Thoroughbred Associates, L.L.C. v. Kansas City Royalty Co., L.L.C.

308 P.3d 1238, 297 Kan. 1193
CourtSupreme Court of Kansas
DecidedSeptember 20, 2013
DocketNo. 102,598
StatusPublished
Cited by50 cases

This text of 308 P.3d 1238 (Thoroughbred Associates, L.L.C. v. Kansas City Royalty Co., L.L.C.) is published on Counsel Stack Legal Research, covering Supreme Court of Kansas primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Thoroughbred Associates, L.L.C. v. Kansas City Royalty Co., L.L.C., 308 P.3d 1238, 297 Kan. 1193 (kan 2013).

Opinions

The opinion of the court was delivered by

BILES, J.:

This is an oil and gas lease dispute regarding: (1) whether tracts of land could be unitized; (2) if so, what minerals were unitized; and (3) alleged drainage of the leased lands. The district court disposed of the first two questions by summary judgment and the drainage claim after a bench trial. Both parties appealed to the Court of Appeals, which affirmed the district court. Thoroughbred Assocs. v. Kansas City Royalty, Co., 45 Kan. App. 2d 312, 248 P.3d 758 (2011). We disagree in part with both lower courts and reverse the summary judgment orders.

We hold the lease unambiguously sets out conditions precedent for unitization and there are no disputed material facts as to whether those prerequisites were met based on the parties’ summary judgment briefs and supporting materials. But this holding does not end the case. We remand to the district court for further proceedings because disputed facts exist regarding alternative claims that have not yet been addressed—and which may need to be considered—depending on how the district court disposes of other issues. We agree the drainage claim was not proven and affirm that ruling.

Factual and Procedural History

In 1998, Thoroughbred Associates, L.L.C., drilled a prolific gas well, known as the Bird Well, in Comanche County, Kansas. Thoroughbred then began targeting other land near the Bird Well, resulting in the acquisition of leases and creation of a unit called tire Thoroughbred-Rietzke Unit (Rietzke Unit). Thoroughbred is the lead plaintiff in this case. The other plaintiffs hold oil and gas interests in the Rietzke Unit. Collectively, the plaintiffs dispute whether the defendants properly belong in the Rietzke Unit.

OXY USA, Inc. owned an undivided one-third interest in the oil, gas, and other minerals underlying a tract in Comanche County near tire Bird Well. In July 1998, Thoroughbred entered into an oil and gas lease with OXY for that tract. An OXY employee drafted the lease (the OXY Lease) from preprinted forms. It was recorded in August of that year. About 2 months after the OXY Lease took effect, Thoroughbred filed a “Declaration of Unitization of Oil and Gas Leases” with the Comanche County Register of Deeds,, com[1196]*1196bining the OXY Lease and numerous other leases into the 640-acre Rietzke Unit. The defendants Kansas City Royalty Company, L.L.C.; Robert E. Thomas Revocable Trust; and D.D.H., L.L.C. (collectively referred to as Kansas City Royalty) later purchased OXY’s interest and became successors-in-interest to the OXY Lease.

Thoroughbred drilled several wells on the Rietzke Unit, which produced both oil and gas in varying quantities, although none were located on the land subject to the OXY Lease. But all of the wells on the Rietzke Unit qualified for what is known in the industry as a full allowable, which becomes relevant to the parties’ dispute whether the OXY Lease could have been unitized. An “allowable” is “[t]he amount of oil or gas which a well, leasehold, field, pipeline system or state is permitted to produce under pro-ration orders of a state conservation commission.” 8 Williams & Meyers, Oil and Gas Law, Manual of Oil and Gas Terms, p. 40 (2012). In Kansas, state regulation provides a full allowable if: “(1) Location exceptions have been granted for manmade structures or topographic features; (2) No interference with drainage of adjacent wells can be shown by competent evidence; or (3) Actual interference is less than the reduced allowable.” K.A.R. 82-3-312(f).

Once Kansas City Royalty had acquired the OXY Lease, it began inquiring whether Thoroughbred’s Bird Well was draining minerals from the adjacent Rietzke Unit. The parties disagreed about what information Kansas City Royalty could receive to investigate the drainage issue and whether the Bird Well was actually draining the Rietzke Unit. Those disagreements preceded this litigation.

Thoroughbred initially submitted royalty payments accruing from the Rietzke Unit, which Kansas City Royalty accepted; but Thoroughbred stopped these payments as tensions increased. Thoroughbred soon argued the OXY Lease’s terms actually prohibited Thoroughbred from including that lease’s lands within the Rietzke Unit. In other words, Thoroughbred contended it had mistakenly unitized the OXY Lease lands as part of the Rietzke Unit.

[1197]*1197 The OXY Lease and Declaration of Unitization

Under its terms, the OXY Lease was to remain in effect for 1 year “and as long thereafter as oil or gas, or either of them, is produced from said land, or lands unitized therewith, by the Lessee, in paying quantities.” But the lease also contained what is known as a Pugh clause limiting the extent the lease could be perpetuated through production from a well elsewhere on a unit. And based on this clause, the parties also disputed whether the lease had expired below certain depths.

The fourth paragraph in the OXY Lease involves the delegation of Thoroughbred’s power to pool or unitize. It is the centerpiece of Thoroughbred’s claim. It states in relevant part:

“Lessee is granted the right and power to pool or unitize all, or part of the lands covered hereby with adjoining or contiguous lands in order to form a unit, or units,/or the production of oil and/or gas when said units are necessary to conform with regular spacing patterns, or to produce a full allowable where such spacing pattern or allowable are established by State, Federal or other regulatory bodies. All lands so pooled into a unit or units, shall be treated for all purposes, except die payment of royalties on production from the pooled unit, as if said lands were included in the lease. If production is found on the pooled lands, it shall be treated as if production is had from this lease, whether the well, or wells be located on the lands covered by this lease or not. Any well drilled on any such units shall be considered as a well hereunder. In lieu of the royalties elsewhere herein specified, Lessor shall receive on production from a unit, only such portion of die royalties stipulated herein as a portion of die above-described lands placed in said unit bears, on an acreage basis, to die total lands so pooled or unitized in the particular unit involved.” (Emphasis added.)

Two portions of this paragraph are particularly important. First is the condition placed on unitization—“when said units are necessary to conform with regular spacing patterns, or to produce a full allowable where such spacing pattern or allowable are established by State, Federal or other regulatory bodies.” Second is that the lease allows unitization for the production of “oil and/or gas.” And this second provision must be contrasted against the Declaration of Unitization filed by Thoroughbred with the register of deeds that states the intention to unitize and pool the leases

“as to the gas rights therein and thereunder so as to form the unit acreage described . . . and does declare the necessity and advisability of said pooling and [1198]*1198unitization in order to properly develop and operate said lease premises so as to promote the conservation of gas in and under and that may be produced from said premises.” (Emphasis added.)

Whether the Declaration of Unitization’s reference to “gas rights” unitized only the gas—but not the oil—is another disputed point.

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Cite This Page — Counsel Stack

Bluebook (online)
308 P.3d 1238, 297 Kan. 1193, Counsel Stack Legal Research, https://law.counselstack.com/opinion/thoroughbred-associates-llc-v-kansas-city-royalty-co-llc-kan-2013.