MICHAEL R. LEATHERS, Plaintiff - Appellee,
RONALD LEATHERS, Defendant-Appellant, and INTERNAL REVENUE SERVICE; JAMES HOLDEN, Trustee for The Dirt Cheap Mine Trust Defendants-Appellees, and CHESAPEAKE OPERATING, INC.; OXY USA INC.; ANADARKO PETROLEUM COMPANY, L.P.; PIONEER NATURAL RESOURCES U.S.A., INC.; MERIT ENERGY COMPANY, Defendants. JOE ALFRED IZEN, JR., Attorney - Appellee. MICHAEL R. LEATHERS, Plaintiff - Appellee,
RONALD LEATHERS; RONDA R. OLSON; RUSTIN R. LEATHERS; INTERNAL REVENUE SERVICE, Defendants-Appellees, JAMES HOLDEN, Trustee for The, a/k/a Dirt Cheap Mine Trust, Defendant-Appellant, and CHESAPEAKE OPERATING, INC.; OXY USA INC.; ANADARKO PETROLEUM COMPANY, L.P.; PIONEER NATURAL RESOURCES U.S.A., INC., Defendants. JOE ALFRED IZEN, JR., Movant - Appellant.
from the United States District Court for the District of
Kansas (D.C. No. 6:08-CV-01213-EFM-GEB)
D. Fielder, Arvada, Colorado, for Ronald Leathers.
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.
L. Kite, Rebein Bangerter Rebein PA, Dodge City, Kansas, for
Michael R. Leathers.
S. Casey (Grant D. Klise with him on the brief), Triplett,
Woolf & Garretson, LLC, Wichita, Kansas, for Ronda R.
Olson and Rustin R. Leathers.
BACHARACH, PHILLIPS, and McHUGH, Circuit Judges.
McHUGH, CIRCUIT JUDGE.
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. 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.
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.
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
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.
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.
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.
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
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.
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.
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.
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.
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
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.
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.
IRS Tax Liens
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.
Dirt Cheap Mine Trust
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 and contemplated that Ronald would
convey to the Trust "a certain chose in action" in
exchange for 45/100 units of "Participation" in the
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.
Texas Reformation Action
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.
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.
Oxy Interpleader Action
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.
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.
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
Present Case, Generally
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.
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.
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").
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.
Ronald and Holden
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.
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
• 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
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
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.
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.
The United States
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.
Bifurcation, and First Round of Dispositive Motions in the
Quiet Title Phase
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.
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.
Reformation and Quiet Title
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.
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, ...