Osage Exploration & Development Inc et al v. Stephens Energy Group LLC

Filing 51

ORDER granting 37 Plaintiffs Osage Exploration and Development, Inc. and U.S. Energy Development Corporations Motion for Summary Judgment ; denying 38 Motion for Summary Judgment of Stephens Energy Group, LLC. Signed by Honorable Robin J. Cauthron on 8/25/15. (lg)

IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF OKLAHOMA
OSAGE EXPLORATION &
DEVELOPMENT, INC., and
U.S. ENERGY DEVELOPMENT
CORPORATION,
Plaintiffs,
v.
STEPHENS ENERGY GROUP, LLC,
Defendant.

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Case No. CIV-14-1319-C

MEMORANDUM OPINION AND ORDER
This lawsuit arises out of a contract dispute. Plaintiffs filed a Motion for Summary
Judgment (Dkt. No. 37) on June 5, 2015. Defendant filed a combined Response and Motion
for Summary Judgment (Dkt. No. 38). Plaintiffs have filed a Response (Dkt. No. 43), and
Defendant has filed a Reply (Dkt. No. 44). The Motions are at issue. All parties agree that
the controlling contracts are clear and unambiguous and that adjudication at the summary
judgment stage is appropriate. The undisputed facts are as follows:
On April 21, 2011, Plaintiffs Osage Exploration and Development, Inc. (“Osage”) and
U.S. Energy Development Corporation (“U.S. Energy”) and non-party Slawson Exploration
Company, Inc. (“Slawson”) (collectively “the signing parties”) entered into a Participation
Agreement. All three companies are in the business of exploring for and developing oil and
natural gas. Osage had developed oil and gas leads and had acquired a leasehold interest in
lands referred to as the Nemaha Ridge Project Area (“the Project Area”). Through the
Participation Agreement, U.S. Energy and Slawson agreed to participate with Osage in the

leasing, drilling, and development of the Project Area. Slawson acquired a 45 percent
working interest and was named Operator of all wells in the Project Area. U.S. Energy
acquired a 30 percent working interest. All three companies signed and executed the
Participation Agreement. The Participation Agreement makes several references to an
attached Operating Agreement. That attached agreement is unsigned. In or around
December 2013, the signing parties entered into a written and signed Partition Agreement,
which states the following: “the parties agree to terminate the Participation Agreement and
the JOA [Joint Operating Agreement] as to all lands within the Nemaha Ridge Prospect,
except for the JV [Joint Venture] Lands which shall continue to be controlled by the
Participation Agreement and JOA.” (Pls.’ Br., Dkt. No. 37, Ex. 2, at 3.) The parties agree
that the Partition Agreement is a modification and amendment to the Participation Agreement
and Operating Agreement. On or around July 25, 2014, Slawson entered into a Purchase and
Sale Agreement (“PSA”) with Defendant, through which Slawson sold all of its rights, title,
and interests—excluding overriding royalty interests—to Defendant. Those interests were
transferred to Defendant through subsequent assignments, bills of sale, and conveyances.
Slawson also transferred to Defendant all of the records and data in Slawson’s possession
related to the operation of the units and wells within the joint venture lands. The parties
agree that Slawson was entitled under the Participation Agreement to “assign [its] rights,
duties, and obligations hereunder, so long as any assignment by a Party hereto is expressly
made subject to the terms and conditions herein contained.” (Pls.’ Br., Dkt. No. 37, Ex. 1,
at 7.) However, Defendant asserts the position of Operator was one of the “rights” validly
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transferred pursuant to the assignment clause in the Participation Agreement. Plaintiffs
disagree and argue that the Operating Agreement controls the succession of the Operator
position. The Operating Agreement states, “If Operator terminates its legal existence, no
longer owns an interest hereunder in the Contract Area, or is no longer capable of serving as
Operator, Operator shall be deemed to have resigned without any action by Non-Operators,
except the selection of a successor.” (Pls.’ Br., Dkt. No. 37, Ex. 1, at 15.) The Operating
Agreement further provides that once an Operator has resigned or been removed, the parties
owning an interest in the Contract Area may select a new Operator. Relying on the
Operating Agreement, Osage asserted that Slawson’s assignment to Defendant was properly
deemed a resignation and proposed the selection of a new Operator. On November 5, 2014,
U.S. Energy and Osage—representing a 55 percent interest collectively—selected Osage as
the successor Operator of the joint venture lands. Defendant—owning a 45 percent
interest—declined to vote. On November 6, 2014, Osage requested that Defendant turn over
possession of the units, wells, and records within the joint venture lands pursuant to the
Operating Agreement. Defendant refused. Plaintiffs then filed suit in state court on
November 19, 2014. Defendant removed the case to this Court a week later. Plaintiffs seek
an order from the Court declaring that Osage is the Operator of the wells that are in the
Project Area and enjoining Defendant from conducting operations of any well or unit under
Osage’s purview as Operator.
Summary judgment is properly granted if the movant shows that no genuine dispute
as to any material fact exists and that the movant “is entitled to judgment as a matter of law.”
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Fed. R. Civ. P. 56(a). A fact is material if it affects the disposition of the substantive claim.
Anderson v. Liberty Lobby, Inc., 477 U.S. 247, 248 (1986). The party seeking summary
judgment bears the initial burden of demonstrating the basis for its motion and of identifying
those portions of “the pleadings, depositions, answers to interrogatories, and admissions on
file, together with the affidavits, if any,” that demonstrate the absence of a genuine issue of
material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986) (quoting Fed. R. Civ. P.
56(c)). If the movant satisfactorily demonstrates an absence of genuine issue of material fact
with respect to a dispositive issue for which the non-moving party will bear the burden of
proof at trial, the non-movant must then “go beyond the pleadings and . . . designate ‘specific
facts showing that there is a genuine issue for trial.’” Id. at 324 (quoting Fed. R. Civ. P.
56(e)). These specific facts may be shown “by any of the kinds of evidentiary materials
listed in Rule 56(c), except the mere pleadings themselves.” Id. Such evidentiary materials
include affidavits, deposition transcripts, or specific exhibits. Thomas v. Wichita Coca-Cola
Bottling Co., 968 F.2d 1022, 1024 (10th Cir. 1992). When considering a motion for
summary judgment, a court must “‘view the evidence and draw reasonable inferences
therefrom in the light most favorable to the nonmoving party.’” Kendrick v. Penske Transp.
Servs., Inc., 220 F.3d 1220, 1225 (10th Cir. 2000) (quoting Simms v. Oklahoma ex rel. Dep’t
of Mental Health & Substance Abuse Servs., 165 F.3d 1321, 1326 (10th Cir. 1999),
abrogated on other grounds by Eisenhour v. Weber Cnty, 739 F.3d 496 (10th Cir. 2013)).
The ultimate dispute between the parties is whether Defendant or Osage is the
successor Operator. Resolving this issue requires the Court to determine whether the
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Participation Agreement and the Operating Agreement constitute a single agreement and
whether the Operator position was an assignable right under the agreement. These questions
are those of contract construction. “The cardinal rule in contract interpretation is to
determine and to give effect to the contractual intent of the parties.” Sunrizon Homes, Inc.
V. Am. Guar. Inv. Corp., 1988 OK 145, ¶ 10, 782 P.2d 103, 107.
Plaintiffs assert that the Participation Agreement and the Operating Agreement must
be construed as a single agreement. While Defendant doesn’t argue that the agreements are
separate and distinct, Defendant does argue that the Operating Agreement is merely a
gapfiller and that the Court should disregard the operator resignation clause within the
Operating Agreement as conflicting with the Participation Agreement. Defendant also
emphasizes that the Operating Agreement is unsigned. “Oklahoma courts have recognized
that a written contract can incorporate an extrinsic document by reference.” Walker v.
BuildDirect.com Techs., Inc., 733 F.3d 1001, 1005 (10th Cir. 2013) (citing High Sierra
Energy, L.P. v. Hull, 2010 OK CIV APP 96, 241 P.3d 1139, 1144; Monkey Island Dev.
Auth. v. Staten, 2003 OK CIV APP 64, 76 P.3d 84, 88). The Participation Agreement
references the Operating Agreement eight times, including the following statement: “The
drilling of each well in the Project Area shall be governed by the applicable operating
agreement in the form attached hereto as Exhibit C (the ‘Operating Agreement’). Where
there is a conflict between the Operating Agreement and this Agreement, this Agreement will
control.” (Pls.’ Br., Dkt. No. 37, Ex. 1, at 4.) Also significant is the Partition Agreement,
which states that “Osage, Slawson, and US Energy, are all parties to that certain Participation
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Agreement (and the Joint Operating Agreement (the ‘JOA’) attached thereto as Exhibit ‘C’)”
and that the joint venture lands “shall continue to be controlled by the Participation
Agreement and JOA.” (Id., Ex. 2, at 1 & 3.) Based on the language in the agreements, the
signing parties clearly intended to incorporate the Operating Agreement into the Participation
Agreement, despite the fact that the Operating Agreement is unsigned. See Monkey Island,
2003 OK CIV APP 64, ¶¶ 16-17, 76 P.3d at 88 (finding that interpretation of the contract
must include the text contained in a referenced but unattached and unsigned “Common
Provisions” exhibit); see also Charles Mach. Works. Inc. v. Valley Ditch Witch, Inc., No.
CIV-13-651-M, 2014 WL 1745059, at *4 (W.D. Okla. May 1, 2014) (finding that the Dealer
Agreement clearly referenced and thereby incorporated an unsigned Standard Provision
document). The result of incorporating the Operating Agreement into the Participation
Agreement is that the intent of the signing parties is construed from the text of both
documents. When determining intent, “‘[s]everal contracts relating to the same matters,
between the same parties, and made as parts of substantially one transaction, are to be taken
together.’” Hirsch Holdings, L.L.C. v. Hannagan–Tobey, L.L.C., 2008 OK CIV APP 79,
¶ 14, 193 P.3d 970, 973 (quoting 15 Okla. Stat. § 158).
The parties agree that the contracts are clear and free of ambiguity. When a contract
is unambiguous, “the court is to interpret it as a matter of law, giving effect to the mutual
intent of the parties at the time of contracting.” Pitco Prod. Co. v. Chaparral Energy, Inc.,
2003 OK 5, ¶ 12, 63 P.3d 541, 545 (footnote omitted). Generally, if a contract is
unambiguous, extrinsic evidence is excluded. The parties have submitted extrinsic evidence
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in the form of affidavits and the PSA between Slawson and Defendant. However, “[i]f a
contract is complete in itself, and when viewed as a totality, is unambiguous, its language is
the only legitimate evidence of what the parties intended.” Id. at ¶ 14, 546. Therefore, the
Court’s determination will rest solely on a four-corners examination of the Participation
Agreement and the Operating Agreement.
The Participation Agreement states that the parties “may assign their rights, duties,
and obligations hereunder, so long as any assignment by a Party hereto is expressly made
subject to the terms and conditions herein contained.” (Pls.’ Br., Dkt. No. 37, Ex. 1, at 7.)
The Operating Agreement states that “[i]f Operator terminates ITS legal existence, no longer
owns an interest hereunder in the Contract Area, or is no longer capable of serving as
Operator, Operator shall be deemed to have resigned.” (Id., Ex. 1, at 15.) Defendant argues
that the assignment clause in the Participation Agreement and the operator resignation clause
in the Operating Agreement conflict and that therefore the resignation clause is not effective
over the parties. The parties agree that under the terms of the Participation Agreement, the
Participation Agreement controls over the Operating Agreement where there is a conflict.
Under Oklahoma law, “[a] contract must be considered as a whole so as to give effect to all
its provisions.” Pitco Prod. Co., 2003 OK 5, ¶ 14, 63 P.3d at 546. 15 Okla. Stat. § 157 states
that “[t]he whole of a contract is to be taken together, so as to give effect to every part, if
reasonably practicable, each clause helping to interpret the others.” Directly beneath the
assignment clause, the Participation Agreement states that an “Operator shall have the right
to require any Party who becomes an assignor to be the authorized agent for any of its
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assignees.” (Pls.’ Br., Dkt. No. 37, Ex. 1, at 7.) The only other provisions in the
Participation Agreement that discuss the Operator are the provision designating Slawson as
the Operator and a few provisions setting forth some Operator duties. The Participation
Agreement contains no provisions similar to the provisions in the Operating Agreement that
set out terms for the resignation, removal, and selection of Operators. Viewing the
agreement as a whole and “each clause helping to interpret the others,” it is clear that the
Participation Agreement and the Operating Agreement designate Slawson as Operator and
that the Operating Agreement sets out the guiding terms for the changes in that position in
the future. Defendant’s interpretation of the contract would render the operator resignation
and selection clauses in the Operating Agreement meaningless. Such construction is to be
avoided pursuant to 15 Okla. Stat. § 157. Furthermore, Defendant’s argument is dependent
on a determination that the position of Operator is an assignable right contemplated under
the Participation Agreement. However, nothing in the Participation Agreement indicates an
intent of the signing parties to treat the position of Operator as an assignable right, and
Defendant has provided no law supporting this assertion. Plaintiffs assert that Operator is
a position of responsibility and not a contractual and assignable right. To support this
argument, Plaintiffs cite 52 Okla. Stat. § 86.1(h), which states that “[t]he term ‘operator’ shall
mean any producer of oil or gas who has drilled a well or wells into a common source of
supply and is engaged in operating such well or wells for the purpose of producing oil or gas
therefrom.” Under Oklahoma law, “[c]ustom and usage should be considered when
interpreting a contract.” Oxley v. Gen. Atl. Res., Inc., 1997 OK 46, ¶ 19, 936 P.2d 943, 946
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(citing 15 Okla. Stat. § 162); see Pitco, 2003 OK 5, ¶ 17, 63 P.3d at 546 n.24. Applying the
standard industry definition provided above to the term “Operator” in the Participation
Agreement and the Operating Agreement, the Court finds that the parties intended the term
“Operator” to connote a position of responsibility and not an assignable right. Based on the
reasoning above, the Court finds that no conflict between the assignment clause and the
operator resignation clause exists.
Having determined that Slawson’s assignment of the operator position to Defendant
was not a valid assignment under the Participation Agreement and the Operating Agreement,
the Court must now determine whether the selection of Osage as the successor Operator was
valid. The Operating Agreement states that an Operator is deemed to have resigned if the
“Operator terminates its legal existence, no longer owns an interest hereunder in the Contract
Area, or is no longer capable of serving as Operator.” (Pls. Br., Dkt. No. 37, Ex. 1, at 15.)
Plaintiffs assert that Slawson was properly deemed to have resigned because Slawson
transferred all of its working interest to Defendant and because Slawson was “no longer
capable of serving as Operator” after Slawson transferred his working interest and all of the
records and data relating to the operations. Defendant argues that Slawson did not resign
because Slawson retained an overriding royalty interest. Defendant does not address whether
Slawson was capable of serving as Operator. Regardless of whether an overriding royalty
interest is sufficient “interest in the Contract Area,” Slawson would not have been able to
perform the many duties of Operator set out in the Participation Agreement and Operating
Agreement after transferring all its control over the wells in the Project Area and all of the
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data and records needed to conduct operations to Defendant. Osage was properly selected
as the successor Operator by a majority interest in the Project Area, as required under the
Operating Agreement. (Pls.’ Br., Dkt. No. 37, Ex. 1, at 4.) Defendant does not assert
otherwise.
Accordingly, Plaintiffs’ Osage Exploration and Development, Inc. and U.S. Energy
Development Corporation’s Motion for Summary Judgment (Dkt. No. 37) is GRANTED.
The Motion for Summary Judgment of Stephens Energy Group, LLC (Dkt. No. 38) is
DENIED. The Court declares that Osage Exploration and Development, Inc. is the Operator
of the wells which have been drilled and which are hereafter drilled in the Project Area
pursuant to the terms of the Participation and Operating Agreements. Defendant is hereby
enjoined from conducting operations or retaining records with respect to any unit or well in
which Osage is the duly elected Operator. The Court orders that Defendant turn over to
Osage all records and data necessary to the performance of Operator with respect to any unit
or well for which Osage is the duly elected Operator. The Court shall issue a separate
judgment.
IT IS SO ORDERED this 25th day of August, 2015.

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