Michigan Oil Co. v. Department of Natural Resources

• Decision Date: 22 April 1986
• Docket Number: Docket No. 80345
• Citation: 148 Mich.App. 745,384 N.W.2d 777
• Parties: MICHIGAN OIL COMPANY, Northern Michigan Exploration Company, McClure Oil Company and Amoco Production Company, Plaintiffs-Appellees, v. DEPARTMENT OF NATURAL RESOURCES, State of Michigan, Commission of Natural Resources, and Howard A. Tanner in his capacity as the Director of the Department of Natural Resources and Supervisor of Wells, Defendants-Appellants.
• Court: Court of Appeal of Michigan — District of US

Page 777

384 N.W.2d 777

148 Mich.App. 745

MICHIGAN OIL COMPANY, Northern Michigan Exploration Company McClure Oil Company and Amoco Production Company Plaintiffs-Appellees, v. DEPARTMENT OF NATURAL RESOURCES, State of Michigan Commission of Natural Resources, and Howard A. Tanner in his capacity as the Director of the Department of Natural Resources and Supervisor of Wells, Defendants-Appellants.

Docket No. 80345.

Court of Appeals of Michigan.

Submitted June 11, 1985.

Decided Oct. 31, 1985.

Released for Publication April 22, 1986.

Foster, Swift, Collins & Coey, P.C. by Webb A. Smith, Lansing, for plaintiffs-appellees.

Frank J. Kelley, Atty. Gen., Louis J. Caruso, Sol. Gen., Stewart H. Freeman and Thomas F. Schimpf, Asst. Attys. Gen., for defendants-appellants.

Before MacKENZIE, P.J., and HOOD and MIES ^*, JJ.

PER CURIAM.

The events giving rise to this case began on October 1, 1968, when defendant Department of Natural Resources's predecessor in interest, the Department of Conservation, and plaintiff Amoco Production Company's predecessor in interest, Pan American Petroleum Corporation, entered into two lease agreements. Under the agreements, gas and oil rights were leased to two parcels, referred to by lease numbers 9656 and 9657. These were parts of the state's opening of the area in the Pigeon River Country State Forest in Otsego and Cheboygan Counties to oil and gas exploration and development. Pan American assigned an undivided one-half interest in 9656 and 9657 to plaintiff Northern Michigan Exploration Company (NOMECO) on December 14, 1968. This was approved by the Department of Conservation.

In April of 1971, Amoco and NOMECO applied to defendant Supervisor of Wells and the DNR for a permit to commence drilling on the SW 1/4 of the SE 1/4 of section 22 which is a 40-acre site in Corwith Township covered by lease 9656 (hereinafter referred to as Corwith 1-22). On October 11, 1971, the Supervisor of Wells and the DNR denied the application because the oil and gas drilling would cause " 'serious and unnecessary damage' to various wildlife in the area, the swamp in the area would be affected, and the drilling would cause a serious intrusion into a nearly solid block of semi-wilderness area of state lands". Michigan Oil Co v. Natural Resources Comm., 406 Mich. 1, 18-19, 276 N.W.2d 141 (1979), cert. den. 444 U.S. 980, 100 S.Ct. 482, 62 L.Ed.2d 407 (1979).

On January 28, 1972, Amoco & NOMECO assigned their lease rights to Corwith 1-22 to plaintiff McClure Oil Co. Vance W. Orr, who was Vice-President of McClure Oil Co., and President of Michigan Oil Co. at the time and who accepted the assignment of the lease on behalf of McClure Oil, had full knowledge of the denial because of his membership on the Oil and Gas Advisory Board of the Supervisor of Wells. On May 19, 1972, McClure then entered into a "farmout" agreement with plaintiff Michigan Oil Co., McClure's wholly owned subsidiary, for Corwith 1-22. Under the farmout agreement Michigan Oil would receive assignment of the leasehold interest provided that it could obtain a drilling permit and commence drilling on or before August 1, 1972. 406 Mich. 19.

On May 31, 1972, Michigan Oil applied for a permit to commence drilling on Corwith 1-22. The Supervisor of Wells and the DNR denied the permit in a letter dated July 21, 1972. The letter explained that the permit was denied for the same reasons that the application of 1971 was denied, that is, because drilling at the site could not be conducted without causing serious damage to animal life and spoiling state-owned lands. The letter also explained that the Natural Resources Commission had asked the DNR to set up a forest management plan to preserve the special quality environment now present and that Michigan Oil could expect "direct denial of all other applications for drilling permits in the area under study, pending drafting of and action on the management plan". 406 Mich. 20, 276 N.W.2d 141. Approximately a week later, Michigan Oil appealed the denial to the Natural Resources Commission which affirmed on April 16, 1974. The Commission's decision was appealed to the Ingham Circuit Court on June 11, 1974, and was affirmed on June 27, 1975. This Court affirmed the decision of the Circuit Court in Michigan Oil Co. v. Natural Resources Comm., 71 Mich.App. 667, 249 N.W.2d 135 (1976).

The Supreme Court initially denied Michigan Oil's application for leave to appeal ¹ but granted it on reconsideration. ² In affirming this Court, Justices Moody, Williams and Fitzgerald found that the Natural Resources Commission under the Department of Conservation act ³ and the oil conservation act ⁴ had the statutory authority to deny Michigan Oil's request for a drilling permit. 406 Mich. 33, 276 N.W.2d 141. Justice Kavanagh concurred in the affirmance. 406 Mich. 34, 276 N.W.2d 141. Justices Levin and Coleman, with Justice Ryan concurring, would have reversed the decision of the Commission, extended Michigan Oil's lease for the time between the denial of its application for a drilling permit and October 31, 1978, and remanded to circuit court for a hearing under the Environmental Protection Act ⁵. Michigan Oil's petition for writ of certiorari on this matter was denied by the United States Supreme Court, 444 U.S. 980, 100 S.Ct. 482, 62 L.Ed.2d 407 (1979).

While Michigan Oil was unsuccessfully pursuing the drilling permit appeal, the DNR developed a comprehensive scheme of management for oil drilling and exploration in the Pigeon River Country State Forest. Leaseholders for other parcels involved in that area and the DNR entered into negotiations in 1976. Lease terms for the involved acreage and a unit agreement were established. In December, 1976, the DNR offered in writing to allow Michigan Oil to join the consent order and enter into an appropriate unit agreement to permit oil and gas development on Corwith 1-22. Michigan Oil rejected the offer.

Since September 20, 1978, plaintiffs have repeatedly requested the DNR to extend leases nos. 9656, 9656-A and 9657 beyond the 10-year primary term provided in paragraph D of each lease which provides:

"It is agreed that this lease shall continue in force for a term of ten years from this date [October 1, 1968], and as long thereafter as oil and/or gas are produced in paying quantities from said lands by the Lessee; provided, however, if Lessee is engaged in actual drilling operations upon any well or wells on said lands at the expiration of the primary term of this lease, this lease shall remain in force and its terms shall continue as long as drilling operations on such well or wells are prosecuted with reasonable diligence and good faith, and if oil and/or gas be found in paying quantities, this lease shall continue and be in force with like effect as if such well or wells had been completed within the primary term; provided further, that the Lessor may extend the primary term of this lease upon such terms and conditions as it deems advisable, if in the opinion of the Lessor sufficient exploratory and development work has been conducted by the Lessee on the leased premises or in the vicinity thereof to justify such extension."

The DNR, however, refused to extend the leases or acknowledge that the leases had been extended. Instead, it took the position that the 10-year period had expired and the leases had terminated under paragraph D.

Plaintiffs filed the complaint commencing the present litigation on December 30, 1981. They asked the trial court to declare that leases 9656, 9656-A and 9657 were extended until the Supervisor of Wells and the DNR issued them a drilling permit and until drilling oeprations no longer were prosecuted with reasonable diligence and good faith. In the alternative, the plaintiffs sought an extension for the period of the prior litigation, which was about 6 years.

Defendants sought accelerated judgment under GCR 1963, 116.1(5), claiming that the relief requested had been considered and denied in the prior litigation culminating with the Supreme Court decision in Michigan Oil Co. v. Natural Resources Comm., supra. The trial court denied defendants' motion.

Plaintiffs then brought a motion for summary judgment under GCR 1963, 117.2(2), failure to state a valid defense, which was denied without prejudice. After plaintiffs deposed Arthur E. Slaughter, whose testimony is addressed briefly below, plaintiffs filed a renewed motion for summary judgment under subsections (2) and (3) of GCR 1963, 117.2. The trial court granted the motion and ordered an extension of the primary term of the leases to six years commencing from the date of its order. Defendants appeal as of right.

The first issue we address is whether the court should have granted accelerated judgment to defendants and dismissed plaintiffs' complaint based on the doctrines of res judicata and/or collateral estoppel. Defendants claim that Michigan Oil has already fought and lost its argument that the state lease was wrongfully forfeited by defendants in Michigan Oil Co. v. Natural Resources Comm., supra. They claim, therefore, that the plaintiffs are barred from bringing the present action. We disagree.

This Court in Ward v. DAIIE, 115 Mich.App. 30, 37, 320 N.W.2d 280 (1982), set forth the elements of the doctrine of res judicata:

"The doctrine of res judicata provides that where two parties have fully litigated a particular claim and a final judgment has resulted, that claim may not be relitigated by either party. In Tucker v Rohrback, [13 Mich 73, 75 (1864) ] the Supreme Court delineated three prerequisites for a prior judgment to constitute a bar in a subsequent action: (1) the former action must have been decided on the merits; (2) the same matter contested in the second action must have been decided in the first; and (3) the two actions must be between the same parties or privies." (Footnotes omitted.) (Emphasis added).

Michigan courts apply the doctrine of res...