Indiana Oil, Gas & Development Co. v. McCrory

• Decision Date: 12 May 1914
• Docket Number: 3301.
• Citation: 140 P. 610,42 Okla. 136
• Parties: INDIANA OIL, GAS & DEVELOPMENT CO. v. MCCRORY ET AL.
• Court: Oklahoma Supreme Court

140 P. 610

42 Okla. 136

INDIANA OIL, GAS & DEVELOPMENT CO. v. MCCRORY ET AL.

No. 3301.

Supreme Court of Oklahoma

May 12, 1914

Rehearing Denied May 12, 1914.

Syllabus by the Court.

A lease which grants "all the oil and gas" under the leased land, together with the right to enter "at all times" for the purpose of "drilling and operating" to erect and maintain structures, pipe lines and machinery necessary for the "production and transportation" of oil and gas, and to use sufficient water, oil, and gas to run the necessary engines for the "prosecution of said business," which reserves to the lessor substantial royalties in kind and in money on the oil produced and saved and the gas used off the premises which shows that the promise of these royalties was the controlling inducement to the grant, and which, while expressly requiring that drilling commence within 90 days from the date of said lease, did not expressly define the measure of diligence to be exercised in the work of development and production after the expiration of that period, contains a covenant by the lessee, arising by necessary implication from the nature of the lease and the other stipulations therein contained, that, if during the term of the lease oil and gas, one or both, are found in paying quantities, the work of development and production shall be continued with reasonable diligence; that is, along such lines as will be reasonably calculated to make the extraction of oil and gas from the leased land of mutual advantage and profit to the lessor and lessee.

Where the object of the operations contemplated by an oil and gas lease is to obtain a benefit or profit for both lessor and lessee, neither is, in the absence of a stipulation to that effect, the arbiter of the extent to which, or the diligence with which, the operation shall proceed; but both are bound by the standard of what, in the circumstances, would be reasonably expected of an operator of ordinary prudence having regard to the interest of both.

Because forfeitures are usually harsh and oppressive, and because they can ordinarily be enforced at law, courts of equity generally refuse to aid in their enforcement; but the rule is not absolute or inflexible. Its influence and operation do not extend beyond the reason which underlies it, and in cases otherwise cognizable in equity there is no insuperable objection to the enforcement of a forfeiture in a court of equity when that is more consonant with the principles of right, justice, and morality than to withhold equitable relief.

A court of equity will decree a forfeiture of an oil and gas lease on account of a breach of an implied covenant to diligently operate and develop the property when such forfeiture will effectuate justice. The granting of such relief depends upon the facts and circumstances surrounding each particular case.

A lessor invoking the jurisdiction of a court of equity to cancel and rescind a lease for breach of an implied covenant must come into court with "clean hands," and must act with reasonable diligence after the discovery of his right to the forfeiture on account of such breach.

In a suit to cancel an oil and gas lease, the court should not decree damages where the measure thereof is uncertain, vague and indefinite.

Commissioners' Opinion, Division No. 2. Error from District Court, Okmulgee County; Wade S. Stanfield, Judge.

Action by John J. McCrory against the Indiana Oil, Gas & Development Company and others. Judgment for plaintiff, and the defendant named brings error. Reversed.

Chas. W. Grimes, of Tulsa, Harlan Read, of Okmulgee, and Davidson & Williams, of Tulsa, for plaintiff in error.

Chas. B. McCrory and Geo. A. Johns, both of Okmulgee, and Chas. Eichenauer, for defendant in error.

GALBRAITH C.

On the 17th day of March, 1906, John J. McCrory, as owner of the land, executed an oil and gas lease to S. P. Elzey, in words and figures following:

"Agreement, made and entered into the 17th day of March, A. D. 1906, by and between J. J. McCrory, of Morris, Indian Territory, party of the first part, and S. P. Elzey, party of the second part.

Witnesseth, that the said party of the first part, for and in consideration of the sum of five dollars per acre in hand well and truly paid by the said party of the second part, the receipt of which is acknowledged, and of the covenants and agreements hereinafter contained on the part of the said party of the second part, to be paid, kept, and performed, hereby grant, demise, lease, and let unto the said party of the second part, their heirs or assigns, for the sole and only purpose of mining and operating for oil and gas, and of laying pipe lines, steam, water, gas, and shackle lines to and from adjoining land, and of building tanks, stations, and structures thereon to take care of said products, with the right of going in, upon, over, and across said land for the purpose of operating the same, also with the right to subdivide and release the same or any part thereof, all of the following described tracts of land situate in the Creek Nation, and within the Indian Territory, to wit: The west half of the northeast quarter and the northeast quarter of the northeast quarter of section twenty-eight, township thirteen north, range fourteen east of the Indian meridian, and containing one hundred and twenty acres, more or less.

It is agreed, that this lease shall remain in force for the term of fifteen years from this date, and as long thereafter as oil and gas, or either of them, is produced therefrom by the party of the second part, their heirs or assigns.

In consideration of the premises, the said party of the second part covenants and agrees:

First. To deliver to the credit of the first party, his heirs or assigns, free of cost, in pipe lines to which they may connect their wells, the equal one-eighth part of all oil produced and saved from the leased premises.

Second. To pay to the first party, his heirs or assigns, one hundred dollars ($100.00) per year for the gas from each and every gas well drilled on said premises, the product from which is marketed and sold off the premises, said payment to be made on each well within sixty days after commencing to use the gas therefrom, as aforesaid, and to be paid yearly thereafter while the gas from said well is so used. First party to fully use and enjoy said premises for farming purposes, except such parts as may be used by second party for the purposes aforesaid; second party agreeing to locate all wells so as to interfere as little as possible with the cultivated portions of the farm. First party to have the right and privilege of using, at his own risk, sufficient gas for one dwelling house on the premises from any gas well found on said described lease, he to make his own connections; and it is agreed that no well shall be drilled within _______ feet of the buildings now on the premises without the consent of the first party.

It is provided, that this lease shall become null and void if a well is not commenced on the premises within ninety (90) days from date.

It is further agreed, that the second party it to have the privilege of using sufficient water, oil, and gas from the premises to run all necessary machinery, and at any time to remove all buildings, machinery, and fixtures on said premises by the said lessee.

All the provisions thereof shall extend to the heirs, successors, and assigns of the respective parties hereto.

In witness whereof, said parties have hereto set their hands and seal the day and year aforesaid."

On the 9th day of May following S. B. Elzey assigned this lease to one C. S. Vaughn, who entered upon the premises about June 1 1906, and began drilling, which resulted, on June 25th following, in bringing in a gas well of large volume and pressure. On the 26th day of October, 1906, Vaughn assigned the lease to the Indiana Oil, Gas & Development Company. This company, in January, 1907, drilled a second well on the premises, which came in a gas well, also of large volume and pressure. On June 26, 1907, the Indiana Oil, Gas & Development Company sublet the west 80 acres of the 120-acre tract included in the lease to one T. H. Bass, reserving a one-fourth royalty interest therein. Bass entered upon said premises on July 12, 1907, and commenced the drilling of a well at location No. 1, and completed the same on August 3d thereafter. On August 14, 1907, he commenced drilling at location No. 2, which well was finished on September 7th. On September 28th he commenced drilling at location No. 12, which was well No. 3, and finished this on October 14th thereafter. On November 6, 1907, he commenced drilling at location No. 13 and finished the well on November 27th. Each of these wells were sunk to a depth of something over 1,600 feet at a cost of about $6,000 each. On November 14, 1907, a receiver was appointed for Bass' interest in this sublease in a suit brought by the Indiana Oil, Gas & Development Company; the receiver taking charge of the property and operating it for 30 days. At the expiration of such time the receiver was discharged, and the property returned to Bass. Bass then executed a trust deed to the property to secure three of his creditors, whose claims amounted to more than $24,000. The trustee named in this deed took charge of the Bass lease in January, 1908, and continued to operate it up until September, 1909, when the property was sold at trustee's sale, and purchased by the National Supply Company of Kansas. Immediately after this sale the Kansas company took charge of the property and continued to operate it up until the commencement of this action, and were still operating the wells at the trial in May, 1911. On May 15, 1910, the plaintiff, John J. McCrory,...