No. 89-498 

IN THE SUPREME COURT OF THE STATE OF MONTANA 

1991 

NOEL L. SUNDHEIM, BERTHA SUNDHEIM 

and LEONA M. JOHNSON, 

Plaintiffs and Appellants, 

REEF OIL CORPORATION, a Montana 

corporation, WOODS PETROLEUM 

CORPORATION, a foreign corporation, 

and ANDY HIESTAND, as Personal 

Representative of the Estate of 

FRANK HIESTAND, deceased, d/b/a 

Saratoga Production Company, 

Defendants and Respondents. 

APPEAL FROM: District Court of the Fifteenth Judicial District, 

In and for the County of Roosevelt, 

The Honorable M. James Sorte, Judge presiding. 

COUNSEL OF RECORD: 

For Appellant: 

Charles L. Neff; Bjella Neff Rathert Wahl & Eiken; 

Williston, North Dakota 

For Respondent: 

Loren J. OIToole; OtToole & OtToole; Plentywood, 

Montana (for Reef Oil Corp. & Andy Hiestand) 

W. Anderson Forsythe; Moulton, Bellingham, Longo & 

Mather; Billings, Montana (for Woods Petroleum) 

Submitted on Briefs: January 31, 1991 

Filed: 9 Decided: February 14, 1991 

". . 

Clerk 
Justice R. C. McDonough delivered the Opinion of the Court. 

Plaintiffs, Noel Sundheim, Bertha Sundheim and Leona Johnson 

(hereinafter referred to as Sundheims) appeal from an order of the 

Fifteenth Judicial District, Roosevelt County, granting summary 

judgment in favor of defendants, Reef Oil Company, the estate of 

Frank Hiestand, and Woods Petroleum Corporation. We affirm in part 

and reverse in part. 

The issues presented for our review are: 

1. Whether the District Court correctly granted summary 

judgment on the Sundheims' allegations of breach of the implied 

covenants to protect and reasonably develop the leasehold and 

breach of the prudent operator standard, which were asserted 

against Reef Oil Company and the estate of Frank Hiestand; 

2. Whether the District Court correctly granted summary 

judgment in favor of Woods Petroleum Corporation on the grounds 

that Sundheims' claims against it were barred by the statute of 

limitations; 

3. Whether the ~istrict Court correctly assessed Rule 11 

sanctions against Sundheims and their attorney. 

The Sundheims are the owners of mineral interests in land 

located in Roosevelt County in northeastern Montana. In May of 

1967, they entered into oil and gas leases covering these 

interests. Those leases were entered into with W.C. Kaufman and 

they had ten year primary terms. 

On March 10, 1969, the leases were assigned to Woods Petroleum 

Corporation. In 1974, Woods Petroleum entered into a Dry Hole 

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Contribution Agreement with Anadarko Production Company, which had 

a lease on land adjacent to the Sundheim leasehold. Woods agreed 

to provide financial assistance in drilling a well on a lease held 

by Anadarko. In return, Anadarko promised to share all well data 

and structural information obtained through drilling the well. 

Anadarko found oil and the well initially produced 596 barrels of 

oil a day. 

Woods Petroleum decided to drill its own well on the Sundheim 

leasehold. This well, Sundheim No. 1, was completed in March of 

1975 and had an initial production of 419 barrels per day. 

In 1976, production on the Sundheim No. 1 well began to 

decline. In an effort to increase production Woods installed a 

pumping unit on the well. Production, however, continued to 

decline and in 1977 the sucker rods broke and production ceased. 

Following this breakdown, Woods Petroleum considered whether 

further investment should be made to rework the well and 

reestablish production. Woods determined that no more than 

$20,000.00 would be spent on reworking the well. According to an 

internal memorandum, its engineers determined that low production 

was caused by reservoir conditions. No mention is made of the 

possibility that the well was not producing large enough amounts 

of oil due to mechanical problems. Some work was then done on the 

well; however due to Woods' belief that the decline in production 

was caused by reservoir conditions, the well was cemented in, on 

July 20, 1977. 

Following this discontinuance, Reef Oil Corporation contacted 
Woods Petroleum. Reef Oil was interested in acquiring the open 

well bore, tubing, wellhead, tanks and other equipment still intact 

and left at the well in return for Reef Oil assuming responsibility 

for operating and eventually plugging the well. Woods agreed to 

this arrangement and in July of 1978 the Sundheim No. 1 well was 

llsoldn to Reef Oil. Before this lfsalent took place Reef Oil entered 

into new oil leases with the plaintiffs. These leases provided for 

a term of three years and contained provisions for annual delay 

rentals of $1.00 per acre per year. 

According to deposition testimony, Reef Oil did not have the 

financial ability to redrill the well. Apparently, it was Reef 

Oil's intent to acquire the well and then attempt to interest 

others to develop the prospect. Reef Oil retained E. Earl Norwood, 

a certified petroleum geologist to do an in-depth geologic 

analysis. Norwood reported the decline in production was caused 

by mechanical problems and was not caused by reservoir conditions. 

This conclusion is supported by another engineer, Robert M. 

Watkins. According to Mr. Watkins, the well's low production 

probably resulted because it was not backflushed with fresh water 

to clear out salt accumulations which restricted the flow of oil. 

Reef Oil did not have the financial ability to rework the 

well. Consequently, nothing was done with it until the early part 

of 1980, when Reef Oil assigned the Sundheim leasehold to Frank 

Hiestand. In 1981, Heistand worked out a farmout arrangement with 

a Canadian Oil Company who drilled a new well, the Sundheim No. 2 

well, which was 300 feet to the south of the Sundheim No. 1 well. 
This new well yielded only salt water. According to the Sundheims, 

as much as 145,000 barrels of oil were drained from their leasehold 

by adjacent oil wells during the time period between 1977 and 1981. 

On January 30, 1986 the Sundheims filed a complaint against 

Reef Oil Corporation, Woods Petroleum Corporation, Frank Hiestand 

and American Penn Energy. American Penn Energy was dismissed by 

stipulation of the parties. In their amended complaint against the 

remaining three defendants, the Sundheims set forth three separate 

counts alleging that the defendants breached the implied covenant 

to protect their leasehold from drainage, the implied covenant to 

reasonably and prudently develop the leasehold, and the implied 

covenant to reasonably and prudently operate the existing Sundheim 

No. 1 well. Frank Hiestand subseqeuntly died and Andy Hiestand, 

the personal representative of his estate was substituted as a 

party-defendant. 

On February 17, 1987, Reef Oil moved for summary judgment. 

Reef's motion was granted on May 18, 1987. In its memorandum in 

support of its order of summary judgment, the District Court held 

that the Sundheims were barred from bringing an action for breach 

of the implied covenant to protect from drainage because they had 

not served written notice upon Reef Oil and demanded it drill an 

offset well. The court further held that Reef Oil did not breach 

the implied covenant of reasonable development because the 

Sundheims accepted delay rentals and because this covenant does not 

arise until after production has been obtained on the leasehold. 

The District Court dismissed Sundheims' third cause of action on 
the ground that the implied covenant to prudently operate a well 

is not an independent cause of action. 

Woods Petroleum moved for summary judgment in January of 1988. 

The District Court granted this motion and held that any claims 

against Woods Petroleum were barred by the statute of limitations, 

5 27-2-202(l), MCA. On August 4, 1989, the District Court 

dismissed Hiestand from the action for the same reasons contained 

in its order granting summary judgment in favor of Reef Oil. 

Finally, the District Court, believing that the Sundheims' 

attorneys purposely misled it, assessed Rule 11 sanctions against 

the plaintiffs and their attorney in the amount of $13,924.90. 

This appeal followed. 

I. Reef Oil Corporation and Frank Hiestand. 

As stated above, the Sundheims based this lawsuit on three 

separate allegations. In summary, their amended complaint alleged 

that the defendants breached the implied covenants of protection, 

to reasonably develop the leasehold and to prudently operate the 

existing well. As a result, Sundheims allege the defendants are 

liable for damages. The District Court granted summary judgment 

in favor of defendants Reef Oil and Frank Hiestand on each of these 

counts. We will discuss each issue separately. 

A. The Implied Covenant to Protect from Drainage. 

Each of the Sundheims' allegations are based upon covenants 

which have been implied by common law, into oil and gas leases. 

The purpose of the implied covenants is to fully effectuate the 

intentions of the parties to a lease. Obviously, the primary 
intention is to produce oil and gas for a profit and to obtain 

royalties for the lessor. U.V. Industries Inc. v. Danielson 

(1979), 184 Mont. 203, 602 P.2d 571. To insure this result is 

obtained the courts have implied, through the express terms of oil 

and gas leases, certain duties which must be performed by the 

lessee. These duties include the covenant to protect from drainage 

and the covenant to reasonably develop the leasehold, both of 

which are at issue in the case now before us. 

The Sundheims maintain that Reef Oil Corporation and Frank 

Hiestand breached the covenant to protect their leasehold from 

drainage. In their brief, the Sundheims estimate that as much as 

145,000 barrels of oil were drained from their leasehold by 

adjacent oil wells. They further argue that Reef Oil and Hiestand, 

in accordance with their duty to protect, should have drilled 

offset wells in order to capture the oil before it was drained. 

Because these defendants failed to drill such wells, they breached 

the covenant to protect, and are therefore liable for damages for 

the value of the oil drained from Sundheims' leasehold. 

The District Court did not reach the merits of the Sundheims' 

argument because it found that they were barred from asserting 

their claim due to the fact that they failed to give written 

notice of the drainage or demand that an offset well be drilled. 

In reaching its conclusion, the court relied upon U.V. Industries 

Inc. v. Danielson (1979), 184 Mont. 203, 602 P.2d 571, where we 

stated: 

The offset drilling rule generally requires the lessor . . . to serve written notice'or demand upon the lessee 
or its assigns to drill an offset well as a precondition 

to the latter's duty to drill. Supra, at 584. 

Based upon this language, the District Court interpreted U.V. 

Industries very narrowly to hold that the Sundheims could not bring 

an action for breach of the implied covenant to protect. All 

parties to this action agree that no written notice or demand was 

served. 

In U.V. Industries the plaintiffs brought a lawsuit alleging 

that the defendants failed to protect their leasehold from drainage 

and were liable for damages. The case involved four defendants. 

Two of the defendants owned an interest in a well, which was 

located on adjoining property. Apparently, this well caused the 

drainage to the plaintiff's leasehold. 

Faced with these facts, we held that written notice or demand 

was not required to be given the two defendants who held interests 

in the adjoining well. We based this conclusion upon the fact 

that these two defendants, through their ownership of the draining 

well, obviously knew of the necessity to protect the plaintiff's 

leasehold. Thus, application of the notice requirement was 

unnecessary. Two other defendants who held no such interest, were 

not deemed to have any knowledge of the drainage. Therefore, it 

was held that they must be given notice of their obligation to 

protect before any duty on their part would arise. 

The District Court interpreted U.V. Industries to hold that 

written notice or demand is always a prerequisite to a lawsuit for 

breach of the covenant to protect, unless the defendant owns the 

adjoining well which is draining the plaintiff Is property. The 

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Sundheims, on the other hand, maintain that under U.V. Industries, 

written notice or demand is only required when the defendant does 

not have knowledge of the drainage. According to Sundheims, a 

notice requirement in a situation when a defendant already has 

knowledge would be wholly unnecessary. Because there is evidence 

which tends to establish that Reef Oil and Hiestand knew of the 

draining of their leasehold, the Sundheims further argue that the 

District Court erred in granting summary judgment based upon lack 

of notice. 

We agree with the Sundheims' interpretation of U.V. 

Industries. There is no sound reason to require a lessor to give 

a lessee notice of drainage in an action for damages, if the lessee 

already has such knowledge. Under the implied covenant to protect, 

a lessee is charged with the duty to act as a reasonable operator 

and to protect the leaseholderls interest. This duty requires the 

lessee to manage the leasehold in such a manner as to bring profit 

to both himself and the lessor. Obviously, if the lessee failed 

to drill an offset well, while knowing the leasehold was being 

drained, he would fail to meet this duty. In such a circumstance, 

he should not be excused for the sole reason that the lessee failed 

to comply with a requirement that is unnecessary. 

Our conclusion on this issue is consistent with the overall 

holding of U.V. Industries. Both the defendants and the District 

Court based their conclusion upon a single statement which occurred 

in a lengthy and complicated opinion. However, the statement 

relied upon must be read and understood within the context of the 
entire opinion. 

In U.V. Industries, we stated that generally a lessor must 

"serve written notice or demand upon a lessee to drill an offset 

well as a precondition to the latter's duty to drill." U.V. 

Industries, 602 P.2d at 584. However, as rationale for this 

general rule we quoted a passage from an earlier case which stated: 

" . . . A usual implied covenant is one against drainage, 

which is not here involved. The necessity of drilling 

offset wells is not brought about by the acts of the 

lessee, but by those of third parties, unless the lessee 

owns adjoining acreage. Hence, before a breach of an 

implied covenant could be claimed as substantial, the 

necessity of protecting the leased premises must be 

brought home to the lessee in some manner by reasonable 

notice or demand on the part of the lessor." (Emphasis 

supplied.) Berthelote v. Loy Oil Co. (1933), 95 Mont. 

434, 446, 28 P.2d 187, 190. 

As this passage clearly indicates, it is only reasonable 

notice which is required as a precondition to the duty to drill an 

offset well. The passage does not indicate that written notice 

is required. Moreover, a close reading of U.V. Industries reveals 

that the written notice requirement was mentioned only once. 

Throughout the rest of the opinion, this Court spoke in terms of 

reasonable notice, or notice. 

Clearly, the reasonable notice requirement is satisfied when 

the lessee has knowledge of drainage. Section 1-1-217, MCA, 

defines notice as follows: 

1-1-217. Notice--actual and constructive. (1) 

Notice is: 

(a) actual whenever it consists of express 

information of a fact; 

(b) constructive whenever it is imputed by law. 

(2) Every person who has actual notice of 

circumstances sufficient to put a prudent man upon 

inquiry as to a particular fact has constructive notice 
of the fact itself in all cases in which, by prosecuting 

such inquiry, he might have learned such facts. 

As this statute indicates, a person is deemed to have 

constructive notice when he is in possession of all of the relevant 

facts and circumstances. Certainly, constructive notice rises to 

the level of reasonable notice as required by Berthelote v. Loy Oil 

Co. (1933), 28 P.2d 187, 94 Mont. 434. Therefore, we now clarify 

our earlier holding in U.V. Industries and hold that before a 

lessee's duty to drill an offset well arises, he must have 

reasonable notice of the necessity to protect the leasehold. Such 

notice can either be express, from the lessor, or constructive, 

gained from the surrounding circumstances. Further support of this 

holding is found in the general rule that oil and gas leases are 

to be construed liberally in favor of the lessor and against the 

lessee. See Clawson v. Berklund (1980), 188 Mont. 48, 610 P.2d 

1168; Thomas v. Standard Development Co. (1924), 70 Mont. 156, 224 

P. 870. 

This rule is only applicable to those cases in which a lessor 

is seeking relief in the form of damages, however. If he is 

seeking other forms of relief, such as forfeiture of the lease, he 

must give written notice in order to give the lessor a chance to 

cure the breach. See Summers, Oil and Gas Volume 2 5 412 (1990). 

The burden of proof is upon the lessor to establish the fact 

that the lessee knew of the drainage. Therefore, upon remand, the 

Sundheims must prove that both Reef Oil Corporation and Frank 

Hiestand knew or should have known that the Sundheim leasehold was 

being drained by the adjacent wells. 

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B. The Implied Covenant to Reasonably Develop the Leasehold. 

As their second issue, the Sundheims argue that the District 

Court erred in granting summary judgment on their claim that Reef 

Oil and Frank Hiestand breached the implied covenant to reasonably 

develop the leasehold. The District Court held that this covenant 

was not breached because the Sundheims accepted delay rental 

payments. As further justification for its ruling, the court held 

that the covenant to reasonably develop does not arise until after 

production has been obtained on the leasehold. Because we uphold 

the lower court based upon the prior reasoning, we will not review 

the latter. 

In short, the Sundheims maintain that their acceptance of 

delay rental payments does not excuse the defendants from 

fulfilling their duty to reasonably develop their leasehold. They 

argue that because oil was discovered and pumped in paying 

quantities from the Sundheim No. 1 well, Reef Oil and Frank 

Hiestand had a continuing duty to further develop the leasehold. 

According to Sundheims, the payment of delay rentals has no bearing 

on this duty. 

We need not dwell upon the legal intricacies of the Sundheims' 

argument. The issue can be resolved through resort to the clear 

wording of the leases. Paragraph 2 of these leases states: 

It is agreed that this lease shall remain in force for 

a term of three years from date and as long thereafter 

as oil or gas of whatsoever nature or kind or either of 

them is produced from said land or premises pooled 

therewith or drilling operations are continued as 

hereinafter provided. If prior to discovery of oil or 

gas on said land or on acreage pooled therewith, lessee 

should drill a dry hole or holes thereon, or if after 
discovery of oil or gas production thereafter should 

cease for any cause, this lease shall not terminate if 

lessee commences additional drilling or reworking 

operations within sixty (60) days thereafter or (if it 

be within the primary term) commences or resumes the 

payment or tender of rental on or before the rentalpavinq date next ensuinq after expiration of three (31 

months from the date of completion of a dry hole or 

cessation of production. (Emphasis added.) 

Paragraph 4 of the leases states: 

If operations for the drilling of a well for oil or gas 

are not commenced or if there is no oil or gas being 

produced on said land or on acreage pooled therewith as 

hereinafter provided on or before one year from the date 

hereof, this lease shall terminate as to both parties 

unless the lessee on or before that date shall pay or 

tender to the lessor . . . the sum of $320.00 which 

shall operate as a rental and cover the privilege of 

deferring the commencement of operations for drilling of 

a well for twelve months from said date. In like manner 

and upon like payments or tenders the commencement of 

operations for drilling of a well may be further 

deferred for like periods of the same number of months 

successively. 

According to these two sections of the Sundheim leases, Reef 

Oil had a duty to explore for or produce oil and gas from the 

Sundheim leasehold. If it failed to adequately carry out this 

duty, the terms allowed the Sundheims to terminate the lease. 

However, Reef Oil could, instead of engaging in drilling or 

production operations, make delay rental payments of $320.00 per 

year. Upon payment of this sum, Reef Oil was excused from the 

drilling and operating requirements contained in the lease. 

It is undisputed that the delay rental payments were made by 

Reef Oil and were accepted by the Sundheims. Therefore, by the 

terms of the contract, Reef Oil was not impliedly required to 

engage in further development of the Sundheim leasehold. The 

rental clauses contained in the lease were presumably bargained for 
and are supported by consideration. We will not look beyond these 

express provisions in order to impose a duty upon Reef Oil which 

is in contravention of their terms. In short, the rental clause 

contained in the Sundheim leases relieves Reef Oil of all drilling 

obligations save that of offset drilling. Williams & Meyers, Oil 

and Gas Law § 835.1 (1990). See also Hemingway, Law of Oil and Gas 

9 8.10 2d Ed. (1983). The duty to drill an offset well is imposed 

through the covenant to protect, not through the covenant to 

reasonably develop. Therefore, there was no breach of the 

development covenant and summary judgment on this issue was 

properly granted. 

C. Prudent Operator/Reasonable Man Standards 

The Sundheims maintain that Reef Oil and Frank Hiestand, in 

addition to breaching implied covenants to the lease, also 

violated the prudent operator standard. This standard is best 

understood through analogy to the reasonable man standard of tort 

law. Simply stated, the prudent operator is a reasonable man 

engaged in oil and gas operations. He is a hypothetical oil 

operator who does what he ought to do not what he ought not to do 

with respect to operations on the leasehold. Williams and Meyers, 

Oil and Gas Law § 806.3 (1990) . 

Sundheims argue that Reef Oil and Frank Hiestand breached this 

obligation because they did not develop the leasehold. Instead, 

they took the lease for speculative purposes, and while they were 

searching for an individual to commence drilling operations 

substantial drainage occurred. The District Court granted summary 
judgment in favor of the defendants on this count. It held that 

the prudent operator standard was not in itself an independent 

cause of action and the prudent operator standard is applied in 

conjunction with and serves to define the other implied covenants. 

We agree with the District Court. We have previously held 

that the Sundheims have presented a valid cause of action for 

breach of the implied covenant to protect. The duty to act as a 

prudent operator underlies this contractual obligation. In order 

to prevail on this issue, the Sundheims must prove at trial that, 

under the circumstances of their case, Reef Oil and Frank Hiestand 

did not act as reasonably prudent operators to prevent drainage. 

Proof of this issue necessarily entails a showing that actual 

drainage occurred and that an offset well would have produced oil 

in paying quantities. Williams and Meyers, Oil and Gas Law 5 822 

(1990). 

Proof of the second element of the above test would 

necessarily establish that the defendants failed to act as 

reasonably prudent operators and, assuming drainage can be 

established, that they breached the covenant to protect. This rule 

of law is supported by the rationale that a reasonably prudent 

operator would drill an offset well if he could gain a profit and 

if it was necessary to protect the value of the lease. On the 

other hand, no breach of this standard, could be established if it 

cannot be shown that such a well could be drilled at a profit to 

the lessee. Accordingly, in such circumstances there would be no 

breach of the covenant to protect. 
It is clear from the facts of this case, that the Sundheims 

allegations of breach of the covenant to protect and breach of the 

prudent man standard are one in the same. Proof of one necessarily 

entails proof of the other. Therefore, the District Court 

correctly granted summary judgment dismissing the allegation 

alleging breach of the prudent operator standard. 

11. Woods Petroleum Corporation. 

The District Court granted summary judgment in favor of Woods 

Petroleum Corporation on the grounds that all claims against it 

were barred by the statute of limitations. This action was brought 

on the 30th day of January 1986. The applicable statutes of 

limitations in this case are eight years for breach of the terms 

of a written contract, 5 27-2-202(1), MCA, three years for 

allegations of negligence, 9 27-2-204, MCA, and two years for 

damage to property, 5 27-2-207, MCA. All parties agree that the 

eight year statute should apply to those counts alleging breaches 

of covenants arising out of an oil and gas lease. Therefore, it 

is clear that Sundheims' claims under such counts are barred. 

The leases executed between the Sundheims and Woods Petroleum 

were executed on May 11, 1967 and May 23, 1967. They were subject 

to a ten-year primary term. Therefore, by their express language, 

the leases expired in May of 1977, unless production of oil and gas 

continued after this date. The applicable provision that supports 

this conclusion reads: 

It is agreed that this lease shall remain in force for 

a term of ten years from date, and as long thereafter as 

oil or gas or either of them, is produced from said land 

by the lessee, its successors or assigns . . . 
It is undisputed that production ceased on the Sundheim No. 

1 well in July of 1977. The well was abandoned and cemented, and 

Woods Petroleum performed no further activity on the well after 

this date. The Sundheims themselves stated, in their complaint, 

that the well was abandoned in July of 1977. Given these 

admissions, it is clear that the issue presented is a matter of 

law, and is properly resolved through summary judgment. 

Absent a reworking clause Montana law dictates that cessation 

of production by the lessee after the primary term automatically 

terminates the lease. Miami Oil Producers Inc. v. Larson (1983), 

203 Mont. 225, 661 P.2d 1260. The primary terms in the Sundheim 

lease terminated in May of 1977. Production on the Sundheim 

leasehold ceased in July of 1977. According to Miami Oil, the 

lease automatically terminated on that date. Once the lease 

terminated, all obligations on Woods Petroleum's part also ended. 

The date for the beginning of the statute of limitations was in 

July of 1977. The Sundheims brought their lawsuit on January 30 

of 1986. This date is outside of the eight year statute and all 

claims against Woods Petroleum are barred. 

Through a convoluted interpretation of the lease, the 

Sundheims attempt to extend the termination date to May of 1978. 

Through reliance upon this erroneous argument, they attempt to 

save their lawsuit against Woods from the statute of limitations. 

We do not find it necessary to fully evaluate this argument. The 

clear language of the lease speaks for itself. 

Next, the Sundheims argue that this Court should toll the 
statute of limitations on equitable principles. However, they have 

not come forward with any evidence or sufficient reason to delay 

its operation. The Sundheims have offered no proof of fraud or 

concealment on the part of Woods Petroleum. Carlson v. Ray 

Geophysical Division (1971), 156 Mont. 450, 481 P.2d 327. On the 

contrary, the Sundheims were well aware of their injury in 1977 

when they stopped receiving royalty checks. Mr. Sundheim knew that 

the reason the royalty checks stopped was that production on the 

Sundheim No. 1 well ceased. The District Courtls order dismissing 

Woods Petroleum is affirmed. 

111. Rule 11 Sanctions 

The District Court granted Reef Oil's motion for Rule 11 

sanctions and assessed a sum of $13,924.90 against the Sundheims 

and their attorneys. Apparently, the District Court determined 

that the Sundheims repeatedly misrepresented the holding of U.V. 

Industries. During argument and briefing at the lower court level, 

the Sundheims maintained that U.V. Industries1 notice requirements 

were inapplicable to this case, because the Sundheims were seeking 

damages, while the plaintiffs in U.V. Industries were seeking 

forfeiture. A close reading of U.V. Industries however, reveals 

that it was a case for damages. 

While it is true that the Sundheims erroneously misinterpreted 

the U.V. Industries decision, we disagree with the District Court's 

decision to assess sanctions. We note that later on in the 

proceedings, the Sundheims changed tactics and argued for a change 

in the law to not require notice in cases seeking damages. Their 
argument is amply supported by the authorities. At least two 

treatises on Oil and Gas Law state that a lessor suing for breach 

of the covenant to protect need not give notice or demand 

protection, if he is only seeking damages. See Hemingway, Oil and 

Gas 5 8.11 2d.Ed. (1983) ; Merrill, Covenants Implied in Oil and 

Gas Leases 5 113 (1964) . Because the Sundheims argument finds 

support in the law and because this opinion holds in their favor 

on the notice issue, we hold sanctions were not warranted. 

Conclusion 

The District Court's order awarding summary judgment in favor 

of Reef Oil Corporation and the estate of Frank Hiestand on the 

issues of breach of the covenant to develop and the prudent 

operator standard are affirmed. Summary judgment dismissing Woods 

Petroleum Company is also affirmed. The District Court's orders 

granting summary judgment to Reef Oil and Frank Hiestand on the 

issue of breach of the covenant to protect and its order granting 

Rule 11 sanctions is reversed. This case is remanded for 

proceedings consistent with this opinion.