Miller v. Union Gas & Oil Co.

• Decision Date: 08 January 1924
• Docket Number: 3789.,3784,3785
• Citation: 295 F. 27
• Parties: MILLER et al. v. UNION GAS & OIL CO. et al. SPARKS et al. v. UNION GAS & OIL CO. SKAGGS et al. v. SAME.
• Court: U.S. Court of Appeals — Sixth Circuit

295 F. 27

MILLER et al. v. UNION GAS & OIL CO. et al. SPARKS et al. v. UNION GAS & OIL CO. SKAGGS et al. v. SAME.

Nos. 3785, 3784, 3789.

United States Court of Appeals, Sixth Circuit.

January 8, 1924

S. S Willis, of Ashland, Ky., for appellants.

Homer E. Holt and John H. Holt, both of Huntington, W.Va. (Holt Duncan & Holt, of Huntington, W. Va., on the brief), for appellees.

Before KNAPPEN, DENISON, and DONAHUE, Circuit Judges.

KNAPPEN Circuit Judge.

These cases were heard together in this court. Each is an appeal from a decree of the District Court dismissing a bill by the lessors in an oil and gas lease (or those standing in the lessor's rights) to cancel the lease for failure to perform the covenant to develop.

In No 3785, the lease was given January 26, 1916, by appellant Sagrave to defendant Albin (who assigned his interest to the other appellee), the lessors subsequently conveying the leased land (subject to a reserved interest) to appellants Miller, who conveyed to appellant Adkins an undivided one-half interest in the oil and gas. The lease was for 'ten years or as long as gas or oil is found in paying quantities'-- the lessors to receive one-eighth of all the oil 'produced and saved,' and $100 per year for each well for gas if 'found in sufficient quantities to transport. ' The lease contained no express covenant to develop the land, but did provide that in case no well should 'be commenced within twelve months from this date' the lease should be null and void, unless the lessees should thereafter pay at the rate of 10 cents per acre per year for each year drilling should be delayed; also that 'in case no paying well is drilled on said premises within two years from date this grant shall be null and void. ' The first year's rental was paid January 15, 1918; the second January 15, 1919. Both payments were accepted. On November 19, 1919 (development not having been begun), appellants notified appellees to proceed to develop the property before January 26, 1920, upon default whereof the lease would thereupon become canceled and void-- appellants announcing that they would receive no more rental.

Appellees brought some material on the ground before January 26, 1920, but began no drilling until February 2d following. A well was completed upon March 10th then next. A second well was completed April 27, 1920, about two weeks before this suit was begun, at which time two producing wells were in operation. At the time of the hearing four wells producing oil in paying quantities were completed, and a fifth was being drilled. The District Court, denying appellants' contention that the lease constituted a mere option to develop and so was void for want of mutuality, held that, whether or not the rental was payable in advance, appellants were bound by the practical construction put upon it (through acceptance of the two annual rentals) as not requiring payment until the end of the year; that the lease was therefore not terminated when appellees entered upon the land for the purpose of drilling; and that the latter complied as soon as reasonably possible with the notice to develop, and had prosecuted the same throughout with due diligence, and so were not in default in that regard.

We cannot assent to the proposition that the lease in question was unilateral and void from the beginning. The argument in this respect is that it is an 'unless' lease, without covenants or consideration. While there was no express covenant to pay rent in default of development, there was an agreement to pay a stipulated royalty on the oil produced and an annual rental for each commercial gas well, and these agreements, together with the expressed consideration of $1, whose receipt was in terms acknowledged, stated a complete consideration, not only for the grant of the ten-year term, but for the privilege of extending the time for developing by paying the stipulated rental therefor. Allegheny Oil Co. v. Snyder (C.C.A. 6) 106 F. 764, 766, et seq., 45 C.C.A. 604; Lindlay v. Raydure (D.C.) 239 F. 928, 932, et seq., affirmed in Raydure v. Lindley (C.C.A. 6) 249 F. 675, 161 C.C.A. 585.

Had this been an 'or' lease, rather than an 'unless' lease, presumably the proposition we have stated would not now be challenged. Hopkins v. Zeigler (C.C.A. 6) 259 F. 43, 46, 170 C.C.A. 43. But the fact that it is an 'unless' lease is not enough to change the situation otherwise existing, as shown by the Allegheny Oil Co. Case, supra, where the lease involved was an 'unless' lease, and by Hopkins v. Zeigler, supra, 43, 47, et seq., where an 'unless' provision was construed. See, also, Leeper v. Neely, 293 F. 967, decided by this court November 6, 1923. We find nothing to the contrary in the recent Kentucky decisions of Union Gas & Oil Co. v. Ind.-Tex. Petr. Co., 199 Ky. 384, 251 S.W. 1008, and Brooks v. Day Oil Co., 200 Ky. 323, 254 S.W. 912, nor anything in any other Kentucky cases cited, which compels such contrary conclusion. In the instant case, so far as concerns the provision for abandonment, not only had the lessee entered and begun development before suit was brought, but the lease in terms called for the payment of $1 upon abandonment by the lessee.

Nor are we impressed by the contention that the lease expired by its own terms at the end of the year for lack of payment of rental in advance. It has been held by the Court of Appeals of Kentucky that, where (as here) the lease does not in terms require payment in advance, tender of the stipulated rental before the expiration of the year for which it is payable is in time to avoid forfeiture. Warren v. Gilliam, 182 Ky. 807, 207 S.W. 698; McNutt v. Whitney, 192 Ky. 132, 232 S.W. 386. But, if the cases just cited are thought distinguishable in the fact that the leases there involved were 'or' leases, it would seem enough to say that, in view of the ambiguity thus resulting, we think appellants bound by the practical construction placed upon the agreement in the acceptance of payment for the two preceding years, made, in each case, shortly before the expiration of the then current year, followed, as it was, by notice to appellees to proceed with development before January 26, 1920, on which the appellees acted.

We thus come to consider whether appellants were entitled to have the lease canceled for breach of the implied covenant to use reasonable diligence in development. The notice demanded that appellees proceed to develop within two months and seven days thereafter. Suit to cancel was begun in about three and one-half months after the date set by the notice for...