Moerman v. Prairie Rose Res., Inc.

• Decision Date: 27 August 2013
• Docket Number: No. DA 12–0666.,DA 12–0666.
• Parties: Irene M. MOERMAN and John H. Moerman, Plaintiffs and Appellants, v. PRAIRIE ROSE RESOURCES, INC., a North Dakota Corporation, Defendant and Appellee.
• Court: Montana Supreme Court

371 Mont. 338

308 P.3d 75

Irene M. MOERMAN and John H. Moerman, Plaintiffs and Appellants,

v.PRAIRIE ROSE RESOURCES, INC., a North Dakota Corporation, Defendant and Appellee.

No. DA 12–0666.

Supreme Court of Montana.

Submitted on Briefs May 28, 2013.

Decided Aug. 27, 2013.

For Appellant: Brian D. Lee; Lee Law Office, P.C.; Shelby, Montana.

For Appellee: Albert R. Batterman; Batterman Law Offices, P.C.; Baker, Montana.

Justice LAURIE McKINNON delivered the Opinion of the Court.

[371 Mont. 339]¶ 1 Irene and John Moerman appeal the judgment and order of the District Court for the Seventh Judicial District, Wibaux County, denying their claim that the oil and gas lease at issue in this case has expired or has been forfeited. We affirm.

¶ 2 We address the following issues on appeal:

¶ 3 1. Whether the District Court correctly concluded that the parties' oil and gas lease remained in effect.

¶ 4 2. Whether the District Court was correct in awarding Prairie Rose Resources, Inc. (Prairie), its attorney fees.

Factual and Procedural Background

¶ 5 Irene and John Moerman (the Moermans) lived on a ranch in Wibaux County, Montana, until 1995, when they sold the ranch to Jim Kane. John's father, Anton Moerman, had acquired the ranch (which included both the surface and mineral estates with the exception of coal) via a land patent. The Moermans, who are now divorced, reserved for themselves life estates to the mineral rights on the ranch with the remainder to vest in their three children. The well in question was originally drilled almost thirty years ago, but was subsequently shut in and abandoned.

¶ 6 In 2006, Prairie, an oil and gas development company incorporated in North Dakota, leased the well from the Moermans, but failed to bring the well into production during the lease period. Consequently, the 2006 lease terminated. In June 2010, the Moermans each ¹ signed a new Oil and Gas Lease with Prairie. These leases were for six months with the primary term of each lease from June 1, 2010, to December 1, 2010. Michael Gleason, Prairie's president, paid the Moermans $32,000 for the leases.

¶ 7 The leases granted to Prairie the exclusive right to the oil and gas in the south half of Section 30, Township 18 North, Range 59 East, M.P.M., for exploration and development purposes. The leases required that Prairie pay the Moermans a royalty of one-eighth of all oil produced and saved from the leasehold premises. As to the term, the leases provided:

It is agreed that this lease shall remain in force for a term ending December 1, 2010 and as long thereafter as oil or gas of whatsoever nature or kind is produced from said leased premises or on acreage pooled therewith, or drilling operations are continued as hereinafter provided. If, at the expiration of the primary term of this lease, oil or gas is not being produced on the leased premises or on acreage pooled therewith but Lessee is then engaged in drilling or re-working operations thereon, then this lease shall continue in force so long as operations are being continuously prosecuted on the leased premises or on acreage pooled therewith; and operations shall be considered to be continuously prosecuted if not more than one hundred eighty (180) days shall lapse between the completion or abandonment of one well and the beginning of operations for the drilling of a subsequent well. If after the discovery of oil or gas on said land or on acreage pooled therewith, the production thereof should cease from any cause after the primary term, this lease shall not terminate if Lessee commences additional drilling or re-working operations within one hundred eighty (180) days from the date of cessation of production or from date of completion of dry hole. If oil or gas shall be discovered and produced as a result of such operations at or after the expiration of the primary term of this lease, this lease shall continue in force so long as oil or gas is produced from the leased premises or on acreage pooled therewith.

[371 Mont. 341]¶ 8 Prairie assigned the leases to PB Oil Company, LLP (PB Oil), ² an oilfield service company operating in the Sidney, Montana, area, subject to the reservation of a small overriding royalty interest. PB Oil then contracted with TOI Operating, Inc. (TOI) as the bonded contractor to bring the well into production.

¶ 9 Keith Carver, a petroleum engineer working for both PB Oil and TOI, worked to get the well into production. Carver testified that because of the high demand for drilling rigs, he was unable to get a “work-over rig” to the well site until November 2010. Carver further testified that he constructed a pad for the pump, installed the hardware and equipment necessary to produce oil at the site, and replaced the pumping unit. Carver testified that he started the well up on November 29, 2010, to make sure it would produce, but he had to leave the site early due to a blizzard. Carver returned to the site on December 1, 2010, but he was prevented from returning the following day due to the severe weather conditions.

¶ 10 On December 9, 2010, Carver again managed to get to the well to prepare the site for inspection by the Montana Board of Oil and Gas Conservation (BOGC). An inspector from BOGC visited the site on December 10 and 13, 2010. The inspector reported that the well was producing and that there was over seven feet of oil in the storage tanks. The BOGC referred to this well as the “Moerman 14–30.”

¶ 11 Gleason called John Moerman on December 10, 2010, to notify him that the well was producing. The record indicates that John Moerman failed to inform his ex-wife of Gleason's call. The record further indicates that John attempted to testify at trial, but due to health and memory issues, he was excused.

¶ 12 Gleason contracted with Shell Oil Corp. to purchase the oil from Moerman 14–30, but before the oil could be sold, Gleason was required to obtain a mineral title opinion to demonstrate clear title to the oil. Gleason contacted several attorneys throughout the latter part of 2010 and the early part of 2011, but because of the growth of the Bakken oil fields in North Dakota, there was a significant backlog in the production of title opinions. Gleason testified at the January 19, 2012 trial that he expected to have a completed title opinion by February 15, 2012, after which time he could begin selling the oil.

¶ 13 While Prairie was working to produce oil at Moerman 14–30 in the south half of Section 30, and to bring it to market, the Moermans leased the mineral rights to the north half of Section 30 to another company. Irene testified that because she had not received notice that Moerman 14–30 was producing, she assumed the leases with Prairie had expired in December 2010. Because Irene wished to lease the mineral rights to the south half of Section 30 to the same drilling company to which the Moermans had leased the mineral rights to the north half of Section 30, the Moermans' attorney sent a letter to Prairie dated February 18, 2011, requesting that Prairie release those leases. Although Gleason later acknowledged that he had received the Moermans' letter, he did not respond.

¶ 14 Gleason testified that the cost to Prairie and TOI to get Moerman 14–30 producing was approximately $150,000. In addition, Carver testified that if the well was leased out from under him, he would either have to plug the well or sell the well bore, all of which would result in his incurring significant losses. Consequently, Prairie declined to cancel the leases.

¶ 15 On July 27, 2011, the Moermans filed a complaint for declaratory judgment claiming that their oil and gas leases with Prairie had expired. The Moermans complained that they were unable to re-lease the premises unless Prairie's lease was voided. Prairie counterclaimed for a declaration that the lease remained in effect, and alleged that the Moermans had breached the contract as well as the implied covenant of good faith and fair dealing.

¶ 16 A bench trial was held on January 19, 2012. On February 15, 2012, the District Court issued its Findings of Facts, Conclusions of Law, Judgment and Order wherein the court found the lease to be in full force and effect, and awarded Prairie its attorney fees and costs pursuant to § 82–1–202, MCA. Notably, the court also pointed out that “Defendant should consider that with better communication between it and Plaintiffs, this action may not have been filed.” The Moermans appealed.

Standard of Review

¶ 17 This Court reviews the findings of fact of a district court sitting without a jury to determine if the court's findings are clearly erroneous. Varano v. Hicks, 2012 MT 195, ¶ 7, 366 Mont. 171, 285 P.3d 592 (citing Olsen v. Milner, 2012 MT 88, ¶ 16, 364 Mont. 523, 276 P.3d 934). We review a district court's conclusions of law to determine whether the court's interpretation of the law is correct. Somont Oil Co., Inc. v. A. & G. Drilling, Inc., 2002 MT 141, ¶ 14, 310 Mont. 221, 49 P.3d 598(Somont I), overruled on other grounds by Johnson v. Costco Wholesale, 2007 MT 43, 336 Mont. 105, 152 P.3d 727 (citing Carbon County v. Union Reserve Coal Co., 271 Mont. 459, 469, 898 P.2d 680, 686 (1995)).

¶ 18 In addition, our standard of review of a trial court's order granting or denying attorney fees and costs is whether the court abused its discretion. Somont Oil Co., Inc. v. A. & G. Drilling, Inc., 2006 MT 90, ¶ 25, 332 Mont. 56, 137 P.3d 536(Somont II), overruled on other grounds by Johnson v. Costco Wholesale, 2007 MT 43, 336 Mont. 105, 152 P.3d 727 (citing Gullett v. Van Dyke Const. Co., 2005 MT 105, ¶ 12, 327 Mont. 30, 111 P.3d 220).

Issue 1.

¶ 19 Whether the District Court correctly concluded that the parties' oil and gas lease remained in effect.

¶ 20 The Moermans contend that the undisputed evidence demonstrates that the Moerman 14–30 well did not produce oil until after the expiration of the primary term of the lease. The Moermans also contend that even if Moerman...