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Leathers v. Leathers

United States Court of Appeals, Tenth Circuit

May 2, 2017

MICHAEL R. LEATHERS, Plaintiff - Appellee,

         Appeal from the United States District Court for the District of Kansas (D.C. No. 6:08-CV-01213-EFM-GEB)

          Gary D. Fielder, Arvada, Colorado, for Ronald Leathers.

          Joe Alfred Izen, Jr., Bellaire, Texas, for James Holden, Trustee for the Dirt Cheap Mine Trust, and Joe Alfred Izen, Jr.

          Randolph L. Hutter, Attorney, Tax Division (Caroline D. Ciraolo, Principal Deputy Assistant Attorney General, Francesca Ugolini, Attorney, Tax Division, and Barry R. Grissom, United States Attorney, appeared with him on the briefs), United States Department of Justice, Washington, D.C., for the Internal Revenue Service/United States.

          Aaron L. Kite, Rebein Bangerter Rebein PA, Dodge City, Kansas, for Michael R. Leathers.

          Derek S. Casey (Grant D. Klise with him on the brief), Triplett, Woolf & Garretson, LLC, Wichita, Kansas, for Ronda R. Olson and Rustin R. Leathers.

          Before BACHARACH, PHILLIPS, and McHUGH, Circuit Judges.



         This case involves a dispute over the ownership of mineral rights appurtenant to several tracts of land located in Haskell County, Kansas, as well as the royalties due on those mineral rights. Michael Leathers and his brother Ronald Leathers each inherited half of these mineral rights from their mother.[1] But an error in a quit claim deed subsequently executed between the brothers left it unclear whether Ronald's one-half interest in the mineral estate had been conveyed to Michael.

         In January 2007, Michael filed a lawsuit seeking to quiet title to the disputed one-half interest and related royalties. As defendants, Michael named Ronald; Ronald's ex-wife, Theresa Leathers; James Holden, as Trustee for an entity called the Dirt Cheap Mine Trust; various energy companies, as producers of natural gas from the mineral rights; and the United States, on behalf of the Internal Revenue Service ("IRS"), as a holder of tax liens on any property owned by Ronald.

         In a series of orders spanning several years, the district court (1) reformed the quit claim deed to reflect that Ronald had reserved his one-half interest in the mineral estate; (2) awarded half of Ronald's one-half interest (i.e., a one-quarter interest) to Theresa, pursuant to Ronald and Theresa's divorce decree; and (3) held that Ronald owed approximately $1.5 million to the IRS and that the IRS's tax liens had first priority to any present and future royalties due to Ronald from his remaining one-quarter mineral interest.

         Ronald filed a timely appeal (Case No. 15-3264), and Holden and Joe Alfred Izen, Jr., the attorney for the Dirt Cheap Mine Trust, filed a separate appeal (Case No. 15-3280). The appeals were briefed and argued separately, and they largely raise independent issues. Nonetheless, because both appeals arise from a common, complicated factual and procedural background, we consolidate them for disposition and consider both appeals in this Opinion. For the reasons set forth below, we affirm the district court's judgment on all grounds.


         A. Factual History

         1. The Mineral Interests

         Michael Leathers and Ronald Leathers are brothers, and Louise Leathers was their mother. Louise owned 2.5 sections of land in Haskell County, Kansas (the "Property"). In 1973, Michael, Ronald, and Louise signed a partnership agreement forming a general partnership called the Leathers Land Company. Louise transferred the surface estate of the Property to the partnership, but she reserved ownership of the appurtenant mineral estate. When Louise died in 1991, ownership of the mineral estate passed to Michael and Ronald in equal shares. Michael and Ronald also each became 50 percent owners of the Leathers Land Company.

         In 1996, Michael invoked a mutual buy-out provision of the partnership agreement in order to purchase Ronald's 50 percent share of the Leathers Land Company's assets. This move led to a dispute between the brothers which ended in a state-court judgment ordering Ronald to convey his 50 percent interest in the surface estate of the Property to Michael. On May 11, 1998, Ronald signed a quit claim deed (the "Quit Claim Deed" or the "Deed") which transferred all of Ronald's interest in the Property to Michael. Critical here, the Deed did not expressly reserve Ronald's 50 percent interest in the Property's mineral estate. The Deed was recorded in Haskell County.

         In June 2000, Ronald's wife, Theresa Leathers, filed for divorce in Kansas state court. In connection with the divorce, Theresa filed a Notice of Lis Pendens with the Register of Deeds in Haskell County, specifically referencing the Property.[2]

         While the divorce was pending, Michael began hearing from several energy companies about issues with the title to the mineral rights in the Property. In September 2000, a representative from Chesapeake Energy Company ("Chesapeake") told Michael that the Deed had not reserved to Ronald any mineral rights appurtenant to the Property. The representative tried to contact Ronald as well, but Ronald did not respond.

         In October 2001, Anadarko Petroleum Corporation ("Anadarko") contacted Michael about future royalty payments on production from a new well. A division order included in the correspondence stated that Ronald held "no interest" in the mineral rights appurtenant to the Property, that Michael owned 50 percent of the rights, and that another entity owned the other 50 percent. Anadarko asked Michael to make any necessary corrections to the division order before signing and returning it. Michael edited the division order to show that he and Ronald each owned 50 percent of the mineral rights, and he sent it to Anadarko along with a letter explaining that this reflected the accurate ownership of the mineral estate and also noting his belief that Theresa would receive half of Ronald's share in their pending divorce. Michael also sent a copy of the letter to Theresa's attorney.

         In subsequent communications, Anadarko told Michael (1) that he would need to transfer 50 percent of the mineral rights to Ronald in order to fix the problem created by the Deed, (2) that Anadarko had sent a letter to Ronald informing him of the Deed's effect, and (3) that payment of one-half of future royalties would be held in a suspense account until the issue was resolved.

         In January 2002, Michael began receiving, and depositing in his bank account, royalty payments from the new Anadarko well. That same month, Ronald stopped receiving royalty payments from Chesapeake. Ronald called Chesapeake and was informed of the title problem.

         In May 2002, Michael testified in Ronald and Theresa's divorce case regarding the ownership, and value, of the mineral interests in the Property. Despite the unresolved title problem, Michael testified that Ronald owned half of the mineral rights. On July 5, 2002, the divorce court entered a divorce decree which awarded Theresa a 25 percent interest in the mineral rights in the Property (i.e., half of Ronald's 50 percent interest). The divorce court did not reform the Deed to reflect a reservation of mineral rights to Ronald.

         Confusion over ownership of the mineral estate and entitlement to royalty payments persisted for several more years. Theresa advised Ronald in 2003, and again in 2004, that she was not receiving royalty checks from Chesapeake, due to Chesapeake's concern about the title problem. In April 2004, Michael received his first royalty payment for production from another new Anadarko well, which he deposited in his bank account. In early November 2005, Ronald sent Michael a letter in which Ronald claimed he recently had discovered the problem with the Deed and believed Michael had been receiving royalty payments that should have been paid to him. Michael responded about a week later, noting that Ronald was informed of the Deed problem in October 2001 and that Theresa's attorney was informed later that year. Michael offered to help investigate any problems with Ronald's royalty payments if Ronald provided more information, and he agreed to execute a new quit claim deed conveying to Ronald and Theresa in equal shares the one-half mineral interest Ronald had inherited. Ronald did not respond to this offer.

         In December 2006, Michael determined that Ronald and Theresa were not receiving royalty payments on production from several wells and came to believe he had received payments belonging to one or both of them.

         2. The IRS Tax Liens

         Ronald did not file tax returns during the years 1997 through 2005, but the IRS determined that he owed, and so assessed against him, federal income tax for those years. The IRS then filed several Notices of Federal Tax Liens in Haskell County, Kansas, thereby effectively encumbering the Property. In April 2005, and again in September 2006, the IRS filed a tax lien for tax years 1997 through 2002. In November 2007, the IRS completed and mailed to Ronald a tax assessment for the years 2003 through 2005. In February 2008, the IRS filed a tax lien for Ronald's tax liabilities from those years. All told, the IRS concluded that Ronald owed more than $900, 000 in income tax, not including interest or penalties.

         3. The Dirt Cheap Mine Trust

         After receiving notice of the first tax liens, Ronald enlisted the services of James Holden to help Ronald protect his assets. Holden drafted and, on October 6, 2006, executed a "Contractual Trust Agreement" which created a trust called "The Dirt Cheap Mine" (the "Dirt Cheap Mine Trust" or the "Trust"), ostensibly to "provide a retirement vehicle for Ronald Roy Leathers." The agreement appointed Holden as Trustee for the Dirt Cheap Mine Trust[3] and contemplated that Ronald would convey to the Trust "a certain chose in action" in exchange for 45/100 units of "Participation" in the Trust.

         That same day, Ronald signed a notarized document entitled "Irrevocable Assignment of Chose(s) in Action" whereby he "convey[ed] all right, title and interests to [the mineral rights he had inherited] and 'chose(s) in action' flowing from said 'mineral rights'" to the Trust. The Trust allegedly was created to recover Ronald's portion of the mineral rights appurtenant to the Property and any royalties mistakenly paid to Michael. But Ronald and Holden both would later concede that the Trust was created to shield Ronald's assets from the IRS.

         4. The Texas Reformation Action

         On October 20, 2006, an attorney named Joe Alfred Izen, Jr., filed a lawsuit on behalf of Ronald and Holden in Texas state court against Michael; Michael's wife, Nancy Leathers; Anadarko; Pioneer Natural Resources, USA, Inc.; OXY USA Inc.; and Coastal Petroleum, Inc. The lawsuit sought to reform the Quit Claim Deed, to recover royalty payments that should have been paid to Ronald, and to recover damages from Michael. The Texas case was later dismissed for lack of subject matter jurisdiction because it was deemed an in rem action affecting the Property located in Kansas.

         Meanwhile, on October 23, 2006, Holden signed a notarized document that appointed and retained Izen "to represent the financial interests of [the] Trust." In exchange for Izen's services, the document awarded Izen 45 of the remaining 55 units of Participation in the Trust. On October 27, 2006, Holden executed an "Attorney Consultation and Fee Contract" with Izen on behalf of the Trust, under which the Trust retained Izen for a contingent fee of 45 percent of any amount collected from Michael, Michael's wife Nancy, and Theresa. Ronald was not a party to either agreement.

         5. The Oxy Interpleader Action

         On February 26, 2007, one month after Michael initiated the present case (which is addressed below), OXY USA Inc. ("Oxy") filed an interpleader action in the United States District Court for the Southern District of Texas, naming Michael, Nancy, Ronald, Holden, and the IRS as defendants. Oxy was holding approximately $25, 000 in suspended royalty payments owed on the disputed one-half mineral interest and sought the assistance of the court in determining who was entitled to the money.

         Michael and Nancy disclaimed any interest in the royalty payments. That left the IRS, on the one hand, and Ronald and Holden, on the other, with competing claims to the money. The district court concluded, and the attorney for Ronald and Holden seemingly conceded, that Holden was a "fake trustee, " that there was "no substance to the [Dirt Cheap Mine Trust], " and that the Trust was a "fake trust." Therefore, the district court concluded the IRS had the superior claim to the money.

         Ronald and Holden appealed, and the United States Court of Appeals for the Fifth Circuit affirmed in an unpublished opinion. See OXY USA Inc. v. Holden, 306 F.App'x 69 (5th Cir. 2009) (per curiam) (unpublished). As relevant here, the Fifth Circuit stated that "[t]he parties conceded [in the district court] that Dirt Cheap Mine Trust was a fake trust, and therefore Holden did not have an interest in the funds superior to Ronald and the IRS." Id. at 72.

         B. Procedural History

         1. The Present Case, Generally

         On January 5, 2007, Michael filed three separate actions in the Kansas state district court located in Haskell County (the "state court"), seeking to quiet title to the disputed one-half mineral interest and the suspended royalties, pursuant to Kansas Statutes Annotated § 60-1002. Michael named as defendants Ronald, Holden, Theresa, and the various energy companies with producing wells on the Property. The three actions eventually were consolidated.

         Ronald and Holden initially were represented by local counsel, who filed answers, counterclaims, and crossclaims on their behalf. Then, in March 2007, Izen was admitted pro hoc vice to represent Ronald and Holden in the case.

         In December 2007, Michael discovered the IRS had filed tax liens against Ronald and moved to amend his petition and to add the United States as a necessary party. His motions were granted, and on June 16, 2008, Michael filed an amended petition, naming the United States as a party potentially claiming an interest in the disputed mineral rights and royalties. The United States filed a notice of removal on July 16, 2008, and the case was removed to the United States District Court for the District of Kansas (the "district court").

         Before and after the amended petition was filed and the case removed, the parties submitted various answers, counterclaims, and crossclaims. Because many of these separate actions are relevant to the issues on appeal, we summarize them briefly here.

         a. Ronald and Holden

         In February 2007, Ronald and Holden filed an answer to Michael's original quiet title petitions in which they asserted affirmative defenses and brought counterclaims, crossclaims, and third-party actions. Among the defenses asserted were (1) reformation, asking that the Deed be reformed to reflect the parties' intention that Ronald would retain the one-half mineral interest he had inherited; and (2) unjust enrichment, stating that Michael paid nothing for the erroneously transferred mineral interest and was unjustly enriched by his retention of the interest and receipt of associated royalty payments.

         They also asserted four causes of action as either a counterclaim or a crossclaim:

Restitution and/or Recovery of Legal Damages-First, the response asserted a counterclaim against Michael and the energy companies for a decree of restitution ordering that any royalties attributable to the disputed one-half interest (whether disbursed or held in suspense) be paid to Holden (not Ronald), since Ronald allegedly assigned his interest to the Trust.
Breach of Fiduciary Duty and Imposition of Constructive Trust -Second, the response asserted a counterclaim against Michael, alleging Michael owed Ronald a fiduciary duty under Kansas law and breached that duty in various ways.
Decree for Complete Accounting-Third, the response asked for a decree directing all other parties, except Theresa, to prepare and file with the district court a complete accounting of all payments made, due, or received, which are attributable to the disputed one-half interest.
Declaratory Judgment or Equitable Decree-Finally, as a crossclaim against Theresa, the response asserted Ronald and Holden are entitled to a decree finding that, to the extent they successfully recover the mineral interest, royalty money, or other damages, they should recover those damages free of any claim of
Theresa. Ronald and Holden asserted that, due to the Deed, Ronald did not own the mineral interest at the time of Theresa and Ronald's divorce. They therefore claimed the divorce court lacked authority to award Theresa a share of the mineral interest in the decree because it was not marital property.

         Ronald and Holden summarized their requested relief in a list of 15 items, which included reformation of the Deed and an order declaring that the disputed one-half interest and related royalties are now owned by Holden, as Ronald's assignee. Neither Ronald nor Holden filed a response to Michael's amended petition.

         b. Theresa

         In February 2007, Theresa filed answers to Michael's original petitions, requesting that the court enter a decree quieting title, assigning her a 25 percent interest in the mineral rights, and ordering the energy companies to pay her the corresponding portion of the suspended royalties. On July 30, 2008, Theresa filed in the state court an "Answer/Cross-claim/Counter-claim" to Michael's amended petition. Because the United States had removed the case already, this pleading was not transferred to the district court. Theresa then filed a notice of her pleading in the district court, with the pleading attached.

         Theresa organized her counterclaim against Ronald and Holden, and crossclaim against Michael, under the same heading, generally asserting that (1) she is entitled to a judgment declaring her the owner of 25 percent of the mineral rights appurtenant to the Property, contrary to Michael's claim; (2) Ronald is barred by res judicata from asserting claims against her that conflict with the divorce decree; (3) Ronald and Holden's claims against her should be disallowed because they are meritless; (4) she should be awarded fees associated with defending against Ronald and Holden's claims; (5) the court should order an accounting, similar to that requested by Ronald and Holden; and (6) the court should order that her interest in the mineral estate and royalties is free of any claim by the IRS.

         c. The United States

         After removing the case to federal court, the United States filed its first answer to Michael's amended petition on August 18, 2008. On June 21, 2010, the government filed an amended answer in which it asserted a single crossclaim against Ronald. Specifically, the government brought a civil action under 26 U.S.C. § 7401 to reduce the outstanding tax assessments against Ronald to judgment. The government alleged that, as of May 1, 2010, Ronald owed approximately $1.4 million in income tax for the years 1997 through 2005, including interest, and it asked for a judgment against Ronald in that amount, plus future interest. Ronald and Holden answered the United States' crossclaim on July 9, 2010, asserting various affirmative defenses.

         2. Bifurcation, and First Round of Dispositive Motions in the Quiet Title Phase

         In November 2008, the district court granted the parties' joint motion for separate trials, ruling that the case should be bifurcated. The court determined that the quiet title issues, including Ronald and Holden's, and Theresa's, respective counterclaims and crossclaims, should be addressed in the first phase of the litigation. All other issues, including the accounting actions and tax matters, would be addressed in a second phase thereafter.

         Between March and April of 2009, Theresa, Michael, and Ronald and Holden each filed motions for summary judgment regarding the first-phase issues and claims. On May 13, 2010, after the motions were fully briefed and heard, the district court issued a comprehensive order granting Theresa's motion, and granting in part and denying in part both Michael's, and Ronald and Holden's, motions ("May 2010 Order"). We now summarize the parties' arguments, and the district court's findings, with respect to the issues relevant to the present appeals.

         a. Reformation and Quiet Title

         Theresa moved for summary judgment, asking the court to grant Michael's request for quiet title. Specifically, Theresa argued the court should (1) reform the Deed to reflect the parties' original intention that Ronald would reserve his one-half mineral interest, and (2) enforce the divorce decree by awarding her half of Ronald's 50 percent mineral interest. Michael did not oppose Theresa's requested relief. Although Ronald and Holden also sought reformation of the Deed to reflect the parties' intent that Ronald retain his 50 percent interest in the mineral estate, they opposed on several grounds Theresa's claim to a one-quarter portion of the mineral rights.

         The district court determined reformation was appropriate under Kansas law due to mutual mistake because both Michael and Ronald intended that Ronald would retain his one-half interest in the mineral estate when he conveyed his one-half interest in the surface estate to Michael by the Deed. The district court further concluded that the reformation related back to the date the Deed was executed-May 11, ...

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