Appeal
from the Superior Court of the State of Alaska, Third
Judicial District, Kenai, Carl Bauman, Judge. Superior Court
No. 3KN-12-00338 CI.
Bruce
E. Falconer and Patrick W. Munson, Boyd, Chandler & Falconer,
LLP, Anchorage, for Appellant.
Matthew
Findley and Eva R. Gardner, Ashburn & Mason, P.C., Anchorage,
for Appellee Cook Inlet Natural Gas Storage Alaska, LLC. John
C. Hutchins, Assistant Attorney General, and Craig W.
Richards, Attorney General, Juneau, for Appellee State of
Alaska, Department of Natural Resources.
Jahna
M. Lindemuth and Katherine E. Demarest, Dorsey & Whitney LLP,
Anchorage, for Appellee Cook Inlet Region, Inc.
Before:
Stowers, Chief Justice, Winfree, Maassen, and Bolger,
Justices. [Fabe, Justice, not participating.].
OPINION
MAASSEN,
Justice.
I.
INTRODUCTION
This
case involves competing claims of right to the pore space in
a large limestone formation about a mile underground. Cook
Inlet Natural Gas Storage Alaska, LLC (CINGSA) has leases
with the holders of the mineral rights -- the State of Alaska
and Cook Inlet Region, Inc. (CIRI) -- that allow it to use
the porous formation as a reservoir for storing injected
natural gas. But the City of Kenai, which owns a significant
part of the surface estate above the reservoir, claims an
ownership interest in the storage rights and sought
compensation from CINGSA. CINGSA filed an interpleader action
asking the court to decide who owns the storage rights and
which party CINGSA should compensate for its use of the pore
space. On summary judgment CINGSA argued that CIRI and the
State own the pore space and attendant storage rights because
of the State's reservation of certain subsurface
interests as required by AS 38.05.125(a). The superior court
granted CINGSA's motion. The City appeals both the grant
of summary judgment and the superior court's award of
attorney's fees to CIRI.
We
affirm, concluding that the State and CIRI own the pore space
and the gas storage rights and that the superior court's
award of attorney's fees to CIRI was within its
discretion.
II.
FACTS AND PROCEEDINGS
A.
Facts
1.
The Cannery Loop Sterling C Reservoir Gas Storage
Facility
The
Cannery Loop Sterling C Gas Reservoir is located
approximately a mile below the Kenai River. The reservoir
began producing natural gas in 2000; gas was extracted from
the " microscopic spaces between or within rocks"
in the reservoir and from natural pools contained by "
[s]urrounding formations of denser, nonporous rock." The
reservoir's gas supply was eventually
depleted.[1]
Once
gas is extracted from sedimentary rock, the emptied pore
space -- " microscopic spaces between or within
rocks" -- can be used to store " non-native
gas," gas that has been extracted elsewhere. This method
of gas storage can help stabilize supply and accommodate
seasonal fluctuations in demand; utilities can store
non-native gas in the summer and withdraw it in the winter
when demand is higher. When the Sterling C Reservoir had been
economically depleted, CINGSA, a public utility, proposed to
convert the gas field into a storage facility for non-native
gas owned by other gas and electric utilities in Southcentral
Alaska.
CINGSA
first had to acquire the necessary property rights from the
owners of different interests in the surface and subsurface.
It acquired many of those rights through negotiation and,
where necessary, the process of eminent domain, available to
CINGSA as a public utility. The only surface estate at issue
here is that belonging to the City of Kenai, amounting to
approximately 576 acres.[2] The rights to minerals underlying
the property belong to the State of Alaska and Cook Inlet
Region, Inc. because of mineral reservations required by the
Alaska Land Act.[3] CINGSA concluded that the State and
CIRI held title to the pore space because they owned the
mineral rights, and in 2011 it therefore sought and obtained
leases from those entities.
2.
Ownership of the surface and mineral estates
a.
The surface estate
The
City of Kenai received a patent for the relevant surface
acreage in 1964, subject to the reservation of rights to the
State required by AS 38.05.125(a) for all conveyances of
State land.[4] The mineral reservation in the patent
recites the statutory language almost verbatim.
In 1973
the State granted oil and gas leases in the property and
other surrounding lands to Marathon Oil Company. The leases
reserved the State's right to dispose of the surface
estate,[5] as well as the State's "
right [as the Lessor] to authorize the subsurface storage of
oil or gas . . . in order to avoid waste or to promote
conservation of natural resources."
b.
The mineral estate
CIRI
received its rights to the subsurface estate under a
three-way agreement with the State and the federal government
pursuant to the Alaska Native Claims Settlement Act
(ANCSA).[6] The ANCSA-related land transfers,
which took place in 1980, had as a predicate step the
State's reconveyance to the United States of " all
of the [State's] right, title and interest, to the
subsurface estate" in the property. A few months later
the United States conveyed " the subsurface estate"
of the property to CIRI. Both deeds -- first from the State
to the federal government, then from the federal government
to CIRI -- were subject to " all valid existing rights
therein, if any," specifically listing the Marathon oil
and gas leases.
Accordingly,
CIRI received the lands subject to the City's preexisting
interest in the surface estate. As successor lessor of the
Marathon leases, CIRI received royalties from the gas
Marathon extracted.
3.
The City of Kenai's claim that it owned the gas storage
rights in the property
After
CINGSA secured its leases of gas storage rights in the
Sterling C Reservoir from the State and CIRI, the City
asserted its own claim to the ownership of those rights. But
the City allowed the storage project to go forward pending
negotiations, granting CINGSA a conditional right of entry in
the meantime. The right of entry provided that should "
either the City of Kenai or CINGSA, in its sole
discretion," determine that the parties were not making
progress in negotiations, CINGSA would file an action in
eminent domain and allow the courts to decide the ownership
issue.
B.
Proceedings
The
parties were unable to resolve their disagreement about gas
storage rights, and CINGSA filed a complaint against the City
in March 2012, seeking alternative forms of relief. In the
first count of its complaint, CINGSA sought to acquire by
condemnation " a gas storage easement and an easement
upon the mineral interests" owned by the City in the
Sterling C Reservoir. In another count, CINGSA interpleaded
CIRI and the State as defendants in order " [t]o prevent
double or multiple liability" given the "
overlapping claims for compensation by CINGSA for use of the
[property] for natural gas storage," and it asked the
court to decide the party or parties CINGSA owed
compensation. CINGSA also sought a " declaratory
judgment confirming that the City [held] no property interest
in the [gas storage rights]" ; an alternative judgment
that if the City did hold those rights CINGSA should
be granted an easement by condemnation, with just
compensation to the City; and -- as an alternative to
condemnation if the City held those rights -- reformation of
CINGSA's leases with the State and CIRI so that CINGSA
was not obliged to pay those entities for rights that were
legally the City's.
1.
Summary judgment
CIRI
and the City cross-moved for summary judgment on whether the
City owned the gas storage rights. The State and CINGSA
joined CIRI's motion, endorsing CIRI's position that
the storage rights belonged to the State and CIRI rather than
the City. The superior court granted summary judgment in
favor of CINGSA, the State, and CIRI. It concluded that
" the State reserved to itself the mineral estate, which
includes the underground storage rights," and that
" [t]he rights the City received [from the State]
regarding the property in question were surface estate
rights."
CINGSA
and the City filed a stipulation -- later approved by the
superior court -- to resolve all remaining condemnation
issues " regarding authority and necessity, possession
and just compensation and entry of final judgment against the
property rights held by the City." The superior court
entered final judgment in favor of CINGSA, the State, and
CIRI.
2.
Attorney's fees
CIRI
moved for an award of attorney's fees against the City,
seeking 20% of its reasonable actual fees under Alaska Civil
Rule 82(b)(2). The City opposed the motion, arguing that
CINGSA had initiated the suit, bringing in CIRI as a party
" in its sole discretion," and that the City had
not alleged any claims against CIRI that could make the City
liable for CIRI's fees. But the superior court concluded
that CIRI was entitled to attorney's fees under Rule
82(b)(2) because it prevailed on the main issue in the case:
" that CIRI owns the subsurface gas storage pore spaces
in dispute." The superior court found that the amount of
work done by CIRI's attorneys was reasonable, but it
awarded an amount less than the scheduled 20% because it
found that CIRI's Anchorage-based attorneys charged at
rates higher than those customarily charged in Kenai
Peninsula communities.
The
City appeals the superior court's decision on summary
judgment and its award of attorney's fees and costs to
CIRI.
III.
STANDARDS OF REVIEW
"
We review a superior court's decision on summary judgment
de novo, drawing all inferences in favor of, and viewing the
facts in the record in the light most favorable to, the
non-moving party." [7] We review " a superior
court's determination of prevailing party status and
attorney's fees for abuse of discretion."
[8]
We will find an abuse of discretion " if the award is
'arbitrary, capricious, manifestly unreasonable, or
stemmed from improper motive.'" [9] " We review the
interpretation of Alaska Civil Rules governing the award of
costs and attorney's fees de novo." [10]
IV.
DISCUSSION
The
central issue in this case is the ownership of the pore space
when the mineral and surface estates have been severed, as
they commonly are under Alaska's mineral reservation
statute, AS 38.05.125, a provision of the Alaska Land
Act.[11] There is a notable lack of consensus
in the courts and among legal scholars on the issue of
pore-space ownership.[12] This is our first opportunity to
address the issue; we do it in the unique context of
Alaska's land laws.
A.
The Superior Court Properly Granted Summary Judgment To CIRI,
The State, And CINGSA Because AS 38.05.125(a) Reserves The
Natural Gas Storage Rights To The
State.
The
City contends that as the owner of the surface it also owns
the underlying pore space or natural gas storage rights.
According to the City, the superior court erred when, in
granting summary judgment to the other parties, it reasoned
that (1) determining ownership of the storage rights is a
question of statutory rather than deed interpretation; (2)
the reserved rights under AS 38.05.125(a) include natural gas
storage rights; and (3) the " American rule" -- by
which the surface owner owns the rights to underground spaces
that have been depleted of their minerals -- did not apply.
1. The superior court properly addressed the
ownership of storage rights as a question of statutory
interpretation.
The
State patents conveying the land at issue to the City recited
verbatim the reservation of mineral rights that AS
38.05.125(a) generally requires. The City argues that the
superior court, when determining whether the parties intended
to convey or to reserve the pore-space rights, should have
interpreted these reservations using rules of deed
interpretation rather than statutory interpretation. We
interpret the language of a deed using a three-step process:
We first " look at the four corners of the document to
see if it unambiguously presents the parties'
intent" ; if it is ambiguous, we next " consider
'the facts and circumstances surrounding the
conveyance' to discern the parties' intent" ;
and finally, " [i]n the event that the parties'
intent cannot be determined, we rely on rules of
construction." [13] As ...