Phelps Mineral Holdings, LLC v. Continental Resources, Inc.

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NORTH DAKOTA
Phelps Mineral Holdings, LLC, 	)
)
Plaintiff, 	) 	ORDER DENYING MOTION FOR
) 	PARTIAL SUMMARY JUDGMENT
v. 	)
)
Continental Resources, Inc., 	) 	Case No.: 1:23-cv-00219
)
Defendant. 	)
Now before the court is Defendant Continental Resources, Inc.’s (“Defendant”) Motion for
Partial Summary Judgment. (Doc. No. 40). For the reasons articulated below, the motion (Doc.
No. 40) is denied.
I. 	BACKGROUND
On November 13, 2023, Plaintiff Phelps Mineral Holdings, LLC (“Plaintiff”) initiated the
above-captioned action by Complaint against Defendant for (1) breach of the Phelps Lease; (2)
breach of obligation to pay royalties pursuant to North Dakota Century Code Section 47-16-39.1;
(3) declaratory judgment; and (4) accounting. (Doc. No. 1).
Plaintiff is a foreign limited liability company with its principal address in Bend, Oregon,
in active and good standing in the State of North Dakota. (Doc. No. 1 at 1). Plaintiff issues no
stock and consists of five members located in the states of Washington and Oregon. (Id.).
Defendant is an Oklahoma corporation with its principal address in Oklahoma City, Oklahoma,
that is registered as a foreign corporation in the State of North Dakota, in active and good standing.
(Id.).
Plaintiff owns oil, gas, and other minerals at certain real property located in McKenzie
County, North Dakota. (Id. at 2). Specifically,
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Township 153 North, Range 94 West
Section 5: Lots 2, 3, 4, SW/4NE/4, S/2NW/4, W/2SE/4, and SW/4
Township 154 North, Range 94 West
Section 32: Lot 3, SW/4, W/2SE/4
(hereinafter, the “Property”).
On October 24, 2012, Plaintiff’s predecessor in interest, the Phelps Mineral Trust, entered
into an oil and gas lease (“Phelps Lease”) for the Property with Defendant. (Id.). The Lease was
recorded and includes an “Oil and Gas Lease Rider” clause. (Id.). The Lease further prohibits
Defendant from taking deductions or reducing Plaintiff’s royalties for charges related to
compressing or transporting any “produced substances” from the Property, and that Plaintiff was
to receive the same price as the Lessee for its share of production. (Id. at 3).
Plaintiff alleged that Defendant has taken deductions from its royalties and reduced its
royalty payments from the production of oil and gas from the Property as related to charges for
compression and transportation. (Id.). Based on these deductions and reductions, Plaintiff
contended that Defendant has violated and continues to violate the Phelps Lease and is in breach
of the Lease due to continued deductions from its royalties, reduction of royalties, and for charges
related to compression and transportation. (Id.).
On April 13, 2026, Defendant filed a Motion for Partial Summary Judgment. (Doc. No.
41). On May 11, 2026, Plaintiff filed a response, and on May 22, 2026, Defendant filed its reply.
(Doc. Nos. 50, 51). This matter is now ripe for the court’s review and consideration.
II. 	LEGAL STANDARD
Federal Rules of Civil Procedure 56 governs summary judgment. “A party may move for
summary judgment, identifying each claim or defense – or the part of each claim or defense – on
which summary judgment is sought.” Fed. R. Civ. P. 56(a). Summary judgment must be granted
“if the movant shows that there is no genuine dispute as to any material fact and the movant is
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entitled to judgment as a matter of law.” Id. In terms of whether facts are material, “[o]nly disputes
over facts that might affect the outcome of the suit under the governing law will properly preclude
the entry of summary judgment. Factual disputes that are irrelevant or unnecessary will not be
counted.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). A dispute about a material
fact is “genuine,” if the evidence is enough that a reasonable jury could return a verdict in favor of
the nonmoving party. Id.
Once the moving party has demonstrated a sufficient showing, the burden rests on the
nonmoving party to provide specific facts, whether through affidavits or other evidence, that there
is a genuine issue of material facts. Hill v. Payne, No. 621CV06029SOHBAB, 2023 WL 2192961,
at *4 (W.D. Ark. Feb. 23, 2023); see National Bank of Commerce v. Dow Chemical Co., 165 F.3d
602, 607 (8th Cir. 1999). The nonmoving party may not rely only on allegations or denials but
must provide specific facts showing there is a genuine issue for trial. Twardowski v. Bismarck
Police Dep’t, No. 1:17-CV-110, 2017 WL 8791103, at *2 (D.N.D. Dec. 22, 2017), aff’d, 754 F.
App’x 492 (8th Cir. 2019).
III. 	DISCUSSION
In support of its motion, Defendant argues, “[p]artial summary judgment is proper on the
legal issue of whether the coded ‘Adjustments’ on the check details from Continental to Plaintiff
constitute improper ‘deductions’ from Plaintiff’s gas royalty payments in violation of the Phelps
Lease.” (Doc. No. 40 at 2). Defendant further contends that Plaintiff’s breach of contract claim
fails with respect to the gas royalties because adjustments reported on Plaintiff’s revenue
statements were not deductions taken by Defendant and do not reduce Plaintiff’s royalty. (Doc.
No. 41 at 20). Plaintiff’s declaratory judgment claim fails because the adjustments reported are not
deductions taken by Defendant and do not reduce Plaintiff’s royalty. (Id.). Finally, Plaintiff’s claim
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alleging Defendant’s breach of its obligation to pay royalties fails with respect to the gas royalties
because the breach of lease and declaratory judgment claims fail. (Id.).
The Phelps Lease contains an “Oil and Gase Lease Rider.” This “Lease Rider” provides
that, “[r]egardless of language to the contrary contained in the oil and gas lease the following shall
control.” (Doc. No. 41-1 at 7) (emphasis omitted). This controls over any contrary language
included in the primary Lease. The main topic of issue in the instant motion revolves around the
parties’ interpretation of Paragraph Eight of the “Oil and Gas Lease Rider.” (See Id.).
8. GAS & OIL PRICING. Lessor shall be paid for gas and oil based upon the rate
Lessee receives for gas or oil it sells at the point of first sale of such production to
a purchaser who is not an “affiliate” of Lessee; and, price paid Lessor for Lessor’s
share of produced substances shall be the same price that Lessee receives for
Lessee’s share of production; however, Lessor shall be paid for produced
substances based upon the rate Lessee receives for the same price it sells produced
substances for; and lessee shall not deduct any charges related to compressing or
transporting said produced substances. In no event shall Lessor receive less than a
net “zero” for gas sold. As used herein, “affiliate” means (i) a corporation, joint
venture, partnership or other entity that owns more than ten percent (10%) of the
outstanding voting interest of Lessee or in which Lessee owns more than ten percent
(10%) of the outstanding voting interest; or (ii) a corporation, joint venture,
partnership or other entity in which, together with Lessee more than ten percent
(10%) of the outstanding voting interest of both the Lessee and the other
corporation, joint venture partnership or other entity is owned or controlled by the
same person or group of persons.
(Id.).1 The parties specifically focus on the construction of this provision as it pertains to requiring
Defendant to pay royalties to Plaintiff based on the price Defendant receives at the point of first
sale and the prohibition on Defendant from taking deductions from Plaintiff’s royalties for post-
production compression or transportation costs. (Doc. No. 41 at 6). Defendant argues partial
summary judgment is proper as the gas royalties Plaintiff characterizes as “deductions” are actually
adjustments applied by ONEOK Rockies Midstream, LLC (“OENOK”), an unaffiliated third-party
gas purchaser, pursuant to its contract with Defendant. (Id.). Plaintiff in turn argues that the alleged
1 Plaintiff is the Lessor and Defendant is the Lessee. (See Doc. No. 41-1 at 7).
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adjustments to the gas royalties result in the same outcome as taking deductions, and as such, the
motion should be denied.
In cases of diversity, a federal court applies the substantive law of the forum state. Highline
Expl., Inc. v. QEP Energy Co., No. 1:19-CV-134, 2021 WL 4847999, at *3 (D.N.D. Oct. 18, 2021),
aff’d, 43 F.4th 813 (8th Cir. 2022); see El Petron Enters, LLC v. Whiting Res. Corp., No. 1:16-CV-
090, 2018 WL 1322391, at *3 (D.N.D. Mar. 14, 2018). Pursuant to North Dakota law, assignments,
deeds, and leases are interpreted the same as contracts. Hallin v. Inland Oil & Gas Corp., 2017 ND
254, ¶ 8, 903 N.W.2d 61.
The construction of a written contract to determine its legal effect is a question of
law. Contracts are construed to give effect to the mutual intention of the parties at
the time of contracting. The parties’ intention must be ascertained from the writing
alone, if possible. A contract must be construed as a whole to give effect to each
provision if reasonably practicable. We will not consider extrinsic evidence when a
lease is unambiguous and the parties’ intent can be ascertained from the writing
alone. A contract is ambiguous when reasonable arguments can be made for
different positions on its meaning. Whether an ambiguity exists is a question of law.
Highline Exp., Inc., 2021 WL 4847999, at *3 (quoting Blasi v. Bruin E&P Partners, LLC, 2021
ND 86, ¶ 10, 959 N.W.2d 872). Ambiguous and unclear contracts are to be construed most strongly
against the party which caused the uncertainty to exist, and if such a conflict exists between a
specific and general contract provision, the specific provision controls. Oaks Farming Ass’n v.
Martinson Bros., 318 N.W.2d 897, 908 (N.D. 1982); see also N.D.C.C. § 9-07-19.
In determining whether post-production costs are deductible from the royalty, the terms of
the lease, nature of costs and expenses to be deducted, and the type of royalty must be considered.
Highline Exp., Inc., 2021 WL 4847999, at *3; see Bice v. Petro-Hunt, L.L.C., 2009 ND 124, ¶ 12,
768 N.W.2d 496. “Post-production costs are the expenses incurred in bringing the product to
market including processing, compression, transportation, marketing, and other costs necessary to
prepare raw oil or gas for sale.” Highline Exp., Inc., 2021 WL 4847999, at *4; Burlington Res. Oil
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& Gas. Co. LP v. Texas Crude Energy, LLC, 573 S.W.3d 198, 203 (Tex. 2019). Because the “Lease
Rider” specifically contemplates the compression or transportation of produced substances, it deals
with post-production costs.
Here, the language at issue in Paragraph Eight is unambiguous and presents a question of
law. As previously noted, the relevant clause of Paragraph Eight at issue states in part as follows:
Lessor shall be paid for gas and oil based upon the rate Lessee receives for gas or
oil it sells at the point of first sale of such production to a purchaser who is not an
“affiliate” of Lessee; and, price paid Lessor for Lessor’s share of produced
substances shall be the same price that Lessee receives for Lessee’s share of
production; however, Lessor shall be paid for produced substances based upon the
rate Lessee receives for the same price it sells produced substances for; and lessee
shall not deduct any charges related to compressing or transporting said
produced substances.
(Doc. No. 41-1 at 7) (emphasis added).
Similar, though not the same, arguments have been raised in the State of North Dakota.
Notably, the North Dakota Supreme Court in Newfield Exploration Company determined that
“[g]ross proceeds from which the royalty payments under the leases are calculated may not be
reduced by an amount that either directly or indirectly accounts for post-production costs incurred
to make the gas marketable.” Newfield Expl. Co. v. N. Dakota Bd. Of Univ. & Sch. Lands, 2019
ND 193, ¶ 12, 931 N.W.2d 478. In making this determination, the North Dakota Supreme Court
found that full consideration paid to Newfield was not determined until after ONEOK incurred
costs associated with making the gas marketable and selling the marketable gas. Id. at ¶ 11.
Newfield’s compensation was calculated based on the amount ONEOK received for the
marketable gas, and in turn, Newfield attempted to base the State’s royalties on this amount, which
had been reduced to account for expenses ONEOK incurred in making the gas marketable. Id. In
concluding the royalty payments under the lease could not be reduced to account for post-
production costs, the North Dakota Supreme Court opined:
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“Here, Newfield unquestionably benefits from [ONEOK’s] expenditures to make
the gas marketable. Calculation of the royalties paid to the State based on an amount
that has been reduced to account for expenses incurred to make the gas marketable,
even though the cost to make the gas marketable only indirectly benefits Newfield,
is contrary to the leases.”
Id.
In this case, the “Lease Rider” specifically states that Defendant shall not deduct any
charges related to compressing or transporting the produced substances. There are no caveats or
exceptions. The plain language of the “Lease Rider” does not allow for Defendant to make either
“deductions” or “adjustments” based on its contract with ONEOK and explicitly states that
regardless of the language contained in the Lease, the provisions of the “Lease Rider” will control
when there is language to the contrary.
Even if the court were to have found this clause was ambiguous as to the royalties and post-
production costs, the conclusion would remain the same. See Hallin, 2017 ND 254, ¶ 9, 903
N.W.2d 61 (“If a contract is ambiguous, extrinsic evidence may be considered to determine the
parties’ intent, and the contract terms and parties’ intent becomes questions of fact.”). The North
Dakota Supreme Court previously agreed with the language of the Kansas Supreme Court
regarding the construction of oil and gas leases:
Construction of oil and gas leases containing ambiguities is in favor of the lessor
and against the lessee for the reason that the lessee usually provides the lease form
or dictates the terms thereof and if such lessee is desirous of more complete
coverage, the lessee has the opportunity to protect itself by the manner in which it
draws the lease.
West v. Alpar Res., Inc., 298 N.W.2d 484, 490-91 (N.D. 1980) (quoting Gilmore v. Superior Oil
Co., 192 Kan. 388, 388, 388 P.2d 602 (1964)). Strong construction against the lessee is supported
by the rationale that the lessor normally knows nothing of the applicable law in lease construction,
while the operator is typically well informed based on years of experience. West, 298 N.W.2d at
491; see Ladd v. Upham, 58 S.W.2d 1037, 1039 (Tex.Civ.App. 1933), aff’d, 128 Tex. 14, 95 S.W.2d
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365 (1936). The North Dakota Supreme Court in West concluded that consistent with its view that
the lease must be construed most strongly against Alpar Resources, Inc., the Wests were entitled
to royalty payments from the sale of gas without deductions for the cost of extracting hydrogen
sulfide and without any other deduction for costs incurred by Alpar.2 West, 298 N.W.2d at 491.
The court agrees with the analysis of the North Dakota Supreme Court. If Defendant had
intended for Plaintiff’s royalties to be calculated after “adjustment” by an unaffiliated third-party,
the Lease should have been construed with this view in mind. A plain reading of the “Lease Rider,”
though stating the parties are to equally share the proceeds from the produced substances, also
provides the caveat that Plaintiff was not to have deductions related to the compression or transport
of the substance. While understanding of Defendant’s position that it is “simply reporting the
adjustments made by ONEOK,” which are part of a formula for determining a purchase price, the
fact of the matter is that while the contract between Defendant and ONEOK may permit the
deduction of costs for post-production fees, the contract at issue here between Plaintiff and
Defendant, does not.
IV. 	CONCLUSION
For the reasons articulated above, the court DENIES Defendant’s Motion for Partial
Summary Judgment. (Doc. No. 40).
IT IS SO ORDERED.
Dated this 9th day of June, 2026.
/s/ Clare R. Hochhalter
Clare R. Hochhalter, Magistrate Judge
United States District Court
2 Also relevant is the North Dakota Supreme Court’s finding that “If Alpar’s predecessor in interest had desired to
limit the royalty payments under the lease to a fraction of the net proceeds received from the sale of the gas after
allowance for a deduction of certain costs such as the cost of extracting hydrogen sulfide, it could have easily included
express language to that effect in the lease.” West, 298 N.W.2d at 491.
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