Leck v. Continental Oil Co.

• Decision Date: 28 November 1989
• Docket Number: No. 72054,72054
• Citation: 800 P.2d 224,1989 OK 173
• Parties: Robert E. LECK, Johnnie V. Steele and Kenneth E. Brandt, Appellants/Plaintiffs, v. CONTINENTAL OIL COMPANY, Appellee/Defendant.
• Court: Oklahoma Supreme Court

Page 224

800 P.2d 224

1989 OK 173

Robert E. LECK, Johnnie V. Steele and Kenneth E. Brandt Appellants/Plaintiffs, v. CONTINENTAL OIL COMPANY, Appellee/Defendant.

No. 72054.

Supreme Court of Oklahoma.

Nov. 28, 1989.

Rehearing Denied Nov. 6, 1990.

John T. Edwards and Henry J. Hood, Monnet, Hayes, Bullis, Thompson and Edwards, Oklahoma City, for appellants/plaintiffs.

S. Paul Hammons, Andrews, Davis, Legg, Bixler, Milsten and Murrah, Oklahoma City, for appellee/defendant.

SIMMS, Justice:

Certified Question of Law from the United States Court of Appeals for the Tenth Circuit.

The appellants are mineral rights owners in Section 21, T13 N, R10 W, Canadian County, Oklahoma. This section was spaced for 640-acre drilling and spacing units for the Atoka-Morrow formation along with the adjacent Section 20, T13 N, R10 W, Canadian County in 1967 pursuant to Order No. 66858 of the Oklahoma Corporation Commission (commission). In 1972, the sections were pooled and the leasehold interests in the minerals were adjudicated with appellee being designated the operator in both units.

Appellee drilled a well in Section 21, calling it the Leck # 1 well, and production commenced in May of 1973. In 1975, appellee drilled a well in the Northeast Quarter of Section 20 and plugged it because it was not sufficiently productive. They again drilled in Section 20, this time in the West Half, only to find a dry hole. Appellee then filed an application with the commission for a location exception to drill a well in Section 20, 1310 feet north of the south line and 330 feet west of the east line. After proper notice was given, the commission held a hearing, no opposition came forth, and the commission granted the application in Order No. 119476. Appellees were granted a normal production allowable for this off-pattern well.

Appellees drilled the well, designating it the Wosika # 1 well, and production commenced in July of 1976. On September 26, 1978, Robert Leck, an appellant herein, filed an application with the commission seeking an order restricting the allowable on the Wosika # 1 well "in order to protect the correlative rights of all parties in the common source of supply." The commission heard the application en banc on January 22, 1979 and entered Order No. 156636 on August 20, 1979 denying the application. No application to reconsider was filed with the commission nor was an appeal of the order lodged with the Oklahoma Supreme Court, and the order became final thirty days after being entered.

On October 23, 1985, appellants filed this action in Canadian County District Court alleging the appellee breached an implied covenant to prevent drainage, breached a fiduciary duty to protect the appellant's correlative rights by drilling and operating the Wosika # 1 well, and made misrepresentations to the commission in order to secure the location exception. The appellants asked for actual damages and punitive damages.

Appellees removed the action to the United States District Court for the Western District of Oklahoma and sought summary judgment arguing that the action was a collateral attack on the Oklahoma Corporation Commission's final order, Order No. 156636. The Honorable Thomas R. Brett, United States District Judge, ruled that the district court had no subject matter jurisdiction over the action and dismissed the case. Appellants appealed to the United States Court of Appeals for the Tenth Circuit, which has now certified the following question of law pursuant to the Uniform Certification of Questions of Law Act, 20 O.S.1981, §§ 1601, et seq:

"Does the district court have subject matter jurisdiction to hear and decide an action for damages brought by mineral interest owners against the owner and operator of an oil and gas lease when the mineral interest owners allege: (1) breach of contract by the operator for causing drainage of the oil and gas under their property by another oil and gas well on adjacent property operated by the operator; (2) violation of fiduciary duties by the operator for failing to protect their correlative rights; and (3) misrepresentations by the operator to the Oklahoma Corporation Commission during a hearing on the application of the mineral interest owners to restrict the allowable production from the other oil and gas well?"

We hold that subject matter jurisdiction rests solely with the district court to determine private rights in mineral interests and oil and gas leaseholds, and therefore, the district court was the proper forum to hear the action based on the private rights that the appellants assert. We also hold that the district court does not have subject matter jurisdiction over the third cause of action, the misrepresentation claim, because we find that the appellants' allegations are in the nature of intrinsic fraud for which relief, if any, must be sought in the forum where the fraud allegedly occurred.

I. BREACH OF CONTRACT FOR CAUSING DRAINAGE

Article 7, § 7 of Oklahoma's Constitution provides that "the District Court shall have unlimited original jurisdiction of all justiciable matters, except as otherwise provided in this Article, and such powers of review of administrative action as may be provided by statute." Title 52, O.S.Supp.1988, § 87.1, defines the Commission's authority relative to a common source of supply and well spacing and drilling units. However, we have construed this statute to vest jurisdiction of public right disputes in the commission, whereas, disputes over private rights are properly brought in the district court. ¹ In other words, the commission's jurisdiction is limited to protection of public rights in development and production of oil and gas. ²

Clearly, the correlative rights of all mineral rights owners in the common source of supply for the subject unit fall within the parameters of public rights when a unitization order, pooling order, or order setting the allowables on the unit's well were concerned. Thus, when the appellants applied for an order to restrict the allowable on the Wosika # 1 well "in order to protect the correlative rights of all parties to the common source of supply," they properly brought the application before the commission.

However, when a dispute arises between a lessor and a lessee regarding the lessee's breach of an implied covenant, the rights involved enter the realm of the private world and are proper disputes for the district court to resolve because they involve issues concerning the construction of a private contract between the parties. ³ Therefore, the appellants' action for damages for the lessee's alleged breach of an implied covenant to protect from drainage is a private action arising from their contract and does not involve the correlative rights of the "public."

Each of the authorities cited in footnote 1 for the proposition that the commission has jurisdiction to hear only public rights disputes involved actions on joint operating agreements or disputes concerning a pooling order's effect. This case concerns an action brought on the lease agreement entered into by the parties pertaining to the oil and gas under the appellants' land. We have held that when an oil and gas company enters into a lease with mineral rights owners to extract oil or gas from the owners' lands, the company (lessee) impliedly covenants to protect the lessors' land from drainage of the minerals from under their land caused by wells on adjoining lands. ⁴ In order to protect the lessor's land from this drainage, we have required the lessee to drill a well and produce the minerals on the lessor's land to offset the draining well. ⁵ Moreover, we also have allowed lessors to bring an action for damages they have received due to their hydrocarbons being drained by adjacent wells where the lessee failed to drill an offset well to protect the lessor from drainage. ⁶ Despite the many actions brought against lessees for their failure to protect the lessor from drainage, we have only determined two cases which involve a situation similar to the one at bar.

In Morriss v. Barton, 200 Okl. 4, 190 P.2d 451 (1947), we stated in the second syllabus by the Court that:

"[the] [l]essee of an oil and gas lease, who owns adjoining land, may not operate wells on his own land, contrary to [the] duty devolved upon him as lessee, so as to materially reduce or effectively destroy production from wells on the leased land."

On 190 P.2d at page 457 of the text, we recognized that the lessee had a duty to proceed with due care and that failure to do so may be more than just a breach of the contract (lease), but could amount to a tortious act. The fact that the lessee owned one of the tracts which were draining the plaintiff's land was not determinative to our holding. What mattered was that the defendant, as lessee, owed his lessor a duty not to materially reduce the production of the plaintiff's well by increasing production on an adjacent well and by failing to exercise due care in operating the well on plaintiff's land. Granted, in the case at bar, the appellants do not allege that the lessee acted without due care in operating the well on their land. However, this distinction is not fatal in light of other cases which support their damage claims.

In Hall Jones Oil Co. v. Claro, Okl., 459 P.2d 858 (1969), we alluded to the potential problem that might arise where a lessee has adjoining leases and operates wells on both leases with one lessor claiming that his land is being drained by the increased production on the adjacent land. In this case, several mineral interest owners brought a class action suit to recover damages for the hydrocarbons drained from their land by wells on adjacent lands also operated by their lessee. The lessors maintained that the lessee tortiously and willingly breached its implied covenant to protect them from drainage by producing oil from a well on an adjacent tract of land upon which lessees also had a leasehold interest. In...