Opinion
NO. 2017-CA-001416-MR NO. 2017-CA-001701-MR
06-28-2019
K. PETROLEUM, INC. APPELLANT v. SIMON M. VANDERPOOL; SANDRA JOAN VANDERPOOL; A.D.I.D. CORPORATION; MARSHALL E. HOLBROOK; MARK HOLBROOK; AND PUISSANT INDUSTRIES APPELLEES AND SIMON M. VANDERPOOL AND SANDRA JOAN VANDERPOOL CROSS-APPELLANTS v. K. PETROLEUM, INC. CROSS-APPELLEE
BRIEF FOR APPELLANT/CROSS-APPELLEE: Scott M. Webster London, Kentucky BRIEF FOR APPELLEES/CROSS-APPELLANTS, SIMON M. VANDERPOOL AND SANDRA JOAN VANDERPOOL: Darrell L. Saunders Corbin, Kentucky BRIEF FOR APPELLEES, A.D.I.D. CORPORATION, MARSHALL E. HOLBROOK, AND PUISSANT INDUSTRIES, INC.: John T. Aubrey Manchester, Kentucky
NOT TO BE PUBLISHED APPEAL FROM WHITLEY CIRCUIT COURT
HONORABLE DANIEL BALLOU, JUDGE
ACTION NO. 02-CI-00371 CROSS-APPEAL FROM WHITLEY CIRCUIT COURT
HONORABLE DANIEL BALLOU, JUDGE
ACTION NO. 02-CI-00371 OPINION
AFFIRMING IN PART, REVERSING IN PART, AND REMANDING
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BEFORE: ACREE, LAMBERT, AND SPALDING, JUDGES. SPALDING, JUDGE: K. Petroleum, Inc. ("KPI") appeals from a judgment based upon a jury verdict awarding Simon and Sandra Vanderpool $27,241.28 in compensatory damages on its finding that KPI produced natural gas from the Vanderpools' property without written proof of a leasehold permit and $190,688.96 in punitive damages based upon a finding that it did so maliciously. The Vanderpools cross-appeal from the judgment alleging entitlement to the sum of $217,930.24 in compensatory damages as well as pre-judgment interest. For the reasons that follow, we affirm in part, reverse in part, and remand the case to the Whitley Circuit Court for additional proceedings.
The facts underpinning this appeal were succinctly stated in this Court's opinion in a prior appeal. For reasons of clarity and consistency, we reiterate the statement of facts set out in our 2014 opinion:
K. Petroleum, Inc. v. Vanderpool, No. 2012-CA-000859-MR, 2014 WL 1881913, at *1-2 (Ky. App. May 9, 2014).
This case concerns the leasehold rights of two natural gas production companies (KPI and ADID) to produce oil and gas on the Vanderpools' property. In January 2002, the Vanderpools executed a Land Contract with
Sandra Vanderpool's parents, Charles and Flora Nantz, and received equitable title to the subject property. Subsequently, a dispute arose between the Vanderpools and KPI regarding royalty payments for oil and gas produced on the property by KPI. KPI requested proof of the property's change of ownership before transferring royalty payments to the Vanderpools. Mike Vanderpool sent KPI a copy of the Land Contract but KPI did not receive a copy of the deed since, pursuant to the Land Contract, no deed was executed at that time.
The Land Contract specified that the mineral rights to the subject property shall be conveyed to the Vanderpools and that the property shall be conveyed free and clear of all encumbrances, except restrictions and easements of record affecting the property. Prior to conveying the subject property to the Vanderpools, the Nantzes had been receiving royalty payments from KPI in exchange for KPI's production of the wells on the property. These royalty payments began in 1995 and ended in 2002, when Mike Vanderpool shut in the wells without notice to anyone, stenciled "Property of Mike Vanderpool" in orange paint on KPI's meters, and locked the gates to the property so KPI was unable to access it. [In a footnote, the Court explained that by 'shut in' it meant that Mike Vanderpool turned off the valves and unhooked the wells from KPI's pipeline located on the property.]
KPI began escrowing the royalty payments pending resolution of the matter and in 2002, filed suit against the Vanderpools seeking a declaration of its leasehold rights, alleging the Vanderpools had converted KPI's equipment and requesting damages for lost profits.
The Vanderpools filed a counterclaim against KPI, asserting KPI had no leasehold interest and KPI had trespassed on their property. In 2004, while this lawsuit was pending, Mike Vanderpool executed an oil and gas lease with ADID and ADID began producing wells on
the subject property. KPI then filed an amended complaint, joining ADID and ADID's president and owner, Marshall Holbrook, as parties and asserted claims against them for conversion of KPI's equipment and tortious interference with KPI's contractual relations. ADID filed a counterclaim against KPI, alleging fraud generally, slander of title, tortious interference with ADID's contractual relations, and declaring KPI's leasehold interest to be null and void.
The case proceeded to trial. At the close of KPI's case, and at the close of all the evidence, the Vanderpools and ADID moved for directed verdicts, relying on the Statute of Frauds and the absence of a written agreement evidencing KPI's leasehold interest in the subject property. The court denied their motions. However, in the course of preparing jury instructions, the court determined that no issue of fact existed as to [KPI's] liability and directed verdicts in [the Vanderpools', A.D.I.D.'s, and Holbrook's] favor. The trial court based its ruling on KPI's failure to produce an oil and gas lease or any other written authorization to be on the Vanderpools' property. The court found that without a lease, KPI had no claim against the defendants for interference with any right KPI claimed to have to the oil and gas. The court further found that without a lease, KPI's presence on the Vanderpools' property constituted a trespass. Accordingly, the court instructed the jury on damages for trespass and ultimately entered a verdict in favor of the Vanderpools. Also, in accordance with the jury's verdict, the court declined to award ADID any compensatory damages and dismissed ADID's counterclaim against KPI. Thereafter, KPI filed motions to vacate the judgment and for a new trial pursuant to CR 59.01, which the court denied.
ADID is the acronym for the appellee, A.D.I.D. Corporation.
Kentucky Rules of Civil Procedure. --------
Although not mentioned in this recitation of facts, A.D.I.D. leased its rights to Puissant Industries, Inc. on April 16, 2012. Both A.D.I.D. and Puissant are appellees in this matter. In resolving the 2014 appeal, this Court determined that the trial court erred in refusing to permit KPI to introduce a settlement agreement under which KPI agreed to pay the Nantzes, the Vanderpools' predecessor in interest, an agreed-upon amount for release of their claims concerning underpaid royalty payments on the subject property. The settlement agreement specifically provided that its terms were binding on the Nantzes' successors in interest. In reversing the trial court's directed verdict as to KPI's liability which had been based solely on KPI's failure to produce written documentation of its right to be on the Vanderpools' property, this Court concluded that the settlement agreement was admissible under the statement against interest of the hearsay rule and that KPI was entitled to a new trial with the settlement agreement admitted into evidence.
The matter again came for trial in June 2017. The jury predicated liability upon the fact that KPI had no written lease on the property and awarded damages for the value of the gas taken. The jury also awarded punitive damages upon a finding that KPI acted maliciously. This appeal followed.
Resolution of this appeal centers on two primary issues: ownership of the wells and damages. Turning first to the question of KPI's right to be on the Vanderpools' property, KPI argues that the admission of the settlement agreement as previously directed by this Court entitled it to a directed verdict in its favor. We disagree.
Contrary to KPI's argument that the settlement agreement is conclusive evidence of a lease entitling it to a directed verdict, we are convinced that the settlement agreement cannot be so expansively construed. It is precisely what this Court previously said it is: mere evidence that a lease exists. The settlement agreement, which contains a confidentiality clause, arose from litigation in which KPI settled many lawsuits by landowners who alleged KPI was underpaying its lease obligations. The agreement specifically provides that it is a contract evidencing the compromise of a "doubtful and disputed claim" about which KPI had expressly denied liability. It does not in any way purport to be a lease.
To be enforceable, an oil and gas lease must be in writing and signed by the party to be charged. Kash v. United Star Oil Co., 192 Ky. 422, 233 S.W. 898, 901 (1921). KPI offered no such writing in the second trial of this matter. Neither was there evidence that such a lease had been recorded. The sub-wells on the Vanderpools' property were listed as abandoned by the Department of Mines and Minerals, Division of Oil and Gas. The bond for the wells was in the name of Midamco, an entity which was dissolved in 1995. The above evidence supports the appellees' position that there was no written lease—a fact which KPI had to prove under the instructions. Thus, we are persuaded that the trial court did not err in denying KPI's motion for a direct verdict as to liability.
In addition, we agree with the contentions of A.D.I.D. and Puissant that, because the lease was unrecorded and there were no supporting records held at the Division of Oil and Gas, any lease claimed by KPI would fail as to subsequent purchasers and their successors. The Vanderpools testified that they did not have any knowledge about the alleged lease and their testimony was unrefuted. We thus find no error in the trial court's determination that because of KPI's failure to prove it had a valid lease on the Vanderpools' property, it was not entitled to be on their property or to collect the natural resources from their land.
Shifting our focus to the question of damages, we look to Harrod Concrete & Stone Co. v. Crutcher, 458 S.W.3d 290 (Ky. 2015), an opinion rendered between the two trials in this case. The Kentucky Supreme Court in Crutcher settled the question of how to properly calculate damages for trespass involving a mineral estate:
[T]he proper measure of damages in all innocent trespass cases is the value of the mineral after extraction, less the reasonable expenses incurred by the trespasser in extracting the mineral. . . .
Where the trespass has been determined to be willful, we continue to maintain that the measure of damages is the reasonable market value of the mineral at the mouth of the mine/well, without an allowance of the
expense of removal. This approach has been consistently applied in Kentucky and serves as a sufficient financial penalty for the wrongdoing of the trespasser, thus obviating the need for additional punitive damages.Id. at 296-97 (emphasis added).
Although error in the calculation of damages was admittedly unpreserved because KPI did not submit jury instructions on this issue, the error appears to be palpable and manifestly unjust. CR 61.02. Here, the Vanderpools were awarded $190,688.96 in punitive damages when, by law, they were entitled to none. Beyond that substantial error, the jury was not instructed to make the correct findings as to the compensatory damages caused by this trespass. Finally, the Vanderpools allege error in the court denying their motion for directed verdict based upon the evidence when construed under the instructions given. In order to conduct that analysis this court would have to review error upon error. In sum, we are convinced that the errors in the instructions as to the proper measure of damages were not only palpable but resulted in manifest injustice entitling KPI to a new trial on the issue of damages. Our resolution of this issue moots the remaining issues in both the direct and cross-appeal.
Accordingly, because KPI does not have a valid lease and was therefore a trespasser, we reverse the judgment as to damages for a new trial consistent with the principles set out in Crutcher, supra. In all other respects, the judgment of the Whitley Circuit Court is affirmed.
ALL CONCUR. BRIEF FOR APPELLANT/
CROSS-APPELLEE: Scott M. Webster
London, Kentucky BRIEF FOR APPELLEES/
CROSS-APPELLANTS, SIMON
M. VANDERPOOL AND SANDRA
JOAN VANDERPOOL: Darrell L. Saunders
Corbin, Kentucky BRIEF FOR APPELLEES, A.D.I.D.
CORPORATION, MARSHALL E.
HOLBROOK, AND PUISSANT
INDUSTRIES, INC.: John T. Aubrey
Manchester, Kentucky