Power Energy Corporation et al v. Hess Bakken II, L.L.C.

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NORTH DAKOTA
Power Energy Corporation, a North 	)
Dakota Corporation; Altschuld Oil, 	)
L.L.C., a Colorado Limited Liability 	) 	ORDER RE HEARING
Company; Copperhead Corporation, a 	) 	ON MOTION FOR
North Dakota Corporation; Strata 	) 	SUMMARY JUDGMENT
Resources, Inc., a Colorado Corporation; 	) 	AND SCHEDULING
Michael S. Johnson, a Colorado Resident; 	)
Michael T. Fitzmaurice, a North Dakota 	) 	Case No.: 1:17-cv-093
Resident; Patrick L. Butz, a North Dakota 	)
Resident; and Jacques F. Butz, a North 	)
Dakota Resident, 	)
)
Plaintiffs, 	)
)
vs. 	)
)
Hess Bakken Investment II, L.L.C., 	)
a Delaware Limited Liability Company, 	)
)
Defendant. 	)
The court will hear oral argument on the pending motion by defendant for summary
judgment on the 8th day of April, 2021 at 9:00 A.M. CDT by conference call. In addition to holding
argument, the court intends to set a trial date in the event the court denies the motion for summary
judgment. Hence, the parties should be prepared to discuss how much time will be required for a
trial and what dates are available.
After reading the briefs and reviewing the record, the undersigned has a number of questions.
Given the complexity of the agreements and transactions, the court thought it would be more
productive to give advance notice of what some of the questions may be.
To begin with, the court wants to make sure it correctly understands the two July 8, 2004
PSAs that are at issue. In putting pen to paper, a rough draft of the court’s understanding is as
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follows:
B. 	The Prima Group’s purchase of oil and gas leases from the
Altschuld Group under the Altschuld PSA and from Strata under
the Strata PSA
1. 	The Altschuld and Strata PSAs
On July 8, 2004, Prima Exploration, Inc. (“Prima Exploration”), Gunlickson
Petroleum, Inc., Niwot Resources, LLC, Cordillera Energy Partners II, LLC, Berry
Ventures, Inc., and Strata Resources, Inc. (“Strata”) 	(collectively the “Prima
Group”) entered into two separate purchase and sale agreements (“PSAs”) for the
purchase of a number of oil and gas leases in Mountrail County, North Dakota. As
relevant here, the sellers under the two PSAs owned oil and gas leases in areas that,
in part, overlapped with each other. The two PSAs were similarly structured. Both
included an Area of Mutual Interest Clause (“AMI Clause”) that was coordinated
with and referenced the other PSA..
Plaintiffs 	Altschuld 	Oil, 	L.L.C. 	(“Altschuld 	Oil”), 	Powers 	Energy
Corporation (“Powers Energy”), and Copperhead Corporation (“Copperhead”) were
the sellers under the “Altschuld PSA” and will be collectively referred to as the
“Altschuld Group.” (Doc. No. 30-1). The AMI delineated in the Altschuld PSA
will be referred to as the “Altschuld AMI.”
Plaintiff Strata Resources, Inc. (“Strata”) was the sole seller under the “Strata
PSA.” (Doc. No. 30-2). It also was a buyer of 2% of the interest acquired by the
Prima Group. The AMI specified in the Strata PSA will be referred as to the “Strata
AMI.”
2. 	The Altschuld and Strata AMIs
The Altschuld AMI encompassed the following lands in Mountrail County, North Dakota:
Township 157 North, Range 91 West – All
Township 157 North, Range 90 West – S½
Township 156 North, Range 92 West – All
Township 156 North, Range 91 West – All
Township 156 North, Range 90 West – All
The Strata AMI was broader in reach. 	It encompassed the same lands as the
Altschuld PSA as well the following additional land in Mountrail County:
Township 155 North, Range 92 West – All
Township 155 North, Range 91 West – All
Township 155 North, Range 90 West – All
(Doc. Nos. 30-1, p. 3; 30-2, p 2).
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Under the AMI Clauses in both the Altschuld and Strata PSAs, the Prima
Group had the right to purchase any new leases acquired by the sellers within one
year following execution of the PSA within the AMI of the respective PSA. For any
leases acquired by the Prima Group during the same one-year period, the Prima
Group agreed to assign to the sellers an overriding royalty interest 	(“ORRI”) in
percentages that varied depending upon where the newly-acquired leases were
located and other criteria.
More particularly, under the Altschuld PSA, an ORRI was due the Altschuld
Group on newly-acquired leases that varied depending upon the distance from an
existing Altschuld lease as follows:
• 	3% on newly-acquired leases located within one mile of an existing
Altschuld lease
• 	1% on newly-acquired leases within the Altschuld AMI but greater than one
mile from an existing Altschuld lease
These percentages were subject to adjustment based upon the percentage of the total
royalty burden imposed upon the Prima Group under a schedule set forth in the
Altschuld PSA. 	Further, these percentages were subject to a further exception,
which was that the ORRI would be only 0.5% for any lease acquired within the
Altschuld AMI but within a mile of a Strata Lease and outside of a defined
“Overlapping Area.” The apparent reason for the reduction to 0.5% was due to the
Strata AMI also encompassing the lands covered by the Altschuld AMI and Strata
being entitled to ORRI on the same newly-acquired lease acreage under the Strata
PSA as discussed next.
The Strata PSA’s AMI provisions were similar but somewhat different. The
Strata PSA provided that Strata (as the seller) was entitled to a 3% ORRI for newly-
acquired leases within the Strata AMI and located within a mile of an existing Strata
Lease. Like the Altschuld PSA, this percentage was subject to adjustment depending
upon the total royalty that would be born by the Prima Group. Unlike the Altschuld
PSA, however, no ORRI was due under the Strata PSA for newly-acquired leases
within the Strata AMI but more than a mile from an existing Strata Lease.
Finally, the Altschuld and Strata PSAs both included an “Overlapping Area
of Interest” provision. Under this provision, the “Overlapping Area” was defined to
be an area where “both parties’s [i.e., the Altschuld Group’s and Strata’s] leasehold
interests . . . are located within a mile of the other.” Undoubtedly, the purpose for
this provision was to deal with the fact that a 3% ORRI was due to each the
Altschuld Group and Strata under their respective PSAs for newly-acquired leases
within a mile of an existing lease. 	The solution to deal with this conflict was to
provide that, for newly-acquired leases in the Overlapping Area, the ORRI was to
be shared equally by the Altschuld Group and Strata.
One of the questions will be whether the foregoing correctly reflects how the two PSAs operate,
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including that there potentially could be multiple Overlapping Areas.
Other questions the court will likely have include the following:
• 	In addressing the question of whether the Altschuld PSA is ambiguous as claimed
by plaintiffs, what is the significance of the fact this it may present several“part in
part out” and “contiguous acreage” interpretation issues as described in 28 Rocky
Mountain Law Institute 14 (1982), which was cited by the North Dakota Supreme
Court in Golden v. SM Energy Co.? 	For example, what would happen under the
Altschuld PSA if newly-acquired lease acreage had one tract within one mile of an
existing Altschuld lease within the Altschuld AMI and another non-contiguous tract
still within the Altschuld AMI but more than a mile from an existing Altschuld
Lease? Is a 3% ORRI owed on all of the lease acreage in that situation or is 3%
owed on the lease acreage within a mile of the existing Altschuld Lease and 1% on
the remaining Altschuld Lease Acreage?
• 	The title of one of the paragraphs in the Altschuld PSA reads: “Additional Acreage
Acquired In AMI.” Does use of the words “acreage acquired in the AMI” suggest
that only newly-acquired lease acreage lying within the AMI or Overlapping Area
would be subject to an ORRI if the lease has some acreage outside of the AMI or the
Overlapping Area?
• 	Under both the Altschuld and Strata PSAs, whether newly-acquired lease acreage
within the AMIs is within one mile of existing lease acreage is significant. Given
that and the fact the acreage in question in this case lies outside of the Altschuld
AMI, why is it reasonable to conclude in this instance that the parties intended that
newly-acquired lease acreage that is not within the Altschuld AMI and is several
miles from the Overlapping Area would be subject to an ORRI just because some of
the lease acreage is within an Overlapping Area?
• 	Assume for the moment that Strata was not entitled to an ORRI with respect to the
Federal Lease acreage in Sections 27, 28, and 33 simply because the Section 6 lease
qualified. 	With that assumption, was the Federal Lease acreage in Sections 27, 28,
and 33 “within” one mile of an existing Strata Lease such as would entitle it to ORRI
on that acreage for that reason? 	What about the acreage in the SE1/4 of Section 17
in the same township that one of the maps identifies to be acreage under an existing
Strata lease?
• 	Is the Red Sky PSA ambiguous with respect to what was being sold in terms of
whether it was all the right, title, and interest in the leased lands or all of the right,
title, and interest in a .8450 interest in the leased lands?
• 	Strata acquired 50% of the ORRI with respect to the Section 6 lands under the
Federal Lease by virtue of the Assignment of Overriding Royalty from Prima
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Exploration. What is the present status of that 50% interest? Is Strata (and/or its
successors and assigns to that interest) being paid on that ORRI? If so, why? If not,
why not?
• 	Has the North Dakota Supreme Court, the Federal District of North Dakota, or the
Eighth Circuit decided a case addressing whether an obligation under an AMI clause
to convey an ORRI runs with the land since Judge Hovland’s decision in Slawson
Exploration v. Nine Point Energy, LLC, No. 1:17-cv-106, 2019 WL 1518164
(D.N.D. April 2019). 	In that case, Judge Hovland suggests the North Dakota
Supreme Court’s decision in Golden v. SM Energy Co. is not dispositive on the
issue?.
• 	If the court concludes there is an obligation to pay an ORRI under one or both of the
Altschuld and Strata PSAs and that the obligation runs with land, why cannot the
court grant relief vis-a-vis Hess? 	Surely, Hess cannot claim it was a good faith
purchaser without knowledge of the obligations created by these PSAs since the two
PSAs are explicitly referenced in the schedule to the Red Sky PSA.
• 	There appears to be nothing in the record that definitively indicates when plaintiff
Michael Johnson acquired the interest upon which he bases his claim to the share of
the ORRI he demands in the complaint. However, it appears from one of the emails
in the record that he acquired his interest well after May 16, 2007 (the date of the
Red Sky sale to Hess). 	(Doc. No. 35-9, p. 12). That being the case, can the court
assume for purposes of the pending motion for summary judgment that Johnson
acquired his interest after the Red Sky sale?
• 	Plaintiffs take the position that the court’s determination there is an ambiguity
necessarily requires a trial, citing several North Dakota Supreme Court cases. Even
if that is correct (the court is not so sure), the court is struggling with what probative
evidence either party could offer that is not already part of the record—particularly
since the “mutual” intent the court must determine with respect to the Altschuld PSA
is for nine different entities who were parties to the Agreement. Also, the court is
skeptical that testimony now by a party with respect to what its intent was at the time
of execution of the Altschuld PSA is entitled to much, if any, weight. See Sickler v.
Lone Tree Energy & Associates, No. 4:12-cv-077, 2014 WL 1334185, at *8 (D.N.D.
Apr. 2, 2014). 	Expect some questions on these subjects. The same applies to any
purported ambiguity with respect to the Red Sky PSA. That is, if the court concludes
the Red Sky PSA is ambiguous, do we need a trial or can the court decide what was
intended based on the existing record.
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IT IS SO ORDERED.
Dated this 30th day of March, 2021.
/s/ Charles S. Miller, Jr.
Charles S. Miller, Jr., Magistrate Judge
United States District Court
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