Continental Resources, Inc. v. Counce Energy BC 1, LLC

Citation: 2018 ND 10Docket: 20170066

Court: North Dakota Supreme Court; January 21, 2018; North Dakota; State Supreme Court

SummaryOriginalCytator Case TreatmentBackward CitatorAnalysis

EnglishEspañolSimplified EnglishEspañol Fácil

Continental Resources, Inc. sued Counce Energy BC #1, LLC for breaching a contract related to the drilling of an oil and gas well, resulting in a jury verdict awarding Continental $153,666.50 plus costs. Counce appealed this judgment, arguing that the district court lacked subject matter jurisdiction over the breach of contract claim and its own counterclaims. The Supreme Court of North Dakota vacated the judgment, affirming that the district court did not have jurisdiction over the breach of contract action or Counce's counterclaims due to the exclusive jurisdiction of the Industrial Commission over the "reasonable actual cost" determination, as per N.D.C.C. 38-08-08(2). The case background details that Counce initially agreed to pay its share of drilling costs, but ceased payments after May 2012, leading to Continental filing a lien for unpaid expenses. Continental later corrected billing errors and amended its complaint to recover additional amounts based on various legal theories. However, the district court had previously determined it lacked jurisdiction over Counce’s claims regarding the reasonableness of charges, leading to the dismissal of those claims with prejudice.

The court granted partial summary judgment dismissing Counce’s counterclaims for fraud and breach of fiduciary duty, as well as both parties' claims for unjust enrichment. After a trial, the jury determined that Continental did not abuse the process against Counce, but found that Counce breached its contract by failing to pay its share for drilling and operating a well, resulting in an award of $153,666.50 to Continental. The central issue on appeal is whether the district court had subject matter jurisdiction. A court must possess both subject matter and personal jurisdiction to issue valid orders or judgments, with subject matter jurisdiction being an essential legal authority to adjudicate the case's general subject. Issues of subject matter jurisdiction cannot be waived and may be raised at any time by either party or the court. Dismissal for lack of subject matter jurisdiction can occur if the plaintiff fails to exhaust administrative remedies, as this precludes court claims. The court reviews subject matter jurisdiction de novo when jurisdictional facts are undisputed.

The North Dakota Legislature has empowered the Industrial Commission with broad authority to regulate oil and gas development, which includes provisions for pooling orders under N.D.C.C. ch. 38-08. Specifically, N.D.C.C. 38-08-08(2) mandates that pooling orders provide for the drilling and operation of a well and the payment of reasonable costs by interest owners, with the Commission determining any disputes regarding costs. The pooling order in this case required working interest owners to reimburse the operator for their share of drilling and operation costs. Statutory interpretation is a question of law subject to de novo review, focusing on the plain language and ordinary meaning of the statute. The parties acknowledged a contractual relationship imposed by N.D.C.C. ch. 38-08, stipulating that Counce was only obligated to pay its proportionate share of the reasonable actual costs of the well, with disputes over these costs to be resolved exclusively by the Commission.

Section 38-08-08(2), N.D.C.C., permits an operator to place a lien on a non-operating working interest owner's share of production, while N.D.C.C. 38-08-10 authorizes foreclosure of this lien akin to chattel foreclosure. However, the statutory provisions do not allow for a court action based on breach of contract to recover what an operator claims a non-operating owner owes for the "reasonable actual cost" of well drilling and operation. When Continental modified its complaint to drop the lien foreclosure action in favor of a breach of contract claim against Counce, the district court lost subject matter jurisdiction. Additionally, since Counce's counterclaims were closely linked to the "reasonable actual cost" issue, the court similarly lacked jurisdiction over them. Only the Commission is empowered to determine this "reasonable actual cost," and the parties did not seek such a determination from the Commission. Consequently, the district court lacked subject matter jurisdiction due to the parties' failure to exhaust administrative remedies. The judgment issued by the court is void and subject to vacatur, as established in relevant case law. The judgment is therefore vacated. The opinion is authored by Judges Tufte, Jensen, Sandstrom, Crothers, and McEvers, with Judge Sandstrom serving as the surrogate judge in place of the disqualified Chief Justice VandeWalle.