Claude C. Arnold Non-Operated Royalty Interest Props., L.L.C. v. Cabot Oil & Gas Corp.

485 P.3d 817

CLAUDE C. ARNOLD NON-OPERATED ROYALTY INTEREST PROPERTIES, L.L.C.; William V. York & Galeeta M. York Revocable Trust; Gunn Living Trust Dated 12-17-91; and Sharon L. Martin, Plaintiffs/Appellees,

v.CABOT OIL & GAS CORPORATION, Defendant/Appellant.

No. 115,807

Supreme Court of Oklahoma.

FILED JANUARY 26, 2021

REHEARING DENIED MARCH 22, 2021

Thomas G. Wolfe, Catherine L. Campbell, and John M. Bunting, Phillips Murrah, P.C., Oklahoma City, Oklahoma, for Plaintiffs/Appellees.

Jesse R. Pierce, Pierce & O'Neill, LLP, Houston, Texas, Douglas D. Dale, Wright & Dale, Guymon, Oklahoma, Mark D. Christiansen, Edinger Leonard & Blakley PLLC, Oklahoma City, Oklahoma, and Michael F. Smith, McAfee & Taft, Tulsa, Oklahoma, for Defendant/Appellant.

Kraettli Q. Epperson, Maris A. Skinner, Mee Hoge PLLP, Oklahoma City, Oklahoma, Amicus Curiae.

GURICH, J.

¶1 This appeal asks us to decide whether the plaintiffs in this case waited too long in asserting their right to payment of an overriding royalty interest in an oil-and-gas-producing formation. In other words, does a statute of limitations defeat their claim for payment of oil-and-gas royalties? The Court of Civil Appeals reversed the trial court's judgment in favor of the plaintiffs on those grounds. We do not agree.

¶2 For reasons we explore below, this litigation could not have arisen until the defendant first developed the disputed formation—which proved productive and profitable—in 2012, and then refused the plaintiffs' request for payment of royalties from that production. Nothing preceding that sequence of events could reasonably have foreclosed the plaintiffs' ability to press their claim for the payments to which they were entitled under valid mineral leases. Accordingly, we hold that the plaintiffs filed a timely lawsuit to enforce their valid overriding royalty interest.

Facts and Procedural History

¶3 The dispute in this case centers around two oil-and-gas-producing formations—known as the Chester and the Marmaton—located in Beaver County, Oklahoma.¹ In 1973, a company called Arnold Petroleum, Inc.—the predecessor in interest of the plaintiffs, whom we collectively refer to as Arnold—obtained six oil-and-gas leases covering land in Beaver County. Each of these 1973 leases was filed in the county land records. The leases had a primary term of three years, plus a five-year extension period.

¶4 In all of the leases, however, the provisions on lease expiration were modified by the following clause, which has often been described in this litigation as unusual and is termed by the parties as the exception clause. It says: "provided, however, that Lessee shall not be obligated to release any formation, horizon or zone, the production from which would conflict with any existing producing horizon, formation or zone." The leases also allowed the lessee to surrender the leases "as to any part or parts of the leased premises by delivering or mailing a release thereof to lessor, or by placing a release of record in the proper County."

¶5 Over the course of 1973 and 1974, Arnold Petroleum assigned its leases to Dyco Petroleum Corporation, expressly reserving an overriding royalty interest in any oil and gas produced under the leases.² Dyco then assigned the leases to Harold Courson—the predecessor in interest of the defendant, Cabot Oil & Gas Corporation. This assignment, too, was expressly subject to Arnold's overriding royalty interest. Before the end of the leases' primary term, Courson drilled and completed two vertical wells in the Chester formation, which underlies the lands covered by the 1973 leases. Importantly—and indisputably—the two wells drilled in the Chester formation have produced "mostly gas with some oil" continuously since the mid-1970s, and at no point since then has Arnold ever stopped receiving payments on its overriding royalty interest in those producing wells.

¶6 The 1973 leases' primary term ended in 1976, and their additional five-year extended term as to open formations expired in 1981. In 1984, Courson obtained several new leases from the mineral owners who had granted the 1973 leases. These 1984 leases purported to cover the same rights as the original 1973 leases, but were silent as to any particular geologic formation or zone. The 1984 leases were recorded in the county land records, but Arnold was not told about them. Arnold did not become aware of the 1984 leases at all until 1999. In that year, Arnold and other royalty holders received a letter from Courson explaining he had recompleted a well in the Chester formation that had originally been drilled into the separate Lower Chester formation by another company, Natural Gas Anadarko, Inc. (NGA). NGA derived its interest in the Lower Chester formation from the 1984 leases. Having learned that Courson's recompleted well would now be producing from the Chester (where Arnold retained an overriding royalty interest), Arnold's landman contacted a Courson representative for further explanation. In the 1999 conversation, the Courson employee told the Arnold landman that the 1984 leases covered only the "deep rights" or "lower depths" that had expired under the 1973 leases. This assertion would exclude the Marmaton, which is a shallow formation. For the next 13 years, the matter of the Marmaton formation would remain dormant.

¶7 Courson assigned his leases to Cabot in August 2011, and Cabot soon set about drilling and completing two horizontal wells (to be followed later by a third well) in the Chester's neighboring formation, the Marmaton.³ Cabot's initial two horizontal wells began producing in the first half of 2012.⁴ In July 2012, Arnold contacted Cabot to request payment, taking the position that its rights in the Marmaton formation were held by virtue of the 1973 leases' exception clause. Arnold maintained that the Marmaton had always been capable of producing oil and gas in commercial quantities, but was prevented from doing so by a conflict caused by simultaneous (and continuous) production from the 1970s-era vertical wells drilled in the Chester.⁵ Because the exception clause allowed such a formation to be held by the conflicting production in a different zone, then (in Arnold's view) the 1973 leases preserved its interest in the Marmaton.⁶

¶8 Cabot rejected Arnold's request for payment, and Arnold sued in October 2012. Arnold sought damages against Cabot for nonpayment of royalties and asked the district court to quiet title to the overriding royalty interest as to the Marmaton. Cabot, in turn, argued Arnold's claims were barred because the applicable statute of limitations began to run with the filing of the new leases in 1984, which event (in Cabot's view) should have put Arnold on notice of an adverse claim to the Marmaton. After a four-day bench trial, the district court—having found that Arnold's cause of action accrued on July 20, 2012, the date Arnold's representative contacted Cabot to request payment of the override—granted judgment in favor of Arnold.⁷ The district court quieted title to the overriding royalty interest in Arnold and awarded $769,000 in actual damages and $493,000 in prejudgment interest, plus postjudgment interest, attorney fees, and costs.

¶9 Cabot appealed. Agreeing with Cabot that Arnold's claim accrued in 1984 upon the filing of the new leases in the county land records, the Court of Civil Appeals reversed the trial court's judgment on the grounds that 12 O.S. 2011 § 93(4)'s 15-year statute of limitations barred Arnold's claims as untimely.⁸ According to the Court of Civil Appeals, Arnold would have needed to sue no later than 1999 to avoid the 15-year statute of limitations and to keep its Marmaton rights. We granted certiorari to examine the application of the statute of limitations based on purported notice of a recorded lease, where the parties' lengthy course of business conduct indicated neither awareness nor acknowledgement of the lease's effect on the oil-and-gas formation at issue.

Standard of Review

¶10 This matter comes to us as an appeal from a judgment rendered following a bench trial in a quiet-title action, which "may be used as an equitable proceeding to determine ownership of oil and gas lease or mineral rights." Voiles v. Santa Fe Minerals, Inc. , 1996 OK 13, ¶ 35, 911 P.2d 1205, 1213. In this case, "[t]he judgment presented for review is a compilation of both findings of facts and conclusions of law." K & H Well Serv., Inc. v. Tcina, Inc. , 2002 OK 62, ¶ 9, 51 P.3d 1219, 1223. "When, as here, the case is tried to the court, its determination of facts [is] accorded the same force as those made by a well-instructed jury." Id. Our caselaw instructs that where "any competent evidence supports the trial court's findings of fact, the same will be affirmed." Id.

¶11 At the same time, we review issues of law de novo, "since an appellate court has plenary, independent and non-deferential authority to reexamine a trial court's legal rulings." Id. Here, the Court of Civil Appeals treated the statute-of-limitations issue as dispositive and reversed the trial court's judgment on that basis alone. "Although limitation issues may involve mixed questions of law and fact, they are ordinarily reviewed in this Court as questions of law." Scott v. Peters , 2016 OK 108, ¶ 19, 388 P.3d 699, 704 ; Calvert v. Swinford , 2016 OK 100, ¶ 19, 382 P.3d 1028, 1036 (same). Likewise, "the application of the discovery rule and its effect on limitation issues present questions of law" that receive de novo review. Woods v. Prestwick House, Inc. , 2011 OK 9, ¶ 14, 247 P.3d 1183, 1188.

Analysis

¶12 This case boils down to one main question: when did Arnold's cause of action arise? Put simply, "[a] cause of action accrues when the injury occurs." Calvert , 2016 OK 100, ¶ 11, 382 P.3d at 1033. That is, "the cause of action accrues when a litigant first could have maintained his action to a successful conclusion." MBA Commercial Constr., Inc. v. Roy J. Hannaford Co. , 1991 OK 87, ¶...