements, perform the
acts required by the agreement. This is so because the covenants required at the end of
the contractual arrangement – payments even when production is ending and reclamation
– can only be performed by an entity with the financial ability to do so.
[¶70] In addition to the question of whether the Restatement applies, Pennaco’s
argument necessarily assumes that the agreements it entered into with the landowners
created servitudes. Section 1.1(1) of the Restatement defines servitude as “a legal device
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that creates a right or an obligation that runs with the land or an interest in land.” As with
other types of agreements, the intent of the parties to create servitudes is determined first
by looking at the language of the agreement itself.
Because servitudes are interests in land with potentially long-
term effects on land use and value, they should be expressly
created by carefully drawn written instruments. A contract or
conveyance intended to create a servitude should express that
intent in words that unambiguously spell out the nature and
terms of the intended servitude.
Id., § 2.2, comment a. Again, there is no language in the agreements between the
landowner and Pennaco stating the parties intended to create servitudes.
[¶71] Pennaco and amici essentially ask this Court to imply the agreements here created
servitudes. “To avoid unfairness, American courts generally seek to ascertain and give
effect to the intentions of the parties, even though imperfectly expressed.” Id. Thus,
servitudes may be express or implied. Id., § 2.2. However,
Courts are justifiably hesitant to find the intent to create
servitudes in vague language … because servitudes create
interests running with the land that affect people beyond the
immediate parties.
Id., comment d. Absent more precise language, we are unwilling to imply Pennaco and
the landowners intended to create servitudes running with the land such that Pennaco’s
obligations cease upon assignment. That simply is not what the agreements provide.
[¶72] Pennaco and amici seek to have this Court imply a servitude burdening the
property of the landowner until coalbed methane operations cease but excusing
Pennaco’s performance of its obligations before those operations cease. Cases in which
one party to a conveyance claims that it was intended to create a servitude burdening the
property of the other “raise the prospect that one party will be unfairly burdened with a
servitude the transaction was not intended to create.” Section 2.11, comment c.
Because of these problems, servitude burdens are established
by implication only where public policy supports implication
of the servitude to avoid economic waste, or where the
evidentiary concerns underlying the Statute of Frauds have
been met and establishment of the servitude is necessary to
prevent injustice.
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No argument is presented that creation of a servitude should be implied here to avoid
economic waste or to prevent injustice. The agreements at issue in this case do not
expressly state that they create servitudes and, under the circumstances presented, we
decline the invitation to imply the parties intended the agreements to create servitudes.
5. Policy Arguments
[¶73] TOGA asserts a holding that Pennaco remains liable under the surface and water
agreements despite the assignment “exposes oil and gas operators to unpredictable and
indeterminate liability for duties respecting the use of lands (1) to which they have no
access and (2) based on the acts of successors over which they have no control.” Given
that Pennaco expressly reserved “its right, title and interest in the easements to the extent
they were attributable to its retained interests” as well as its right to complete, plug and
abandon wells and restore the sites at CEP-M’s expense if CEP-M failed to do so, we see
no basis for TOGA’s assertion that Pennaco has no access to the land.
[¶74] As for the contention that oil and gas operators will be exposed to liability based
on the acts of successors over which they have no control, the solution is a simple one.
An operator may be discharged from obligations it assumes in a surface or water storage
agreement either by including an exculpatory clause excusing it from further liability
after assignment or by novation, in which it transfers its duties to a third party with the
landowner’s consent. William & Meyers, Oil & Gas Law, § 403.1; Seagull, 207 S.W.3d
at 347; Wold, 2011 U.S. Dist LEXIS, at 5-6. See also Williams v. McWhorter, 30 Wyo.
229, 232, 218 P. 791, 793 (1923). Pennaco is experienced in the oil and gas business,
where surface and water agreements and assignments are regularly used, and could have
acted to protect its interests by bargaining for language excusing it from liability or
obtaining the landowner’s consent to transfer its duties to CEP-M. It failed to do so, and
this Court will not depart from firmly established rules of law to insulate Pennaco from
its lack of care. The record shows that Pennaco attempted to obtain consent from KD for
the assignment of an easement to CEP-M, perhaps believing that such consent would
amount to a novation. KD did not consent. The record indicates Pennaco did not request
that KD or the Hollcrofts release Pennaco from its contractual obligations, and the
landowners did not execute any such releases.
[¶75] PAW asks the Court to overlook the plain language of the agreements and, by
applying other interpretative devices – specifically the law of servitudes or covenants
running with the land – arrive at an interpretation that is contrary to both the plain
language and firmly established rules of law. In an effort to persuade the Court to reverse
the district court and hold that Pennaco is not liable under the agreements, PAW points to
certain “facts,” which it asserts will result if the district court’s decision is upheld.
Among those “facts” are: a flood of litigation, denying mineral developers the use of
traditional common law defenses (such as laches) to claims by landowners, decreased use
of surface agreements by the industry, and a chilling of mineral production. Whether or
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not these “facts” will materialize as a result of this Court’s holding is simply speculation.
Our duty is to apply the law to the plain language in the contracts.
6. Hollcroft Lease Exculpatory Provision
[¶76] Addressing its agreements with the Hollcrofts, Pennaco points to a clause in the
mineral leases covering their lands that expressly absolves Pennaco of liability for the
acts or omissions of a successor lessee 5. Pennaco asserts the Hollcrofts are successors to
the lessor under the mineral leases and, as such, are bound by the exculpatory clause.
Pennaco argues the mineral leases and surface use agreement are part of the same
transaction and must be read together. Pennaco makes the same argument with respect to
the replacement water well agreements it entered into with the Hollcrofts. Pennaco
further asserts because the surface use agreement references the mineral leases, the
exculpatory clause contained in the leases is incorporated into the surface use agreement.
[¶77] There are two mineral leases at issue. They state they are agreements entered into
in June of 1998 between the lessors and High Plains Associates, Inc., as lessee. The first
lease identifies Delbert and Maurine Hollcroft & Hollcroft & Company as lessors. The
second lease identifies Hollcroft & Company as lessor. Both leases provide the rights of
the lessor and lessee may be assigned in whole or in part. The leases further state: “if all
or any part of this lease is assigned, no leasehold owner shall be liable for an act or
omission of any other leasehold owner.”
[¶78] The surface use agreement references the leases as follows:
Operator represents that it owns operating rights and is an
assignee of an interest in a valid Gas Lease or Gas Leases
covering portions of the subject lands or adjacent lands …. It
is understood and agreed that this Agreement cannot be used
for the drilling of wells other than those necessary and
prudent for the development of the coal bed methane strata
covered by Operator’s Gas Leases.
[¶79] Under general contract principles, when a contract expressly refers to and
incorporates another instrument in specific terms which show a clear intent to incorporate
that instrument into the contract, both instruments are to be construed together. See 11
Williston on Contracts § 30.25 (4th ed. 2015 Supp.) See also Knight v. TCB Constr. and
Design, LLC, 2011 WY 27, ¶ 13, 248 P.3d 178, 182 (Wyo. 2011). (“A contract may refer
elsewhere for full understanding of its terms, just as it may adopt another document by
reference.”) However, in order for an instrument to be incorporated into and become part
5
This opinion does not address whether the language in the Hollcroft leases, or any particular language, is or is not
sufficient to excuse an assignor of an agreement like those in this case from further liability after assignment.
28
of a contract, the instrument must actually be incorporated. Gross v. WB Texas Resort
Communities, L.P., 2014 Tex. App. LEXIS 13775 (Ct. of App. Tex. 2014). It is not
enough for the contract to merely mention the instrument; the referring language in the
contract must demonstrate the parties intended to incorporate all or part of the referenced
instrument. Id. Parties do not undertake obligations contained in a separate document
unless their contract clearly says so. Prichard v. Clay, 780 P.2d 359, 361 (Alaska 1989).
A reference in a contract to another instrument will incorporate the other instrument only
to the extent indicated and for the specific purpose indicated. Id. See also Housing
Authority v. Snyder, 44 P.3d 724 (Utah 2002). (To incorporate the terms of another
instrument into a contract, the reference must be clear and unequivocal, and alert the non-
drafting party that terms from another document are being incorporated.)
[¶80] This Court applied these principles in Marcam Mortg. Corp. v. Black, 686 P.2d
575, 577 (Wyo. 1984). There the parties’ contract referred to an initial installment land
contract, a copy of which was attached and marked as an exhibit, and expressly stated it
was “incorporated by this reference as if fully set forth herein.” The Court held the
contract incorporated the original contract by reference and the two contracts were to be
construed as one agreement.
[¶81] In contrast, the Court in Prichard, 780 P.2d at 361, concluded a reference in a
purchase and sale agreement (PSA) to a prior lease fell short of incorporating the terms of
the lease. The PSA provided the purchasers had read and reviewed the terms and
conditions of the lease and agreed to assume the obligation of payment and the mortgage
on the lease. The PSA did not explicitly state purchasers assumed any other lease term.
The court concluded although the language in the PSA evidenced the parties’ knowledge
of the lease terms and conditions, it did not evidence their intent to abide by those terms
and conditions.
[¶82] The surface use agreement at issue in the present case does not state the lease is
incorporated by reference. It states only that Pennaco owns operating rights and is an
assignee of an interest in gas leases and the surface use agreement is for the purpose of
drilling wells to develop coalbed methane on lands covered by the leases. Although this
language is evidence that the parties knew Pennaco owned the leases and would be
drilling on the leased land, it does not evidence an intent to incorporate the terms of the
leases into the surface use agreement. The mere mention of the leases is simply
insufficient to support the conclusion that the exculpatory clause contained in the leases
is incorporated in the surface use agreement.
[¶83] In February of 2009, Hollcrofts and Pennaco also entered into two agreements for
replacement of water wells. The agreements state Pennaco’s coalbed methane operations
had impaired Hollcrofts’ water wells #8 and #10, respectively. Pennaco agreed to pay the
costs associated with drilling and supplying electricity to two replacement wells, and the
cost of constructing and supplying power to two stock tanks. Upon termination of the
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surface use and water well agreements, Pennaco agreed to pay Hollcrofts an amount
equal to three times the annualized cost of electricity for the wells. Upon completion of
the replacement water wells, Pennaco agreed to restore the lands. The replacement well
agreements contain no reference to the leases, but do provide:
9. This Agreement constitutes the entire Agreement
between the parties regarding the Hollcroft #8 [and #10 by
separate agreement] well, and any prior understanding or
representation of any kind preceding the date of this
agreement shall not be binding on either party except to the
extent incorporated into this agreement. …
By their clear and unequivocal terms, the water well replacement agreements do not
incorporate the exculpatory clause contained in the lease.
7. Attorney Fees and Costs
[¶84] Attorney fees are recoverable if expressly provided for by statute or contract.
Where a contract allows the award of attorney fees, that includes fees incurred on appeal.
Hofhine v. Hofhine, 2014 WY 86, ¶ 18, 330 P.3d 242, 247 (Wyo. 2014), quoting Kinstler
v. RTB South Greeley, LTD., LLC, 2007 WY 98, ¶ 13, 160 P.3d 1125, 1129 (Wyo. 2007).
The surface and damage agreement between KD’s predecessor and Pennaco states that “if
Operator defaults” the landowner is to provide written notice of the default. If the
operator fails to correct the default within sixty days, and if operator disagrees that it is in
default, either party may file an action for judgment declaring whether operator defaulted.
The agreement provides the prevailing party “shall be” entitled to recover attorney fees
and costs. Pursuant to this provision, the district court awarded KD $16,074.03 in costs
and attorney fees.
[¶85] The replacement water well agreements between Hollcrofts and Pennaco provide:
“If Pennaco Energy defaults under this agreement, Pennaco Energy shall pay all costs and
expenses, including reasonable attorney’s fees, incurred by Hollcroft in enforcing this
agreement.” Pursuant to this provision, the district court awarded Hollcrofts $15,618.09
as attorney fees and costs.
[¶86] Pennaco contends the district court’s attorney fee awards are erroneous because
Pennaco was not in default under the agreements.6 We disagree. The surface agreement
required Pennaco to make the annual payments until the coalbed methane wells were
plugged and abandoned and the lands were reclaimed. The replacement water well
agreements provided:
6
Pennaco does not contest the amount of the fees and costs awarded.
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1. … Upon termination of the Surface Use Agreement
and Water Well agreement governing these lands, Pennaco
Energy shall pay Hollcroft an amount equal to three (3) times
the annualized electric cost reimbursement most recently paid
pursuant to this Agreement regarding the Hollcroft #8 [and
#10]. Upon making these payments, Pennaco Energy shall
have no further obligation with respect the Hollcroft #8 [and
#10].
As we have said, Pennaco remained liable under the agreements despite the assignments
to CLP-M and High Plains Gas. Upon their default, Pennaco was obligated to make the
payments. Pennaco has not made the annual payments due under the surface agreement
until the lands are restored and it has not made the payments under the replacement water
well agreements as required. Having not made the payments, Pennaco is in default and
the district court properly awarded the landowners attorney fees and costs. The
landowners are also entitled to the attorney fees and costs incurred on appeal. Hofhine,
id.
CONCLUSION
[¶87] The plain language of the surface and water agreements entered into between
landowners and Pennaco required Pennaco to perform certain obligations until the
coalbed methane operations ceased and the lands were reclaimed. Those agreements did
not contain language indicating any intent that Pennaco would be discharged from its
obligations upon assignment to a third party. To the contrary, the surface use and water
agreements contained numerous indications that Pennaco’s contractual obligations
continued even after assignment. Therefore, under firmly established principles of
contract law, and because there was no express clause that terminated Pennaco’s
obligations upon assigning the agreements to a third party, Pennaco remained liable to the
landowners to perform the covenants in the event its assignee defaulted.
[¶90] We affirm.
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