Crystal Oil Co. v. Warmack

• Decision Date: 07 June 1993
• Docket Number: No. 92-1102,92-1102
• Citation: 855 S.W.2d 299,313 Ark. 381
• Parties: CRYSTAL OIL COMPANY and Nevada Oil Operators, Appellants, v. Donald L. WARMACK, Appellee.
• Court: Arkansas Supreme Court

Page 299

855 S.W.2d 299

313 Ark. 381

CRYSTAL OIL COMPANY and Nevada Oil Operators, Appellants, v. Donald L. WARMACK, Appellee.

No. 92-1102.

Supreme Court of Arkansas.

June 7, 1993.

Hayes C. McClerkin, Barry A. Bryant, Texarkana, James B. Bennett, El Dorado, for appellants.

Oliver M. Clegg, Carolyn J. Clegg, Magnolia, for appellee.

NEWBERN, Justice.

This is an accounting case involving oil and gas leases. The appellee, Donald L. Warmack, sued the appellants, Crystal Oil Company (Crystal) and Nevada Oil Operators (Nevada), claiming he, instead of they, should have been paid royalties on a mineral leasehold. His claim was based on the allegation that the 1963 lease, under which Crystal and Nevada claimed the royalties, had expired because of breach of the implied covenant to develop, thus activating his 1979 "top lease" prior to the payment of the royalties which occurred sometime after 1985.

Crystal and Nevada disputed the allegation that the 1963 lease, which formed the basis of the payments to them, had expired. They also contended Warmack was, because of laches, estoppel, and ratification of the 1963 lease, barred from asserting whatever right he might have. We agree with the Trial Court that the 1963 lease had expired prior to the payment of the royalties and that Warmack's claim was not barred by laches, estoppel, or ratification.

The 1963 mineral rights lease covered 200 acres. Shortly after the lease was granted, 80 of the 200 acres were placed in a unitized field. We need not recite all the transactions which resulted in Crystal's and Nevada's claims. It is enough to say that each of them was an assignee of the 1963 lease, and each reserved an overriding royalty interest when the lease was further assigned. In 1979 Warmack, took a "top lease" from the grantor of the 1963 lease of the 120 acres remaining outside the unit. A "top lease," according to H. Williams and C. Meyers, Oil and Gas Terms, (7th ed. 1987), p. 1011, is "A lease granted by a landowner during the existence of a recorded mineral lease which is to become effective if and when the existing lease expires or is terminated."

There was no exploratory or other drilling or testing on the 200 acres by any lessee or leasehold assignee from 1963 until 1985 with the exception that in 1979 Warmack re-entered a well he had drilled in 1955 on the 120 acres. Only minimal production occurred from that well, about a barrel and a half a day.

In 1985, the Tullos Group acquired, by assignment, rights under the 1963 lease as well as under Warmack's top lease and began exploratory drilling on the 120 acres Warmack had top leased. Royalties were paid to Crystal and Nevada, and in 1989 Warmack asserted his claim to the royalties.

Crystal's abstract of the record, on which both Crystal and Nevada rely, with minor additions by Nevada, tells us hardly anything about the 1963 lease. All we know from the abstract is that the 1963 lease is an "Oil and Gas Lease," the names of the parties, and the description of the land covered. Nothing is stated about the terms of the lease, such as its duration or whether there is any provision which would determine the effect of unitization of the 80 acres on the matter of whether there was sufficient development to avoid breach of the implied covenant to develop the remaining 120 acres.

Although it is just barely so, the abstract is sufficient to allow us to consider the issue of the breach of the implied covenant to develop. Absent a provision to the contrary, there is such an implied covenant in any "oil and gas lease." See Enstar Corp. v. Crystal Oil Co., 294 Ark. 77, 740 S.W.2d 630 (1987), where we quoted the following from Byrd v. Bradham, 280 Ark. 11, 655 S.W.2d 366 (1983):

In oil and gas leases where royalties constitute the chief consideration, an implied covenant exists that the lessee will explore and develop the property with reasonable diligence. (Citation omitted.) The duty to explore extends to the entire tract, and this is especially true where paying quantities of oil have been found on a part of the tract. (Citation omitted.)

Of course, due deference must be given to the judgment of the lessee in determining whether to drill, but the lessee must not act arbitrarily. (Citation omitted.) Furthermore, the lessee must act not only for his own benefit but also for the benefit of the lessor. (Citation omitted.) The lessee's obligation to explore is a continuing one, even after paying quantities of oil are discovered, in order to effect the purpose of the lease. (Citation omitted.) Production on only a small portion of the leased land does not justify allowing the lessees to hold the entire leasehold indefinitely, thus depriving the lessor of receiving royalties from another arrangement. (Citation omitted.)

Nevada acknowledges the ruling in Byrd v. Bradham, supra, that it was insufficient to explore five acres of an 80-acre tract and thus the leases in that case were cancelled. It argues, however, "Here we have a substantial portion of the leased acreage, 80 of 200 acres, continuously producing since they were placed in the Irma Unit in approximately 1964. In Appellant's view this production and respective royalties paid to lessor held the 1963 lease." There are two problems with the argument. First, the only inkling we have from the abstract that the 80 acres in the unit were "continuously producing" is a reference by Mr. Corley to the receipt by Nevada of some royalties from the unit. Second, no authority is cited in support of the conclusion that unitization of two-fifths of a leasehold interest is sufficient to hold the remaining three-fifths. We acknowledge Bibler Bros. Timber Corp. v. Tojac Minerals, 281 Ark. 431, 664 S.W.2d 472 (1984), a case not cited by the parties, which seems to support this argument. By way of an obiter dictum we stated:

The general rule is that an oil, gas and mineral lease is indivisible. Production in any part of the lease keeps the lease in effect for as long as oil, gas and other minerals are being produced on any of the lands described in the instrument. The standard lease with a pooling clause provides that the entire lease will be considered held by production, whether that production is on the pooled area or some area of the tract that has not been unitized.

That case, however, in which we went on to describe the "Pugh clause" and its effect, turned on the language of the lease, be it a "standard" or other type. Here we are limited by not having the language of the lease included in the abstract and must consider the effect of the implied...