No. 12230 

IN THE 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: FB 2 7 1973 
Mr. Justice Frank I. Haswell delivered the Opinion of the Court. 

Plaintiff landowners, Gordon and Lorene Christian, brought this 

action to quiet title to separate oil and gas leases owned by A. A. Oil 

Corporation and Robert E. Byrne, defendants. This appeal is from 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 to 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 to the larger lease only. 

On April 5, 1940, James and Bertha Christian executed an "unless" 

type oil and gas lease to John Reynolds covering a tract of about 1740 acres 

in Tool e County, Montana. Shortly thereafter, title to this leasahold entered 

was assigned to A. A. Oil Corporation. The lease was amended twice, first 

in 1941 and again 1946, each time extending the lease for five year periods. 

Incorporated into one of the amendments was a provision that in the event 

the lessor should believe the lessee to be 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 feet of gas per day. 

Christian #1 well was plugged and abandoned in 1958 without any oil or gas 

having been commercial ly sold therefrom. 

The district court also found that drill ing of Christian #2 commenced 

on July 1, 1951 and was completed later that same year. Gas from Christian 

#2 was first 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 is provided by Montana Power Co. There 

is no evidence that Christian #2 was ever plugged and abandoned. 

The district court found that at the 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 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 testimony, the court sustained the objections and disregarded Branch's testimony. 

No facts were presented as to 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, but it 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 

title 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 now appeals from the judgment extinguishing 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 is 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 district court correct in finding the A. A. Oil 

Corporation lease a valid lease? 

(3) Does the principle of equitable estoppel have any application 

to the facts as presented in 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 it permissible for a landowner to shift the burden of proof 

to an adverse intervening lessee to prove an underlying oil and gas lease 

invalid? 

In Montana oil and gas leases are to be construed liberally in favor 

of the lessor and strictly 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 in 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 first 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 in force for a term of 

5 years from this date and as long thereafter as oil or gas, or either of 

them, is 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 in event lessor has occasion to charge 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 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 district court found that at the end of the primary term Christian #1 well had 

been drilled, having an estimated natural gas flow of 250,000 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 continuing 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 with the terms of the agreement. 

This leads us to the second issue involved in 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 is understood 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 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 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 is 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 is 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 to the market by various modes of 

transportation. Gas must be stored below ground and is moved to the market 

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. 2 Williams, 

Oil & Gas Law, § 853, p. 388. 

The parties to the lease involved here may well have had this problem in mind. Paragraph (c) of the amended lease provides: 

"(c) - That if natural gas only, or as long as natural 

gas only, is 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 available for such natural gas * * *." 

Ordinarily, the mere discovery of oil and gas is not sufficient 

under a lease continuing, as in 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 in commerce, especially where the 

real consideration for the lease is the proceeds. 

Here we are dealing with gas producing wells only. The discovery 

of gas in 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 is 

discovered the lessee is required to use reasonable diligence in operating 

the well and marketing the product within a reasonable time. Failure to 

do so will result in 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, 541, p. 97, 543, p. 100. 

It has been held sufficient, under a lease similar to the one at 

issue here, to produce gas in commercial quantities, even though the gas 

is not in fact marketable because there was no available pipeline facilities 

or no commercial market within 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. However satisfaction of the marketing covenant in paragraph C of this lease 

will not satisfy the habendum clause indefinitely. After a reasonable time 

the lease will expire if there is no production. 

The district 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 in 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. But there was no evidence that a commercial market was 
available to purchase the gas. Further, there was no competent evidence 

to show that the gas well drilled could not produce gas in paying quantities. 

This Court in Berthelote set down the rule in reference to the 

"thereafter" clause that to continue the lease after the fixed term requires 

that oil or gas is produced in paying quantities. There this Court upheld 

that part of the instruction to the jury which defined "paying quantities" 

to mean production in such quantities as will pay a profit to the lessee 

over operating expenses, excluding the initial cost of drilling and equipping the wells. This is still the law in this state. 

Due to the alignment of the parties in this action to quiet title 

the burden rested upon Byrne to prove that the A. A. Oil we1 1 was incapable 

of producing gas in paying quantities. Byrne was required to prove that 

A. A. Oil did not use reasonable diligence in marketing the gas. Byrne 

failed to meet his burden of proof. Therefore, the district court was correct 

in finding that the A. A. Oil lease continued in full force and effect. 

Directing our attention to the third issue for review, Byrne relies 

upon the doctrine of equitable estoppel, citing section 93-1301-6, R.C.M. 

1947. Byrne contends that the Christians led him to believe that A. A. Oil's 

lease was expired and showed him in the abstract office written evidence of 

the "notice" of A. A. Oil's breach. The district court, however, found that 

Byrne was aware at the time of obtaining the lease that A. A. Oil had a prior 

lease of record covering the same land. Byrne examined the records in the 

Shelby abstract office and relied thereon. Where there is no reliance on 

any alleged misrepresentation, equitable estoppel does not apply.. 

Next, Byrne contends that the probate court, being a court of limited 

jurisdiction, had no authority to allow the executrix of the Gordon Christian 

estate to compromise and settle the dispute with A. A. Oil. It is true that 

the probate court does not have jurisdiction over questions of title to real 

property. Maury v. Jones, 25 F.2d 412 (9th Cir. 1928). But the probate 

court does have authority to authorize an executrix to settle 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 title to 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 in this respect but disregarded 

such testimony in its findings of fact because no proper foundation was laid. 

Branch is a petroleum and consulting geologist qualified to 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. To attack the A. A. Oil 

lease requires a qualified expert, such as a reservoir engineer, to testify 

as to the reservoir capacity of the we1 1, its bottom 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 to A. 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, 123 Mont. 242, 211 P.2d 968, comnented that a claim of equitable 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 is 

affirmed. 

Associate Justice 
~sbociate Justices .