M G Expl. v. XTO Energy Inc.

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M G Exploration, LLC, Plaintiff, v. XTO Energy Inc., Defendant and Third Third-Party Plaintiff, v. Helene Brynestad, Third-Party Defendant.

No. 1:22-cv-200

United States District Court, D. North Dakota

October 30, 2024

ORDER ON CROSS MOTIONS FOR SUMMARY JUDGMENT AND PARTIAL SUMMARY JUDGMENT

DANIEL L. HOVLAND, DISTRICT JUDGE UNITED STATES DISTRICT COURT

Before the Court is the Plaintiff's motion for partial summary judgment filed on June 27, 2024, and the Defendant's motion for summary judgment filed on June 28, 2024. See Doc. Nos. 35 and 40. The motions have been fully briefed. See Doc. Nos. 36, 41, 43, 44, 49, and 50. For the reasons set forth below, the Plaintiff's motion is denied and the Defendant's motion is granted in part and denied in part as to the conversion claim.

I. BACKGROUND

M G Exploration, LLC (“MG”) owns overriding royalty interests in Dunn County, North Dakota. MG's sole member Valerie Valdez, is a citizen of Colorado. XTO Energy Inc. (“XTO”) owns and operates oil and gas wells in North Dakota. XTO is a Delaware corporation with its principal place of business in Texas.

This case arises from overriding royalty interest (“ORRI”) payments XTO made to Avalon Corporation (“Avalon”), MG's predecessor-in-interest between 2013 and 2021. The ORRI at issue in this case was carved out of the working interest in an oil and gas lease dated October 1, 1977, between the Bureau of Land Management, State of Montana, as lessor, and PJ Allen, as lessee (“PJ Allen lease'). In August 1990, Avalon conveyed its working interest in the PJ Allen lease to JN Exploration & Production Limited Partnership (“JN Exploration”) and reserved an overriding royalty interest. In the conveyance, Avalon and JN Exploration agreed that JN Exploration would pay the overriding royalty interest to Avalon out of JN's working interest in the PJ Allen lease. JN Exploration later conveyed its working interest to third parties.

Although XTO does not own any of the working interest in the PJ Allen lease, XTO made payments to Avalon for the ORRI between October 2013 and September 2021, because XTO operates some of the wells that include portions of the PJ Allen lease. XTO initially sent the ORRI payments to Avalon at 3500 Bow Valley Squire IV, Calgary AB T2P 3H7 (“Calgary address”). However, a November 20, 2013, payment to Avalon was returned to XTO for a bad address. XTO searched for a new address for Avalon but could not find one, so XTO sent a verification of address letter to Avalon at the Calgary address. Avalon did not respond to the letter. However, on January 16, 2014, XTO received a verification of address letter where Helene Brynestad identified herself as the owner of Avalon. Brynestad identified 6788 Olden, Norway (“Norway address”) as Avalon's new address. Brynestad did not own the interests related to this case. However, she did own other oil and gas interests. The parties dispute how Brynestad received the verification of address letter intended for Avalon. After receipt of the letter XTO updated its records by changing the payment address for Avalon to the Norway address. Between January 2014 and September 2021, XTO sent all payments for Avalon's ORRI to the Norway address. XTO mistakenly paid out $490,452.69 to Brynestad. Avalon did not contact XTO to inquire about the ORRI payments during this time. From 2013 to 2021, the only communications XTO received pertaining to Avalon's ORRI came from Brynestad and her representatives.

Valdez, MG's sole member, found Avalon's ORRI while searching various state's unclaimed property department records. Valdez contacted Dundee International Inc., an entity with whom Avalon merged in 1993, to offer a finders service on unclaimed funds held by various state's unclaimed property departments. As part of the finders service Valdez contacted various oil companies, including XTO, in search of suspended or unclaimed funds related to Avalon's interests. MG agreed to purchase all of Avalon's oil and gas interests, as well as litigation claims belonging to Avalon.

In January 2021, Valdez contacted XTO to inquire whether XTO was holding money in suspense for Avalon. XTO informed Valdez it did not have any funds in suspense. In May 2021, Valdez asked XTO to transfer the ORRI from Avalon to MG because she acquired the ORRI. XTO transferred the ORRI to MG in September 2021, after Valdez provided documentation of the conveyance. Since then, XTO has paid MG for the ORRI.

On October 17, 2022, MG brought claims against XTO in state court for breach of contract, failure to pay royalties under N.D.C.C. § 47-16-39.1, and conversion.^[1] On November 15, 2022, XTO removed the action to federal court on the basis of diversity jurisdiction. MG filed a motion for partial summary judgment on June 27, 2024, requesting the Court grant summary judgment in its favor on its breach of contract, failure to pay royalties under N.D.C.C. § 47-16-39.1, and conversion claims. See Doc. No. 35. It also argues XTO cannot assert laches as an affirmative defense. XTO filed a motion for summary judgment on June 28, 2024, requesting the Court grant summary judgment in its favor on each of the MG's claims. See Doc. No. 40. XTO argues that in the alternative, if MG can assert a conversion claim against XTO, the statute of limitations bars any claims occurring before October 2016. The motions have been fully briefed and are ripe for disposition.

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 that 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); see 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. The purpose of summary judgment is to assess the evidence and determine if a trial is genuinely necessary. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986).

The Court must inquire whether the evidence presents a sufficient disagreement to require the submission of the case to a jury or whether the evidence is so one-sided that one party must prevail as a matter of law. Diesel Mach., Inc. v. B.R. Lee Indus., Inc., 418 F.3d 820, 832 (8th Cir. 2005). The moving party bears the responsibility of informing the court of the basis for the motion and identifying the portions of the record which demonstrate the absence of a genuine issue of material fact. Torgerson v. City of Rochester, 643 F.3d 1031, 1042 (8th Cir. 2011). The nonmoving party may not rely merely on allegations or denials in its own pleading; rather, its response must set out specific facts showing a genuine issue for trial. Id.; Fed.R.Civ.P. 56(c)(1). The Court must consider the substantive standard of proof when ruling on a motion for summary judgment. Anderson, 477 U.S. at 252. If the record taken as a whole and viewed in a light most favorable to the non-moving party could not lead a rational trier of fact to find for the non-moving party, there is no genuine issue for trial and summary judgment is appropriate. Matsushita, 475 U.S. at 587.

III. LEGAL DISCUSSION

A. BREACH OF CONTRACT

MG alleges XTO has “a contractual duty to pay royalties to MG and MG's predecessors in interest pursuant to applicable oil and gas leases and other contracts.” See Doc. No. 1-2, p. 6. MG alleges XTO breached its duty to pay royalties. MG has not identified any contract between XTO and MG or its predecessors in interest. Instead, MG argues it is a third-party beneficiary to joint operating agreements (“JOAs”) associated with oil and gas wells relevant to this matter. XTO is a party to the JOAs. MG maintains the JOAs require XTO to pay royalties to third parties. MG and XTO dispute whether MG is a third-party beneficiary to the JOAs.

North Dakota law allows third-party beneficiaries to enforce a contract. Under Section 902-04 of the North Dakota Century Code, “[a] contract made expressly for the benefit of a third person may be enforced by that person at any time before the parties thereto rescind it.” When determining whether a party was a third-party beneficiary of a contract such that it could enforce the contract, the North Dakota Supreme Court has said:

To enforce a contract between two others, a third party must have been intended by the contracting parties to be benefited by the contract. To determine whether the contract at issue was made expressly for the third party's benefit, we must look to the intentions of the parties to the contract. The intentions of the parties to a contract must be ascertained from the written contract alone, if possible. Another guideline for determining whether a party is a third-party beneficiary, as opposed to an incidental beneficiary, is whether the benefit to the third party was within the contemplation of the contracting parties.

Peoples State Bank of Truman, Inc. v. Molstad Excavating, Inc., 2006 ND 183, ¶ 20, 721 N.W.2d 43 (internal citations and quotation marks omitted).

MG was not expressly named in the JOAs. MG argues the alleged benefit it receives was within the contemplation of the contracting parties. MG claims it is an intended third-party beneficiary under the following provision of the operating agreement:

Operator shall charge the Joint Account with the following items:

2. Rentals and Royalties

Lease rentals and royalties paid by Operator for the Joint Operations. See Doc. No. 45-2,...