Menoah Petroleum, Inc. v. McKinney

• Decision Date: 14 June 1989
• Docket Number: No. 20538-CA,20538-CA
• Citation: 545 So.2d 1216
• Parties: MENOAH PETROLEUM, INC., Plaintiff/Appellant, v. Mrs. Willie J. McKINNEY, Defendant/Appellee.
• Court: Court of Appeal of Louisiana — District of US

Page 1216

545 So.2d 1216

MENOAH PETROLEUM, INC., Plaintiff/Appellant, v. Mrs. Willie J. McKINNEY, Defendant/Appellee.

No. 20538-CA.

Court of Appeal of Louisiana, Second Circuit.

June 14, 1989.

J. Michael Rhymes, William H. Hallack, Monroe, for plaintiff/appellant.

Campbell, Campbell & Johnson by John T. Campbell, Minden, for defendant/appellee.

Before NORRIS and HIGHTOWER, JJ., and JASPER E. JONES, J. Pro Tem.

JASPER E. JONES, Judge Pro Tem.

Plaintiff, Menoah Petroleum, Inc., filed a petition for the issuance of a temporary restraining order and for a permanent injunction prohibiting defendant, Mrs. Willie J. McKinney, from blocking plaintiff's access to a well not located on defendant's property, but located on property covered by a lease owned by plaintiff which lease included defendant's property. The temporary restraining order was issued, and a hearing was held to determine whether the temporary restraining order should be converted into a permanent injunction. After the hearing, the trial court found that (1) plaintiff did not have a right of ingress and egress across defendant's property pursuant to the lease because the lease failed to produce oil, gas or other minerals in paying quantities in 1986, and (2) there was no production in March and April of 1987 which caused the lease to terminate due to nonproduction. The court rendered judgment dissolving the temporary restraining order, denying plaintiff's petition for permanent injunction, awarding $1,000.00 damages for the wrongful issuance of the temporary restraining order, and awarding $2,500.00 in attorney's fees.

Plaintiff appealed raising the following assignments of error:

1) The trial court erred in placing the burden of proof upon it to prove the validity of an oil and gas lease which produced during and after expiration of the primary term;

2) The trial court erred in finding that the wells within the lease failed to produce oil, gas, or other minerals in paying quantities in 1986;

3) The trial court erred when it found that a lapse in production in excess of sixty (60) days caused the lease to lapse;

4) The trial court erred in assessing damages for the wrongful issuance of the temporary restraining order; and

5) The trial court erred in awarding excessive attorney's fees.

For the reasons which follow, we affirm the judgment below.

On March 19, 1937, Olive Goodwill Roberts granted a mineral lease (Kennon lease) to Robert F. Kennon covering approximately 950 acres which included the property owned by defendant. The lease had a primary term of ten (10) years and for as long thereafter as oil, gas, or other minerals were produced. The lease further provided that after the discovery of oil or gas and after the primary term, if production ceased due to any cause, the lease would not terminate if the lessee commenced additional drilling or re-working operations within sixty (60) days after production ceased.

Three wells, beginning with the O.G. Roberts No. 1 Well, were initially drilled on the property. There was production from the leased property prior to expiration of the primary term. This production was still continuing when the State of Louisiana, Department of Conservation, issued Order No. 104-11 forming the North Shongaloo Red Rock Pettit Lime Production Unit in 1961. The unit was composed of over 4,000 acres and was established as a water flood production unit. The Kennon lease and various other individual leases and agreements were amended by the unit agreement to make them conform to the terms and provisions of the unit agreement. Several different operators managed the unit from 1961 through 1987. Unit production continually declined from a total production of over 27,000 barrels of oil in 1979 to a low of less than 7,000 barrels in 1986.

On July 23, 1987, the State of Louisiana, Office of Conservation, issued Order No. 104-11-A dissolving the unit effective July 7, 1987. The Commission dissolved the unit for (1) the operator's failure to file the required monthly reports; (2) abandonment of the secondary recovery process; (3) failure to manage the unit for waste prevention; and (4) failure of the operator to protect the rights of the parties in the unit. The Commission found that continued operation of the unit was no longer in the best interest of conservation.

The Kennon lease was transferred several times throughout the years by a series of assignments. In 1986, Highland Operating Company, Inc., operated the unit for the bankruptcy trustee since some of the current owners had filed bankruptcy. Plaintiff acquired its interests in the leases formerly within the unit from sales authorized by the bankruptcy trustee in 1987 and from other sources.

After dissolution of the unit plaintiff did not have access over the road which originally serviced the Roberts' well while the unit was in existence because this road crossed property not located within the Kennon lease which had been acquired by plaintiff. Plaintiff, who was unaware that defendant's property was included in the Kennon lease, began negotiating with defendant to acquire a right-of-way over her property. After receiving verbal approval of a right-of-way from defendant's brother, Buddy Lee, plaintiff began building a road utilizing portions of a pre-existing road. Defendant subsequently decided not to grant plaintiff a right-of-way over her property and blocked plaintiff's access to the well.

On September 29, 1987, plaintiff filed a petition for the issuance of a temporary restraining order and for a permanent injunction prohibiting defendant from denying it access to the O.G. Roberts No. 1 Well. Plaintiff contended it was entitled to the right-of-way to the Roberts' well pursuant to the terms of the Kennon lease. The temporary restraining order was issued, and a hearing was held to determine whether the order should be converted into a permanent injunction. The trial court placed the burden of proof upon plaintiff to prove that it had a valid lease. The court found that in 1986 the unit had total operating expenses totaling $118,185.74 and total production revenue of $69,849.59. The court noted the decrease in unit production from 1979 through 1986. The court found that plaintiff had not shown that there was production in paying quantities under the lease in 1986. The court further found that since there was no production from the wells on the lease during the months of March and April, 1987, the lease terminated due to nonproduction since more than sixty (60) days of nonproduction had occurred. The court dissolved the temporary restraining order, denied plaintiff's petition for permanent injunction, and awarded damages and attorney's fees in favor of defendant. Plaintiff appealed.

Plaintiff, citing Frazier v. Justiss Mears Oil Company, Inc., 391 So.2d 485 (La.App. 2d Cir.1980), writ denied, 395 So.2d 340 (La.1980), contends that the trial court erred when it placed the burden of proving the validity of the mineral lease upon it. It argues that normally the burden of proving the lapse of an oil, gas or mineral lease is upon the lessor. Defendant contends that according to Webb v. Hardage Corporation, 471 So.2d 889 (La.App. 2d Cir.1985), the lessee has the burden of proving the existence of a viable lease when the lessee claims that its rights of ingress and egress across defendant's property are derived from a lease that the lessee alleges burdens defendant's property.

Defendant's reliance upon Webb is misplaced. The general rule is that the party attacking the validity of a mineral lease, recorded and on the face of the public records, has the burden of proving the lease's invalidity. Frazier v. Justiss Mears Oil Company, supra; Cox v. Cardinal Drilling Company, 188 So.2d 667 (La.App. 2d Cir.1966). In Webb we recognized the general rule but held that before a lessee may rely upon it a lessee must prove by a preponderance of the evidence that prior to the expiration of the primary term or a continuous drilling operations term, a well was completed and surface tested to the extent that the well was capable of producing in paying quantities.

Webb involved circumstances where the lessee did minimal surface testing of gas wells on the leased premises prior to expiration of the leases' primary terms and the wells were shut in for lack of a market. The initial potential test required by the State Office of Conservation was not performed. The shutting-in of the gas wells on the leased properties could only extend the leases beyond their primary terms if the wells were capable of producing in paying quantities.

In the instant case, there is no question that there was production from the Kennon lease prior to expiration of the primary term. The lease was recorded and third parties were placed on notice as to the lease's effect upon the property encompassed within the lease. Although defendant does not seek cancellation of the lease, defendant's main defense to plaintiff's claim of ingress and egress across her property is that plaintiff's lease lapsed due to failure to produce in paying quantities after the primary term expired. Under these circumstances, the exception pronounced in Webb is inapplicable, and the general rule should be applied. Accordingly, the burden of proof was upon defendant to show that the lease affecting her property had lapsed due to failure to produce in paying quantities after expiration of the primary term.

Finding that the trial court improperly placed the burden of proof upon plaintiff, we must now determine whether defendant proved that plaintiff's lease lapsed due to failure to produce in paying quantities in 1986.

Production of minerals from a unit is tantamount to production from all lands within the unit. Landry v. Flaitz, 245 La. 223, 157 So.2d 892 (1963); LeBlanc v. Danciger, 218 La. 463, 49 So.2d 855 (1950); Hunter Company v. Shell Oil Company, 211 La. 893, 31 So.2d 10 (1947). Not only must there be actual production of...