Kittleson v. Grynberg Petroleum Company
876 N.W.2d 443
| N.D. | 2016Background
- In 1991, Grynberg Petroleum and Kittleson’s predecessor entered into an oil and gas lease with a rider amending the lease.
- The royalty clause provided market value at the well but barred deductions for processing and other post-production costs from the royalty.
- The gas was sour and had to be processed (compression, dehydration, etc.) to become marketable, creating post-production costs.
- Grynberg used the work-back method to compute market value at the well, deducting post-production costs from plant tailgate proceeds before royalty calculation.
- Kittleson sued in 2005 alleging Grynberg deducted post-production costs starting in 1997, arguing the “no deductions” clause prohibited such deductions.
- The district court held no deductions were allowed, awarded roughly $111,300 including interest and fees, and found damages about $17,237.71 for underpaid royalties from 1997–2009; the court also applied a ten-year statute of limitations.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Which contract interpretation governs the lease terms? | Kittleson urges no post-production deductions per the no-deductions clause. | Grynberg argues market value at the well allows post-production deductions via work-back. | The no-deductions language prevails over market-at-the-well language; deductions are not allowed. |
| What amount of damages was proper for underpaid royalties? | Kittleson presented calculation to show underpayment based on post-production deductions. | Grynberg contends deductions were permitted, reducing damages. | Damages supported by evidence amount to about $17,237.71, with related interest and costs. |
| Which statute of limitations applies to the action? | N/A | N.D.C.C. § 28-01-15(2) ten-year limit or other limits argued. | Ten-year limitations period applies because the obligation to pay royalties is a contract contained in a real-property instrument. |
| Does U.C.C. apply to royalty payments? | N/A | Royalties may be governed by U.C.C. four-year limit for sale of goods. | U.C.C. does not apply because Kittleson is not a seller of gas; royalties under lease fall outside U.C.C. four-year limit. |
Key Cases Cited
- Bice v. Petro-Hunt, L.L.C., 2009 ND 124, 768 N.W.2d 496 (ND 2009) (established at-the-well rule with possible post-production deductions under work-back)
- Ramada, Inc., 553 N.W.2d 760 (ND 1996) (ten-year limit for contracts contained in real-property conveyances; lease-based obligations treated as real-property contracts)
- Jones v. Barnett, 2000 ND 207, 619 N.W.2d 490 (ND 2000) (distinguishes when ten-year does not apply to non-lease verbal financial terms)
- Finstrom v. First State Bank of Buxton, 525 N.W.2d 675 (ND 1994) (discussed accrual and U.C.C. applicability in royalty disputes)
- Diocese of Bismarck Trust v. Ramada, Inc., 553 N.W.2d 760 (ND 1996) (treats real-property lease as instrument affecting title for limitations)