Frankfort Oil Company v. Snakard, 6114.
| Decision Date | 21 July 1960 |
| Docket Number | No. 6114.,6114. |
| Citation | 279 F.2d 436 |
| Parties | FRANKFORT OIL COMPANY, a Division of Carstairs Bros. Distilling Company, Inc., a foreign corporation, Appellant, v. W. F. SNAKARD, Appellee. |
| Court | U.S. Court of Appeals — Tenth Circuit |
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Mathias F. Correa, New York City (T. Murray Robinson, Leon Shipp, Oklahoma City, Okl., Richard P. Loftus, Sheldon Oliensis, New York City, were with him on the brief), for appellant.
C. J. Watts and John B. Dudley, Jr., Oklahoma City, Okl. (P. D. Erwin, Chandler, Okl., Luther Bohanon, Bohanon & Barefoot, Looney, Watts, Looney & Nichols, and Dudley, Dudley & Dudley, Oklahoma City, Okl., were with them on the brief), for appellee.
Before HUXMAN, PICKETT and BREITENSTEIN, Circuit Judges.
Appellee-plaintiff Snakard recovered judgment against appellant-defendant Frankfort Oil Company in the amount of $1,493,277 as damages arising from the alleged misconduct of Frankfort in connection with certain transactions between the parties pertaining to Oklahoma oil and gas properties. Jurisdiction is based upon diversity.
The complaint in the court below contained two counts, the first alleging breach of contract and tort and the second charging conspiracy. There were seven defendants, one of whom, Frankfort, asserted a counterclaim against Snakard. The record as filed in this court did not show disposition of all of the claims or as to all of the defendants, and there was no compliance with Rule 54(b), F.R.Civ.P., 28 U.S.C.A., relating to judgments on multiple claims. Because of doubt as to whether the record presented an appealable judgment,1 we ordered that the parties show cause as to why the appeal should not be dismissed. In response the parties filed a stipulation establishing the disposition or abandonment of all claims except those asserted against Frankfort in the first count of the complaint. This stipulation will be considered as a supplemental record in the case.2 The issue for determination is the liability of Frankfort under the first count.3
Snakard held 13 leases covering 12 tracts of land with a total area of 1,280 acres in Lincoln County, Oklahoma. These leases were for a period of one year with no provision for delay rental and required drilling on or before July 1, 1955, to extend their terms.
On November 11, 1954, Snakard entered into four different but related contracts with Frankfort covering the 1,280-acre block. In substance, Snakard agreed to assign to Frankfort a one-half interest at $1 per acre and to take care of certain title clearance matters with Frankfort to participate in the cost thereof. Snakard contracted to drill a well, later known as Stanolind No. 1, at an agreed location on the block, to a depth adequate to test the Arbuckle formation. For the drilling of this well Frankfort was to pay Snakard a sum considerably higher than is customarily paid in the area. The purpose of the increased payment was to give Snakard a profit of approximately $20,000 for lease acquisitions. If production was obtained, Frankfort was to be the operator of the block under a joint operating contract.
The Stanolind No. 1 well was drilled in January, 1955, to its maximum depth and secured production in the second Wilcox sand, but because of water trouble and mechanical difficulties it was not completed as a commercial producer. Two other wells, the Erwin No. 1 and the Meador's Estate No. 1, were completed in February and April, 1955, and secured oil production in the second Wilcox sand. In the period March to June, inclusive, 1955, five other wells were drilled.4 None of these obtained oil production but some were completed as shutin gas wells.
By the middle of June, 1955, Frankfort had drilled on seven of the tracts. On June 20 Frankfort notified Snakard that it would make no effort to validate the Lee and Simpson leases. Without notice to Frankfort, Snakard, on July 1, 1955, commenced drilling on the Christian and Thomas leases in an attempt to validate them. On the Christian lease he withdrew and did not complete a well. Snakard had financial difficulties and became involved in a lawsuit questioning the continuity of his drilling on the Thomas lease. As a result he lost his interest in the Thomas lease.
Between July 1, 1955, and July, 1958, three commercial oil wells were developed by other parties on the Christian lease, six on the Thomas, and one on the Simpson. The basis for the claim of damages is the loss to Snakard resulting from the lack of validation of the Christian, Thomas, and Simpson leases.
Snakard contends that Frankfort breached its contractual obligations by not drilling on all the leases before the termination thereof. As production was secured, the operating agreement became effective. Therein, Frankfort was made the operator of the jointly-held leases. Under the agreement, if either party desires to drill a well he shall give notice to the other party who shall then have 10 days within which to elect to participate. If the election is to participate, then the "Operator Frankfort shall drill such well for the Joint Account and at the joint cost of the parties, and such well shall for all purposes be a jointly-owned well." If the election is not to participate, then "the party desiring to drill may nevertheless drill, complete and equip the well at its own cost and expense." The operating agreement is on a printed form which provides that as to any well not drilled for the Joint Account the participating party shall have entire ownership. This was modified to provide that if Snakard is a non-participating party on any well Frankfort should have a 7/8 working interest and Snakard a 1/8 working interest until Frankfort, out of 3/8 of the working interest, shall have reimbursed itself in a sum equal to 200% of ½ of the well cost. Thereafter, Frankfort and Snakard should each have ½ of the working interest.
Admittedly, Frankfort was obligated to drill one well.5 The trial court so held but went on to decide that Frankfort "elected to drill the remaining undeveloped leases and in then failing so to do breached its contractual agreement with plaintiff."
Election to drill is said to result from Frankfort's April 8, 1955, letter to Snakard which read in part: If this letter was intended as a notice of desire to drill it was defective as the operating agreement required such notice to state the depth to which the well was to be drilled and the location thereof, and such statements were not made.
Further, it is urged that an election to drill resulted from a so-called caveat filed by Frankfort for record in the office of the county clerk of Lincoln County, Oklahoma, on March 8, 1955. At that time Snakard had not executed all of the lease assignments to which Frankfort was entitled. Previously, the relations between the parties had become strained because Frankfort had refused to pay Snakard the sums due in excess of the actual drilling costs of the Stanolind No. 1 well and also refused to pay certain title correction expenses incurred by Snakard. The Frankfort refusal to pay resulted from a suit filed in December, 1954, by one Burkett against Snakard. Burkett asserted an ownership of a one-half interest in the leases included in the Frankfort-Snakard transactions.6
The caveat refers to the Frankfort-Snakard contracts, describes the land covered by the leases, and states:
"Now, Therefore, the undersigned Frankfort Oil Company * * * does hereby notify the world that it has performed all of the terms of said contract with W. F. Snakard and is entitled to and is the owner of an undivided 7/8ths interest in and to all of the oil and gas leases covering the above described land and any party purchasing same does so at his own risk and peril and with notice of the rights of the undersigned adverse thereto."
Such document did not meet the requirements of the operating agreement as to a notice of intent to drill. As neither it nor the letter of April 8, 1955, was in conformity with the provisions of the operating agreement, it might well be found that Frankfort had never notified Snakard of an intent to develop the undrilled leases. In the absence of a notice of such intent no drilling obligation, beyond that for the first well, rested upon Frankfort. Nevertheless, the trial court found that Frankfort had elected to drill and it may be that such is a reasonable inference to be drawn from the circumstances. The question then is the effect of such election.
The operating agreement provided that when notice of intent to drill was given and the other party chose to participate, the operator "shall drill" and that when the election was not to participate, the party giving the notice "may nevertheless drill." Snakard did not elect to participate. Hence, Frankfort, as the notifying party, had the right to drill but, as the operator, had no obligation to drill.
Snakard seeks to avoid this conclusion by asserting that the mentioned provisions relate to the division of expenses and not to the obligation to drill.7 The position is not well taken as the provisions refer both to the obligation to drill and the responsibility for the expenses.
The last sentence of the paragraph, relating to notice of intent to drill and election to participate or not, reads thus:
"Operations for the drilling of any well under the provisions of this paragraph must be commenced within ninety (90) days after the initial notice is given, and not thereafter."
Counsel for Snakard argue that the use of the word "must" obligates the notifying party to drill whether or not there is...
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