AEC Industries, LLC v. Survivor Oil, Inc.

7 P.3d 1052, 147 Oil & Gas Rep. 451, 2000 Colo. J. C.A.R. 6413, 1999 Colo. App. LEXIS 304, 1999 WL 1067491
CourtColorado Court of Appeals
DecidedNovember 26, 1999
DocketNo. 98CA1251
StatusPublished

This text of 7 P.3d 1052 (AEC Industries, LLC v. Survivor Oil, Inc.) is published on Counsel Stack Legal Research, covering Colorado Court of Appeals primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
AEC Industries, LLC v. Survivor Oil, Inc., 7 P.3d 1052, 147 Oil & Gas Rep. 451, 2000 Colo. J. C.A.R. 6413, 1999 Colo. App. LEXIS 304, 1999 WL 1067491 (Colo. Ct. App. 1999).

Opinion

Opinion by

Judge KAPELKE,

In this action for foreclosure of mechanic's liens relating to an oil and gas lease, defendant, Survivor Oil, Inc. (Survivor), appeals from the summary judgment entered by the trial court determining that Survivor either had no interest in the properties that are the subject of the foreclosure (the subject properties) or that any interest that it had was junior to the mechanies' liens held by plaintiff, AEC Industries, LLC (AEC). Also, defendants Conrad Ratliff and Gary Tibbits separately appeal from the summary judgment determining that any interest they had in the subject properties was junior to the mechanic's liens held by AEC. We affirm.

As pertinent to this appeal, the claims in this action relate to a federal oil and gas lease in Rio Blanco County, Colorado, and a well on that leasehold. In January 1992, Survivor received an assignment of the lease but only insofar as it related to the geologic formations from the surface of the earth down to the top of the Frontier formation (Shallow Formations). In addition, Survivor received an assignment of "wellbore," which was defined as all of the assignor's interest in the specific well, "together with all oil, gas and other hydrocarbons that may be produced from said wellbore, together with all downhole equipment therein."

In April 1998, Survivor assigned all of its rights in the Shallow Formations of the lease and in the wellbore to another company. The assignment contained the following provision, which forms the basis of Survivor's claimed interest:

In the event that Assignee recovers 100% of its Data and Completion Costs of [the welll ... Assignor [Survivor] reserves an overriding royalty interest equal to five [1054]*1054percent (5%), in and to the oil, gas, minerals and other hydrocarbons which may be produced and saved from the herein de-seribed wellbore, or lands pooled, commu-nitized or unitized therewith, free and clear of any costs and expenses of development and operations thereof excepting taxes applicable to said interest and the production therefrom. '

Work was performed on the well by various oil field contractors in an attempt to complete it in the formations below the Shallow Formations. Ratliff and Tibbits entered into arrangements with the contractors to perform the work and apparently provided certain consulting services Many of the contractors were not paid for their services and therefore filed mechanic's lien claims on the property pursuant to § 38-24-101, et seq., C.R.98.1999. The suits brought by the lien claimants were consolidated into this action, and AEC later obtained assignments of the lien claims and was substituted as plaintiff,

The trial court appointed a special master who made recommendations to the court as to rulings on motions. By separate motions for summary judgment, AEC sought a determination that the liens it held were senior and superior to any claimed interest of Survivor as well as to any claimed interest of Ratliff and Tibbits.

Pursuant to recommendations of the special master, the trial court entered summary judgments in favor of AEC and against Survivor, and also against Ratliff and Tibbits.

The court ruled that Survivor has no overriding royalty in the subject properties as to the formations below the Shallow Formations and that any interest it does have either will: "(a) never become effective, or (b) is in the nature of a carried working interest and therefore subject to the liens of AEC and this foreclosure."

By separate order, the court concluded that the liens of AEC were also prior and superior to the claims and interests of Ratliff and Tibbits,

On August 3, 1998, the trial court entered a final judgment and decree authorizing foreclosure by ABC of its liens. This appeal followed.

I.

Survivor contends that the trial court erred in concluding that its interest in the subject properties was junior to AEC's mechanic's liens and would be extinguished upon foreclosure of such liens. We disagree.

A.

First, it is undisputed that, at the time it made its wellbore assignment and assignment of operating rights, Survivor had rights in the lease only as to the Shallow Formations. Accordingly, as the trial court ruled, the rights reserved by Survivor pursuant to those assignments were limited to those formations.

Second, we reject Survivor's contention that the trial court erred in ruling that any interest Survivor reserved was in the nature of a carried working interest, rather than an overriding royalty interest, and was therefore junior to, and subject to foreclosure of, AEC's mechanic's liens.

An overriding interest is an interest in oil and gas produced at the surface, free of expenses of production. Garman v. Conoco, Inc., 886 P.2d 652 (Colo.1994); Hagood v. Heckers, 182 Colo. 337, 513 P.2d 208 (1973); see also 2 H. Williams and C. Meyers, Oil and Gas Law 748 (1998). It is an interest that is carved out of the working interest created by an oil and gas lease, and is limited in duration to the life of the leasehold interest. Grynberg v. Waltman, 946 P.2d 473 (Colo.App.1996).

Because it is a nonoperating interest carved out of the lease, an overriding royalty interest has been regarded as an encumbrance on the working interest "and is therefore free from liens thereafter imposed on the working interest." 5 E. Kuntz, A Treatise on the Law of Oil and Gas § 68.2, p. 222 (1991), citing Roberts v. Tice, 198 Ark. 397, 129 S.W.2d 258 (1939); DaMac Drilling, Inc. v. Shoemake, 11 Kan.App.2d 38, 713 P.2d 480 (1986); and Cities Service Oil Co. v. Pubco Petroleum Corp., 497 P.2d 1368 (Wyo.1972).

[1055]*1055Indeed, AEC acknowledges in its brief that if Survivor held an overriding royalty interest, such interest would not be subject to the costs of the kind represented by AEC's liens. It asserts, however, that the interest reserved by Survivor is in the nature of a carried working interest and, as such, is subject to such liens.

A carried interest is "[al fractional interest in oil and gas property, usually a lease, the holder of which has no personal obligation for operating costs, which are to be paid by the owner or owners of the remaining fraction, who reimburse themselves therefor out of production, if any. The person advancing the costs is the carrying party and the other is the carried party." 2 H. Williams and C. Meyers, supra, at 183.

Unlike an overriding royalty interest, a carried interest has been found to be subject to the rights of mechanic's lien claims such as those of AEC here. See Dufford and Hel-mick, Mechanic's Liens Relative to Oil and Gas Operations-Part II, 34 Dicta 373, 380-381 (1957); see also Ball v. Red Square Oil & Gas Co., 113 Kan. 763, 216 P. 422 (1923).

Overriding royalty interests are distinguishable from carried interests in that overriding royalty interests are usually shares of gross production free of costs. 2 H. Williams and C. Meyers, supra, § 424 at 488.

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7 P.3d 1052, 147 Oil & Gas Rep. 451, 2000 Colo. J. C.A.R. 6413, 1999 Colo. App. LEXIS 304, 1999 WL 1067491, Counsel Stack Legal Research, https://law.counselstack.com/opinion/aec-industries-llc-v-survivor-oil-inc-coloctapp-1999.