A jury verdict awarding $1 million to the owners of a western North Dakota hunting ranch who claimed that oil drilling turned their pristine landscape into "an industrial zone" could set a costly precedent for the state's oil industry.
Deadwood Canyon Ranch LLP sued Fidelity Exploration & Production Co., an affiliate of Bismarck-based MDU Resources Group Inc., in October 2010, claiming $3 million in damages for breach of contract and damages to its property as a result of two wells drilled on the ranch between Stanley and New Town in Mountrail County.
“The well pumps operate continuously and emit a loud groaning noise; the oil wells flare and smell of excess gas; and the well sites are serviced by a fleet of 14-wheel tanker trucks that barrel down the newly constructed access roads, sometimes kicking up a dust storm as they pass,” the ranch partners stated in their trial memo.
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After an eight-day trial in December in U.S. District Court in Bismarck, jurors found that Denver-based Fidelity owed Deadwood $1 million based on a 1979 state law known as the Oil and Gas Production Damage Compensation Act.
The law provides that a mineral developer “shall pay the surface owner a sum of money equal to the amount of damages sustained by the surface owner and the surface owner’s tenant, if any, for lost land value, lost use of and access to the surface owner’s land, and lost value of improvements caused by drilling operations.”
Deadwood’s lawyers alluded to the case’s importance in one court filing, writing that it “presented a unique situation” for the parties, the court and the jury to litigate the amount of compensation Deadwood could seek under the law.
The attorneys for the ranch said the case advanced North Dakota’s public policy of providing the “maximum amount of constitutionally permissible protection provided to surface owners” from oil and gas development.
Judge Daniel Hovland also ordered Fidelity to pay nearly $543,000 in attorneys’ fees, plus interest, and about $154,000 in costs and expenses.
Peter McGlynn, the Boston attorney who represented Deadwood along with former assistant U.S. attorney David L. Peterson and attorney Paul Germolus, both of Bismarck, said Fidelity will likely appeal the $1 million judgment unless the two sides can reach a settlement.
“And we sincerely hope that we can do something in that regard,” McGlynn said.
Fidelity’s attorney, Paul Sanderson of Bismarck, did not return multiple phone messages seeking comment.
James Grijalva, a University of North Dakota law professor whose areas of expertise include property law, said a jury verdict doesn’t set a precedent from a legal standpoint, but it could be an example for other juries to follow in thinking that a particular kind of damage is compensable.
“It’s kind of like the tobacco industry. They fought really hard never to lose a case, because once there’s a hole in the dam, the dike is breached,” he said.
Grijalva said he wasn’t familiar with the Deadwood case and didn’t know of any other court cases in which the surface damage law was used to award damages.
Started in 2006
Court documents trace the case back to 2006, when three real estate developers bought the surface rights to about 4,000 acres of undeveloped ranch land in Mountrail County with plans to develop the rolling hills and canyon along the Little Knife River into a hunting and recreational sporting ranch.
The developers — Charles N. Steele of Markham, Va., Stuart W. Pratt of Boston and David Richards of Bozeman, Mont. — spent more than $170,000 improving the property and were able to attract people willing to pay “considerable daily sums” to hunt and relax at the ranch, the lawsuit states.
In early 2008, Fidelity, which leased the rights to the minerals beneath the ranch, began contacting Deadwood about potential oil and gas drilling locations in what the partners considered the most pristine areas of the ranch. The two sides negotiated over drilling locations until July 2009, but Deadwood claims Fidelity was unwilling to compromise.
Fidelity is a subsidiary of WBI Holdings Inc., which is wholly owned by Centennial Energy Holdings Inc. Centennial’s parent company is MDU Resources Group.
On Sept. 2, 2009, Deadwood received a standard 20-day notice of Fidelity’s intent to drill three oil wells. Fidelity offered a one-time payment of $8,000 to $14,500 for surface damage associated with constructing access roads and the three well sites, plus a one-time payment of $18,000 for each well if it became a commercial producer of oil, court documents state.
Deadwood accepted the $18,000 payment for one of the wells but wanted $1.5 million for each of the other two wells if they became commercial producers, reasoning that those two wells would “destroy the pristine viewshed, the best hunting area … and the future development potential.”
Richards modified some of the documents to reflect the higher compensation and returned them to Fidelity.
Fidelity spent the following weeks getting drilling permits, building access roads and starting construction on the well sites. The company claimed that it didn’t notice the contract changes until Dec. 18, 2009. Five days later, Fidelity’s legal counsel sent Richards a letter requesting that he sign the original $18,000-per-well proposal. Richards refused.
Fidelity began drilling one of the wells on Christmas Day 2009 and the other on Jan. 23, 2010. Both became commercial wells in 2010.
Deadwood claims that, as predicted, the well sites — each about 5 acres — disrupted the landscape and its development plans.
“The result of this activity has rendered what had been a pristine natural landscape into an industrial zone,” the partners stated in their trial memo.
Deadwood sued Fidelity on Oct. 19, 2010, in Mountrail County, seeking $1.5 million for each of the two commercial wells, as well as costs and attorneys’ fees. Fidelity had the lawsuit moved to federal court in Bismarck two weeks later.
Fidelity denied Deadwood’s allegations, noting the mineral rights were already leased when Deadwood bought the land and arguing that it had effectively rejected Deadwood’s counter offer before starting to drill the two wells.
Hovland, the judge, granted partial summary judgment to Fidelity and threw out the breach-of-contract claim in May 2012.
“The undisputed facts establish that Fidelity was unaware of DCR’s $1.5 million dollar counteroffers and, therefore, never accepted the counteroffers," he wrote.
However, the judge noted that Deadwood was “not left without a remedy” and referred to the state’s surface damage act.
If the parties can’t agree on the damages, the surface owner can sue, as Deadwood did, resulting in the $1 million jury award — $500,000 for each commercial well.
Fidelity sought a different judgment or a new trial, calling the jury’s verdict “excessive” and “against the clear weight of the evidence,” but Hovland denied the motion. The judge agreed not to make Fidelity pay the $1 million judgment until pending motions in the case are settled.