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Pennaco Energy, Inc. v. Sorenson

Supreme Court of Wyoming

March 11, 2016

PENNACO ENERGY, INC., Appellant (Defendant),
v.
BRETT L. SORENSON, Trustee of the Brett L. Sorenson Trust dated November 2, 2011, Appellee (Plaintiff)

          Appeal from the District Court of Sheridan County. The Honorable William J. Edelman, Judge.

         For Appellant: Marie R. Yeates and Michael A. Heidler of Vinson & Elkins, L.L.P., Houston, Texas; Mark R. Ruppert, Isaac N. Sutphin, and Jeffrey S. Pope of Holland & Hart, LLP, Cheyenne, Wyoming; Patrick H. Martin, Professor of Law, Louisiana State University. Argument by Ms. Yeates.

         For Appellee: Kendal R. Hoopes of Yonkee & Toner, LLP, Sheridan, Wyoming.

         Before BURKE, C.J., and HILL, DAVIS, FOX, and KAUTZ, JJ.

          OPINION

Page 121

          DAVIS, Justice.

          [¶1] This case arises from Pennaco Energy Inc.'s refusal to perform obligations under a surface damage and use agreement. The story began some years back when Pennaco acquired mineral leases beneath a surface estate owned by Brett Sorenson, Trustee

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of the Brett L. Sorenson Trust. The parties negotiated a contract concerning damage to and use of the surface estate. It granted Pennaco access to and use of the land during exploration for and production of minerals it had leased. In return, Pennaco agreed to pay for damage to and use of the surface estate, and to reclaim the land once operations ended.

          [¶2] With the surface damage and use agreement in place, Pennaco began drilling and production operations on Sorenson's land. It continued operations and made the requisite payments to Sorenson for a number of years, but then decided to sell its oil and gas interest to CEP-M Purchase, LLC. As part of the sale, Pennaco assigned its interest in the operations and agreements to CEP-M, which reassigned those interests to another company, High Plains Gas, Inc. Since then, neither Pennaco nor the assignees have made any of the payments required by the surface damage and use agreement and have not reclaimed Sorenson's land.

          [¶3] Sorenson brought this lawsuit against Pennaco, CEP-M and High Plains Gas to recover the unpaid surface damage and use payments, and for damages resulting from the failure to reclaim lands and repair water wells. CEP-M and High Plains Gas defaulted. Pennaco answered and unsuccessfully moved for summary judgment, after which the case made its way to a jury trial. The jury rendered a verdict finding that Sorenson suffered $1,055,982.62 in damages. The district court entered judgment on the jury's verdict, and also awarded Sorenson costs and attorney fees, as provided for in the contract, in the amount of $332,662.97.

          [¶4] Pennaco contends on appeal that the district court erred by (1) ruling as a matter of law that Pennaco remained liable under the surface damage and use agreement after assignment, and (2) using a 2.5 multiplier to enhance the lodestar amount in awarding attorney fees. As to the first issue, the parties in this case submitted their briefs without having the benefit of our recent decision in Pennaco Energy, Inc. v. KD Co. LLC, 2015 WY 152, 363 P.3d 18 (Wyo. 2015). That precedent controls the first issue, and we conclude the district court did not err in ruling that Pennaco remains liable under the surface damage and use agreement. As to the second issue, the district court did not abuse its discretion in awarding attorney fees to Sorenson as it did. Accordingly, we affirm.

         ISSUES

          [¶5] 1. Did the district court err when it determined as a matter of law that Pennaco remains liable to perform obligations under the surface damage and use agreement, where those obligations purportedly accrued after Pennaco assigned its interest in the mineral estate and the surface damage and use agreement to a third party?

         2. Did the district court abuse its discretion by adjusting Sorenson's attorney fees award upward 2.5 times from an amount calculated by multiplying the number of hours by the hourly rate?

         FACTS

          [¶6] Sorenson owns a ranch along the Powder River near the town of Arvada, Wyoming. The ranch land is a split estate for mineral development purposes; that is, the surface estate is owned by Sorenson and the mineral estate is owned by several parties. Specifically, the minerals are owned in part by seven private parties, the State of Wyoming and Sorenson. The third party mineral owners, including the State of Wyoming, executed oil and gas leases underlying the surface estate. Subsequently, so did Sorenson.[1]

          [¶7] In the 1990s, Pennaco acquired interests in the oil and gas leases underlying Sorenson's ranch. Pennaco and Sorenson then entered into a surface damage and use agreement, the stated purpose of which was to give the parties a " firm understanding as to what damages will be payable in the event of development of the lands" owned by Sorenson. The contract gave Pennaco the right to enter upon and use Sorenson's lands for

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the purpose of coalbed methane drilling and production operations. The access and use rights granted to Pennaco were separate from and in addition to the basic reasonable use of the surface that Pennaco had as a mineral owner under the oil and gas leases.[2] As a result, Pennaco had the benefit of detailed terms upon which it could construct access roads, put up power lines, and install pipelines on Sorenson's property.

          [¶8] In exchange for the rights it was granted by the surface damage and use agreement, Pennaco agreed to make annual payments to compensate Sorenson for the use of his land and the damages caused by its operations. The agreement required annual payments of $750.00 for each well drilled and $5.00 per rod[3] for the access roads and pipelines constructed. The contract provided that " [a]ll annual payments are due and payable until such time as the property is restored and reclaimed."

          [¶9] Pennaco also agreed to restore and reseed well sites, to remove all above-ground equipment, and to restore the land to its original state when mineral production ended. It was also required to return roads and other rights-of-way to a condition as close to the land's original state as reasonably possible. It promised to restore any of Sorenson's water wells or natural artesian springs that were impaired by the coalbed methane operations, either by reconfiguring or redrilling them, or by drilling new water wells if necessary.

          [¶10] With the surface damage and use agreement in place, Pennaco began developing its coalbed methane operation on Sorenson's ranch. It drilled ten coalbed methane wells, constructed 5.67 miles (1,815.37 rods) of road, and installed 4.19 miles (1,343.57 rods) of pipeline. It also constructed four water disposal pits to store water produced by the wells.

          [¶11] Pennaco made the annual payments required by the surface damage and use agreement through 2010. However, in 2009, Pennaco wrote Sorenson that it intended to shut-in[4] some or all of its coalbed methane wells on the ranch.[5] In early 2010, when Pennaco was shutting down its operations, Sorenson contacted Pennaco's landman regarding reclamation of the coalbed methane operations, including reclaiming the four water disposal pits (otherwise referred to as reservoirs). Pennaco's landman wrote to him in response on June 11, 2010, stating in part: " Pennaco affirms by the Surface Damage and Surface Use Agreement (" SUA" ) dated April 13, 2001 . . . that upon termination of the productive life of the producing field in conjunction with the following impoundments that if you elect not to retain the reservoirs for personal use that Pennaco will reclaim them."

          [¶12] A few weeks later, Pennaco entered into a purchase and sale agreement effective July 1, 2010 with CEP-M. As part of the sale,[6] Pennaco assigned its interest in the lease underlying Sorenson's ranch lands and rights in the surface damage and use agreement to CEP-M. That entity then as

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signed its interests to High Plains Gas. According to Sorenson, the wells, pipelines, and roads were for all practical purposes abandoned.

          [¶13] After the assignment in 2010, Pennaco did not pay annual payments or reclaim any of Sorenson's land as required by the surface damage and use agreement. The assignees did not do so either. Accordingly, Sorenson gave Pennaco written notice of its default and of the impairment of his water sources as was required under the surface damage and use agreement. Pennaco still did not perform these obligations after receiving notice that Sorenson claimed it was in violation of the contract.

          [¶14] Sorenson then sued Pennaco and the assignees to collect the annual payments and to enforce the reclamation obligations he was owed under the surface damage and use agreement. CEP-M and High Plains Gas failed to answer or otherwise respond to the complaint, and as a result, the district court entered a default judgment against them.[7] Pennaco answered, generally denying Sorenson's claims.

          [¶15] In due course, Pennaco filed a motion for summary judgment in which it claimed that it was no longer required to perform the obligations in the surface damage and use agreement. It argued that the exculpatory clause included in the mineral lease[8] was incorporated by reference into the surface damage and use agreement, and that as a result, it was no longer liable after assignment. Alternatively, it argued that obligations in the surface damage and use agreement constitute covenants running with the ownership of the mineral estate that benefits from using an easement on the surface estate. Thus, it asserted, because the obligations are considered covenants running with the land, those obligations passed from Pennaco to CEP-M when the mineral estate and surface damage and use agreement was assigned, leaving Pennaco free and clear of any continued liability. Sorenson argued in response that Pennaco continued to be bound to perform the obligations in the contract after assignment by basic principles of contract law. Sorenson contended that because there was neither an exculpatory clause in the contract nor a subsequent novation, Pennaco remained on the hook.

          [¶16] The district court denied Pennaco's motion for summary judgment, finding that the company was not entitled to judgment as a matter of law. By virtue of its analysis and ultimate conclusion, the district court decided in effect that Pennaco remained liable under the surface damage and use agreement. Accordingly, Pennaco's continued liability was treated as a foregone legal conclusion by the parties and the district court, and it was no longer an issue for jury trial. The trial instead focused on the amount of damages owed by Pennaco for breach of the contract.

          [¶17] The damage case was tried to a jury over a four-day period. After Sorenson rested his principal case, Pennaco moved for judgment as a matter of law pursuant to W.R.C.P. 50(a), but in its motion it only challenged the sufficiency of the evidence to support Sorenson's claims for damages. It did not raise the legal issue of whether it was liable under the surface damage and use agreement after assignment. The district court denied the motion, and Pennaco then presented its case.

          [¶18] The court's charge to the jury included an instruction not objected to by Pennaco indicating that the court had previously determined that Pennaco was obligated to honor the surface damage and use agreement it entered into with Sorenson, and that it was required to fulfill its obligations under the agreement regardless of whether it sold or assigned it to CEP-M.

          [¶19] The jury returned a verdict finding that Sorenson had suffered damages of: (1) $76,033.62 for unpaid annual surface payments; (2) $883,732.00 for the costs of reclaiming Pennaco's operations; and (3) $96,217.00 for the cost of replacing an artesian

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spring that had been damaged by Pennaco's drilling operations.[9] The district court subsequently entered judgment in favor of Sorenson in the amount of $1,055,982.62. Pennaco renewed its motion for judgment as a matter of law concerning damages pursuant to W.R.C.P. 50(b), this time tersely touching upon the legal issue of its liability under the assigned contract.

          [¶20] Sorenson then moved for an award of costs and attorney fees under the surface damage and use agreement, which provided: " Operator, if determined by a court of competent jurisdiction to be in default, will be responsible for all reasonable legal fees and costs." Although Sorenson's counsel took the case on a contingent fee arrangement, they meticulously tracked the hours they worked on the case.

          [¶21] Applying the lodestar test, the district court first determined the total fee that would have been charged based upon the number of hours worked times Sorenson's attorneys' usual hourly rate--$124,591.25. It then considered the factors listed in Wyo. Stat. Ann. § 1-14-126(b) to decide whether an upward or downward adjustment to the fee was warranted. Applying several of those factors, the district court awarded Sorenson attorney fees in the amount of $311,478.13.

          [¶22] Pennaco timely perfected this appeal.

         DISCUSSION

         Pennaco's Contractual Obligations after Assignment

          [¶23] We must first address Sorenson's assertion that Pennaco did not preserve the legal issue of whether it remains liable for obligations under the surface damage and use agreement after assignment for appellate review. This complication arises out of the order denying Pennaco's motion for summary judgment.

          [¶24] Although it denied Pennaco's motion, the order also resulted in an affirmative legal ruling somewhat akin to that made possible by the procedures found in W.R.C.P. 56(c)-(d).[10] The district court determined, in essence, that Pennaco remained liable after assignment as a matter of law. Although the order did not say this in so many words, the parties and the court interpreted it that way, and it is easy to see why they did. The trial was accordingly limited to causation and damages. A separate order granting a partial summary judgment in favor of Sorenson on the issue of Pennaco's continuing duty to perform under the contract was neither requested by the parties nor entered sua sponte by the district court.[11]

          [¶25] On appeal, Sorenson takes an austere view of the situation, urging that because the ruling denied Pennaco's motion for summary judgment, and because Pennaco failed to challenge the legal ruling on liability through a W.R.C.P. 50(a) motion, the issue

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was not preserved for our review. It is true " that challenges to the denial of a defendant's summary judgment motion are generally not reviewable." Halvorson v. Sweetwater Cty. Sch. Dist. No. 1, 2015 WY 18, ¶ 21, 342 P.3d 395, 402 (Wyo. 2015). We have explained that " [t]he proper procedural mechanism for challenging an adverse judgment, following a trial on the merits, is a motion for judgment as a matter of law." Cargill, Inc. v. Mountain Cement Co., 891 P.2d 57, 61 (Wyo. 1995).

          [¶26] We see Sorenson's point, but there is more to the order than just the denial of Pennaco's summary judgment motion. After studying the order and rest of the record, we conclude that the order denying Pennaco's motion determined as a matter of law that Pennaco remained liable for the obligations in the surface damage and use agreement. The ruling did not leave questions of fact for a jury to determine as to Pennaco's contractual duties, but only as to the damages caused by any breach of its obligations. See W.R.C.P. 56(c); see also Wheatland Irr. Dist. v. McGuire, 537 P.2d 1128, 1129-30 (Wyo. 1975); cf. 10B Charles A. Wright & Arthur R. Miller, Federal Practice and Procedure, Civil § 2736 (3d ed., database updated April 2015). That ruling then became the law of the case, although it was not appealable until it was subsumed into a final judgment on the entire case after the trial. See Big-D Signature Corp. v. Sterrett Properties, LLC, 2012 WY 138, ¶ 18, 288 P.3d 72, 77 (Wyo. 2012). As a result, the issue was preserved for our review.[12]

          [¶27] Turning to the merits, Pennaco posits that in construing the surface damage and use agreement, this Court must apply real property principles because the agreement creates real property interests. It contends that if such principles are followed--namely those found in the Restatement (Third) of Property: Servitudes § 4.4--the only possible conclusion is that the obligations are covenants running with the land, and therefore the covenant obligations are owed only by the owner at the time the covenant obligation is to be performed. Pennaco says its obligations passed like a quarterback passes the football to a receiver--once the ball is passed, the receiver has it, and the quarterback does not. We view Pennaco's attempts to relieve itself of the obligations it bargained to perform more as a game of hot potato.

          [¶28] The Court recently dealt with this subject in Pennaco Energy, Inc. v. KD Co. LLC, supra. As in this case, the controlling issue was whether the relationship established between Pennaco and the landowners by the surface agreements was primarily contractual, or whether it was instead based on privity of estate involving ...


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