Court Opinion

ID: 7923550
Source: CourtListenerOpinion
Date Created: 2022-09-08 22:29:02.205595+00
Date Added: 2024-06-11T16:33:09.679809
License: Public Domain

Johnson, J.,
concurring in part and dissenting in part: I agree with the majority on the drainage issue. Kansas City Royalty Company, L.L.C., et al., had the opportunity to litigate its drainage claims against Thoroughbred Associates, L.L.C., and nothing in the record would persuade me to disturb the district court’s assessment that the claims were not adequately proved. For simplicity, hereafter I will refer to the Kansas City Royalty Company, L.L.C. as *1217either lessor or property owner and will refer to Thoroughbred Associates, L.L.C. as either lessee or operator.
Where I initially part company with the majority is when it opines that lessee would be entitled to summary judgment if the matter is to be decided solely under the unambiguous terms of the oil and gas lease. Although I do not believe that the “conditions” in the fourth paragraph of the oil and gas lease are plain and unambiguous, my more fundamental problem with the majority opinion is that I cannot accept the nonsensical notion that lessee can use its own breach of contract as a ground to obtain any remedy from lessor, much less a rescission of the unitization agreement and return of years’ worth of royalties. Accordingly, given that there is no legal way that lessee/operator can force a partial rescission of its unitization agreement under the facts of this case, I would simply affirm the district court’s grant of summary judgment to lessor/ property owner rather than remanding for further proceedings on any “alternative theories.”
As I understand the facts, operator obtained the lease from owner’s predecessor in title in July 1998, shortly after operator had drilled the good-producing gas well, known as the Bird Well, on nearby land. Soon after the subject lease became effective, operator filed the Declaration of Unitization that combined lessor’s land with other lands to form the 640-acre Rietzke Unit, the boundaries of which zigzagged through three different sections, including 480 acres in Section 21, 40 acres in Section 22, and the 120 acres in Section 16 in which lessor had an interest. The recorded Declaration of Unitization states that all of the leases in the unit “grant the right, power and privilege to the Lessee or his assigns, to pool or combine the acreage covered by each lease so as to form a gas production unit to cover, limit, and restrict only the acreage covered by each lease and not exceeding 640 acres.” In other words, the declaration indicates that some of the leases, albeit not the subject lease, contained a 640-acre limitation on the size of any gas unit that could be unilaterally formed by the lessee, which might provide some insight into why lessee chose 640 acres for the size of the gas unit in this case.
*1218Operator proceeded to develop tire Rietzke Unit, and according to a map in the record, a well was drilled on the 120-acre tract in which lessor had an interest. That certainly suggests that lessee finagled the boundaries of its maximum-sized unit to include lessor s tract for development reasons. Nevertheless, the map indicates a diy hole on lessor s tract but that three other drill sites in the unit resulted in producing wells. A proportionate share of the royalties from the unit’s production was paid to and accepted by lessor/property owner for some period of years. But when operator became aggravated with lessor for investigating whether the Bird Well was draining minerals from underneath the lands in the Rietzke Unit, operator suspended the payment of royalties to lessor, claiming that it had mistakenly included lessor s land in the unit. Approximately 4 years after unitizing lessor s land, operator filed a declaratory judgment action to effectively back out of that unitization.
Although the majority does not discuss any motive for operator to claim that its unitization of lessor s land did not conform to the lease provisions, I can discern no other reason than either retribution for lessor s having caused trouble about the Bird Well or destruction of lessor s standing to complain about the drainage from the Bird Well. Certainly, the motive could not have been the withheld royalties or the recovery of previously paid royalties, because those monies would not legally belong to operator. The other unit landowners would be entitled to the returned royalties based upon their newly calculated proportionate shares, using as a denominator the 520 acres remaining after lessor’s land is retroactively lacked out of the unit. No wonder the other unit landowners joined with operator in its rescission attempt, even though none of the landowners apparently challenged the establishment of the unit in the beginning or voiced any complaint for all tiróse years they accepted royalty payments under the unitization agreement.
As I view the majority holding, it would permit lessee to rescind the unitization arrangement with lessor through the ploy of claiming that lessee had been a wrongdoer in the beginning by unitizing lessor’s land without having the authority to do so under the oil and gas lease. As evidence of its own breach of the lease, lessee *1219uses an affidavit from a Kansas Corporation Commission (KCC) employee that says the inclusion of lessor s land in the unit was not required by that regulatory agency. Never mind that lessor/properly owner acquiesced in the unitization declaration, i.e., effectively waived any wrongdoing in forming the unit; never mind that the condition of necessity of conforming to regular spacing patterns did not refer to KCC requirements; never mind that both lessee and lessor accepted and enjoyed their respective benefits from the unitization arrangement for years after lessee’s alleged breach of the lease agreement without so much as a whimper of complaint; and, most importantly, never mind that rescinding the unitization agreement benefits the breaching party (lessee/operator) to the detriment of the nonbreaching party (lessor/property owner), i.e., rewards lessee for an admitted failure to comply with its obligations under the oil and gas lease. That holding is repugnant to me on several levels.
Before proceeding with a legal analysis, I pause to analogize our situation with a more familiar transaction, given my fear that some people are intimidated by oil and gas law to the point of losing sight of what is actually happening. In my admittedly imperfect, but close, analog, a homeowner (seller) sells a person (buyer) .some building lots that are near seller’s own home. The sale contract includes a provision granting buyer an option to purchase an additional area that contains a storage shed, in the event buyer needs additional storage space after buyer completes the building of a house on the purchased lots. After building a home, buyer exercises the option; seller accepts the money and delivers the storage shed deed to buyer, who then records the deed and takes possession of the shed, filling it with buyer’s possessions.
Four years later, seller complains that buyer is not mowing the grass on buyer’s residential property and threatens to take action against buyer in order to avoid the impairment of the value of seller’s adjoining home because of buyer’s unsightly premises. Buyer reacts by declaring that buyer did not really need the storage space of the option property, as evidenced by an affidavit from the city’s zoning administrator that says the city would not have required buyer to have additional storage space on his residential *1220property. Accordingly, buyer vacates the storage shed; demands the return of the purchase price; and ultimately sues for a declaratory judgment that buyer s exercise of the option was contrary to the terms of the written option contract because the condition precedent of necessity of additional storage space was not met.
Apparently, under the majority’s rationale, buyer would be entitled to summary judgment that effectively rescinded the storage shed sale based on buyer’s claim of buyer’s own breach of the plain and unambiguous terms of the written option contract, as evidenced by the uncontroverted affidavit of the city employee. Again, never mind that seller had acquiesced in the exercise of the option in the first instance; never mind that the option did not specify that the storage necessity had to be required by zoning regulations; never mind that both parties had accepted and enjoyed their respective benefit of the bargain for years after buyer’s alleged breach of contract; and never mind that the rescission would be detrimental to seller but would reward buyer for having breached the option contract.
Over a century ago, this court suggested that a party should not win all the marbles by throwing a postperformance, retroactive breach-of-contract flag on himself/herself/itself, even if the culprit has a facially seductive argument. In Trust Co. v. McIntosh, 68 Kan. 452, 463-64, 75 P. 498 (1904), this court discussed whether a plaintiff had “standing to impeach the defendant’s conduct,” specifically reciting some fundamental principles, to-wit:
“ ‘One who pays money on a contract cannot recover the same unless he is entitled to a rescission of the contract.
“ ‘The rescission of a contract is a remedy to be applied in the sound discretion of the court, and only he is entitled to it who can show that he is without fault, and that the other party is derelict.’ (Thomas v. McCue, 19 Wash. 287, 53 Pac. 161.)
“ ‘It is obvious that tire right to rescind a contract belongs only to tire party who is himself without default. Even if he has sufficient grounds for rescission, if he has done some act which hinders performance by the other party, or has failed in any way to perform his own part of the contract, his right to rescind is forfeited.’ 24 A. & E. Encycl. of L., 2d Ed., 647.” 68 Kan. at 464.
The notion that a party rescinding must not be in breach or default is so established that it has its own section in Corpus Juris *1221Secundum, 17B C.J.S., Contracts § 633. Moreover, our sister states ascribe to the principle that “[a] party to a contract may not set up his own breach to relieve himself of his contractual obligations; nor may he set up his breach as the basis for rescission of the contract or as the ground for his own recovery.” (Emphasis added.) Dorsett v. Cross, 106 S.W.3d 213, 220 (Tex. App. 2003); see also Hooper v. Commercial Lumber Company, 341 P.2d 596, 598 (Okla. 1959) (contracting party cannot rescind or terminate contract because of own breach but right must be afforded by opposite party). Contrary to those rules, the majority here would permit Thoroughbred to utilize its own contract breach as the ground for its own recoveiy.
Nevertheless, my rejection of the majority decision is based on more than an aversion to putting our imprimatur on the concept of winning-by-wrongdoing. I take issue with the majority’s construction of the oil and gas lease. Specifically, I discern that the majority has missed the point of the fourth paragraph of the lease.
I believe the problem is created when the majority ignores its recited principle that all of a contract’s provisions are to be “considered together, not in isolation.” Thoroughbred, 297 Kan. at 1206. Instead, the majority gets hung up on and focuses its entire attention on drat certain language in the middle of the lease’s fourth paragraph to which the lessee has misdirected us and to which the majority has assigned the label “the condition placed on unitization.” Thoroughbred, 297 Kan. at 1197. That label suggests that unitization can never happen without meeting one of the “conditions” described in the fourth paragraph. As will be discussed later, that is simply not true.
But returning to the lease to view the forest, rather than the trees, we find that the very clear and explicit language beginning die fourth paragraph defines what is being created by that provision, as well as leading us to an understanding of the purpose for the conditions. That language reads: “Lessee is granted the right and power to pool or unitize all, or part of the lands covered hereby . . . .” (Emphasis added.) Obviously, lessor is giving lessee the authority to unitize lessor’s land with other lands without the necessity of having to obtain lessor’s approval, i.e., lessee is granted tire right to unilaterally unitize. With such unfettered power to *1222unilaterally unitize, it only makes sense that lessee’s exercise of that power should be subject to certain conditions. In this lease, lessor chose to condition unilateral unification upon whether the unit was “ ‘necessary to conform with regular spacing patterns, or to produce a full allowable where such spacing pattern or allowable are established by State, Federal or other regulatory bodies.’ ” Thoroughbred, 297 Kan. at 1197. What the lease does not say is that unitization cannot happen without meeting those conditions; it only says that those are the conditions under which lessee is empowered to effect unilateral unitization. Unitization on any other basis than lessee’s unilateral declaration is not foreclosed by the fourth paragraph.
Ascribing a limited effect to the fourth paragraph conditions becomes more compelling when one considers that the lease provision is not tire only means whereby tire subject land could have been unitized. Pursuant to K.S.A. 55-1301 et seq., referred to as “the Kansas compulsory unitization law,” Parkin v. Kansas Corporation Comm’n, 234 Kan. 994, 995, 677 P.2d 991 (1984), and specifically under K.S.A. 55-1304, the KCC can compel the uniti-zation of land after making certain findings of necessity, economic feasibility, and fairness. Nothing in the statute requires the unit to comply with any lease conditions before the KCC orders unitization. To the contrary, lease provisions are considered modified to tire extent necessary to conform to the compulsory unitization act and, in fact, even unleased tracts can be included in the unit. K.S.A. 55-1308.
Additionally, the legislature has obviously contemplated that a unitization can occur consensually. K.S.A. 55-1317 addresses uni-tization without a KCC order and provides, in part, that unit operations Can become effective without application to or order by tire KCC where “all mineral and royalty owners and not less than 90% of the working interest owners approve, in writing, a contract for the unit operation of a pool or part thereof.” K.S.A. 55-1317(b). Such a consensual unitization is likewise not statutorily conditioned upon the existence of any lease provision.
Perhaps the bottom line is that, if there is a complaint to be made that lessee abused its “right and power” under the lease, only *1223lessor should have standing to make that argument. After all, it was lessor that invested lessee with the right and power to unilaterally unitize, so only lessor should be able declare an abuse of power. Certainly, there is nothing in the language of the lease agreement that would preclude a lessor/property owner from acquiescing or stipulating to the existence of the lease conditions that permit unilateral unitization. Likewise, there is no contractual constraint on a lessor’s ability to waive any irregularity in the lessee’s exercise of its right and power to unitize under the lease agreement.
Moreover, as noted, there is no statutory or contractual impediment to a consensual unitization agreement between lessor and lessee. Here, the parties consented to, or at least acquiesced in, the unitization agreement and then performed under the agreement, enjoying their respective benefits of their bargain for a number of years. I have no problem holding that the parties’ consensual performance of a legitimate unitization agreement was not invalidated by the terms of the oil and gas lease. Moreover, I can perceive of no way in which lessee, Thoroughbred, could obtain a remedy of any sort under die facts of this case. Consequently, I would find that the district court made the correct ruling in denying lessee’s motion for summaiy judgment and granting summary judgment to lessor, Kansas City Royalty.
Although my decision is not driven by the ambiguity, or lack thereof, of the “conditions” language in the fourth paragraph of the lease, I disagree with the majority on that score as well. For instance, I cannot discern from the lease language who establishes the first condition—conformance with “regular spacing patterns.” Under the second condition, the “ ‘spacing pattern . . . [is] established by State, Federal or other regulatory bodies.’ ” Thoroughbred, 297 Kan. at 1197. If the lease means that the regulators at KCC determine the spacing patterns for the first condition, why did the lease language fail to say so like it did for the second condition? If the KCC was meant to establish the regular spacing pattern for the first condition, as well as for the second condition, one might wonder what the fourth paragraph adds to lessee’s ability to get a compulsory unitization order from the KCC under K.S.A. 55-1301 et seq. If the KCC is not the final word, does one determine *1224regular spacing based upon the particular mineral being produced, i.e., gas only, oil only, or both gas and oil? Is there a different “regular spacing” for a horizontally drilled well that can span a mile or more underground? Moreover, the foregoing questions are germane to whether one should accept the affidavit of a KCC employee about what is required by law and regulation as being relevant to what constitutes a “regular spacing pattern” under the custom and practice of the trade. In sum, I would view summary judgment in favor of lessee to be improper under any circumstance.
Luckert, J., joins in the foregoing concurring and dissenting opinion.