Olson v. Schwartz
| Decision Date | 06 February 1984 |
| Docket Number | 10503,Nos. 10466,s. 10466 |
| Citation | 345 N.W.2d 33 |
| Parties | Theodore OLSON, Plaintiff and Appellee, v. Earl SCHWARTZ and Gofor Oil, Inc., Defendants, Vern Lund, Defendant and Appellant. Merwyn L. LARSEN, Dwaine Larsen, Marlene Resch, and Marlys Rodenz, Plaintiffs and Appellees, v. Earl SCHWARTZ, Defendant, and Prosper Energy Corporation, Defendant and Appellant. Civ. |
| Court | North Dakota Supreme Court |
Richard H. McGee, Sr. [argued], of McGee, Hankla, Backes & Wheeler, Minot, for appellant in Civ. No. 10466.
Frederick E. Whisenand, Jr. [argued] and Bruce O. Bekkedahl, of McIntee & Whisenand, Williston, for appellee in Civ. No. 10466.
Gary R. Wolberg [argued], of Fleck, Mather, Strutz & Mayer, Ltd., Bismarck, for appellant in Civ. No. 10503.
Bruce O. Bekkedahl [argued], and Frederick E. Whisenand, Jr., of McIntee & Whisenand, Williston, for appellees in Civ. No. 10503.
These are appeals from separate judgments of the District Court of Burke County decreeing cancellation of portions of certain oil and gas leaseholds on the theory of abandonment. We reverse.
These cases had been consolidated for trial in the district court on December 16, 1982, with three other cases involving similar factual issues. On April 20, 1983, the district court issued its memorandum opinion in lieu of findings of fact, conclusions of law, and order for judgment. Separate judgments were entered in each of the five cases and appeals were taken in three of these cases. These appeals were consolidated for oral argument before this court. Because a resolution of the issues involved in the third case, Sorum v. Schwartz, 344 N.W.2d 73 (N.D.1984), turns on considerations of law distinct from those at issue in the instant cases, we will address that case in a separate opinion.
On June 7, 1949, Earl Monson and Twila Monson executed and delivered an oil and gas lease to Stanolind Oil and Gas Company. The lease conveyed certain oil and gas interests in and under the East Half (E 1/2) of Section Eighteen (18), Township One Hundred Sixty-two (162), Range Ninety (90) West, in Burke County. The sole consideration for this lease was either delay rentals or a one-eighth royalty from production. The term of the lease was for ten years "and as long thereafter as oil or gas, or either of them, is produced from said land by the lessee".
In 1958, within the primary term of the lease, a well was drilled resulting in production on the Northwest Quarter of the Northeast Quarter (NW 1/4 NE 1/4) of Section 18. This well has been producing oil in paying quantities since that time with only occasional interruptions during the winter months.
In 1962 the defendant, Earl Schwartz, acquired an interest in the East Half of the The plaintiff, Theodore Olson, is one of several holders of the mineral interest in the leasehold. The leasehold contains 320 acres and is subject to 160-acre spacing. All parties concede that there has been no exploration or development of the leasehold since the original well was drilled in 1958, in spite of the fact that spacing is available for an additional well on the Southeast Quarter (SE 1/4) of Section 18.
Northeast Quarter (E 1/2 NE 1/4) and the West Half of the Southeast Quarter (W 1/2 SE 1/4) of Section 18. The remainder of the leasehold, including the existing well, was acquired by the defendant, Vern Lund, in 1969. Lund has been the sole operator of the well since that time.
On June 4, 1949, Alfred Larsen and Sarah Larsen, husband and wife, executed and delivered an oil and gas lease to Stanolind Oil and Gas Company. The lease, which was for a primary term of ten years, covers the oil and gas leasehold estate in and under approximately 720 acres of land in Burke County. That land is legally described as follows:
The # 1 Alfred Larsen well was spudded in on the Northwest Quarter of the Southeast Quarter (NW 1/4 SE 1/4) of Section 22 on July 24, 1958, and was completed as a producing well on August 22, 1958. It is a Madison well in the Stony Run Field and was drilled to a depth of 5,600 feet. Except for the # 1 Alfred Larsen well, no other wells have been drilled on the lease. The well is a "stripper" well in an 80-acre spacing unit. The present operator of the well is the defendant Earl Schwartz.
The appellees [Larsens] acquired the oil and gas estate by virtue of a contract for deed from Alfred Larsen and a subsequent warranty deed dated February 16, 1980. No minerals were reserved in the conveyance.
On March 29, 1956, Stanolind assigned to Hunt Oil Company [Hunt] its interest in the Southeast Quarter (SE 1/4) of Section 22 and the West Half (W 1/2) of Section 23. On May 22, Hunt assigned all of its interest to I.J. Wilhite, insofar as the lease covered the East Half of the Southeast Quarter (E 1/2 SE 1/4) of Section 22 and the East Half of the Southwest Quarter (E 1/2 SW 1/4) of Section 23 to a depth of 6,110 feet. Hunt reserved a one-sixteenth of the seven-eighths overriding royalty. On October 13, 1958, Hunt assigned to Wilhite all of its remaining interest in the lease [the West Half of the Southeast Quarter (W 1/2 SE 1/4) of Section 22 and the Northwest Quarter, West Half of the Southwest Quarter (NW 1/4, W 1/2 SW 1/4) of Section 23] down to a total depth of 5,775 feet. Hunt reserved an overriding royalty of three-sixty-fourths of the seven-eighths and all rights below 5,775 feet. Hunt assigned all of its remaining interest to the defendant, Prosper Energy Corporation, on December 30, 1977. Thus, Prosper has no working interest in the # 1 Alfred Larsen well, which was drilled to a depth of 5,600 feet, but only an overriding royalty based upon production from the well. Further, as far as the deep rights are concerned, Prosper has only a 25 percent working interest. None of the other working interest owners were joined in the lawsuit insofar as it sought to cancel the oil and gas lease as to the deep rights.
As in the Olson lease, there has been no exploration or development of the leasehold since the # 1 Alfred Larsen well was drilled in 1958.
The appeals in these cases were taken by Vern Lund and Prosper Energy Corporation. Earl Schwartz did not appeal.
The issues raised by appellants in these appeals are identical:
(1) Did the trial court err in finding that there had been an abandonment of the undeveloped portions of the leaseholds, and (2) Did the trial court err in failing to rule on the plaintiffs' claims of breach of implied covenants and in not ordering judgment in favor of the lessees on that issue?
In its memorandum opinion, the district court found that there had been an abandonment of those portions of the above described leases outside of the spacing units on which the producing wells were located and ordered the leases over these undeveloped portions of the lands canceled.
The principal question before us concerns the doctrine of abandonment. Olson and Larsen argue that where there has been a long failure to explore or drill on available portions of an oil and gas lease, and where the lessees have no present intention of developing those portions of the leasehold, there is a legal presumption that the lessees have abandoned those portions even though no physical relinquishment has been shown. Lund and Prosper, on the other hand, argue that the leases are maintained over the entire acreage of their respective leaseholds by production from the stripper wells. They further contend that cancellation of a portion of a leasehold under these circumstances can only be granted upon proof of breach of implied covenants, following notice and demand. The district court adopted the theory urged by the lessors.
Each lease contains a habendum clause, which provides:
"It is agreed that this lease shall remain in force for a term of ten years from this date, and as long thereafter as oil or gas, or either of them, is produced from said land by the lessee."
Oil was produced from the leased premises within the ten-year primary terms of the leases. The wells have been producing in paying quantities since that time. Although production from these wells is marginal (less than ten barrels per day), it is sufficient to meet the costs of production and provide a royalty to the mineral interest owners. The express terms of the leases have thus been fulfilled and the entire acreage covered by both leases has been held since 1958 by marginal production.
The district court based its finding of abandonment on three undisputed facts:
(1) There had been no attempt at further development of either lease in over twenty years;
(2) Neither lessee has any present intention to drill an additional well on an available spacing unit because there is no indication that such a well would be profitable;
(3) Both lessees wish to hold the undeveloped portions on speculation that operations might prove profitable in the future.
The court also held that, in North Dakota, a finding of abandonment may be based upon intention alone--that physical relinquishment is not a requisite.
The authority relied upon by the district court, and by the lessors, is a statement by this court in Hermon Hanson Oil Syndicate v. Bentz, 77 N.D. 20, 40 N.W.2d 304, 306 (1949):
Neither Hermon...
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