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JS Interests, Inc. v. Hafner

United States District Court, E.D. Arkansas, Western Division

August 22, 2017

JS INTERESTS, INC. and XISTO PROPERTIES, LLC PLAINTIFFS
v.
JOHN HAFNER & ASSOCIATES, THE ESTATE OF JOHN F. HAFNER, MARY KAYE HAFNER, and SEECO, INC. n/k/a SWN PRODUCTION ARKANSAS, INC. DEFENDANTS

          ORDER

         SEECO, Inc.'s motion for summary judgment [Doc. No. 34] is denied on plaintiffs' breach of contract claim and on SEECO's indemnification claim, and is granted on plaintiffs' claim for statutory penalties.

         I. BACKGROUND

         SEECO is an oil and natural gas production company that explores, drills, develops, and produces oil, gas, and other minerals. Designated as an operator by the Arkansas Oil and Gas Commission, it contracts with landowners to enter upon the land of those landowners for the purpose of exploring, drilling, developing, and producing the oil, gas, and other minerals contained in certain drilling units on the land. It is the current operator of the oil and gas drilling units covered by the leases in question. The leases cover units located in several Arkansas counties, including Cleburne, Conway, Faulker, Pope, Van Buren, and White county.

         SEECO and defendant John F. Hafner & Associates (“Hafner”) entered into oil and gas leases that give Hafner a working interest in the oil, gas, and other minerals produced and sold by SEECO from the units in question. The leases between Hafner and SEECO are governed by joint operating agreements (“Agreements”). The Agreements permit Hafner to participate as a consenting party or to abstain as a non-consenting party. As a consenting party, Hafner assumes its working interest and participates in the mineral production process by sharing in the cost of the operations conducted. In return, Hafner shares in the profits from the sale of the oil, gas, and minerals produced. As a non-consenting party, Hafner does not assume its working interest and does not share in the production process, operations, and profits. When Hafner is a non-consenting party, SEECO assumes Hafner's working interest and responsibilities. On the leases at issue herein, Hafner participated as a consenting party as to some leases and abstained as a non-consenting party as to others.

         Hafner assigned overriding royalty interests on its leases with SEECO to plaintiffs JS Interests, Inc. and Xisto Properties, LLC (“plaintiffs”). The assignments gave plaintiffs a small percentage of the profit derived by Hafner. These assignments were recorded in the counties where the real property was located. It is important to note that the Agreements did not take effect until after the creation of these assignments, SEECO is not a party to any of the assignments between Hafner and plaintiffs, and Hafner did not directly disclose the assignments to SEECO at the time the Agreements were entered into.

         Hafner has dissolved as the result of the death of John F. Hafner, and the estate of John F. Hafner and Mary Kaye Hafner are included as defendants because they are the successors-in-interest of Hafner. Therefore, Hafner, the estate of John F. Hafner, and Mary Kaye Hafner are collectively referred to as Hafner.

         Plaintiffs have yet to receive any of the overriding royalty interest payments owed to them and bring this case claiming breach of contract and willful withholding of overriding royalty interest payments. Plaintiffs seek a determination as to which of the defendants is responsible for the overriding royalty interest payments owed to them. See Am. Compl. ¶ 35, Doc. No. 21. SEECO is cross claiming against Hafner claiming that Hafner must indemnify SEECO for any judgment plaintiffs receive against SEECO. See SEECO's Answer 13, 14, Doc. No. 25.

         SEECO moves for summary judgment [Doc. No. 34] on plaintiffs' claims arguing that it is not responsible for the overriding royalty interest payments owed to plaintiffs because Hafner did not inform SEECO that Hafner assigned the leases to plaintiffs. SEECO also moves for summary judgment on its indemnity claim against Hafner arguing that the Agreements require Hafner to indemnify SEECO.

         It is undisputed that Hafner is liable to plaintiffs for the overriding royalty interest payments it did not pay to plaintiffs on those leases in which Hafner was a consenting party. See SEECO's Reply Supp. Mot. Summ. J. 1, Doc. No. 44 (“SEECO's Reply”); Hafner Defs.' Disc. Resp. 9, Doc. No. 23; Pl. JS Interests, Inc. Disc. Resp. 9-10, Doc. No. 27; Pl. Xisto Properties, Inc. Disc. Resp. 9-10, Doc. No. 28. The key question, therefore, is whether Hafner is liable for the overriding royalty interest payments owed to plaintiffs on the leases in which Hafner was a non-consenting party.

         II. LEGAL STANDARD

         Summary judgment is appropriate when there is no genuine dispute as to any material fact and the moving party is entitled to judgment as a matter of law. See Fed. R. Civ. P. 56(a); Anderson v. Liberty Lobby Inc., 477 U.S. 242, 249-50 (1986). Once the moving party demonstrates that there is no genuine dispute of material fact, the non-moving party may not rest upon the mere allegations or denials in his pleadings. Holden v. Hirner, 663 F.3d 336, 340 (8th Cir. 2011). Instead, the non-moving party must produce admissible evidence demonstrating a genuine factual dispute that must be resolved at trial. Id. Importantly, when considering a motion for summary judgment, all reasonable inferences must be drawn in a light most favorable to the non-moving party. Holland v. Sam's Club, 487 F.3d 641, 643 (8th Cir. 2007). Additionally, the evidence is not weighed, and no credibility determinations are made. Jenkins v. Winter, 540 F.3d 742, 750 (8th Cir. 2008).

         III. DISCUSSION

         It is undisputed that the Agreements, see Doc. No. 25-1 (copy of model agreement), provide whether SEECO is responsible for the overriding royalty interest payments owed to plaintiffs and whether SEECO is to be indemnified by Hafner. See SEECO's Br. Supp. Mot. Summ. J. 5, Doc. No. 34 (“SEECO's Br.”); Hafner Defs.' Br. Resp. SEECO's Mot. Summ. J. 4, Doc. No. 37 (“Hafner Defs.' Resp.”); ...


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