Adolph v. Stearns

• Decision Date: 08 June 1984
• Docket Number: No. 55874,55874
• Citation: 235 Kan. 622,684 P.2d 372
• Parties: A.W. ADOLPH and Delia Adolph, Appellees, v. Ralph STEARNS, Lloyd L. Harp, Ray Stearns and Linda Stearns, Harold Welch and Frances A. Welch, Dick Netercot and Jayne Netercot, Leonard R. Johns and Anna Johns, Lloyd R. Nuckolls and Aleen M. Nuckolls, Ronald Hopkins and Beth D. Hopkins, Donald Stearns and Ruth Stearns, Robert Stearns and Mary Stearns, and Lloyd Nuckolls, Appellants.
• Court: Kansas Supreme Court

Page 372

684 P.2d 372

235 Kan. 622

A.W. ADOLPH and Delia Adolph, Appellees, v. Ralph STEARNS, Lloyd L. Harp, Ray Stearns and Linda Stearns, Harold Welch and Frances A. Welch, Dick Netercot and Jayne

Netercot, Leonard R. Johns and Anna Johns, Lloyd R. Nuckolls

and Aleen M. Nuckolls, Ronald Hopkins and Beth D. Hopkins,

Donald Stearns and Ruth Stearns, Robert Stearns and Mary

Stearns, and Lloyd Nuckolls, Appellants.

No. 55874.

Supreme Court of Kansas.

June 8, 1984.

Syllabus by the Court

1. Whether a lessee has performed his duties under the expressed or implied covenants is a question of fact. In absence of a controlling stipulation, neither the lessor nor the lessee is the sole arbiter of the extent, or the diligence with which, the operations and development shall proceed. The standard by which both are bound is what an experienced operator of ordinary prudence would do under the same or similar circumstances, having due regard for the interests of both. Fischer v. Magnolia Petroleum Co., 156 Kan. 367, 133 P.2d 95 (1943).

2. The lessor who alleges breach of the covenant to develop or operate, contained in the habendum clause of an oil and gas lease, has the burden to show by substantial, competent evidence the lessee has breached the agreement. He must prove the lessee has not acted with reasonable diligence under the circumstances.

3. Familiar rules governing the construction of oil and gas leases are stated.

4. Development is the drilling and bringing into production of wells in addition to the exploratory or discovery well on a lease.

5. A party asserting equitable estoppel must show that another party, by its acts, representations, admissions, or silence when it has a duty to speak, induced it to believe certain facts existed. It must show it rightfully relied and acted upon such belief and would now be prejudiced if the other party were permitted to deny the existence of such facts.

Harold V. Matney, Kansas City, argued the cause, and Jon K. Lowe, Ottawa, was with him on briefs for appellants.

John L. Richeson of Anderson, Byrd & Richeson, Ottawa, argued the cause and was on brief for appellees.

LOCKETT, Justice:

This action was commenced by the landowners to cancel an oil and gas lease for violation of the lease covenants to produce or develop and operate the premises. The trial court partially granted the landowners summary judgment, finding the lessees had failed to produce oil or gas in paying quantities. The remaining issues of whether the lessees' efforts to operate or develop the leased premises had extended the primary term were tried to the court. The trial court found in favor of the lessors, voiding the oil and gas lease, ordering the lessees to plug the wells and restore the premises, and awarding statutory damages and attorney fees pursuant to K.S.A. 55-202. Lessees appeal.

The plaintiffs/appellees, A.W. Adolph and Delia Adolph (lessors), are the owners of 250 acres of land situated in Franklin County, Kansas. Defendants/appellants (lessees) are the successors to the original lessees.

July 12, 1979, Charles Gorges d/b/a Pioneer Oil Company obtained an oil and gas lease from the landowners. The lease was on a printed form; all typed portions of the lease were prepared in advance by Charles Gorges, Don Gorges, Mr. Tillery or Mr. Schmanke. The landowners required certain changes to the oil and gas lease agreement: (1) the term of the lease be set at one year, and (2) the deferral for drilling be advanced from February 12, 1980, to September 12, 1979. The modifications were approved by the parties. By agreement with Charles Gorges, Tillery and Schmanke, each had an interest in the well for their efforts in obtaining the lease for Pioneer. The landowners were unaware of this agreement. In February of 1980, the lease was assigned by Pioneer Oil Company to Lloyd R. Nuckolls. The defendants/appellants acquired their interest in the lease by later assignments.

Lessees commenced drilling within sixty days after signing the lease. A core sample was obtained and when completed the well was pumped. Well No. 2 was drilled and placed in production in May, 1980. Permanent tanks were set north of the road that divided the lease. Wells No. 1 and No. 2 produced enormous quantities of salt water which contained only a slight scum of oil. During July, 1980, thirteen loads of water, at sixty-six barrels each, were hauled off the lease. Seventy-six barrels of oil were sold. Because of the heavy gravity of the oil, an adjustment based upon cost to make the oil marketable was required. After adjustment the oil purchaser paid for 22.8 barrels. This was the only production obtained between the lease signing and the forfeiture of the lease by the court.

In January, 1981, lessees decided to drill wells No. 3 and No. 4. Well No. 3 was commenced about February 25, 1981, and completed in April or May of that year. It produced more salt water and little oil. Well No. 4 was completed within two to four weeks after No. 3. Well No. 4 caved in and had to be dug and washed out. Each well, when placed in production, only increased the output of salt water.

In an effort to increase production of oil from the lease, the lessees attempted the following: (1) continued pumping to reduce the salt water; (2) prepared an existing well from a prior lease for injection of salt water; no permit was obtained by the lessee; (3) tried K-4 chemical, which caused the oil to thin momentarily; and (4) installed gas lock anchors with an extra ball to keep the wells from sanding up. The lessees contacted individuals to obtain advice on increasing production. A student from Oklahoma University made an analysis of the lease which became his master's thesis for the university; this thesis resulted in the drilling of wells No. 3 and No. 4. Plans for increasing the pump size on each well and water flooding the field were contemplated by the lessees.

Cold and wet weather interfered with the lessees' attempts to increase production. Pump motors burned out, lines froze, wet ground impeded efforts to increase production, and during the summer of 1981, the area was flooded.

The trial court determined that lessees had actually two plans for development. Plan No. 1 was to "pump it, pump it, pump it" and see if the salt water could be depleted. Plan No. 2 was to use a bigger pump jack. Neither plan succeeded. Due to repeated motor burnouts, plan No. 1 was not successful. Plan No. 2 was never initiated.

Personality conflicts developed between several of the lessees and A. W. Adolph. Adolph's attitude was described as congenial one day and demanding the next. At one point, Adolph had been hired by the lessees to assist in pumping. When he was ordered to clean up an oil spill on his land, Adolph lost his temper. He requested the property not be rutted when wet and that gates be kept closed. The court determined Adolph's demands were not unusual for a landowner. No threats of bodily harm were directed by Adolph to any person. None of the lessees' efforts were totally frustrated by his alleged interference.

Lessors determined the lessees had failed to comply with the expressed covenants of the lease agreement. Beginning January 27, 1982, the lessors published their intent to cancel the lease by placing such notice in the Ottawa Herald for three consecutive weeks pursuant to K.S.A. 55-201. In March, 1982, A. W. Adolph directly notified the lessees of his intent to cancel the lease. The lessors filed this action May 11, 1982. They requested the oil and gas lease be declared void, their title be quieted, their land be restored to its pre-drilling condition, and statutory damages allowed under K.S.A. 55-202.

The lessors filed a motion for summary judgment. The trial court granted partial summary judgment, finding the lessees had not produced oil and gas in paying quantities. The trial court did not determine whether the lease property was being developed and operated as required under the lease agreement. The remaining issue was tried to the court on April 12 and 14, 1983. The trial court found for the lessors, deciding the oil and gas lease was void, and granted the lessors their requested remedies. The lessees appeal.

The appellants' major contention is that the habendum clause in the lease does not require production in paying quantities for extension of the lease beyond the primary term. The appellants argue production is not required since they have developed and operated the leased property as required.

The habendum clause in this lease provides:

"It is agreed that this lease shall remain in full force for a term of one years from this date, and as long thereafter as oil or gas, or either of them, is produced from said land by the lessee, or the premises are being developed or operated."

The habendum clause was printed on a form lease provided by Tillery or Schmanke. Similar clauses from leases and deeds have been cited in other Kansas cases but the exact question raised by the appellants has not been previously addressed. See e.g., Pray v. Premier Petroleum, Inc., 233 Kan. 351, 662 P.2d 255 (1983); Classen v. Federal Land Bank of Wichita, 228 Kan. 426, 617 P.2d 1255 (1980), 9 A.L.R. 4th 1106.

It must be remembered that the large expense incident to exploration and development is born by the lessees, not the lessors. Such expense justifies the lessees to proceed with reasonable caution and proper regard for their own interests, as well as the lessors'. There is no implied duty on the lessees to engage in an undertaking which is not profitable to them even though it might, or would, result in a profit to the lessors. It is only to the end of mutual benefit or profit to both the lessors and lessees that the implied covenants require reasonable diligence to produce and develop.

The terms "produced and developed" have been discussed previously by the court when reviewing expressed and implied covenants. This court, when speaking of...