Court Opinion

ID: 6856547
Source: CourtListenerOpinion
Date Created: 2022-07-23 20:42:57.416044+00
Date Added: 2024-06-11T16:05:10.265453
License: Public Domain

MeDERMOTT, Circuit Judge
(dissenting).
There are two reasons which lead me to the conclusion that the decree of the trial court should be modified to require the defendant either to drill a well within a reasonable time or surrender the unexplored 320-aere tract.
I.
An oil and gas lease in Kansas conveys an interest in real estate. Robinson v. Smalley, 102 Kan. 842, 171 P. 1155. The rights of a holder of an oil and gas lease are governed by the decisions of the state court. “These decisions constitute rules of property and must be accepted and applied in passing upon the complainants’ rights.” Guffey v. Smith, 237 U. S. 101,113, 35 S. Ct. 526, 529, 59 L. Ed. 856. Unless there is a commanding reason to the contrary, a nonresident should not be permitted to acquire a greater interest in Kansas real estate than a resident may acquire; nor should”a sovereign state be denied the power to determine, within constitutional limits, rights to real estate within its borders. Cities Service Oil Co. v. Roberts (C. C.,A. 10) 62 P. (2d) 579.
To this settled rule there is a well recognized and proper exception. If an interest in real estate is acquired in reliance upon a rule of property then settled by state decisions, the federal courts will apply the law as laid down when the interest was acquired.
My understanding is that the genius of this exception lies in the reliance of the purchaser upon a rule of property law settled by the state decisions, and the injustice of denying to him the rights he believed he was acquiring. I do not understand that when a nonresident buys Kansas real estate he is not bound by any later decision of the Supreme Court of that state. A nonresident who sees fit to buy real property in another state ought to take his chances, along with residents, on how the Supreme Court of the state may eventually decide open questions.
Counsel for appellant state that McCarney v. Freel, 121 Kan. 189, 246 P. 500, “supports the conclusion of the trial court.” It does. A lease on 160 acres was made in 1912. The original term had expired. The testimony for the defendant was that a lessee would not be justified in drilling more wells. In that ease there was one producing well on 160 acres; in our ease, two producers on 360 acres. That lease was less than 13 years old; the lease here was executed 17 years ago. The trial court there, as here, canceled the lease except as to a tract around the producing well. The Supreme Court of Kansas affirmed that decree.
It thus clearly appears that if the lessee of the Sauder lease were a resident of Kansas, the lessor would be entitled to relief. This nonresident lessee is not entitled to a greater right than a resident unless McCarney v. Freel is contrary to a rule of property established by the decisions when the lease was made in 1916. An examination of the decisions prior to 1916 persuades me that McCarney v. Freel did not overturn any settled rule of property law; but on the contrary finds support in the earlier decisions.
In Mills v. Hartz, 77 Kan. 218, 220, 94 P. 142, 143 (1908), the court laid down the general principles underlying mineral lease law as follows:
“The only consideration moving to the lessor for the right which he gave to the lessee to explore and procure minerals was the royalty on the coal to be found and the fixed compensation for each well when gas should be found and utilized, together with sufficient gas to supply two stoves in his farmhouse. If there were no search, nor any product, no possible benefit could come to the lessor for the exclusive rights whieh had been given to the lessee. It is not easy to infer that the lessor intended to give a valuable right for a nominal consideration, and permit the lessee to retain the right for a period of 20 years without development, when development was the chief purpose in the execution of the lease. Neither the character of the right given nor the nature of the instrument admits of such an irrational interpretation. The lease contemplates that the lessee shall proceed to dig and bore for gas, oil and coal, and that the lessor shall obtain gas for his farmhouse, not 20 years hence, but as soon as it can reasonably be procured.”
In the ease of Howerton v. Kansas Nat. Gas Company, 81 Kan. 553, 106 P. 47, 34 L. R. A. (N. S.) 34 (1910), the court cited *14and followed Brewster v. Lanyon Zinc Co. (C. C. A. 8) 140 F. 801, 809, 810, which is undoubtedly the leading ease on the subject of implied covenants diligently to explore and develop. The primary term of the lease involved in the Brewster Case had expired; there was one producing well thereon when the suit to cancel the lease was brought. Justice Van Devanteris entire opinion is illuminating, but the following excerpts are particularly pertinent:
“The implication necessarily arising from these provisions — the intention which they obviously reflect — is that if, at the end of the five-year period prescribed for original exploration and development, oil and gas, one or both, had been found to exist in the de>mised premises in paying quantities, the work of exploration, development, and production should proceed with reasonable diligence for the common benefit of the parties, or the premises be surrendered .to the lessor. * * * qijjg su|3ject waSj therefore, rationally left to the implication, necessarily arising in the absence of express stipulation, that the further prosecution of the work should be along such lines as would be reasonably calculated to effectuate the controlling intention of the parties as manifested in the lease, which was to make the extraction of oil and gas from the premises of mutual advantage and profit. * * * Upon both principle and authority it must be held that the present lease contains a covenant by the lessee to continue, with reasonable diligence, the work of exploration, development, and production at the end of the five years, if during that time oil and gas, one or both, are found in paying quantities.”
It will be noted that the implied obligation includes that of “exploration.” The Supreme Court of Kansas, in the Howerton Case, further indicated its conception of the duty of the lessee by the following quotation from the opinion of Justice Lurton in Petroleum Company v. Coal, Coke & Manufacturing Company, 89 Tenn. 381,18 S. W. 65, 66:
“The 'testing’ provided for was manifestly a condition upon which the lease depended. If such test showed no minerals, then the contract was at an end; if it, on the other hand, showed the presence of valuable mines, then the lessees were bound to operate them in good faith for the joint profit of themselves and the owners of the fee.”
Culbertson v. Cement Co., 87 Kan. 535, 125 P. 81, 83, Ann. Cas. 1914A, 610 (1912), presents a different state of facts and the decision is not pertinent. The following statement of principle has some bearing:
“Since the number of wells to be drilled on the land was not specified, there was an implied obligation on appellants to fully develop the land and put down as many wells as were necessary to secure to appellee his proportionate share of the pool of gas. Kleppner v. Lemon, 176 Pa. 502, 35 A. 109; Thornton on Oil and Gas, § 91.”
In Day v. Kansas City Pipe Line Co., 87 Kan. 617, 623, 125 P. 43, 45 (1912), there were eight producing wells on two eighty-acre tracts included in a single lease covering 600 acres. Although the primary term had not expired, an action was brought to cancel the lease. Relief was granted as to the 440 acres upon which no wells had been drilled. There was an express covenant in that case, not present here, “to continue drilling as long as paying wells are found or royalties paid.” The case is therefore distinguishable from the case at bar. The court interpreted the lease to require “that drilling should continue with reasonable diligence so long as paying wells could be found,” and then held:
“The appellant was, of course, not required to develop land that had been tested and found to be unprofitable for operation; but, if paying wells could not be found on the land or any part of it, there is no reason why appellees’ title should be longer clouded with a barren encumbrance, nor any reason why appellant should resist a cancellation.”
These decisions were all before the lease in question was executed. I think they do not conflict with those whieh follow; nor has the Kansas Supreme Court intimated, in any of the later eases, that there is any conflict between the earlier and later decisions.
Two years after this lease was given, the ease of Alford v. Dennis, 102 Kan. 403, 405, 170 P. 1005, 1006 (1918), was decided. In 1902 the lessor executed one lease covering two tracts, one of 220 acres and one of 716 acres. There 'were many producing wells on the larger tract, but no exploration of the smaller. The primary term had expired. The Supreme Court of Kansas held that it “is not the province of the courts to end a contract merely because it is a bad bargain”; and that “The plaintiff asks the court to cancel this contract, to decree a forfeiture of it, and not for default of any expressed provision of the contract, but merely for default of one of its implied covenants. The instanc*15es are rare where equity will enforce a forfeiture. It will never do so where less drastic redress will satisfy the demands of justice.” Citing then its earlier decisions, the court said:
“Unless the plaintiff’s tract was to be developed some time there was no reason to include it in the lease, and as it stands it is of no value to defendants. Unless the defendants had a bona ñde intention to prospect and develop this tract they had no proper purpose in leasing it, and to cancel the lease will do them no injury. "While equity abhors forfeitures it likewise abhors injustice.”
A decree was directed that the lease as to the 220-aere tract be canceled unless the lessee prospected and developed the tract within a reasonable time.
In Webb v. Croft, 120 Kan. 654, 657, 658, 244 P. 1033, 1035 (1926), the primary term had expired. The lease covered 580 acres and there was one producing well thereon. The closest development to the lease were two wells, eaeh three-fourths of a mile away. The facts were not as favorable to the lessor as the facts here. The trial court entered a decree requiring the lessee to develop or cancel. The Supreme Court affirmed and held, upon authority of its earlier decisions, that:
“Leases of this kind contemplate exploration and development, and not the bottling up of land for speculative or other purposes or the postponement of reasonable development, nor yet the limiting of development to an extent merely to prevent a declaration of forfeiture. Although not expressly mentioned in the lease, there is an implied covenant or condition that there shall be reasonable development and such operation as will protect the interests of both the lessor and lessee. Howerton v. Gas Co., 81 Kan. 553, 106 P. 47, 34 L. R. A. (N. S.) 34; Id., 82 Kan. 367, 108 P. 813, 34 L. R. A. (N. S.) 46; Alford v. Dennis, 102 Kan. 403, 170 P. 1005; Harris v. Ohio Oil Co., 57 Ohio St. 118, 48 N. E. 502. The lease is silent as to the number of wells that shall be drilled on the land, and in such a case there is an implication that there shall be reasonable development of the land by drilling such number of wells as an ordinary prudent man would do under the circumstances, taking into consideration the results of the development and whether or not there was sufficient production to warrant the continuance óf exploration and drilling. * * * We think the court rightly concluded that the land of defendants has not been sufficiently developed. It would be grossly inequitable to hold a tract of 580 acres with no more development than has already been made. Plaintiff was entitled to some remedy for the failure to develop it, and we think it was competent for the court, instead of decreeing a cancellation of the lease, to give the defendants an opportunity to make reasonable development of the land pursuant to their implied covenants as has already been determined in Alford v. Dennis, supra.”
Then came McCarney v. Freel, squarely in point, and conceded by counsel to support the decree of the trial court.
There are other decisions of the Kansas Court, but these appear to be sufficient to demonstrate that there has been no change in the current of Kansas authority from the start; and that either before or after 1916, that court would not permit a lessee to hold 320 acres for 17 years without exploration or development. As I read the decisions of the Kansas court, they adhere to the same general test first announced in Brewster v. Lanyon Zinc Co., supra, and followed by our court in Denker v. Mid-Continent Petroleum Corporation, 56 E.(2d) 725, 84 A. L. R. 756. The difference is that the Kansas court places more emphasis on the phrase “having due regard for the interests of the lessor” than does our court. The interpretation given to a general rule becomes a part of the rule, just as an interpretation of a statute becomes a part of the statute.
If I am right in this analysis of the Kansas decisions, Guffey v. Smith, supra, requires that Kansas law be applied. If I am wrong in my construction of the earlier Kansas decisions, the question was at least an open one except for the dictum in the Day Case. Where the question is an open one at the time interests in real estate are acquired, the rights of the parties should be governed by the later decisions of the state court, and not by the still later decisions of the federal court. Why should the rights of these parties be determined by our decision in the Denker Case decided in 1932, instead of the decision of the state Supreme Court in the McCarney Case decided in 1926 ?
Forewarned by the earlier decisions and the dietum in the Day Case that the Kansas Supreme Court would adhere to the rule that the principal consideration moving to a lessor was the development of his property, and that emphasis would be placed on the lessee’s obligation to pay heed to the interest of the lessor, this nonresident came voluntarily to Kansas and acquired this lease. It does no more than to hold it to its bargain to say to it “When you buy Kansas real property, you-*16hold it subject to Kansas law.” Unless the MeCarney Case upset a rule of property law which was settled in 1916 — and I can find no basis for such a claim — there is no reason for according this nonresident company rights in Kansas property which a resident company would not have acquired under the identical lease.
II.
Even if the Kansas decisions are to be ignored, I come to the same conclusion. Since the decision in Brewster v. Lanyon Zinc Company, supra, the test laid down by both the state and federal courts is what a prudent operator, having regard for the interests of the lessor as well as his own, would do. If the phrase “having regard for the interests of the lessor” has any real meaning, I think the defendant ought not to hold 32i0 acres, almost surrounded by oil wells, without even one test well. The defendant, in common fairness, ought to give these lessors a well or get off and let some one else drill it.
Defendant’s testimony is that the geologic inference is unfavorable. But geologic inference is not infallible. This is a spotted field, and its many dry holes give mute and expensive evidence of the fallibility of geology. Even Mr. Moody does not accord verity to his own geologists, for notwithstanding their unfavorable report, he is not willing to relinquish this half section. He frankly says that he wants to hold it because, there may be oil under it. Of course that is true, or he would not go to the expense of defending this suit unless he thought enough of the possibilities to warrant the expense.
The truth is that this half section is neither proven nor condemned. No one will ever know whether there is oil under this land until a drill goes down. Mr. Moody says that; his geologists say it; their anxiety to keep it corroborates their statements. Mr. Moody wants some other company to drill on adjoining acreage; in other words, he wants to retain his gamble at the expense of his lessors and adjoining operators.
But geologic inference is not as unfavorable as defendant contends. I lay to one side the wells in the Bartlesville sand, for it appears to have pinched out before reaching this half section. But there are many wells in the Mississippi lime both to the northeast and to the southwest of this tract. The defendant’s answer is that the Mississippi lime is too low under this lease to justify explora^tion. The lime under these 320 acres is from 570 to 610 feet below sea level, and much of the south half is between 570 and 590 feet. The map, prepared and introduced by the defendant, shows in the section adjoining on the southwest 23 producing wells where the lime is between 570 and 610 feet below sea level, and nine producing wells higher than 570 feet. It shows 18 producers within the 570-610 range in the field adjoining on the northeast, and three higher than 570 feet. There are dry holes between 590 and 610 feet, but there are dry holes as high as 564 feet. It is true that the wells are more productive on the higher spots in the lime, but there is no ground for condemning that part of this tract where the lime lies between 570 and 590 feet, for that is the bracket’within which a large number of the adjoining producers were brought in.
Dry holes have been drilled in this field, two of them to the west of this lease. There are others to the southwest and the northeast, but there are also many producers there. The trend of the sand in the lime is undoubtedly under this lease, and part of it is at the depth where many wells have been brought in. Against these record facts, the defendant produces geologists whose opinions are adverse to drilling. But Mr. Moody, experienced with the fickleness of oil geology, knows too much to release this lease because of geologic guess. Their science is valuable to .condemn the lease in court in justification of a failure diligently to develop; but he will not back their testimony by relinquishing the lease.
While the trial court made no specific finding upon the point, the decree entered must rest upon a finding that defendant has not complied with its implied obligation diligently to explore and develop the leased premises. I agree. The defendant company has tied up this half section for 17 years and has not drilled a single exploratory well thereon; it asks to hold it indefinitely in the future, with no hope of a well unless some other operator drills on adjoining land. Such conduct does not seem to me to square with the “due regard for the interests of the lessor” which was an integral part of its contract, under any rule of law or fair dealing.
I think the two small producing offset wells are enough to hold the forty on which they are situate. But I think a deeree should enter that the lease as to the 320 acres be canceled unless, within a reasonable time, an exploratory well is drilled to the Mississippi lime.