Thoroughbred Associates, L.L.C. v. Kansas City Royalty Co., L.L.C., 297 Kan. 1193

Background

In 1998 Thoroughbred drilled the Bird Well in Comanche County and formed the 640-acre Rietzke Unit by declaring unitization of multiple leases, including OXY’s undivided one-third interest.
The OXY Lease contains a Pugh clause, a drainage clause requiring well drilling to prevent drainage, and a unitization provision allowing pooling for production of oil and/or gas to conform with spacing or to produce a full regulatory allowable.
Thoroughbred filed a Declaration of Unitization to include the OXY Lease lands in the Rietzke Unit; KC Royalty acquired OXY’s interest and became successor-in-interest.
Disputes centered on whether the OXY Lease could be unitized (authority and scope) and whether the unitization met prerequisites under the lease and state regulations, plus a drainage claim by KC Royalty.
The district court granted KC Royalty summary judgment on unitization and related issues, denied Thoroughbred summary judgment, and KC Royalty pursued a drainage counterclaim trial which the court upheld for Thoroughbred.
On appeal, the Court of Appeals affirmed, and the Kansas Supreme Court reversed in part, remanding for further proceedings on alternative claims while affirming the drainage ruling.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Can the OXY Lease be included in the Rietzke Unit?	Thoroughbred: unitization prerequisites unmet; OXY Lease improperly included.	KC Royalty: OXY Lease validly unitized under the fourth paragraph and conduct/Ratification arguments support inclusion.	Remanded for further proceedings; unitization may be valid if prerequisites ultimately met.
Were the unitization prerequisites/conditions precedent met?	No regulator-required spacing or full-allowable justification existed; unitization exceeded authority.	Prerequisites were satisfied; unitization authorized under the lease and conduct.	There were no material disputes on the prerequisites at summary judgment; remanded for factual resolution on alternatives.
Did mutual mistake, ratification, or a separate agreement affect unitization?	Possibility of mutual mistake invalidating unitization; conduct could ratify or modify.	Prior conduct/radiation may ratify or modify; acceptance of royalties could create binding effect.	Remanded to consider these theories; the court did not resolve them on the record.
What is the scope of production (oil and/or gas) under unitization and Declaration of Unitization?	Declaration limited to gas in unit; oil may not be included under unitization.	Declaration purportedly unitizes all production, potentially including oil.	Skelly Oil-based reasoning discussed; not decided on full record; remand for proper factual basis.
Who bears the burden of proof on drainage and was drainage proven?	KC Royalty, as counterclaimant, bore burden to prove drainage.	Thoroughbred as operator bears burden; district court’s burden ruling should be preserved.	Court adopted the appellate analysis; KC Royalty failed to prove drainage.

Key Cases Cited

Shamberg, Johnson & Bergman, Chtd. v. Oliver, 289 Kan. 891 (2009) (summary judgment standard; material facts must be disputed for denial)
Klippel v. Beinar, 222 Kan. 681 (1977) (acceptance of royalties can bind owners to unitization; ratification concepts)
Barbara Oil Co. v. Kansas Gas Supply Corp., 250 Kan. 438 (1992) (extrinsic evidence admissible to aid construction when contract silent/ambiguous)
Thoroughbred Assocs. v. Kansas City Royalty Co., 45 Kan. App. 2d 312 (2011) (Court of Appeals opinion relied upon for initial reversal on certain points)
Skelly Oil Co. v. Savage, 202 Kan. 239 (1968) (oil and gas unitization; incidental byproduct argument for pooling)
Spurgeon v. Union National Bank, 137 Kan. 98 (1933) (party cannot raise new burden-of-proof issues on appeal after trial)
Trust Co. v. McIntosh, 68 Kan. 452 (1904) (standing to rescind contract; fault-free requirement for rescission)