Holly Energy, Inc. v. Patrick

• Decision Date: 18 July 1986
• Docket Number: No. 57229,57229
• Citation: 722 P.2d 1073,239 Kan. 528
• Parties: HOLLY ENERGY, INC., Appellant, v. R.J. PATRICK, d/b/a R.J. Patrick Operating Company, et al., Appellees.
• Court: Kansas Supreme Court

Page 1073

722 P.2d 1073

239 Kan. 528

HOLLY ENERGY, INC., Appellant, v. R.J. PATRICK, d/b/a R.J. Patrick Operating Company, et al., Appellees.

No. 57229.

Supreme Court of Kansas.

July 18, 1986.

Syllabus by the Court

1. Some general principles pertaining to the construction of written instruments are stated and applied.

2. When the trial court has made findings of fact and conclusions of law, the function of this court on appeal is to determine whether the findings are supported by substantial competent evidence and whether the findings are sufficient to support the trial court's conclusions of law.

3. The admission of expert testimony lies within the sound discretion of the trial court.

4. In an action involving the construction of a written oil and gas farmout agreement and two assignments of oil and gas leases, the record is examined and it is held the trial court did not commit error in finding the farmout agreement to be ambiguous and in its subsequent construction given to the terms of the agreement, all as more fully set forth in the opinion.

R. Doak Bishop, Jr. of Hughes & Luce, Dallas, Tex., argued the cause and Thomas W. Luce, III and John J. Little, of the same firm, and Donald R. Newkirk of Fleeson, Gooing, Coulson & Kitch, Wichita, were with him on brief for appellant.

Charles W. Harris of Curfman, Harris, Stallings & Snow, Wichita, argued the cause and Steven J. Rupp, of the same firm, was with him on brief for appellees.

HOLMES, Justice:

Holly Energy, Inc., (hereinafter Holly) appeals from an adverse judgment in an action involving the construction and interpretation to be given an oil and gas lease farmout agreement between Holly and the defendant R.J. Patrick d/b/a R.J. Patrick Operating Co. (hereinafter Patrick). The farmout agreement involves two quarter sections of land in Comanche County. Appellees are three investors who purchased working interests from Patrick in oil and gas leases on the two properties. The appellee Continental Illinois National Bank & Trust Company of Chicago is the mortgagee of one of the investors. Fourteen other investors and Patrick have effected a settlement with Holly and are not involved in this appeal.

The facts are complicated and will be set forth in detail. For convenience in understanding the facts, the following map of the area in litigation is reproduced.

NOTE: OPINION CONTAINS TABLE OR OTHER DATA THAT IS NOT VIEWABLE

Beginning in 1977 Holly, a foreign corporation, with its principal place of business in Dallas, Texas, sought to obtain oil and gas leases on extensive acreage in southwest Kansas. Among leases purchased by Holly in 1978 were the Wimmer lease covering the east one-half of Section 35, Township 33 South, Range 20 West, and the Ora Baker lease covering the northeast quarter and the east one-half of the northwest quarter of Section 2, Township 34 South, Range 20 West, both in Comanche County. The eighty acres comprising the east one-half of the northwest quarter of Section 2 has been referred to throughout this litigation as the Baker Trust property or tract. The northeast quarter of Section 35 included in the Wimmer lease is not involved in this appeal and further references to the Wimmer lease or tract will apply only to the southeast quarter. Patrick held several leases in the area including 320 acres, referred to as the Ralph Baker lease, adjoining the Wimmer and Ora Baker tracts on the east. The Wimmer and Ora Baker tracts are those directly involved in this action and are the subject matter of the farmout agreement. The three leases were considered as being located in wildcat territory with the nearest proven production nearly one mile away.

In 1980 Patrick desired to drill on the Ralph Baker lease. In order to make such exploration economically feasible, he sought support from other lessees in the area. In April 1980 Patrick contacted Holly about the possibility of obtaining a farmout agreement on all or part of the Wimmer and Ora Baker leases and was advised to make a written proposal. Holly evidently was not interested in drilling its own wildcat acreage at that time. On April 28, 1980, Patrick wrote Holly about the Ora Baker lease advising that he owned the lease on the Ralph Baker property to the east. He indicated he wanted to drill on that lease and stated in his letter:

"The wells in this area are being drilled on 40 acre spacing. I would like to make a deal for alternating 40's or perhaps a farm-out on all your acreage on an override basis." (Emphasis added.)

Patrick's initial proposal was not acceptable to Holly although the parties continued negotiations. On July 8, 1980, Patrick submitted another proposal suggesting a 1/16th overriding royalty on oil and 1/8th on gas with Patrick receiving the leases on 320 acres in return for drilling one well. Several telephone calls followed and on July 30, 1980, Holly submitted its own proposal which was accepted by Patrick on August 2, 1980. That agreement led to this lawsuit. The agreement, prepared by Holly and addressed to Patrick, stated in part:

"Re: 4205--SE/4 Sec. 35, T33S, R20W

4308--NE/4 Sec. 2, T34S, R20W

Comanche County, Kansas

"Gentlemen:

"1. Subject to the terms, conditions, and provisions of this agreement, Holly Energy, Inc., hereinafter referred to as First Party, agrees to transfer to you an undivided interest in the captioned lands as covered by the above captioned Oil and Gas Leases.

"2. You shall have the option to commence or cause to be commenced, on or before 90 days from the date hereof, the actual drilling of a well for production of oil and gas at a location of your choice on either of the captioned quarter sections, and to diligently prosecute the drilling of same to completion or abandonment.

"3. In the event you timely commence, drill and complete the well provided for in Paragraph 2 hereof as a well producing oil or gas in paying quantities in compliance with the provisions of this agreement, then, and in such event, First Party agrees to execute and deliver to you a recordable assignment of the oil and gas rights of First Party in that portion of the captioned quarter section situated within the production unit established for that well producing oil or gas in paying quantities, ... and subject to an overriding royalty interest reserved in favor of First Party of 22.5%, which reserved interest includes all royalty, overriding royalty, and other burdens on production presently affecting the interest assigned in said leases.

"4. Further, in the event you timely commence, drill, and complete the well provided for in Paragraph 2 hereof, you shall have the option to commence or cause to be commenced, on or before 60 days from the release of the rig from the said well drilled pursuant to Paragraph 2 hereof, the actual drilling of a well for production of oil and gas at a location on the remaining captioned undrilled quarter section, and to diligently prosecute the drilling of same to completion or abandonment.

"5. In the event you timely commence, drill, and complete the well provided for in Paragraph 4 hereof as a well producing oil or gas in paying quantities in compliance with the provisions of this agreement, then, and in such event, First Party agrees to execute and deliver to you a recordable assignment of the oil and gas rights of First Party in that portion of the captioned quarter section situated within the production unit established for that well producing oil or gas in paying quantities, ... and subject to an overriding royalty interest reserved in favor of First Party of 22.5%, which reserved interest includes all royalty, overriding royalty, and other burdens on production presently affecting the interest assigned in said leases." (Emphasis added.)

Paragraph 9 pertains to the release or surrender of the Holly leases by Patrick and states in part:

"If you should at any time desire to surrender any of said leases as to all or any portion of the above described lands...."

Paragraph 14 states:

"Upon your [Patrick's] written request, made within 180 days of completion of a test well earning specific acreages, First Party [Holly] shall execute and deliver a conveyance of such earned Oil and Gas Leases or leasehold estates."

Other provisions of the agreement referred to "either well," "said well," "any well," "all wells," "each well," "well or wells," "any wells" and "a well" in various contexts which appellees contend compound what they assert are ambiguities in the sections of the agreement quoted above.

Following the execution of the farmout agreement, Patrick undertook the drilling of a well on his Ralph Baker lease which was dually completed October 25, 1980, as a producing oil and gas well. Having been successful with the Ralph Baker well, Patrick then commenced the Ora Baker # 1 well under the terms of the farmout agreement with Holly. Holly was aware of the location of the well in the center of the southeast quarter of the northeast quarter of the section and was furnished daily drilling reports and other pertinent information. On December 31, 1980, the well was completed as an oil producer and on January 15, 1981, Patrick formally notified Holly of the successful completion of the well and further stated:

"This is our written request as required in our farmout agreement, asking you to assign the Northeast 1/4 of Section 2-34-20 to me as agreed."

Holly responded on January 26, 1981, sending an executed assignment of its oil and gas lease as to the entire quarter section stating:

"Enclosed is an Assignment of Interest earned by your drilling and completing the above captioned well."

The assignment reserved Holly's overriding royalty interest as provided for in the farmout agreement and specifically provided that the assignment was subject to all of the terms of the farmout agreement.

During this general period of time Patrick sold several interests to various investors and, after receiving the assignment of the lease...