Appeal from the District Court of Sublette County, The Honorable Norman E. Young, Judge.
The opinion of the court was delivered by: Kite, Justice.
Before VOIGT, C.J., and GOLDEN, HILL, KITE, and BURKE, JJ.
KITE, J., delivers the opinion of the Court; VOIGT, C.J., files a dissenting opinion.
[¶1] This case encompasses seven appeals and cross-appeals and involves seven plaintiffs and six defendants.*fn1 The contest is over a net profits interest (NPI) granted by Malco Refineries, Inc., El Paso Natural Gas Company, and Continental Oil Company (referred to in the documents as ―First Parties‖) to Novi Oil Company (Novi) in the 1950s. The NPI was consideration for Novi's assignment of certain oil and gas leases to First Parties. Generally, the district court concluded that the NPI continues to exist and is owned by the plaintiffs, who are successors to Novi, and the defendants, as successors to First Parties, are obligated to pay net profits to them. The district court also awarded statutory penalties, interest and attorney fees to the plaintiffs.*fn2 We affirm in part and reverse and remand in part.
[¶2] The numerous briefs filed herein set forth dozens of issues, many of which are duplicative. We have identified the following separate issues:
1. Were the plaintiffs entitled to summary judgment on the question of whether the NPI survived termination of the Pinedale Unit?
2. Were the plaintiffs entitled to summary judgment on the question of whether they own the NPI and do the defendants have standing to contest plaintiffs' claim of ownership?
3. Did the district court err by granting the defendants' Rule 52(c) motion regarding the plaintiffs' duty to provide proof of their ownership of the NPI under Section 5 of the Pinedale Unit Area Net Profits Contract (Unit NPI Contract) or by determining that the plaintiffs gave sufficient notice of their ownership in Mr. Hartman's February 22, 2006, letter?
4. Did the district court err in granting the defendants' Rule 52(c) motion on the plaintiffs' claim for breach of the implied covenant of good faith and fair dealing?
5. Did the district court err in granting the non-operator defendants' Rule 52(c) motion on the plaintiffs' Wyoming Royalty Payment Act, Wyo. Stat. Ann. §§ 30-5-301 through 305 (LexisNexis 2009) (WRPA) claims?
6. Did the district court correctly determine that the non-operating defendants breached the Unit NPI Contract by failing to pay the NPI?
7. Did the district court err by ruling that plaintiffs were entitled to be awarded WRPA interest and penalties against the operating defendants Shell and Ultra when the Unit NPI Contract provided that they could withhold payment of net profits, without interest, during the pendency of any dispute regarding ownership of the NPI?
8. Did the district court properly determine that State Lease 79-0645 was a ―replacement lease‖ under the Unit NPI Contract?
9. Did the district court err by ruling that plaintiffs' claims were not time barred under either the statute of limitations or the equitable doctrine of laches?
10. Did the district court err by refusing to exclude certain expenses from the net profits calculation?
11. Did the district court err by holding all defendants jointly and severally liable for the entire judgment?
12. Did the district court properly grant credit to the defendants for plaintiffs' settlement with Questar/Wexpro?
13. Were the non-operators the prevailing parties and, therefore, entitled to an award of attorney fees under the WRPA?
14. Did the district court abuse its discretion by awarding plaintiffs over $3.9 million in attorney fees?
[¶3] In the 1950s, First Parties sought to develop oil and gas interests in Sublette County, Wyoming. Because Novi controlled some leases that First Parties wanted to include in their development plans, First Parties and Novi entered into the ―Agreement for Assignment of Novi Leases and for a Net Profits Interest Pinedale Unit Area Sublette County, Wyoming‖ (Assignment Agreement). The Assignment Agreement provided that Novi would assign three federal leases and one fee lease to the First Parties in exchange for ―5% of the net profits realized from operations for oil and gas by First Parties under the leases shown on Exhibit A....‖ Exhibit A included a list of sixty-two leases, including the four Novi leases. The First Parties intended to unitize the leases identified in Exhibit A, except portions of two of the Novi leases that were not to be included in the unit at that time. The Assignment Agreement further stated that Novi was also to receive an NPI for the portions of the leases not included in the unit and identified those leases in Exhibit A-1. The Assignment Agreement provided that final execution of the NPI documents and lease assignments were conditioned upon the federal government's approval of the Pinedale Unit.
[¶4] In addition, the First Parties entered into an agreement among themselves, the Supplemental Accounting Agreement. As found by the district court, the purpose of the Supplemental Accounting Agreement was to ―outline the manner in which the First Parties would account for and pay any profits from production.‖
[¶5] In 1954, the Pinedale Unit was approved by the United States Geological Survey (USGS), and the Pinedale Unit Agreement (Unit Agreement) was executed between the operators, other working interest owners and Novi. Among other things, the Unit Agreement outlined the operators' responsibilities, included general unit accounting terms, and provided for contraction of the unit to eliminate non-producing properties at certain intervals.
[¶6] Consistent with the requirements of the Assignment Agreement, Novi and the First Parties entered into the Unit NPI Contract which pertained to the leases included in the Pinedale Unit and identified in Exhibit A. The Unit NPI Contract contains many of the terms and obligations that are presently at issue:
1. NET PROFITS INTEREST --
Subject to the conditions hereinafter set forth, First Parties agree to pay to Novi a sum or sums representing 5% of the net profits (as hereinafter defined), herein referred to as ―said net profits interest,‖ resulting from operations for oil and gas by First Parties, or any of them, under those certain leases committed to that certain Unit Agreement for the Development and Operation of the Pinedale Unit Area and shown on Exhibit A attached hereto and made a part hereof, such leases being herein referred to as ―said leases.‖
Net profits shall be computed on the basis of all operations under the Pinedale Unit applicable to said leases....
Net profits as used herein shall mean the gross revenue (not required for payment of the overriding royalties shown on Exhibit A and landowners' royalties) from unit operations allocable to said leases after deduction of all expenses of unit operations (unit operations being construed to include all operations of any of First Parties under said leases) except those charged to the working interest owners, if any, under the said unit other than First Parties.
In computing gross revenue, there shall be taken into account the proceeds of production sold for delivery at the wellhead. As to production not so sold, the fair market value of such production at the wellhead shall be taken into account;
If there should be any overriding royalty or other burden on production allocated to the Novi leases other than the overriding royalties shown on Exhibit A and the landowners' royalties, such excess override or burden shall be exclusively the responsibility of Novi and Novi shall bear and pay any such additional burdens whether or not net profits are realized.
Expenses shall include by way of illustration but not by way of limitation, expenses incurred in connection with the preparation for the drilling of and drilling of wells, whether productive or dry; the equipping, completing, plugging and abandoning of wells; the producing of wells and treatment, storage and marketing of production therefrom; the building of roads, campsites and the making of improvements in connection with unit operations; expenses incurred in connection with exploratory work conducted in connection with operations hereunder; expenses incurred in connection with the examining and perfecting of and defense of titles to said leases, including attorneys' fees incurred in connection therewith; losses, damages or liabilities sustained or incurred in connection with unit operations; gross production and ad valorem taxes or any tax measured by production; premiums paid for workmen's compensation insurance, public liability, fire, wind, tornado or other insurance; and any other expenses and charges that are reasonable and customary in connection with the operation and development of oil and gas properties and which are properly chargeable against the leasehold interests. Without limiting the foregoing, the accounting with respect to unit operations shall be in accordance with the Accounting Procedure attached hereto and marked ―Exhibit C-1‖ and made a part hereof to the extent that such exhibit is applicable and not inconsistent with the foregoing provisions and including the overhead charges provided for in said exhibit.
Inasmuch as the Operator in charge of operations under said leases and under the said Pinedale Unit Agreement will either be Continental or El Paso, or both, the responsibility for handling the accounting for net profits and making payments hereunder to Novi for its share thereof shall be the responsibility of Continental and El Paso, such parties (or either of them) being hereinafter sometimes referred to for convenience as ―Operator.‖
Novi shall be entitled to receive its percentage of net profits at the end of any month whenever it shall appear at the end of such month that net profits have been realized as a result of operations under said leases, taking into consideration all expenses theretofore incurred in connection with such operations and all accounts payable or receivable with regard thereto at the end of said month and all payments of net profits theretofore made to Novi. In making the foregoing computations, deficits shall be carried over from month to month and the accumulated total thereto applied against subsequent earnings before profits will be considered to have accrued. Payment of such net profits shall be made as soon as practicable after the end of any month in which net profits have been so realized. Notwithstanding that there may be separate operations under said leases relating to separate deposits of oil and gas (whether conducted by Continental or El Paso or some by Continental and some by El Paso), all accounting for the purpose of determining net profits hereunder shall be upon a consolidated basis involving all operations under said leases and the said Pinedale Unit.
Operator shall keep an accurate record of all accounts hereunder, showing the costs and expenses incurred and charges made and all receipts and credits received, which record shall be available at all reasonable times for the examination and inspection of Novi or its duly authorized representative. Within one (1) month after the close of each calendar month, Operator shall furnish to Novi a statement of costs and expenses incurred and charges made and all receipts and credits received during such calendar month.
4. LOGS AND INFORMATION RELATING TO PRODUCTION AND EXPLORATORY WORK --
Operator shall furnish Novi copies of well logs of all types with respect to operations hereunder and shall, at Novi's request, furnish Novi with all information relative to producing operations hereunder or relative to exploratory work conducted in connection with operations hereunder whenever the expense of any such exploratory work is chargeable as an expense in computing net profits under the provisions hereof.
Operator shall not be required to take cognizance of any deed, assignment, transfer or passing of title by will, testament or inheritance of said net profits interest, or any interest therein, unless and until Operator shall have been furnished with legal evidence of such deed, assignment, transfer or passing of title by will, testament or inheritance which is acceptable to Operator.... In no event shall Operator be liable hereunder to any successor in interest of Novi or its successors for all or any part of said overriding royalty until after Operator has been furnished with proof of interest or notice of adverse claim of such successor in interest, and then only for payments accruing after the first day of the following calendar month. In the event of any dispute at any time concerning the ownership of any net profits interest payable hereunder, Operator may withhold payment of such net profits interest or any part thereof of the amount in dispute without interest until such dispute is settled.
First Parties reserve and shall have the right to release and surrender said leases except those acquired from Novi, either in whole or in part, at any time without giving any notice thereof to or obtaining any consent or approval thereof from Novi or Novi's successors in interest, and such release or surrender shall terminate the net profits interest herein provided for as to the leasehold interest which is so released and surrendered.
As to such of said leases as were acquired by First Parties from Novi, if First Parties desire at any time to surrender their entire and undivided interest in such leases, or any part, thereof, First Parties shall first offer in writing to transfer and assign the same to Novi.... and shall, upon acceptance of such offer by Novi..., transfer and assign such interest to Novi. Upon acceptance of such assignment, First Parties shall be relieved of any and all responsibility or liability hereunder with respect to the interest assigned....
Notwithstanding any surrender, release or assignment of interest under the provisions of this section, Novi's net profits interest in operations relating to lands the leasehold interest in which is not so surrendered, released or assigned shall remain a 5% net profits interest. In the event any lease is surrendered or released pursuant to the provisions of this section and Novi shall thereafter obtain a lease or other interest in the lands the leasehold interest in which is so released or surrendered, Novi shall be entitled to hold such interest free and clear of any obligations under the provisions hereof. In the event any lease is surrendered or released pursuant to the provisions of this section and thereafter First Parties, or any of them, obtain a lease covering lands the leasehold interest in which has been so surrendered, the interest so acquired or obtained by First Parties, or any of them, shall be subject to the provisions hereof, if such new lease is obtained within five (5) years from the date of any such surrender or release; otherwise, such new lease shall be held by First Parties, or any one of them acquiring such interest, free and clear of the provisions of this agreement and without any obligations whatsoever to Novi.
This agreement shall be binding upon and inure to the benefit of the heirs, representatives, administrators, executors, successors and assigns of the parties hereto.
[¶7] Novi and First Parties also entered into the Net Profits Contract Pinedale Area of Interest Sublette County, Wyoming (Area NPI Contract) contemplated by the Assignment Agreement. The Area NPI Contract covered the portions of the two Novi leases lying outside the Pinedale Unit and identified in Exhibit A-1 of the Assignment Agreement. On March 18, 1955, Novi executed assignments of its leases to the First Parties.
[¶8] During the two decades following creation of the Pinedale Unit, the First Parties drilled some wells and discovered a large reservoir of gas in the Pinedale anticline, but, for various reasons, production was impracticable at that time. The record indicates that, over time, the USGS approved extensions to the automatic unit contraction date.*fn3
Finally, in 1977, the Pinedale Unit contracted from 91,000 acres to 14,000 acres, located within two participating areas.
[¶9] The Pinedale Unit terminated on July 10, 1981, without having earned any profits. Two new units were, however, created out of the Pinedale Unit acreage: the Mesa Unit in the north, and the New Fork Unit in the south. The federal documents approving formation of the Mesa and New Fork units established that the Pinedale Unit did not terminate until after the new units were in place and recognized that the acreage was transferred from the Pinedale Unit into the new units. The Mesa Unit Agreement stated that portions of the land within the unit were subject to the Pinedale Unit Agreement, and ―in the event of a discovery of unitized substances in paying quantities under this agreement, the Pinedale Unit Agreement shall be contracted and the lands subject thereto shall be merged into this unit agreement....‖ The Department of Interior letter authorizing the New Fork Unit specifically stated that ―the Fort Union participating area ‗A' of the Pinedale Unit [was]... transferred intact to and committed to the New Fork unit.‖ The New Fork Unit terminated in 2001.
[¶10] As of 2006, when plaintiffs demanded payment of the NPI and this action was filed, twenty-two of the original sixty-two leases covered by the Unit NPI Contract, including two of the leases assigned by Novi, all with issue dates of 1950 through 1952, were still in place. The continuation of the leases was the result of having been part of the Pinedale Unit, the automatic two year extension of the federal leases after contraction or termination of a unit, inclusion in the Mesa or New Fork units, and/or production on individual leases. The district court also determined that an additional lease, State Lease No. 79-0645, was a ―replacement lease‖ subject to the NPI obligations under Section 7 of the Unit NPI Contract because it covered the same lands as two of the original Exhibit A leases and had been reacquired by a First Party within five years after the original leases were surrendered.
[¶11] Over time, all of the original parties to the agreements were replaced by successors. Plaintiffs Doyle and Margaret M. Hartman, Michael L. Klein and Jeanne Klein, Ronnie H. Westbrook and Karen Westbrook, and John H. Hendrix Corporation claim to have succeeded to Novi's NPI.*fn4 The leases remaining under the Unit NPI Contract became profitable in May 2005. On February 22, 2006, the plaintiffs sent a letter to the defendants, indicating that they owned the NPI and requesting an accounting and payment. When the defendants did not meet their demands, the plaintiffs brought suit on March 31, 2006. The plaintiffs' amended complaint lists the defendants in two groups: Group A defendants-Questar Exploration and Production Company (Questar), Wexpro Company (Wexpro), Ultra Resources, Inc. (Ultra), and Shell Rocky Mountain Production, L.L.C. (Shell)-working interest owners and operators in the Pinedale Field; and Group B defendants-Lance Oil & Gas Company (Lance), SWEPI, LP (SWEPI), Williams Production Rocky Mountain Co. (Williams), and Arrowhead Resources (U.S.A.) LTD (Arrowhead)-working interest owners in the Pinedale Field with no operating responsibilities.*fn5
[¶12] The amended complaint asserted several claims for relief, including: declaratory judgment as to the validity, and plaintiffs' ownership, of the NPI under the Unit NPI Contract; breach of the Unit NPI Contract; breach of the duty of good faith and fair dealing; breach of the WRPA; slander of title (Questar); conversion; constructive trust (in the alternative); and rescission and reassignment of Novi leases to plaintiffs (in the alternative). The defendants generally denied the plaintiffs' claims and asserted various affirmative defenses and counterclaims.
[¶13] The plaintiffs filed two motions for summary judgment: Motion for Partial Summary Judgment No. 1 Declaring the Net Profits Interest as Lease-Based Pursuant to the Unambiguous Language of the Agreements; and Motion for Partial Summary Judgment No. 2 Declaring Plaintiffs the Owners of the Net Profits Interest. The defendants filed a motion for summary judgment arguing their obligation to pay net profits under the Unit NPI Contract depended upon the leases being included in the Pinedale Unit and, since the Pinedale Unit terminated without ever having shown any profits, the NPI no longer existed. Some of the defendants also moved for summary judgment asserting the plaintiffs' claims were barred by various statutes of limitation.
[¶14] The district court heard all of the summary judgment motions on April 30, 2007. It granted both of the plaintiffs' motions and denied all of the defendants' motions. The general effect of the district court's summary judgments rulings was two-fold: the NPI survived termination of the Pinedale Unit, meaning that net profits continued to be due on production attributable to the leases, and the plaintiffs own the NPI. After the summary judgment rulings, the plaintiffs reached a settlement with defendants Questar and Wexpro. All claims between the plaintiffs, Questar and Wexpro were dismissed by an order entered on September 5, 2007. Thereafter, the parties agreed to waive a jury trial and have the remaining issues determined by the district court.
[¶15] The bench trial on the outstanding claims began on October 9, 2007, and ended on October 19, 2007. At the end of the plaintiffs' case-in-chief, the defendants moved for judgment as a matter of law under W.R.C.P. 52(c).*fn6 The district court granted the defendants judgment under Rule 52(c) as follows: 1) pursuant to Section 5 of the Unit NPI Contract, the defendants were not obligated to pay the NPI until March 2006, because they were not notified of the plaintiffs' ownership interest until February 22, 2006; 2) the defendants had not violated the implied covenant of good faith and fair dealing by failing to investigate the NPI ownership or by failing to account for and pay amounts owed thereunder; and Lance and Arrowhead, as non-operator working interest owners, were not liable for interest or penalties under the WRPA.
[¶16] During the trial, both sides presented expert accounting testimony calculating the NPI on the burdened leases. Although the experts differed in their final net profit figures, they agreed that revenues and expenses on the NPI leases exceeded $2 billion. The plaintiffs' expert testified that the NPI due to the plaintiffs for the period of March 2006 through December 2006 was more than $4 million. The defense expert testified that there were no net profits on the NPI leases during that time.
[¶17] After the bench trial, the district court issued its Findings of Fact, Conclusions of Law and Judgment. The order reiterated its summary judgment and Rule 52 rulings and also included the following holdings:
1. All defendants, as successor to First Parties, breached their obligations under the Unit NPI Contract.
2. State Lease 79-0645 is a replacement lease under § 7 of the Unit NPI Contract and is, therefore, burdened by the NPI because it covers the same property as two Exhibit A State of Wyoming leases and was acquired by a First Party successor within five years after the state leases were surrendered by El Paso.
3. The principal sum due for net profits payable for the period March 2006 through December 2006 is $4,896,589.
4. The operator defendants violated the WRPA by not paying net profits beginning in March 2006, the month after the plaintiffs notified them of their ownership of the NPI. The operators are liable to the plaintiffs for the unpaid net profits, plus the statutory 18 percent per annum interest and the statutory penalty of $100 per month.
5. All of the defendants are jointly and severally liable under the Unit NPI Contract for the judgment amount.
6. Applying the accounting provisions from the Supplement Accounting Agreement, defendants are liable for 70% of the judgment amount, after allowing a credit of 30% for the amounts paid in settlement by Questar and Wexpro.
7. All defendants remain obligated under the Unit NPI Contract for accounting and payment of the NPI, beginning with January 2007 production.
8. The filing of this action in March 2006 was timely under the applicable ten-year statute of limitations for breach of contract. See Wyo. Stat. Ann. § 1-3-105(a)(i) (LexisNexis 2009). The defendants did not breach the contract until 2005, when net profits began to accrue and became payable. The plaintiffs' claim for breach of contract accrued, at the earliest, in May 2005, when revenue and expense data became available.
9. The doctrine of laches does not apply in an action at law for breach of contract. Further, the defendants proved neither inexcusable delay nor prejudice to establish any of defendants' equitable defenses.
10. The operator defendants were responsible for the plaintiffs' attorney fees and costs.
[¶18] The district court subsequently reviewed the plaintiffs' request for attorney fees and granted judgment in their favor for over $3.9 million. The defendants appealed the district court's summary judgment determinations, adverse trial rulings and attorney fees award, and the plaintiffs appealed the district court's rulings against them.
[¶19] In order to facilitate analysis of the many issues in this case, we will divide the discussion into types of orders: 1) summary judgments; 2) rulings as a matter of law under Rule 52(c); 3) rulings after the bench trial; and 4) attorney fee rulings.
[¶20] As to the review of a summary judgment, we have stated:
A summary judgment is appropriate when no genuine issue as to any material fact exists and when the prevailing party is entitled to have a judgment as a matter of law. Covington v. W.R. Grace-Conn., Inc., 952 P.2d 1105, 1106 (Wyo.1998); see also W.R.C.P. 56(c). We evaluate the propriety of a summary judgment by employing the same standards and by using the same materials as the lower court employed and used. Kirkwood v. CUNA Mutual Insurance Society, 937 P.2d 206, 208 (Wyo.1997). We do not accord deference to the district court's decisions on issues of law. Kanzler v. Renner, 937 P.2d 1337, 1341 (Wyo.1997). In cases requiring the interpretation of a contract, a summary judgment is appropriate only if the contract is clear and unambiguous. Kirkwood, 937 P.2d at 208; Treemont, Inc. v. Hawley, 886 P.2d 589, 592 (Wyo.1994).
Wolter v. Equitable Res. Energy Co., 979 P.2d 948, 951 (Wyo. 1999). ―The court considers the record from the viewpoint most favorable to the party opposing the motion, giving all favorable inferences to be drawn from the facts contained in affidavits, depositions and other proper material appearing in the record to the opposing party.‖ Powder River Oil Co. v. Powder River Petroleum Corp., 830 P.2d 403, 406-07 (Wyo. 1992). Comet Energy Services, LLC v. Powder River Oil & Gas Ventures, LLC, 2008 WY 69, ¶ 5, 185 P.3d 1259, 1261 (Wyo. 2008). This standard applies equally in actions for declaratory judgment. Coffinberry v. Bd. of County Comm'rs of the County of Hot Springs, 2008 WY 110, ¶ 3, 192 P.3d 978, 979 (Wyo. 2008); Laughter v. Bd. of County Comm'rs for Sweetwater County, 2005 WY 54, ¶ 9, 110 P.3d 875, 879 (Wyo. 2005).
B. Were the plaintiffs entitled to summary judgment on the question of whether the NPI created in the Unit NPI Contract survived termination of the Pinedale Unit?
[¶21] The issue of whether the NPI created in the Unit NPI Contract was conditioned upon the continuation of the Pinedale Unit is pivotal. The defendants claim that the NPI terminated with the Pinedale Unit and the district court erred by interpreting the NPI as being a continued burden on the leases listed in the Unit NPI Contract. The plaintiffs contend that the district court properly concluded the NPI continued to encumber the leases after termination of the Pinedale Unit.
[¶22] Resolution of this issue requires interpretation of contracts. Our primary focus in contract interpretation is the parties' intent. Carlson v. Flocchini Invs., 2005 WY 19, ¶ 15, 106 P.3d 847, 854 (Wyo. 2005). The ―language of the parties expressed in their contract must be given effect in accordance with the meaning which that language would convey to reasonable persons at the time and place of its use.‖ Moncrief v. Louisiana Land Exploration Co., 861 P.2d 516, 524 (Wyo. 1993). We employ common sense in interpreting contracts and ascribe the words with a rational and reasonable intent. Comet, ¶ 6, 185 P.3d at 1261; Caballo Coal Co. v. Fidelity Expl. & Prod. Co., 2004 WY 6, ¶ 11, 84 P.3d 311, 314 (Wyo. 2004); Wadi Petroleum, Inc. v. Ultra Resources, Inc., 2003 WY 41, ¶¶ 10-11, 65 P.3d 703, 708 (Wyo. 2003). Courts should consider the circumstances surrounding execution of the agreement to determine the parties' intention, even in reviewing unambiguous contracts. Mullinnix LLC v. HKB Royalty Trust, 2006 WY 14, ¶ 6, 126 P.3d 909, 915 (Wyo. 2006); Caballo, ¶ 11, 84 P.3d at 314-15.
[¶23] If we determine that the contract conveys a ―double or obscure meaning,‖ we must conclude that it is ambiguous. Wolter, 979 P.2d at 951. The determination of whether a contract is ambiguous is a matter of law for the court to decide, regardless of whether or not the parties agree as to the contract's meaning. Id. Parol evidence of the parties' intent regarding what particular terms in their agreement mean is considered only when the contract is ambiguous. Wells Fargo Bank Wyo., N.A. v. Hodder, 2006 WY 128, ¶ 31, 144 P.3d 401, 412 (Wyo. 2006).Because we use an objective approach to interpret contracts, evidence of a party's subjective intent is not admissible, regardless of whether the court determines a contract is ambiguous or clear. Omohundro v. Sullivan, 2009 WY 38, ¶ 24, 202 P.3d 1077, 1084-85 (Wyo. 2009).
[¶24] The defendants do not argue that the relevant contractual language is ambiguous or that genuine issues of material fact exist which preclude summary judgment. They argue, instead, that the district court erred as a matter of law in interpreting the contract language.
[¶25] Although there is a dispute between the parties over which documents are properly considered in determining the meaning of the NPI, everyone agrees that the document which actually created the NPI was the Unit NPI Contract. Ferguson v. Coronado Oil Co., 884 P.2d 971, 976 (Wyo. 1994) established that the nature of a net profits interest is ―determined from the instrument creating the interest.‖ We will, therefore, start with the Unit NPI Contract; however, before we parse the language of the agreement, it is helpful to understand the concepts of leasing and unitization in oil and gas exploration and production.
[¶26] The majority of the mineral estate First Parties leased and committed to the Pinedale Unit was owned by the federal government. The primary term of most of the leases was five years. Prior to unitization, a lease could only be held after the primary term if there was hydrocarbon production on the leasehold. Formation of an oil and gas unit is a means of holding a number of leases without drilling and obtaining production on each lease.
[¶27] The Pinedale Unit was a federal oil and gas exploration unit, governed by the Department of the Interior. After unitization, the unit operator has a certain period of time to explore for oil and gas, and, if production is obtained, a ―participating area‖ is designated and each lease is considered held by production. Land located within the unit but outside a participating area does not participate in the production in the participating area, and, in accordance with the unit agreement, the boundaries of the unit typically contract to include only the acreage of participating areas, thus eliminating from the unit non-producing acreage. This has the effect of consolidating the producing, or participating areas, and releasing the leases that are not producing. In order to encourage development of the leases that are eliminated from a unit by contraction, federal leases are automatically extended by two years after such elimination. See 30 U.S.C. § 226(m) (1952). The state leases included in the Pinedale Unit apparently did not include a provision for an automatic two year extension after unit contraction.
[¶28] Although the date for automatic contraction of the Pinedale Unit was extended at least twice, the unit finally contracted in 1977 reducing it from over 90,000 acres to just over 14,000 acres. The contraction triggered the automatic two year extension for the eliminated federal leases. When the Pinedale Unit was terminated in 1981, some of the lands that were included in the Pinedale Unit folded into the newly created New Fork and Mesa Units. The New Fork Unit terminated in 2001, but the Mesa Unit is still in operation. All in all, twenty-two of the original sixty-two leases included in the Unit NPI are still held by production, including two of the original Novi leases.
[¶29] Keeping in mind the purposes of oil and gas leasing and unitization, we turn to the Unit NPI Contract. First, we note there is no express language in the contract which states that the NPI would terminate if the leases were no longer included in the Pinedale Unit. Nevertheless, the defendants argue the Unit NPI Contract language indicates Novi and First Parties intended that the NPI would terminate with the Pinedale Unit.
[¶30] There are several provisions that are relevant to the determination of whether the parties intended that the NPI was dependent on the continued existence of the Pinedale Unit. In Section 1, the ―Net Profits Interest‖ provision, First Parties agreed to pay to Novi 5% of the net profits resulting from operations for oil and gas by First Parties, or any of them, under those certain leases committed to that certain Unit Agreement for the Development and Operation of the Pinedale Unit Area and shown on Exhibit A attached hereto and made a part hereof, such leases being herein referred to as ―said leases.‖
[¶31] The separate lease descriptions, referencing the sixty-two leases*fn7 in the Pinedale Unit which were subject to the Unit NPI Contract, were attached as Exhibit A to the Unit NPI Contract. The defendants emphasize that the Unit NPI Contract defines ―said leases‖ as leases that are ―committed‖ to the Pinedale Unit Agreement ―and‖ shown on Exhibit
A. They claim, therefore, that the contract created two conditions that must be met before the NPI was valid: the leases be committed to the Pinedale Unit and shown on Exhibit A.
[¶32] The defendants argue that Novi and First Parties intended that the term ―committed‖ to the Pinedale Unit be interpreted in accordance with its particular usage in the oil and gas trade. They claim that, because the Pinedale Unit Agreement is specifically referenced in the Unit NPI Contract, it must be considered in interpreting the Unit NPI Contract. Thus, according to the defendants, because the Pinedale Unit terminated years ago before any profits were realized, the leases were no longer ―committed‖ to the unit and the NPI no longer exists.
[¶33] We agree that Novi's and First Parties' use of the term ―committed‖ to the unit has special meaning in the context of unitization in general and the Pinedale Unit specifically, and the Unit Agreement is appropriate evidence in interpreting the Unit NPI Contract. Formation of the Pinedale Unit was an important part of the parties' plan in negotiating for assignment of the Novi leases and the resulting NPI. Unitization was a means for both Novi and the First Parties to obtain more time for development of the leases, and the Unit NPI Contract would not have been executed had the unit not been approved. Obviously, the parties intended that the leases covered by the Unit NPI Agreement initially be ―committed‖ to the Pinedale Unit under the terms of the Pinedale Unit Agreement approved by the federal government. That does not, however, answer the question of whether the parties intended that the leases be burdened by the NPI only so long as the unit existed.
[¶34] The Unit NPI Contract does not provide that the NPI was tied only to unit production or that the continued existence of the Pinedale Unit was required for the NPI to remain an obligation on the leases. We do not read the clear language of the net profit provision as creating two separate conditions for payment-the leases had to continue to be committed to the Pinedale Unit and also shown on Exhibit A. Instead, we agree with the district court and conclude that the phrase simply identifies the leases originally included in the Unit NPI Contract. Two of the leases assigned by Novi actually contained both lands to be included in the Pinedale Unit and lands outside of the unit and those leases were included on both Exhibit ―A‖ and Exhibit ―A-1.‖ Nothing in the Unit NPI Contract indicates the parties intended that, if the unit terminated, the NPI would cease to burden the portions of those leases originally within the unit, but continue to burden the portions outside of the unit.
[¶35] Considering the entire transaction, which involved Novi's assignment of leases both in and out of the Pinedale Unit, it makes sense that the parties would refer to the leases committed to the unit in the Unit NPI Contract. It does not, however, mean that the continuance of the unit was required in order for the NPI to remain a burden on the leases.
[¶36] Other provisions of the Unit NPI Contract confirm this reading of the Net Profits provision. Initially, we note that throughout the Unit NPI Contract, the parties' obligations and benefits are in reference to the leases rather than to the unit. In the ―Computation‖ provision of the Unit NPI Contract, net profits were to be computed on the basis of all unit operations applicable to and allocable to the leases, not to all of the operations under the Pinedale Unit. The defendants assert that, since unit operations were referenced in computing the NPI, the parties must have intended that the NPI would terminate if the Pinedale Unit no longer existed. It is true that the Unit NPI Contract contemplated that unit operations pertaining to the leases would have to be considered in order to establish expenses and revenues and calculate the NPI. However, the fact that the unit no longer exists does not prevent computation of the NPI. The consolidated net profits applicable and allocable to the NPI leases can still be calculated whether or not any of the properties are unitized.
[¶37] The Unit NPI Contract limits the definition of ―unit operations‖ for the purposes of the NPI as ―all operations of any of First Parties under said leases.‖ This is significant because the unit could, and did, contain leases other than those subject to the NPI. The Unit NPI Contract defined deductible expenses as those ―which are properly chargeable against the leasehold interests.‖ This provision acknowledged that the unit existed and would incur expenses and revenues but specifically required that the NPI be calculated using only the revenues and expenses pertaining to the leases covered under the Unit NPI Contract. If First Parties and Novi had intended that the NPI be conditioned on the leases' continued inclusion in the Pinedale Unit, the NPI would have been calculated under the provisions of the Pinedale Unit Agreement, using the entire unit, rather than the Unit NPI Contract which pertained to some, but not all, of the leases included in the unit.
[¶38] Moreover, under the ―Logs and Information Relating to Production and Exploratory Work‖ provision of the Unit NPI Contract, Novi was entitled to information, not on the entire unit, but ―whenever the expense of any such exploratory work is chargeable as an expense in computing net profits....‖ In other words, Novi had the right to access information pertaining to the leases listed in Exhibit A to the Unit NPI Contract, but not to all leases within the unit. That provision reinforces the parties' intent that the NPI obligation is not dependent on the leases' continued inclusion in the Pinedale Unit.
[¶39] The only provision of the Unit NPI Contract that speaks to termination of the NPI is the ―Surrender‖ section. It is very significant that the surrender provision does not provide for termination of the NPI upon removal of the leases from the Pinedale Unit. Although the First Parties were allowed to surrender leases which could then result in termination of the NPI, the contract specifically protected Novi's interest in several ways.
As to... said leases as were acquired by First Parties from Novi, if First Parties desire at any time to surrender their... interest in such leases,... First Parties shall first offer... to transfer and assign the same to Novi. Upon acceptance of such assignment, First Parties shall be relieved of any and all responsibility or liability hereunder with respect to the interest assigned....
Notwithstanding any surrender, release or assignment of interest under the provisions of this section, Novi's net profits interest in operations relating to lands the leasehold interest in which is not so surrendered, released or assigned shall remain a 5% net profits interest.
By providing that in the event of surrender of any of the Exhibit A leases, the NPI would continue on ―operations relating to lands in which the leasehold interest is not so surrendered,‖ this provision clearly attaches the NPI to the leases rather than to continuation in the unit.
[¶40] Another part of the Surrender provision provides:
In the event any lease is surrendered or released pursuant to the provisions of this section and thereafter First Parties, or any of them, obtain a lease covering lands the leasehold interest in which has been so surrendered, the interest so acquired or obtained by First Parties, or any of them, shall be subject to the provisions hereof, if such new lease is obtained within five (5) years from the date of any such surrender or release....
This is commonly known as an ―anti-wash‖ provision. Such provisions prevent a lessee from ―washing‖ an encumbrance from a lease by acquiring it subject to an encumbrance tied to the lease, dropping the lease and then re-leasing the same property without the encumbrance. The Surrender provision of the Unit NPI Contract indicates a clear intent that Novi's interest be protected in the face of the First Parties' right to unilaterally surrender leases which would, in effect, occur if the unit was contracted and/or terminated. The application of the surrender and anti-wash provisions is discussed in more detail in Section III.D., below. That discussion about the replacement lease demonstrates very clearly that continuation of any particular lease in the unit was a voluntary and unilateral decision belonging to the First Parties and from which Novi intended its interest to be protected.
[¶41] These provisions reflect the reality that production units and their boundaries are temporary, whereas lease assignments are forever, and the operator, not the holder of an NPI, has control over the duration and configuration of the unit. Under the terms of the Pinedale Unit Agreement, the working interest owners could terminate the unit if 75% of them (on an acreage basis) agreed to do so; Novi had no say in that decision. If the net profits interest were contingent upon the continued existence of the Pinedale Unit, the First Parties could have terminated the unit at any time simply to ―wash‖ the net profit interest. That clearly would have been contrary to the intent of the Unit NPI Contract and Novi's purpose in entering into the assignment/net profit transaction. The surrender provision would have been written much differently if the parties intended the NPI to terminate if the leases were no longer part of the Pinedale Unit.
[¶42] Considering that unitization, contraction, lease extension and reunitization are well known and valuable tools in retaining leaseholds and encouraging production, it is unreasonable to conclude that Novi would have intended that it could lose its valuable lease rights and the NPI simply because the First Parties decided to contract or terminate the Pinedale Unit. Given that the Unit NPI Contract said nothing about termination of the Pinedale Unit leading to termination of the NPI, ascribing such intent to Novi would violate our rule against reading language into a contract and would be counter to assigning a rational and reasonable intent to contractual language. Wadi Petroleum, ¶¶ 10-11, 65 P.3d at 708. The logical view of the Unit NPI Contract is that Novi permanently gave up its leases in exchange for a permanent 5% NPI, not a temporary one. Thus, we agree with the district court's conclusion that the clear intention of the parties to the Unit NPI Contract was to encumber the leases identified in Exhibit A, regardless of whether the Pinedale Unit continued.
[¶43] The parties disagree over what extrinsic evidence of the circumstances surrounding the Unit NPI Contract should be considered in interpreting it. This Court has, for many years, stated that courts should consider the circumstances surrounding execution of an agreement, i.e., facts showing the parties' relationship, the subject matter of the contract, and the parties' apparent purpose in making the contract, to determine the parties' intention, even when reviewing unambiguous contracts. Mullinnix, ¶ 6, 126 P.3d at 915; Moncrief, 861 P.2d at 524; Balch v. Arnold, 9 Wyo. 17, 29, 59 P. 434, 436 (1899). In Boley v. Greenough, 2001 WY 47, ¶¶ 14-22, 22 P.3d 854, 858-60 (Wyo. 2001), we recognized the importance of interpreting contracts at the time and place of execution because the term ―overriding royalty‖ used in a conveyance thirty years before had a different meaning than it did at the time of interpretation. Parol evidence, which is distinguishable from extrinsic evidence, of the parties' intent is not, however, admissible if the contract is unambiguous.*fn8 Wells Fargo, ¶ 31, 144 P.3d at 412.
[¶44] Although the defendants dispute the appropriateness of considering some of the other agreements, they do argue the Area NPI Contract is a relevant fact or circumstance in this dispute without explanation of how that is consistent with their position that only the language of the Unit NPI Contract (and the associated unit agreement) can be considered to determine the parties' intent. Novi and First Parties entered into the Area NPI Contract, which had the same date as the Unit NPI Contract, to cover the portions of the Novi leases that were not to be included in the Pinedale Unit Agreement. That agreement clearly ties the NPI to the leases and makes no reference to the Pinedale Unit. The defendants argue that, considering the Area NPI Contract, the parties obviously knew how to draft a lease based NPI agreement and, because the Unit NPI Contract refers to the unit in terms of calculating the NPI and identification of the leases covered under the agreement, they must have intended that the unit NPI remain only as long as the Pinedale Unit continued to exist.
[¶45] We agree with the district court and conclude just the opposite-the Area NPI Contract provides support for the district court's interpretation of the Unit NPI Contract. The Area NPI Contract is nearly identical to the Unit NPI Contract, except there are no references to the unit and no allocation of unit revenues and expenses to particular leases in the former. That difference recognizes the reality that calculation of the NPI while the Exhibit A leases were part of the Pinedale Unit required consideration of unit operations. It would, however, be illogical to conclude that Novi and the First Parties intended that the NPI would attach permanently to the portion of the leases outside the unit but attach to the portions of the leases in the unit only so long as the First Parties unilaterally decided not to contract or terminate the unit and the defendants provide no explanation why the parties would have intended such a result. We conclude, therefore, the Area NPI Contract was properly considered as a relevant circumstance surrounding execution of the Unit NPI Contract and supports the district court's interpretation of such.
[¶46] The defendants then argue that the district court erroneously considered the Assignment Agreement and Supplemental Accounting Agreement in interpreting the Unit NPI Contract. They claim that, since the Unit NPI Contract was unambiguous and did not expressly incorporate the Assignment Agreement or Supplemental Accounting Agreement, the district court should not have considered the other documents and they were, in fact, inadmissible parol evidence. The defendants also suggest, although with little relevant discussion, that the Assignment Agreement should not be considered because its terms provided that it would no longer be effective after the leases had been assigned and the net profits contracts had been executed.
[¶47] We do not need to resolve the issue of whether the Assignment Agreement and Supplemental Accounting Agreement were properly considered by the district court because they simply provide further support for the plain language of the Unit NPI Contract. The Assignment Agreement provided a roadmap of the ensuing transactions, which culminated in the Unit NPI Contract, Area NPI Contract and lease assignments. It is significant that the agreement did not differentiate between the NPI that would be created in the Unit NPI Contract and the NPI that would be created in the Area NPI Contract. The Supplemental Accounting Agreement provides for accounting between First Parties on a lease by lease basis.
[¶48] With or without consideration of the two disputed agreements, we would arrive at the same result as the district court did--the Unit NPI Contract was clear and unambiguous and the NPI continued to encumber the relevant leases after contraction and/or termination of the Pinedale Unit.*fn9 The district court properly granted summary judgment in the plaintiffs' favor on this issue.
C. Were the plaintiffs entitled to summary judgment on the question of whether they own the NPI?
[¶49] In their amended complaint the plaintiffs requested a declaration that they ―are the owners of the NPI as alleged and are entitled to payment of the NPI and an accounting thereof by the Group A defendants from operations‖ under the leases. It is fair to say that initially the defendants' resistance to paying the plaintiffs was based largely on their argument that the NPI had terminated with the Pinedale Unit. Nevertheless, the plaintiffs sought a declaration in their second motion for summary judgment that they were the owners of the NPI. Their motion and the accompanying memorandum contained an extensive review of the series of mesne conveyances through which they claimed ownership of the NPI. In response, the defendants conducted their own review of the title of the NPI. None of the defendants, however, claimed they owned the NPI.
[¶50] The district court reviewed the conveyances and concluded, as a matter of law, plaintiffs owned the NPI. The defendants appealed that determination and the plaintiffs argue, on appeal, that the defendants do not have standing to challenge the district court's conclusion that they own the NPI.
―Standing‖ is short for ―standing to sue,‖ which requires a ―legally protectable and tangible interest at stake in the litigation.‖ Olsten Staffing Servs., Inc. v. D.A. Stinger Servs., Inc., 921 P.2d 596, 599 (Wyo. 1996) (quoting Black's Law Dictionary 1405 (6th ed. 1990)). The phrase ―tangible interest‖ has been equated with the phrase ―personal stake in the outcome.‖ Goshen Irrigation Dist. v. Wyo. State. Bd. Of Control, 926 P.2d 943, 947 (Wyo. 1996); State ex rel. Bayou Liquors, Inc. v. City of Casper, 906 P.2d 1046, 1048 (Wyo. 1995). The person alleging standing must show a ―perceptible,‖ rather than a ―speculative‖ harm from the action; a remote possibility of injury is not sufficient to confer standing. Sinclair Oil Corp. v. Wyo. PSC, 2003 WY 22, ¶ 13, 63 P.3d 887, 894-95 (Wyo. 2003).
Halliburton Energy Serv., Inc. v. Gunter, 2007 WY 151, ¶ 11, 167 P.3d 645, 649 (Wyo. 2007). Standing is a jurisdictional issue, involving a question of law that may be raised at any time, and is reviewed de novo. Hicks v. Dowd, 2007 WY 74, ¶ 18, 157 P.3d 914, 918 (Wyo. 2007). The standing issue was raised in the plaintiffs' consolidated brief in cases S-08-0258 through 0261. Without citation to any authority, the plaintiffs make the following argument:
Defendants have no standing to contest ownership. They concede on appeal that they have now been furnished with legal evidence of plaintiffs' ownership. No other party claims any ownership of the NPI. The district court's Judgment settled any ―ownership dispute‖ and provides defendants with protection from multiple claims for payment. Yet, defendants contest plaintiffs' NPI ownership. They do so in order to extinguish the NPI, not because they are accounting to or paying net profits to some other party or expect to do so.
It seems odd that the plaintiffs would contest the standing of the defendants to appeal a trial court ruling on a claim that was raised by the plaintiffs against the defendants. However, the plaintiffs' argument does alert us to a related issue.
[¶51] In any declaratory judgment action, the plaintiff must allege a justiciable controversy which requires, among other things, a showing that the parties before the court have a genuine interest in the dispute and the proceedings are truly adverse in nature. See, Brimmer v. Thomson, 521 P.2d 574, 578 (Wyo. 1974) and its progeny. The necessity of showing an actual controversy is recognized in the elements of claims for declaration of ownership of property, whether real or personal. In a claim for declaration of ownership of personal property, i.e., conversion, the plaintiff must allege that the defendant is exercising dominion over the plaintiff's property. Ferguson, 884 P.2d at 975. In a claim for declaration of ownership of real property, i.e., quiet title, the plaintiff must allege an interest in the real property and the defendant ―claims an estate or interest adverse to him.‖ Wyo. Stat. Ann. § 1-32-201 (LexisNexis 2009). See also, Bamforth v. Ihmsen, 28 Wyo. 282, 296, 204 P. 345, 352 (1922) (stating plaintiff has ―the right to bring an action to quiet title against a party making an adverse claim thereto‖).
[¶52] A Washington court of appeals recognized that one cannot bring an action for declaration of title to property against someone who does not claim a right to the property. Ruvalcaba v. Kwang Ho Baek, 2007 WL 2411691, No. S8877-0-I at 1 (Wash. Ct. App., Aug. 27, 2007). The court stated that a complaint brought by the plaintiff ―against strangers to the severed property‖ failed to state a claim upon which relief could be granted. The same concept is stated in other contexts. For example, a Hawaiian court held that a defendant cannot set up title in a stranger to the litigation to defeat a plaintiff's quiet title claim. See, e.g., Hana Ranch, Inc. v. Kanakaole, 623 P.2d 885, 888 (Haw. Ct. App. 1981). Similarly, Missouri courts have repeatedly stated that:
The trial court in a quiet title action must ―ascertain and determine the rights of the parties under the pleadings and evidence, grant such relief as may be proper and determine the ‗better' title, as between the parties to the proceeding, though a title superior to the rights of either party may be held by a stranger.‖ Manard v. Williams, 952 S.W.2d 387, 389-90 (Mo. Ct. App. 1997), quoting Robertson v. North Inter-River Drainage Dist., 842 S.W.2d 544, 546 (Mo. App. 1992). See also, Pitts v. Pitts, 388 S.W.2d 337, 339 (Mo. 1965).
[¶53] Any declaration by the court in this case as to the superiority of plaintiffs' title to defendants' title would have no effect since the defendants did not claim title to the NPI and others who may assert an interest in the NPI would not be bound by the declaration because they were not represented in the case. Stated yet another way, ―a mere stranger to the title cannot complain about a cloud upon the title.‖ McVey v. Unknown Shareholders of Inland Coal and Washing Co., 427 N.E.2d 215, 218 (Ill. Ct. App. 1981). Thus, a defendant can only assert his own title; if he does not make a claim to title, there is no dispute to adjudicate. Although not directly on point, we think that the concepts announced by this Court in Mountain West Farm Bureau Mut. Ins. Co. v. Hallmark Ins. Co., 561 P.2d 706, 710 (Wyo. 1977) are applicable here. ―It is well settled that in no case can a stranger to a contract maintain an action upon it.‖ Nowhere in the record do the defendants claim that they had somehow acquired ownership of the NPI, and no other party claimed ownership adverse to the plaintiffs.
[¶54] Given that we have affirmed the district court's ruling that the NPI continued after termination of the Pinedale Unit, someone owns the interest. The district court stated in its order on ...