North Finn v. CookNorth Finn v. Cook
ORDER GRANTING DEFENDANT’S MOTION FOR PARTIAL SUMMARY JUDGMENT
This matter came before the Court on April 1,1993. Supplemental briefs were filed on May 3, 1993. The Court, having considered the materials on file both in support of and in opposition to the motion, having considered the arguments of counsel, and being fully advised in the premises, FINDS and ORDERS as follows:
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In 1989 and 1990 Kelly drilled the # 1-7 W. Oedekoven Well located on the NE/ 4NE/4 of Section 7, Township 54 North, Range 73 West, and D.L. Cook # 2-7 on the SE/4NE/4 of Section 7, Township 54 North,
Background
The United States issued a mineral rights lease in Campbell County, Wyoming to one Nelson, who assigned the lease to defendant D.L. Cook (“Cook”). Cook did not develop the lease. Instead, he “farmed out” portions of the leased property to Kelly Oil and Gas Company.
Cook agreed that upon completion of a well capable of producing oil and/or gas in paying quantities, he would deliver to Kelly:
an assignment covering the 40 acre drill site ... conveying depths from 2,500 feet below the surface to 100 feet below the deepest depth drilled, of an undivided 75% of %ths of all right, title and interest of Cook in the SE/4 SE/4 of Section 6, T54N, R73W, Campbell County, Wyoming....
(Farmout and Option Farmout Agreement at p. 5). The Farmout agreement further provided that:
Following payout 1 ..., Cook shall be reassigned by Farmee, a fully participating thirty percent (30%) backin working interest in the Test Well, (emphasis added). 2
The interests before and after payout are set out in the Farmout Agreement as follows:
Range 73 West. The focus in this order is on well # 1-7.
Well # 1-7 was deemed capable of producing oil and/or gas in paying quantities. On June 1, 1990, in accordance with the Farmout
Limited to those depths between 2500 feet below the surface and 100 feet below the total depth drilled in the # 1-7 W. Oedeko-ven Well located on transferred lands and subject to the terms and conditions of the Farmout and Option Farmout dated June 2,1989 between the parties hereto wherein transferor reserved a 30% reversionary interest after payout, (emphasis added).
Cook contends that well #2-7 was not capable of producing oil and/or gas in paying quantities. Therefore, the working interest in #2-7 was never conveyed to Kelly. 3 •
Kelly failed to pay bills for drilling and completing the wells. Liens were filed, and Kelly’s property interests were foreclosed. A sheriffs sale was conducted in October, 1991. Plaintiff North Finn purchased the foreclosed property for $150,000. North Finn received a certificate of purchase from the Campbell County Sheriffs office on October 31, 1991. A court order confirming the foreclosure sale was entered on December 11,1991. The order described the foreclosed property as follows:
All right title and interest of Kelly Operating Company, Tom Kelly and Kelly Oil and Gas (eolectively “Kelly”), in and to the federal oil and gas lease known as Bureau of Land Management Lease No. 1118346, and all right title and interest of Kelly in any wells located on such lease, and in any production of oil, gas or minerals attributable to Kelly’s interests, including without limitation the wells known as D.L. Cook Federal No. 1-7 and Kelly-Cook Federal No. 2-7....
The property was not redeemed and North Finn received a Sheriffs deed on April 16, 1992.
Many of the liens filed by parties that supplied goods and services for drilling and completion of well # 1-7 and well # 2-7 named Cook as an owner of the lease, and most served him with notice of filing of liens. Cook was also named as a party defendant in a consolidated complaint in case no. 17631 filed by Oedekoven Water & Hot Oil Service, KR Well Sendee Inc., Cole’s Oilfield Service Inc., and Melgaard Construction Co. Cook was named in the cross claims of five other firms named as defendants in that complaint. However, the recoz’ds do not indicate that a summons was ever issued to Cook on the complaint or the cross claims.
Plaintiff North Finn filed this action seeking a declaratory judgment that it is the owner of federal oil and gas lease no. 118346, including wells # 1-7 and # 2-7. Defendant Cook asserts a counterclaim for a declaratory judgment that North Finn’s interest in well # 1-7 is subject to a reassignment to Cook of a fully participating 30% backin working interest. Cook also seeks to quiet his title to well # 2-7.
Standard of Review
“By its very terms, [the Rule 56(c) ] standard provides that the mere existence of
some
alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there is no
genuine
issue of
material
fact.”
Anderson v. Liberty Lobby, Inc.,
The trial court decides which facts are material as a matter of law. “Only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment.”
Id.
at 248,
Summary judgment may be entered “against a party who fails to make a sufficient showing tó establish the existence of an
Discussion
Well # 1-7
The agreement- between Cook and Kelly provided that upon completion of a well capable of producing oil and/or gas in paying quantities, Cook would convey a 100% (of-75%) working interest in well # 1-7 to Kelly. Following payout, Kelly was to convey a 30% (of 75%) working interest back to Cook. The obvious reason for structuring the deal this way was to allow Kelly, the driller, to take all of the tax deductions associated with drilling the well. Payment to Cook is in the form of reassignment after payout.
The focus in this order is whether North Finn’s interest in the well is subject to Cook’s 30% reservation.
Cook’s Interest
It is necessary to identify Cook’s 30% interest in order to determine its viability. The transfer agreement characterizes Cook’s interest as a “30% reversionary interest after payout.” The farmout agreement describes Cook’s interest as a “fully participating thirty percent (30%) backin working interest in the test well.”
Cook’s interest is arguably one of the following: (1) a possibility of a reverter; (2) a covenant running with the land; or (3) a personal covenant. Plaintiff North Finn argues that Cook’s interest is a personal covenant. Defendant Cook contends that it is a covenant running with the land. The Court, for reasons stated below, finds that Cook’s interest is a possibility of reverter.
A possibility of reverter is “a future interest left in the transferor
4
or his successor in interest on a transfer in fee simple determinable or in fee simple conditional.”
5
Lewis Simes, Law of Future Interests, § 13 at 28 (1966). In other words, it is a “rever-sionary interest subject to a condition precedent.” Restatement (Second) of Property, § 154 (1936);.
see also Williams v. Watt,
The transfer agreement conveyed the NE/4NE/4 of Section 7, Township 54 North, Range 73 West, “limited to ... depths, between 2500 feet below the surface and 100 feet below the total depth drilled in [well # 1-7] subject to the terms and conditions of Farmout and Option Farmout dated June 2, 1989 between the parties hereto wherein Transferor reserved a 30% rever-sionary interest after payout.” It is significant that the plain language of the transfer agreement refers to Cook’s interest as a “30% reversionary interest.”
The farmout agreement provides that “[fjollowing payout ... Cook shall be reassigned by Farmee, a fully participating thirty percent (30%) backin working interest in the Test Well.” Under the terms of the farmout agreement, “payout” is the condition precedent to reversion.
Although a possibility of reverter may be created without any expression of intention in the creating instrument that the property
Plaintiff North Finn argues that Cook’s interest is not a possibility of reverter because the 30% working interest does not revert automatically to Cook, but requires the farmee to reassign the interest.
7
While the Court notes that the agreements could have been more artfully drawn, the intent of the parties to create a reversionary interest is clear. See
Town of Moorcroft v. Lang,
Plaintiff North Finn contends that liens attached to defendant Cook’s 30% re-versionary interest. There has been no assertion that the liens attached by contract. Therefore, the Court will focus on whether liens attached to Cook’s interest by virtue of statute.
Wyo.Stat. § 29-3-103 provides that:
(a) Every person who works upon or furnishes material, whether incorporated into the real property or not, under contract with the owner of any interest in real estate or.with an agent, trustee or receiver of an owner has a lien to secure payment for:
(i) Constructing, altering, digging, drilling, driving, boring, operating, completing or repairing any wells, mines or quarries.
(b) Notwithstanding subsection (a) of this section ...
(i) If work is performed for or materials are furnished the owner of an estate less than a fee the lien granted by this chapter shall not extend to the underlying fee or royalty interest unless expressly provided by contract with the owner of the underlying fee or royalty interest.
(ii) If work is performed for or materials furnished to the owner, part owner or lessee of the working interest in only a portion of the acreage covered by a lease, the lien granted by this chapter shall be restricted to that portion of the acreage.
Wyo.Stat. § 29-3-110 states that:
Nothing in this act [chapter] shall be construed to fix a greater liability against the owner of the land or leasehold ... than the price or sum stipulated by the owner to be paid for the materials or services furnished or labor performed.
North Finn, in its memorandum opposing partial summary judgment, concedes that Cook’s 12.5 per cent overriding royalty interest was not affected by the lien foreclosure proceedings.
Cities Service Oil Co. v. Pubco Petroleum Corp.,
However, the Court is not convinced. “Oil and gas lien laws, like other lien laws, are purely statutory; they must be strictly construed; and their scope cannot be extended by implication.”
Burg v. Ruby Drilling Co., Inc.,
In Cities Service Oil Co., the Wyoming Supreme Court adopted a narrow interpretation of Wyoming’s lien statute. The court stated that “the intent of the legislature was to restrict the lien in the case of an oil well to the leasehold estate of the party who contracts .for the drilling.” Cities Service Oil . Co., 497 P,2d at 1371. The court went on to say that “[n]o lien- can be created under our law without a contract with an owner or part-owner, either, legal or equitable, upon the property upon which the lien is established.” Id. at 1373. The court concluded that liens will not attach to the underlying fee or royalty interest unless expressly provided by contract. Id.
In
Adobe Oil & Gas Corp. v. Getter Trucking, Inc.,
In
Burg,
Ruby Drilling Company filed a lien against-the oil and gas leasehold. The Wyoming Supreme Court held that “Ruby’s
The Wyoming Supreme Court has further held that “a subcontractor has a right to a lien only to the same extent that the original contractor would have lien rights.... ”
Adobe Oil & Gas Corp.,
In the instant case, there is no evidence of any agreement by Cook to pay Kelly or any of the subcontractors for services and materials rendered in connection with the drilling of well # 1-7. Paragraph 2(b) of the farmout agreement provides- that “the test well shall be drilled, tested, completed, and equipped ... at the solé cost, risk, and expense of Farmee.” Paragraph 6 provides that “[a]ll operations hereunder shall be at the sole cost, risk and expense of Farmee.” Because Cook did not contract to pay for drilling or other associated costs, the Court holds that the liens filed in the foreclosure proceeding cannot attach to Cook’s interests in well # 1-7. Therefore, Cook’s interests were not foreclosed.
Even if Cook’s interests were lienable, the Court finds that Cook’s 30% reversionary interest would not have been foreclosed. Plaintiff North Finn concedes that Cook was never personally served with a summons for the foreclosure proceeding.
Personal service achieves jurisdiction for the foi’um court over the subject matter and the listed defendants by issuance of a summons by the clerk of court and service by the sheriff or other authorized person, W.R.C.P. 4(c), on the individual or entity to be found within the jurisdiction pursuant to W.R.C.P. 4(d)....
In Interest of DG,
Further, the August 27,1991 order of foreclosure ordered that Kelly’s property be sold to satisfy the oil and gas lien claims of 13 creditors of Kelly. The order described the property to be sold as follows:
All right title and interest of Kelly Operating Company, Tom Kelly and Kelly Oil and Gas (collectively “Kelly”), in and to the federal oil and gas lease known as bureau of Land Management Lease No. 118346, and all right title and interest of Kelly in any wells located on such lease, and in any production of oil, gas or minerals attributable to Kelly’s interests, including without limitation the wells known as D.L. Cook Federal No. 1-7 and Kelly-Cook Federal No. 2-7, located as follows:
D.L. Cook Federal 1-7
NE/4NE/4 T54N, R73W, Section 7, Sixth Principal Meridian, Campbell County, Wyoming.
Kelly-Cook Federal 2-7
E/2NE/4 T54N, R73W, Section 7, Sixth Principal Meridian, Campbell County Wyoming. (emphasis added).
The certificate of purchase issued by the Sheriff, and the order confirming foreclosure sale contained an identical description of the interests foreclosed. It is significant to this Court that Judge O’Brien’s orders spoke only to Kelly’s interests, and did not order the foreclosure of Cook’s interests.
In conclusion, the Court finds that Cook’s 30% interest in well # 1-7 is a possibility of reverter which was not extinguished in the foreclosure proceeding. Factual issues re
THEREFORE, it is ORDERED that defendant’s motion for partial summary judgment is granted to the extent outlined in this order. The Court finds that Cook’s 30% interest is a possibility of reverter which was not extinguished in the foreclosure proceeding, and therefore remains viable. Defendant Cook is entitled to proceed to a determination as to whether its 30% reversionary interest has matured.
Notes
. Payout is defined as "that period of time until Farmee has recovered from the gross proceeds of production attributable to the Test Well an amount equal to the Net Cost.”
. Cook also reserved an overriding royalty interest.
. North Finn counters that well # 2-7 is capable of producing oil and/or gas in paying quantities, and argues that Cook should be required to transfer well # 2-7 to Kelly.
. A future interest is "left in the transferor” when the transferor transfers less than his entire interest. Restatement (Second) of Property, § 154 (1936).
. A possibility of reverter is alienable together with or apart from the surface. 2 Howard Williams and Charles Meyers, Oil and Gas Law, § 336 at 188 (1992).
A possibility of reverter is exempt from the rule against perpetuities. Id. § 335 at 186.4.
.The automatic reversion upon the happening of an event differentiates a possibility of reverter from a power of termination. "[A] power of termination does not take effect in possession on the breach of the condition, but only when the owner of such power of termination, thereafter, by appropriate acts, indicates his election to forfeit the estate held on condition subsequent.” Lewis Simes, Law of Future Interests, § 14 at 30 (1966). .
. Even if this fact were decisive, the logical argument would be that Cook's interest is a power of termination rather than a possibility of reverter. See note 6 supra.
. It is the Court’s view that Cook's interest is best characterized as a possibility of reverter. However, even if Cook only.had á lesser interest, it is the Court’s view that he held at the very least a covenant running with the land.
In order to find that a covenant runs with the land, the following elements must be established:
1. The original covenant must be enforceable;
2. The parties to the original covenant must intend that the covenant run with the land;
3. The covenant must touch and concern the land; and
4. There must be privity of estate between the parties.
Jackson Hole Racquet Club v. Teton Pines,
North Finn attacks the elements of "privity of estate” and "touch and concern the land.” However, the Court finds that there is privity of estate because although North Finn was not an original party to the agreement, by purchasing Kelly’s interests at the foreclosure sale, North Finn stepped into Kelly’s shoes, subjecting it to all defects and equities which could have been asserted by Kelly.
See Lombardi v. Sinanides,
The Court also finds that a covenant to convey a 30% working interest to Cook is related to the land to such an extent that it touches and concerns the land. The Wyoming Supreme Court has held that a conveyance or reservation of a mineral interest gives title to oil in place.
Picard v. Richards,
What is essential is that the burdens and benefits created are not the personal duties or rights of the parties to a covenant that exist independently from the ownership of an interest in the land, [citations omitted]. In Neponsit Property Owner's Association v. Emigrant Industrial Savings Bank, [278 N.Y. 248 ]15 N.E.2d 793 , 796 (1938), the court stated: ”[T)he distinction between covenants which run with land and covenants which are personal, must depend upon the effect of the covenant on the legal rights which otherwise would flow from ownership of land and which are connected with the land. The problem then is: Does the covenant in purpose and effect substantially alter these rights?
Flying Diamond Oil v. Newton Sheep Co.,
Thus the elements of "privity of estate” and "touch and concern the land” have been met. The Court also finds that the covenant to convey a 30% working interest to Cook meets the other two elements which are required to find that a covenant runs with the land. In summary, the Court finds that Cook’s interest is best characterized as a possibility of reverter, and at the very least, it is a covenant running with the land. Under these two characterizations, the result is the same. Cook’s interest remains viable unless extinguished in the foreclosure proceeding.