Kittleson v. Grynberg Petroleum Co.

876 N.W.2d 443

Tyronne B. KITTLESON, Trustee, Tyronne B. Kittleson Real Estate and Oil Trust, Plaintiff and Appellee

v.GRYNBERG PETROLEUM COMPANY; Celeste C. Grynberg, Trustee of the Rachel Susan Grynberg Trust; Celeste C. Grynberg, Trustee of the Stephen Mark Grynberg Trust; and Celeste C. Grynberg, Trustee of the Miriam Zela Grynberg Trust, Defendants and AppellantsandGrynberg Petroleum Company; Celeste C. Grynberg, Trustee of the Rachel Susan Grynberg Trust; Celeste C. Grynberg, Trustee of the Stephen Mark Grynberg Trust; and Celeste C. Grynberg, Trustee of the Miriam Zela Grynberg Trust, Third–Party Plaintiffs

v.Missouri River Royalty Corporation, Third–Party Defendant.

No. 20150075.

Supreme Court of North Dakota.

Feb. 22, 2016.

Kent A. Reierson (argued), Williston, N.D., and Aaron W. Nicholson (appeared), Bismarck, N.D., for plaintiff and appellee.

Monte L. Rogneby, Bismarck, N.D., for defendants and appellants Grynberg Petroleum Company and Celeste C. Grynberg.

SANDSTROM, Justice.

[¶ 1] The successors to the interest of the Grynberg Petroleum Company ("Grynberg") appeal from a judgment concluding Grynberg wrongfully deducted certain costs from gas royalties paid to Tyronne B. Kittleson, as trustee of the Tyronne B. Kittleson Real Estate and Oil Trust ("Kittleson"), under a lease between the parties. We affirm, concluding the district court correctly interpreted the lease, the amount of damages was not clearly erroneous, and the correct statute of limitations was applied.

I

[¶ 2] In 1991, Grynberg Petroleum Company and Kittleson's predecessor in interest, Tyronne and Marilyn Kittleson, entered into an oil and gas lease. The parties also executed a separate rider that modified and amended the lease. The royalty clause of the lease provides in part:

Lessee [Grynberg] shall pay Lessor [Kittleson] the market value at the well for all gas (including all substances contained in such gas) produced from the leased premises and sold by Lessee ...; provided however, that there shall be no deductions from the value of Lessor's royalty of any required processing, cost of dehydration, compression, transportation, or other matter to market such gas.

[¶ 3] The gas produced from the well on the leased premises is a sour gas with little to no market value. To be made marketable, the gas must be compressed, treated, dehydrated, and processed. After processing, the gas has a market value and can be sold. The processing also produces additional products contained in the unprocessed sour gas that have value such as propane, butane, natural gasoline, and drip liquids.

[¶ 4] Grynberg does not operate the gas-producing well. The well is operated by Missouri River Royalty Corporation under a joint operating agreement with Grynberg. Missouri River entered into agreements for third parties to gather and process the gas.

[¶ 5] After the gas and liquids were processed and sold, Grynberg calculated Kittleson's royalty using the work-back method. Under the work-back method, market value of the gas at the well is calculated by deducting post-production costs incurred in making the sour gas a marketable product from the plant tailgate proceeds. Grynberg paid Kittleson by subtracting post-production costs from the sales price Grynberg received for the processed gas.

[¶ 6] In 2005, Kittleson sued Grynberg, claiming that under the "no deductions" language in the royalty clause of the lease, Grynberg was prohibited from deducting the costs of processing the sour gas from Kittleson's royalty. Kittleson alleged Grynberg began wrongfully deducting post-production costs from Kittleson's royalties in 1997. Grynberg denied liability, claiming the royalties paid to Kittleson did not violate the terms of the lease.

[¶ 7] After a bench trial, the district court concluded the royalty clause of the lease did not allow Grynberg to deduct the processing costs incurred in turning the sour gas into a marketable product. The court applied the ten-year statute of limitations under N.D.C.C. § 28–01–15(2) and found Kittleson's royalties were underpaid by approximately $17,240 from 1997 to 2009. Kittleson was also awarded interest on the underpaid royalties and attorney's fees and costs for a total judgment of approximately $111,300.

[¶ 8] The district court had jurisdiction under N.D. Const. art. VI, § 8, and N.D.C.C. § 27–05–06. Grynberg's appeal is timely under N.D.R.App.P. 4(a). This Court has jurisdiction under N.D. Const. art. VI, §§ 2 and 6, and N.D.C.C. § 28–27–01.

II

[¶ 9] Grynberg argues the district court erred in its interpretation of the lease. Grynberg argues the lease allows it to subtract post-production costs from Kittleson's royalty.

[¶ 10] Interpretation of a written contract to determine its legal effect is a question of law, fully reviewable on appeal. City of Moorhead v. Bridge Co., 2015 ND 189, ¶ 10, 867 N.W.2d 339. "The general rules governing contract interpretation apply to the interpretation of leases." Sterling Dev. Grp. Three, LLC v. Carlson, 2015 ND 39, ¶ 13, 859 N.W.2d 414. "When a contract is reduced to writing, the intention of the parties is to be ascertained from the writing alone if possible." N.D.C.C. § 9–07–04. A contract must be construed as a whole to give effect to each provision if reasonably practicable. N.D.C.C. § 9–07–06. Words are given their plain, ordinary, and commonly understood meaning, unless a contrary intention plainly appears. N.D.C.C. § 9–07–09.

[¶ 11] Grynberg argues the district court's interpretation of the lease and valuation of the gas is contrary to our decision in Bice v. Petro–Hunt, L.L.C., 2009 ND 124, 768 N.W.2d 496. In Bice, the royalty clauses of the leases in dispute required the lessor's royalty to be calculated on the basis of the gas's market value at the well. Id. at ¶ 4. We adopted the "at the well" rule in our interpretation of "market value at the well." Id. at ¶ 21. Under the "at the well" rule, a lessee may use the work-back or netback method to calculate the gas or oil's market value at the well. Id. at ¶ 14. "Under the work-back method the lessee calculates the market value of the gas at the well ‘by taking the sales price that it received for its oil or gas production at a downstream point of sale and then subtracting the reasonable post-production costs (including transportation, gathering, compression, processing, treating, and marketing costs) that the lessee incurred after extracting the oil or gas from the ground.’ " Id. (quoting Byron C. Keeling & Karolyn King Gillespie, The First Marketable Product Doctrine: Just What is the Product?, 37 St. Mary's L.J. 1, 32 (2005) ). The work-back method under the "at the well" rule allows a lessee to deduct post-production costs from the plant tailgate proceeds before calculating royalty. Bice, at ¶ 21.

[¶ 12] Grynberg argues our holding in Bice controls this case and allows Grynberg to deduct from Kittleson's royalty the post-production costs required to make the gas marketable.

[¶ 13] Here, similar to Bice, the royalty clause of the lease requires Grynberg to pay Kittleson the market value at the well for all gas produced from the leased premises. However, unlike Bice, the royalty clause contains additional language stating, "provided however, that there shall be no deductions from the value of Lessor's royalty of any required processing, cost of dehydration, compression, transportation, or other matter to market such gas."

[¶ 14] Under our rules of contract interpretation, "if a conflict exists between a specific provision and a general provision in a contract, the specific provision qualifies the general provision." Kortum v. Johnson, 2008 ND 154, ¶ 44, 755 N.W.2d 432 (quoting Oakes Farming Ass'n v. Martinson Bros., 318 N.W.2d 897, 908 (N.D.1982) ); Fortis Benefits Ins. Co. v. Hauer, 2001 ND 186, ¶ 17, 636 N.W.2d 200 ("[I]t is a well-accepted rule of contract interpretation that when a conflict exists between a specific provision and a general provision in a contract, the specific provision ordinarily prevails over the general provision.").

[¶ 15] Here, "market value at the well" and "no deductions from the ... royalty" are in conflict. Under the "at the well" rule, calculating market value using the work-back method allows a lessee to deduct post-production costs from the royalty. The "no deductions" language in the royalty clause, however, specifically prohibits deductions of post-production costs from the royalty. We hold the more specific "no deductions" language qualifies and prevails over "market value at the well." We conclude that under the "no deductions" language of the royalty clause, Grynberg is not allowed to deduct from Kittleson's royalty the post-production costs required to make the gas marketable.

[¶ 16] Contrary to Grynberg's assertion, our decision in this case does not require the reversal of Bice. As the district court noted, by including the "no deductions" language in the royalty clause, the parties altered the meaning of "market value at the well." Grynberg can calculate the gas's market value at the well using the work-back method; however, any deductions for post-production costs must be added back to calculate Kittleson's royalty. The district court correctly interpreted the lease.

III

[¶ 17] Grynberg argues the district court's findings of fact on the value of the gas and liquids at the well are not supported by the evidence in the record.

[¶ 18] A district court's decision on the amount of damages caused by a breach of contract is a finding of fact subject to the clearly erroneous standard of review. Langer v. Bartholomay, 2008 ND 40, ¶ 27, 745 N.W.2d 649. "A finding of fact is clearly erroneous if it is induced by an erroneous view of the law, if there is no evidence to support it, or if, after reviewing all of the evidence, we are left with a definite and firm conviction a mistake has been made." Sterling, 2015 ND 39, ¶ 7, 859 N.W.2d 414. The evidence is viewed in the light most favorable to the district court's...