Opinion
NO. 2012-CA-000859-MR
05-09-2014
K. PETROLEUM, INC. APPELLANT v. SIMON M. VANDERPOOL; SANDRA JOAN VANDERPOOL; A.D.I.D. CORPORATION; AND MARSHALL HOLBROOK APPELLEES
BRIEFS FOR APPELLANT: Scott M. Webster London, Kentucky BRIEF FOR APPELLEES SIMON M. VANDERPOOL AND SANDRA JOAN VANDERPOOL: Darrell L. Saunders Corbin, Kentucky BRIEF FOR APPELLEES A.D.I.D. CORPORATION AND MARSHALL HOLBROOK: Greta S. Price Williamsburg, Kentucky
NOT TO BE PUBLISHED
APPEAL FROM WHITLEY CIRCUIT COURT
HONORABLE DANIEL BALLOU, JUDGE
ACTION NO. 02-CI-00371
OPINION
REVERSING AND REMANDING
BEFORE: NICKELL, THOMPSON, AND VANMETER, JUDGES. VANMETER, JUDGE: K. Petroleum, Inc. ("KPI") appeals from the Whitley Circuit Court order dismissing its claims against defendants Simon Michael ("Mike") Vanderpool, Sandra Vanderpool, and A.D.I.D. Corporation, and directing verdicts in favor of the defendants at the close of a two-day jury trial. The trial court submitted the defendants' counterclaims against KPI to the jury, which found in favor of the Vanderpools and recommended a judgment in their favor in the amount of $217,890.24. Thereafter, the trial court entered a judgment against KPI in accordance with the jury's verdict. KPI filed motions to vacate the judgment and for a new trial, which the trial court denied. KPI now appeals, arguing that the directed verdicts were premised on erroneous evidentiary rulings by the trial court. We agree with KPI and hereby reverse the trial court's order and remand this case for a new trial.
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. 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.
By "shut in" we mean Mike Vanderpool turned off the valves and unhooked the wells from KPI's pipeline located on the property.
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 the defendants' liability and directed verdicts in their 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.
Kentucky Rules of Civil Procedure.
On appeal, KPI first contends the trial court made erroneous evidentiary rulings, which led the court to improperly apply the Statute of Frauds as grounds for directing verdicts in favor of the defendants. Specifically, KPI maintains the trial court abused its discretion by excluding evidence of a written Settlement Agreement between KPI and the Nantzes, which KPI argues constitutes written proof of its leasehold interest in the subject property. KPI further asserts the trial court abused its discretion by excluding evidence of an Operating Agreement between KPI and Signal Gas Partnerships. We hold that the trial court improperly excluded the Settlement Agreement, but did not abuse its discretion by excluding the Operating Agreement.
The original oil and gas lease on the subject property was executed by the Nantzes and Mid-South Land & Exploration Co. in March of 1990 and is part of the record. The record also contains an assignment of that lease from Mid-South to Signal Reserve Corporation, executed in March of 1991. Signal Reserve laid a substantial pipeline on the Nantzes' property which, at the time of this trial, was still there. KPI's president and owner, Jam Khorrami, testified that Signal Reserve was owned by several partnerships and that KPI purchased all the available interests in those partnerships to gain control of the company's assets. The Operating Agreement at issue purportedly establishes how KPI came to operate the subject wells.
An appellate court reviews a trial court's evidentiary rulings for an abuse of discretion, i.e., "'whether the trial judge's decision was arbitrary, unreasonable, unfair, or unsupported by sound legal principles.'" Barnett v. Commonwealth, 317 S.W.3d 49, 61 (Ky. 2010) (citation omitted).
With respect to interests in real estate, the Statute of Frauds, set forth in KRS 371.010, provides, in pertinent part:
Kentucky Revised Statutes.
No action shall be brought to charge any person . . . [u]pon any contract for the sale of real estate, or any lease thereof for longer than one year . . . unless the promise, contract, agreement, representation, assurance, or ratification, or some memorandum or note thereof, be in writing and signed by the party to be charged therewith, or by his authorized agent.KRS 371.010(6) (emphasis added).
"[A]n oil or gas lease is an interest in land, and must be in writing, and no valid assignment thereof can be made except in writing." Kash v. United Star Oil Co., 192 Ky. 422, 424, 233 S.W. 898, 899 (1921). In particular,
an assignment of an oil and gas lease, to be enforceable, must be in writing and signed by the assignor or vendor, and no action can be maintained on a verbal assignment or on any contract respecting the sale of real estate, including oil leases, unless the contract, or some memorandum in writing, [is] signed by the party to be charged[.]Id. at 901. The purpose of the writing requirement is to protect the holders of title to realty from alleged verbal agreements for its sale or assignment. City of Murray v. Crawford, 138 Ky. 25, 32, 127 S.W. 494, 495 (1910).
Applying the Statute of Frauds to the present case, the "party to be charged" is the lessor, the Nantzes, and KPI was required to present written proof of its leasehold interest to succeed on its claim. Written proof does not require a contract; rather, "some memorandum in writing" suffices. Kash, 233 S.W. at 901. During trial, KPI sought to introduce a notarized Settlement Agreement between it and the Nantzes, which resolved prior claims by the Nantzes against KPI for underpaid royalty payments on the subject property. See Mobley v. K. Petroleum, Inc., Clay Circuit Court, Civil Action No. 98-CI-00308. In that case, the Nantzes explicitly pled that KPI was the successor-in-interest to the original oil and gas lease the Nantzes executed and, as a result, the Nantzes were entitled to receive a landowner royalty for gas produced and sold by KPI. KPI filed the Complaints in the Mobley action with the Whitley Circuit Court in the present action as proof of the Nantzes' allegations.
The Vanderpools, in turn, as assignees of the Nantzes, are subject to any valid, continuing leasehold interest on the land created by the Nantzes. "'Ordinarily, the purchaser of property takes subject to a lease thereof where he has actual or constructive notice of it, even though it is unrecorded, and the rights and liabilities existing between the grantee and the lessee are the same as those existing between the grantor and the lessee.'" Francis Co. v. Lincoln Fed. Bldg. & Loan Ass'n, 445 S.W.2d 153, 155 (Ky. 1969) (citation omitted).
We note the Vanderpools' entire Statute of Frauds argument is based on the misplaced notion that Signal Reserve Corporation is the "party to be charged," rather than the Nantzes.
Per the terms of the Settlement Agreement, KPI paid the Nantzes an agreed upon amount in exchange for the Nantzes' release of their claims against KPI. By its terms, the Settlement Agreement was to be binding on the Nantzes' successors. KPI argues the Settlement Agreement constitutes written proof of its leasehold interest in the oil and gas on the Nantzes' property so as to satisfy the Statute of Frauds and, when read in conjunction with the Land Contract, clearly shows that KPI's leasehold interest is binding on the Vanderpools as the Nantzes' successors.
KPI sought to admit the Settlement Agreement into evidence through the video deposition testimony of Robert Stivers, an attorney who represented KPI in the Mobley action. The Vanderpools objected to the admission of the portion of Stivers' video testimony that discussed the Settlement Agreement, and to the admission of the Settlement Agreement itself, which was attached as an exhibit to Stivers' deposition. The Vanderpools argued the Settlement Agreement was inadmissible hearsay. In response, KPI cited numerous grounds for admitting the Settlement Agreement: (1) the Vanderpools' objection was untimely since they failed to object 10 days before trial, as required by CR 30.02(4)(e); (2) the notarized Settlement Agreement is a self-authenticating document per KRE 902(8) and thus extrinsic evidence of its authenticity is not required as a condition precedent to its admission; and (3) the Settlement Agreement is admissible as a hearsay exception - a statement against interest pursuant to KRE 804(b)(3) made by an unavailable declarant per KRE 801. Ultimately, the trial court sustained the Vanderpools' objection on hearsay grounds, while acknowledging the objection was untimely per CR 30.02(4)(e). Stivers' video testimony was then edited to remove any discussion of the Settlement Agreement.
Kentucky Rules of Evidence.
With regards to the timeliness of the Vanderpools' objection, the Kentucky Supreme Court recently addressed the interplay between the 10-day requirement of CR 30.02(4)(e) and CR 32.02, and held that a party's failure to timely object shall not render admissible otherwise inadmissible evidence. Hashmi v. Kelly, 379 S.W.3d 108, 113 (Ky. 2012). Under CR 32.02, "objections may be made at the trial or hearing on the whole or any part of a deposition for 'any reason' which would require the exclusion of the evidence. . . . CR 32.01 conditions use of a deposition on the testimony on it being admissible as though the deponent were testifying at trial." Id. at 113. Conversely, the 10-day requirement of CR 32.02(4)(e) "is a convenience procedural rule rather than a substantive one. Its purpose is to avoid delay at trial while video testimony is being edited. CR 32.02 is a much more substantive rule dealing with the use of depositions at trial." Id. The Supreme Court elaborated:
The rules of discovery and use of depositions are not intended to foster the introduction of incompetent evidence or to encourage gamesmanship . . . One of theId. at 113-14.
bedrock principles expressed throughout the rules is fair notice and opportunity to be heard, which would be undermined by the trial court's elevation of the 10-day limitation period in CR 30.02 over the procedural guarantees in CR 32.02.
. . . .
. . . [T]he trial court must exercise its discretion to ensure that only properly admissible evidence comes in, even when objections to video depositions were not timely made. A rule designed for convenience should rarely trump a rule designed to ensure only admissible evidence is presented to the jury.
In the case at bar, the trial court properly declined to elevate the 10-day requirement over the substantive rule prohibiting admission of hearsay evidence. Still, the court's determination that the Settlement Agreement was inadmissible hearsay evidence was unsupported by sound legal principles. Generally speaking, hearsay evidence is not admissible except as provided in the civil rules or by rules of the Supreme Court of Kentucky. KRE 802. Identified exceptions to the hearsay rule include a "statement against interest" exception, which does not exclude hearsay evidence if the declarant is unavailable as a witness. KRE 804(b)(3). The definition of a "statement" includes "[a]n oral or written assertion[.]" KRE 801(a). A "declarant" is "a person who makes a statement." KRE 801(b). And "hearsay" is defined as "a statement, other than one made by the declarant while testifying at trial or hearing, offered in evidence to prove the truth of the matter asserted." KRE 801(c).
A person is "unavailable as a witness" if he or she "[i]s unable to be present or to testify at the hearing because of death or then existing physical or mental illness or infirmity[.]" KRE 804(a)(4). Contrary to the Vanderpools' assertion, KRE 804 does not require the declarant to be a party; rather, the declarant must simply be "unavailable."
A "statement against interest" is defined, in pertinent part, as:
A statement which was at the time of its making so far contrary to the declarant's pecuniary or proprietary interest, or so far tended to subject the declarant to civil or criminal liability, or to render invalid a claim by the declarant against another, that a reasonable person in the declarant's position would not have made the statement unless believing it to be true.KRE 804(b)(3).
Here, the Settlement Agreement constitutes a "statement" (a written assertion), made by unavailable witnesses, the Nantzes. The evidence at trial showed the declarants, Flora and Charles Nantz, were both unavailable as witnesses. Specifically, Mike Vanderpool testified that Flora was deceased and Charles had suffered a stroke and was physically infirm. Counsel for KPI further represented that he had attempted to serve Charles Nantz with a subpoena, but was informed by the sheriff that Charles was in Tennessee.
In addition, the Settlement Agreement released the Nantzes' claims against KPI, i.e., rendered their claims invalid, contemporaneous with KPI's payment. Therefore, the Settlement Agreement falls within the "statement against interest" exception to the hearsay rule and should have been admitted into evidence. Moreover, no extrinsic evidence of the Settlement Agreement's authenticity as a condition precedent to admissibility was required since the document was "accompanied by a certificate of acknowledgement executed in the manner provided by law before a notary public[.]" KRE 902(8). And even if evidence of the document's authenticity was required, Stivers' testimony sufficed in that regard.
Due to the trial court's finding that KPI failed to produce written documentation of its right to be on the Vanderpools' property, the court granted the defendants' motions for a directed verdict. Upon consideration of a motion for a directed verdict,
the trial court must draw all fair and reasonable inferences from the evidence in favor of [the non-moving party]. If the evidence is sufficient to induce a reasonable juror to believe . . . that the defendant is [liable], a directed verdict should not be given. For the purpose of ruling on the motion, the trial court must assume that the evidence for the [non-moving party] is true, but reserving to the jury questions as to the credibility and weight to be given to such testimony.Commonwealth v. Benham, 816 S.W.2d 186, 187 (Ky. 1991); accord Banks v. Commonwealth, 313 S.W.3d 567, 570 (Ky. 2010).
On appellate review, the test of a directed verdict is, if under the evidence as a whole, it would be clearly unreasonable for a jury to find [liability], only then the defendant is entitled to a directed verdict of acquittal.
Had the trial court admitted the Settlement Agreement into evidence, we believe, upon consideration of the evidence as a whole, that it would not have been clearly unreasonable for a jury to find liability. Consequently, the directed verdicts were not appropriate. Additionally, the trial court's exclusion of the Settlement Agreement is not harmless error, as the Vanderpools contend, because the sole basis upon which the trial court directed verdicts in favor of the defendants was premised on KPI's failure to produce written documentation of its right to be on the Vanderpools' property.
The Vanderpools present additional grounds for excluding the Settlement Agreement besides just hearsay, but those grounds were not raised before the trial court and therefore we decline to address them on appeal. See Ten Broeck Dupont, Inc. v. Brooks, 283 S.W.3d 705, 734 (Ky. 2009) ("[a]n appellate court 'is without authority to review issues not raised in or decided by the trial court[]'") (citations omitted). Likewise, we decline to address ADID's argument on appeal concerning lack of notice of KPI's interest since the record does not show that issue was ever submitted to the trial court for adjudication.
Next, KPI claims the trial court abused its discretion by excluding the Operating Agreement between it and Signal Gas Partnerships. We disagree.
KPI maintains the Operating Agreement provides additional written proof of KPI's leasehold interest in the subject property. The record shows KPI and Signal Gas Partnerships entered into the Operating Agreement in April 1995. In the Agreement, Signal Gas Partnerships sets forth its interest in certain oil and gas wells, leases, and/or oil and gas properties located in Kentucky, "more fully identified in Exhibit 'A' attached hereto and made a part hereof[.]" Exhibit A lists well numbers and their corresponding well name, i.e., the name of the property on which the wells are located. Two wells on the list are identified as the Nantzes' wells.
The Vanderpools objected to the admission of the Operating Agreement on grounds that the referenced Exhibit A was not attached to the Operating Agreement provided to them in discovery. Without Exhibit A, the Operating Agreement alone does not mention the Nantzes or their wells. KPI claims it supplied the Operating Agreement to the Vanderpools five years ago during discovery and the omission of Exhibit A should have been obvious to the Vanderpools such that they should have objected prior to the close of discovery instead of waiting until trial to object for the first time.
Yet, KPI does not provide any legal support for this position, other than citing a case from the Sixth Circuit, Varga v. Rockwell Int'l Corp., 242 F.3d 696, 698 (6th Cir. 2001), which we find to be inapposite. Furthermore, the record does not reflect that a pretrial order with objection deadlines regarding exhibits was ever entered by the trial court. As a result, KPI has failed to show the Vanderpools were in violation of any pretrial order, or that the court's decision to exclude the Operating Agreement was unsupported by sound legal principles.
Under the Local Rules of Practice, Thirty-Fourth Judicial Circuit, vol. 3, Ky. Rules Annotated (Michie/Lexis-Nexis 2013), a pretrial order addressing such matters was permissive. Therefore, if KPI wanted the protection of such an order, it should have sought the entry of one.
As noted, infra, we are remanding for a new trial. On retrial, KPI undoubtedly will have the opportunity to correct this omission.
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Lastly, KPI argues it is entitled to a new trial. CR 59.01 provides, in relevant part:
A new trial may be granted to all or any of the parties and on all or part of the issues for any of the following causes:
(a) Irregularity in the proceedings of the court, jury or prevailing party, or an order of the court, or abuse of discretion, by which the party was prevented from having a fair trial.
. . . .
(f) That the verdict is not sustained by sufficient evidence, or is contrary to law.
. . . .
(h) Errors of law occurring at the trial and objected to by the party under the provisions of these rules.
Appellate review of a trial court's denial of a motion for new trial is limited to whether the trial court's decision was clearly erroneous. Miller v. Swift, 42 S.W.3d 599, 601 (Ky. 2001). Here, the trial court's exclusion of the Settlement Agreement led the court to direct verdicts in favor of the defendants, based on its finding that KPI had failed to produce written evidence of its leasehold interest. This evidentiary ruling, and the directed verdicts that followed, was in error and denied KPI a fair trial.
Hence, the Whitley Circuit Court judgment, and order denying KPI's motions to vacate and for a new trial, are reversed and this case is remanded with directions for the court to conduct a new trial, and admit the Settlement Agreement into evidence during the new trial.
ALL CONCUR. BRIEFS FOR APPELLANT: Scott M. Webster
London, Kentucky
BRIEF FOR APPELLEES
SIMON M. VANDERPOOL
AND SANDRA JOAN
VANDERPOOL:
Darrell L. Saunders
Corbin, Kentucky
BRIEF FOR APPELLEES
A.D.I.D. CORPORATION AND
MARSHALL HOLBROOK:
Greta S. Price
Williamsburg, Kentucky