Phx. Cap. Grp. Holdings v. Bd. of Oil & Gas Conservation

416 Mont. 321

PHOENIX CAPITAL GROUP HOLDINGS, LLC, a Delaware limited liability company, Plaintiff, Appellant, and Cross-Appellee,

v.BOARD OF OIL AND GAS CONSERVATION OF THE STATE OF MONTANA, Defendant, Appellee, and Cross-Appellant,andKRAKEN OIL AND GAS LLC, Intervenor, Appellee, and Cross-Appellant.

No. DA 23-0289.

Submitted on Briefs February 7, 2024.

Decided April 30, 2024.

2024 MT 89.

416 Mont. 321.

____P.3d___.

Appeal from the District Court of Yellowstone County.

Thirteenth Judicial District Court, Cause No. DV-56-2021-1591.

Honorable Colette V. Davies, Judge.

The fact that the oil and gas company applied for a pooling order after receiving the LLC’s offer to participate was not, by itself, indicative of bad faith, and the company made unsuccessful, good faith attempts to obtain a voluntary agreement, and the Board of Oil and Gas Conservation of the State of Montana (Board) did not err by entering the force-pooling Order; reliance on the presumption of non-participation was unnecessary where the record established the landowner’s failure or refusal to participate and pay a share of the costs of drilling; the landowner’s failure to participate occurred in January 2020, over a year before the LLC became involved with the property in February 2021.

Affirmed.

For Appellant: Adrian A. Miller, Michelle M. Sullivan, Sullivan Miller Law PLLC, Billings.

For Appellees: Liz Leman, Agency Legal Counsel, Montana Department of Justice, Helena (for Board of Oil and Gas Conservation of the State of Montana); Jeffrey J. Oven, Brett L. Kvasnicka, Crowley Fleck PLLP, Billings Montana (for Kraken Oil and Gas, LLC).

JUSTICE RICE delivered the Opinion of the Court.

¶1 Phoenix Capital Group Holdings, LLC (Phoenix) appeals an April 17, 2023 Judgment entered by the Thirteenth Judicial District Court, Yellowstone County, in favor of Defendant Board of Oil and Gas Conservation of the State of Montana (Board) and Intervenor Defendant Kraken Oil and Gas LLC (Kraken) regarding the Board’s decision to force pool mineral interests held by Phoenix and impose statutory penalties. The Board and Kraken have filed a combined cross-appeal of the District Court’s exclusion of proffered evidence as hearsay.

¶2 We restate the issues as follows:

1. Whether the District Court correctly affirmed the Board’s determination that Kraken is entitled to forced pooling of Phoenix’s mineral interests.

2. Whether the District Court correctly affirmed the Board’s determination that Kraken is entitled to recover statutory risk penalties pursuant to § 82-11-202(2)(b), MCA.

¶3 We affirm on both issues, and therefore do not address the cross-appeal.

FACTUAL AND PROCEDURAL BACKGROUND

¶4 Phoenix is an oil and gas mineral rights investment firm that owns mineral interests on two sections of real property in Richland County, Montana. Phoenix acquired its interest by deed on February 26, 2021, from Steve Solis, who received the interests via transfer from Katherine Solis (Solis) earlier the same day.

¶5 Kraken is an energy production company and the operator of a spacing unit¹ covering the two sections of property with mineral interests held by Phoenix. Starting in 2017, Kraken attempted to secure a lease of the mineral interests from then-owner Katherine Solis. One of Kraken’s employees, Lindsay Meszaros, made several attempts to obtain a voluntary lease agreement for the mineral interests but, each time she contacted Solis, Solis hung up the phone. Kraken followed up on several occasions by mail, which also failed to prompt a response from Solis. Eventually, in October 2017, Meszaros was able contact Solis and explain to her the provisions of the lease offer and that Solis would have the opportunity to participate in drilling wells in the spacing unit, but that non-participation by Solis would result in statutory non-consent "risk penalties."² On February 28, 2018, Kraken sent Solis an election packet that included, for the first well to be drilled on the property (1H Well), the lease offer, election letter, and authorization for expenditure. The packet was returned to Kraken unclaimed, and Kraken began drilling the well in June 2018.

¶6 In October 2018, the Board issued an Order designating both sections as a permanent spacing unit for oil and gas obtained from the 1H Well. The Board issued a separate Order force-pooling the interests in the same area and allowing Kraken to recover risk penalties in relation to the 1H Well. In early January 2020, the Board approved Kraken’s application for permits to drill more wells in the same spacing unit. Following this approval, on January 13, 2020, Kraken sent Solis additional election letters for the new wells that explained the required terms regarding timing, costs, and planned coverage area. The letters once again gave Solis the option of participating by paying a share of the costs or by leasing her mineral interests to Kraken. The letters also explained that, as with the initial 1H well, non-participation would result in assessment of risk penalties. According to the letters, Solis had 30 days to decide whether to participate in the drilling. Solis rejected service of the letters from Kraken. Kraken began "spudding" (drilling the new wells) on January 21, 2020, weeks prior to the expiration of the 30-day term stated in the election letters sent to Solis.

¶7 Just over a year later, on February 26, 2021, Phoenix acquired the mineral interests from Solis and informed Kraken of its purchase via email. Phoenix further indicated that it would like to participate in the oil and gas production from the wells being drilled by Kraken in the spacing unit. Kraken responded to Phoenix on March 18, 2021, explaining that the mineral interests had been deemed "non-consent," due to Solis’s lack of participation, and stating it was authorized to recover risk penalties under § 82-11-202(2), MCA. On August 26, 2021, Kraken applied to the Board for a pooling order and imposition of risk penalties for the spacing unit, including the mineral interests now owned by Phoenix. The Board held a hearing on October 14, 2021, with both Phoenix and Kraken present and represented by counsel.

¶8 At the hearing, Phoenix argued that pooling was improper since it was now the owner of the mineral interests and wanted to voluntarily participate. Kraken argued that pooling was still appropriate because it had previously made good faith attempts to obtain Solis’s participation but was unsuccessful. The Board concluded Kraken had made unsuccessful, good faith attempts to acquire voluntary pooling in the spacing unit, and that, as a successor in interest, Phoenix was bound to Solis’s decision not to participate. The Board therefore determined that the mineral interests owned by Phoenix would be subject to forced pooling and that Kraken could recover risk penalties from Phoenix under § 82-11-202(2), MCA. Phoenix would receive a 12.5% royalty on the minerals.

¶9 Phoenix requested a rehearing from the Board, but that request was denied on December 1, 2021. Phoenix thereafter filed a Complaint seeking injunctive relief from the Board decision in the Thirteenth Judicial District Court, Yellowstone County. The parties submitted cross-motions for summary judgment, and the District Court held a hearing on the motions. On April 17, 2023, the District Court issued an Order granting Kraken and the Board’s motions for summary judgment, and dismissing Phoenix’s Complaint. The District Court reasoned the Board "was sufficiently thorough" in granting forced pooling and authorizing risk penalties, and there were otherwise no "compelling indications" that the Board erred in its ruling. Phoenix appeals.

STANDARD OF REVIEW

¶10 [1] "We review a district court’s grant of summary judgment de novo, using the same M. R. Civ. P. 56 criteria applied by the district court." Cramer v. Farmers Ins. Exch., 2018 MT 198, ¶8, 392 Mont. 329, 423 P.3d 1067. Therefore, "[w]e review district court’s conclusions of law to determine whether they are correct and its findings of fact to determine whether they are clearly erroneous." Tractor & Equipment Co. v. Zerbe Bros., 2008 MT 449, ¶ 12, 348 Mont. 30, 199 P.3d 222. "Summary judgment is proper only when no genuine issues of material fact exist and the moving party is entitled to judgment as a matter of law." Emp’rs Mut. Cas. Co. v. Estate of Buckles, 2019 MT 136, ¶ 6, 396 Mont. 153, 443 P.3d 534.

¶11 [2] We also review agency decisions by applying the same standard as the district court. Mont. Power Co. v. Mont. PSC, 2001 MT 102, ¶ 18, 305 Mont. 260, 26 P.3d 91. An order issued by the Board is not binding on this Court but shall be considered "prima facie valid." See § 82-11-144, MCA. When reviewing a Board order, a court’s role "is not to say whether it would have granted" the order; rather, the reviewing court must determine whether the Board was "sufficiently thorough and discerning in its decision-making process …." Mont. Wildlife Fed’n v. Mont. Bd. of Oil & Gas Conservation, 2012 MT 128, ¶ 51, 365 Mont. 232, 280 P.3d 877. We may set aside a Board order for a number of reasons, including if it is arbitrary, capricious, or in excess of statutory authority. See § 82-11-144(2), MCA.

DISCUSSION

¶12 1. Whether the District Court correctly affirmed the Board’s determination that Kraken is entitled to forced pooling of Phoenix’s mineral interests.

¶13 [3] Under § 82-11-202(1)(b), MCA, the Board must decide whether the applicant for pooling "has made an unsuccessful, good faith attempt to voluntarily pool the interests within the spacing unit" before it can issue a force-pooling order. Phoenix argues that its offers to voluntarily pool in the months prior to Kraken’s application preclude the Board’s Order pooling the mineral interests because Kraken’s rejections of those offers cannot constitute an unsuccessful, good faith attempt. We disagree, and hold that the Board correctly interpreted the statutory force-pooling requirements, and that its decision...