Deadwood Canyon Ranch LLP v. Fidelity Exploration and Production Company

Filing 34

ORDER by Judge Daniel L. Hovland denying Deadwood Canyon Ranch's 13 Motion for Partial Summary Judgment, and granting Fidelity's 21 Motion for Partial Summary Judgment on the Plaintiff's breach contract claim. (QF)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NORTH DAKOTA
NORTHWESTERN DIVISION
Deadwood Canyon Ranch, LLP,

)
)
Plaintiff,
)
ORDER DENYING PLAINTIFF’S
)
MOTION FOR PARTIAL SUMMARY
vs.
)
JUDGMENT AND GRANTING
)
DEFENDANT’S MOTION FOR
Fidelity Exploration and Production
)
PARTIAL SUMMARY JUDGMENT
Company,
)
)
Case No. 4:10-cv-081
Defendant.
)
______________________________________________________________________________
Before the Court are cross-motions for partial summary judgment. See Docket Nos. 13 and
21. The Court denies the Plaintiff’s motion for partial summary judgment, and grants the
Defendant’s motion for partial summary judgment on the breach of contract claim.

I.

BACKGROUND
The plaintiff, Deadwood Canyon Ranch, LLP (“DCR”), has three principal partners which

include Stuart Pratt, Charles Steele, and the David Richards Children Trust - 1977 (for which David
Richards is the trustee). In 2006, DCR purchased property in Mountrail County, North Dakota. The
defendant, Fidelity Exploration and Production Company (“Fidelity”), owns the mineral rights to
the property.
In 2009, Fidelity contacted DCR regarding a plan to drill oil wells on the property. On
September 2, 2009, Fidelity sent DCR a “Notice of Drilling Operations” which is a standard 20-day
notice of its intention to drill three wells known as 44-32H, 11-33H, and 44-34H. See Docket Nos.
14-28, 14-29, and 14-30. The notices contained Fidelity’s proposed agreements for damages
associated with drilling and oil production. Fidelity offered a one-time payment ranging between

$8,000.00 and $14,500.00 for surface damages associated with constructing access roads and the
three wells sites. Fidelity also offered a one-time payment of $18,000 per well to be paid if the well
became a commercial producer of oil. See Docket Nos. 14-28, p. 8; 14-29, p. 8; and 14-30, p. 8.
On September 15, 2009, David Richards, on behalf of DCR, signed the receipt of the “Notice
of Drilling Operations.” See Docket Nos. 14-31, p. 4; 14-32, pp. 4-5; and 14-33, p. 1. Richards
also signed the proposed agreements concerning a one-time payment for surface damages. Each of
the agreements also contained an offer of a payment of $18,000 per well. Richards signed one of
the three offers and accepted the payment of $18,000 if well 44-32H became a commercial producer
of oil. See Docket No. 14-31, p. 2. However, Richards modified several other documents contained
within Fidelity’s proposal.
Specifically, Richards modified Exhibit B which contained conditions concerning the impact
of the oil activity for all of the proposed wells. See Docket Nos. 14-31, p. 3; 14-32, p. 2; 14-33, p.
4. Richards also modified “Exhibit A” for wells 11-33H and 44-34H, specifically changing the
offered price of $18,000 per well to $1,500,000 per well if the wells became commercial producers
of oil. See Docket Nos. 19-1 (original for well 11-33H); 19-2 (original for well 44-34H); 19-3
(modified for well 11-33H); 19-4 (modified for well 44-34H). Richards signed the modified
documents and the unmodified documents, and returned all of the documents to Fidelity. Although
Richards and other partners of DCR communicated with Fidelity after Richards returned the
modified documents, it is undisputed that DCR did not explicitly notify Fidelity of the significant
modifications to the compensation to be paid. See Docket No. 14-4, pp. 33-40. As noted, Richards
changed the compensation to be paid from $18,000 per well to $1.5 million dollars per well.

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On September 17, 2009, Dennis Zander, Fidelity’s Regional Operations Manager, received
the documents or agreements from Richards. See Docket No. 14-34. On the same day, Scott
Kemmis, a Fidelity landman, also acknowledged receiving the signed documents from Richards.
Kemmis sent an email to David Richards that stated as follow:
David,
I stopped by the Glendive Fidelity office this morning before leaving town for a few
days (30th anniversary).
We received the signed documents for the 3 wells that are scheduled for construction
and drilling, thank you.
I will get the payment requests processed for next week check run, where would you
like the check sent? We show the Bozeman address but if elsewhere let me know.
Sincerely,
Scott A. Kemmis
Contract Land Agent
Fidelity E&P
See Docket No. 14-35.
On September 29, 2009, Fidelity contacted David Richards for permission to survey the
property. See Docket No. 14-38. On September 30, 2009, and in accordance with the signed
agreements, Fidelity sent DCR checks for surface damage associated with the construction of access
roads and the drilling sites for the three oil wells known as 44-32H, 11-33H, and 44-34H. See
Docket No. 14-37. On October 1, 2009, Fidelity applied for drilling permits for the wells. See
Docket Nos. 14-39; 14-40; and 14-41. Between October 9-12, 2009, Fidelity received the permits
to drill the three wells from the North Dakota Industrial Commission. See Docket Nos. 14-39, pp.
3-4; 14-40, pp. 3-4; and 14-41, pp. 3-4.

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On October 19, 2009, Scott Kemmis of Fidelity notified David Richards that Fidelity planned
to begin “construction this week.” See Docket No. 14-44, p. 4. Invoices from an excavating
company, Excel Industries, Inc., show work occurred at each of the three wells from October 24,
2009, to November 11, 2009. See Docket No. 14-42. The work at the wells, as described in the
invoice, included “[w]ell site excavation,” “pit excavation,” “[a]ccess road excavation,” “[c]ulverts,”
and installation of cattleguards. See Docket No. 14-42.
On December 18, 2009, Scott Kemmis of Fidelity allegedly noticed for the first time that
David Richards had modified Fidelity’s proposal. See Docket No. 14-47. On December 21, 2009,
Kemmis sent an email to Fidelity employees Jim Kennedy and Dennis Zander. See Docket No. 1446. On December 23, 2009, counsel for Fidelity sent a letter to Richards requesting that he sign and
return a copy of Fidelity’s original proposal for damages of $18,000 per well if wells 11-33H and
44-34H became commercial producers of oil. See Docket No. 14-50. Richards did not do so.
On December 25, 2009, Fidelity began to drill the oil well known as 11-33H. See Docket
No. 14-51 (showing the “spud” date). On January 23, 2010, Fidelity began to drill the oil well
known as 44-34H. See Docket No. 14-52. It is undisputed that both 11-33H and 44-34H became
commercial-producing oil wells in 2010.
On October 19, 2010, DCR initiated a lawsuit against Fidelity in state court in Mountrail
County, North Dakota. See Docket No. 1-1. DCR alleged in the complaint that Fidelity breached
the agreements with DCR and that Fidelity owed DCR the sum of $3,000,000. On November 4,
2010, Fidelity removed the lawsuit to federal district court. See Docket No. 1.
On December 14, 2011, DCR moved for partial summary judgment on the breach of contract
claim. See Docket No. 13. DCR alleges that David Richards executed a counteroffer when he

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modified Fidelity’s offer for damages; that Fidelity’s conduct amounted to acceptance of the
counteroffer; and that Fidelity owes DCR damages in the amount of $1,500,000 per well or a total
of $3,000,000 pursuant to the agreements because the oil wells 11-33H and 44-34H became
commercial producers of oil. See Docket No. 14. On January 11, 2012, Fidelity filed a brief in
opposition to the motion. See Docket No. 19. On February 3, 2012, DCR filed a reply brief. See
Docket No. 26.
On January 11, 2012, Fidelity moved for partial summary judgment on the DCR’s breach
of contract claim. See Docket No. 21. Fidelity characterizes Richards’s modifications as a
counteroffer. Fidelity argues there are no facts which support the existence of an agreement because
Fidelity timely rejected the counteroffer prior to drilling the wells. On February 3, 2012, DCR filed
a responsive brief in opposition to the motion. See Docket No. 26. On February 28, 2012, Fidelity
filed a reply brief. See Docket No. 28.

II.

STANDARD OF REVIEW
Summary judgment is appropriate when the evidence, viewed in a light most favorable to the

non-moving party, indicates no genuine issues of material fact exist and the moving party is entitled
to judgment as a matter of law. Davison v. City of Minneapolis, Minn., 490 F.3d 648, 654 (8th Cir.
2007); Fed. R. Civ. P. 56(a). Summary judgment is not appropriate if there are factual disputes that
may affect the outcome of the case under the applicable substantive law. Anderson v. Liberty Lobby,
Inc., 477 U.S. 242, 248 (1986). An issue of material fact is genuine if the evidence would allow a
reasonable jury to return a verdict for the non-moving party. Id.

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III.

LEGAL DISCUSSION
The Court is sitting in diversity jurisdiction and, therefore, North Dakota substantive law

applies. Under North Dakota law, a contract requires an offer, acceptance of that offer, and mutual
acceptance and understanding of the offeror and offeree as to the terms of the legally enforceable
obligation incurred. Lagerquist v. Stergo, 2008 ND 138, ¶ 15, 752 N.W.2d 168; see also Geostar
Corp v. Parkway Petroleum, Inc., 495 N.W.2d 61, 66 (N.D. 1993). In order to form a contract there
must be a meeting of the minds between the parties with respect to all of the terms and conditions,
and there must be an unqualified and absolute acceptance of an offer by either party. See Davis v.
Satrom, 383 N.W.2d 831, 833 (N.D. 1986) (citing Greenberg v. Stewart, 236 N.W.2d 862 (N.D.
1975)); N.D.C.C. § 9-03-21 (requiring acceptance to be absolute). In order to form a contract, the
offer and acceptance must express assent to the same thing. Wucherpfennig v. Dooley, 351 N.W.2d
443, 444 (N.D. 1984).
In determining whether there has been an acceptance of an offer, the order of
communications is critical to an accurate analysis of the offer, counteroffer, acceptance,
modification, and the like. See B.J. Kadmas, Inc. v. Oxbow Energy, LLC, 2007 ND 12, ¶ 14, 727
N.W.2d 270. Both parties agree that David Richards submitted a counteroffer to Fidelity when he
modified Fidelity’s original proposal for additional compensation in the amount of $18,000 per well.
See N.D.C.C. § 9-03-21 (“A qualified acceptance is a new proposal.”); Cooke v. Blood Sys., Inc.,
320 N.W.2d 124, 128 (N.D. 1982) (“An offer to be considered accepted must be accepted
unconditionally. . . . A conditional acceptance of an offer is in itself a counteroffer which rejects
the original offer.”).

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Consent to a contract is only sufficient where the consent is (1) freely given; (2) mutual; and
(3) communicated to the other contracting party. N.D.C.C. § 9-03-01. North Dakota recognizes that
a party’s actions may constitute consent. N.D.C.C. §§ 9-03-20 and 9-20-25 provide as follows:
9-03-20. Acts constituting acceptance. Performance of the conditions of a
proposal, or the acceptance of the consideration offered with a proposal, is an
acceptance of the proposal.
9-03-25. Acceptance of benefit equivalent to consent. A voluntary
acceptance of the benefit of a transaction is equivalent to a consent to all the
obligations arising from it so far as the facts are known or ought to be known to the
person accepting.
N.D.C.C. §§ 9-03-20; 9-03-25. Unless an offer specifically prescribes the method of communicating
the consent, “any reasonable and usual mode may be adopted.” N.D.C.C. § 9-03-18.
DCR contends that Fidelity’s conduct amounted to an acceptance of the new terms. DCR
presented evidence which reveals that Fidelity constructed oil well sites, applied for drilling permits,
and obtained the drilling permits concerning the wells known as 11-33H and 44-34H. As DCR’s
counteroffer provides, Fidelity also submitted payments to DCR for the surface damages caused by
the construction of the well sites and access roads for 11-33H and 44-34H. In addition, David
Richards testified that with respect to oil wells drilled on their property before this dispute, Fidelity
did not sign the proposed agreements, but instead, would essentially start to construct the wells and
begin drilling after Richards signed the agreements. See Docket No. 14-4, p. 35; N.D.C.C. § 9-0318 (acceptance of a contract may be carried out by “any reasonable and usual mode”).
Fidelity contends that its conduct does not amount to an acceptance of DCR’s counteroffer
which changed the original offer price of $18,000 per well to $1,500,000 per well if the two wells
became commercial producers of oil. Fidelity argues that it was unaware of DCR’s counteroffer
until December 18, 2009, and promptly rejected the counteroffer on December 23, 2009. Fidelity
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contends that the rejection was effective because it had not commenced to drill the wells until after
the rejection - well 11-33H was drilled on December 25, 2009, and well 44-34H was drilled on
January 23, 2010.
The Court finds that Fidelity is entitled to summary judgment on DCR’s breach of contract
claim because no contract existed between Fidelity and DCR for the payment of additional
compensation for wells 11-33H and 44-34H. The undisputed facts establish that Fidelity was
unaware of DCR’s $1.5 million dollar counteroffers and, therefore, never accepted the counteroffers.
Absent an acceptance of DCR’s counteroffers, no contract existed between Fidelity and DCR for
additional compensation for wells 11-33H and 44-34H.
The uncontroverted facts establish that Fidelity never accepted DCR’s counteroffers of
$1,500,000 per well. Fidelity sent DCR a twenty-day “Notice of Drilling Operations” for wells 4432H, 11-33H, and 44-34H, which contained contractual offers of $18,000 per well of additional
compensation if the oil well became a commercial producer of oil. DCR accepted the additional
compensation of $18,000 for well 44-32H and signed and returned that contract. However, DCR
unilaterally altered Fidelity’s offers for additional compensation on wells 11-33H and 44-34H.
Specifically, DCR retyped the contract to look exactly the same as the original, except DCR
increased the additional compensation from $18,000 per well to $1,500,000 per well. The Court
finds as a matter of law that this significant and unilateral change in the amount to be paid on a
contractual instrument is a material alteration which would not bind a non-consenting party.
The Court finds that DCR had no authority to make a binding offer on behalf of Fidelity to
new contract terms of which Fidelity had no knowledge. DCR certainly had a right to make a
counteroffer, but it could not significantly alter the original offer of $18,000 per well; increase the

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offer to $1.5 million dollars per well without Fidelity’s knowledge; and then bind Fidelity to the
counteroffer when it had no knowledge of the material change in terms of the compensation to be
paid. DCR has failed to cite any legal authority to support its position that it had the power to make
a unilateral, binding offer on behalf of Fidelity, and then accept its own significantly-increased offer,
all unbeknownst to Fidelity. The Court finds as a matter of law that no contract existed between the
parties because there clearly was no meeting of the minds.
In addition, Fidelity is entitled to partial summary judgment on DCR’s breach of contract
claim because there was no mutual consent to the payment of $1,500,000 per well as additional
compensation for wells 11-33H and 44-34H. A valid contract requires the mutual consent of the
parties. See N.D.C.C. § 9-01-02 (requiring mutual consent of the parties is essential to the existence
of a contract). North Dakota law requires that the consent of the parties must be free, mutual, and
communicated to each other. See N.D.C.C. § 9-03-01; see also Stout, 1999 ND 218, ¶ 11, 603
N.W.2d 52. Consent is not mutual unless the parties agree upon the same thing in the same manner.
N.D.C.C. § 9-03-16; Thompson v. Thompson, 2008 ND 144, ¶ 11, 752 N.W.2d 624; Stout, 1999 ND
218, ¶ 11; Anderson v. Mooney, 279 N.W.2d 423, 426-27 (N.D. 1979).
In determining whether mutual consent existed, the critical issue is whether both Fidelity and
DCR agreed to compensate DCR $1,500,000 per well in additional compensation for wells 11-33H
and 44-34H if those wells became commercial producers of oil. In deciding whether the parties
mutually consent to entering into a contract, the court must look to the actions of the parties both
at the time and after the agreement was made. Gulden v. Sloan, 311 N.W.2d 568, 571 (N.D. 1981).
For a valid contract to exist there must be mutual consent, meaning the parties all agree upon
the same thing in the same sense. N.D.C.C. § 9-03-16; Thompson, 391 N.W.2d 608 (N.D. 1986).

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In Thompson, the North Dakota Supreme Court addressed the issue of mutual consent involving a
waste-water disposal well. Id. at 611. In analyzing the legal standard for determining mutual
consent, the Thompson Court relied on Corbin on Contracts, which stated:
If the court is convinced that the parties to a transaction gave different meanings to
the express terms of the agreement and that neither party knew or had reason to
known that fact, the holding will be that no contract was made and neither
reformation nor enforcement in accordance with anybody’s ‘meaning’ will be
granted.
Id. (citing Corbin on Contracts § 540, p. 88 (1960)). The North Dakota Supreme Court concluded
the parties materially differed as to what was being conveyed in the contract. Id. Thus, the Court
held there was no contract because the parties did not “agree upon the same thing in the same sense.”
Id. (citing N.D.C.C. § 9-03-16).
The undisputed facts clearly establish that Fidelity and DCR did not “agree upon the same
thing in the same sense.” See N.D.C.C. § 9-03-16. Fidelity reasonably believed that DCR agreed
to additional compensation of $18,000 per well for wells 11-33H and 44-34H. Fidelity was not
informed that DCR had changed the agreements and had made significantly-increased counteroffers
in the amount of $1,500,000 per well as additional compensation. DCR claims it believed Fidelity
agreed to the additional compensation of $1.5 million dollars per well because Fidelity never
rejected the counteroffer. Common sense would lead a reasonable person to conclude otherwise.
In situations where the parties to a transaction gave different meanings to the terms of the agreement
and neither party knew or had reason to know that fact, the court will hold that no contract was
made. See Thompson, 391 N.W.2d at 611 (citing Corbin on Contracts § 540, p. 88; see also
Restatement (Second) of Contracts § 20 (1981) (stating there is no manifestation of mutual assent
to an exchange if the parties attach materially different meanings to their manifestations and neither

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party knows the meaning attached by the other). Both Fidelity and DCR assigned a significantly
different meaning to the amount of additional compensation to be paid for wells 11-33H and 4434H. The Court finds as a matter of law that no contract ever existed between the parties as to the
amount of additional compensation to be paid for wells 11-33H and 44-34H if those wells became
commercial producers of oil.
The Court notes that DCR is not left without a remedy. Chapter 38-11.1 of the North Dakota
Century Code provides for compensation to surface owners for damage related to oil and gas
production. N.D.C.C. § 38-11.1-04 states, in pertinent part:
The mineral developer shall pay the surface owner a sum of money equal to
the amount of damages sustained by the surface owner and the surface owner’s
tenant, if any, for loss of agricultural production and income, lost land value, lost use
of and access to the surface owner’s land, and lost value of improvements caused by
drilling operations. The amount of damages may be determined by any formula
mutually agreeable between the surface owner and the mineral developer. When
determining damages, consideration must be given to the period of time during
which the loss occurs and the surface owner may elect to be paid damages in annual
installments over a period of time; except that the surface owner must be
compensated for harm caused by exploration only by a single sum payment. The
payments contemplated by this section only cover land directly affected by drilling
operations. Payments under this section are intended to compensate the surface
owner for damage and disruption.
N.D.C.C. § 38-11.1-04. The determination of damages is to initially be made by the parties based
upon a mutually-agreeable formula, i.e., a settlement agreement. If the parties are unable to agree
on the damages to be awarded, the surface owner may sue for damages as DCR has done in this
case. Murphy v. Amoco Prod. Co., 729 F.2d 552, 554 (8th Cir. 1984). If the damages awarded
exceed the amount offered by the mineral developer, the surface owner can recover costs and
reasonable attorneys’ fees. Id. (citing N.D.C.C. § 38-11.1-09). Both parties have demanded a jury
trial and the trial is scheduled to commence on October 29, 2012. The surface owner’s claim for

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damages under Chapter 38-11.1 remains. It will ultimately be left to a jury to determine the
appropriate amount of damages associated with Fidelity’s drilling activities if the parties are unable
to resolve their differences. This Court has noted in the past that the damages recoverable under
N.D.C.C. 38-11.1-04 are broad in scope.

III.

CONCLUSION
The Court has carefully reviewed the record, the parties’ briefs, and relevant case law. The

Court finds that no genuine issues of material fact exist concerning the existence of a contract, and
that Fidelity is entitled to judgment as a matter of law on the breach of contract claim. The Court
DENIES DCR’s partial motion for summary judgment (Docket No. 13), and GRANTS Fidelity’s
motion for partial summary judgment on the breach of contract claim (Docket No. 21). The claim
for damages under Chapter 38-11.1 of the North Dakota Century Code remains.
IT IS SO ORDERED.
Dated this 10th day of May, 2012.
/s/ Daniel L. Hovland
Daniel L. Hovland, District Judge
United States District Court

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