Thoroughbred Associates, L.L.C. v. Kansas City Royalty Co.
45 Kan. App. 2d 312
| Kan. Ct. App. | 2011Background
- Thoroughbred acquired a gas lease (OXY lease) in Comanche County in 1998 and later sought unitization with nearby tracts.
- The OXY lease included limited unitization rights but was negotiated to include the Rietzke Unit; the written language did not reflect this mutual understanding.
- A Pugh clause in the OXY lease limited the lease’s perpetuation to production from the Marmaton-Altamont interval, potentially expiring below that depth.
- Kansas City acquired its mineral interests in 1999 and claimed that wells on Thoroughbred’s unit drained the Rietzke Unit, reducing Kansas City’s revenue.
- Thoroughbred sued in 2002, withheld revenue from the Rietzke Unit, and faced counterclaims for revenue, drainage, prejudgment interest, and attorney fees.
- The trial court granted summary judgment on unitization and revenue issues, then a bench trial on drainage, with judgments awarding Kansas City damages and fees; the appellate court affirmed all rulings.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether OXY lease was properly included in the Rietzke Unit | Thoroughbred: written lease controls; intends no inclusion | Kansas City: parol/understanding governs unitization; proper inclusion | Yes; reformation to reflect true agreement; lease included in Rietzke Unit |
| Effect of the Pugh clause on lease rights below Marmaton-Altamont | Thoroughbred: Pugh clause restricts perpetuation | Kansas City: unitization extends rights below Marmaton-Altamont | Pugh clause lapsed Thoroughbred’s interests below Marmaton-Altamont; Kansas City treated as having working interest below that interval |
| Treatment of incidental oil revenue within a gas unit | Oil incidental to gas unit not recoverable by unit | Oil revenue should be included as unitized gas unit byproducts | Included; Skelly Oil rule applies; nongas revenue allocated pro rata |
| Burden of proof on drainage claim and prudence of operator | Thoroughbred bears burden; no drainage shown | Kansas City seeks burden shift due to self-dealing | Trial court properly placed burden and found no drainage; no reversal on shift |
| Availability of prejudgment interest and attorney fees under K.S.A. 55-1614 et seq. | Thoroughbred contests fee/interest award | Kansas City entitled to fees and interest as prevailing party | Award affirmed; statutory framework and fee allocation upheld |
Key Cases Cited
- Sandefer Oil & Gas, Inc. v. Duhon, 961 F.2d 1207 (5th Cir.1992) (Pugh clause scope and unitization effects; vertical/horizontal limitations)
- Rogers v. Westhoma Oil Company, 291 F.2d 726 (5th Cir.1961) (horizontal Pugh clause interpretation)
- Krug v. Krug, 618 P.2d 323 (Kan. App. 1980) (unleased interests treated as working interest for drilling costs)
- Skelly Oil Co. v. Savage, 202 Kan. 239 (Kan. 1968) (gas unit with incidental oil byproducts; proportional revenue allocation)
- Parkin v. Kansas Corp. Comm'n, 234 Kan. 994 (1984) (prudent-operator rule applied to development; standards for development duties)
- Rush v. King Oil Co., 220 Kan. 616 (1976) (prudent-operator rule governing drainage obligations)