Christian v. A. A. Oil Corp., 12230
| Decision Date | 27 February 1973 |
| Docket Number | No. 12230,12230 |
| Citation | 506 P.2d 1369,161 Mont. 420 |
| Parties | Gordon CHRISTIAN and Lorene Christian, his wife, Plaintiffs and Respondents, v. A. A. OIL CORPORATION, a corporation, Defendant, and Robert E. Byrne, Defendant and Appellant. Robert E. BYRNE, Cross-Complainant and Appellant, v. A. A. OIL CORPORATION, a corporation, Gordon Christian and Lorene Christian, Cross-Defendants and Respondents. |
| Court | Montana Supreme Court |
Nelson & Kalbfleisch, Shelby, James A. Nelson argued, Shelby, for appellant.
Aronow, Anderson & Beatty, Shelby, Robert G. Anderson argued, Shelby, Church, Harris, Johnson & Willaims, Great Falls, Douglas C. Allen argued, Great Falls, for respondents.
Plaintiff landowners, Gordon and Lorene Christian, brought this action to quiet title to separate oil and gas leases owned by A. A. Oil Corporation and Robert E. Byrne, defendants. This appeal is from a judgment in the district court of Toole County by the Hon. R. D. McPhillips, district judge, sitting without a jury. Judge McPhillips found A. A. Oil's 1741.64 acre lease valid, subject to a top lease on the same lands in favor of Robert E. Byrne and finding an 867.42 acre lease valid in favor of Byrne. Byrne now appeals from the judgment relating to the larger lease only.
On April 5, 1940, James and Bertha Christian executed an 'unless' type oil and gas lease to John Reynolds covering a tract of about 1740 acres in Toole County, Montana. Shortly thereafter, title to this leasehold entered was assigned to A. A. Oil Corporation. The lease was amended twice, first in 1941 and again 1946, each time extending the lease for five year periods. Incorporated into one of the amendments was a provision that in the event the lessor should believe the lessee to be in default of any of the covenants, lessor was to give lessee notice in writing specifying the alleged violation and lessee was to have forty-five days within which to remedy any existing breach. The primary term of the lease expired on July 1, 1951.
In 1950 an oil and gas well known as Christian #1 was completed, with an estimated natural gas flow of 250,000 to 500,000 cubic feet of gas per day. Christian #1 well was plugged and abandoned in 1958 without any oil or gas having been commercially sold therefrom.
The district court also found that drilling of Christian #2 commenced on July 1, 1951 and was completed later that same year. Gas from Christian #2 was first purchased by Montana-Dakota Utility Co. In November, 1954, Montana Power Co. started purchasing natural gas from said well. Cost of operation and supervision for producing is provided by Nontana Power Co. There is no evidence that Christian #2 was ever plugged and abandoned.
The district court found that at the time of the trial Christian #2 had an estimated gas production of 1,500,000 to 3,000,000 cubic feet of gas per day. No evidence was offered to show the capacity to be any different except the testimony of Jerry Branch, a geologist, who testified he thought the well to be noncommercial. The district court allowed Branch to testify over repeated objections that sufficient foundation was not laid and that he was not qualified to testify on the subject. After hearing Branch's testimony, the court sustained the objections and disregarded Branch's testimony.
No facts were presented as to whether Christian #2 had sufficient pressure to force gas into a nearby pipeline.
Gordon Christian gave notice on August 14, 1963, stating that A. A. Oil had not paid royalties or rentals, had failed to conduct exploration, and that the lease would be declared forfeited '* * * unless the breaches of the terms of said oil and gas leases are corrected and remedied within forty-five (45) days of the date of service of said notice.'
On August 19, 1963, Gordon and Lorene Christian executed to Robert Byrne an oil and gas lease on the same lands involved in the A. A. Oil lease. Byrne gave the Christians a draft for $1,741.64 in payment, but it was not presented for payment for nearly two years after issued. On this same day, the Christians requested that the lease be returned due to the conflicting prior lease with A. A. Oil. Byrne refused and duly recorded the lease.
In August of 1963, Gordon and Lorene Christian commenced a quiet title action on the tract in question against A. A. Oil and Robert Byrne. The object of the suit was to extinguish the leasehold interests of Byrne and the A. A. Oil Corporation. Byrne now appeals from the judgment extinguishing his leasehold interest.
Gordon Christian died in June, 1965 and his estate was probated in Toole County. In October of 1966, Lorene Christian as executrix of his estate petitioned the court for authority to ratify the A. A. Oil lease, reciting that a settlement had been reached between A. A. Oil and the estate. Over objections of Byrne, the probate court permitted the settlement. In July, 1965 A. A. Oil conveyed their lease to Bernice Lutz, who is holding in trust for Cedor Aronow and others, with a reservation of an overriding royalty and retention of two gas wells.
The significant issues raised upon appeal are:
(1) What effect does a notice clause have on the term of the lease after expiration of the primary term?
(2) Was the district court correct in finding the A. A. Oil Corporation lease a valid lease?
(3) Does the principle of equitable estoppel have any application to the facts as presented in this case?
(4) Did the probate court have authority to ratify the settlement of the A. A. Oil lease?
(5) Is the evidence of Branch, the geologist, concerning costs and production admissible?
(6) Is it permissible for a landowner to shift the burden of proof to an adverse intervening lessee to prove an underlying oil and gas lease invalid?
In Montana oil and gas leases are to be construed liberally in favor of the lessor and strictly against the lessee. Schumacher v. Cole, 131 Mont. 166, 309 P.2d 311; Thomas v. Standard Development Co., 70 Mont. 156, 224 P. 870. And further, while forfeitures are usually not favored in the law, due to the peculiar nature of oil and gas leases, forfeitures are here favored. Solberg v. Sunburst Oil & Gas Co., 76 Mont. 254, 246 P. 168.
The first issue, the effect a notice clause has on the term of the lease after expiration of the primary term, is the principal issue upon appeal. In the original oil and gas lease executed on April 5, 1940, the habendum clause provided '* * * that this lease shall remain in force for a term of 5 years from this date and as long thereafter as oil or gas, or either of them, is produced from said land by the lessee.' Subsequently, on July 1, 1941, the primary term was extended '* * * subject to compliance with its original and * * * amended conditions.' In paragraph (d) of the amended lease appears the following provisions:
'(d)-That in event lessor has occasion to charge that lessee or assigns may not be carrying out his (or its) obligations under intent of terms of lease and amendments thereof * * * Lessor shall notify Lessee in writing, specifying the alleged breach and Lessee shall have the full period of forty-five days from and after date of service of such notice within which to remedy any existing breach * * * lease shall terminate at the option of the lessor'.
Byrne contends that the above notice provision has no application to an expired oil and gas lease, citing Schumacher this Court held that an 'unless' type oil and gas lease may expire automatically at the conclusion of the primary term without a declaration of forfeiture or notice to a lessee if such be the general intent of the lease. See also McDaniel v. Hager-Stevenson Oil Co., 75 Mont. 356, 243 P. 582.
The Schumacher and McDaniel cases, however, can be distinguished. In those cases the Court found an automatic termination at the expiration of the primary term because no drilling, no payment of rentals, or anything else was ever done beyond the initial consideration for the lease.
No notice is required and an 'unless' type lease will automatically terminate if the lessee fails to commence drilling, pay delay rentals, or comply with the other obligations in the habendum clause. But here the district court found that at the end of the primary term Christian #1 well had been drilled, having an estimated natural gas flow of 250,000 to 500,000 cubic feet of gas per day. In addition, A. A. Oil had commenced drilling the Christian #2 well. In light of these facts the district court was correct in finding that the A. A. Oil lease did not automatically terminate at the end of the primary term.
In Fey v. A. A. Oil Corp., 129 Mont. 300, 285 P.2d 578, an almost identical notice clause was present. There this Court ruled that the lessor who intends to claim forfeiture, where development is an element, has the duty to demand that development proceed or commence. In this respect, when an oil and gas lease contains a notice clause, compliance with that clause is necessary after expiration of the primary term of the lease where drilling has commenced, the well remains capable of producing, and the lessee is continuing to develop with reasonable diligence....
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