Northern Natural Gas Company v. Tract No. 1062710 et al
Filing
1000
MEMORANDUM AND ORDER granting 950 Motion for Summary Judgment; granting 952 Motion for Summary Judgment; granting 954 Motion for Summary Judgment; granting 956 Motion for Partial Summary Judgment; denying 959 Motion for Order; denying 960 Motion for Sanctions. Signed by District Judge Monti L. Belot on 7/8/2015. (sz)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF KANSAS
NORTHERN NATURAL GAS COMPANY,
)
)
Plaintiff,
)
)
v.
)
)
APPROXIMATELY 9117 ACRES IN PRATT, )
KINGMAN, AND RENO COUNTIES,
)
KANSAS, AND AS FURTHER DESCRIBED
)
HEREIN;
)
)
TRACT NO. 1062710
)
CONTAINING 80.00 ACRES MORE OR
)
LESS, LOCATED IN KINGMAN COUNTY,
)
KANSAS, AND AS FURTHER DESCRIBED
)
HEREIN; ET AL.,
)
)
Defendants.
)
)
CIVIL ACTION
No.
10-1232-MLB-DWB
MEMORANDUM AND ORDER
Before the court are the following:
1. Northern Brief Regarding Pre-Judgment Interest (Doc.
949); Huff Group Response (Doc. 967); Meireis Group
Joinder in Huff Response (Doc. 968); Producer-Defendants’
Response (Doc. 969); Northern Reply (Doc. 976);
2. Summary Judgment Motions Concerning Validity of Leases
- Val Group (Docs. 950, 951), Northern Response (Doc.
970), Huff Group Response (Doc. 974), Val Reply to
Northern (Doc. 989), Val Reply to Huff Group (Doc. 990);
- Pratt Well Service (PWS) Group (Doc. 952, 953),
Huff Group Response (Doc. 972), PWS Reply (Doc. 987);
- Nash Oil & Gas (Docs. 954, 955), Huff Group Response
(Doc. 975), Sonja Sue Staab Response (Doc. 971); Nash
Reply (Doc. 988), Nash Reply to Staab (Doc. 991);
- L.D. Drilling, Inc. (Docs. 956, 957), Huff Response
(Doc. 973), L.D. Drilling Reply (Doc. 992);
3. Northern’s Motion to Reallocate Fees and Expenses
(Doc. 959); Huff Group Response (Doc. 978); ProducerDefendants’ Response (Doc. 981); Hudson Group Response
(Doc. 986);
4. Huff Group’s and Producer-Defendants’ Motions for
Attorney’s Fees and Expenses (Docs. 961, 962) and Meireis
Group’s and Hudson Group’s Joinder in the motions (Docs.
964, 966); Northern’s Response (Doc. 977);
5. Northern’s Motion for Sanctions (Doc. 960); Huff Group
Response (Doc. 984); Meireis and Hudson Groups’ Joinder
in Huff Response (Docs. 983, 985);
6. Joint Report on Allocation to Interest Owners in
Tracts Without Wells (Doc. 963);
7. Producer-Defendants’ Report on Division Between
Royalty and Working Interest Owners in Tracts with Wells
(Doc. 965).
I. Introduction.
Northern brought this condemnation action under the Natural Gas
Act (NGA), 15 U.S.C. § 717f(h), to expand its natural gas storage
field near Cunningham, Kansas. Pursuant to authority granted by the
Federal Energy Regulatory Commission (FERC), Northern sought to
acquire
over
9,000
subsurface
acres
in
the
Viola
and
Simpson
formations of the designated Extension Area. The court granted a
preliminary injunction allowing Northern to take possession of the
property as of March 30, 2012. Doc. 464. The court subsequently held
that the date of taking was March 30, 2012, the date Northern
perfected a right to possession of the property. Doc. 691 at 34. A
commission appointed by the court to determine just compensation for
the property taken by Northern held extensive hearings and filed a
report of its findings. Doc. 888. The court subsequently adopted the
commission’s report. Doc. 941.
The findings adopted by the court are summarized in Exhibit 3 of
the commission’s report, Doc. 888 at p. 84-85. The total compensation
owed by Northern as of the date of taking was $7,310,427. Of that
-2-
amount, about $5.9 million was attributable to Extension Area tracts
that had producing gas wells in the Viola formation. A little over $1
million was attributable to the storage lease potential of the
property taken. Additional compensation was determined to be owing for
well
salvage
($46,800),
surface
damages
($178,540),
buildings
($278,190), and well isolation costs ($51,000).
The court now has before it motions addressing most of the
remaining issues in the case, including: whether prejudgment interest
should be awarded as part of just compensation; whether oil and gas
leases on a number of well tracts terminated prior to the date of
taking; whether some of the commission costs paid by Northern should
be reallocated to other parties; whether defendants are entitled to
attorney’s fees; whether Northern is entitled to sanctions against
landowners’ counsel; how the award on non-well tracts should be
allocated; and how the award on tracts with wells should be allocated
among the various interest owners.
II. Prejudgment interest.
Northern took possession of the defendant property on March 30,
2012, but has yet to pay the owners just compensation. As the court
has previously noted, when property is taken by a condemnor prior to
payment of just compensation, the condemnor has an obligation to pay
interest on the value of the property until just compensation is
ultimately paid to the owner. Doc. 691 at 9 (citing United States v.
Dow, 357 U.S. 17, 22 (1958)). “[I]f disbursement of the award is
delayed, the owner is entitled to interest thereon sufficient to
ensure that he is placed in as good a position pecuniarily as he would
-3-
have occupied if the payment had coincided with the appropriation.”
Kirby Forest Indus., Inc. v. United States, 467 U.S. 1, 10 (1984).
Interest is thus an element of just compensation owed for the
taking of the property. See Seaboard Air Line Ry. Co. v. United
States, 261 U.S. 299, 306 (1923) (“The addition of interest allowed
by the District Court is necessary that the owner shall not suffer
loss and have ‘just compensation’ to which he is entitled.”). The
Supreme Court has said that a “reasonable rate” of interest is
appropriate in such circumstances. See United States v. Creek Nation,
295 U.S. 103, 111 (1935). In Seaboard Air Line, the court found that
awarding interest at a rate established by state law was a “palpably
fair and reasonable method” of awarding just compensation. 261 U.S.
at 306. See also United States v. Rogers, 255 U.S. 163, 170 (1921)
(the fact that the interest rate applied by the court “is in harmony
with the policy of the state where the lands are situated does not
militate against, but makes for, the justice and propriety of its
adoption.”).
After examining the various alternatives, the court concludes
that the Kansas post-judgment interest rate provided for in K.S.A. §
16-204(e)(1) provides the appropriate measure of compensation. Kansas
law applies this rate when an appeal from an initial condemnation
award results in a greater award. K.S.A. § 26-511. Although the
condemnation procedures used in this federal proceeding differ from
the Kansas procedures, the Kansas judgment rate nevertheless provides
a fair assessment of the compensation owed for the period from the
taking of the property until ultimate payment of the condemnation
award. Cf. Spears v. Williams Nat. Gas Co., 932 F.Supp. 259 (D. Kan.
-4-
1996) (in condemnation proceeding under the Natural Gas Act, court
applied the judgment rate of K.S.A. § 16-204). Under the formula in
K.S.A. § 16-204(e)(1), the applicable rate in this case is 4.75%,
which is four percentage points above the federal reserve discount
rate for the prior year.1
The court has considered but rejected the alternatives suggested
by the parties. Northern, for example, argues that prevailing money
market rates (0.70% for a 36-month CD) “would place the condemnees,
as ordinary investors, in as good a pecuniary position as had there
been no delay” in payment. Doc. 949 at 10. But as Northern itself
recognizes, this has been a period of historically low interest rates
during which cash equivalents like CDs have earned little or no
return.
During
alternatives
the
from
same
which
period,
ordinary
there
were
investors
reasonably
could
generate
safe
more
substantial returns. For example, other courts have awarded interest
based upon long-term corporate bond yields. See e.g., Textainer
Equipment Management Limited v. United States, 115 Fed.Cl. 708, 719
(Fed.Cl.2014) (“the court is persuaded that in this instance an
objective ‘reasonably prudent investor’ would have sought yields
consistent with the Moody's Rate.”). See also Pitcairn v. United
States, 547 F.2d 1106, 1124 (Ct.Cl.1976) (“[L]ong-term corporate bond
yields are an indicator of broad trends and relative levels of
investment yields or interest rates. They cover the broadest segment
of the interest rate spectrum.”). The court notes that in the period
from April 2012 to present, long-term corporate bond yields have
1
The judgment rate is published by the Kansas Secretary of State.
See http://kssos.org/other/business_finance_rates.html#judgment.
-5-
generally been between 3.5% and 4.5%.2 Under the circumstances,
current CD yields and similar measures are not sufficient to ensure
that property interest owners suffer no economic loss from the delay
in payment over the past three years.
The Huff group and the producer-defendants, by contrast, urge the
court to apply the 10% annual rate in K.S.A. § 16-201. Huff points out
that the Kansas Supreme Court previously applied that statute to
damages awarded in an inverse condemnation case. Herman v. City of
Wichita, 228 Kan. 63, 612 P.2d 588 (1980). (At the time Herman was
decided, it should be noted, the statute provided for 6% annual
interest.). Aside from the fact that Herman was expressly limited to
inverse condemnation claims, however, the 10% flat rate in K.S.A. §
16-201 takes no account of actual market conditions. It embodies an
arguably punitive element that has no place in just compensation. And
a 10% annual return is well above what a relatively safe investment
would have earned over the period in question. Defendants are not
entitled to a windfall return reflecting a risky investment for which
they bore no risk.
Producer-defendants likewise urge the court to apply a 10%
prejudgment interest rate because the commission discounted the value
of the gas reserves in the Extension Area by 10%. Doc. 969 at 3-4. But
the 10% discount applied by the commission was based on evidence that
willing
buyers
and
sellers
typically
apply
such
discounts
in
determining the market value of oil and gas properties. That fact says
nothing
about
the
appropriate
level
2
of
prejudgment
Moody’s
Seasoned
Aaa
Corporate
https://research.stlouisfed.org/fred2/series/AAA.
-6-
interest
Bond
to
Yield,
compensate defendants for a delay in payment of just compensation.
The court’s obligation is to award interest “sufficient to ensure
that [the property owner] is placed in as good a position pecuniarily
as he would have occupied if the payment had coincided with the
appropriation.” Kirby Forest Indus., Inc. v. United States, 467 U.S.
1, 10 (1984). The 4.75% annual interest rate provided for in K.S.A.
§ 16-204 accomplishes this. It takes into account actual market
conditions for the period in question and provides a rate of return
consistent with a relatively safe investment.
Northern
contends
that
no
interest
should
be
imposed
on
$2,671,700 of the condemnation award because Northern deposited that
amount with the court prior to the taking. It argues defendants had
the ability to withdraw that sum (although none chose to do so), and
that by analogy to Kansas condemnation procedures, interest should
only be imposed on the difference between the total $7.3 million award
and this $2.6 million deposit.
See K.S.A. § 26-511.
This argument is not persuasive. Northern’s deposit was required
by the court as security for the injunction allowing Northern’s upfront taking; it was not intended to be just compensation for the
taking of the property.3 (Northern was allowed to post a bond for the
lion’s share of the security.) See Doc. 464 at 25, 29. The cash
deposit was required in part to allow well tract owners to avoid or
mitigate the consequences of having their wells immediately taken. See
3
In fact, Northern’s proposed instructions to the commission
specifically stated that the “deposits and bonds shall not be
considered as evidence of the fair market value of the tracts before
or after Northern’s taking.” Doc. 756 at 8. This language was included
in the court’s instructions to the commission. Doc. 848 at 14, Inst.
9.
-7-
Doc. 464 at 22. Additionally, the defendants who were eligible to
withdraw the cash deposit faced practical barriers and were not at
liberty to simply withdraw the funds.
party
seeking
to
withdraw
the
funds
The court required that any
show
the
“consent
of
any
landowners, royalty owners, working interest owners and lienholders
who have an interest in the tract....” Doc. 464 at 30. Property owners
also
faced
liability
if
a
withdrawal
exceeded
the
ultimate
determination of just compensation. These measures served to prevent
pre-litigation disputes over the security deposit, but they also
erected a significant hurdle in the path of any interest owner wanting
to withdraw the funds. Unlike a garden variety condemnation, ownership
of these tracts was splintered in such a way that withdrawal of the
deposit was impracticable. The court concludes that Northern has an
obligation to pay interest on the entirety of the condemnation award,
including the cash deposit made prior to the taking.
Finally, the court concludes that the obligation to pay this
interest continues until Northern pays just compensation to the owners
of the property, and that the interest should be compounded annually
to ensure that the owners are placed in as good a position as they
would have enjoyed had payment coincided with the taking. Compounding
is appropriate here given the significant delay between the taking and
the payment of just compensation. See e.g., Hardy Storage Co., LLC v.
An Easement to Construct, Operate and Maintain gas Transmission
Pipelines, 2009 WL 900157, *8 (N.D. W.Va. 2009) (in action under the
NGA, interest was compounded annually to fully compensate for the
condemnation); Textainer Equip. Mgmt. Ltd. v. United States, 115
Fed.Cl. 708, 719 (Fed.Cl. 2014) (“Compound interest may be necessary
-8-
‘to
accomplish
complete
justice’
under
the
Just
Compensation
Clause.”); 520 E. 81st St. Associates v. State of New York, 19 A.D.3d
24, 30, 799 N.Y.S.2d 1, 5 (N.Y.A.D. 1 Dept. 2005) (quoting Bowles v.
United States, 31 Fed.Cl. 37, 52 (Fed.Cl. 1994)) (“because of the long
delay since the date of taking in this case, the award of compound
interest is not only proper, but its denial would effectively undercut
the protections of the fifth amendment”).
In sum, the court concludes that Northern owes interest on the
value of the property taken ($7,310,427) from the date of taking on
March 30, 2012, until the date just compensation is paid to the owners
by Northern, at a rate of 4.75%, compounded annually.
III. Summary Judgment on Validity of Leases.
Several owners/producers with oil and gas leases in the Extension
Area have filed summary judgment motions seeking a ruling that their
leases were valid on the date of taking, such that they are entitled
to share in the compensation paid for the tracts taken by Northern.
Although the wells on these tracts were shut-in and were not producing
at the date of taking, the producers argue that the leases remained
valid for various reasons, including the effect of force majeure
provisions.
The
Huff
Group
of
landowners
(and
certain
other
landowners), on the other hand, contend that several leases terminated
due to a lack of production and/or because the producers failed to pay
shut-in royalties.4
4
The parties have filed a joint report on factual stipulations
pertaining to leases. Doc. 939. The report is exceptionally helpful
in view of the complexity of issues and the history of the litigation.
The court compliments counsel for their highly professional efforts
-9-
Val Group
The Val group argues that Val Energy’s leases remained valid on
the date of taking by virtue of the leases’ force majeure clauses.
Docs. 950, 951. It further argues that it would be inequitable under
the circumstances to terminate the leases. In response, the Huff
landowner group argues (as to the Branscom lease) that the force
majeure clause did not apply, but even if it did that the lease
terminated because Val failed to pay shut-in royalties to extend the
lease. Northern makes a similar argument as to the McGuire lease and
further contends that even if the lease remained valid, the Val lease
interest was personal property and is not compensable in this action.
Uncontroverted facts. The court finds the following facts to be
uncontroverted for purposes of summary judgment.
The Val Group defendants5 held interests in three relevant
leases: the McGuire lease (covering Tract No. 2312620), the Branscom
lease (Tract No. 3302610), and the Riffey lease (Tract No. 4252611).
Val Energy operated a producing well on each of these leases - the
in conferring with each other and in reporting to the court. The
report discloses that the parties stipulated that seven leases
remained valid and that one lease was invalid on the date of taking.
There was no stipulation as to 16 leases, which are the subject of the
summary judgment motions set forth above.
To the extent the parties’ briefs have duplicated issues or
claims concerning the validity of the leases, the court has generally
addressed the issue only once within the following sections. The
court’s ruling with respect to one party or lease applies equally to
any other party raising the same issue.
5
The Val Group consists of: Allam Exploration, LLC; Apollo
Energies, Inc.; Robert P. Bayer II; Hastings Oil & Gas Properties;
Lies Exploration, LLC; David Munro; Brenda Brown Riffey; Larry D.
Riffey; Dale L. Smith and Mae D. Smith Revocable Trust Dated 12-5-07;
Eric D. Stinson Trust; Val Energy, Inc.; and Vosburgh Exploration. See
Doc. 950 at 1.
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McGuire 1-31, the Branscom 1 and the Riffey VI-25, respectively. Each
well was completed in and producing gas from the Viola/Simpson
formations prior to June 2010.
At the time Val drilled the McGuire 1-31 well in 2008, it was
aware of litigation between Northern and various producers operating
wells farther to the south. The McGuire 1-31 began producing in
January 2009.
In December of 2008, Northern sued Val, L.D. Drilling, Inc., and
Nash Oil & Gas, Inc. in federal court, claiming they were producing
gas
belonging
to
Northern
that
was
migrating
from
Northern’s
Cunningham Storage Field. Northern Nat. Gas Co. v. L.D. Drilling,
Inc., et al., Case No. 08-1405 (U.S. Dist. Ct., D. Kan.).6 Northern
alleged various state law tort claims, including conversion, nuisance,
and civil conspiracy.
In September 2009, Lumen, the gas purchaser on the McGuire 1-31
well, suspended payments on gas purchases from Val and other producers
because of Northern’s claim that the gas belonged to Northern.
Northern filed an action in Pratt County District Court in
December 2009 claiming that purchasers of gas from Val and other
producers were converting gas belonging to Northern. On April 15,
2010, the judge in the state case ruled in a summary judgment motion
that Northern did not have title to the disputed gas.
On June 2, 2010, FERC granted Northern a Certificate of Public
Convenience and Necessity authorizing it to expand the boundaries of
6
Northern had filed an earlier case against L.D. Drilling and
Val Energy. Case No. 08-1400 (U.S. Dist. Ct., D. Kan.). That case was
consolidated with Case No. 08-1405. (Doc. 152 in Case No. 08-1405).
-11-
the Cunningham Storage Field by over 12,000 acres. The certificate
allowed Northern to acquire by condemnation the Viola and Simpson
formations underlying the Extension Area, including the acreage on
which the three Val wells were operating.
On June 17, 2010, Northern filed a Motion to Enjoin Production
in the federal “damage case” (D. Kan. No. 08-1405) asking the court
to require operators to halt production from specified Extension Area
Viola wells, including the three Val wells.
On June 30, 2010, the judge in the Pratt County District Court
action
ordered
gas
purchasers
to
continue
holding
gas
purchase
payments in suspense pending further order of the court. He certified
his summary judgment ruling as a final judgment to allow an immediate
appeal to the Kansas Supreme Court.7
On July 16, 2010, Northern filed the instant condemnation action
(Case No. 10-1232).
Thereafter in July 2010, Val Energy shut-in its gas wells on the
McGuire, Branscom and Riffey leases. The Val leases were all producing
in paying quantities prior to being shut-in. Val would have continued
to produce from these wells but for the foregoing events.
Prior to entry of the June 2, 2010 FERC order, Val Energy’s
president considered the interruption of gas payments by purchasers
to be temporary. After the FERC order he believed it was inevitable
that the property would be condemned.
On December 22, 2010, in the federal damage case, Judge Brown
7
The ruling was subsequently affirmed by the Kansas Supreme
Court. Northern Nat. Gas Co. v. ONEOK Field Svcs. Co., LLC, 296 Kan.
906, 296 P.3d 1106 (2013).
-12-
ordered Val and other operators to cease production from their Viola
wells by February 21, 2011. (Case No. 08-1405, Doc. 420). The
injunction was based on a finding that Northern was likely to prevail
on a nuisance claim. The injunction prohibited gas production from the
Viola and Simpson formations in the Extension Area, but not from other
formations, pending resolution of the claims in Case No. 08-1405.
Each of the three Val leases included the following provisions
[labeled by the court for ease of reference as the habendum, shut-in
royalty, and force majeure clauses]:
[Habendum clause] Subject to the provisions
herein contained, this lease shall remain in
force for a term of three (3) years from this
date (called the “primary term”) and as long
thereafter as oil, liquid hydrocarbons, gas or
other respective constituent products, or any of
them is produced from said land or land with
which said land is pooled.
[Shut-in royalty clause]8 Where gas from a well
producing gas only is not sold or used, lessee
may pay or tender as royalty One Dollar ($1.00)
per
year
per
net
mineral
acre
retained
thereunder, and if such payment or tender is made
it will be considered that gas is being produced
within the meaning of the preceding paragraph.
[Force majeure clause] All express or implied
covenants of this lease shall be subject to all
Federal and State Laws, Executive Orders, Rules
or Regulations, and this lease shall not be
terminated in whole or part, nor lessee held
liable in damages, for failure to comply
therewith, if compliance is prevented by, or if
such failure is the result of, any such Law,
Order, Rule or Regulation.
In December 2010, Northern acquired the fee title to the McGuire
property (Tract 2312610), including title to the hydrocarbons located
8
This provision was part of a royalty clause under which the
lessee promised to pay the lessor a one-eighth royalty for gas used
or sold.
-13-
thereon. The property was then subject to the McGuire lease. The
three-year primary term of the lease had expired by that time but had
been extended as a result of production from the McGuire 1-31 well.
The primary term of the Branscom lease ended on August 3, 2010.
Val has not tendered any shut-in royalty payments under any of
the three leases.
Whether the McGuire and/or Branscom leases terminated prior to
the date of taking.
The undisputed facts show that the McGuire 1-31 and the Branscom
1 wells were producing in paying quantities until they were shut-in
toward the end of July 2010. The facts also show that Val’s decision
to shut-in its Extension Area wells resulted from litigation over the
wells. The decision was due in large part to the suspension of
payments by the gas purchaser. The purchasers initially suspended
payment due to Northern’s claims of title to the gas. The Pratt County
District judge ruled in April 2010 that Northern had no title to the
gas, but on June 30, 2010, he ordered the purchasers to hold all
payments in suspense pending further order of the court.9 In the same
time frame, Northern obtained FERC authority to condemn the well
tracts and it filed the condemnation action. It additionally moved for
an
injunction
in
the
federal
damage
case
to
prevent
further
production. It is beyond reasonable dispute that these factors caused
Val to shut-in its wells despite its desire to continue production.
9
Although Lumen voluntarily suspended payments as of September
2009, Val continued production into the summer of 2010. The state
court order prohibiting payments beginning June 30, 2010 and the
accompanying state and federal court developments at that time, made
it apparent that the suspension order would remain in effect for an
extended period while the state case was appealed.
-14-
In
light
of
these
events
Val’s
president
understood
that
the
suspension of payment was not a short-term measure and that the
property was ultimately going to be condemned. A shut-in under these
circumstances was not a “voluntary business decision” in the ordinary
sense of that phrase.10
But whether voluntary or not, the effect of the shut-in is
determined by the terms of the leases. Under the habendum clause
quoted above, each Val lease was valid for three years and thereafter
for as long as oil or gas was produced in paying quantities. Because
production ceased in July 2010, the McGuire lease terminated at that
time unless some other provision modified the habendum clause and
effectively extended the term of the lease. See Pray v. Premier
Petroleum, Inc., 233 Kan. 351, 353, 662 P.2d 255 (1983); D. Pierce,
Kansas Oil and Gas Handbook § 9.22 (“If the habendum clause requires
production of oil or gas to extend the lease, and there are no other
lease provisions which extend the lease in the absence of production,
failure to obtain and maintain the required production terminates the
lease.”). Similarly, the Branscom lease terminated in August 2010
unless it was extended by some provision of the lease.
Whether force majeure event occurred. The force majeure clause
in each Val lease provided that the lease convenants were subject to
“all Federal and State Laws, Executive Orders, Rules or Regulations,”
10
The Huff group argues that because there was no court order in
July 2010 that prohibited Val from continuing to produce, Val’s
decision to shut-in the wells was a voluntary business decision.
That’s like arguing that closing the air valve on a scuba diver’s tank
does not bar the diver from continuing to breathe. No operator could
continue to produce gas for any appreciable length of time in the face
of a court order cutting off all gas payments.
-15-
and “this lease shall not be terminated, in whole or in part, ... for
failure to comply therewith, if ... such failure is the result of any
such Law, Order, Rule or Regulation.” Val contends the leases remained
valid under this clause, despite the lack of production or shut-in
royalties, while Huff argues that none of the events cited by Val
amount to force majeure events (pointing out the clause said nothing
about failures resulting from “motions” or “court orders”) and, in any
case, that those events did not cause Val’s failure to pay shut-in
royalties and therefore resulted in termination of the leases under
the rule of Welsch v. Trivestco Energy Co., 43 Kan.App.2d 16, 221 P.3d
609 (2010).
The purpose of a force majeure clause generally is “to relieve
an oil and gas lessee from the harsh termination of the lease due to
circumstances beyond its control that would make performance untenable
or impossible.” R. Eclavea, 38 Am.Jur.2d Gas and Oil §83 (Westlaw May
2015). See also 2 Summers Oil and Gas § 15:32 (3d ed.) (“In the
context of an oil and gas lease, the purpose of a force majeure clause
is to excuse the lessee from non-performance of lease obligations when
the nonperformance is caused by circumstances beyond the reasonable
control of the lessee, or when nonperformance is caused by an event
which is unforseeable at the time the parties entered the contract.”).
Of course, the scope and effect of any force majeure clause depends
upon its wording, but courts have construed these clauses in light of
their general purpose and have limited them to circumstances beyond
the lessee’s control that cannot be overcome with due diligence. See
e.g., Edington v. Creek Oil Co., 690 P.2d 970 (Mont. 1984) (although
state commission ordered shut-in, force majeure clause did not save
-16-
the lease because the shut-in was required by saltwater seepage within
the lessee’s control).
Governmental actions, including orders to halt oil and gas
production, have been held to constitute force majeure events. See
Joan Teshima, Gas and Oil Lease Force Majeure Provisions: Construction
and Effect, 46 A.L.R. 4th 976 (citing, inter alia, Frost Nat. Bank v.
Matthews,
713
S.W.2d
365
(Tex.App.
1986)
(force
majeure
clause
prevented termination when wells were shut-in pursuant to orders of
Railroad Commission). The particular force majeure clause at issue
here is a fairly common one, see Lightcap v. Mobil Oil Corp., 221 Kan.
448, 457, 562 P.2d 1 (1977), and the parties presumably intended it
to have its commonly understood meaning. Although the few reported
cases on this issue have dealt with administrative (as opposed to
judicial)
orders
to
halt
oil
and
gas
production,
courts
have
characterized this clause as one directed at governmental action
generally. See e.g., Fransen v. Conoco, Inc., 64 F.3d 1481, 1488 (10th
Cir. 1995) (noting that the clause excused any failure that was
prevented by or that resulted from “any such governmental action.”);
Watts v. Atlantic Richfield Co., 115 F.3d 785, 795 (10th Cir. 1997)
(construing what the court termed the “governmental regulations
clause”).
The Val force majeure clause specifically provided that the lease
shall not be terminated if the lessee’s failure to comply was the
result of any federal or state law. It is fair to say that Val’s July
2010 shut-in was the result of the state court order suspending gas
payments, coming as it did in the wake of FERC’s condemnation
decision, the filing of the condemnation suit, and Northern’s motion
-17-
for an injunction to halt production. Huff contends that because the
force majeure clause referred only to executive orders, a judicial
order cannot qualify as a force majeure event. But the clause as a
whole applies to failures resulting from federal and state “laws” -in addition to rules, regulations, and executive orders -- and Val’s
shut-in is reasonably considered “the result of ... [a state] law.”
The order requiring suspension of gas payments was duly issued by a
state court and had the force of state law. It was an intervening act
by the state that prevented Val from continuing its ongoing production
and thereby extending the lease.
The
fact
that
executive
orders
but
not
court
orders
are
specifically mentioned in the force majeure clause does not evince an
intent to exclude all court orders from its scope. Executive orders
are common in oil and gas production because executive agencies are
typically given primary jurisdiction over oil and gas production. The
specific mention of executive orders in this context reflects this
reality, but does not reasonably imply an intent to exclude all other
governmental orders from its scope. In fact, doing so would be
contrary to the portion of the clause covering failures from “federal
and
state
laws,”
which
are
governmental
restraints
enacted
by
legislatures and applied to specific cases by the courts. All of the
items in this clause share a common trait: they are all forms of
governmental restraint that can prevent a lessee from performing.
Executive orders represent one such form; “state laws” represent
another. Absent some indication of contrary intent not present here,
the “state laws” that can rise to force majeure under this clause
would reasonably include not only legislative enactments, but also
-18-
court decrees based on state or federal law. Cf. Restatement (Second)
of Contracts § 264, comment. b (a basic assumption of a contract may
be upset if performance is made impracticable by having to comply with
a government order; for purposes of this rule “[a]ny governmental
action is included and the technical distinctions between ‘law,’
‘regulation,’ ‘order’ and the like are disregarded.”)
The state court order requiring suspension of payments on Val’s
gas
sales
constituted
“state
law”
within
the
meaning
of
this
provision. It was beyond Val’s control and resulted in Val shutting
in its Extension Area wells. Had it not been for the indefinite
deprivation of payment ordered by the court, Val would have continued
to produce in July of 2010. In sum, the state court order was a force
majeure event covered by the clause in the Val leases.
Failure to pay shut-in royalties. Huff contends that even if this
is so, Val’s failure to pay shut-in royalties when its production
ceased was not excused by the force majeure clause, meaning the lease
terminated under the habendum clause.11 Citing Welsch v. Trivestco
Energy Co., 43 Kan.App.2d 16, 221 P.3d 609 (2009), rev. denied (Dec.
7, 2010).
The question of whether the lease terminated for failure to pay
shut-in royalties in these circumstances is governed by Kansas law.
See Phillips v. Washington Legal Foundation, 524 U.S. 156, 164 (1998)
(the existence of a property interest is determined by state law). The
11
Huff argues that any shut-in royalties on the Branscom lease
were due at least by one year after the July 2010 shut-in. Doc. 974
at 9. For the reasons discussed infra, the court finds that the
Branscom lease (whose primary term did not expire until August 3,
2010) was extended by the force majeure clause and that the failure
to pay shut-in royalties did not terminate the lease.
-19-
court therefore looks to the final decisions of the Kansas Supreme
Court for authority on this question. Absent such a decision -- and
there is none on this point -- the court must make an “Erie guess” and
determine in its best judgment how the Kansas Supreme Court would
resolve the issue. See Cornhusker Cas. Co. v. Skaj, ___F.3d ___, 2015
WL 2348628 (10th Cir. 2015). In doing so, the court may consider state
intermediate appellate decisions, decisions of other states, federal
decisions, and the general weight and trend of authority. Armijo v.
Ex Cam, Inc., 843 F.2d 406, 407 (10th Cir. 1988).
The Welsch decision by the Kansas Court of Appeals is the only
Kansas case discussing the interplay between a force majeure and a
shut-in royalty clause. In Welsch, the lessee shut-in a gas well after
the gas purchaser ceased making payments and declared bankruptcy. The
lessee did not pay shut-in royalties. In a subsequent action by the
lessor to declare the lease terminated, a district court ruled that
the bankruptcy was a force majeure event that prevented termination,
and that the lessor was entitled to damages but not termination for
the lessee’s failure to pay shut-in royalties. The Kansas Court of
Appeals reversed, finding among other things that the bankruptcy of
the purchaser was not a force majeure event. Welsch, 43 Kan.App.2d at
28. The court went on to say that even if it had been a force majeure
event, “the failure to exercise an option to pay shut-in royalties was
not due to this purported force majeure event” and therefore was not
excused by the force majeure clause,12 such that the lease expired
12
The force majeure clause in Welsch provided that the lessee
“shall not be liable for delays or defaults in its performance of any
agreement or covenant hereunder due to force majeure.” Welsch, 43
Kan.App.2d at 28.
-20-
under the terms of the habendum clause.
Where
question,
a
a
state
federal
intermediate
court
appellate
should
follow
court
that
has
decided
decision
a
absent
convincing evidence that the state’s highest court would decide
otherwise. Webco Indus., Inc. v. Thermatool Corp., 278 F.3d 1120, 1132
(10th Cir. 2002) (“W]here an intermediate appellate state court rests
its considered judgment upon the rule of law which it announces, that
... is a datum for ascertaining state law which is not to be
disregarded by a federal court unless it is convinced by other
persuasive data that the highest court of the state would decide
otherwise.”)
A close examination of Welsch raises doubts about its application
here. To begin with, Welsch’s finding that shut-in royalties were due
after a force majeure event was clearly dicta because the bankruptcy
of the gas purchaser was held not to be a force majeure event. Welsch,
43 Kan.App.2d at 29 (“we are not convinced the financial issues of a
gas purchaser should be considered a force majeure event under this
lease.”). The Welsch panel rightly noted that the lack of a market due
to the purchaser’s bankruptcy was a circumstance covered by the shutin royalty clause, not the force majeure clause. A shut-in royalty
clause is designed to allow a lessee to keep a lease in effect when
a well is capable of producing but there is no market for the gas, see
Levin v. Maw Oil and Gas, 290 Kan. 928, 931, 234 P.3d 805 (2010),
which is precisely what the lessee faced in Welsch. By contrast, Val’s
ability to produce was effectively thwarted by a governmental decree,
which was a force majeure event under the Val lease.
To the extent there is any authority or commentary on this
-21-
specific point, it generally says that when a force majeure event
halts production in the secondary term, the lessee is not required to
pay shut-in royalties to keep the lease in effect. See Maralex
Resources, Inc. v. Gilbreath, 134 N.M. 308, 318, 76 P.3d 626 (2003)
(“If the cessation of production is caused by a force majeure event,
then no shut-in royalties are due. [citing Sun Operating Ltd., infra]
When production stops because of an event beyond the control of the
lessee, both parties bear the burden of the loss of royalties from
non-production. [cite omitted] In contrast, when the lessee shuts down
operations for market reasons, the shut-in royalty clause applies and
the lessee must compensate the lessor for lost production.”); Sun
Operating Ltd. Partnership v. Holt, 984 S.W.2d 277 (Tex.App.-Amarillo
1998) (“a shut-in royalty clause does not ipso facto take precedence
over every other clause which may affect the term of the lease;” by
including
the
phrase
“anything
in
this
lease
to
the
contrary
notwithstanding” in the force majeure clause, the parties evinced an
intent to allow lessee to rely upon that clause to extend the lease);
Frost Nat. Bank v. Matthews, 713 S.W.2d 365, 368 (Tex.App.-Texarkana
1986) (where railroad commission ordered shut-in, lease was extended
by
force
majeure;
although
lessee
paid
shut-in
royalties,
such
payments were not necessary to extend the lease); Williams & Meyers,
Oil & Gas Law §633 (LexisNexis Matthew Bender 2014)(“If the force
majeure clause is applicable, then the payment of shut-in royalties
is not required to keep the lease alive in the secondary term.”); 38
Am.Jur.2d Gas and Oil § 84 (“If the cessation of oil and gas
production is caused by a force majeure event, then no shut-in
royalties are due under the lease.”) (citing Miralex, supra).
-22-
Unlike the force majeure clause in Welsch, the Val lease provided
that “this lease shall not be terminated in whole or in part” if
compliance was prevented by law. Additionally, the habendum clause
provided that it was “[s]ubject to the provisions herein contained,”
including, a fortiori, the force majeure clause. Construing these
provisions as part of a whole, they evince an intent to extend the
lease rather than terminate it so long as production in the secondary
term was prevented by a force majeure event. Cf. Central Nat. Res.,
Inc. v. Davis Operating Co., 288 Kan. 234, 244, 201 P.3d 680 (2009)
(intent is gathered from examination of instrument as a whole). See
also Beardslee v. Inflection Energy, LLC, 25 N.Y.3d 150, 2015 WL
1423473, *5 (N.Y. 2015) (force majeure clause would excuse failure to
produce in secondary term of lease). The state court order preventing
payment was a force majeure event that effectively prevented Val from
continuing production. Under these circumstances, the Kansas Supreme
Court would likely find that termination is contrary to the terms of
the lease and that payment of shut-in royalties was not required to
keep the lease in effect.
It is clear that Val would have continued to produce gas in and
after
July
2010
had
governmental decree.
it
not
been
prevented
from
doing
so
by
Considering the particular terms of the Val
leases, the court is convinced that the Kansas Supreme Court would not
apply Welsch’s dicta in these circumstances, but would instead find
that
a
force
majeure
event
temporarily
excused
the
absence
of
production and prevented termination of the Val leases up to the date
of taking. This view is consistent with authority from other gasproducing jurisdictions, with the opinions of leading commentators,
-23-
and with the language of the Val leases. See Peak ex rel. Peak v.
Central Tank Coatings, Inc., ___ Fed.Appx. ___,
2015 WL 1069399, 3
(10th Cir. 2015) (when no controlling state decision exists, it is
appropriate to look to appellate decisions in other states with
similar legal principles). As noted by Williams & Meyers, Oil and Gas
Law §683 (LexisNexis Matthew Bender 2014) [footnotes omitted]:
Arguably the force majeure clause is inconsistent
with
clauses
of
limitation
which
operate
automatically. However, a number of cases
expressly or implicitly hold that a clause of
limitation may be modified by a force majeure
clause. We believe that the latter position is
correct. In effect, the limitation provisions of
the lease provide for automatic termination of
the lease under certain circumstances, e.g., upon
failure of production during the secondary term.
The force majeure clause may properly be read as
defining the event upon which the lease will
terminate, e.g., "upon failure of production
during the secondary term unless such failure was
due to force majeure." Thus, the force majeure
clause will modify not only the habendum clause,
but [also] a shut-in gas royalty clause should
the force majeure event cause a cessation of
production of natural gas in the secondary term.
The terms of Val’s lease excused Val’s cessation of production
after the state court ordered suspension of payment for gas sales.
With the lease’s production excused by this ongoing force majeure
event, Val was not required to pay shut-in royalties to hold the
lease.13
Lastly, Northern contends that even if the McGuire lease was
valid on the date of taking, Val’s interest in the lease is not
13
In view of this conclusion the court need not address the
parties’ remaining arguments, including Val’s contention that the
condemnation action suspended Val’s lease obligations because it
constituted an attack on the title to the property. Doc. 990 at 8. The
court notes that under the Val leases, the lessor warranted and agreed
to defend the title to the lands described in the lease.
-24-
compensable. Northern points out that under Kansas law, an oil and gas
lease is classified as personal property, while oil and gas in the
ground are considered part of the realty and thus belong to the
landowner. Northern argues that as the fee simple owner of all oil and
gas
remaining
in
the
ground
on
this
tract,
it
is
entitled
to
compensation for all of the remaining gas, with Val having no standing
or ownership claim to that property. Doc. 970 at 11-12.
Regardless of the fact that Kansas characterizes Val’s ownership
as
personal
property,
Northern
took
that
property
under
its
condemnation authority and must pay just compensation for it. Northern
cites no authority for its argument that condemnation of a tract
covered
by
an
oil
and
gas
lease
entitles
the
lessee
to
no
compensation, and the court finds its argument unpersuasive. Northern
may own the minerals underlying the tract, but it owned them subject
to a valid oil and gas lease that granted Val a right to produce the
minerals and to share in the proceeds from their sale. Val is now
entitled to receive just compensation reflecting the value of the
property taken from it. Cf. 26 Am.Jur.2d Eminent Domain § 318 (“In the
absence of an agreement, the measure of damages for a leasehold
interest taken under eminent domain is generally the fair market value
of the leasehold or unexpired term of the lease....”). That value
takes into account the lease rights assigned to Val by the former
owner
of
the
property,
notwithstanding
Northern’s
title
to
the
minerals under the property.
For the foregoing reasons, Val’s motion for partial summary
judgment (Doc. 950) as to the validity of its oil and gas leases as
to tracts 2312610, 3302610, and 4252611 is granted. The court finds
-25-
that Val’s oil and gas leases as to these tracts were valid in the
Viola and Simpson formations as of the date of taking. The court
further finds that Val is entitled to a share of the just compensation
owing for the taking of these tracts.
Pratt Well Service Group (Doc. 952)
Pratt Well Service (PWS) group14 moves for summary judgment
confirming the validity of the Schwertfeger lease (covering Tract
1232611) as of the date of taking. It argues that the lease remained
valid under the habendum clause, which provided that the lease would
continue in effect after the primary term as long as oil or gas “is
or can be produced.” In response, the Huff group argues that the
lease’s shut-in royalty clause effectively limited that provision and
made payment of shut-in royalties a condition for perpetuation of the
lease. The Huff group contends the lease terminated because PWS failed
to pay shut-in royalties.
Uncontroverted facts. PWS was the operator of the Schwertfeger
lease. From March 2009 to June 2010, the Schwertfeger 1-23 well on
this lease produced both oil and gas in paying quantities.
In June 2010, PWS’s gas purchaser stated that it would no longer
pay for gas produced from the Schwertfeger lease. It did so because
of developments in litigation concerning the Extension Area, including
Northern’s claims that it owned the gas being produced and FERC’s
authorization for Northern to condemn the Viola formation in the
Extension Area. As a result, PWS decided to halt production from the
14
The group consists of Pratt Well Service, Inc., Iuka/Carmi
Development, LLC, and I/C Investment Pool. Doc. 953 at 1.
-26-
Schwertfeger lease pending resolution of the litigation.
Had
it
not
been
for
the
condemnation
and
the
litigation
surrounding the Extension Area, PWS would have continued to produce
oil and gas in paying quantities from the Schwertfeger lease. PWS’s
president, Kenneth Gates, planned to return the Schwertfeger 1-23 to
production if the judicial uncertainty was removed.
The primary term of the Schwertfeger lease expired on July 13,
2009.
The Schwertfeger lease included the following provisions:
[Habendum clause] This lease shall remain in
force for a term of three (3) years (called
“primary term”) and as long thereafter as oil
[or] gas ... is or can be produced.
[Shut-in royalty clause] [part of a gas royalty
clause15 stating that the lessee shall pay the
lessor a one-eighth royalty on proceeds from the
sale of gas] If such gas is not sold by the
lessee, lessee may pay or tender annually at or
before the end of each yearly period during which
such gas is not sold, as a shut-in royalty, ...
an amount equal to one dollar per net mineral
acre, and while said shut in royalty is so paid
or tendered, it will be considered under all
provisions of this lease that gas is being
produced in paying quantities. The first yearly
period during which such gas is not sold shall
begin on the date the first well is completed for
production of gas.
[Cessation of production clause] If after the
expiration of the primary term, production of oil
or gas should cease from any cause, this lease
shall
not
terminate
if
lessee
commences
additional drilling or reworking operations
within one hundred-twenty (120) days thereafter,
or if at the expiration of the primary term, oil
or gas is not being produced on said land, but
lessee is then engaged in drilling or reworking
operations thereon, then in either event, this
15
The Schwertfeger lease contained a separate royalty clause for
oil produced from the premises.
-27-
lease shall remain in force so long as operations
are prosecuted either on the same well or any
other
well
thereafter
commenced,
with
no
cessation of more than one hundred twenty (120)
consecutive days, and if they result in
production of oil or gas, this lease shall remain
in effect so long thereafter as there is
production of oil or gas under any provisions of
this lease.
Whether the Schwertfeger lease terminated prior to the date of
taking. This court previously construed an identical
habendum clause
that extended a lease for as long as oil or gas “is or can be
produced,” finding this language “can only reasonably be interpreted
to
require
actual
production
or
the
capability
to
produce....”
Hunthauser Holdings, LLC v. Loesch, 2003 WL 21981969, *5 (D. Kan., May
1, 2003), reconsideration denied, 2003 WL 21981961 (D. Kan., June 10,
2003). The court relied in part on Anadarko Petroleum Corp. v.
Thompson, 94 S.W.3d 550 (Tex. 2002), which similarly found that this
type of clause will extend a lease beyond the primary term if a well
is capable of production in paying quantities, even if the well is not
actually producing.
Because the Schwertfeger 1-23 was capable of producing oil and
gas in paying quantities when it was shut-in, and thereafter until the
date of taking, the Schwertfeger lease remained valid on the date of
taking unless some other provision effectively limited the habendum
clause or otherwise caused the lease to terminate.
The Huff group argues that the shut-in royalty clause did so. It
first notes that Anadarko, supra, distinguished a similar New Mexico
case (Greer v. Salmon, 82 N.M. 245, 479 P.2d 294 (1970)) on the
grounds that the Greer lease had a shut-in royalty clause. Anadarko,
94 S.W.3d at 556-57. Huff also suggests the Kansas Supreme Court would
-28-
not follow Anadarko, pointing out that in Levin v. Maw Oil & Gas, LLC,
290 Kan. 928, 948, 234 P.3d 805 (2010), the court declined to adopt
Anadarko’s understanding of when a well is “capable of production.”
Huff argues that the shut-in royalty clause in the Schwertfeger lease
modified the habendum clause and established a condition that had to
be satisfied to perpetuate the lease. To read it otherwise, Huff says,
would be to allow the habendum clause to trump the shut-in royalty
clause and render the latter meaningless, because it would never be
needed to save the lease. Doc. 972 at 10.
As PWS points out, however, the Schwertfeger 1-23 was capable of
producing oil as well as gas in paying quantities, and the capability
to produce either one extended the lease under the habendum clause.
The shut-in royalty clause applied only insofar as there was a failure
to produce gas. Even assuming it was intended as a limitation on the
habendum clause, then, the shut-in royalty clause did not terminate
the
lease,
because
the
Schwertfeger
1-23
was
still
capable
of
producing oil. There is no inconsistency with the shut-in royalty
clause in this instance, because that clause did not apply to
production of oil. Moreover, the cessation of production clause can
likewise be harmonized with the habendum clause, as Anadarko pointed
out. Any apparent inconsistency between extending the lease when oil
or gas “can be produced” [the habendum clause] and termination of the
lease if actual production is not timely restored after a halt in
production [the cessation clause], is resolved if the cessation clause
is understood to apply only when a producing well holding the lease
ceases to be capable of producing oil or gas in paying quantities.
Anadarko, 94 S.W. 3d at 556.
-29-
Provisions in an oil and gas lease, like other contracts, must
be construed together and harmonized if possible. See Stady v. Texas
Co., 150 Kan. 420, Syl.¶ 1, 94 P.2d 322 (1939). The construction
outlined above reasonably harmonizes the habendum, shut-in royalty,
and cessation of production clauses of the Schwertfeger lease. The
court concludes that the lease was capable of producing oil in paying
quantities from its June 2010 shut-in through the date of taking, and
that the lease remained valid for that reason under the habendum
clause. Neither the shut-in royalty clause nor the cessation clause
caused the lease to terminate in these circumstances. The PWS group
is therefore entitled to a share of the just compensation payable for
the tract (no. 1232611) covered by the Schwertfeger lease.
Nash Oil & Gas leases (Doc. 954)
Nash Oil & Gas held the following five leases in the Extension
Area: Holland, Trinkle, JC1, CRC, and Staab. Nash argues that the
leases remained valid until the date of taking for several reasons.
First, it argues that gas was “produced” within the meaning of the
leases’ habendum clauses by leaving the gas in the ground pending
condemnation, as found by Mich. Wis. Pipeline Co. v. Mich. Nat’l.
Bank, 324 N.W.2d 541, 544 (Mich.Ct.App. 1982). With respect to the
Holland lease, whose habendum clause said the lease was extended so
long as gas is “or can be produced,” Nash further argues that the
lease remained valid because the Holland well was capable of producing
at all times.
Second, Nash argues that both the state court order of
June 30, 2010 and the federal court injunction entered by Judge Brown
in December 2010 were force majeure events that prevented the leases
-30-
from expiring. Finally, Nash argues that finding the leases invalid
would constitute an uncompensated taking of its property in violation
of the Fifth Amendment.
The Huff group contends the three leases on tracts owned by its
members (the Holland, Trinkle and JC1 leases) terminated. As it did
previously, Huff argues there was no force majeure event preventing
the operator from continuing to produce or from paying shut-in
royalties. Sonja Sue Staab, the owner of the tracts covered by the CRC
and Staab leases, similarly argues there was no force majeure event
preventing Nash from continuing to produce in 2010 (pointing out that
L.D. Drilling continued to produce until Judge Brown’s injunction took
effect in February of 2011), and that even after the injunction took
effect nothing prevented Nash from exploring zones other than the
Viola and Simpson.
Uncontroverted facts.
Nash held an interest in the following mineral leases: the
Holland lease (tract 3262611), on which it operated the Holland 1-26
and Holland 2-26 wells; the Trinkle lease (tract 2362611) on which it
operated the Trinkle-1 well; the JC1 lease (tract 4272611), on which
it operated the JC1 well; the CRC lease (tract 2012711), on which it
operated the CRC1 and CRC2 wells; and the Staab lease (tract 5352611),
on which it operated the Staab 1 well.
All of the foregoing Nash wells were shut-in in July 2010, except
for the CRC wells, which were not shut-in until November 2010. All of
the wells were capable of producing gas in paying quantities when they
were
shut-in.
All
of
the
wells
were
shut-in
as
a
result
of
developments in litigation, including FERC’s June 2, 2010 certificate
-31-
authorizing Northern to condemn the property, Northern’s motion for
an injunction to halt production, Northern’s claim of title to the
gas, and the Pratt County District Court order of June 30, 2010
requiring purchasers to suspend all payments for gas from the wells.16
The intent of Nash Oil & Gas’s president was to resume production
from Nash’s wells if the federal court denied Northern’s request for
an injunction and the state court restored ONEOK’s ability to pay for
natural gas.
Nash tendered shut-in royalties to the lessors on each of the
foregoing leases on July 12, 2013, and on November 4, 2014. The lessor
on the CRC and Staab leases rejected the tendered shut-in royalties.
Holland lease.
The Holland lease contained the following provisions:
[Habendum clause] This lease shall remain in
force for a term of Three (3) years and as long
thereafter oil [or] gas ... is or can be
produced.
[Shut-in royalty clause] [part of a royalty
clause requiring lessee to pay one-eighth of the
value of gas used or sold] [W]here gas only is
found and where such gas is not sold or used,
lessee shall pay or tender annually at the end of
each yearly period during which such gas is not
sold or used, as royalty, an amount equal to the
delay rental provided in paragraph 5 hereof, and
while said royalty is so paid or tendered this
lease shall be held as a producing lease under
16
In May 2009, Northern filed a motion for a preliminary
injunction in the federal court “damage case” to require Nash Oil to
pay into court or place in escrow any proceeds from the sale of gas
from four of its wells (CRC #1, CRC #2, Trinkle #1, and Staab #1).
(Doc. 60, 08-1405). The court denied the motion on December 22, 2009,
finding that Northern had failed to show irreparable harm if an
injunction was not issued. (Doc. 166, 08-1405). The court noted that
counsel had represented that as a result of Northern’s case in state
court, no runs from the wells would be paid to Nash pending full
resolution of all issues. (Doc. 166 at 12-13).
-32-
[the habendum clause]....
[Force majeure clause] All provisions hereof,
express or implied, shall be subject to all
federal and state laws and the orders, rules, or
regulations (and interpretations thereof) of all
governmental agencies administering the same, and
this lease shall not be in any way terminated
wholly or partially nor shall lessee be liable in
damages for failure to comply with any of the
express or implied provisions hereof if such
failure accords with any such laws, orders, rules
or regulations (or interpretations thereof)....
Trinkle Lease.
The Trinkle lease contained the following provisions:
[Habendum clause] This lease shall remain in
force for a term of Three (3) years from this
date (called “primary term”) and as long
thereafter as ... oil [or] gas ... is produced
from said land....
[Shut-in royalty clause] [part of royalty clause
requiring payment of one-eighth royalty for gas
sold or used] Where gas from a well producing gas
only is not sold or used, lessee may pay or
tender as royalty One Dollar ($1.00) per year per
net mineral acre retained hereunder, and if such
payment or tender is made it will be considered
that gas is being produced within the meaning of
the [habendum clause].
[Force majeure] All express or implied covenants
of this lease shall be subject to all Federal and
State Law, Executive Orders, Rules or Regulation,
and this lease shall not be terminate [sic] in
whole or in part, nor leassee [sic] held liable
in damages, for failure to comply therewith, if
compliance is prevented by, or if such failure is
the result of, any Law, Order, Rule or
Regulation.
JC1 Lease, CRC Lease and Staab Lease.
The
JC1,
CRC,
and
Staab
leases
each
contained
provisions
essentially identical to the above provisions of the Trinkle lease.
Whether Nash’s leases terminated prior to the date of taking.
The court first rejects out of hand two of Nash’s arguments. Nash
-33-
argues the court should apply the reasoning of Mich. Wis. Pipeline Co.
v. Mich. Nat. Bank, 118 Mich.App. 74, 324 N.W.2d 541 (1982) and find
that gas was still being “produced” despite the fact that the wells
were shut-in. The plain meaning of “produced” cannot support such a
finding. Leaving gas in the ground is the opposite of producing it.17
Nash also argues that declaring its leases to be terminated would be
an unconstitutional taking of its property. But if Nash’s leasehold
interests expired or terminated by reason of the terms of the parties’
lease agreements -- terms that were agreed to by Nash -- then Nash
could claim no property rights with respect to the leases.
Nevertheless, for the same reasons expressed with respect to the
Val leases, the court concludes that the Nash leases remained valid
up to the date of taking by virtue of a force majeure event. The state
court order of June 30, 2010, which suspended all payments for sales
of gas from Nash’s wells, was an application of state law that
resulted in Nash’s inability to continue producing gas. That order,
and
the
circumstances
under
which
it
was
entered,
effectively
strangled Nash’s ability to produce. It is true, as the Huff group
17
The Michigan-Wisconsin Pipeline case is one of the few cases
where a shut-in occurred in the face of a condemnation action.
Although the court cannot accept the Michigan-Wisconsin Pipeline
construction of the habendum clause, that case highlights the fact
that condemnation is an extraordinary governmental act, and as such
it may constitute a force majeure event. For example in National Fuel
Gas Supply Corp. v. Cunningham Nat. Gas Corp., 548 N.Y.S.2d 588, 600
(N.Y. Sup. 1989), the court concluded that condemnation of a leasehold
was a “legal proceeding” that triggered the force majeure clause in
a gas purchase agreement. The instant case is brought under the
Natural Gas Act and is therefore application of a “Federal Law” within
the meaning of Nash’s force majeure clause. As National Fuel pointed
out, it is not always easy to say when a condemnation occurs. The
court need not decide that issue, however, because the state court
order of June 30, 2010, was an application of state law that triggered
the Nash force majeure clause.
-34-
argues, that the order was not an absolute bar to continued production
-- as illustrated by Nash’s continued production of the CRC wells
until
November
of
2010.
(By
contrast,
Judge
Brown’s
injunction
requiring the wells to be shut-in by February 21, 2011, was an
absolute bar.). But nothing in the Nash force majeure clauses or in
the law of force majeure generally requires absolute impossibility.
Cf. Restatement (Second) of Contracts §261, comment d (“Although the
rule
stated
in
this
Section
is
sometimes
phrased
in
terms
of
‘impossibility,’ it has long been recognized that it may operate to
discharge
a
party's
duty
even
though
the
event
has
not
made
performance absolutely impossible. This Section, therefore, uses
‘impracticable,’ the term employed by Uniform Commercial Code §
2-615(a), to describe the required extent of the impediment to
performance. Performance may be impracticable because extreme and
unreasonable difficulty, expense, injury, or loss to one of the
parties will be involved.”).
The court order prohibiting payment for gas sales effectively
rendered Nash’s production impracticable, which was sufficient to
invoke the force majeure clauses. Those clauses applied to any failure
that “accords with” state law (the Trinkle lease) or that “is the
result of” such state law (the other Nash leases). Cf. Restatement
(Second) of Contracts § 264, comment a (“It is ‘a basic assumption on
which the contract was made’ that the law will not directly intervene
to make performance impracticable when it is due.”).18 Under the force
18
The first illustration in this section of the Restatement
provides: “1. A sells land to B, who, as part of the contract,
promises that the land shall not be built upon. The land is taken by
eminent domain under statutory authority and a building is built on
-35-
majeure clauses, Nash’s failure to produce beginning in July 2010 was
excused because that failure resulted from a state court order
foreclosing payment.
The
court
further
finds,
again
for
the
reasons
previously
expressed, that Nash was not required to pay shut-in royalties to hold
the leases. Under the force majeure clause, Nash’s failure to produce
was excused because it resulted from a legal obstacle interposed by
state law. The habendum clause requiring production to extend the
lease was expressly made subject to the other clauses in the lease,
including the force majeure clause. The production requirement of the
habendum clause was excused and, by agreement of the parties, was not
to be a basis for termination of the lease in whole or in part.
Requiring Nash to pay shut-in royalties to keep the lease alive in
these circumstances would hold the failure to produce against Nash and
would essentially nullify the intent and benefit of the force majeure
clause. See supra Frost Nat. Bank, 713 S.W.2d at 368 (lease was
extended by force majeure where railroad commission ordered shut-in;
payment of shut-in royalties was not required to extend the lease);
Williams & Meyers, Oil & Gas Law §633 (“If the force majeure clause
is applicable, then the payment of shut-in royalties is not required
to keep the lease alive in the secondary term.”).
The fact that Nash remained free to explore other zones (besides
the Viola and Simpson) does not alter this conclusion. All of the
force majeure clauses at issue state that if a force majeure event
occurs, the lease shall not be terminated “in whole or in part” or
it. B’s duty not to build on the land is discharged, and B is not
liable to A for breach of contract.”
-36-
shall not be terminated “wholly or partially.” None of the parties
have provided any authority dealing with a factual situation where a
force majeure event affects only a part of a lease, e.g., a specific
zone or zones, as is the situation in this case. The court has failed
to find any such authority. However, the fact that all of the force
majeure clauses in all of the leases in this case specifically state
that a force majeure event will prevent the termination of a part of
a lease can only mean that the part of the lease affected by a force
majeure event will not terminate regardless of the circumstances
pertaining to the other parts of the lease. Huff’s argument that a
lessee is nevertheless obligated in such circumstances to explore
other zones to perpetuate the lease simply disregards this language.
Huff focuses on other zones but essentially ignores the fact that the
part
of
the
lease
covering
the
Viola
and
Simpson
formations
necessarily remains in force due to a force majeure event. Such an
interpretation wholly disregards the “in part” language of the force
majeure clauses. And all the court need determine here is whether the
leases remained in effect as to the Viola and Simpson formations,
since those are the formations to which the state court order, and
later the federal court injunction, apply and which are the subject
of this condemnation action. The court need not deal with the question
of the other zones covered by the leases remain in effect as a result
of the force majeure event or whether the lessees must take further
actions to perpetuate the leases as to those other zones. That issue
is for another day and another court to decide.
The Nash lease, like the other disputed leases, was not to be
terminated in whole or in part if the operator’s failure to produce
-37-
was the result of a force majeure event, which it clearly was. The
production requirement of the habendum clause was thereby excused and
the lease was extended by the ongoing force majeure. Under this
language, Nash’s lease clearly remained valid at least with respect
to the Viola and Simpson formations.
In sum, the court finds that Nash’s oil and gas leases as to
tract 3262611 (the Holland lease), tract 2362611 (the Trinkle lease),
tract 4272611 (the JC1 lease), tract 2012711 (the CRC lease), and
tract 5352611 (the Staab lease) remained valid in the Viola and
Simpson formations until the date of taking, and that Nash Oil & Gas
is entitled to a share of the just compensation owed for the taking
of those tracts.
L.D. Drilling, Inc. Leases (Doc. 956)
There is a dispute as to the validity of five area leases held
by L.D. Drilling, Inc. In arguing for the validity of these leases,
L.D. Drilling relies upon now-familiar force majeure arguments. It
also contends there are various equitable reasons why it should share
in the compensation for the tracts. The Huff group denies the
availability of any equity-based recovery, disputes the application
of force majeure, and argues that the leases terminated pursuant to
the terms of the shut-in royalty clauses.
Uncontroverted facts.
L.D. Drilling held the following leases (among others) in the
Extension Area: Geesling (tract 1262611); Mezger (tract 4262611); Zink
1 (tract 1252611); Zink A (tract 1252611; and Zink B (tract 4242611).
The leases contain the following provisions:
-38-
Type 1 Habendum Clause (Zink leases)
This lease shall remain in force for a term of
three (3) years (called “primary term”) and as
long thereafter as oil ... [or] gas ... is or can
be produced.
Type 2 Habendum Clause (Geesling & Mezger)
Subject to the provisions herein contained, this
lease shall remain in force for a term of two (2)
years from this date (called “primary term”) and
as long thereafter as oil ... [or] gas... is
produced....
Type 1 Force Majeure Clause (Zink leases)
All provisions hereof, express or implied, shall
be subject to all federal and state laws and the
orders,
rules,
or
regulations
(and
interpretations thereof) of all governmental
agencies administering the same, and this lease
shall not be in any way terminated wholly or
partially nor shall the lessee be liable in
damages for failure to comply with any of the
express or implied provisions hereof if such
failure accords with any such laws, orders, rules
or regulations (or interpretations thereof). If
lessee should be prevented during the last six
months of the primary term hereof from drilling
a well hereunder by the order of any constituted
authority having jurisdiction thereover, the
primary term of this lease shall continue until
six months after said order is suspended.
Type 2 Force Majeure Clause (Geesling & Mezger)
All express or implied covenants of this lease
shall be subject to all Federal and State Laws,
Executive Orders, Rules or Regulations, and this
lease shall not be terminated, in whole or in
part, nor lessee held liable in damages, for
failure to comply therewith, if compliance is
prevented by, or if such failure is the result
of, any such Law, Order, Rule or Regulation.
Type 1 Shut-In Royalty Clause (Zink leases)
If such gas is not sold by the lessee, lessee may
pay or tender annually at or before the end of
each yearly period during which such gas is not
sold, as a shut-in royalty, whether one or more
wells, an amount equal to one dollar per net
-39-
mineral acre, and while said shut-in royalty is
so paid or tendered, it will be considered under
all provisions of this lease that such gas is
being produced in paying quantities. The first
yearly period during which such gas is not sold
shall begin on the date the first well is
completed for production of gas.
. . .
[Para. 17 of Addendum] Notwithstanding anything
in this lease form to the contrary, the shut-in
gas well royalty clause shall not have the effect
of extending the term of this lease for a period
in excess of three (3) years after the expiration
of the primary term.
Type 2 Shut-in Royalty Clause (Geesling & Mezger)
Where gas from a well producing gas only is not
sold or used, lessee may pay or tender as royalty
One Dollar ($1.00) per year per net mineral acre
retained hereunder, and if such payment or tender
is made it will be considered that gas is being
produced within the meaning of the [habendum
clause].
. . .
[Para. 13 of Addendum] Notwithstanding anything
herein to the contrary, no gas well may be held
by the payment of shut-in royalties for more than
three (3) years past the expiration date of this
lease, or past the completion of such shut in gas
well, whichever first occurs.
In December 2008, Northern sued L.D. Drilling and others in this
court (Case No. 08-1405), claiming nuisance (among other things)
arising from L.D.’s production of migrating storage gas. In December
2009, Northern filed a state conversion claim in Pratt County District
Court against ONEOK and other gas purchasers; the purchasers in turn
asserted indemnity claims against L.D. Drilling and other producers.
Although the state court granted summary judgment to the producers in
April 2010, on June 30, 2010 it ordered the purchasers to hold all gas
payments in suspense pending further court order, indicating that this
would preserve the status quo pending an appeal of the court’s ruling.
On December 22, 2010, Judge Brown granted Northern’s motion for
-40-
injunction in Case No. 08-1405, requiring the Extension Area producers
to
cease
producing
gas
from
their
wells
in
the
Viola/Simpson
formations by February 21, 2011. On February 24, 2011, the Tenth
Circuit Court of Appeals lifted a temporary stay of the order, meaning
the injunction took effect on February 24, 2011. L.D. Drilling ceased
production from its Extension Area wells on February 25, 2011, because
it was legally required to do so. Had it not been for the injunction,
L.D. Drilling would have continued to produce gas from these wells
until the date of taking. The injunction did not expressly preclude
L.D. Drilling from exploring or producing from other formations in the
Extension Area.
The primary terms of the relevant L.D. leases all ended on or
before April 30, 2006. The relevant L.D. wells (Geesling 1, Mezger
1&2, Zink 1, Zink A, and Zink B) were shut-in on February 25, 2011.
L.D. Drilling tendered shut-in royalty payments on January 31, 2012
for all of the foregoing wells except the Zink A.
L.D. Drilling recompleted the Zink A well in the Lansing-Kansas
City Swope formation in September 2011 and began producing oil from
that formation. L.D. Drilling has not tendered a shut-in royalty
payment under the Zink A lease.
Each of the Zink leases contained the following cessation of
production clause:
If after the expiration of the primary term,
production of oil or gas should cease from any
cause this lease shall not terminate if lessee
commences additional drilling or reworking
operations within one hundred twenty (120) days
thereafter; or if at the expiration of the
primary term oil or gas is not being produced on
said land but lessee is then engaged in drilling
or reworking operations thereon, then in either
-41-
event, this lease shall remain in force so long
as operations are prosecuted on the same well or
any other well thereafter commenced with no
cessation of more than one hundred twenty (120)
consecutive days, and if they result in
production of oil or gas, this lease shall remain
in effect so long thereafter as there is
production of oil or gas under any provision of
this lease.
Whether L.D. Drilling’s leases terminated prior to the date of
taking. The court need not address L.D. Drilling’s equity-based
arguments because, for the reasons set forth below, it finds that the
leases remained valid until the date of taking pursuant to their force
majeure clauses. It bears pointing out, however, that to the extent
the court retains any equitable discretion to determine the effects
of its own injunctions (see L.D. Drilling argument, Doc. 957 at 10),
that issue would merit serious consideration here were the leases not
preserved under force majeure. The shut-in injunction entered by Judge
Brown was clearly intended to freeze the status quo among the parties,
not to alter their property rights. See Northern Nat. Gas Co. v. L.D.
Drilling, Inc., 759 F.Supp.2d 1282, 1302 (D. Kan. 2010) (“[t]he court
notes that any harm to the defendants from an injunction should be
lessened by the remedy available in the condemnation action. In the
condemnation, Northern will have to compensate the defendants for the
taking of any of defendants’ property, including any taking of the
right to produce native gas or any other gas to which the defendants
or their lessors hold title. In this limited sense, the status quo
would actually be maintained by an injunction, because it may help to
reduce current migration and ‘freeze’ the parties’ respective rights
to the gas currently found in the Expansion Area.”). Using the
injunction and the related condemnation as grounds for terminating the
-42-
producers’ rights would raise substantial concerns.19
The Huff group again disputes the application of the force
majeure clauses to a court order, but for reasons previously indicated
the court finds that Judge Brown’s preliminary injunction order
halting production falls within the ambit of “Federal and State Laws,”
and that L.D. Drilling’s failure to produce was the result of (and
accorded with) “any such Law, Order, Rule or Regulation.” Simply put,
this was a forced halt in production required by governmental order
and fell squarely within the scope of the force majeure clauses.
The causation element of the force majeure clauses was satisfied
as well. The injunction prevented L.D. Drilling from continuing its
production out of the Viola/Simpson formations. The force majeure
clause provided that the lease was not to be terminated, in whole in
part, for that failure. Huff’s argument that the leases nevertheless
terminated because L.D. failed to produce from other zones ignores
that fact. It would nullify the effect of the force majeure clause
with respect to L.D. Drilling’s Viola/Simpson production. As the court
noted previously, it need not determine here whether the leases
terminated (or could terminate) with respect to any other zones. As
far as the Viola/Simpson is concerned -- the only zone the court need
address -- the force majeure clauses provided that the leases were not
19
A fundamental premise underlying the valuation of the
condemned tracts was that some tracts had producing Viola wells as of
the date of taking. That premise took account of the fact that ongoing
production had been interrupted by court intervention and by the
condemnation. Absent that premise, the value of the well tracts at the
date of taking would have been significantly reduced. Additionally,
the same premise was a factor underlying the conclusion that the value
of recoverable gas in the Extension Area should be attributed to
tracts with producing Viola wells.
-43-
to be terminated for a failure to produce caused by a force majeure
event.
Because the federal court injunction constituted a force majeure
event under these leases, production under the habendum clause was
excused and the leases remained valid during the period of force
majeure. Payment of shut-in royalties was not required to extend the
lease in these circumstances. See supra at Pp. 19-24. The three-year
time limit on holding a lease under shut-in royalties was likewise
inapplicable because the leases were held by force majeure. Finally,
the cessation of production clause must also be construed in light of
the force majeure clause. Although the former refers to a cessation
of production “from any cause,” its application must be understood to
except a halt in production caused by a force majeure event -- an
event for which the lease “shall not be terminated,” lest this
language of the force majeure clause be rendered a nullity. Under the
circumstances,
the
court
concludes
that
L.D.
Drilling’s
leases
remained valid in the Viola and Simpson formations on the date of
taking.
In view of this finding, the court need not determine what effect
the language of the Zink leases’ habendum clause (extending the lease
as long as oil or gas “is or can be produced”) had on the validity of
these leases.
IV. Northern’s Motion to Reallocate Fees and Expenses (Doc. 959).
In recommending the appointment of a commission in this case,
Judge Bostwick noted Northern’s acknowledgment that it expected to pay
the “lion’s share” of the commission’s costs. Doc. 254 at 16. When the
-44-
court subsequently appointed the commission, it adopted the following
standard for payment of the commission’s fees and expenses: “Such
compensation shall be paid by Northern Natural Gas Company, except
that a portion may be payable by a defendant if Northern establishes
that the defendant has unreasonably caused the commissioners to expend
unnecessary time.” Doc. 641 at 3.20 See also Guardian Pipeline, LLC v.
295.49 Acres of Land, 2008 WL 2482005 (E.D. Wis. 2008) (standards for
payment of special masters in Rule 53(g) would be applied since Rule
71.1 was silent on the issue).
Northern subsequently paid commission fees and expenses in the
amount of $211,996.31 and additional expenses (including real-time
reporting and transcript costs) of $53,728.80. Northern now seeks to
recoup some unspecified portion of these payments, arguing defendants
unreasonably and unnecessarily caused the commission to spend time
considering testimony from Rod Anderson, a geologist who testified for
defendants, and from William Henry, who gave opinions for landowners
concerning storage lease values.
It is fair to say that the commission offered a blistering
assessment of Anderson’s testimony. Doc. 888 at 29-34 (finding that
Anderson’s analysis was conducted to reach a predetermined result; his
map was “unworthy of belief, and any analysis based on that map is
inexorably tainted.”). The commission also rejected William Henry’s
20
Defendants contend the court has no authority to make them pay
such costs because Rule 71.1(l) provides that costs are not subject
to Rule 54(d). The court’s disposition makes it unnecessary to decide
that issue, but the court notes that even if Rule 71.1 does not
authorize it, other sources could justify reallocation of costs for
unreasonably causing delay and expense in court proceedings, including
Rule 11, 28 U.S.C. § 1927, and the court’s inherent authority.
-45-
opinions concerning comparable gas storage leases. Doc. 888 at 65-67.
But the court rejects Northern’s premise that the presentation of
these witnesses unreasonably wasted the commission’s time.21 This case
appears to be unique in terms of the number of variables affecting the
taking and the determination of just compensation. The court cannot
fault defendants for their efforts to establish the value of the
property taken from them by Northern, including the volume of gas left
within the Extension Area on the date of taking. It is clear that the
case required a series of estimates or educated guesses by experts,
as the commission itself acknowledged:
[W]e feel it appropriate to note that the
evidence
overwhelmingly
showed,
and
the
experience of several of the commissioners (three
of whom have petroleum engineering backgrounds)
confirmed, that evaluation of the physical
phenomena
associated
with
the
underground
migration of fluids in hydrocarbon reservoirs is
far from an exact science. Instead, it is often
an exercise in trial and error in which seemingly
reasonable approximations are initially made
based on limited, even scant, data, and then
revised, or discarded altogether as additional
wells are drilled and new data is collected that
invariably conflicts to some degree with prior
models and assumptions. Out of this inherently
iterative process, the parties in this case have
molded their respective theories and models. We
have little doubt that all of them are wrong,
just as any theory that attempts to describe the
intricate details of thousands upon thousands of
acres of land located thousands of feet below the
surface of the earth, based on a few dozen
penetration points that are themselves less than
one foot in diameter, will invariably be wrong in
the sense of technical precision. Rather, our
role in this regard was to determine which of the
21
Northern also argues that defendants wasted the commission’s
time with a portion of the testimony of J.P. Dick. (Doc. 959 at 5-6).
However, Northern fails to mention that the commission found Dick’s
analysis was useful in determining the recoverable reserves associated
with individual well tracts. Doc. 888 at 57-59.
-46-
theories was the most accurate based on how well
it explained and comported with all the available
evidence.
Doc. 888 at 9-10.
The use of Anderson and Henry’s testimony to attempt to fill
these knowledge gaps and provide a basis for valuation was not beyond
the pale, even if they were rejected (sometimes emphatically) by the
commission.
It also bears pointing out that the commission similarly
rejected various theories offered by Northern, including its assertion
that well tracts should be valued without considering pressure support
from
the
Cunningham
Field,
something
the
commission
considered
“completely divorced from the physical realities in and around the
field” and “a fiction that we find unworkable and inappropriate.” Doc.
888 at 54.
The fact is that all sides in this case faced extremely
difficult hurdles in terms of gathering and presenting proof.
Northern has not shown that defendants unreasonably caused the
commissioners to expend unnecessary time. Under the circumstances, it
is appropriate that Northern as the condemnor should bear the costs
associated with the condemnation proceeding. Northern’s motion to
reallocate costs and fees is denied.
V. Various Defendants’ Motions for Attorneys’ Fees (Docs. 961, 962,
964, 966).
Several defendants contend they are entitled to an award of
attorneys’ fees, citing as authority K.S.A. § 55-1210(c)(3) and K.S.A.
§ 66-176. These arguments are unavailing.
The Fifth Amendment forbids the taking of private property for
public use without “just compensation.” The compensation owed under
-47-
this provision is the monetary equivalent of the property taken; it
does not take into account the benefits or detriments to the owner
from the taking. See Monongahela Nav. Co. v. United States, 148 U.S.
312, 326 (1893). Indirect costs to the property owner caused by the
taking are generally not part of the just compensation to which he is
constitutionally entitled. United States v. Bodcaw Co., 440 U.S. 202,
203 (1979). “Thus, [a]ttorneys’ fees and expenses are not embraced
within just compensation....” Bodcaw, 440 U.S. at 203 (quoting Dohany
v. Rogers, 281 U.S. 362, 368 (1930)).
As the Supreme Court noted in Bodcaw, one could argue as a matter
of fairness that a landowner should be able to recover reasonable
litigation costs incurred in the taking of his property, but such
compensation
is
a
matter
of
legislative
grace
rather
than
a
constitutional requirement. Bodcaw, 440 U.S. at 204. And there is no
provision for an award of attorneys’ fees in the Natural Gas Act -the act upon which this action is based -- nor have defendants
identified any other federal law that would permit an award of
attorneys’ fees in this case.22 See Williston Basin Interstate Pipeline
Co. v. Property Interests Necessary to Conduct Gas Storage Operations,
2010 WL 5104991, *3 (D.Mont. 2010) (American law does not provide for
the award of attorney fees absent a contractual or statutory provision
to the contrary, and there is no basis for attorneys’ fees in the
Natural Gas Act or Fed. R. Civ. P. 71.1); Guardian Pipeline, LLC v.
295.45 Acres of Land, 2008 WL 1751358, *6. (E.D. Wis. 2008) (Rule 71.1
22
Attorneys’ fees and other expenses are recoverable when a
condemnor acting under federal law fails to acquire the property. See
42 U.S.C. § 4654(a).
-48-
has no fee-shifting provision that allows the owner to recover
attorneys’ fees from the condemnor).
Defendants’ reliance on state law is unavailing in a proceeding
governed by federal law and procedures. Perhaps the state statutes
they cite authorize attorneys’ fees in similar actions under state
law, but they have no application in this action under the NGA.23 See
Irick v. Columbia Gas Transmission Corp., 2008 WL 191324, 3 (W.D.Va.
2008) (state law providing for attorneys’ fees was inapplicable to
action under the NGA).
The court concludes for the foregoing reasons that defendants are
not entitled to an award of attorneys’ fees in this action.
VI. Northern’s Motion for Sanctions (Doc. 960).
Northern argues that landowners’ counsel should be sanctioned
under Rule 16(f)(2). It seeks total fees and expenses of $66,162. The
request stems from landowners’ replacement of their expert appraiser
(Jones) shortly before commission hearings began. Northern argues that
it incurred unnecessary expenses as a result of the late substitution,
including (among other things) costs associated with the deposition
of the substitute appraiser (Gardner), preparing rebuttal to his
opinions, and preparing cross-examination of his opinions. Northern
faults landowners’ counsel Steve Robison for failing to be more
vigilant with respect to the preparation of expert reports from Jones
23
The court notes that some of the defendants are seeking
attorneys’ fees under K.S.A. § 55-1210(c)(3) in the state court
proceedings that decided the question of title to the gas that
migrated from the storage field. See Case No. 08-1405, Docs. 534-8,
534-10, and 534-13.
-49-
and for delaying the request to substitute another expert.
Rule 16(f) authorizes a court to issue any order, including a
discovery-type sanction, if a party or its attorney fails to obey a
scheduling or other pretrial order. Additionally, the court must order
the party or its attorney to pay the reasonable expenses, including
attorneys’ fees, incurred because of any noncompliance with Rule 16,
unless
the
noncompliance
was
substantially
justified
or
other
circumstances make an award of expenses unjust.
There can be no reasonable dispute that the need to substitute
for Jones, and the attendant logistical problems that came with it,
arose because of Jones’ deteriorating health. Robison’s affidavit
explains that he and his firm had used Jones a number of times in the
past
and
Jones
had
always
provided
good
reports
and
effective
testimony. When Jones was first contacted about this case, he was
recovering from back surgery and was on pain medication. Robison
recognized that Jones’ abilities were somewhat impaired at that time,
but he believed the problem would be resolved when Jones stopped using
pain medication. Doc. 984-1 at 2. Robison states that he had a series
of conferences with Jones about his report, during which Jones at
times appeared in command of his responsibilities and at other times
appeared to have difficulty. Jones told Robison that he was tapering
off his pain medication.
Robison
produced
it,
subsequently
received
Jones’
although
worked
with
it
draft
report
contained
Jones
and
January, March and April of 2014.
in
December
numerous
produced
errors.
revised
2013
and
Robison
reports
in
In February 2014, Robison first
informed Northern’s counsel that Jones might not be able to testify.
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Jones had told Robison, however, that he had stopped taking pain
medications in early 2014, and Robision expected that Jones’ mental
capabilities would improve. Doc. 984-1 at 4. Robison again spoke with
Northern’s counsel about a possible need to replace Jones just prior
to Jones’ deposition on March 3, 2014. Robison states that it became
apparent to all during Jones’ deposition that he was not able to
testify competently. During the deposition Jones indicated he was
taking 16 different medications, although he had previously told
Robison he was only taking three.
In March 2014, Robison also learned through consultation with
Jones’ doctor that Jones had conditions that impaired his mental
abilities and that he was medically unable to perform as an expert
witness. On March 28, 2014, Robison and other counsel for landowners
filed motions to substitute Gardner for Jones. The motion represented
that Gardner had agreed to adopt Jones’ opinions. The court held a
hearing on April 7, 2014, and deferred any question of sanctions, but
determined that landowners could substitute the witness with the
understanding that Gardner would adopt Jones’ opinions and that
Gardner should produce a report by April 21, 2014, and also undergo
a deposition.
Gardner’s deposition was taken on May 14, 2014, during a break
in the commission hearings. In his subsequent testimony before the
commission, Gardner offered various opinions, including “corrections”
of what he said were clear “typographical errors” in Jones’ reports
relating to base values of properties. Gardner testified that he
confirmed with Jones that these were in fact inadvertent errors. In
the course of the hearings Northern objected on numerous occasions
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that Gardner was offering opinions that went beyond or contradicted
Jones’
opinions.
Commissioner
Broomes
ruled
on
these
various
objections and generally limited Gardner to matters that were covered
at his deposition. See e.g., Doc. 906 at 166-67 (Tr. Pp. 3633-34).
With the benefit of hindsight it might be said that landowners’
counsel could have acted sooner to affect the substitution. But all
things are clear in hindsight. The court cannot fault counsel for
believing that Jones’ initial impairments were due to surgery and
medication and that they would improve over time. Nor can the court
agree with Northern’s attempt to characterize counsel’s work with
Jones as dilatory or deficient. Jones’ health problems were beyond
counsel’s
ability
to
control
or
predict.
The
court
notes
that
Robison’s attempt to continue working with Jones evinces an intent to
comply with the established scheduling order rather than to derail it
or disregard it. On the other side of the coin, the court is not
persuaded that Northern incurred much difficulty or extra work in
coping with the late substitution. It is true that a fair amount of
confusion was caused by the various versions of Jones’ reports that
were circulated, as well as by Gardner’s adoption and “correction” of
certain matters in those reports. But Northern’s capable counsel
handled these matters in stride, and much of its asserted extra work
likely
would
have
occurred
no
matter
who
ultimately
ended
up
testifying for landowners at the hearing.
Even where a party fails to comply with a scheduling order, the
court may elect to deny a request for expenses where the party shows
that
its
actions
were
substantially
justified
or
that
the
circumstances render an award of expenses unjust. Fed. R. Civ. P.
-52-
16(f)(2); Sager v. Johnson County Community College,
2012 WL 280638,
2 (D.Kan. 2012). The court concludes that the belated substitution of
Jones was substantially justified and that it would be unjust in these
circumstances to award Northern’s claimed expenses of $66,162. Robison
acted
reasonably
and
with
reasonable
promptness
in
seeking
to
substitute for Jones once it became clear that he would be unable to
testify. Counsel’s failure to accurately predict Jones’ health is not
grounds for requiring him to pay Northern’s attorneys’ fees. Moreover,
Northern’s attorneys capably handled the substitution and likely would
have incurred most of the same expenses regardless of who testified
for landowners at the hearing. Finally, it would be unjust in the
context of this condemnation to saddle the landowners or their counsel
with additional expenses that ultimately spring from Northern’s taking
of the landowners’ property for a public purpose. Northern’s motion
for sanctions is therefore denied.
VII. Joint Report on Non-Well Tracts (Doc. 963).
The three landowner groups represented in this action are: the
Huff group, the Meireis group, and the Hudson group. As to non-well
tracts
owned
by
members
of
these
groups,
the
groups
have
now
stipulated concerning the appropriate allocation of the condemnation
award among their various members having ownership interests in nonwell tracts.
As to Huff group members, the agreed-upon allocation for non-well
tracts is set forth in Doc. 963-1.
As to Meireis group members, the agreed-upon allocation is set
forth in Doc. 963-2.
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As to Hudson group members, the agreed-upon allocation is set
forth in Doc. 963-3.
The
court
hereby
adopts
Docs.
963-1,
963-2,
and
963-3
as
representing the appropriate allocation of the condemnation award
among property interests holders in the listed non-well tracts.
Prejudgment interest shall be included on the award in accordance with
this order.
VIII. Joint Report on Well Tracts (Doc. 965).
Defendants L.D. Drilling, Inc., Nash Oil & Gas, Inc., Pratt Well
Service, Inc., and Val Energy, Inc., and their associated interest
holders in Extension Area gas leases, have filed a joint report with
the court. (Doc. 965). All interest owners represented by counsel have
agreed that the condemnation award for the “oil and gas value” on
well-tracts should be allocated such that the royalty and overriding
royalty interests will not be burdened with any of the operating
expenses found by the commission.
These parties have further agreed that such a division would be
appropriate as to tracts with oil and gas leases that the parties
stipulated were valid on the date of taking (in Doc. 939), and
appropriate for tracts covered by oil and gas leases which the court
subsequently determines to be valid. Doc. 965 at 1. Inasmuch as the
court has now determined that the non-stipulated leases were in fact
valid
on
the
date
of
taking,
and
all
interested
parties
have
stipulated to or waived any further challenge to the accuracy of the
figures provided in Doc. 965-1, the court hereby adopts Doc. 965-1 as
representing the appropriate allocation of the “oil and gas value” of
-54-
the condemnation award as to the tracts and interest owners set forth
in that exhibit.
IX. Conclusion.
The court determines that Northern must pay interest on the
condemnation award, at a rate of 4.75%, compounded annually, from the
date of taking until the payment of just compensation.
The court determines that the oil and gas leases discussed in
Section III of this order remained valid on the date of taking as
discussed above. The lessees are accordingly entitled to share in the
just compensation awarded for oil and gas value on the specified well
tracts. The motions for summary judgment on this issue from Val group
(Doc. 950), Pratt Well Service group (Doc. 952), Nash Oil & Gas (954),
and L.D. Drilling, Inc. (Doc. 956) are granted.
Northern’s motion to reallocate fees and expenses (Doc. 959) is
denied.
The defendants’ motions or requests for attorneys’ fees are
denied.
Northern’s motion for sanctions (Doc. 960) is denied.
The court adopts the allocations of the condemnation award
amongst interest owners set forth in Docs. 963-1,963-2, and 963-3, and
in Doc. 965-1.
A motion for reconsideration of this order is not encouraged. Any
such motion shall not exceed 5 double-spaced pages and shall strictly
comply with the standards enunciated by this court in Comeau v. Rupp,
810 F.Supp. 1172, 1174 (D. Kan. 1992).
-55-
IT IS SO ORDERED.
Dated this 8th day of July 2015, at Wichita, Kansas.
s/Monti Belot
Monti L. Belot
UNITED STATES DISTRICT JUDGE
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