Oil Valley Petroleum, LLC v. Moore

536 P.3d 556

OIL VALLEY PETROLEUM, LLC, Plaintiff/Appellant,

v.Clay E. MOORE, an individual, or his Heirs, Executors, Administrators, Trustees, Devisees, Successors, Agents, or Assigns, Defendant/Appellee.

No. 119,810

Supreme Court of Oklahoma.

Filed: September 19, 2023

As Corrected: October 3, 2023

Joseph M. Vorndran, Breanne M. Gordon, Stuart & Clover, PLLC, Shawnee, Oklahoma, for Plaintiff/Appellant.

Michael Kelly, Long, Claypole & Blakley Law, PLC, Enid, Oklahoma, for Defendant/Appellee on appeal and certiorari.

Jana Knott, Bass Law, Oklahoma City, Oklahoma, for Defendant/Appellee on certiorari.

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

EDMONDSON, J.

I. Introduction and Summary

¶1 Plaintiff, Oil Valley Petroleum, LLC, (Oil Valley) and defendant, Clay Moore, (Moore), sought equitable relief in the District Court to adjudicate title based upon two oil and gas leases. Their arguments may be simplified: (1) Oil Valley claims its title is based upon a top-lease and a release by a lessee of its interest in a well; and (2) Moore claims his title is based upon the base or bottom lease and production from that same well, with an added allegation of unclean hands by Oil Valley. Oil Valley claims a release creates a washout of Moore's interests because the released well was the only well keeping the lease in effect during the secondary term of the lease. As we explain, Moore and the amicus curiae use the term "washout" to describe an interest in a lease that is extinguished with an added element of alleged wrongfulness by the person causing the extinguishment. Moore states production from the well kept the lease in effect regardless of the release.

¶2 Amicus curiae on certiorari correctly identifies the issues presented to us by the parties: Whether a lessee's release of a lease may extinguish another's interests in the base oil and gas lease when a claim is made of continuing production holding the lease, and whether this production may be used to show a party's "unclean hands" or constructive fraud in obtaining the release. Amicus curiae indicates a quiet title proceeding is a form of equitable relief, and all circumstances must be considered.¹ Moore and amicus curiae appear to argue the fact of production would necessarily show a type of fraud or estoppel relating to a release. However, because elements for fraud or estoppel theories are not identified as such for facts specific to Moore's claim, their argument may also be read as indicating production from the well and conduct of the parties relating to the release are simply two of several factors to be considered supporting a claim in equity to quiet title and cancel an oil and gas lease. We agree that a trial court proceeding in equity must consider all circumstances when parties seek to cancel an oil and gas lease and adjudicate title.

¶3 The parties used a partial summary adjudication procedure for a decision by the trial court. Moore sought and was granted partial summary relief. Although he argued the well was producing, he did not supply facts necessary to show the well was commercially profitable. The fact of commercial profitability was raised and disputed by Oil Valley during the partial summary relief proceedings. Moore's allegation of Oil Valley's unclean hands was not addressed in the summary relief proceedings other than what appears to be a legal conclusion by Moore based upon his allegation the well continued to produce, and that Oil Valley obtained both the top-lease and the release. Moore did not address when facts are sufficient to show unclean hands, estoppel, or a constructive fraud. Oil Valley did not address whether fraud or breach of a fiduciary duty may invalidate a lessee's release of an interest in a lease.

¶4 We may address a trial court's grant of interlocutory summary relief when an appeal is brought from a subsequent judgment.² The interlocutory order granting movant's motion for partial summary relief occurred when the parties expressly disputed a fact material to the movant's motion, e.g. , whether the well was commercially profitable. This order must be reversed.

¶5 The trial court also pronounced a subsequent final order that granted judgment to Oil Valley on a counterclaim raised by Moore. The parties did not supply in the appellate record any of their trial court motions used by the trial court when adjudicating this counterclaim. There is no discussion by the parties whether this final adjudication relied in any part, or to any degree, on the interlocutory partial summary adjudication reversed herein. We do not address the final order.

¶6 Oil Valley sought partial summary relief on the quiet title claim and its request was denied. Oil Valley raised the fact of the release, claimed the well was not producing, and argued Moore was required to commence drilling operations and produce after the release was filed in Dewey County. Oil Valley did not address elements to a claim in equity to cancel an oil and gas lease based upon all of the circumstances in the controversy. Oil Valley does not show on appeal that its request for partial summary relief is within a narrow category of appellate review when a trial court's denial of summary relief is reversed on appeal.

¶7 We hold: (1) Exhibits presented during partial summary adjudication proceedings were insufficient to show a material fact that a well was commercially profitable for the purpose of the habendum clause of an oil and gas lease; (2) An overriding royalty interest may be extinguished by an extinguishment of the working interest from which it was carved by lessee's surrender in substantial compliance with the lease, unless the surrender is the result of fraud or breach of a fiduciary relationship; and (3) Prevailing party status for the purpose of an attorney fee must be determined in the trial court. We also conclude we will not make a first instance adjudication of rights and obligations of parties to a lease and top-lease when the facts were not developed in the trial court equitable proceeding and are not before us in the appellate record.

II. First Lease, First Well, Assignments, Release, Second Lease, and Second Well

¶8 Waban Oil Corporation (Waban) executed an oil and gas lease to Athan Inc. (Athan) in 1980. The Athan lease covered a one-half interest in the minerals in and under the SW/4 of Section 24, Township 17 North, Range 14 West of the Indian Meridian in Dewey County, Oklahoma. Athan assigned all of its interest in the Athan lease to Mustang Production Company, approximately two weeks later on March 24, 1980.

¶9 The Ball #1-24 well was drilled to a depth of 9,700 feet, and completed in February 1981 for producing gas and gas condensate. Completion of the well occurred during the three-year primary term in the Athan lease. The Oklahoma Corporation Commission created a 640-acre drilling and spacing unit for Section 24, T17N-R14W, and included the Ball #1-24 well.

¶10 Mustang made two assignments and divided its interest in the Athan lease based upon depth from the surface and also created an override interest. Mustang's first assignment was made in June 1981 to Funk Exploration. Mustang assigned its "right, title and interest" in the Waban Athan lease "from the surface of the earth to the stratigraphic equivalent of 9,747 feet (being the total depth drilled and logged plus 50'), ... in the Ball #1-24 well."³ Mustang also reserved a 1/8 of an 8/8 overriding royalty interest in this assignment, and the assignment was made subject to a previous farmout agreement between Mustang and Funk.

¶11 Mustang's second assignment was made approximately ten years later in November 1991 (effective Jan. 1, 1992), by its successor, Mustang Fuel Corporation, to Clay E. Moore (Moore). Mustang assigned "all of Assignor's interest" created by "lessor Waban Oil Corporation" (i.e. , the Athan lease), excluding rights to wells and wellbore rights retained by the assignor.⁴ In summary, Mustang assigned both (1) its remaining interest in Waban's Athan lease below the stratigraphic equivalent of 9,947 feet, and (2) Mustang's remaining 1/8 overriding royalty interest.

¶12 Mustang's first assignment with its assignment of shallow rights⁵ to Funk Exploration in 1981, i.e. , "from the surface of the earth to the stratigraphic equivalent of 9,747 feet including the Ball #1-24 well," was subsequently possessed by Staab Holdings, LLC, (Staab), "as successor to Funk."⁶ In October 2017, Staab executed, but did not file, a "Release of Oil and Gas Lease" for "all of its rights, title and interest in and to the oil and gas leases hereinafter described;" and then described Waban's lease to Athan and one additional lease. Staab's release was filed in the Dewey County records on March 5, 2018.⁷

¶13 In June 2017, Waban, as lessor, executed a second oil and gas lease for property described in the Athan lease. The lessee is plaintiff, Oil Valley Petroleum, LLC (Oil Valley). Both Moore and Oil Valley view this second lease as a "top-lease" when it was executed in June 2017. A "top-lease" is a lease subject to a pre-existing lease that has not expired,⁸ and the parties agree the Athan lease was in effect the date the top-lease was executed.

¶14 Based on Oil Valley's subsequent actions, the Corporation Commission granted a drilling permit for the Holsapple #1-24-13XH well (Holsapple Well) to Council Oak Resources, LLC (Council Oak). The permit to drill was granted on May 21, 2018, and this well was completed at a vertical depth of 11,524 feet.

¶15 The parties agree the lease and assignments occurred, that a release was filed, and a top-lease was created. However, this agreement appears to be partially inconsistent with part of Moore's argument during the partial summary adjudication proceedings which referenced "other working interest owners" in the Ball #1-24 well. The parties disagree on the effect of the March 2018 release on the 1980 Athan lease, e.g. , whether Moore's rights were...