Court Opinion

ID: 8910236
Source: CourtListenerOpinion
Date Created: 2022-11-27 02:40:26.025066+00
Date Added: 2024-06-11T17:08:27.867934
License: Public Domain

HEANEY, Circuit Judge,
dissenting.
I respectfully dissent. In my view, the District Court correctly terminated the portions of the Superior lease outside the Will-son Ranch Unit because Superior breached its implied covenant to further develop.
I agree with the majority that this action is governed by Nebraska law and that the Nebraska courts would apply the implied covenant to further develop. I do not agree that the District Court erred in holding that notice was not required prior to the termination of the lease.
The requirement of notice is grounded in equitable principles and is designed to prevent unnecessary forfeitures by informing a lessee of a breach of an implied covenant and giving him an opportunity to repair the breach within a reasonable time. See generally 5 E. Kuntz, A Treatise on the Law of Oil and Gas § 58.4 (1978); 3 W. Summers, The Law of Oil and Gas § 469 (perm. ed. 1958). If, however, the lessee already knows that he has breached the implied covenant and within a reasonable time thereafter does not correct it, or indicates in some manner that he is not going to undertake further development, the notice requirement is dispensed with because its purposes have already been fulfilled. See Benedum-Trees Oil Co. v. Davis, 107 F.2d 981, 986 (6th Cir. 1939), cert. denied, 310 U.S. 634, 60 S.Ct. 1076, 84 L.Ed. 1404 (1940); American Wholesale Corporation v. F. & S. Oil & Gas Co., 242 Ky. 356, 46 S.W.2d 498, 500 (1932). In such circumstances, requiring the lessor to give notice would be a useless act. Thus, notice is required only where it is equitable to do so in light of the policies behind the requirement.1 Cf. Doss Oil Royalty Co. v. Texas Co., 192 Okl. 359, 137 P.2d 934, 938-939 (1943).
In this case, Superior knew that it had breached the implied covenant to further develop and did not correct it within a reasonable time. Consequently, notice would serve no useful purpose.
The implied covenant to further develop requires the lessee to maintain an active *1074interest in the lease after an exploratory well has been drilled. E. KUNTZ, A TREATISE ON THE LAW OF OIL AND GAS § 58.1 (1978). Thus, after the lease is held by production, a lessee may not, consistent with its duty under the implied covenant, hold the remaining portions of the leasehold for speculative purposes. As noted by the court in Doss Oil Royalty Co. v. Texas Co., supra, 137 P.2d at 938:
The implied covenants of a lease require the lessee to develop and operate the lease with due regard for the lessor’s interest therein as well as his own. Neither the lessor nor the lessee is the arbiter of the extent to which, or the diligence with which, the lessee shall proceed, but such question is committed to the sound discretion of the courts to be determined from the facts and circumstances of each case. To permit the lessee to hold the lease for an unreasonable length of time for merely speculative purposes, is to allow him to protect his own interest and to disregard the interest of the lessor. If conditions do not indicate to him that further development will be profitable, it is but fair that, after a reasonable time has expired, he surrender the undeveloped portions of the lease and allow the lessor to procure development by others or assume the burden of showing why in equity and good conscience the undeveloped portion should not be cancelled so that the owner may, if possible, get it developed by others. (Citation omitted.)
Superior made a conscious decision not to develop the lease for speculative purposes and, in doing so, it intended to breach the implied covenant. Prior to 1960, Superior possessed geological evidence which indicated that further development of the lease was warranted. Superior did not act on this information. In addition, it refused to farm out any portion of its lease. Frank Baumgartner, for example, requested a farm out in March, 1960, on the same acreage where the Christensen well was successfully drilled seventeen years later. In rejecting the farm out, Superior noted in an inter-office memorandum:
As the Olsen lease is -held by production, I can see no reason at this time to grant an additional farmout [sic] to Frank Baumgartner. He still has the opportunity to earn additional acreage in Sec. 22. I feel we have moved too fast in this immediate area, as we have farmed out apparently good oil land to both British American and Baumgartner within the past year.
As we are under no strain from a date standpoint, we can afford to await further drilling on acreage already farmed out.
It is difficult to see how Superior can claim that it is inequitable to terminate its lease without notice, or that it was surprised by the actions of the Schuler-Olsens. Once Superior made the decision to hold the lease for speculative purposes, it knowingly assumed the risk that the lessor would terminate the lease.2 Notice would serve no purpose in this case except to encourage such conduct in the future.
I also conclude that the District Court did not abuse its discretion in considering other equitable factors in its decision to dispense with the notice requirement. The District Court noted that this is an unusual case because additional, successful drilling had already taken place. Generally, the result of notice will be either development or forfeiture of the lease. Either result will satisfy the lessor under normal circumstances and the lessee can proceed with a course of action which is economically feasible. Although the evidence suggests that but for the new well Superior would have continued to sit on its rights,3 it is obvious that Superior presently desires to develop the lease. Allowing it to cure its breach at *1075this time would, however, unduly reward its dilatory practices because any new production would stem not from their own efforts but from the efforts of the Schuler-Olsens and the working interest defendants.
An additional factor considered by the District Court was that the Schuler-Olsens had no actual4 or constructive knowledge of the Superior lease. The District Court stated that
[w]hile such unawareness does not usually excuse a lessor from the binding obligations contained within a pre-existing oil and gas lease, the lack of knowledge is relevant in a consideration of its ameliorative effect on any need for notice to a lessee regarding violation of an implied covenant. This is especially true where the ignorance of a lessor is attributable in large measure to the lack of lease development by a lessee.
458 F.Supp. at 1077-1078.
Thus, the Schuler-Olsens could not have given Superior notice of its breach of the implied covenant prior to the development of the new well. Moreover, Superior is responsible in part for the Schuler-Olsens’ lack of knowledge since it did not file an affidavit of production.
The majority indicates that an affirmance of the District Court would introduce uncertainty in the oil and gas law field. I disagree, noting the flexible nature of equitable rules and the strong dependence on the particular factual situation to which the rules are being applied. By reversing the District Court, we sanctify Superior’s decision to hold the lease for. speculative purposes to the detriment of the public.
Insofar as I conclude that the District Court correctly decided that notice was unnecessary under the particular facts of this case, it is necessary to decide whether the finding that Superior breached the implied covenant to further develop is clearly erroneous. I conclude that it is not. The evidence upon which the District Court based its decision is carefully detailed in 458 F.Supp. at 1072-1074, and no useful purpose would be served in repeating it here. The record shows that there was abundant geological evidence available to Superior indicating that profitable drilling prospects existed on the Superior lease, but that Superior declined to take advantage of them.5
Given the equitable considerations present in this case, including Superior’s decision to hold the lease for speculative purposes, I conclude that it was not an abuse of the District Court’s discretion to cancel the Superior lease as to all lands other than those in the Willson Ranch Unit rather than to order a less drastic remedy such as a conditional decree of cancellation.
I would affirm the District Court.

. Considerable confusion has arisen in this area because many courts have framed the issue in terms of the theory on which relief is sought in the forfeiture suit. E. KUNTZ, A TREATISE ON THE LAW OF OIL AND GAS § 58.4 (1978). Where the theory relied on is breach of the implied covenant to further develop, the courts ordinarily require notice. E. g., Sapp v. Massey, 358 S.W.2d 490, 493 (Ky. 1962). Where the theory relied on is abandonment, the lessor need not give notice. E. g., American Wholesale Corporation v. F. & S. Oil & Gas Co., 242 Ky. 356, 46 S.W.2d 498 (1932). In the case of “true” abandonment, the lessee has the intent to abandon the lease and physically relinquishes it. Id. Obviously notice would serve no purpose in such situations. Many courts have, however, taken an expansive view of abandonment and have inferred abandonment where the lessee has been in default for an unreasonable period of time without regard to the lessee’s actual intent. See Smyth v. Koplin, 294 S.W.2d 525 (Ky.1956). Notice appears to have been dispensed with in this latter type of abandonment case because under all the circumstances, it was reasonable to assume that the lessee knew of the breach of the implied covenant but had refused to correct it.
Although some courts have recognized that this latter type of case merely represents an application of the implied covenant to further develop, see Doss Oil Royalty Co. v. Texas Co., 192 Okl. 359, 137 P.2d 934 (1943), this does not undercut the rationale for not requiring notice.

. The evidence indicates that Superior did not develop the lease because it had hoped for an increase in oil prices.

. In its attempt to show that it did not breach the implied covenant to further develop, Superior introduced evidence indicating that further drilling was pointless. But for the new well, Superior would probably have relied on this evidence to justify a decision to refrain from any future development.

. The District Court’s finding in this regard is not clearly erroneous.

. Since I would find that Superior breached the ' implied covenant to further develop, I would also affirm the dismissal of the case against the working interest defendants.