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Ramsey Herndon LLC v. Whiteside

Supreme Court of Illinois

November 30, 2017

RAMSEY HERNDON LLC, Appellee,
v.
LISA WHITESIDE, Appellant.

          JUSTICE GARMAN delivered the judgment of the court, with opinion. Chief Justice Karmeier and Justices Freeman, Thomas, Kilbride, Burke, and Theis concurred in the judgment and opinion.

          OPINION

          GARMAN JUSTICE

         ¶ 1 Plaintiff Ramsey Herndon LLC sued defendant, Lisa Whiteside (formerly known as Lisa E. Luchtefeld), doing business as Beam Oil Company, for breach of contract and conversion because defendant refused to pay plaintiff royalties arising from an oil and gas lease. The Macon County circuit court granted defendant's motion to dismiss with prejudice under section 2-615 of the Code of Civil Procedure (735 ILCS 5/2-615 (West 2014)), finding that plaintiff failed to state a cause of action. The court determined that plaintiff did not own the claimed overriding royalty interest but defendant did. The Fourth District affirmed the dismissal of the conversion claim in count II but remanded the case for further proceedings on the breach of contract claim in count I. 2016 IL App (4th) 150853-U, ¶ 1. Defendant appealed. Plaintiff did not challenge the dismissal of the conversion claim in count II, so we address only the claim for breach of contract in count I.

         ¶ 2 We agree with the circuit court that plaintiff failed to state a cause of action for breach of contract. The instrument of assignment unambiguously transferred all of plaintiff's interest to defendant, so defendant's refusal to pay plaintiff royalties was not a breach. We reverse the appellate court's decision to the contrary and reinstate the circuit court's order dismissing count I of plaintiff's complaint.

         ¶ 3 BACKGROUND

         ¶ 4 A. Oil, Gas, and Mineral Market

         ¶ 5 Some background information on the oil, gas, and mineral market may help clarify the various interests involved. When a landowner discovers that its property has oil, gas, or mineral reserves, often it is not equipped to extract those reserves itself. Instead, the landowner enters into a lease with an operator. The operator purchases the right to occupy the land and extract the oil, gas, or minerals. See People ex rel. Harris v. Parrish Oil Production, Inc., 249 Ill.App.3d 664, 666 (1993). The operator's interest is called a "working interest, " and this interest bears all the expenses associated with extracting the resources. The landowner retains the right to a portion of whatever oil, gas, or minerals the operator extracts. Typically the landowner retains a one-eighth interest in the extracted resources. The landowner's interest is called a "royalty interest." See generally Bruce Kramer, Royalty Interests in the United States: Not Cut From the Same Cloth, 29 Tulsa L.J. 449 (Spring/Summer 1994). Once the operator extracts the resources from the land, it compensates the landowner for that portion.

         ¶ 6 Sometimes the operator will decide that it does not want to conduct business by itself, so it seeks partners. The operator divides its working interest into pieces and leases those pieces to partners. Like in the initial deal with the landowner, the operator can retain a portion of whatever oil, gas, or minerals the partners extract. This is called an "overriding royalty interest" or an "override." Id. at 457. If the partners extract oil, gas, or minerals, they must compensate both the original landowner for its royalty interest and the initial operator for its override.

         ¶ 7 In the present case, plaintiff was the operator. Plaintiff and its partners conveyed the working interest to defendant. This court must decide whether plaintiff also conveyed its override.

         ¶ 8 B. Factual and Procedural History

         ¶ 9 The circuit court found that plaintiff conveyed its override to defendant, so it granted defendant's motion to dismiss. Whether to grant or deny a motion to dismiss is a question of law that this court reviews de novo. Ferris, Thompson & Zweig, Ltd. v. Esposito, 2017 IL 121297, ¶ 5. The court accepts all well-pleaded facts as true and construes those facts in the light most favorable to the plaintiff. If the plaintiff can prove no set of facts that would entitle it to recovery, the court should grant the motion to dismiss. Kanerva v. Weems, 2014 IL 115811, ¶ 33. If the plaintiff attached exhibits to its complaint, those exhibits are part of the pleadings, and the court may consider them in evaluating the complaint. 735 ILCS 5/2-606 (West 2014); Ferris, Thompson & Zweig, Ltd., 2017 IL 121297, ¶ 6.

         ¶ 10 Plaintiff alleged the following: In 2007, plaintiff entered into an agreement with Eleanor and Norman Jordan (lessors) whereby plaintiff acquired the right to develop oil and gas reserves on 220 acres of the lessors' property in Macon County, Illinois. Plaintiff's interest here is the working interest. Plaintiff also promised to pay the lessors a royalty for oil and gas produced on the land. After this first conveyance, plaintiff owned a working interest, and the lessors owned a royalty interest.

         ¶ 11 Later that year, plaintiff assigned 75% of its working interest to Headington Oil, Limited Partnership, Focus Energy LLC, and Bayswater Exploration & Production, LLC (collectively, third parties). Plaintiff reserved its own royalty in the interest it conveyed to the third parties. This is an "override." Plaintiff owned the override and the remaining 25% of the working interest, subject to the lessors' royalty interest. The third parties owned 75% of the working interest, subject to the lessors' royalty interest and plaintiff's override. The lessors retained their royalty interest.

         ¶ 12 Two years later, plaintiff, the third parties, and defendant entered into the agreement that is the subject of this lawsuit. Plaintiff and the third parties each assigned to defendant "all of [their] right, title and interest in and to the oil, gas and mineral leases *** together with a like interest in and to all personal property located therein." Paragraph six of the agreement also provided that defendant agrees "to assume, be bound by and subject to each Assignor's express and implied covenants, rights, obligations and liabilities" and that defendant's interest "shall bear its proportionate share of royalty ...


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