Arkansas Natural Gas Corporation v. Pierson

• Decision Date: 09 July 1936
• Docket Number: No. 10431.,10431.
• Citation: 84 F.2d 468
• Parties: ARKANSAS NATURAL GAS CORPORATION et al. v. PIERSON et al.
• Court: U.S. Court of Appeals — Eighth Circuit

84 F.2d 468 (1936)

ARKANSAS NATURAL GAS CORPORATION et al. v. PIERSON et al.

No. 10431.

Circuit Court of Appeals, Eighth Circuit.

July 9, 1936.

Jesse Reynolds, of Clarksville, Ark. (H. C. Walker, Jr., of Shreveport, La., on the brief), for appellants.

G. O. Patterson, of Clarksville, Ark. (G. O. Patterson, Jr., of Clarksville, Ark., on the brief), for appellees.

Before GARDNER, SANBORN, and BOOTH, Circuit Judges.

SANBORN, Circuit Judge.

Briefly stated, the facts out of which this controversy arises are these:

The Piersons, appellees (plaintiffs), own 120 acres in Johnson county, Ark., described as the northeast quarter of the northeast quarter of section 22, and the west half of the northwest quarter of section 23, township 10 north, range 24 west. On May 19, 1928, they included this land in an oil and gas lease to the Arkansas Natural Gas Corporation. The lease was for five years and as long thereafter as oil or gas was produced from the leased land. There were other lessors, and other lands were included in the lease, but with them we are not concerned. The consideration for the lease was the payment of $2,000 and a one-eighth royalty interest in all gas and oil produced. The lease was assigned by the lessee to Bethany Oil & Gas Company, without the lessors' consent. Subsequently that company became the Arkansas Louisiana Gas Company. (The appellants will be referred to as "the lessees.") At the time the lease was made, there was a well on the northeast quarter of the northeast quarter of section 22 which had been put down in 1921 by the Indiahoma Oil & Gas Company. It was 2,345 feet deep and came in with an initial production of 6,500,000 cubic feet of gas per day. About a year later, its production was down to 3,000,000 cubic feet per day. It was never commercialized, and no use was made of the gas except by the Piersons in their home and by the Indiahoma Oil & Gas Company in drilling other wells on other property. In 1928 the well was not producing, and had been drowned out by salt water which had come into the well either from the gas sands or from some vein above the sands, the source of the water being in dispute. Shortly after the lease in suit was made, the Arkansas Natural Gas Corporation plugged the well, without having made any attempt to restore it. In November, 1928, the lessees completed a well on property owned or controlled by them 626 feet north of the northeast quarter of the northeast quarter of section 22, known as the Houston well. It was 2,440 feet deep, and its initial production was 1,500,000 cubic feet of gas per day. In December, 1930, the lessees completed another well 852 feet north of the northwest quarter of the northwest quarter of section 23. This well was 3,155 feet deep, and its initial production was 21,000,000 cubic feet of gas per day. It was called the Hudson-Kelley well. Both of these wells went into commercial production.

The lease contained the following provision relative to the development of the leasehold: "If no well be commenced on said land on or before the 19th day of May, 1928 1929, this lease shall terminate as to both parties, unless the lessee, on or before that date shall pay or tender to the lessor, or to the lessor's credit in the First National Bank of Clarksville, Arkansas, or its successors, which shall continue as the depository regardless of chances changes in the ownership of said land, the sum of One Hundred and no/100 Dollars which shall operate as a rental and cover the privilege of deferring the commencement of a well for 12 months from said date. In like manner and upon like payments or tenders the commencement of a well may be further deferred for like periods in the same number of months successively."

The lessees never developed the Pierson land for oil or gas. After the lease had been in force for a year, the lessees paid $100 to the Piersons, which extended the privilege of drilling to May 19, 1930. Thereafter the Piersons refused to accept further payments tendered them for the purpose of extending the drilling privilege beyond May 19, 1930, and demanded that the lessees protect the leased lands from drainage by drilling off-set wells. Thereupon the lessees, without the knowledge or consent of the Piersons, filed a deed of release of their two forties nearest the Houston and Hudson-Kelley wells. This deed was recorded August 25, 1930. On April 7, 1932, the lessees filed another deed of release of all lands included in the lease. This also was done without the Piersons' knowledge or consent.

The Piersons, in August, 1930, brought suit in equity in the chancery court of Johnson county, Ark., to enforce specific performance of the lease, to recover damages for drainage of gas from their lands, and to enjoin future drainage. The suit was removed to the United States District Court for the Western District of Arkansas by the appellants. The case came on for trial, and the court dismissed the lessors' complaint as to all issues except that of drainage, as to which issue the court reserved its decision and granted an opportunity for the production of further evidence. Upon the trial of the issue reserved, the court found that there are two productive sands in the Clarksville gas field in which the Pierson land is located; that both sands underlie the Pierson land; that it would be profitable to the Piersons and to the lessees to develop and protect, by drilling, the northeast quarter of the northeast quarter of section 22, and the northwest quarter of the northwest quarter of section 23; and that that particular part of the leased land has been drained of gas by the Houston and Hudson-Kelley wells to the extent of 30 per cent. of the production of those wells. The court also held that there was an implied covenant in the lease to protect the lands of the Piersons from drainage by wells drilled by the lessees upon their adjoining property, and that the failure of the lessees to protect the Pierson land from such drainage constituted a breach of this implied covenant and entitled the Piersons to damages. The damages allowed were in an amount equal to the value of one-eighth of 30 per cent. of the gas produced from the Houston and Hudson-Kelley wells during the period from May 19, 1930, to December 1, 1933. The agreed value of the gas was 8 cents per thousand cubic feet. A decree in favor of the Piersons for $2,679.63 was accordingly entered, and from this decree the lessees have appealed.

The lessees, as a basis for the reversal of the decree, assert:

1. That the evidence is insufficient to justify a finding that the Pierson land was drained by either the Houston or the Hudson-Kelley wells.

2. That the lease contained no implied covenant to drill the Piersons' land, and that there was an express stipulation in the lease against implied covenants.

3. That the lease was canceled in 1930.

We shall consider these contentions in their order.

1. The lessees argue that the sand which produced the gas in the Piersons' well in 1921 and succeeding years and the sand from which the Houston well produced gas are not the same sand, and that the Piersons' well was drowned out by water from gas sand at the bottom of the well. It is their contention that further drilling of the Pierson land would be impractical. With respect to the Hudson-Kelley well, the lessees' contention is that the so-called Kelley sand which produces the gas from that well is several hundred feet below the producing sand of the Houston well, and that the Kelley sand underlying the Pierson land is lower on the structure and is inundated by salt water, and that there could, therefore, be no drainage of gas from the Pierson land through the Hudson-Kelley well. With respect to the Houston well, the lessees' experts expressed the opinion that the producing sand is not the same sand as that of the Pierson well which had been plugged; that the producing sand in the Pierson well was a "sand-lens" or isolated gas sand which did not extend to the Houston well; that the Pierson well was drowned out by water from the gas sands at the bottom of the well; and that the Houston well was not draining gas from the Pierson land. The Piersons' experts, on the other hand, gave it as their opinion that the producing sands of the Houston and Pierson wells are the same, and that the Pierson sands are being drained by the Houston well. One of the Piersons' experts, a consulting geologist, gave it as his opinion that the water in the Pierson well was not water from the gas sand, but was seepage water from above the gas sand. There was also expert testimony to the effect that the only sands which produced salt water in that gas field were far above or far below the producing sand of the Pierson well. With respect to the Hudson-Kelley well, the lessees' experts were of the opinion that any well drilled to the Kelley sands on the Pierson land would be a salt water well, since the Pierson land was somewhat lower on structure, and that there could be, therefore, no drainage of the Pierson land by the Kelley well. The Piersons' experts opposed this view, being of the opinion that the Kelley sands under the Pierson land would be productive of gas and were being drained by the Hudson-Kelley well. One of the geologists who testified for the Piersons estimated the drainage of the Pierson land by the Houston and Hudson-Kelley wells to be as much as 40 per cent. of the production of those wells, for the reason that the gas would drain more readily up-structure. Another geologist of wide experience estimated the drainage by the Houston well to be approximately 30 per cent. of its volume from the nearest Pierson forty (the northeast quarter of the northeast quarter of section 22), and 15 per cent. from the other forty (the northwest quarter of the northwest quarter of section 23).

The findings of the court below were obviously based upon testimony much of which was in direct conflict.

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