Court Opinion

ID: 6921390
Source: CourtListenerOpinion
Date Created: 2022-07-23 23:03:01.494224+00
Date Added: 2024-06-11T16:06:48.591382
License: Public Domain

On Petition for Rehearing.
BREITENSTEIN, Circuit Judge.
With the court’s permission, 28 lawyers have joined in an amici curiae brief supporting the appellee’s petition for rehearing. Among other things, they at*733tack the holding that the Pugh clauses were for the protection of the lessors. They point out that all of the leases in question were executed during World War II and say that the Pugh clauses were to permit the consolidation necessary to accommodate the leases to an order of the Office of Production Management limiting the availability of certain materials to gas wells drilled on a pattern of 1 to 640 acres.1 The point is not well taken because 7 of the leases were executed before December 23, 1941, the date of that order. The parties tried the cases and presented the appeals on the basis that there were no facts distinguishing any one lease from the others. The mentioned order could not have influenced the drafting of leases issued prior thereto.
The opinion of the court is said to be a departure from the prudent-operator rule. No such departure was either intended or made. The prudent-operator rule imposes on a lessee the implied duty to do whatever in the circumstances would be reasonably expected of a prudent operator of a particular lease, having rightful regard for the interest of both the lessor and the lessee.2 Ordinarily, the prudent-operator rule comes into play in connection with a claim of breach of the implied covenant for further development. We have no such situation here as these consolidated cases involve the question of lease termination at the expiration of the primary term. They do not involve any claimed breach of the implied covenant for further development. Counsel for Westhoma have explicitly recognized in their briefs the rule laid down in Panhandle Eastern Pipe Line Company v. Isaacson, 10 Cir., 255 F.2d 669, and Whitaker v. Texaco, Inc., 10 Cir., 283 F.2d 169, that production from a unit which contains a part of the leasehold estate continues the entire lease beyond the primary term in the absence of countervailing lease provisions. They concede that the Pugh clauses have the effect of abrogating this rule so far as vertical divisions are concerned but they say that this result does not follow as to horizontal divisions. The holding of the court applies the Pugh clauses to both vertical and horizontal divisions and gives those clauses the effect of abrogating the Whitaker and Panhandle rule as to the entire leasehold estate.
In the case at bar if there had been no consolidation, production of oil or gas from above-sea-level horizons would have continued the lease or leases in connection with which such production was obtained as to all horizons within the vertical boundaries but the lessee would be under the obligation of the implied covenant of further development.3 The parties agree that the continuation of the leases beyond the primary term is controlled by the Pugh clauses. By their terms these clauses operate to continue the leases beyond the primary term by gas production only as to the parts thereof within a consolidation. Diverse ownership made the consolidation of the below-sea-level horizons with above-sea-level horizons impossible.
Counsel for Westhoma insist that the opinion of the court places an unreasonable interpretation on the leases because no rational purpose can be accomplished by applying the Pugh clauses to ununitized horizontal divisions. We disagree. An important purpose of the Pugh clauses when considered in connection with vertical divisions is to prevent lease continuation beyond the primary *734term as to unproductive areas not included within a unit and to obviate the necessity of an action for breach of the implied covenant to develop further in order to terminate the lease as to such areas.4 Exactly the same reason applies so far as horizontal divisions are concerned.
The amici object to the application of subsurface meaning to the word “part” and analyze the use of that word in the leases. In so doing they fail to mention paragraph 10 providing for lease assignment “in whole or in part” and disregard the fact that the parties admit the validity of the partial assignments to Plains and Westhoma on the basis of horizontal divisions!
The petition for rehearing is denied.
BRATTON, Circuit Judge, would grant the petition for rehearing and affirm the judgment.

. Conservation Order M-68, 6 Fed.Reg. 6687.

. Sun Oil Company v. Frantz, 10 Cir., 291 F.2d 52.

. In saying this we are neither overlooking nor determining the effect of lease paragraph 16 which reads: “Lessee shall be under no obligation, express or implied, to drill more than one well upon the consolidated lease hold for the production of gas, regardless of when, where, or by whom offset wells may be drilled, provided nothing herein shall prevent lessee from drilling as many wells as it may desire.” This has no application to oil production or to unconsolidated portions such as the beiow-sea-level horizons.

. In Whitaker and Sun Oil, both supra, it was pointed out that lease continuation beyond the primary term resulting from production on a unit containing part of the leased premises was subject to compliance with the implied covenant to further develop. The Sun Oil case was an action to forfeit for breach of that covenant.