Thoroughbred Assoc. v. Kansas Royalty Co.
248 P.3d 758
| Kan. Ct. App. | 2011Background
- OXY lease in Comanche County was negotiated to be unitized but the written lease failed to reflect the mutual understanding; the Rietzke Unit included the OXY lease and other lands.
- Thoroughbred declared unitization September 1998 to form the Rietzke Unit, reporting gas production and unitized gas rights.
- Kansas City acquired its mineral interests in OXY lease in summer 1999; Wells on Rietzke Unit allegedly drained by Thoroughbred-Bird Unit wells.
- Thoroughbred withheld production proceeds to Kansas City; Kansas City counterclaimed for revenue, drainage, prejudgment interest, and attorney fees.
- The trial court granted summary judgment for Kansas City on revenue and unitization issues, denied drainage relief, and awarded prejudgment interest and partial attorney fees; court awarded specific damages amounts after bench trial.
- This appeal and cross-appeal challenge unitization interpretation, Pugh clause effects, drainage proof burden, and fee/interest awards; the appellate court affirms all district court rulings.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Unitization of the OXY lease in the Rietzke Unit | Thoroughbred argues the written lease language controls and precludes inclusion. | Kansas City contends the parties’ mutual understanding required inclusion in the Rietzke Unit. | The court reformed to reflect the actual agreement, including the OXY lease in the Rietzke Unit. |
| Effect of the Pugh clause on the lease in the unit | Thoroughbred asserts the Pugh clause preserves only surface-level rights tied to Marmaton-Altamont interval. | Kansas City argues the Pugh clause limits the lease below Marmaton-Altamont. | Pugh clause lapsed Thoroughbred’s interests below Marmaton-Altamont; Kansas City held a working interest for that production. |
| Treatment of incidental oil byproducts in the gas unit revenues | Thoroughbred claims non-gas hydrocarbons must be excluded from unit revenues. | Kansas City relies on Skelly Oil Co. v. Savage to include incidental oil as part of gas unit revenues. | Revenue from incidental hydrocarbons should be included in unit revenues and distributed pro rata. |
| Drainage claim and burden of proof | Thoroughbred argues no drainage occurred or burden properly rests with Kansas City. | Kansas City contends Thoroughbred failed to act prudently to prevent drainage and shoulders burden. | Trial court properly found no proven drainage; burden rules remained conventional and no reversal. |
| Interest and attorney fees under K.S.A. 55-1614 et seq. | Thoroughbred challenges awards as improperly pleaded or calculated. | Kansas City maintains the Act provides a make-whole remedy and supports the awarded amounts. | Prejudgment interest and attorney fees affirmed; award properly rests on the Act and discretionary review. |
Key Cases Cited
- Davis v. Key Gas Corp., 34 Kan. App. 2d 728 (2006) (contract interpretation governs oil and gas leases like other contracts)
- Liggatt v. Employers Mut. Casualty Co., 273 Kan. 915 (2002) (unambiguous contract enforcement; reform possible to reflect true intent)
- Conner v. Koch Oil Co., 245 Kan. 250 (1989) (reformation of contract to reflect mutual mistake; equity relief available)
- Skelly Oil Co. v. Savage, 202 Kan. 239 (1968) (incidental hydrocarbons in gas unit revenues allocated pro rata when unit addresses gas rights)
- Krug v. Krug, 5 Kan. App. 2d 426 (1980) (treat unleased mineral interests as bearing proportionate burdens as working interest)