Heavy Petroleum Partners, LLC et al v. Atkins et al
Filing
198
MEMORANDUM AND ORDER denying 190 Motion for Summary Judgment. See Order for details. Signed by District Judge Eric F. Melgren on 1/23/2013. (cm)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF KANSAS
HEAVY PETROLEUM PARTNERS, LLC,
and CHEROKEE WELLS, LLC,
Plaintiffs,
vs.
Case No. 09-1077-EFM
PAUL ATKINS, an individual, and J.J.R. OF
KANSAS LIMITED,
Defendants.
MEMORANDUM AND ORDER
This case involves a dispute between Plaintiffs Heavy Petroleum Partners, LLC (HPP) and
Cherokee Wells, LLC and Defendants Paul Atkins and J.J.R. of Kansas Limited (JJR). Before the
Court is Plaintiffs’ Motion for Summary Judgment (Doc. 190). The issue is whether the Court
should quiet title in Plaintiffs’ favor. Because the Court finds that several issues of fact preclude the
granting of summary judgment, the Court denies the motion.
I. Factual and Procedural Background1
In 1988, Defendant JJR’s predecessor in interest, KLM Exploration Company, Inc., took an
oil and gas lease from John and Sandra Zachariah in Jefferson County, Kansas. The lease covers
approximately 240 acres. Through various assignments, JJR succeeded to the lessee’s interest in the
lease. The lease is underlain by the McClouth sandstone, a petroleum reservoir containing a very
1
The Court will only give a brief background of the facts pertinent to the issues with respect to this motion for
summary judgment.
dense, heavy crude oil.
On May 19, 2006, JJR and HPP entered into a farmout agreement (the Farmout) in which
HPP was given the opportunity to earn 75% of JJR’s working interest in the lease. Defendant Paul
Atkins, owner of JJR, signed the Farmout. Several of the relevant contractual provisions will be set
forth. Paragraph 2 of the Farmout states:
Test Pod: On or before August 1, 2006, Farmoutee (HPP) shall from the Zachariah
Pod # 1 (sometimes hereinafter referred to as “Test Pod”), and at its sole risk, cost
and expense commence actual operations for the drilling of new wells and the
reworking of existing wells to a depth of approximately 1,500 feet to inject steam
into the McClouth Sandstone for the purpose of producing oil in commercial
quantities. . . . Failure to commence operations as herein provided shall result in the
termination of this agreement without penalty.
Paragraph 5 of the Farmout provides:
Assignment: Farmoutor (JJR) agrees that when and if Farmoutee has timely and
properly prosecuted the prescribed operations on the said Test Pod and has
completed same as a facility capable of producing oil in commercial quantities, and
if Farmoutee has otherwise complied with all of the terms and conditions contained
herein, then Farmoutor will assign to Farmoutee, subject to the reservations and
conditions contained herein, a 75% Working Interest and corresponding 62.625%
Net Revenue Interest in and to the Oil and Gas Lease covering the Farmout Area as
to all depths and all substances. . . . Any assignment made to Farmoutee hereunder
shall be effective as of the date of this Farmout Agreement. As used herein, the term
“Pod” is defined as an injection well and the producing oil wells assigned thereto.
Unless otherwise provided by the KCC, each producing oil well shall have a drilling
and spacing unit of 2.5 acres. Farmoutee agrees to accept the foregoing assignment
of the Farmout Area subject to all the terms and provisions and conditions of the Oil
and Gas Lease covering the Farmout Area. Farmoutee assumes and agrees to comply
fully with and to perform timely each and every duty, obligation, provision and
condition contained therein, both expressed and implied, insofar as they concern the
Farmout Area. . . . Furthermore, Farmoutee agree[s] to maintain all Farmouter’s
production facilities and equipment in a good and workman like condition.
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Robert Defeo, a member of HPP and a manager of Cherokee Wells, LLC, avers that HPP
undertook development of the test pod and by August 2006, the test pod was capable of producing
in paying quantities. On August 23, 2006, JJR executed an assignment (the Assignment) to HPP of
75% of the working interest in the lease. The Assignment was given an effective date of May 19,
2006–the same date as the date of the Farmout’s execution. Mr. Defeo avers that steam injection
into the test pod of wells did not commence until sometime after October 6, 2006, when the Kansas
Corporation Commission (KCC) approved the permit to commence injection.
Paragraph 15 of the Farmout provides:
If the Test Pod has been drilled and developed as hereinabove provided, Farmoutee
shall have the option to contemporaneously drill and develop approximately 5,000
acres owned by Farmoutor in the area outlined . . . . Notwithstanding any of the
remedies contained herein, should Farmoutee violate or fail to comply with any of
the terms and provisions of this agreement, Farmoutor shall give Farmoutee written
notice by certified mail of any violation of the agreement that has occurred and
Farmoutee shall have thirty (30) days from the receipt of such notice in which to
come into compliance with said agreement. Failure of Farmoutee to come into
compliance with said agreement will result in the termination of said agreement in
its entirety with all rights and interest in the Contract Area reverting to Farmoutor.
In such event, Farmoutee agrees to assign to Farmoutor, within thirty (30) days from
the date of termination of the agreement, all interest theretofore earned in the
Contract Area.
The Farmout also included a Model Form Operating Agreement, often referred to as a joint
operating agreement (JOA).2 The JOA designated Blue Jay Operating as the operator of the lease.
On December 31, 2006, Blue Jay Operating assigned all its rights and interests as operator of the
lease to Plaintiff Cherokee Wells.
2
The Court notes that Defendants object to this fact and states that Atkins never executed or agreed to this
JOA. In Defendants’ very next sentence, however, they state that “Paul Atkins did execute the JOA for JJR but did so
to facilitate the plaintiffs’ misrepresented rapid development reasons.” See Doc. 194, p. 5, ¶ 23. Thus, the Court is left
with Defendants’ assertion that JJR did not execute the JOA and Defendants’ assertion that Atkins executed the JOA
on behalf of JJR. In any event, the Tenth Circuit previously determined that this Court properly found the JOA to be a
binding contract. Thus, there is no dispute as to whether JJR is a party to the JOA.
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In early January 2009, HPP noted diminished oil sales from the lease for the month of
December 2008 and directed Atkins to concentrate on increasing production for the upcoming
months. 300 barrels of oil from the lease sold during January, 2009. In early March 2009, HPP
noticed that there were no oil sales from the lease for the month of February, 2009. Thus, HPP sent
field personnel to the lease to investigate the causes of reduced production. HPP found that the
wells on the lease had been shut-in.
On January 26, 2009, Mr. Atkins filed an affidavit of non-production regarding the lease in
the official records of Jefferson County, Kansas. In this affidavit, Mr. Atkins stated: “Affiant further
knows of own personal knowledge that there is at present no production of oil or gas in commercial
quantities at this time and secondary recovery attempts have failed. Assignment and farmout
agreement authorizing said assignment has expired by its own terms.”
On or about February 5, 2009, Mr. Atkins filed a “Request for Change of Operator” form
with the KCC designating JJR as the operator of the lease. He also attached the affidavit of nonproduction to that form. As a result of the affidavit and filing with the KCC, the KCC approved the
change of operator and cancelled a pending application for enhanced injection that Cherokee Wells
had filed with respect to the lease. Mr. Atkins also contacted Coffeyville Resources requesting that
the lease ownership be changed to reflect JJR as the operator and the owner of 100% of the working
interest in the lease. As a result of that contact, Coffeyville Resources changes its records to reflect
JJR was the operator of the lease.
Plaintiffs filed their original complaint in this case on March 25, 2009 and asserted seven
claims against Defendants, including claims for breach of contract and quiet title. Defendants
counterclaimed for conversion and quiet title asserting that Plaintiffs had breached the Farmout. In
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June 2010, this Court granted Plaintiffs’ motion for summary judgment on most of their claims,
including their quiet title claim finding that Plaintiffs were the owners of the 75% interest in the
lease. In December 2010, the Court held a jury trial on the limited issue of whether Defendants
breached their duty to pay amounts under the JOA. A jury found Defendants liable under the JOA
in the amount of $87,387.03 for unpaid joint interest billing and unpaid overhead. The jury also
determined that Defendants owed $155,239.36 for litigation expenses.
Defendants appealed to the Tenth Circuit Court of Appeals and raised five issues on appeal.
The Tenth Circuit affirmed on some issues but found that this Court erred in granting summary
judgment to Plaintiffs on the quiet title issue and should not have quieted title in Plaintiffs’ favor.
The Tenth Circuit found that the Assignment must be read in conjunction with the Farmout and
remanded the case to this Court to redetermine the quiet title issue. The appellate court noted certain
questions that this Court may need to consider. Plaintiffs again seek summary judgment and seek
the Court’s determination that title should be quieted in their favor.
II. Summary Judgment Standard
Summary judgment is appropriate if the moving party demonstrates that “there is no genuine
dispute as to any material fact” and that it is “entitled to judgment as a matter of law.”3 The Court
must view the evidence and all reasonable inferences in the light most favorable to the nonmoving
party.4 The moving party bears the initial burden of demonstrating the absence of a genuine issue
of material fact.5 To meet this standard, the moving party need not disprove the nonmoving party’s
3
Fed. R. Civ. P. 56(a).
4
LifeWise Master Funding v. Telebank, 374 F.3d 917, 927 (10th Cir. 2004).
5
Thom v. Bristol-Myers Squibb Co., 353 F.3d 848, 851 (10th Cir. 2003) (citing Celotex Corp. v. Catrett, 477
U.S. 317, 322-23 (1986)).
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claim; rather, the movant must simply point out the lack of evidence on an essential element of the
nonmoving party’s claim.6
If the moving party carries its initial burden, the party opposing summary judgment cannot
rest on the pleadings but must bring forth “specific facts showing a genuine issue for trial.”7 “To
accomplish this, the facts must be identified by reference to affidavits, deposition transcripts, or
specific exhibits incorporated therein.”8 Conclusory allegations alone cannot defeat a properly
supported motion for summary judgment.9
III. Analysis
Plaintiffs contend that they are entitled to summary judgment because (1) Defendant failed
to comply with the notice-and-cure provisions of the Farmout, (2) in the alternative, the Farmout
does not require HPP to continue to produce oil in commercial quantities as a result of steam
injection in order to maintain HPP’s interest in the lease, (3) in the alternative, Defendant
permanently waived any requirement that production in commercial quantities be established from
steam injection, and (4) any breaches asserted by Defendant are frivolous and do not give rise to a
forfeiture of HPP’s interest in the lease.
Before the Court can consider Plaintiffs’ argument regarding Defendant’s alleged failure to
follow the notice-and-cure provision in Paragraph 15 of the Farmout, the Court must first consider
certain threshold requirements regarding the Assignment set forth in paragraphs 2 and 5 of the
6
Id. (citing Celotex, 477 U.S. at 325).
7
Garrison v. Gambro, Inc., 428 F.3d 933, 935 (10th Cir. 2005).
8
Adler v. Wal-Mart Stores, Inc., 144 F.3d 664, 671 (10th Cir. 1998).
9
White v. York Int’l Corp., 45 F.3d 357, 363 (10th Cir. 1995).
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Farmout.10 Paragraph 2 of the Farmout requires HPP, on or before August 1, 2006, to form a test
pod and “commence actual operations for the drilling of new wells and the reworking of existing
wells to a depth of approximately 1,500 feet to inject steam into the McClouth Sandstone for the
purpose of producing oil in commercial quantities. . . . Failure to commence operations as herein
provided shall result in the termination of the agreement without penalty.”
Plaintiffs state that they undertook development of the test pod and by August 2006, the test
pod was capable of producing in paying quantities.11 As Paragraph 2 requires commencing actual
operations for drilling wells to inject steam for the purpose of producing oil in commercial
quantities, the Court finds that there is a question of fact as to whether Plaintiffs met the
requirements of Paragraph 2.12 Because Paragraph 2 states that failure to commence operations as
herein provided shall result in the termination of the agreement, this threshold question of fact needs
to be determined.
10
Plaintiffs contend that the Tenth Circuit established the following threshold criteria for Defendants’ assertions
that Plaintiffs’ 75% interest in the Lease had been forfeited: “Defendants were not entitled to reassignment of a 75%
working interest in the lease unless (1) Plaintiffs breached the farmout, (2) Defendants gave Plaintiffs notice of the
breach by certified mail, and (3) Plaintiffs failed to cure the breach within thirty days.” See Doc. 190, pp. 15-16 (citing
the Tenth Circuit’s opinion at Doc. 176, p. 20). While the Court agrees that the Tenth Circuit set forth this criteria, the
Tenth Circuit also directed this Court to consider such issues as “whether Plaintiffs failed to ‘commence operations,’ and,
if so, whether the lease terminated automatically.” See Doc. 176, p. 21. Thus, the Court must first consider whether
Plaintiffs earned the Assignment and if not, whether the lease terminated automatically pursuant to Paragraph 2.
11
The Court notes that the Farmout appears to require Plaintiffs to develop test pod capable of producing oil
in commercial quantities–not necessarily the requirement that it actually is producing oil in commercial quantities. In
any event, as noted, there appears to be a question of fact as to whether the test pod was capable of producing oil in
commercial quantities.
12
“Paying quantities” may be the equivalent of “commercial quantities.” The Court, however, was not given
any argument or authority regarding this quesiton.
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In addition, Paragraph 5 of the Farmout addresses the Assignment that Plaintiffs could earn.
It provides that “when and if [HPP] has timely and properly prosecuted the prescribed operations
on the said Test Pod and has completed same as a facility capable of producing oil in commercial
quantities, and if [HPP] has otherwise complied with all of the terms and conditions contained
therein, then [JJR] will assign to [HPP], subject to the reservations and conditions contained herein,
a 75% Working Interest . . . in and to the Oil and Gas Lease covering the Farmout Area as to all
depths and all substances.” Paragraph 5 requires Plaintiffs to complete a facility capable of
producing oil in commercial quantities. The evidence indicates that steam injection did not actually
commence until on or after October 6, 2006; thus, it appears as if Plaintiffs did not meet the
requirements of Paragraph 5. Yet, Defendants still executed the Assignment on August 23, 2006.
Accordingly, Defendants may have waived the requirement that production in commercial quantities
be established by steam injection.13 “The question of waiver is one of fact or a mixed question of
law and fact. Waiver must be manifested in some unequivocal manner by some distinct act or by
inaction inconsistent with an intention to claim forfeiture of a right.”14 Thus, the Court finds that
there is a question of fact as to whether Defendants waived any of the requirements in the Farmout.
Because there are several issues of fact, the Court cannot grant Plaintiffs’ Motion for
Summary Judgment.
13
The question may also be whether Defendants waived the requirement that Plaintiffs complete a facility
capable of producing oil in commercial quantities. As noted above, there is an initial question of fact as to whether
Plaintiffs complied with Paragraph 2 of the Farmout and whether the Farmout automatically terminated.
14
Patrons Mut. Ins. Ass’n v. Union Gas Sys., Inc., 250 Kan. 722, 725-26, 830 P.2d 35, 39 (1992) (citation
omitted).
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IT IS ACCORDINGLY ORDERED this 23rd day of January, 2013 that Plaintiffs’ Motion
for Summary Judgment (Doc. 190) is hereby DENIED.
IT IS SO ORDERED.
ERIC F. MELGREN
UNITED STATES DISTRICT JUDGE
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