Marvin Isgur, UNITED STATES BANKRUPTCY JUDGE.
Jonah LLC
On April 29, 2016, Ultra filed for chapter 11 bankruptcy. (See Case No. 16-32204; ECF No. 1). On December 19, 2016, Jonah filed this adversary proceeding against Ultra seeking: (i) a determination of the validity and extent of its ORRIs; (ii) payments that Ultra allegedly failed to make, and (iii) a determination that any underpaid ORRIs did not become property of Ultra's bankruptcy estate. (ECF No. 1 at 17-24). Both parties filed competing motions for partial summary judgment. (ECF Nos. 48; 49). On August 24, 2017, the Court denied both summary judgment motions. (ECF No. 71). The Court found that further examination of the agreements was needed to establish whether the gas price is set at the wellhead or at the delivery point. (ECF No. 71 at 10-11).
On November 14, 2018, the Court held a hearing to determine at which point the oil and gas should be valued according to the ORRIs. (ECF No. 134 at 8). At the hearing, Jonah argued that the instruments creating Classes 2, 3, and 4 of its ORRIs, and the instruments creating the farm-out overrides do not allow for deductions and do not have the requisite specific language regarding what costs of production may be deducted from Jonah's ORRI payments. Jonah argued that the absence of specific language requires the application of the Wyoming Royalty Payment Act ("WRPA").
Ultra argued that ORRI Classes 2, 3, and 4 were sufficiently specific to be removed from the confines of the relevant WRPA provisions.
For the reasons set forth below, the Court finds that: (i) the WRPA cannot apply retroactively to Classes 2, 3, and 4; (ii) the WRPA applies to the farm-out overrides; and (iii) Ultra is not bound by the 2004 SWEPI Letter.
Ultra owns working interests in federal oil and gas leases located in the Pinedale Field of Sublette County, Wyoming. (ECF No. 1 at 5). These leases stem from fifteen Bureau of Land Management (the "BLM")
Atlantic Richfield Company ("ARCO") and Burlington Resources & Gas Company, L.P. ("Burlington") originally owned the working interests burdened by these five classes of ORRIs. (ECF No. 1 at 9). Burlington's working interest was burdened by Classes 1, 2, 3, and 5, while ARCO's interest was burdened by Classes 1, 2, and 4. (ECF No. 1 at 9). In 1992, ARCO sold substantially all of its working interest to McMurry Oil, Nerd Enterprises, and Fort Collins Consolidated Royalties. (ECF No. 1 at 9). Burlington sold a
In 2013, a dispute arose between Jonah and some of the Ultra defendants regarding the proper method of paying the Class 1, 2, 3, and 4 ORRIs burdening Ultra's working interest in the Pinedale Field. (ECF No. 1 at 11). Jonah agreed that the Class 1 ORRIs were not subject to the WRPA and therefore must be paid in accordance with their express terms. (ECF No. 1 at 11). Conversely, Jonah claimed that the Class 2, 3 and 4 ORRIs were subject to the WRPA's definitions and payment provisions because they did not contain specific language providing how to pay the ORRIs. (ECF No. 1 at 11). Thus, as to Classes 2, 3, and 4, Ultra could not deduct post-production costs in contravention of the WRPA. In response to Jonah's contentions, Ultra alleged that it had paid all of Jonah's ORRIs in the same manner as the federal royalty interest. (ECF No. 1 at 12). Ultra argued that this payment calculation was justified by the language of the Class 1 ORRIs and the instruments creating Classes 2, 3, and 4. (ECF No. 1 at 12).
On October 1, 2014, Jonah sued Ultra in Wyoming state court. (ECF No. 71 at 4). The parties agreed to allow discovery and summary judgment briefing on the proper deductions that may be taken under the Class 1, 2, 3, and 4 ORRI instruments as the first phase of the litigation. (ECF No. 1 at 13). Through discovery, Ultra first learned of the 2000 Amendment. (ECF No. 1 at 13). Based upon a belief that Ultra was underpaying the Class 5 ORRIs, Jonah demanded an accounting from Ultra. (ECF No. 1 at 14). Receiving no response, Jonah filed a separate lawsuit on April 28, 2016, also in Wyoming state court. (ECF No. 71 at 4).
On April 29, 2016, Ultra filed for chapter 11 bankruptcy, staying the two Wyoming state court lawsuits. (Case No. 16-32202, ECF No. 1).
On December 19, 2016, Jonah filed this adversary proceeding against Ultra seeking:
(ECF No. 1 at 32-33).
On March 31, 2017, Jonah and Ultra filed motions for partial summary judgement in this adversary proceeding. (ECF
Ultra countered that the WRPA does not apply to any of the ORRI classes because: (i) the assignments creating those classes either contain express language dictating how the ORRIs should be paid or incorporate or reference specific federal royalty payment procedures; and (ii) alternatively, even if not specific, the WRPA is inapplicable because its provisions cannot be applied retroactively to the ORRIs in order to modify the terms of the ORRI assignments. (ECF No. 49 at 16-43).
On May 23, 2017, the Court held a hearing on the parties' motions for partial summary judgment. (ECF No. 62 at 1). On August 24, 2017, the Court denied both motions. (ECF No. 71 at 11). The Court found that Ultra and Jonah failed to begin their analysis by utilizing the market price in the field or at the wellhead. (ECF No. 71 at 11). The Court further found, with respect to Class 3 ORRIs, that it was unclear whether revenue should be based on a wellhead price or market price in the field. (ECF No. 71 at 11). In light of these errors, the Court determined that more information was needed to determine what gathering and other costs of production may be deducted from Jonah's ORRI payments. (ECF No. 71 at 11).
On November 14, 2018, the Court held a hearing to determine at which point the oil and gas should be valued according to the ORRIs. (ECF No. 134 at 8). During Stephen Thompson's
At the conclusion of the hearing, the Court found that at the time the contracts were executed there was an underlying market belief that oil and gas was valued at the wellhead as to Classes 2, 3, and 4. (ECF No. 134 at 338). In other words, wellhead pricing was assumed when the ORRIs were formed. (ECF No. 134 at 338). Two issues, however, remained: (i) whether the WRPA can apply retroactively to alter an assumption underlying the contract, and (ii) the treatment required for a class of overrides not included in the complaint but listed as a contested matter in the pretrial order. (ECF No. 137 at 336-37). The Court requested that the parties file post-trial briefs on both these issues. (ECF No. 134 at 336-339).
The District Court has jurisdiction over this proceeding pursuant to 28 U.S.C. § 1334. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (B), (E), and (O). Pursuant to 28 U.S.C. § 157(a), this proceeding has been referred to the Bankruptcy Court by General Order 2012-6.
Jonah contends that "[u]nder Fifth Circuit law, matters identified as contested issues of law in the Joint Pretrial Statement are deemed to amend the pleadings and become live and available for trial." (ECF No. 138 at 2). Thus, both claims relating to the farm-out overrides and SWEPI's course of performance are live and available for trial. (ECF No. 138 at 4). Ultra acknowledges that Fifth Circuit law views a pre-trial order as an amended pleading; however, it argues that the pretrial order amends the complaint only when "all elements of the claim are included" in the pretrial order. (ECF No. 137 at 20). Specifically, Ultra argues that Jonah failed to plead damages as to its farm-out overrides claim, and therefore, the claim fails. (ECF No. 137 at 21-22). Ultra did not address the SWEPI claim. (See ECF No. 137).
"Where a claim was not included in the complaint, but was included in the pretrial order, `it is irrelevant that the pleadings were never formally amended.'" Rockwell Int'l. Corp. v. United States, 549 U.S. 457, 474, 127 S.Ct. 1397, 167 L.Ed.2d 190 (2007) (citing Curtis v. Loether, 415 U.S. 189, 190, 94 S.Ct. 1005, 39 L.Ed.2d 260 (1974)). "A party has presented an issue in the trial court if that party has raised it in either the pleadings or the pretrial order, or if the parties have tried the issue by consent." Burch v. Coca-Cola Co., 119 F.3d 305, 319 (5th Cir. 1997). "It is well settled that a joint pretrial order signed by both parties supersedes all pleadings and governs the issues and evidence to be presented at trial." Elvis Presley Enters. Inc. v. Capece, 141 F.3d 188, 206 (5th Cir. 1998). Therefore, the inclusion or incorporation of a claim or issue in the pre-trial order amends the previous pleadings to state the new claim. Rockwell Int'l. Corp., 549 U.S. at 474, 127 S.Ct. 1397. "[E]ven when neither the pleadings nor the pretrial order contain a claim, that claim may still proceed if the record contains sufficient evidence to convince the court that the parties consented to the adjudication of the issue." Elder Offshore Leasing, Inc. v. Bolivarian Republic of Venezuela, 297 F. App'x 351, 355 (5th Cir. 2008).
The joint pretrial order also lists the farm-out overrides as contested issues of law. (ECF No. 107 at 9, 13 ("Do the WRPA definitions of `overriding royalty' and `costs o[f] production' apply to the Farm-Out Overrides?")). Ultra, however, argues that Jonah failed to "sufficiently plead a cause of action as to the Farmout Overrides." (ECF No. 137 at 21). Ultra contends that in failing to include the farm-out overrides in their damage model, Jonah failed to properly include all elements of a breach of contract claim. (ECF No. 137 at 22). Thus, the claim fails. Specifically, Ultra highlights Plaintiff's Exhibit 30, an attachment to the joint pretrial statement, noting that according to Jonah's damage model, its Class 1 through Class 4 overrides comprise 100% of its damages. (ECF No. 137 at 21). In essence, Ultra claims that Jonah failed to account for the farm-out overrides when assessing its own damages and therefore has plead an incomplete claim. Ultra, however, fails to note that Jonah explicitly states in the same exhibit that it is also seeking damages for the farm-out overrides.
(ECF No. 111-12 at 12) (emphasis added). Therefore, Jonah has alleged damages based on its farm-out overrides claim against Ultra. (ECF No. 111-12 at 8-12).
Accordingly, both claims, which were included in the joint pretrial order as contested issue of law, are live and available for decision. Elvis Presley Enters. Inc., 141 F.3d at 206.
As noted above, the Court found that at the time the contracts creating Jonah's ORRIs were executed, the parties' intended to use wellhead price as the starting point for royalty calculation. (ECF No. 134 at 338). Wellhead pricing is an implied term and a contractual assumption in the underlying contracts. The crux of the issue before the Court is whether the WRPA's definitions of "overriding royalty" and "costs of production" apply to ORRI Classes, which contain no express or specific language but rather are defined under
In Wyoming, royalties and overriding royalties are to be computed in accordance with the WRPA, "unless other periods or arrangements ... are provided for in a valid contract with the person or persons entitled to such proceeds." WYO. STAT. § 30-5-305(a). In other words, ORRIs must be computed in accordance with WRPA's provisions unless the parties provide, through agreement, a different method of calculation. In such cases, the agreement between the parties controls.
The WRPA, effective June 1, 1982, "was enacted to ensure the proper payment of proceeds derived from production of oil, gas or related hydrocarbons by providing time limits within which payments must be made, and also by mandating penalty interest to be paid on delayed payments and shifting payment costs, penalties and attorney's fees to recalcitrant royalty payors."
The 1989 amendments to the WRPA provided definitions for key terms, "mandated uniform payment reports to owners of royalties, and penalized payors of royalties for failing to make proper payment reports." Brandin Hay, Wyoming's Royalty Payment Act, 31 LAND & WATER L. REV. 823, 823 (1996) (internal citations omitted). Among the definitions applicable to the question at issue are the WRPA's definitions of "overriding royalty" and "costs of production." The WRPA defines "overriding royalty" as "a share of production, free of the costs of production, carved out of the lessee's interest under an oil and gas lease. WYO. STAT. § 30-5-304(a)(v). As defined above, "costs of production" include all of the costs incurred for exploration, development, recovery, and abandonment operations under the underlying leases. WYO. STAT. § 30-5-304(a)(vi). "Costs of production" do not include the costs associated with transporting the oil or gas to market. Id. The parties do not dispute the meaning of the definitions provided in § 30-5-304, rather the crux of the issue before the Court is whether the WRPA's definitions apply to Classes 2, 3, 4, 5, and the farm-out overrides.
In Wyoming, the primary purpose when construing a statute is to determine the intent of the legislature. Moncrief v. Harvey, 816 P.2d 97, 105 (Wyo. 1991). Legislative intent should be ascertained, as nearly as possible, from the language of the statute viewed in the light of its object and purpose. Id. (citations omitted).
The WRPA "is intended to `stop oil [and gas] producers from retaining other people's money for their own use.'" Hartman, 226 P.3d at 916 (citations omitted). The Act "was designed to protect royalty owners and permit them to determine if correct payment of royalties has been made." Wold v. Hunt, 52 F.Supp.2d 1330, 1334 (D. Wyo. 1999). Thus, the WRPA is intended to be remedial and the Wyoming Supreme Court construes its provisions liberally to achieve the Act's remedial purpose. Id. (emphasis added). As noted above, Ultra does not challenge the WRPA's definitions or intent, rather it argues that it cannot be applied retroactively to alter its contractual rights.
The leases in this dispute are governed by Wyoming Law. Except in matters governed by the Constitution or by acts of Congress, it is the role of the federal courts to apply the law of the state, whether "declared by its Legislature in a statute or by its highest court in a decision." Erie R. Co. v. Tompkins, 304 U.S. 64, 78, 58 S.Ct. 817, 82 S.Ct. 1188 (1938). This includes the interpretation of state statutes. See Cardenas v. United of Omaha Life Ins. Co., 731 F.3d 496, 499 (5th Cir. 2013). When state law questions have not been answered by the highest court of the state, it is the duty of the federal court to decide the case as would an intermediate appellate court of the state in question. Transcon Gas Pipeline Corp. v. Transp. Ins. Co., 958 F.2d 622, 623 (5th Cir. 1992); Guilbeau v. Hess Corp., 854 F.3d 310, 315 (5th Cir. 2017). The retroactivity of the WRPA is not entirely settled. However, a number of decisions by the Wyoming Supreme court inform this Court's decision as to the applicability of the WRPA here.
The Wyoming Supreme Court has addressed retroactivity as applied to the WRPA on various occasions. In Indep. Prod. Mktg. Corp. v. Cobb, the Supreme Court of Wyoming first discussed retroactivity as applied to the WRPA. 721 P.2d 1106 (Wyo. 1986). Although the issue did not ultimately require the court to retroactively apply the WPRA, its discussion is instructive. In Cobb, the operator withheld royalties owed under the lease until 1984, four years after it became liable, and almost two years after the effective date of the WRPA. Id. at 1107-08. The royalty owner filed suit, seeking payments plus statutory penalties pursuant to § 30-5-303 of the WRPA. Id. at 1108. The trial court held in favor of the royalty owner and the operator appealed, arguing that the trial court applied the interest penalty provision of the WRPA retroactively since the triggering event was the production of oil and gas, which precipitated the Act's interest penalty. Id. at 1109. On appeal, the Supreme Court of Wyoming agreed with the operator that the "Act contains no explicit retroactivity language, and therefore, should only be applied prospectively...." Id.
In Moncrief v. Harvey, the Wyoming Supreme Court revisited the issue of retroactivity. 816 P.2d 97 (Wyo. 1991). In Moncrief, the trial court awarded the royalty interest owner 18% penalty interest pursuant to § 30-5-303(a) of the WRPA on production occurring during and after the WRPA's enactment. Id. at 101. Relying on Cobb, the Wyoming Supreme Court reversed the trial court's decision, holding that the operator was entitled to the WRPA's six-month grace period and therefore, interest began accruing following the WRPA's enactment. Id. at 106. Similarly, although the production at issue in Moncrief commenced prior to the WRPA's enactment, the court held that the triggering event occurred after the Act's effective date and thus, it was not applied retroactively. Id. ("We see no reason for treating an obligor whose obligation began to accrue before the effective date of the Act any differently from one whose obligation arose after the Act, so long as the Act is not applied retroactively." (emphasis added)).
In Cities Serv. Oil & Gas Corp. v. State, the Wyoming Supreme Court made a similar application and allowed an operator to benefit from the six-month grace period recognized in Cobb and Moncrief for production and sale which predated the effective date of the WRPA. 838 P.2d 146, 156 (Wyo. 1992). Again, the Wyoming Supreme Court avoided retroactive application of the Act. Id. (finding "interest began to accrue not later than 60 days after the end of the calendar month within which subsequent production is sold").
These decisions highlight the Wyoming Supreme Court's concern with a royalty owner's right to timely payments. As noted above, the WRPA sets time limits for payments to royalty owners and penalties against operators who fail to comply with the limits prescribed. In applying the WRPA, the Wyoming Supreme Court construed the Act in a way that would carry out its intended purpose—protecting royalty owners by permitting them to determine the correct payment of royalties. However, the Wyoming Supreme Court was notably cautious in applying the statute retroactively.
Retroactivity is disfavored in the law. See Mullinax Concrete Serv. v. Zowada, 275 P.3d 474, 476 (Wyo. 2012) ("[R]etrospective application of a statute to events occurring before enactment of a statute is not favored."); see Bowen v. Georgetown Univ. Hosp., 488 U.S. 204, 208, 109 S.Ct. 468, 102 L.Ed.2d 493 (1988) (noting that generally "congressional enactments and administrative rules will not be construed to have retroactive effect unless their language requires this result"). There is no explicit language in the WRPA that provides for its retroactive effect; therefore, the presumption is that the statute should only apply prospectively. Cobb, 721 P.2d at 1109. Although the decisions of the Wyoming Supreme Court mainly dealt with the penalty provision of the WRPA, its reasoning is instructive. The Wyoming Supreme Court's reasoning counsel in favor of avoiding retroactive application of the WRPA. Nevertheless, the Wyoming Supreme Court has emphasized the Act's remedial nature. See Moncrief, 816 P.2d at 105 ("The Act is a remedial statute and, as such, is to be liberally construed to achieve its remedial purpose."). It is the Act's remedial nature and purpose that Jonah highlights in arguing for its application to the underlying contracts.
At the conclusion of trial, this Court found that at the time the contracts were
Jonah argues that the WRPA applies to ORRI Classes 2, 3, 4, and the farm-out overrides because the application of the WRPA would not cause substantial impairment to the parties' rights under the contract. (ECF No. 138 at 15-17). Specifically, Jonah argues that considering the existence of "state overriding royalty payment regulation" at the time Ultra purchased its working interest in the leases, it should have expected further federal and state regulation, such as the WRPA. (ECF No. 138 at 17). Jonah further maintains that even if the WRPA acted to impair Ultra's rights, such impairment serves a legitimate public purpose—to standardize business practices and terms in the Wyoming oil and gas industry and, therefore, the adjustment is minimal and justified. (ECF No. 138 at 21-23).
Ultra counters that a retroactive application of the WRPA acts as a substantial impairment to its rights under the contracts because the "modification imposes an obligation or liability that was unexpected at the time the parties entered into the contract and relied on its terms." (ECF No. 137 at 17) (citation omitted). Specifically, Ultra argues that in changing the point of valuation, the WRPA acts to "effectively transfer[] a significant amount of revenue from one party to another." (ECF No. 137 at 20). Such a drastic change amounts to substantial impairment of its rights under the contract. (ECF No. 137 at 15-17).
Article I, § 10, of the Constitution provides: "No State shall ... pass any... Law impairing the Obligation of Contracts." U.S. Const. art. I, § 10, cl. 1. The Contracts Clause "restricts the power of States to disrupt contractual arrangements, but it does not prohibit all laws affecting pre-existing contracts...." Sveen v. Melin, ___ U.S. ___, 138 S.Ct. 1815, 1817, 201 L.Ed.2d 180 (2018). Courts apply a two-step test in determining whether a statute violates the Contracts Clause. Id. The threshold inquiry is whether the state law has operated as a substantial impairment on a contractual relationship." Id. (citing Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, 244, 98 S.Ct. 2716, 57 L.Ed.2d 727 (1978)). If a court finds substantial impairment, "the inquiry turns to the means and ends of the legislation." Id.
The substantial impairment inquiry has three components: "whether there is a contractual relationship, whether a change in law impairs the contractual relationship, and whether the impairment is substantial." Gen. Motors Corp., 503 U.S. at 186, 112 S.Ct. 1105; see Sveen, 138 S. Ct. at 1817 (noting courts consider "the extent to which the law undermines the contractual bargain, interferes with a party's reasonable expectations, and prevents the party from safeguarding or reinstating
"If a substantial impairment is found, the State, in justification, must have a significant and legitimate public purpose behind the regulation." Id. at 412, 103 S.Ct. 697. "One legitimate state interest is the elimination of unforeseen windfall profits." Id. The requirement of a legitimate public purpose guarantees that the State is exercising its police power, rather than providing a benefit to special interests." Id. "Once such a purpose has been identified, the adjustment of the contracting parties' rights and responsibilities must be based upon reasonable conditions and must be of a character appropriate to the public purpose justifying the legislation's adoption." Id. "[C]ourts defer to legislative judgment as to the necessity and reasonableness of a particular measure." Id.
The threshold inquiry is whether the WRPA, if applied to classes 2, 3, 4, 5 and the farm-out overrides would substantially impair Ultra's contractual rights. Whether the parties are operating in a regulated field is significant to the inquiry. Id. at 413, 103 S.Ct. 697. The underlying leases stem from fifteen BLM leases issued between 1950 and 1952. (ECF Nos. 1 at 6; 49 at 9).
Bryan Hassler and Kris Terry, as expert witnesses for Jonah and Ultra, respectively, testified that at the time the underlying leases were executed, the industry was heavily regulated, and prices were based on wellhead price. (ECF No. 134 at 118, 255 (noting that up until the mid-1980s, "producers [] had no choice," and "were driven and beholden to what essentially was a monopoly of the interstate pipeline systems purchasing gas at the wellhead or at the field level ...")). In 1985, the Federal Energy Regulatory Commission ("FERC") issued Order Number 436, which allowed producers to sell directly to a third party without the need to sell through a pipeline company. (ECF No. 134 at 118-119, 253). In the 1990s, FERC Order Number 636 took the issue a step further and "required the pipelines to unbundle their sales function with purchases of natural gas and resell to end use customers from their transportation and storage functions." (ECF No. 134 at 119). In essence, Order 636 required pipelines to separate selling gas and transporting gas. Thus, the industry evolved over time to the point at which "pipelines are no longer in control of the transportation facility," meaning buyers and sellers are free to negotiate among each other, rendering "for the most part, a completely deregulated market." (ECF No. 134 at 119, 254).
No such foreseeability is present here. Contrary to the facts in Energy Reserves, when Ultra purchased its working interests in the Pinedale Field in the mid-to-late 1990s, the industry was in a state of deregulation, which gave buyers and sellers larger freedom in negotiating deals. (ECF No. 134 at 254). The changes to which the expert witnesses testified related to the relationship between producers and pipeline companies rather than cost-shifting between producers and royalty interest owners as to transportation costs. (ECF No. 134 at 118-19, 253-54) ("Producers are free to identify places where they can sell gas, and enter into all the appropriate contracts...."). Furthermore, unlike in Energy Reserves, none of the underlying leases made sale prices subject to alteration in connection with "present and future state and federal law." Id. at 416, 103 S.Ct. 697. Rather, as this Court held, the contracts operated under the assumption that prices were based at the wellhead as was customary at the time.
Applying the WRPA would change the point of valuation, which would then shift the burden of transportation costs. Shifting the burden of transportation costs in accordance with the WRPA would increase Jonah's royalty payments significantly. (ECF No. 137 at 19 (arguing Jonah's damage model seeks $6,783,922.00 in under paid overriding royalty payments, interest, attorney's fees, and costs). Thus, Ultra's rights would be impaired if the WRPA were to apply retroactively to change the point of valuation and the impairment would be substantial.
It is appropriate to now focus on the economics of this dispute. Although there may be variations at final trial, the simple
Under that hypothetical scenario, one can assume that the cost of transporting the gas is $200,000. If the WPRA does not apply, Ultra would pay Jonah $1,000,000. That is the contracted price under this "efficient market" hypothetical. Jonah demands that it receive $1,200,000, with no deduction for transportation costs. The difference is a direct modification of the parties' contractual rights.
The hypothetical example does not end the discussion. The market may not be efficient. For example, it is possible that the wellhead price in the hypothetical example would be $1,100,000. Because the market may be inefficient, it is possible that the price received by Ultra at the delivery point minus the transportation costs from the wellhead to the delivery point would not equal the wellhead price. Jonah is entitled to the upside (or must suffer the downside) of any such market inefficiencies. It is entitled to wellhead value. Deducting post-production costs may be a good proxy for determining well-head pricing. However, the Court does not have any evidence before it demonstrating that a deduction of post-production costs will produce accurate well-head value.
"If a substantial impairment is found, the State, in justification, must have a significant and legitimate public purpose behind the regulation." Energy Reserves, 459 U.S. at 412, 103 S.Ct. 697. There is no question that the WRPA serves a legitimate public purpose. The WRPA exemplifies "the legislature's obvious intent to stop oil producers from retaining other people's money for their own use." Cities Serv., 838 P.2d at 156 (quoting Cobb, 721 P.2d at 1110). The Wyoming legislature was concerned with ensuring timely and correct payments for royalty owners. Wold, 52 F. Supp. 2d at 1335 (noting the Act "was designed to protect royalty owners[] and permit them to determine if correct payment of royalties has been made."). It enacted the WRPA "to ensure the proper payment of proceeds derived from production of oil, gas or related hydrocarbons by providing time limits within which payments must be made and also by mandating penalty interest to be paid on delayed payments and shifting payment of costs, penalties and attorney's fees on recalcitrant royalty payors." Brandin Hay, Wyoming's Royalty Payment Act, 31 LAND & WATER L. REV. 823, 823 (1996) (emphasis added) (internal citations omitted). In providing limits for when payments should be made and relief to royalty owners who are not paid accordingly, the legislature sought to remedy "a broad and general [] economic problem." Allied Structural Steel, 438 U.S. at 247, 98 S.Ct. 2716.
"Once a legitimate public purpose is identified, the next inquiry is whether the adjustment of the rights and responsibilities of contracting parties is based upon reasonable conditions and is of a character appropriate to the public purpose justifying the legislation's adoption." Energy Reserves, 459 U.S. at 412, 103 S.Ct. 697 (internal quotations omitted). The means chosen to implement the WRPA's intent is not deficient. This is so because the Act limits the extent of its reach. The WRPA states:
WYO. STAT. § 30-5-301 (emphasis added). Although the WRPA sets time limits for timely payments to royalty owners, it acknowledges that a time frame for payment may also be established through a legal agreement between the parties. Id.; see Ferguson v. Coronado Oil Co., 884 P.2d 972, 979 (Wyo. 1994); (ECF No. 68-3 at 14 ("The legislature did not usurp the parties' ability to contract—it merely provided definitions in case of [contractual] silence."). This acknowledgement applies equally to the definitions found in § 30-5-304(a). (ECF No. 138 at 21 ("[T]he WRPA specifically requires the § 304 definitions to be applied to leases where those terms have been left undefined.")). Thus, although the Act serves the legitimate purpose of protecting royalty payment owners, it does not and was not intended to supplant a valid contract between parties. Accordingly, the adjustment of the rights and responsibilities of contracting parties is based upon reasonable conditions and is appropriate to the public purpose justifying the WRPA's adoption. Energy Reserves, 459 U.S. at 412, 103 S.Ct. 697. Here, however, the WRPA cannot be applied retroactively because the parties fall within the Act's limitation—they have agreed to calculate the ORRIs differently through a valid contract. Here, the adjustment of the rights and responsibilities of the contracting parties would not be appropriate in light of the public purpose that justifies the legislation's adoption. Energy Reserves, 459 U.S. at 412, 103 S.Ct. 697.
As noted above, this Court found that at the time the contracts were executed, it was an assumption under the contract that the overriding royalty owners were to receive payments from the oil and gas valued at the wellhead. (ECF No. 134 at 338). Wellhead pricing was an implied term under the contracts. The WRPA is a remedial act of legislation, intended to ensure timely and correct payments to royalty owners by establishing payment time frames for producers and creating penalties for those producers who fail to comply with the time limits prescribed. In its decisions addressing retroactivity regarding the WRPA's application, the Wyoming Supreme Court highlighted the Act's prospective application, unless explicitly indicated otherwise. Furthermore, both the state of the industry since the contracts were executed and the Act itself highlight the Wyoming legislature's intent to allow parties' contractual freedom. Accordingly, the WRPA cannot apply retroactively to change the implied wellhead pricing term.
The following are not in dispute: (i) chain of title, (ii) the allocation of damages amongst the Jonah Plaintiffs; (iii) what percentage of the total ORRI owned by the Jonah Plaintiffs is allocated to each class of Override, and the Jonah Plaintiffs' ownership of the overrides. (ECF No. 107 at 5).
Both parties agree that the Class 1 overrides contain express language dictating how the ORRIs are to be computed. (ECF No. 124 at 27 "[T]he Jonah Plaintiffs do not dispute that in ... Class One, there are revenues generated and paid and deductions taken that ... are the same as if the Federal Government had been the
The Class 2 overrides include ORRIs reserved by the Andersons in 1955 (ECF No. 1 at 6). The Andersons assigned to third parties their entire working interest in certain BLM leases, reserving for themselves the Class 2 ORRIs using a BLM form of assignment. (ECF No. 49 at 11). The Class 2 ORRI instruments contain the following language:
(Joint Exhibit 2 at 4). Other than this language, Class 2 does not provide how to calculate overriding royalty interests. At trial, the Court held that at the time the contracts were executed there was an assumption that royalties were to be calculated using wellhead pricing. (ECF No. 134 at 339 ("[W]hen the contracts were executed, there was an underlying belief by everyone in the market, because that it what existed in the market, that we were talking about wellhead prices.")). The language referring to "market price ... prevailing in the field" in Class 2 ORRIs, therefore, refers to wellhead pricing. Accordingly, the WRPA does not apply to Class 2. Jonah is entitled to wellhead value.
The Class 3 overrides include ORRIs reserved by Hondo Oil & Gas on September 5, 1978. (ECF No. 1 at 7). Hondo completed 14 assignments of its working interest in the BLM leases in exchange for a reservation of an ORRI of "3-1/8% of 8/8ths." (ECF Nos. 1-3 at 1; 49 at 11). There is no specific language that expressly provides costs or expenses that may be deducted from the value of production when computing the ORRI payments. As noted above, the Court held that at the time the contracts were executed there was an assumption that royalties were to be calculated using wellhead pricing. Therefore, the WRPA does not apply to Class 3. Jonah is entitled to wellhead value.
Class 4 includes an August 1, 1951 assignment reserving an ORRI of one percent of all oil, gas, and other hydrocarbons produced on the covered property. (ECF No. 1-4 at 1). The form of the assignment does not contain language describing how the ORRI should be computed, other than stating the percentage of overriding royalty reserved. Similar to Class 3, there is no specific language in Class 4 ORRIs that expressly provides costs or expenses that may be deducted from the value of production when computing the ORRI payments. (ECF No. 119 at 3). As noted above, the Court held that at the time the contracts were executed there was an assumption that royalties were to be calculated using wellhead pricing. Therefore, the WRPA does not apply to Class 4. Jonah is entitled to wellhead value.
In 2000, Jonah "and/or their predecessors in interest entered into an agreement ("the 2000 Amendment") with a successor of ARCO, which held a 25% working interest" burdened by Classes 1, 2 and 4. (ECF
Jonah contends that "[a]lthough the 2000 Amendment included specific language regarding deductions for certain costs," the 2004 SWEPI letter is binding on Ultra and therefore Ultra may not deduct "costs of production" as defined in the WRPA. (ECF No. 119 at 3). Ultra counters that the 2000 Amendment's purpose was to "confirm the existing method for calculating the ORRIs" and serves as an acknowledgement by Jonah that "all overriding royalty payments with respect to oil, gas and other hydrocarbons produced prior to the effective date ... have been timely and properly paid." (ECF No. 106 at 11-12 (quoting Joint Exhibit 5)). In essence, Ultra argues the terms of the 2000 Amendment control as it is not bound by the 2004 SWEPI Letter.
On May 31, 2000, "Jonah or their predecessors entered into a written agreement with the working interest owners concerning how the ORRIs [for Class 5] should be calculated." (ECF No. 106 at 11). The 2000 Amendment provides:
(Joint Exhibit 5 at 1) (emphasis added). Thus, the 2000 Amendment contains clear and specific language dictating the deductible post-production costs.
On September 23, 2004, Shell
(Plaintiff's Exhibit 13 at 1). Ultra acquired SWEPI's working interest in 2014 and became aware of the 2000 Amendment through discovery in a state court suit. (ECF Nos. 1 at 13; 113 at 8). The issue is whether Ultra is bound by the terms of the 2004 SWEPI Letter.
Here, the 2000 Amendment was intended to outline the specific post-production deductions that should be taken from ORRI Class 5. (See Joint Exhibit 5). The 2000 Amendments is unambiguous. Jonah, however, argues that the terms of the 2004 SWEPI Letter take precedence over the express terms in the 2000 Amendment. Specifically, Jonah maintains that Ultra's course of performance as to certain Class 5 wells binds Ultra to the terms in the 2004 SWEPI Letter. (ECF No. 119 at 7 ("Ultra continues SWEPI's course of performance and does not deduct `costs of production' as defined by the WRPA with regard to some wells.")). The Court disagrees.
Under Wyoming law, "`course of performance' is a sequence of conduct between the parties to a particular transaction that exists if: (i) [t]he agreement of the parties with respect to the transaction involves repeated occasions for performance by a party; and (ii) [t]he other party, with knowledge of the nature of the performance and opportunity to object to it, accepts the performance or acquiesces in it without objection." WYO. STAT. § 34.1-1-303(a). Generally, "the express terms of an agreement and any applicable course of performance, course of dealing, or usage of trade shall be construed whenever reasonable as consistent with each other. If such a construction is unreasonable ... (i) [e]xpress terms prevail over course of performance, course of dealing, and usage of trade." WYO. STAT. § 34.1-1-303(e). However, "a course of performance is relevant to show a waiver or modification of any term inconsistent with the course of performance." WYO. STAT. § 34.1-1-303(f). A party
At trial, Jonah noted that SWEPI did not take any deductions pursuant to the 2004 SWEPI letter from 2004 to 2014. (ECF No. 134 at 214). Furthermore, Mr. Falenski testified that from December 2014, after Ultra had acquired the SWEPI interest, Ultra took no deductions as to 30% of the royalty interests paid by SWEPI. (ECF No. 134 at 219-21 (noting Ultra takes deductions on only a portion of the SWEPI interests)). Jonah argues that after Ultra acquired SWEPI's working interest, burdened by Class 5, it continued "SWEPI's course of performance" and failed to deduct costs of production as defined by the WRPA with regard to some wells, but not as to others. (ECF No. 119 at 7).
Ultra did not learn of the 2000 Amendment until late 2014 during the discovery phase of the state court litigation. (ECF No. 1 at 13). Therefore, it is questionable whether Ultra "with knowledge of the nature of the performance and with opportunity to object to it ... acquiesced" and waived its right to take deductions under the 2000 Amendment. WYO. STAT. § 34.1-1-303(a). Furthermore, Ultra may retract its waiver, if any, through "reasonable notification" that it will no longer abide by the terms of the 2004 SWEPI letter. WYO. STAT. § 34.1-2-209(e). Jonah has not demonstrated that it materially changed its position in reliance on Ultra's purported waiver of its right to deduct post-production costs pursuant to the 2000 Amendment. Accordingly, Ultra is not bound by the 2004 SWEPI letter.
During the period of 2002-2005, Shell Rocky Mountain Production, LLC ("Shell") acquired from Ultra additional working interests on acreage in the Pinedale Field under a 1996 New Fork Unit Farm-out Agreement between Meridian Oil Company ("MOC") and Burlington. (ECF No. 111-12 at 6). As MOC's successor in interest, Shell began paying the farm-out overrides.
The farm-out overrides do not contain specific language regarding price or specific language that express provides for costs or expenses that may be deducted from the value of production. (ECF Nos. 119 at 4; 134 at 31). Unlike Classes 2, 3, and 4, however, the farm-out overrides were created between 2002 and 2005 from an agreement created in 1996. (Joint Exhibit 9 at 1). The amendments to the WRPA that set forth the definitions at issue were enacted in 1989. Further, Hassler and Terry, as expert witnesses for Jonah and Ultra, respectively, testified that by the mid-1990s, the state of the industry was considerably different from when the contracts creating Classes 2, 3, and 4 were enacted.
The Court will issue an order consistent with this Memorandum Opinion.
(ECF No. 111-12 at 8) (emphasis added).
Id. at 1109.
Hartman, 226 P.3d 889, 909 (internal citations omitted).
