Title: CHRISTIAN v A A OIL CORP BYRNE

State: montana

Issuer: Montana Supreme Court

Document:

No. 12230 I N T H E S U P R E M E C O U R T O F T H E STATE O F MONTANA 1973 GORDON CHRISTIAN and L O R E N E CHRISTIAN, h i s wife, P l a i n t i f f s and Respondents, A. A. OIL CORPORATION, a corporation, Defendant, and R O B E R T E. BYRNE, Defendant and Appellant; -."------- R O B E R T E. BYRNE, Cross -Complainant and Appellant, A. A. OIL CORPORATION, a corporation, GORDON CHRISTIAN and L O R E N E CHRISTIAN, Cross-Defendants and Respondents. Appeal from: D i s t r i c t Court of the Ninth J u d i c i a l D i s t r i c t , Honorable R. D. McPhillips, Judge presiding. Counsel of Record : For Appellant: Nelson and Kalbfleisch, Shelby, Montana James A. Nelson argued, Shelby, Montana For Respondents: Aronow, Anderson and Beatty, Shelby, Montana Robert G. Anderson argued, Shelby, Montana Church, Harris, Johnson and Williams, Great F a l l s , Montana Douglas C. Allen argued, Great F a l l s , Montana Submitted: -, January 22, 1973 Filed: F B 2 7 1973 Mr. Justice Frank I . Haswell delivered the Opinion of the Court. Plaintiff landowners, Gordon and Lorene Christian, brought t h i s action to quiet t i t l e t o separate oil and gas leases owned by A. A. Oil Corporation and Robert E . Byrne, defendants. This appeal i s from a judgment in the d i s t r i c t court of Toole County by the Hon. R. D. McPhillips, d i s t r i c t judge, sitting without a jury. Judge McPhillips found A. A . Oil's 1741.64 acre lease valid, subject t o a top lease on the same lands in favor of Robert E. Byrne; and finding an 867.42 acre lease valid in favor of Byrne. Byrne now appeals from the judgment relating t o the larger lease only. On April 5, 1940, James and Bertha Christian executed an "unless" type oil and gas lease t o John Reynolds covering a t r a c t of about 1740 acres i n Tool e County, Montana. Shortly thereafter, t i t l e to t h i s leasahold entered was assigned to A . A. Oil Corporation. The lease was amended twice, f i r s t i n 1941 and again 1946, each time extending the lease for five year periods. Incorporated into one of the amendments was a provision that i n the event the lessor should believe the lessee t o be in default of any of the covenants, lessor was t o give lessee notice in writing specifying the alleged violation and lessee was t o have forty-five days within which t o remedy any existing breach. The primary term of the lease expired on July 1 , 1951. In 1950 an oil and gas well known as Christian #I was completed, with an estimated natural gas flow of 250,000 t o 500,000 cubic f e e t of gas per day. Christian #1 well was plugged and abandoned i n 1958 without any oil or gas having been commercial ly sold therefrom. The d i s t r i c t court also found that d r i l l ing of Christian #2 commenced on July 1, 1951 and was completed later that same year. Gas from Christian #2 was f i r s t purchased by Montana-Dakota Utility Co. In November, 1954, Montana Power Co. started purchasing natural gas from said well. Cost of operation and supervision for producing i s provided by Montana Power Co. There i s no evidence that Christian #2 was ever plugged and abandoned. The d i s t r i c t court found that a t the time of the t r i a l Christian #2 had an estimated gas production of 1,500,000 t o 3,000,000 cubic feet of gas per day. N o evidence was offered to show the capacity to be any different except the testimony of Jerry Branch, a geologist, who testified he thought the well to be noncomnercial. The district court allowed Branch to testify over repeated objections that sufficient foundation was not laid and that he was not qua1 ified to testify on the subject. After hearing Branch's testi- mony, the court sustained the objections and disregarded Branch's testimony. N o facts were presented as t o whether Christian #2 had sufficient pressure to force gas into a nearby pipeline. Gordon Christian gave notice on August 14, 1963, stating that A. A. Oil had not paid royalties or rentals, had failed to conduct exploration, and that the lease would be declared forfeited " * * * unless the breaches of the terms of said oil and gas leases are corrected and remedied within forty-five (45) days of the date of service of said notice." On August 19, 1963, Gordon and Lorene Christian executed to Robert Byrne an oil and gas lease on the same lands involved in the A. A. Oil lease. Byrne gave the Christians a draft for $1,741.64 in payment, b u t i t was not presented for payment for nearly two years after issued. On this same day, the Christians requested that the lease be returned due to the conflicting prior lease with A. A. Oil. Byrne refused and duly recorded the lease. In August of 1963, Gordon and Lorene Christian commenced a quiet t i t l e action on the tract in question against A. A. Oil and Robert Byrne. The object of the suit was to extinguish the leasehold interests of Byrne and the A. A. Oil Corporation. Byrne n o w appeals from the judgment ex- tinguishing his leasehold interest. Gordon Christian died in June, 1965 and his estate was probated in Toole County. In October of 1966, Lorene Christian as executrix of his estate petitioned the court for authority to ratify the A. A. Oil lease, reciting that a settlement had been reached between A. A. Oil and the estate. Over objections of Byrne, the probate court permitted the settlement. In July, 1965 A. A. Oil conveyed their lease to Bernice Lutz, who i s holding in trust for Cedor Aronow and others, with a reservation of an overriding royalty and retention of two gas wells. The significant issues raised upon appeal are: (1) What effect does a notice clause have on the term of the 1 ease after expiration of the primary term? (2) Was the d i s t r i c t court correct i n finding the A. A. Oil Corporation lease a valid lease? (3) Does the principle of equitable estoppel have any application t o the facts as presented i n this case? (4) Did the probate court have authority to ratify the settlement of the A. A. Oil lease? (5) Is the evidence of Branch, the geologist, concerning costs and production admissible? (6) Is i t permissible for a landowner t o s h i f t the burden of proof t o an adverse intervening lessee to prove an underlying oil and gas lease invalid? In Montana oil and gas leases are t o be construed liberally i n favor of the lessor and s t r i c t l y against the lessee. Schumacher v. Cole, 131 Mont. 166, 309 P.2d 31 1 ; Thomas v. Standard Development Co., 70 Mont. 156, 224 P. 870. And further, while forfeitures are usually not favored i n the law, due to the peculiar nature of oil and gas leases, forfeitures are here favored. Solberg v. Sunburst Oil & Gas Co., 76 Mont. 254, 246 P. 168. The f i r s t issue, the effect a notice clause has on the term of the lease after expiration of the primary term, is the principal issue upon appeal. In the original oil and gas lease executed on April 5, 1940, the habendum clause provided I' * * * that this lease shall remain i n force for a term of 5 years from this date and as long thereafter as oil or gas, or either of them, i s produced from said land by the lessee." Subsequently, on July 1 , 1941, the primary term was extended " * * * subject to compliance with its original and * * * amended conditions." In paragraph (d) of the amended lease appears the following provisions: "(d) - That i n event lessor has occasion t o charge that lessee or assigns may not be carrying out his (or i t s ) obligations under intent of terms of lease and amend- ments thereof * * * Lessor shall notify Lessee i n writing, specifying the alleged breach and Lessee shall have the full period of forty-five days from and after date of service of such notice within which to remedy any existing breach * * * lease shall terminate at the option of the 1 essor" . Byrne contends that the above notice provision has no application to an expired oil and gas lease, citing Schumacher this Court held that an "unless" type oil and gas lease may expire automatically at the conclusion of the primary term without a declaration of forfeiture or notice to a lessee if such be the general intent of the lease. See also McDaniel v. Hager-Stevenson Oil Co., 75 Mont. 356, 243 P. 582. The Schumacher and McDaniel cases, however, can be distinguished. In those cases the Court found an automatic termination at the expiration of the primary term because no drilling, no payment of rentals, or anything else was ever done beyond the initial consideration for the lease. No notice is required and an "unless" type lease will automatically terminate if the lessee fails to commence drill ing, pay delay rentals, or comply with the other obligations in the habendum clause. But here the dis- trict court found that at the end of the primary term Christian #1 well had been drilled, having an estimated natural gas flow of 250,000 to 500,000 cubic feet of gas per day. In addition, A. A. Oil had commenced drilling the Christian #2 well. In light of these facts the district court was correct in finding that the A. A. Oil lease did not automatically terminate at the end of the primary term. In Fey v . A . A. Oi 1 Corp. , 129 Mont . 300, 285 P. 2d 578, an almost identical notice clause was present. There this Court ruled that the lessor who intends to claim forfeiture, where development is an element, has the duty to demand that development proceed or commence. In this respect, when an oil and gas lease contains a notice clause, compliance with that clause is necessary after expiration of the primary term of the lease where drilling has commenced, the well remains capable of producing, and the lessee is con- tinuing to develop with reasonable diligence. After notice is given of claimed forfeiture, it is for the court to determine whether the amount of production or development is in accord w i t h the terms of the agreement. T h i s leads us to the second issue involved i n this appeal--whether the A. A . Oil lease continued in full force and effect. The parties agreed that the lease should continue in effect as long as oil or gaswasproduced and the lessee exercises reasonable diligence in development. The 1941 amended 1 ease specifically provides : "(e) - That it i s understood and agreed that the commence- ment of operations for development of o i l , and/or gas production upon said lands by lessee or assigns within the term of said lease and amendments thereof shall operate to extend same and lessee's rights, privileges and interests as hereunder for and during such period of time as Lessee or assigns shall prosecute such operations with reasonable diligence after the term expiration hereof, and in the event oil and/or gas in commercial quantity be discovered as a result thereof, this lease shall thereupon be and thereafter remain as fully in force and effect as though such discovery had been accomplished within the term here- of as hereinbefore stated". The test for determining whether there was sufficient production or whether the lessee was acting with reasonable diligence in producing and marketing the gas from the leased lands is the diligence which would be exer- cised by the ordinary prudent operator having regard to the interests of both lessor and lessee. Sullivan, Handbook of Oil and Gas Law, S 91, p. 173, 2 Brown, Oil and Gas Leases, 2d ed., g16.02, p. 16-49. This i s a question of fact that will depend upon the facts and circumstances of each case. Berthelote v. Loy Oil Co,, 95 Mont. 434, 28 P.2d 187. The rule pertaining to oil i s different from gas due to the peculiar characteristics of producing gas. Oil may be stored above ground in tanks or other receptacles and may be moved t o the market by various modes of transportation. Gas must be stored below ground and i s moved to the market only by pipeline. In addition, the product of a gas well can only be trans- ported to a market when the volume and pressure are sufficient. 2 Williams, Oil & Gas Law, § 853, p. 388. The parties to the lease involved here may well have had this prob- lem i n mind. Paragraph (c) of the amended lease provides: "(c) - That if natural gas only, or as long as natural gas only, i s found in comercially productive amounts on the lands covered by said leases and amendments thereto, Lessee Is and Assigns ' obl igations shall not require the producing of same until there is a commercial market avail- able for such natural gas * * *." Ordinarily, the mere discovery of oil and gas is not sufficient under a lease continuing, as i n the present case, for "as long thereafter as oil or gas is produced." The oil or gas must be withdrawn from the land and reduced to possession for use i n commerce, especially where the real consideration for the lease i s the proceeds. Here w e are dealing w i t h gas producing wells only. The discovery of gas i n commercial quantities during the primary term satisfies the "thereafter" provisions of the habendum clause for a period of time, and thereby extends the lease into the secondary term. After the mineral i s discovered the lessee i s required to use reasonable diligence i n operating the well and marketing the product within a reasonable time. Failure t o do so will result i n termination of the lease under the habendum clause after the expiration of the primary term. Berthelote v . Cole, supra; 2 Williams, Oil & Gas Law, s 854, p. 394; Sullivan, Handbook of Oil and Gas Law, 5 4 1 , p. 97, 5 4 3 , p. 100. I t has been held sufficient, under a lease similar t o the one a t issue here, to produce gas i n commercial quantities, even though the gas is not i n fact marketable because there was no available pipeline f a c i l i t i e s or no commercial market w i t h i n the area. Fey v. A. A. Oil Corp., 129 Mont. 300, 285 P.2d 578; Brown, Oil and Gas Leases, 2d ed., 5 5.06, p. 30. How- ever satisfaction of the marketing covenant i n paragraph C of this lease will not satisfy the habendum clause indefinitely. After a reasonable time the lease will expire i f there i s no production. The d i s t r i c t court found the prevailing price paid for gas by the pipeline owner of six cents per thousand cubic feet (five cents for the years 1953 to 1956, six cents from 1956 to 1970) was exceedingly modest and suggestive of the fact that a market for the gas i n the quantity which the well was capable of delivering did not exist. Christian #2 well had an estimated producing capacity of 1,500,000 to 3,000,000 cubic feet of gas per day. B u t there was no evidence that a commercial market was available t o purchase the gas. Further, there was no competent evidence t o show t h a t the gas well d r i l l e d could not produce gas i n paying quantities. This Court i n Berthelote s e t down the r u l e i n reference t o the "thereafter" clause t h a t t o continue the lease a f t e r the f i x e d term requires t h a t o i l o r gas i s produced i n paying quantities. There t h i s Court upheld t h a t p a r t o f the i n s t r u c t i o n t o the j u r y which defined "paying quantities" t o mean production i n such quantities as w i l l pay a p r o f i t t o the lessee over operating expenses, excluding the i n i t i a l cost o f d r i l l i n g and equipp- i n g the wells. This i s s t i l l the law i n t h i s state. Due t o the alignment of the parties i n t h i s action t o quiet t i t l e the burden rested upon Byrne t o prove t h a t the A. A. O i l we1 1 was incapable o f producing gas i n paying quantities. Byrne was required t o prove t h a t A. A. O i l d i d not use reasonable diligence i n marketing the gas. Byrne f a i l e d t o meet h i s burden o f proof. Therefore, the d i s t r i c t court was correct i n f i n d i n g t h a t the A. A. O i l lease continued i n f u l l force and e f f e c t . Directing our a t t e n t i o n t o the t h i r d issue f o r review, Byrne r e l i e s upon the doctrine o f equitable estoppel, c i t i n g section 93-1301-6, R.C.M. 1947. Byrne contends t h a t the Christians l e d him t o believe that A. A. O i l ' s lease was expired and showed him i n the abstract o f f i c e w r i t t e n evidence o f the "notice" o f A. A. O i l ' s breach. The d i s t r i c t court, however, found t h a t Byrne was aware a t the time of obtaining the lease t h a t A. A. O i l had a p r i o r lease o f record covering the same land. Byrne examined the records i n the Shelby abstract o f f i c e and r e l i e d thereon. Where there i s no reliance on any alleged misrepresentation, equitable estoppel does not apply.. Next, Byrne contends t h a t the probate court, being a court o f l i m i t e d j u r i s d i c t i o n , had no a u t h o r i t y t o allow the executrix o f the Gordon Christian estate t o compromise and s e t t l e the dispute w i t h A. A. O i l . It i s true t h a t the probate court does not have j u r i s d i c t i o n over questions o f t i t l e t o r e a l property. Maury v. Jones, 25 F.2d 412 (9th C i r . 1928). But the probate court does have authority t o authorize an executrix t o s e t t l e claims against the estate. The probate court here simply authorized a compromise settlement of a disputed claim involving the Gordon Christian estate and in no sense adjudicated t i t l e t o real property. Byrne also contends that the testimony of Branch, a local geologist, concerning costs of supervision and record keeping was admi ssi bl e. The district court permitted Branch to testify i n this respect b u t disregarded such testimony in i t s findings of fact because no proper foundation was laid. Branch i s a petroleum and consulting geologist qualified t o testify as to certain aspects of oil and gas production. However, no proper foundation was laid concerning his qualifications to give expert opinion evidence in the field of cost accounting or general operation of wells other than his admission that he signed an operating agreement. T o attack the A. A. Oil lease requires a qualified expert, such as a reservoir engineer, to testify as to the reservoir capacity of the w e 1 1, i t s bottom hole pressure or pro- ducing pressure, and whether the well was capable of producing in paying quantities. The final issue for review concerns the burden of proof. Byrne the claims that he relied upon/Christiansl intentions to obtain a release of the A. A. Oil lease. H e contends that the Christians are estopped from tak- ing a position favorable t o A. A. Oil which has the effect of placing the burden on him to prove the validity of his o w n lease. This Court in Fiers v. Jacobson, 123 Mont. 242, 211 P.2d 968, comnented that a claim of equit- able estoppel may not be founded on a true statement as to a party's present The intention with regard to his future act. /Christians are not required to take a position in favor of one lessee or the other. In the instant case the burden of proof rested on Byrne's shoulders to establish the invalidity of the prior A. A. Oil lease in order to entitle him to judgment. This he failed to do. For the foregoing reasons, the judgment of the district court i s affirmed. Associate Justice ~ s b o c i a t e Justices .