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Denbury Onshore, LLC v. Christensen

United States District Court, D. Wyoming

April 17, 2015

DENBURY ONSHORE, LLC, a Delaware Limited Liability Company, Plaintiff
v.
ROBERT F. CHRISTENSEN and JANET K. CHRISTENSEN, Defendants

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For Denbury Onshore LLC, a Delaware limited liability company, Plaintiff: James R Belcher, LEAD ATTORNEY, Crowley Fleck PLLP, Casper, WY; Timothy Michael Stubson, LEAD ATTORNEY, CROWLEY FLECK, Casper, WY.

For Robert F Christensen, Janet K Christensen, Defendants: Brian J Marvel, LEAD ATTORNEY, WILLIAMS PORTER DAY & NEVILLE PC, Casper, WY; Scott P Klosterman, WILLIAMS PORTER DAY & NEVILLE, LEAD ATTORNEY, Casper, WY.

For Robert F Christensen, Janet K Christensen, Robert F Christensen, Janet K Christensen, Counter Claimants: Brian J Marvel, LEAD ATTORNEY, WILLIAMS PORTER DAY & NEVILLE PC, Casper, WY.

For Denbury Onshore LLC, a Delaware limited liability company, Denbury Onshore LLC, a Delaware limited liability company, Counter Defendants: James R Belcher, LEAD ATTORNEY, Crowley Fleck PLLP, Casper, WY; Timothy Michael Stubson, LEAD ATTORNEY, CROWLEY FLECK, Casper, WY.

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OPINION AND ORDER DENYING DENBURY'S MOTION FOR SUMMARY JUDGMENT ON ITS THIRD, FOURTH, AND FIFTH CLAIMS FOR RELIEF AGAINST THE CHRISTENSEN DEFENDANTS AND OPINION AND ORDER DENYING DENBURY'S MOTION FOR SUMMARY JUDGMENT ON CHRISTENSENS' COUNTERCLAIM IV (BREACH OF THE COVENANT OF GOOD FAITH AND FAIR DEALING) AND THEIR DAMAGES COUNTERCLAIMS AND ORDER GRANTING IN PART AND DENYING IN PART DENBURY'S MOTION TO STRIKE AFFIDAVIT AND EXHIBITS

Alan B. Johnson, United States District Judge.

The following have come before the Court for consideration: Denbury Onshore, LLC's, Plaintiff, Motion for Summary Judgment on its Third, Fourth, and Fifth Claims for Relief Against the Christensen Defendants (Doc. No. 17), Robert F. Christensen's and Janet K. Christensen's (" Christensens" ), Defendants, opposition (Doc. No. 24), and Denbury's further reply (Doc. No. 25); Denbury's Motion for Summary Judgment on Christensens' Counterclaim IV (Breach of the Covenant of Good Faith and Fair Dealing) and Their Damages Counterclaims (Doc. No. 51), and the Christensens' opposition (Doc. No. 62); and Denbury's Motion to Strike Affidavit and Exhibits (Doc. No. 65), and the Christensens' opposition (Doc. No. 75). After reviewing the parties' submissions, the arguments of counsel at the hearing, the applicable law, and being fully advised, the Court finds that Denbury's Motion for Summary Judgment on its Third, Fourth, and Fifth Claims for Relief Against the Christensen Defendants should be DENIED, that Denbury's Motion for Summary Judgment on Christensens' Counterclaim VI (Breach of the Covenant of Good Faith and Fair Dealing) and Their Damages Counterclaims should be DENIED, and that Denbury's Motion to Strike Affidavit and Exhibits should be GRANTED IN PART and DENIED IN PART for the reasons stated below.

BACKGROUND

This case centers on the proposed construction of a one-quarter mile long road in Section 3, Township 45 North, Range 76 West, Campbell County, Wyoming.[1] The United States conveyed the surface of Section 3 by patents issued pursuant to the Stock-Raising Homestead Act of 1916, 43 U.S.C. § § 291-302 (" SRHA" ). Under the

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patents, the United States reserved all minerals underlying Section 3 as well as the right to use the surface of Section 3 to produce the reserved minerals. Robert Christensen's parents, Charles and Alice Christensen (" Christensen Parents" ), owned a ranch in Campbell County, Wyoming, which included the surface of Section 3. Between 1976 and 1988, Robert and Janet Christensen obtained their interest in the lands from Christensen Parents via four different warranty deeds.

On August 22, 1980, the Wyoming Oil and Gas Conservation Commission (" WOGCC" ) created the Hartzog Draw Unit (" HDU" ), a 35,000 acre oil and gas secondary recovery unit in Campbell and Johnson Counties, Wyoming, which includes Section 3. The surface of the HDU overlies federal, state, and private mineral interests. All minerals under the unit surface have been committed to the HDU. All mineral interests included in the HDU share in the production of oil and gas from unit operations, irrespective of the location of the wells from which oil and gas is produced.

The federal government certified the Unit on August 27, 1980 and determined that " the drilling, production, rental, minimum royalty, and royalty requirement of all Federal leases committed to [the Unit] agreement are hereby established, altered, changed, or revoked to conform with the terms and conditions of this agreement." The State of Wyoming Board of Land Commissioners approved the Unit Agreement and included State of Wyoming minerals in the Unit in its July 17, 1980 Order and also amended the State of Wyoming leases to conform to the Unit Agreement. In pertinent part, the Unit Agreement states the following:

WHEREAS, the parties hereto are the owners of working, royalty, or other oil and gas interests in the Unit Area subject to this Agreement; and
WHEREAS, the term " Working Interest" as used herein shall mean the interest held in Unitized Substances or in lands containing Unitized Substances by virtue of a lease, operating agreement, fee title, or otherwise, which is chargeable with and obligated to pay or bear all or a portion of the costs of drilling, developing, producing, and operating the land under the unit or cooperative agreement. " Royalty Interest" as used herein shall mean a right to or interest in any portion of the Unitized Substances or proceeds thereof other than a Working Interest. The owner of oil and gas rights that are free of lease or other instrument conveying the working interest rights to another shall be regarded as a Working Interest Owner to the extent of a seven-eighths (7/8ths) interest in and to such oil and gas rights, and as a Royalty Owner to the extent of the remaining one-eight (1/8th) interest therein;
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NOW THEREFORE, in consideration of the premises and the promises herein contained, the parties hereto commit to this Agreement their respective interests in the below-defined Unit Area....
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1. ENABLING ACT AND REGULATIONS. The Mineral Leasing Act of [illegible], as amended, supra, and all valid, pertinent regulations, including operating and unit plan regulations, heretofore issued thereunder or valid, pertinent and reasonable regulations hereafter issued thereunder are accepted and made a part of this Agreement as to Federal lands, provided such regulations are not inconsistent with the terms of this Agreement; and as to non-Federal lands, the oil and gas operating regulations in effect as of the effective

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date hereof governing drilling and producing operations, not inconsistent with the terms hereof or the laws of the State in which the non-Federal land is located, are hereby accepted and made a part of this Agreement.

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10. RIGHTS AND OBLIGATIONS OF UNIT OPERATOR. Except as otherwise specifically provided herein, the exclusive right, privilege, and duty of exercising any and all rights of the parties hereto, including surface rights, which are necessary or convenient for prospecting for, producing, storing, allocating, and distributing the Unitized Substances are hereby delegated to and shall be exercised by the Unit Operator as herein provided. Acceptable evidence of title to said rights shall be deposited with said Unit Operator and, together with this Agreement, shall constitute and define the rights, privileges, and obligations of Unit Operator. Nothing herein, however, shall be construed to transfer title to any land or to any lease or operating agreement, it being understood that under this Agreement the Unit Operator, in its capacity as Unit Operator, shall exercise the rights of possession and use vested in the parties hereto only for the purposes herein specified.
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11. PLAN OF OPERATION. . . . [T]he parties hereto, to the extent of their rights and interests, hereby grant to the Unit Operator the right to use as much of the surface of the land within the Unit Area as may be reasonably necessary for the operation and the development of the Unit Area hereunder.
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26. NO WAIVER OF CERTAIN RIGHTS. Nothing in this Agreement contained shall be construed as a waiver by any party hereto of the right to assert any legal or constitutional right or defense as to the validity or invalidity of any law of the State of Wyoming, or of the United States, or regulations issued thereunder in any way affecting such party, or as a waiver by any such party of any right beyond his or its authority to waive . . . .

Doc. No. 18-1, p. 4-39. On July 16, 1980, Cities Service, Denbury's predecessor in interest, the Christensen Parents, and the Christensens approved and became parties to the Unit Agreement. The Christensen Parents and the Christensens became parties to the Unit Agreement by singing an " Agreement to become a party to Unit Agreement or Unit Operating Agreement Hartzog Draw Unit Area Campbell and Johnson Counties, Wyoming." Id. at 40-45. The Christensen Parents and the Christensens signed that agreement as " Royalty Owners." Id.

On September 1, 1983, Cities Service and the Christensen Parents entered into the Surface Damage Agreement (" SDA" ). In pertinent part, the SDA provides the following:

For and in consideration of the covenants and agreements herein contained, and other valuable consideration, the parties hereto AGREE:
1. That operator conducts oil and gas production operations on Owner's property situated in Campbell & Johnson Counties State of Wyoming, to Wit:... [Section] 3 ... in T45N, R76W.
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3. That in order for Operator to enter and conduct production operations, it is necessary that they cross and use certain property of Owners, and the parties hereby agree as to the entry and surface use thereof.
4. Owners hereby give, grant and convey unto Operator, its agents, employees

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and assigns, a right-of-way easement to enter upon and use the property of Owners for the purpose of conducting production operations of the below described wells and facilities under lease or leases.

* * *
7. It is agreed that this Agreement can be amended so as to add rights-of-way, easements, and site payments by the revision of Exhibit " A" and Exhibit " B" to the mutual satisfaction of Owners and Operator.
8. Operator shall notify Owners prior to entry upon said lands. Operator will advise Owners as to the location of well site and shall consult with Owners as to the location of roads, pipelines and other facilities. All surface and mineral use not inconsistent with the rights of Operator, including the right to grant successive easements thereon or across, are hereby reserved to Owner and consideration shall always be given to such reserved uses and rights when locating sites, roads, pipelines and facilities. Owners agree that any successive easements granted by Owners on or across site locations, roads and pipelines established by Operator, shall be made subject to Operator's rights under this agreement.
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19. Exhibits " A" and " B" attached hereto describing said roads, well sites, and battery sites are made a part of this Agreement. Exhibits " A" and " B" may be amended by adding to or deleting roads or sites covered under their Agreement by written approval of both the Owners and Operator. Such amendments to Exhibits " A" and " B" shall be a part of this agreement in all respects.

Doc. No. 18-1, p. 51-58.

In 2002, the Unit Operator drilled and completed four more wells located within the Christensens' ranch and the HDU. The Christensens entered into a separate surface damages agreement in which they accepted a onetime payment of $21,946.59 for damages related to drilling and completion of those wells. In a subsequent agreement dated October 31, 2003, the Christensens were paid an additional $5,000.00 in surface damages. No amendment to the SDA accompanied those agreements. The Christensens later entered into an agreement with the Unit Operator dated January 10, 2006 for surface damages for use of a portion of their ranch on which coal bed methane operations were conducted within the HDU.

Denbury is the current Unit Operator of the HDU. On November 27, 2013, Denbury notified the Christensens that it intended to construct approximately 1,500 feet of new road (" New Road" ) in Section 3 to connect two existing roads within the HDU. The site of the New Road overlies federally reserved mineral interests. Denbury offered to amend the SDA and pay the Christensens $1,691.26 for surface damage associated with construction the New Road. Denbury calculated this amount to be four times the value of the land to be disturbed. The Christensens rejected Denbury's offer and requested an initial payment of $2,500.00 per acre and annual payments of $3,000.00 for Denbury's construction and use of the New Road.

Denbury did not agree to the amount proposed by the Christensens. Instead, Denbury notified the Christensens by letter dated January 8, 2014 that it intended to begin constructing the New Road on January 14, 2014. When Denbury began constructing the New Road on January 14, 2014, Robert Christensen ordered Denbury off of Section 3. Mr. Christensen stated that Denbury could not come onto Section 3 to continue constructing the New Road until a judge ordered him to do so.

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On July 11, 2014 and September 4, 2014, Mathew Dahan, Denbury's Vice President of the North Region, met with Mr. Christensen to discuss damage payments for the New Road. Denbury offered four times 110% of what it assessed to be the fair market value of the land that would ...


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