Stewart v. Hauptman

No. 04-547

IN THE SUPREME COURT OF THE STATE OF MONTANA

2007 MT 162N

CARTER STEWART,

Plaintiff and Appellant,

v.

JOHN S. HAUPTMAN and
INTERMOUNTAIN LEASING, INC.,

Defendants and Respondents.

APPEAL FROM: The District Court of the Thirteenth Judicial District,
In and For the County of Yellowstone, Cause No. DV 2002-766,
Honorable Russell C. Fagg, Presiding Judge

COUNSEL OF RECORD:

For Appellant:

Mark T. Errebo, Attorney at Law, Billings, Montana

For Respondents:

James P. Healow, Attorney at Law, Billings, Montana

Submitted on Briefs: February 23, 2005

Decided: July 10, 2007

Filed:

__________________________________________
Clerk
Justice James C. Nelson delivered the Opinion of the Court.

¶1 Pursuant to Section I, Paragraph 3(c), Montana Supreme Court 1996 Internal

Operating Rules, as amended in 2003, the following decision shall not be cited as

precedent. It shall be filed as a public document with the Clerk of the Supreme Court and

its case title, Supreme Court cause number and disposition shall be included in this

Court's quarterly list of noncitable cases published in the Pacific Reporter and Montana

Reports.

¶2 Carter Stewart appeals a Judgment of the District Court for the Thirteenth Judicial

District, Yellowstone County, finding in favor of John Hauptman and Intermountain

Leasing, Inc., (jointly “Intermountain”) regarding certain oil and gas leases in Roosevelt

County, Montana. Stewart also appeals the court’s Order and Decision denying Stewart’s

Motion for New Trial.

¶3 Stewart raises the following issues on appeal:

¶4 1. Did the District Court err in holding that Stewart is required to offer all

subsequently acquired oil and gas leases to Intermountain under the “Area of Mutual

Interest” provision of the Participation/Farmout Agreement?

¶5 2. Did the District Court err in requiring Stewart to specifically perform the

March 13, 1995 Agreement between the parties?

¶6 3. Did the District Court err in denying Stewart’s motion to take additional

testimony with regard to newly discovered evidence pursuant to M. R. Civ. P. 52(b) and

59(a)?

Factual and Procedural Background

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¶7 In early 1995, Stewart, a geologist, approached Hauptman, a petroleum landman,

about an oil and gas prospect in Roosevelt County. Stewart asked Hauptman to put up

some of the money for the leases. Hauptman obtained the leases from the mineral owners

under the name Intermountain. Subsequently, Dennis Rue and Neal LaFever also

contributed money for the leases.

¶8 Stewart, Intermountain, Rue and LaFever entered into an Agreement regarding the

ownership of the oil and gas leases in the North Shotgun Creek Prospect in Roosevelt

County on March 13, 1995. This Agreement provided that the four would own the

leasehold interests already acquired and “any oil and gas leases and leasehold estates

which may be subsequently acquired.” Three wells were eventually drilled on these

leases.

¶9 On August 15, 1995, Intermountain, as operator of the wells, prepared and

executed a Participation/Farmout Agreement (P/FA). 1 Although Stewart did not sign the

P/FA, Intermountain claimed that Stewart was bound by its terms because Intermountain,

as holder of the leases, had executed the P/FA as Stewart’s agent and trustee. The P/FA

included an “Area of Mutual Interest” (AMI) provision which required each party to offer

any subsequently acquired leases in the North Shotgun Creek Prospect to the other parties

at acquisition cost. Intermountain claimed that the interests of the parties under the

original March 13, 1995 Agreement were transferred, redefined and refined by the P/FA.

¶10 In 1998, Intermountain reacquired a number of the North Shotgun Creek Prospect

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The parties occasionally refer to this as the September 15, 1995 P/FA, however, it is
actually dated August 15, 1995.

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leases which had expired, and assigned interests in those leases pursuant to the P/FA. In

February 2000, Stewart reacquired seven leases in the North Shotgun Creek Prospect and

indicated his intent to share interests in those leases with Rue and LaFever, but not with

Intermountain. To that end, Stewart wrote a letter to Rue and LaFever with the salutation

“Dear Partners.” A well was subsequently drilled on these leases.

¶11 Intermountain filed an affidavit with the Clerk and Recorder of Roosevelt County

on May 1, 2002, in which Intermountain claimed an interest in the oil and gas leases

acquired by Stewart. Stewart alleged that, as a result of the filing of the affidavit, title to

the well was clouded and the producer refused to pay Stewart his share of the proceeds of

the well.

¶12 On October 15, 2002, Stewart filed an Amended Complaint and Jury Demand

against Intermountain alleging that he was damaged by Intermountain’s actions in filing

the affidavit. Stewart sought an order requiring Intermountain to rescind the affidavit and

thereby remove the cloud from the title so that Stewart could receive his share of the

proceeds from the well. Stewart also sought damages for deceit, libel and interference

with contract.

¶13 In its Amended Answer, Intermountain claimed that Stewart was bound by the

P/FA because: (1) Intermountain had executed it on Stewart’s behalf pursuant to their

joint venture in the North Shotgun Creek Prospect in Roosevelt County; (2) Stewart

accepted the benefits of the P/FA; and (3) by accepting assignments of the 1998 leases

from Intermountain, Stewart impliedly consented to be bound by the P/FA.

Intermountain further claimed that Stewart was bound by the AMI provision which

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required Stewart to allow Intermountain to participate in Stewart’s oil and gas leases.

Intermountain sought a judgment declaring that the AMI provision was applicable to

Stewart’s leases and that Stewart was required to specifically perform his obligations

under the AMI provision.

¶14 The case was tried before the District Court without a jury on September 22 and

23, 2003. On October 7, 2003, the court issued its Findings of Fact and Conclusions of

Law wherein the court determined that Intermountain owns a 1/6 interest in the seven

leases acquired by Stewart. The court also determined that Stewart was entitled to

reimbursement for his time and costs in procuring said leases.

¶15 On October 23, 2003, Stewart moved for a new trial on the grounds that he had

discovered new evidence. Specifically, he contended that he discovered a letter from

Hauptman dated March 8, 2000, which is in “direct contravention of defendant

Hauptman’s testimony at trial and paragraph 16 of the Findings of Fact issued by the

Court on October 7, 2003.” In an Order and Decision entered December 1, 2003, the

District Court denied Stewart’s Motion for New Trial on the basis that the evidence was

not “newly discovered” as Stewart claimed and the evidence did not directly contravene

Hauptman’s testimony or the court’s Finding of Fact No. 16.

¶16 On March 23, 2004, the court entered Judgment for Intermountain and against

Stewart declaring that the P/FA dated August 15, 1995, and particularly the AMI

provision, was applicable to any leases acquired by Stewart within the North Shotgun

Creek Prospect for so long as any of the oil and gas leases subject to the P/FA continued

in effect, whether by production, extension or otherwise. The court also ordered that

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Stewart specifically perform the provisions under the March 13, 1995 Agreement, as well

as the P/FA, and allow Intermountain to participate under those agreements after

Intermountain has paid its share of expenses incurred in procuring the leases.

¶17 Stewart appeals. Intermountain did not file a response brief until more than a year

after the time for filing such brief had expired. Stewart moved to disregard

Intermountain’s untimely brief and this Court so ordered.

Issue 1.

¶18 Did the District Court err in holding that Stewart is required to offer all
subsequently acquired oil and gas leases to Intermountain under the AMI provision of the
P/FA?

¶19 Stewart maintains on appeal that he is not bound by the P/FA because he did not

sign it and, even if it is determined that he was bound by the P/FA, he was not required to

offer the subsequently acquired leases to Intermountain pursuant to the AMI provision of

the P/FA because the Operating Agreement attached to the P/FA states that leases

acquired more than six months after the expiration of an existing lease are not subject to

the P/FA.

¶20 In construing an oil and gas lease, courts will generally apply the rules of contract

interpretation. Sandtana, Inc. v. Wallin Ranch Co., 2003 MT 329, ¶ 26, 318 Mont. 369,

¶ 26, 80 P.3d 1224, ¶ 26. The construction and interpretation of a contract is a question

of law for the court to decide. Ophus v. Fritz, 2000 MT 251, ¶ 19, 301 Mont. 447, ¶ 19,

11 P.3d 1192, ¶ 19 (citing Schwend v. Schwend, 1999 MT 194, ¶ 36, 295 Mont. 384, ¶ 36,

983 P.2d 988, ¶ 36; Stutzman v. Safeco Ins. Co. of America, 284 Mont. 372, 376, 945

P.2d 32, 34 (1997)). We will review a district court’s conclusions of law for correctness.

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Ophus, ¶ 19 (Schwend, ¶ 36; Carbon County v. Union Reserve Coal Co., Inc., 271 Mont.

459, 469, 898 P.2d 680, 686 (1995)).

¶21 Here, the March 13, 1995 Agreement “set forth the understanding and agreement

by and among” Intermountain, Stewart, LaFever, and Rue “regarding the North Shotgun

Creek Prospect in Roosevelt County, Montana” and was signed by all four parties. This

Agreement stated:

WHEREAS, it is the desire of the parties hereto to define and
stipulate the proportionate interest owned by each in the oil and gas leases
and leasehold estates described in Exhibit “A” and provide for the sharing
[of] all prospect fees, revenues, costs, expenses and liabilities attributable
thereto and any oil and gas leases and leasehold estates which may be
subsequently acquired. [Emphasis added.]

¶22 In 1998, Intermountain reacquired a number of the North Shotgun Creek leases

which had expired, and assigned interests in those leases. The District Court determined

that by virtue of the P/FA, Stewart received the benefit of an assignment of those leases

and that, having accepted the benefits of the agreement, Stewart is deemed to have given

his implied consent to the P/FA. Moreover, subsequent to execution of the agreement,

Stewart accepted at least five different assignments from Intermountain: three

assignments of royalty; an assignment of the original oil and gas leases; and an

assignment of the 1998 reacquired leases. These various assignments each included

provisions expressly making the assignments subject to the P/FA.

¶23 The “Assignment of Overriding Royalty” executed by Hauptman as President of

Intermountain Leasing, Inc., on May 1, 1998, “but effective December 10, 1995,”

assigned 25% royalties to all four participants in the North Shotgun Creek Prospect:

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Stewart, Rue, LaFever and Hauptman. This document stated:

This assignment is subject to the terms and conditions of the oil and
gas leases and is expressly made subject to the following:
A. That certain Participation/Farmout Agreement (“Agreement”)
effective August 15, 1995, covering the Oil and Gas Leases described in
Exhibit “A” by and among Intermountain Leasing, Inc., . . . Stewart
Geological, Inc., Dennis J. Rue, Neal LaFever . . . , the terms and
conditions of which shall be applicable, whether or not specifically recited
herein. [Emphasis added.]

¶24 Two other “Assignment[s] of Overriding Royalt[ies]” were also executed on

May 1, 1998, one indicating an effective date of December 10, 1995, and the other

indicating an effective date of December 10, 1996. Both assignments contained the same

information quoted above regarding the applicability of the P/FA.

¶25 In addition, a document entitled “Assignment of Oil and Gas Leases” was

executed by Hauptman as President of Intermountain Leasing Inc., on May 30, 1997,

“but effective as of December 1, 1995.” This document assigned to Rue, LaFever and

Stewart their respective interests in the leases specified therein, and contained the

information quoted above regarding the P/FA.

¶26 Stewart admitted on cross examination that he was not a record owner of the

leaseholds until he received an assignment from Intermountain. He also admitted that

during the time prior to the assignment, Intermountain held Stewart’s interests for his

benefit.

¶27 Based on the foregoing, we hold that by accepting the benefit of the assignments

under the P/FA, Stewart bound himself to the P/FA. Section 28-2-503(2), MCA (“A

voluntary acceptance of the benefit of a transaction is equivalent to a consent to all the

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obligations arising from it, so far as the facts are known or ought to be known to the

person accepting.”)

¶28 Nevertheless, Stewart maintains that even if he is bound by the P/FA, he was not

required to offer the subsequently acquired leases to Intermountain pursuant to the P/FA.

Stewart hinges his argument on Article VIII.B. of the Model Form Operating Agreement

(Operating Agreement). The Operating Agreement is attached to the P/FA as Exhibit

“C” and provides as follows:

Any renewal or replacement Lease taken before the expiration of its
predecessor Lease, or taken or contracted for or becoming effective within
six (6) months after the expiration of the existing Lease, shall be subject to
this provision so long as this agreement is in effect at the time of such
acquisition or at the time the renewal or replacement Lease becomes
effective; but any Lease taken or contracted for more than six (6) months
after the expiration of an existing Lease shall not be deemed a renewal or
replacement Lease and shall not be subject to the provisions of this
agreement. [Emphasis added.]

¶29 The District Court determined, and we agree, that the AMI overrides the language

of Article VIII.B. of the Operating Agreement because of the conflict between the two.

The P/FA states at ¶ 8: “In the event of a conflict between the terms of this agreement

and those of the Operating Agreement, this Agreement shall prevail.” Moreover, Stewart

himself acted as though the six-month provision of Article VIII.B. of the Operating

Agreement did not apply to his newly acquired leases when he executed and delivered to

all of the North Shotgun Creek Prospect participants, except Intermountain, assignments

of those leases in their previous percentages via a letter with the salutation “Dear

Partners.”

¶30 The AMI, which is set forth in ¶ 10 of the P/FA, provides: “The parties hereto

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create between themselves, for so long as any of the oil and gas leases subject hereto are

continued in force as to any part, whether by production, extension or otherwise, an Area

of Mutual Interest covering lands in Roosevelt County, Montana . . . .” This paragraph

further provides: “It being understood and agreed that any subsequently acquired lease

(hereinafter “AMI” Interest) acquired by any of the parties hereto shall be offered to all

such parties at the actual acquisition costs of the offering party . . . .” In February 2000,

when Stewart acquired the leases at issue here, there were at least eleven other leases in

the North Shotgun Creek Prospect still “in force,” hence Stewart was contractually and

legally required to offer the leases to Intermountain as well as the other participants in the

North Shotgun Creek Prospect.

¶31 Accordingly, we hold that the District Court did not err in holding that Stewart

was required to offer all subsequently acquired oil and gas leases to Intermountain under

the AMI provision of the P/FA.

Issue 2.

¶32 Did the District Court err in requiring Stewart to specifically perform the
March 13, 1995 Agreement between the parties?

¶33 In its March 23, 2004 Judgment, the District Court ordered that Stewart

specifically perform the provisions under the March 13, 1995 Agreement, as well as the

P/FA, and allow Intermountain to participate under those agreements after Intermountain

has paid its share of expenses to be able to participate.

¶34 Stewart contends on appeal that the District Court erred in ordering that he

specifically perform the March 13, 1995 Agreement because that issue was never pled

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and there was never any evidence supporting that claim offered at trial. Although

Stewart is correct that Intermountain did not plead specific performance of the March 13,

1995 Agreement in its Amended Answer, the Pretrial Order, signed by counsel for both

parties, set forth the following Issues of Fact:

9. Whether [Intermountain is] entitled to a judgment declaring that
the March 13, 1995 Agreement applies to Stewart’s subsequently acquired
leasehold.
10. Whether [Intermountain is] entitled to specific performance of
the AMI language of the Participation/Farmout Agreement and/or the
March 13, 1995 Agreement. [Emphasis added.]

¶35 M. R. Civ. P. 16(e) provides that a pretrial order controls the subsequent course of

the action unless modified by a subsequent order. “The purpose of pretrial orders is to

prevent surprise, simplify the issues and permit counsel to prepare their case for trial on

the basis of the pretrial order.” Zimmerman v. Robertson, 259 Mont. 105, 111, 854 P.2d

338, 342 (1993) (citing Workman v. McIntyre Const. Co., 190 Mont. 5, 617 P.2d 1281

(1980)). This Court has often held that parties may not assert issues or other matters

which were not included in the pretrial order. Travelers Indem. Co. v. Andersen, 1999

MT 201, ¶ 34, 295 Mont. 438, ¶ 34, 983 P.2d 999, ¶ 34 (citations omitted).

¶36 In the case sub judice, not only was the issue of specific performance of the

March 13, 1995 Agreement included in the Pretrial Order, but that order itself declared:

IT IS HEREBY ORDERED that this pre-trial [sic] order shall
supersede the pleadings and govern the course of the trial of this cause,
unless modified to prevent manifest injustice.
IT IS HEREBY ORDERED that all pleadings herein shall be
amended to conform to this pretrial order. [Emphasis added.]

Moreover, the March 13, 1995 Agreement was admitted as an exhibit in the trial in this

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matter, and counsel for both parties spent a considerable amount of time eliciting

testimony as to the significance of that Agreement.

¶37 Consequently, pursuant to both the terms of the Pretrial Order and Zimmerman,

the issue of specific performance of the March 13, 1995 Agreement was properly before

the District Court at trial and before this Court on appeal.

¶38 Accordingly, we hold that the District Court did not err in requiring Stewart to

specifically perform the March 13, 1995 Agreement between the parties.

Issue 3.

¶39 Did the District Court err in denying Stewart’s motion to take additional testimony
with regard to newly discovered evidence pursuant to M. R. Civ. P. 52(b) and 59(a)?

¶40 Shortly after trial and before the District Court entered judgment in this case,

Stewart moved for a new trial pursuant to M. R. Civ. P. 59(a) and § 25-11-103, MCA,

claiming that he had newly discovered evidence. This evidence was a letter from

Hauptman which Stewart claimed directly contravened Hauptman’s testimony at trial and

the District Court’s Finding of Fact No. 16. In addition, in reply to Hauptman’s brief in

opposition to the Motion for New Trial, Stewart requested that, rather than granting an

entirely new trial, the court reopen the case under M. R. Civ. P. 52(b) for the limited

purpose of admitting and considering the letter prior to rendering judgment. The District

Court denied Stewart’s motion on the grounds that the evidence was not newly

discovered, nor did it directly contravene Hauptman’s testimony or the court’s Finding of

Fact No. 16.

¶41 We review a district court’s decision to grant or deny a new trial based upon

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newly discovered evidence for a manifest abuse of discretion. Groves v. Clark, 1999 MT

117, ¶ 32, 294 Mont. 417, ¶ 32, 982 P.2d 446, ¶ 32 (citing Fjelstad v. State, Through

Dept. of Highways, 267 Mont. 211, 220, 883 P.2d 106, 111 (1994)). We stated in

Groves, that

[a] party moving for a new trial on the basis of newly discovered evidence
must show that: (1) this evidence came to the party’s knowledge since the
trial; (2) it was not through want of diligence that the evidence was not
discovered earlier; (3) the evidence is so material that it would probably
produce a different result upon retrial; (4) the evidence is not merely
cumulative; and (5) the evidence does not tend only to impeach the
character or credit of a witness.

Groves, ¶ 33 (citing In re Marriage of Neal, 267 Mont. 455, 461-62, 884 P.2d 789,

793-94 (1994)).

¶42 Stewart attested in his affidavit accompanying his Motion for New Trial that he

found the letter amongst his own papers and that it had been in his possession for 3½

years. Hence, although Stewart had forgotten about the letter, he has not shown that it

only came to his knowledge since the trial, nor has he shown that he could not have

“discovered” the letter and produced it at trial with reasonable diligence.

“Where the moving party in a motion for new trial on the ground of ‘newly
discovered’ evidence has had the books and documents in his possession,
from which he later ‘discovers’ the ‘new evidence,’ the motion will be
denied, even though the evidence itself may be material.”

In re Marriage of Burner, 246 Mont. 394, 396, 803 P.2d 1099, 1100 (1991) (quoting

Kartes v. Kartes, 175 Mont. 210, 215, 573 P.2d 191, 194 (1977)).

¶43 We conclude that the letter in question was not “newly discovered” evidence.

Therefore, we hold that the District Court did not abuse its discretion in denying

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Stewart’s Motion for New Trial.

¶44 Affirmed.

/S/ JAMES C. NELSON

We Concur:

/S/ KARLA M. GRAY
/S/ BRIAN MORRIS
/S/ W. WILLIAM LEAPHART
/S/ JOHN WARNER
/S/ PATRICIA COTTER
/S/ JIM RICE

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