McCullough Oil, Inc. v. Rezek

• Decision Date: 08 July 1986
• Docket Number: No. 16593,16593
• Citation: 346 S.E.2d 788,176 W.Va. 638
• Court: West Virginia Supreme Court
• Parties: McCULLOUGH OIL, INC., formerly known as McCullough Oil and Gas, Inc. v. William B. REZEK, et al.

Page 788

346 S.E.2d 788

176 W.Va. 638

McCULLOUGH OIL, INC., formerly known as McCullough Oil and Gas, Inc. v. William B. REZEK, et al.

No. 16593.

Supreme Court of Appeals of West Virginia.

July 8, 1986.

Syllabus by the Court

1. An oil and gas lease (or other mineral lease) is both a conveyance and a contract. It is designed to accomplish the main purpose of the owner of the land and of the lessee (or its assignee) as operator of the oil and gas interests: securing production of oil or gas or both in paying quantities, quickly and for as long as production in paying quantities is obtainable.

2. A habendum clause in an oil and gas lease (or other mineral lease) providing for a short primary term and a secondary term for "so long as" production in paying quantities or operations therefor continue, or similar language, conveys a "determinable" interest, that is, an interest subject to a special limitation. Such an interest automatically terminates by its own terms upon the occurrence of the stated event, namely, expiration of the primary term without production or operations at such time, or the cessation of production or operations during the secondary term.

3. Where an oil and gas lease (or other mineral lease) contains a cessation of production clause applicable to the secondary term, the lease terminates automatically at the end of the "grace period" provided by such clause, unless production or operations are resumed within the grace period. The cessation of production clause grants the lessee the right to resume operations within the grace period; it does not impose the duty to do so.

4. The lessee (or its assignee as operator) is not entitled to notice before the lease terminates automatically under the habendum clause or the cessation of production clause of an oil and gas lease (or other mineral lease).

5. "Under the provisions of Rule 56 of the West Virginia Rules of Civil Procedure, when the moving party presents depositions, interrogatories, affidavits or otherwise indicates there is no genuine issue as to any material fact, the resisting party to avoid summary judgment must present some evidence that the facts are in dispute." Syl. pt. 2, Guthrie v. Northwestern Mutual Life Insurance Co., 158 W.Va. 1, 208 S.E.2d 60 (1974).

6. "Summary judgment cannot be defeated on the basis of factual assertions contained in the brief of the party opposing a motion for such judgment." Syl. pt. 3, Guthrie v. Northwestern Mutual Life Insurance Co., 158 W.Va. 1, 208 S.E.2d 60 (1974).

Robert E. Cesner, Jr., Worthington, Ohio, for appellant.

Orville L. Hardman, Parkersburg, for appellee.

McHUGH, Justice:

This action is before this Court upon appeal by McCullough Oil, Inc., the plaintiff below (McCullough), ¹ from a final order of the Circuit Court of Wood County, West Virginia, denying McCullough's motion for summary judgment as to liability and granting the defendants' motion for summary judgment. This case has been submitted on the petition, all matters of record and the briefs and oral argument of counsel. We affirm the ruling of the trial court.

I

On February 25, 1966, Ohio River Sand & Gravel, a division of McDonough Co., executed a lease granting to McCullough oil and gas rights in certain real estate containing 110 acres, more or less, in Wood County, West Virginia, known as Neal Island. Under this oil and gas lease McDonough Co. granted a 7/8 part interest to McCullough and reserved a 1/8 part interest. The lease, as amended, contained these pertinent provisions:

(2) It is agreed that this Lease shall remain in force for a primary term of eighty (80) days from this date and as long thereafter as operations for oil or gas are being conducted on the premises, or oil or gas is found in paying quantities thereon.

....

(14) It is expressly agreed that if the Lessee shall commence drilling operations at any time while this Lease is in force, it shall remain in force and its terms continue so long as such operations are prosecuted, and if production results therefrom, then as long as production continues. If after the expiration of the [primary] term of this Lease, production from the leased premises shall cease from any cause, this Lease shall not terminate, provided Lessee resumes operations within sixty (60) days from such cessation, and this Lease shall remain in force during the prosecution of such operations, and, if production results therefrom, then as long as oil or gas is produced in paying quantities.

In April, 1966, McCullough assigned the lease to William B. Rezek. Under this assignment McCullough reserved a 1/32 working interest in the 7/8 lease (a 1/16 working interest if production gross income would equal or exceed the total cost of a well). The assignment also provided that if the lease be abandoned for any reason by the assignee, his successors or assigns, then all right, title and interest in and to the lease shall revert to McCullough, without prejudice or encumbrance.

William B. Rezek assigned the lease in March, 1969, and after several mesne assignments, the lease was assigned to James V. Reynolds in July, 1977.

On March 24, 1980, James V. Reynolds executed a "Surrender of Lease" of the subject oil and gas rights to Ohio River Sand & Gravel, a division of McDonough Co. On March 25, 1980, Ohio River Sand & Gravel, a division of McDonough Co., executed an oil and gas lease on the subject property back to James V. Reynolds.

In December, 1980, McDonough Co. assigned its interest as lessor in the subject lease, and in January, 1981, Dravo Corporation obtained this interest as lessor by an assignment.

Within the primary term two wells were drilled and production therefrom was in paying quantities. According to the unopposed affidavits of two individuals familiar with Neal Island (one of whom had been an assignee of the lease) and according to the uncontroverted testimony of one of these individuals upon deposition, there was no activity or effort to produce oil or gas and there was no production at all during the years 1972 through 1978. According to the answer of Dravo Corporation, production from the wells commenced again in early July, 1981. No royalties or rentals were paid during the years of inactivity.

In September, 1981, McCullough filed this action in the trial court. Although other defendants were named, the dispute is actually between McCullough on the one hand, as the original lessee, and, on the other hand, James V. Reynolds, as ultimate assignee of McCullough, and Dravo Corporation, as the current lessor. McCullough, claiming that Reynolds' surrender of the lease in March, 1980, constituted an abandonment triggering a reversion of the 7/8 lease to McCullough, brought this action to quiet title, for the appointment of a special receiver and an accounting, and for compensatory and punitive damages resulting from the alleged civil conspiracy of the defendants to deprive McCullough of its interest in the oil or gas production.

After reviewing the pleadings and affidavits and deposition, the trial court granted the defendants' motion for summary judgment and denied the plaintiff's motion for summary judgment as to liability. The trial court ruled that the lease (the operating interest) had initially "reverted" to McCullough, under the terms of its assignment to Rezek, upon abandonment resulting from complete cessation of production and lack of operations. The trial court further ruled that after "reverting" to McCullough, the lease expired by its own terms, thereby extinguishing McCullough's interest, due to cessation of production after the primary term without resumption of operations within sixty days as required by the lease. Finally, the trial court ruled, therefore, that this case did not involve a "forfeiture" for failure to perform a "condition," which, under the lease, would have required notice to McCullough or its assignees and the opportunity to correct the default.

On this appeal McCullough contends that paragraph number (5) of the lease, requiring notice and opportunity to cure (within ten days) a breach of a payment or performance condition, applies here, and since no notice of default in production or operations was given to McCullough or any of its assignees, no forfeiture of McCullough's interest in the lease resulted. ²

II

An oil and gas lease (or other mineral lease) is both a conveyance and a contract. It is designed to accomplish the main purpose of the owner of the land and of the lessee (or its assignee) as operator of the oil and gas interests: securing production of oil or gas or both in paying quantities, quickly and for as long as production in paying quantities is obtainable. Analyzed an oil and gas lease contains traditional conveyancing portions and the usually separate contractual portions. Montana-Fresno Oil Co. v. Powell, 219 Cal.App.2d 653, 659, 33 Cal.Rptr. 401, 404 (1963).

One of the conveyancing portions of an oil and gas lease is the "habendum" clause, also known as the "term" clause. The purpose of the habendum clause in an oil and gas lease (or other mineral lease) is to define and limit the duration of the lessee's estate. R. Donley, The Law Of Coal, Oil And Gas In West Virginia And Virginia § 65a. (1951). ³ The habendum clause of virtually all contemporary oil and gas leases provides for a relatively short "primary" term, consisting of a fixed period of time of from a few months to five or ten years, at the end of which period there must be production (or in some leases, the prosecution of drilling operations); the habendum clause also provides that the lease may be preserved for an indefinite period of time beyond the expiration of the primary term "as long thereafter" as oil or gas is produced in paying quantities (or in some leases, for as long thereafter as operations for oil or gas are being conducted). 3 H. Williams, Oil And Gas Law § 601.4 at 9-10 (1985). See also R. Donley, The Law Of Coal, Oil And Gas In...