Kingwood Oil Co. v. Bell

• Decision Date: 29 May 1953
• Docket Number: No. 10693.,10693.
• Parties: KINGWOOD OIL CO. v. BELL et al.
• Court: U.S. Court of Appeals — Seventh Circuit

204 F.2d 8 (1953)

KINGWOOD OIL CO. v. BELL et al.

No. 10693.

United States Court of Appeals Seventh Circuit.

April 17, 1953.

Rehearing Denied May 29, 1953.

Wirt L. Harris, Oklahoma City, Okl., Harold G. Baker and Leigh M. Kagy, East St. Louis, Ill., Clovis A. McKenzie, Oklahoma City, Okl., Baker, Kagy & Wagner, East St. Louis, Ill., of counsel, for plaintiff-appellant Kingwood Oil Co.

Philip R. Wimbish, Tulsa, Okl., John C. Roberts, East St. Louis, Ill., Charles M. Spence, Joseph P. Logan, St. Louis, Mo., Richard H. Eagleton, Robinson, Ill., Thompson, Mitchell, Thompson & Douglas, St. Louis, Mo., for appellees.

Before MAJOR, Chief Judge, and DUFFY and LINDLEY, Circuit Judges.

DUFFY, Circuit Judge.

Plaintiff-appellant (hereinafter called Kingwood) brought this action against certain defendants who are legatees, grantees, and assignees of William Bell, deceased. These defendants joined in a motion to dismiss the complaint on the ground that it failed to state a claim upon which relief could be granted. The Texas Company was also named as a defendant, but did not join in the motion to dismiss, and filed an answer. The original complaint was dismissed and thereafter plaintiff filed its amended complaint, naming the same said defendants and seeking a declaratory judgment under 28 U.S.C.A. §§ 2201 and 2202. All of the defendants except the Texas Company again moved to dismiss. The Texas Company answered the amended complaint. The motion to dismiss the amended complaint was granted, and this appeal followed.

It is alleged in the amended complaint that William Bell, prior to his death on February 9, 1948, was the owner of oil and gas leases on real estate in Marion County, Illinois. Two of these leases are hereinafter referred to as the "Dodson" and "Shanafelt A" leases, and were dated July 9, 1936, and July 13, 1936, respectively. Each lease was for the term of ten years "and as long thereafter as oil or gas, or either of them, is produced from said land by lessee." Each lessor was to receive 1/8 of the oil produced and saved from the leased premises.

On September 7, 1938, William Bell entered into a written agreement with Kingwood for the drilling and development of the property under the Dodson and Shanafelt A leases. On October 28, 1938, he entered into another and similar agreement with Kingwood for the drilling and development of three small tracts in Section 16, hereinafter referred to as "Shanafelt C." In the unit operating agreement hereinafter described, the three leases are referred to as "Tract No. 234 — W. G. Dodson," "Tract No. 17 — J. O. Shanafelt A," and "Tract No. 6 — J. O. Shanafelt C."

In said agreements Bell assigned to Kingwood an undivided one-half interest in the working interest in each oil and gas lease. In the September 7 agreement Kingwood agreed to commence drilling on or before September 30, 1938; in the October 28 agreement, the drilling was to be commenced on or before November 20, 1938. The first agreement provided that Kingwood "shall continuously carry on said drilling of said well with due diligence to completion and if oil or gas sufficient for commercial production shall not be found in an upper formation said well shall be drilled to and into the McClosky producing formation, and if oil or gas shall be found in said well in paying quantities Kingwood shall drill additional wells on said Tract as fast as good business judgment shall dictate until said Tract shall be fully developed and said Kingwood shall drill all offset wells that may be necessary to protect said Tract from drainage by other wells * * *." The second agreement provided that Kingwood "shall continuously carry on said drilling of said well with due diligence to the McClosky producing formation. If said well is a failure in the McClosky formation, but cores taken indicate commercial production in the upper formations, then the said well shall be plugged in the McClosky and made into a producing well in the upper formations, but if said well is a commercial well in the McClosky it shall be completed as a producing well in that formation, and another well drilled on said seven acre tract to the upper formations, if cores taken indicate commercial production in those formations." A similar provision applied to an eighteen acre tract covered also by the second agreement, and it was provided that the wells be drilled "as fast as good business judgment shall dictate, and Kingwood shall drill all off-set wells that may be necessary to protect said tracts from drainage by other wells * * *." Kingwood agreed to pay all costs and expenses of such development and operation, and of abandoning and plugging wells which did not produce in paying quantities and those which became exhausted, and also agreed to protect William Bell from all liability for costs or damages incurred in connection with the development and operation of said wells, and to divide equally with William Bell all of the oil and gas saved from the 7/8 working interest under the leases. The provisions of Paragraphs 4, 5, and 6 of each agreement are set out in Footnote.¹

Kingwood proceeded with the development of the tracts hereinbefore described by drilling, equipping, and putting a number of oil wells into operation and production. The amended complaint alleges that Kingwood has complied with and carried out all of the terms and conditions of the two 1938 agreements by it to be performed.

On November 1, 1940, Kingwood and Bell entered into a written agreement with the trustee of the Missouri-Illinois Railroad Company with respect to the railroad's right-of-way where it crossed the Shanafelt A tract. Under this agreement certain claims asserted by Kingwood and Bell against the trustee were settled by the payment of $50,000 to each (Kingwood and Bell) and in addition the trustee gave to Kingwood and Bell an oil and gas lease covering the 60 foot right-of-way upon which four wells had previously been drilled, and which were producing oil. The trustee also sold to Kingwood and Bell certain personal property used in connection with the four wells located on said right-of-way. There was no written agreement between Kingwood and Bell as to the operation of this property.

Prior to June 30, 1939, Kingwood and Bell, pursuant to an oral agreement between them, purchased two 80,000 barrel storage tanks which were installed on the Shanafelt A tract. The purchase price and incidental costs were shared equally between them. On February 15, 1941, the tanks were leased to Sohio Petroleum Company and the rentals amounting to $14,600 were divided equally between Kingwood and Bell. On July 31, 1942, these tanks were sold for $40,000 and Kingwood and Bell each received one-half of the sale price.

In 1942, in the vicinity of the Shanafelt A tract, oil was discovered in the Trenton lime, a deeper geological formation than the McClosky formation to and into which producing wells had been drilled in the Lake Centralia-Salem Oil Field. On September 4, 1942, Kingwood and Bell entered into a written agreement by the terms of which Bell agreed to pay one-half of the costs of deepening Well No. 19 on the Shanafelt A tract to the Trenton lime formation. The well was deepened and Bell paid one-half of the costs. This agreement provided in part: "3. Upon completion as a producing well, Kingwood shall carry on the production and operations of this well at its sole cost and expense precisely as in the case of all other wells on this property and this special agreement entered into because of the unusual costs and risks involved is not intended to change, nor shall it have the effect of modifying any part of the existing agreement for the development and operation of this property hitherto entered into except and only with respect to the costs of deepening Well No. 19 to the pay zone of the Trenton Limestone."

Well deepening operations were subsequently undertaken by Kingwood and Bell with respect to Wells Nos. 20, 21, 22, and 24 on the Shanafelt A tract. These operations were pursuant to oral agreements between Kingwood and Bell and the latter paid one-half of the costs of deepening these wells to the Trenton lime formation.

On July 11, 1941, Bell assigned to each of his sons, Kenneth C. Bell and J. M. Bell, an undivided 1/8 interest in said leaseholds. By reason of the subsequent death of J. M. Bell, his share is now owned by defendant Beatrice Mary Bell. The other defendants, except The Texas Company, received their interests in the leaseholds under the will of William Bell, deceased.

All the wells drilled on the leases hereinbefore described were drilled, completed and operated by the customary primary recovery method, which consisted of drilling wells to the oil producing formation, installing casing, pumping and storage equipment, and the pumping of the oil from the wells. About 5,000,000 barrels of oil were thus recovered.

By 1949 the production of oil in this field began to diminish and it was then apparent that commercial production would end within a reasonably short period...