SunBehm Gas, Inc. v. Equinor Energy, LP

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IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NORTH DAKOTA
)
SunBehm Gas, Inc., 	) 	ORDER DENYING MOTION FOR
) 	SUMMARY JUDGMENT AND
) 	GRANTING MOTION TO DISMISS
)
Plaintiff, 	)
)
vs. 	)
)
Equinor Energy, LP, 	)
) 	Case No.: 1:19-cv-94
)
Defendant. 	)
_____________________________________________________________________________
Before the Court are defendant Equinor Energy, LP’s Motion to Dismiss for Failure to
State a Claim and plaintiff SunBehm Gas, Inc.’s Motion for Partial Summary Judgment. The
Court grants the motion to dismiss and denies the motion for summary judgment because
N.D.C.C. § 47-16-39.1 does not apply to the holders of overriding royalty interests.
I. 	Background
SunBehm, a North Dakota corporation, owns overriding royalty interests in various oil
and gas wells in McKenzie County, North Dakota. (Doc. No. 1-2, ¶ 1; Doc. No. 12-2, ¶¶ 1-2).
Equinor, a Texas-based limited partnership, operates the wells. (Doc No. 1-2 at ¶ 2). Equinor
commenced oil production at the various well sites in 2012, 2013, and 2014. Id. at ¶ 7. However,
Equinor did not begin paying SunBehm for its overriding royalty interests until 2017. Id. at ¶ 8.
SunBehm made a demand for statutory interest pursuant to North Dakota Century Code §
47-16-39.1, after Equinor started paying royalties. Section 47-16-39.1 provides that if an
operator fails to pay royalties to a mineral owner or their assignee within 150 days of the oil or
gas being marketed, the operator owes interest on late payments at a rate of 18 percent per year.
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N.D.C.C. § 47-16-39.1. Equinor refused SunBehm’s demand for statutory interest and this suit
followed.
SunBehm filed a claim for statutory interest, attorneys’ fees and costs in state court.
(Doc. No. 1-2). Equinor removed the suit to federal court on June 3, 2019, invoking the Court’s
diversity jurisdiction. (Doc. No. 1).
On June 10, 2019, Equinor filed its Motion to Dismiss for Failure to State a Claim,
contending that N.D.C.C. § 47-16-39.1 does not apply to SunBehm's overriding royalty interests.
(Doc. No. 5). SunBehm filed a Motion for Partial Summary Judgment on July 15, 2019, arguing
facts regarding its overriding royalty interests are undisputed and that N.D.C.C. § 47-16-39.1
applies as a matter of law. (Doc. No. 12, 12-1). Both parties submitted their responses and replies
and the matter is ripe for review. (Doc. Nos. 18, 24).
II. 	Standard of Review
A. 	Motion to Dismiss for Failure to State a Claim
Rule 12(b)(6) of the Federal Rules of Civil Procedure mandates the dismissal of a claim
if there has been a failure to state a claim upon which relief can be granted. In order to survive a
motion to dismiss under Rule 12(b)(6), “a complaint must contain sufficient factual matter,
accepted as true, to state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S.
662, 678 (2009). A complaint is sufficient if its “factual content . . . allows the court to draw the
reasonable inference that the defendant is liable for the misconduct alleged.” Id. The court must
accept all factual allegations as true, except for legal conclusions or “formulaic recitation of the
elements of a cause of action.” 	Id. at 681. 	Dismissal will not be granted unless it appears
beyond doubt the plaintiff can prove no set of facts entitling plaintiff to relief. 	Ulrich v. Pop
Cnty, 715 F.3d 1054, 1058 (8th Cir. 2013).
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B. 	Summary Judgment.
Summary judgment is appropriate when the evidence, viewed in a light most favorable to
the non-moving party, indicates that no genuine issues of material fact exist and that the moving
party is entitled to judgment as a matter of law. Davison v. City of Minneapolis, Minn., 490 F.3d
648, 654 (8th Cir. 2007); see Fed. R. Civ. P. 56(c)(3). Summary judgment is not appropriate if
there are factual disputes that may affect the outcome of the case under the applicable
substantive law. 	Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). 	An issue of
material fact is genuine if the evidence would allow a reasonable jury to return a verdict for the
non-moving party. 	Id. The moving party bears the responsibility of informing the court of the
basis for the motion and identifying the portions of the record which demonstrate the absence of
a genuine issue of material fact. Torgerson v. City of Rochester, 643 F.3d 1031, 1042 (8th Cir.
2011). 	If the movant does so, the non-moving party must submit evidentiary materials setting
out specific facts showing a genuine issue for trial. Id.
C. 	Substantive Law
A federal court sitting in diversity applies the substantive law of the forum state. Chew v.
American Greetings Corp., 754 F.3d 632, 635 (8th Cir. 2014). When no state supreme court
decision is directly on point, a federal court must predict how the state supreme court would
decide the issue. Blankenship v. USA Truck, Inc., 601 F.3d 852, 856 (8th Cir. 2010); see also
Chew, 754 F.3d at 635.
III. 	Analysis
The relevant facts are undisputed. The legal disagreement is narrow: do the statutory
interest requirements of N.D.C.C. § 47-16-39.1 apply to SunBehm's overriding royalty interests?
N.D.C.C. § 47-16-39.1 states in relevant part:
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If the operator under an oil and gas lease fails to pay oil or gas royalties to the
mineral owner or the mineral owner's assignee within one hundred fifty days
after oil or gas produced under the lease is marketed and cancellation of the lease
is not sought or if the operator fails to pay oil or gas royalties to an unleased
mineral interest owner within one hundred fifty days after oil or gas production is
marketed from the unleased mineral interest owner's mineral interest, the operator
thereafter shall pay interest on the unpaid royalties, without the requirement that
the mineral owner or the mineral owner's assignee request the payment of interest,
at the rate of eighteen percent per annum until paid. . .
N.D.C.C. § 47-16-39.1 (emphasis added). There is no North Dakota Supreme Court case
specifically addressing the application of N.D.C.C. § 47-16-39.1 to overriding royalty interests.
Equinor argues that SunBehm, as a holder of overriding royalty interests, is not entitled to
18 percent interest under N.D.C.C. § 47-16-39.1 because SunBehm is not a “mineral owner” or
“mineral owner’s assignee.” SunBehm bases its opposition on two arguments. First, it claims
overriding royalty interests are a type of royalty interest. Second, it contends every royalty
interest is “a smaller interest in a mineral estate,” such that any holder of any royalty interest is a
mineral owner’s assignee.
The Court will address these claims separately below.
A. 	Whether Overriding Royalty Interests are a Type of Royalty Interest
Equinor argues that overriding royalty interests are distinct from other royalty interests
and are not included in N.D.C.C. § 47-16-39.1. SunBehm contends that its overriding royalty
interests are included in the statute.
1. 	Applicable Law
The primary purpose of statutory interpretation is to determine the intention of the
legislation. Nelson v. Johnson, 778 N.W.2d 773, 777 (N.D. 2010). Words used in a statute are
given their plain, ordinary, and commonly understood meaning unless defined by statute or
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unless a contrary intention plainly appears. Nelson, 778 N.W.2d at 77, citing N.D.C.C. § 1–02–
02.
North Dakota courts often use the term “royalty interest” without further elaboration, but
the distinctions between various kinds of royalty interest are at the heart of this case. Three kinds
of royalty interests are defined below.
Landowner’s Royalty. The royalty interest held by a mineral owner is sometimes
described as a “landowner’s royalty,” though often the unadorned term “royalty” is used. See
Slawson v. N.D. Indus. Com’n, 339 N.W.2d 772, 776 and 778 (N.D. 1983) (discussing
definitions of royalty interests, including landowner’s royalties, and then going on to note that
the “landowner’s royalty is frequently 1/8th production”); see also 8 Williams & Meyers, Oil and
Gas Law Scope (2019) (defining and discussing “royalty”).
The landowner’s royalty typically comes into play upon execution of a mineral lease.
Under a conventional lease, the mineral owner retains a royalty interest for himself and conveys
a working interest to the operator. Slawson, 339 N.W.2d at 776. Yet even unleased mineral
owners hold royalty interests; the royalty interest “does not rise from the lease but from
ownership of the minerals.” Id. The royalty interest guarantees the mineral owner a share of
production from the operator’s activity under the lease. Id.; see also Acoma Oil Corp. v. Wilson,
471 N.W.2d 476, 481 (N.D. 1991).
Nonparticipating Royalty. If the mineral owner conveys his royalty interest to another
person, the resulting interest is sometimes called a “nonparticipating royalty,” though often
referred to simply as a royalty. See 1 Williams & Meyers, Oil and Gas Law § 301 (2019)
(“Royalty interests as defined here are also called nonparticipating royalties”); see also Yesel v.
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Brandon, 867 N.W.2d 677, 681 (alternating between terms “royalty” and “nonparticipating
royalty.”)
The owner of a nonparticipating royalty does not have the right to develop the minerals,
execute leases, or receive bonus and rentals; he or she is simply entitled to receive a share of any
production. See 1 Williams & Meyers, Oil and Gas Law § 301 (2019); Yesel, 867 N.W.2d at
681-82. A nonparticipating royalty is “carved out of the mineral estate as a free royalty. . .” 8
Williams 	& 	Meyers, 	Williams 	& 	Meyers, 	Oil 	and 	Gas 	Law 	Scope 	(2019) 	(defining
“nonparticipating royalty”) (citing Bradshaw v. Steadfast Financial, LLC, 395 S.W.3d 348, 350
(Tex. App.—Ft. Worth 2013)); see also Yesel, 867 N.W.2d at 681 (“a royalty interest is a
smaller interest in a mineral estate”); see also William P. Pearce, The North Dakota Supreme
Court Deals with the Abandoned Minerals Act, 93 N.D. L. Rev. 355, 413 (2018) (noting that a
nonparticipating royalty interest “does not exist independently from the mineral interest from
which it was carved, since the royalty interest is only meaningful or valuable to the extent the
mineral interest is meaningful or valuable.”)
The landowner may convey the royalty under a specific lease or in perpetuity, in which
case the royalty interest endures under all present and future leases. Corbett v. La Bere, 68
N.W.2d 211, 214 (N.D. 1955).
Overriding Royalty. Upon execution of an oil and gas lease with an operator, the
mineral owner retains the owner’s royalty interest, and conveys to the operator a working
interest. Slawson 339 N.W.2d at 776. The working interest gives the operator the right to
develop the minerals in and under the land. Armstrong v. Berco Resources, LLC, No. 4:10–cv–
022, 2012 WL 1493738 at *8 (D.N.D. April 27, 2012).
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An overriding royalty is carved out of the working interest created by an oil and gas
lease. El Petron Enterprises, LLC v. Whiting Res. Corp., No. 1:16-CV-090, 2018 WL 1322391,
at *3 (D.N.D. Mar. 14, 2018); Randall J. Bakke, P.C. v. Murex Petroleum Corp., No. 4:07CV86,
2008 WL 4937553, at *4 (D.N.D. Nov. 13, 2008), aff'd sub nom. Bakke v. Murex Petroleum
Corp., 342 Fed. App'x 230 (8th Cir. 2009) (emphasis added). Since an overriding royalty springs
from the working interest created by the lease, its duration is limited by the lease; it does not
survive termination of the lease except in exceptional circumstances. Bakke, P.C., 2008 WL
4937553, at *4. “It is an interest in the lease out of which it is carved, and cannot be a property
interest of greater dignity than the lease itself.” Id (citing Olson v. Continental Resources, Inc.,
109 P.2d 351 (Okla.2005)). 	Like other royalty interests, an overriding royalty interest gives its
owner a right to a share of production. Slawson, 339 N.W.2d at 776.
2. 	Analysis
Both parties cite much of the above law, but with different results.
Equinor acknowledges that overriding royalty owners receive a portion of income from
the production of oil and gas, but emphasizes that overriding royalty owners “do not have an
ownership interest in the minerals under the ground.” The Court agrees. The right to a
landowner’s royalty interest “does not rise from the lease, but from ownership of the minerals,”
Slawson, 339 N.W.2d at 776, while an overriding royalty interest springs from the lease itself,
Bakke, 2008 WL 4937553 at *4.
SunBehm acknowledges that overriding royalty interests are carved out of leases and
have different characteristics than landowner’s royalty interests. Yet it contends that “all types of
royalty interests are ultimately derived from the mineral estate,” citing the following statement
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from Acoma Oil Corp v. Wilson: “A royalty interest is a smaller interest in a mineral estate. . .”
471 N.W.2d at 481.
When placed in context, however, Acoma does not have the impact SunBehm suggests.
The relevant sentence reads: “A royalty interest is a smaller interest in a mineral estate which is a
share of the product or proceeds reserved to the owner for permitting another to develop or use
the property.” Acoma, 471 N.W.2d at 481 (emphasis added). Clearly, the court in Acoma is
referring to royalty interests held by mineral owners, not overriding royalty interests. Acoma is
inapplicable to overriding royalty interests.
SunBehm also relies on the North Dakota Supreme Court case of Van Sickle v. Hallmark
& Assocs., Inc., in which the court affirmed an award of interest under N.D.C.C. § 47-16-39.1 to
holders of royalty interests. 2013 ND 218, ¶ 3, ¶ 37, 840 N.W.2d 92, 96, 105. Like Acoma,
however, Van Sickle did not involve overriding royalty interests. The Van Sickle plaintiffs
appear to have held nonparticipating royalty interests. Van Sickle 840 N.W.2d at 96, 105. Thus,
both Acoma and Van Sickle are distinguishable from SunBehm's arguments.
SunBehm's contention that overriding royalty interests are a “type” of royalty interests,
even if true, does not support SunBehm’s claim. It is true as a matter of nomenclature that
overriding royalty interests are a “type” of royalty interest; all royalty interests guarantee a share
of production to the person that holds them. See 8 Williams & Meyers, Oil and Gas Law Scope
(2019) (defining “royalty.”) But overriding royalty interests differ from other royalty interests in
critical ways. The right to a landowner royalty interest “rises from ownership of the minerals”
and a nonparticipating royalty is “carved out of the mineral estate,” whereas overriding royalties
arise from a particular lease. Slawson, 339 N.W.2d at 776; 8 Williams & Meyers, Oil and Gas
Law Scope (2019) (defining “nonparticipating royalty”); Bakke, P.C., 2008 WL 4937553, at *4.
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The Court is not persuaded that N.D.C.C. § 47-16-39.1 applies to overriding royalty interest
holders simply because overriding royalty interests are a type of royalty interests.
B. 	Whether Holders of Overriding Royalty Interests are Mineral Owner’s
Assignees
SunBehm's second argument focuses on the next words of the statute.
If the operator under an oil and gas lease fails to pay oil or gas royalties to the
mineral owner or the mineral owner's assignee within one hundred fifty days
after oil or gas produced under the lease. . .
N.D.C.C. § 47-16-39.1 (emphasis added). SunBehm admits it is not a mineral owner but
claims to be a “mineral owner’s assignee,” such that N.D.C.C. § 47-16-39.1 applies.
1. 	Law
The North Dakota Century Code defines a “mineral owner” as “any person or persons
who presently own the mineral estate, their successors, assigns, or predecessors in title, under a
specified tract of land by means of a mineral deed, or by an exception or reservation in the deed,
grant, or conveyance of the surface, or by any other means whatsoever.” N.D.C.C. § 38-18-
05(6).
2. 	Analysis
SunBehm argues the holders of overriding royalty interests are mineral owners’ assignees
because (again) royalty interests are smaller portions of mineral estates. SunBehm states:
Equinor may argue that, because SunBehm’s overriding royalty interests were carved out
of a lease, rather than coming immediately from the mineral owner’s estate, SunBehm is
not a “mineral owner’s assignee,” but is instead an assignee of the lessee. However, this
argument is only fleetingly helpful to Equinor because the lessee, by acquiring a working
interest through the oil and gas lease, is also an assignee of the mineral owner. Therefore,
any assignee of an interest carved out of the lease is also a “mineral owner’s assignee…”
(Doc. No. 12-1, p. 9-10).
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Equinor disagrees, arguing that SunBehm was never assigned actual ownership of the
mineral estate.
The Court agrees with Equinor. The statutory text reads “if the operator . . . fails to pay
oil or gas royalties to the mineral owner or the mineral owner's assignee. . .” SunBehm’s
interpretation would bend the phrase back on itself to say “if the operator fails to pay royalties to
the mineral owner, or the mineral owner’s assignee, including the operator himself and his
assignees.” Such tortured construction is not supported by the plain language of the statute.
Equinor’s position limits the function of the phrase “mineral owner’s assignee” to
encompass only holders of landowner royalty interests and non-participating royalty interests. As
described above, these interests are intrinsic to mineral ownership, whether they are held by the
mineral owner or carved from the mineral estate and assigned to another person. SunBehm’s
position expands the phrase “mineral owner’s assignee” to include holders of overriding royalty
interests originating from and subordinate to the operator’s lease. This interpretation goes farther
than any North Dakota court has allowed. Equinor’s position is more consistent with the interests
involved, existing case law, and plain language of the statute.
IV. 	Conclusion
As matter of law, the Court finds that N.D.C.C. § 47-16-39.1 does not apply to holders of
overriding royalty interests. SunBehm's Motion for Partial Summary Judgment is DENIED
(Doc. No. 12). SunBehm's Motion for Hearing (Doc. No. 13) is moot. SunBehm cannot show an
entitlement to relief and fails to state a claim upon which relief can be granted. Accordingly,
Equinor's Motion to Dismiss is GRANTED (Doc. No. 5) and SunBehm's complaint is
dismissed, with prejudice, as to all claims.
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IT IS SO ORDERED.
Dated this 27th day of April, 2020.
/s/ Clare R. Hochhalter
Clare R. Hochhalter
United States Magistrate Judge
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