Phyfer v. San Gabriel Development Corp.
| Decision Date | 28 September 1989 |
| Docket Number | No. 88-4690,88-4690 |
| Citation | 884 F.2d 235 |
| Parties | Jim PHYFER, Plaintiff-Appellant, v. SAN GABRIEL DEVELOPMENT CORP., Defendant-Appellee. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Michael E. Earwood, Jackson, Miss., for plaintiff-appellant.
Leslie H. Southwick, John M. Grower, Jackson, Miss., for defendant-appellee.
Appeal from the United States District Court for the Southern District of Mississippi.
Before WISDOM, RUBIN, and KING, Circuit Judges.
The issue is whether the lease of an oil and gas well terminated automatically upon the lessee's breach of its terms and, if not, whether, under Mississippi law, the lessor waived or is estopped to assert his right to recover possession of the well. The district court correctly held that the lease did not terminate automatically, and that the lessor, by his course of conduct, is estopped to terminate the lease.
Jim Phyfer owned the Thomas D. Smith 9-2 No. 1 oil and gas well and approximately 3,500 acres of land surrounding the well in Holmes County, Mississippi. Neither Phyfer nor the well's original owner, Patrick Petroleum Company, had accomplished production from the well.
In July, 1983, Phyfer leased the well and the surrounding property to Matrix Energy, Inc. In a letter agreement drafted by Phyfer, Matrix agreed to pay Phyfer $100,000 in the stock of another corporation for the right to place and maintain the well in production by August 1, 1985, or to purchase, for an additional $100,000, the opportunity to start production two years later, by August 1, 1987. The agreement invested Phyfer with an overriding royalty interest in any oil, gas, and minerals produced. If, however, Matrix did not start production by the original deadline and failed to obtain an extension, or obtained an extension but failed to meet the extended target date for commencing production, it was obliged to assign the well and land back to Phyfer.
Matrix did not pay Phyfer the $100,000 in stock. After a federal district court had determined that Matrix had breached the contract by failing to make this payment, the parties agreed to a settlement of the $100,000 claim by which Matrix would pay Phyfer $80,000 cash in two installments. Matrix paid Phyfer the first $20,000 installment immediately as agreed, but never paid the remaining $60,000.
Matrix commenced production on the Smith well in April, 1985, but, in ten weeks, had produced only 1,103 barrels of oil and 36,279 mcf. of gas. Matrix then shut down the well, concluding that continued production was not economically feasible, and that the sulphur extraction plant, used to treat the natural gas emitted from the well, required improvement before production could resume. Matrix neither sought an option to extend its time to maintain production nor attempted to improve either the well or the extraction plant.
Matrix subsequently filed for bankruptcy under Chapter 11, and in September, 1986, the bankruptcy court issued an Order of Abandonment assigning Matrix's interest in the Smith well to the San Gabriel Development Corporation. During the next year, San Gabriel spent approximately $2,000,000 purchasing and installing surface and sulphur extraction equipment at the well, renovating and starting-up the adjacent Tchula Lake Gas Extraction Plant, and building pipelines from the well to the plant. San Gabriel commenced production from the Smith well in December, 1986.
Meanwhile, on October 10, 1986, Phyfer informed San Gabriel that he had been unaware of Matrix's bankruptcy and had not been apprised of San Gabriel's acquisition of the well. He demanded that San Gabriel satisfy Matrix's outstanding debt to him and affirm in writing his overriding royalty interest in the well and leases, and threatened to rescind the 1983 agreement if San Gabriel refused. Two weeks later, Phyfer filed a royalty proof of claim with the bankruptcy court requesting that the well be assigned to him. During the next several months, however, Phyfer and San Gabriel negotiated the amount of Phyfer's overriding royalty interest in the Smith well.
In March, 1987, Phyfer filed this suit, claiming that the 1983 agreement had terminated automatically when Matrix breached it, and that ownership of the well and the right to use the surrounding land had, therefore, reverted to him in 1983. The district court found that Matrix had breached the 1983 agreement by not paying Phyfer the price originally specified and by failing to obtain production by August 1, 1985. The court held, however, that the agreement did not terminate automatically; to recover for Matrix's breach, Phyfer had to file suit for breach of the lease or for its forfeiture. The court found that by asking for written affirmation of his royalty interest and subsequently negotiating with San Gabriel over the amount of royalties to which he was entitled, Phyfer did not give San Gabriel notice of his claim for termination of the lease, but to the contrary, indicated that the 1983 agreement was still in effect. The court held that, by his conduct, Phyfer had assented to San Gabriel's continued operation of the well under the 1983 agreement, waived his claim that Matrix had forfeited its interest in the well and leases, and was estopped to assert that the assignment had terminated.
Phyfer appeals, claiming that the 1983 agreement automatically terminated on Matrix's breach so that the well and leases reverted to him without the need for filing suit. Alternatively, Phyfer claims that the district court should not have rendered summary judgment declaring that he had waived his forfeiture claim, that he had not, in fact, waived this claim and should not be estopped to assert it, and that San Gabriel should not have been permitted to amend its original answer.
San Gabriel does not dispute that Matrix breached the 1983 contract repeatedly. Matrix paid neither the original nor recalculated consideration for the assignment of the well and leases. Although Matrix placed the well in production for ten weeks, it subsequently discontinued production for more than 15 months, without repairing or improving the well or the sulphur extraction plant, thus violating its contractual obligation to "maintain the well on production as a prudent operator." 1 Having failed to maintain production by August 1, 1985, and having failed to extend its expiration date until August 1, 1987, Matrix also breached its duty to "assign to [Phyfer] its right, title, and interest" in the well and leases; instead, it permitted the bankruptcy court to assign these rights to San Gabriel.
Phyfer claims that Matrix's numerous breaches caused the contract to terminate automatically and ownership of the wells and leases to revert automatically to him, obviating any need for a suit. Resolution of this claim turns on interpretation of the 1983 agreement between Phyfer and Matrix.
Mineral lease agreements generally contain a clause enunciating the circumstances under which the lease will terminate. The oil and gas industry has distinguished between two primary types of termination provisions: "unless" clauses and "or" clauses. An "unless" clause typically provides that if drilling has commenced on a certain property or well by a specified date, the
lease shall terminate ... unless the lessee on or before that date shall pay ... to the lessor ... the sum of ______ dollars, which shall operate as a rental and cover the privilege of deferring the commencement of a well for [____] months from said date. 2
A contract containing such an "unless" clause does not oblige the lessee to drill or pay a rental fee, and does not render the lessee liable for damages should he fail to drill within a specified time. 3 Instead, the lease, by its terms, terminates automatically, "ipso facto, without necessity of demand or notice on the part of the lessor," 4 and title to the property reverts to the owner.
Other leases contain what is eponymously called an "or" clause. Such a clause usually provides:
Lessee agrees to commence a well on said premises on or before ... [a certain] date ... or pay ... to lessor ... ____ dollars, which payment ... shall secure the privilege to the lessee to defer the commencement of drilling operations for a [certain] period. 5
Under such an agreement, the lessee "enter[s] into a covenant ... either to commence drilling operations or to pay a specified sum to the lessor." 6 Failure to do one or the other--that is, to drill or to pay the specified delay rental--does not, however, automatically terminate the lease. To obtain relief for the lessee's failure to drill or pay, the lessor must sue for breach of contract, requesting either damages for the lessee's violation or forfeiture of the lease. 7
As the district court observed, the 1983 agreement between Phyfer and Matrix is a "hybrid" containing aspects of both the "or" and "unless" clauses. It provides in part:
[Matrix] shall have a period until August 1, 1985, in which to place the ... Smith Well on production as a prudent operator.
[Matrix] shall cause good delivery [to Phyfer] on or before August 15, 1983 ... shares of the common stock of Xenerex Corp. ... total[ling] $100,000....
Should the Smith Well not be on production on or before August 1, 1985, [Matrix] shall have the option to acquire an additional period of time until August 1, 1987, in which to place the well on production by the payment of $100,000 ... to [Phyfer]. Failure to cause the well to be in production ... before August 1, 1985, or to pay the above consideration for an additional period until August 1, 1987, or having obtained the additional time until August 1, 1987, and having failed to cause the well to be timely in production, will result in [Matrix's] obligation to assign to [Phyfer] all [of Matrix's] right, title, and interest in all of the Oil, Gas and Mineral Leases in the Area of Mutual Interest ... and the Smith Well and the...
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