No. 12230 INTHE SUPREME COURT OF THE STATE OF MONTANA 1973

GORDON CHRISTIAN and LORENE CHRISTIAN, his wife, Plaintiffs and Respondents,

A. A. OIL CORPORATION, a corporation, Defendant, and ROBERT E. BYRNE, Defendant and Appellant; 

## -."------- ROBERT E. BYRNE, Cross-Complainant and Appellant,

A. A. OIL CORPORATION, a corporation, GORDON CHRISTIAN and LORENE CHRISTIAN, Cross-Defendants and Respondents.

Appeal from: District Court of the Ninth Judicial District, 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 Falls, Montana Douglas C. Allen argued, Great Falls, Montana

Submitted: -, January 22, 1973 Filed: 

# FB2

## 71973

### Mr. Justice Frank I. Haswell delivered the Opinion of the Court.

Plaintiff landowners, Gordon and Lorene Christian, brought this action to quiet titleto separate oil and gas leases owned by A. A. Oil Corporation and Robert E. Byrne, defendants. This appeal isfrom a judgment in the district court of Toole County by the Hon. R. D. McPhillips, district judge, sitting without a jury. Judge McPhillips found A. A. Oil's 1741.64

acre lease valid, subject toa 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 thejudgment relating tothe larger lease only. On April 5, 1940, James and Bertha Christian executed an "unless" type oil and gas lease toJohn Reynolds covering a tract of about 1740 acres inToole County, Montana. Shortly thereafter, titleto this leasahold entered

was assigned toA. A. Oil Corporation. The lease was amended twice, first in 1941 and again 1946, each time extending the lease for fiveyear periods. Incorporated into one of the amendments was a provision that inthe event the lessor should believe the lessee 

### tobe in default of any of the covenants, lessor was to give lessee notice in writing specifying the alleged violation and lessee was to have forty-five days within which to 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 to 500,000 cubic feetof gas per day. Christian #1 well was plugged and abandoned in 1958without any oil or gas having been commercially sold therefrom. The districtcourt also found that drilling of Christian #2 commenced

on July 1, 1951 and was completed later that same year. Gas from Christian #2was firstpurchased 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 is provided by Montana Power Co. There isno evidence that Christian #2 was ever plugged and abandoned. The districtcourt found that atthe time of the trial Christian #2 had an estimated gas production of 1,500,000 to 3,000,000 cubic feet of gas per day. No evidence was offered to show the capacity to be any differentexcept 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 qua1ified to testify on the subject. After hearing Branch's testimony, the court sustained the objections and disregarded Branch's testimony. No factswere presented as 

### towhether 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 toconduct 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, but itwas not presented for payment for nearly two years after issued. 

### On this same day, the Christians requested that the lease be returned due tothe conflicting prior leasewith A. A. Oil. Byrne refused and duly recorded the lease. In August of 1963, Gordon and Lorene Christian commenced a quiet titleaction on the tract in question against A. A. Oil and Robert Byrne. The object of the suitwas to extinguish the leasehold interests of Byrne and the A. A. Oil Corporation. Byrne now appeals from thejudgment extinguishing his leasehold interest. Gordon Christian died in June, 1965and his estatewas 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, 1965A. A. Oil conveyed their lease toBernice Lutz, who isholding 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 districtcourt correct infinding the A. A. Oil Corporation lease 

### a valid lease? (3) Does the principle of equitable estoppel have any application tothe facts as presented inthis case? (4) Did the probate court have authority toratify the settlement of the A. A. Oil lease? (5) Is the evidence of Branch, the geologist, concerning costs and production admissible? (6) Is itpermissible for a landowner 

### to shiftthe burden of proof toan adverse intervening lessee toprove an underlying oil and gas lease invalid?In Montana oil and gas leases are tobe construed liberally infavor of the lessor and strictlyagainst the lessee. Schumacher 

### v. Cole, 131 

### Mont. 166, 309 P.2d 311;Thomas 

### v. Standard Development Co., 70 Mont. 156, 224 P. 870. And further, while forfeitures areusually not favored inthe 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 firstissue, the effecta 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 inforce fora term of 5years from this date and as long thereafter as oil or gas, or either of them, isproduced 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 inevent lessor has occasion tocharge that lessee 

### or assigns may 

### not be carrying out his (or its) obligations under 

### intent of terms of lease and amendments thereof 

## * ** Lessor shall notify Lessee in

### writing,specifying the alleged breach and Lessee shall have the full period of forty-five days from and after date of serviceof such noticewithin which to remedyany existing breach

## * * * lease shall terminateat the option of the 

### 1essor"

# . 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 leasemay expire automaticallyat the conclusion of the primary termwithout a declaration of forfeiture or notice to a lessee if such be the general intent of the lease. See also McDaniel v. Hager-StevensonOil Co., 75Mont. 356, 243 

### P. 582. The Schumacherand McDaniel cases, however, can be distinguished. In those cases the Court found an automatic terminationat 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 leasewill automatically terminate if the lessee fails to commencedrilling,pay delay rentals,or complywith the other obligations in the habendum clause. But here the district court found that at the end of the primary term Christian

### #1 well had been drilled,having an estimated natural gas flow of 250,000to 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 courtwas correct in finding that the

### A. 

### A. Oil leasedid not automatically terminate at the end of the primary term. In Fey

### v

# . A. 

### A. Oi

### 1 Corp.

### ,129Mont

# . 300, 285 

### P.2d 578,an almost identical notice clausewas 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,compliancewith 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 continuing to developwith reasonable diligence. After notice is given of claimed forfeiture, it is for the court to determine whether the amount of productionor development 

### is in accord with the terms of the agreement. This leads 

### us to the second issue involved inthis 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 specificallyprovides: "(e)

## - That it isunderstood and agreed that the commencement of operations for development of oil, 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 hereof as hereinbefore stated". The testfordetermining whether there was sufficient production

or whether the lessee was actingwith reasonable diligence in producing and marketing the gas from the leased lands 

### is the diligencewhich would be exercised 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 isa question of factthat 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 isdifferent from gas due tothe peculiar characteristics of producing gas. Oil may be stored above ground in tanks or other receptacles and may be moved 

### to the market by various modes of transportation. 

### Gas must be stored below ground and ismoved to themarket only by pipeline. In addition, the product of a gas well can only be transported to a market when the volume and pressure are sufficient. 2Williams, Oil & Gas Law, § 853, p. 388. The parties to the lease involved here may well have had this problem inmind. Paragraph (c)of the amended lease provides: "(c)

# - That if natural gas only, or as long as natural gas only, isfound in comerciallyproductive amountson the lands covered by said leases and amendments thereto, Lessee

### Is and Assigns' obligations shall not require the producing of same until there 

### is a commercial market available for such natural gas

## * **." Ordinarily, themere discovery of oil and gas is not sufficient under a lease continuing, as inthe 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 foruse incommerce, especiallywhere the real consideration for the lease isthe proceeds. Here we are dealing withgas producing wells only. The discovery of gas incommercial quantities during the primary term satisfiesthe "thereafter"

### provisions of the habendum clause for a period of time, and thereby extends the lease into the secondary term. After themineral is discovered the lessee isrequired to use reasonable diligence inoperating the well and marketing the product within a reasonable time. Failure to do sowill result intermination of the lease under the habendum clause afterthe 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, 541, p. 97, 543, p. 100. Ithas been held sufficient, under a lease similar tothe one at issue here, toproduce gas incommercial quantities, even though the gas 

### isnot infactmarketable because there was 

### no available pipeline facilities

or no commercial market within the area. Fey v. A. A. Oil Corp., 129Mont. 300, 285 P.2d 578; Brown, Oil and Gas Leases, 2d ed., 5 5.06, p. 30. However satisfactionof themarketing covenant inparagraph C of this lease will not satisfythe habendum clause indefinitely. After a reasonable time the leasewill expire if there isno production. The districtcourt 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 exceedinglymodest and suggestive of the factthat a market for the gas inthe 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. 

### Butthere was no evidence that a commercial market wasavailable to purchase the gas. Further, there was no competent evidence toshow that the gas well drilledcould not produce gas inpaying quantities. This Court inBerthelote setdown the rule inreferencetothe "thereafter" clause that tocontinue the lease after the fixedterm requires that oil or gas isproduced inpaying quantities. There this Court upheld that part of the instruction tothe jury which defined "paying quantities" tomean production insuch quantities as will pay a profittothe lessee

over operating expenses, excluding the initial cost of drillingand equippingthe wells. This isstill the law inthis state. Due tothe alignment of the parties inthis actiontoquiet title the burden rested upon Byrne toprove that theA. A. Oilwe11was incapable of producing gas inpaying quantities. Byrne was requiredtoprove that A. A. Oildid not use reasonable diligence inmarketing the gas. Byrne failedtomeet his burden of proof. Therefore, the districtcourt was correct infinding that the A. A. Oil lease continued infull force and effect. Directing our attentiontothe third issue for review, Byrne relies upon the doctrine of equitable estoppel, citing section 93-1301-6, R.C.M. 1947. Byrne contends thatthe Christians led him to believe thatA. A. Oil's leasewas expired and showed him inthe abstract officewritten evidence of the "notice" ofA. A. Oil's breach. The districtcourt, however, found that Byrne was aware atthe time of obtaining the lease thatA. A. Oil had a prior lease of record covering the same land. Byrne examined the records inthe Shelby abstract officeand reliedthereon. Where there isno relianceon any alleged misrepresentation, equitable estoppel does notapply.. Next, Byrne contends that the probate court, being a court of limited jurisdiction, had no authoritytoallow the executrix of the Gordon Christian estate tocompromise and settlethe dispute with A. A. Oil. It istrue that the probate court does not have jurisdiction over questions oftitleto real property. Maury v. Jones, 25 F.2d 412 (9th Cir. 1928). But the probate court does have authority toauthorize an executrix tosettleclaims against the estate. The probate court here simply authorized a compromise settlementof a disputed claim involving the Gordon Christian estate and in no sense adjudicated title

### toreal property. Byrne also contends that the testimony of Branch, a local geologist, concerning costs of supervision and record keeping was admi

### ssible. The districtcourt permitted Branch to testify inthisrespect but disregarded such testimony in itsfindings of fact because no proper foundation was laid. Branch isa petroleum and consulting geologist qualified 

### totestify 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 fieldof cost accounting or general operation of wells other than his admission that he signed an operating agreement. To attack the A. A. Oil lease requires a qualified expert, such as a reservoir engineer, to testify

as tothe reservoir capacity of the we11, itsbottom hole pressure or producing 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. He contends that the Christians are estopped from taking a position favorable 

### toA. A. Oil which has the effect of placing the burden on him to prove the validity of his own lease. This Court in Fiers



### v. Jacobson, 123Mont. 242, 211 P.2d 968, comnented that a claim of equitable estoppel may 

### not be founded 

### on a true statement as toa 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 entitlehim tojudgment. This he failed to do. For the foregoing reasons, thejudgment of the district court is affirmed.

Associate Justice

### ~sbociate Justices 

## .