Opinion ID: 2586675
Heading Depth: 1
Heading Rank: 12

Heading: Was State Lease 79-0645 a replacement lease under the Unit NPI Contract?

Text: [¶ 108] Wyoming State Leases 0-11505 and 0-11529 were identified in Exhibit A to the Unit NPI Contract and originally included in the Pinedale Unit. In 1977, the unit contracted and the two state leases were eliminated. The leases terminated because they were already past their primary term and there was no production attributable to the leases. [17] Two years later, in 1979, the same lands were leased to Robert E. Ribbe in State Lease 79-0645, and he assigned the lease to Questar's predecessor in 1980. Questar later assigned its interest in State Lease 79-0645 to defendants Lance and Ultra. The plaintiffs argued that Lease 79-0645 was subject to the NPI because it was a replacement lease under the terms of the Unit NPI Contract. [¶ 109] The relevant provision of the Unit NPI Contract states: 7. SURRENDER  First Parties reserve and shall have the right to release and surrender said leases except those acquired from Novi, either in whole or in part, at any time without giving any notice thereof to or obtaining any consent or approval thereof from Novi or Novi's successors in interest, and such release or surrender shall terminate the net profits interest herein provided for as to the leasehold interest which is so released and surrendered. . . . . In the event any lease is surrendered or released pursuant to the provisions of this section and thereafter First Parties, or any of them, obtain a lease covering lands the leasehold interest in which has been so surrendered, the interest so acquired or obtained by First Parties, or any of them, shall be subject to the provisions hereof, if such new lease is obtained within five (5) years from the date of any such surrender or release; otherwise, such new lease shall be held by First Parties, or any one of them acquiring such interest, free and clear of the provisions of this agreement and without any obligations whatsoever to Novi. [¶ 110] At the conclusion of the bench trial, the district court ruled that Lease 79-0645 fell under the provisions of the last clause of Section 7 and, therefore, was subject to the NPI as a replacement lease. The district court made the following relevant findings of fact: 11. Defendants argue that State leases 0-11505 and 0-11529 expired so that the wash-out provision of Section 7 of the Net Profits Contact does not apply. As of 1977, all leases in the Pinedale Unit were past their primary term, but they remained in force and effect by reason of unitization in the Pinedale Unit. The Pinedale Unit Agreement specified a lease elimination provision in Paragraph 2(e) operative upon contraction or termination of the unit by the operator. 12. On August 11, 1977, the then operator of the Pinedale Unit, El Paso Natural Gas Company (El Paso), wrote interest owners Mountain Fuel Supply and Hondo Oil & Gas Company announcing that it planned activation of the automatic elimination provision of the Pinedale Unit. ... On October 12, 1977, El Paso informed the United States Geological Survey as follows: El Paso Natural Gas hereby files a plan of development for the calendar year 1977 calling for no activity. In accordance with the foregoing, it is our view that this action will activate the automatic elimination provision of the Pinedale Unit Agreement as set forth in the amendment to said unit dated February 15, 1974. 13. The action of El Paso was in essence a surrender of all of the leases it held in the Pinedale Unit and resulted in the termination of the State leases and reversion of the mineral estate to the lessor, the State of Wyoming. 14. Lease 79-0645 was acquired by a First Party within five years of the surrender of the predecessor Exhibit A state leases and is subject to the Net Profits Contract. (Citations omitted). The district court's conclusions of laws included: State Lease 79-0645 82. The final clause of Section 7 of the Net Profits Contract provides protection for Novi and its successors from a wash out. A `washout' is the `elimination of an overriding royalty or other share of a working interest by the surrender of a lease by a sub lessee or assignee and subsequent reacquisition of a lease on the same land free of such interest. A renewal clause is included in an instrument to avoid a washout. 83. The term surrender involves a voluntary transfer of all or part of the defeasible fee simple estate held by the lessee back to the lessor. The surrender or release of a leasehold interest contemplates an affirmative act by the lessee. 84. El Paso surrendered Exhibit A state leases 0-11505 and 0-11529. State lease 79-0645 covers the lands in the leaseholds so surrendered, was acquired by a First Party within five years of surrender, and is burdened by the NPI under the terms of the Net Profits Contract. (Citations omitted). [¶ 111] As we discussed in Section I.B. of this decision, Section 7 of the Unit NPI Contract constitutes what is commonly known as an anti-washout clause. The purpose of such a clause is to protect the owner of an overriding royalty or net profit interest from having his interest removed by the lessee giving up the lease and then reacquiring the same lands without the burden. Anti-washout clauses extend the burden to a new lease obtained on the same property by the same lessee within a certain period of time. See, e.g., Sawyer v. Guthrie, 215 F.Supp.2d 1254, 1264 (D.Wyo.2002); Avatar Exploration, Inc. v. Chevron, U.S.A., Inc., 933 F.2d 314, 319 (5th Cir.1991). [¶ 112] Section 7 applies when the First Parties release or surrender the leases. The plain meaning of the term surrender is to yield (something) to the possession or power of another. Webster's Third New Int'l Dictionary 2301 (2002). Similarly, the relevant definition of release is to give up, relinquish, or surrender (a right, claim, etc.). Id. at 1917. Both of these verbs require some sort of voluntary, affirmative act by the one doing the surrendering or releasing. [18] [¶ 113] The parties disagree over whether First Parties (El Paso) took an affirmative action to surrender/release the original state leases or the leases terminated automatically under the terms of the Pinedale Unit Agreement. The defendants argue that, in order for Section 7 to apply, El Paso had to voluntarily assign or transfer the leases back to the lessor (the State of Wyoming) and that did not happen here. The plaintiffs maintain the act of surrendering or releasing does not require assignment or transfer and the evidence established that El Paso took affirmative action to surrender/release the leases. [¶ 114] The defendants direct us to a Fifth Circuit case they claim supports their position, Fuller v. Phillips Petroleum Co., 872 F.2d 655 (5th Cir.1989). Fuller and Phillips both owned leases in a Unit Area. Id. at 656. They entered into an operating agreement which included a provision requiring the consent of all parties before the surrender, in whole or in part, of any lease affecting the Unit Area or, in the absence of such consent, the assignment of such leases to the non consenting parties. Id. at 659. Some of the leases terminated due to cessation of production and Fuller brought an action claiming breach of the provision requiring Phillips to obtain his consent before surrendering the leases. Id. The Fifth Circuit ruled that Phillips had not breached the contract because the leases expired on their own terms and the surrender clause was inapplicable. The court explained: [Fuller's argument] is belied by the legal difference between the terms surrender and termination of a lease. In the oil and gas industry, the term surrender refers to the contractual right of a lessee to voluntarily relinquish to the lessor all or part of the leased premises, thereby allowing the lessee to retain the most profitable portion of a lease while at the same time releasing the least profitable portion of the lease. William & Meyers, 8 Oil and Gas Law § 966 (1985). Moreover, while a lease may be terminated by the act of one party by surrendering its rights under the lease, such a surrender may only occur while the lease is in effect. In contrast, termination of a lease as applied to the facts of the instant case refers to the expiration of a lease by its own terms for the failure of the operator (Phillips) to maintain operations on the leased premises. Id. at 659-60. [¶ 115] Fuller did not involve a washout situation; there is no indication that Phillips reacquired the leases to Fuller's detriment. Thus, we find the case of limited value to the issue presented here. We agree, however, with the concept recited in the decision that surrender requires voluntary relinquishment of an interest while the lease is still in effect. [¶ 116] The ten year primary term of the original state leases ended in 1961. The leases remained in force after that because they were included in the Pinedale Unit. The Unit Agreement had clauses for automatic contraction; nevertheless, the First Parties had negotiated with federal authorities for extension of the automatic contraction provision on at least two occasions. Amendments to the Unit Agreement reflected the extensions. Finally, on August 10, 1977, (twenty-three years after formation of the unit and sixteen years after the primary term of the leases expired), First Party and operator El Paso notified the other First Parties, with copies to state and federal authorities, that it was going to allow unit contraction. The letter stated in relevant part: El Paso Natural Gas Company, as Operator of [the Pinedale Unit], wishes to advise of the activation of the automatic elimination provision of the Pinedale Unit as set forth in the Amendment to said Unit dated February 15, 1974. It is anticipated that the elimination be effective September 12, 1977, the date on which the filing of a Plan of Development for the ensuing year is required. Although it is our belie[f] that such action is automatic, please furnish us [with] any comments or suggestions you may have within fifteen (15) days from the date of this letter. It is with extreme reluctance and regret that we ac[cede] to this result. ... It appears most unlikely that elimination of certain lands from the Unit, the ultimate restoration of such lands to the public domain and the subsequent leasing thereof to others will result in said lands being developed with the same imagination and tenacity which have been heretofore demonstrated. Economic realities have brought us to the point where we feel additional immediate operations cannot be justified and therefore we feel we have no practical alternative but to ac[cede] to the above automatic elimination. El Paso then followed up with a letter to the USGS on October 12, 1977. The letter reiterated its regret in acceding to the automatic elimination and also stated, in relevant part: El Paso Natural Gas Company hereby files a plan of development for the calendar year 1977 calling for no activity. In accordance with the foregoing, it is our view that this action will activate the automatic elimination provision of the Pinedale Unit Agreement. ... [¶ 117] There is simply no question that El Paso affirmatively yielded possession of the leases to the lessor (State of Wyoming). Until El Paso filed its development plan of no activity, the original state leases remained in effect as part of the Pinedale Unit. The letters make it very clear that El Paso (as operator) had the power to determine how to proceed with the unit and leases included within the unit. In fact, the First Party operators had, for twenty-three years since formation of the unit, filed development plans and negotiated amendments to the unit agreement to prevent contraction of the unit. By filing a plan of no activity, the operator acceded to the contraction of the unit. This action was a surrender that triggered the anti-washout provision. When a successor of the First Parties re-acquired the same lands in State Lease No. 79-0645 within the five year period set out in Section 7, the NPI attached to the new lease. The anti-wash provision was designed to protect the plaintiffs (as successors to Novi) from the exact situation that happened heresurrender of the lease followed by a subsequent reacquisition of the same property by the same lessee. The district court's interpretation of Section 7 of the Unit NPI Contract was correct and its findings of fact, particularly its finding that El Paso surrendered the leases, were not clearly erroneous.