Bennett v. Sinclair Oil & Gas Company

• Decision Date: 09 November 1967
• Docket Number: Civ. A. No. 11716.
• Citation: 275 F. Supp. 886
• Parties: J. W. BENNETT et al., Plaintiffs, v. SINCLAIR OIL & GAS COMPANY, Defendant.
• Court: U.S. District Court — Western District of Louisiana

275 F. Supp. 886

J. W. BENNETT et al., Plaintiffs, v. SINCLAIR OIL & GAS COMPANY, Defendant.

Civ. A. No. 11716.

United States District Court W. D. Louisiana, Monroe Division.

November 9, 1967.

Robert J. Moffatt, Simon Herold, Shreveport, La., for plaintiffs.

Frank S. Kennedy, Naff, Kennedy, Goodman & Johns, Shreveport, La., for defendant.

BEN C. DAWKINS, JR., Chief Judge.

RULING ON THE MERITS

Plaintiffs¹ seek cancellation of three separate mineral leases executed in favor of defendant² as lessee. The specifics of the complaint allege that Sinclair has: 1) failed to tender shut-in royalties as provided by the leases; 2) allowed lands covered by the leases to be wrongfully drained; and 3) failed to release the lands subject to the leases to plaintiffs after timely demand. Alternatively, plaintiffs seek partial cancellation of the leases involved. There is also a prayer for attorney's fees in the event plaintiffs are successful in this action. Our jurisdiction rests upon 28 U.S.C. § 1332, diversity of citizenship, and involves the requisite amount in controversy. Litigation arose pursuant to the following facts:

May 19, 1960, R. D. Bennett executed a mineral lease³ in favor of Sinclair covering the land designated in Plaintiffs' Exhibit 4 and Defendant's Exhibit 2 as "Lease No. 1." The lease provides for a primary term of 5 years, and contains other standard clauses, including the habendum clause, the shut-in royalty clause, the regular royalty clause and the delay rental clause. Also included was what is commonly referred to as a "Pugh Clause."⁴

August 25, 1960, two additional leases⁵ were executed by J. W. Bennett et ux to Sinclair with terms identical to those contained in the original R. D. Bennett lease. These two leases are also graphically depicted in Plaintiffs' Exhibit 4 and Defendant's Exhibit 2. Through mesne conveyances, plaintiffs acquired the royalty interest in the R. D. Bennett lease.

During the primary term of the three leases, delay rentals were tendered in the following manner: (1) on Lease # 1 for the full primary term of five years; (2) on Leases # 2 and 3 for the first three years of the primary term. These payments were uncontroverted and accepted by plaintiffs. Delay rentals were also tendered for leases # 2 and 3 after they had been included in a forced drilling unit established by the Louisiana Commissioner of Conservation. Unitization of the leased lands took place in the following way.

Commissioner's Order No. 397-B-10-a,⁶ effective December 1, 1962, pooled and unitized all interests within what was known as the Cadeville Sand which included small portions of lands covered by Leases # 2 and 3, owned by plaintiffs. Subsequent orders of the Commissioner, made effective as of February 1, 1965,⁷ enlarged the original unit and included additional acreage owned by plaintiffs. At this time, none of the acreage in Lease # 1 had been placed within the unitized area.

April 1, 1965, Sinclair requested that the Commissioner of Conservation call an emergency hearing for the purpose of establishing a new unit which would include parts of Leases # 2 and 3 and all of Lease # 1.⁸ After a duly authorized hearing, the Commissioner promulgated Order No. 397-B-11⁹ unitizing the lands mentioned above, said order being effective from May 11, 1965. Prior to issuance of this order, Sinclair had, on April 14, 1965, spudded a well on tract # 3 which was completed as a producer sometime in May or June. After completion, the well was shut-in on or about June 13, 1965. August 19, 1965, Sinclair tendered shut-in royalty to plaintiffs, which royalty was designated as applicable to Lease # 1. This royalty check was never cashed. No shut-in royalty payment applicable to Leases # 2 and 3 has ever been made.

Subsequently, on October 20, 1965, the Commissioner issued Order No. 397-B-10-e¹⁰ which further enlarged the unit known as the Cadeville Sand Unit, Calhoun Field. In this enlargement, additional portions of Leases # 2 and 3 were taken in as well as a substantial portion of Lease # 1. This order became effective November 1, 1965. Thus, the respective positions of the parties became fixed with reference to the unitized lands.

Interspersed with the above activities, the complaint alleges that in October of 1963, plaintiffs notified Sinclair, by letter from counsel,¹¹ that in their opinion certain portions of their lands were being drained by mineral production on adjacent premises. This letter formed part of the basis of plaintiffs' claim for damages due to drainage, and a copy thereof was introduced into evidence. Further complicating matters, Sinclair denies ever receiving the letter. Having set forth the facts, we now undertake to decide the issues. First is the claim for total cancellation.

Plaintiffs base their claim for total cancellation of Leases # 2 and 3 on the following provision of the leases in question:

"3. The royalties to be paid by lessee are:

* * * * * *

(c) Where gas from a well producing gas only is not sold or used because of no market or demand therefor, lessee may pay as royalty $50.00 per well per year, payable quarterly, and upon such payment it will be considered that gas is being produced within the meaning of Article 2 of this contract."¹²

In this regard, plaintiffs allege that when the J. W. Bennett-Sinclair Well # 1 was completed and shut-in, Sinclair was bound to pay shut-in royalties because they chose not to produce the well. Sinclair contends that no shut-in payment was due because prior to the expiration of the primary term, portions of Leases # 2 and 3 were included in the Cadeville Sand Unit, and that production from that unit at all times kept both leases in full force and effect. Succinctly, Sinclair's position is that because there was actual production in paying quantities legally attributable to the entirety of the leased premises, there was no necessity for shut-in payments which are treated as constructive production in lieu of actual production.¹³

Plaintiffs allege that when the additional well was completed Sinclair incurred additional obligations. Specifically, they say, Sinclair had to produce the well or tender the proper shut-in royalty. Thus, we are presented with an issue which may be best articulated by a hypothet identical to the facts of this case, to wit: mineral leases are partially included within a compulsory drilling unit established by the Commissioner of Conservation, and a producing well, located in the unit, but off the leased premises, is producing in paying quantities. Later, a second well is completed within the unit and upon the leased premises but is shut-in. Does production from the first unit well maintain the leases as to all acreage under lease and also dispense with the obligation to pay shut-in royalties applicable to the second well? It should be borne in mind that we decide this issue without deciding whether the "Pugh Clause" "divides" the various leases. In other words, our chief concern is the effect such production has on the obligation to pay shut-in royalties. Resolution of this issue may be obtained only after careful scrutiny of the leases in question and application of pertinent principles of Louisiana law.

Aiding in solution of this problem is the following language found in all three leases:

"2. Subject to the other provisions herein contained, this lease shall be for a term of 5 years from this date (called `primary term') and as long thereafter as oil, gas or other mineral is produced from said land or land with which said land is pooled hereunder." (Habendum Clause with emphasis added.)¹⁴

This provision, read in conjunction with the previously quoted portion of the shut-in royalty clause, (Clause 3, supra,) leaves no doubt as to what the parties intended. Under the express terms of these leases, actual production from the leased premises or "land with which said land was pooled" would maintain the leases in force as long as such production continued. Shut-in royalty payments were to be considered as if gas was being produced within the meaning of the Habendum Clause (Article 2). In other words, shut-in payments were required under these leases only in the absence of actual production in paying quantities from any well, and a well capable of producing in paying quantities having been completed but shut-in due to a lack of market or demand for its gas production. Our decision is buttressed by the following language of the Louisiana Supreme Court in Davis v. Laster:¹⁵

"* * * Once, therefore, drilling operations have commenced, the lessees are relegated to continuing drilling operations, or the payment of shut-in royalties, or actual royalties to maintain the lease, or, where production ceases, resumption of delay rentals * * *" (138 So.2d at 562)

Similarly, we note the following language of the Court in Sohio Petroleum Co. v. V. S. & P. R. R.,¹⁶ construing a shut-in royalty provision similar to the one in the instant case:

"Article 3 of the lease shut-in clause, relied on by the plaintiffs as an alternative ground for the cancellation of their leases, does not provide for a forfeiture of the lease in the event of the failure of the lessee to pay the shut-in well fee or royalty of $50.00 a year. The payment of this royalty is not made a condition precedent for the continuation of the lease. Instead, the provision makes it optional with the lessee to make such payment if he wants it `to be considered that gas is being produced within the meaning of Article 2' of the contract, i. e., the primary term is to be continued so long as minerals are produced." (62 So.2d at 620)

These pronouncements by the highest court of Louisiana leave no doubt that where there is actual production attributable to a mineral lease, there is no additional obligation to tender shut-in royalties in the event a second well capable of producing in paying quantities is shut-in on the leased premises. Where there is actual production in...