DA 07-0687

IN THE SUPREME COURT OF THE STATE OF MONTANA

2008 MT 320N

ENERGY PARTNERS OF MONTANA, LLC,

 Petitioner and Appellant,

 v.

THE MONTANA DEPARTMENT OF NATURAL

RESOURCES AND CONSERVATION,

 Respondent and Appellee.

APPEAL FROM: District Court of the First Judicial District,

In and For the County of Lewis and Clark, Cause No. ADV 2007-25

Honorable Dorothy McCarter, Presiding Judge

COUNSEL OF RECORD:

For Appellant:

Wilmer E. Windham, Attorney at Law; Polson, Montana

For Appellee:

Hon. Mike McGrath, Montana Attorney General; Tommy H. Butler,

Special Assistant Attorney General, Montana DNRC; Helena, Montana

Submitted on Briefs: August 6, 2008

 Decided: September 16, 2008 

Filed:

__________________________________________

Clerk

September 16 2008
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Justice W. William Leaphart delivered the Opinion of the Court.

¶1 Pursuant to Section I, Paragraph 3(d), Montana Supreme Court 1996 Internal 

Operating Rules, as amended in 2003, the following memorandum decision shall not be 

cited as precedent. It shall be filed as a public document with the Clerk of the Supreme 

Court and its case title, Supreme Court cause number and disposition shall be included in 

this Court’s quarterly list of noncitable cases published in the Pacific Reporter and 

Montana Reports.

¶2 Energy Partners of Montana, LLC (“Energy Partners”), obtained sixteen oil and 

gas leases from the State of Montana through a lease sale held by the Department of 

Natural Resources and Conservation (“DNRC”). Paragraph 1 of the leases provided an 

effective date of September 7, 2005. According to Paragraph 5 of the leases, rental 

payments for subsequent years were due before the beginning of the next lease year. 

Paragraph 5 also stated that the leases would terminate “unless there [was] a well 

currently being drilled, a producing well, or a shut-in well approved by the [DNRC] 

. . . .” A cover letter sent by the DNRC stated: 

Please note the automatic lease termination provisions (5, RENTAL) of 

your leases. Annual advance rental payments must be postmarked on or 

before the September 7 effective date. If you have any questions, please 

contact me at (406) 444-4576. [Emphasis added.] 

¶3 Energy Partners failed to pay annual rentals on or before September 7, 2006. 

DNRC held an administrative hearing to determine whether the leases automatically 

terminated when Energy Partners failed to pay annual rentals by that date. At the 

hearing, the DNRC found that the leases took effect on September 7, 2005; that Energy 
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Partners failed to make payment on or before September 7, 2006; that there were no 

producing wells, wells currently being drilled or shut-in wells approved by the DNRC; 

and that, as a result, the leases automatically terminated as of September 7, 2006. Energy 

Partners appealed the DNRC’s ruling. Following cross-motions for summary judgment, 

the District Court affirmed the DNRC’s ruling and granted summary judgment in favor of 

the DNRC.

¶4 On appeal, Energy Partners apparently argues that it should have received 

notification that the leases were about to automatically terminate and further, that it 

should have had an opportunity to make late rental payments pursuant to Paragraph 31 

[Cancellation] of the leases and § 77-3-440, MCA. However, this Court has previously 

stated that notice is not required with respect to the automatic termination of leases and 

that an “unless” lease automatically terminates “if the lessee fails to commence drilling, 

pay delay rentals, or comply with the other obligations in the habendum clause.” 

Christian v. A.A. Oil Corp., 161 Mont. 420, 426, 506 P.2d 1369, 1372 (1973). The plain 

language of the leases, demonstrated by Paragraph 5, establishes that the sixteen leases 

held by Energy Partners were “unless” leases that automatically terminated when Energy 

Partners failed to pay timely rentals or demonstrate that it had either drilled a well or

developed the resources pursuant to § 77-3-423, MCA (providing for automatic 

termination of oil and gas leases upon a lessee’s failure to pay annual rentals). Further, 

we stated that “[i]t has long been the dominant rule in Montana (and other producing 

states) that time is of the essence in oil and gas leases, and failure to pay rentals on time 

results in immediate and automatic termination of the lease.” Sandtana, Inc. v. Wallin 
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Ranch Co., 2003 MT 329, ¶ 45, 318 Mont. 369, ¶ 45, 80 P.3d 1224, ¶ 45. In this case, 

the District Court and the DNRC correctly concluded that the express terms of the leases, 

together with § 77-3-423, MCA, resulted in the automatic termination of the leases on 

September 7, 2006.

¶5 Energy Partners also contends that § 77-3-423, MCA, should be harmonized with 

§ 77-3-440(4), MCA (providing notice and opportunity to cure defaults in obligations), 

apparently arguing that § 77-3-440, MCA, requires the DNRC to give Energy Partners 

notice of the automatic termination and an opportunity to make late rental payments. 

However, we have already noted above that neither the terms of the leases nor settled 

Montana law required the DNRC to do so and that the leases automatically terminated by 

operation of law when Energy Partners failed to pay annual rentals by September 7, 2006. 

¶6 Finally, we do not find Energy Partners’ argument that it was deprived of its due 

process rights persuasive. Energy Partners was asked whether it disagreed with the status 

of the leases following the automatic termination and was granted a hearing before the 

DNRC to demonstrate that it had either paid annual rentals or that there was a producing 

well, a well currently being drilled, or a shut-in well approved by the DNRC. The DNRC 

and District Court correctly concluded that Energy Partners failed to establish any of 

these exceptions to automatic termination of the leases.

¶7 Energy Partners urges us to consider six additional issues raised for the first time 

on appeal to this Court. However, we cannot address issues raised for the first time on 

appeal where those issues could have been raised before the administrative agency, in this 

case, the DNRC. Section 2-4-702(1)(b), MCA. Since Energy Partners failed to raise 
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these issues before the DNRC at the administrative hearing on December 4, 2006, we do 

not address them here.

¶8 It is appropriate to decide this case pursuant to our Order of February 11, 2003, 

amending Section 1.3 of our 1996 Internal Operating Rules and providing for 

memorandum opinions. The District Court and the DNRC correctly ruled that the sixteen 

oil and gas leases held by Energy Partners terminated by operation of law upon Energy 

Partners’ failure to timely pay annual rentals. Further, both the District Court and the 

DNRC correctly ruled that neither Section 31 of the leases nor § 77-3-440, MCA, apply 

to instances where leases automatically terminate for failure to pay annual rentals. 

Finally, Energy Partners’ due process rights were not violated by the DNRC. 

/S/ W. WILLIAM LEAPHART

We concur: 

/S/ KARLA M. GRAY

/S/ JAMES C. NELSON

/S/ JIM RICE

/S/ BRIAN MORRIS