Rainbow Oil Co. v. Christmann

• Decision Date: 29 December 1982
• Docket Number: No. 5734,5734
• Citation: 656 P.2d 538
• Parties: RAINBOW OIL COMPANY, Appellant (Defendant), v. John J. CHRISTMANN, Margaret Roden, Vernon Delgado, Barbara McKinley and Stuart McKinley, MGF Oil Corporation, and Sublette Properties, Inc., Appellees (Plaintiffs).
• Court: Wyoming Supreme Court

Page 538

656 P.2d 538

RAINBOW OIL COMPANY, Appellant (Defendant), v. John J. CHRISTMANN, Margaret Roden, Vernon Delgado, Barbara McKinley and Stuart McKinley, MGF Oil Corporation, and Sublette Properties, Inc., Appellees (Plaintiffs).

No. 5734.

Supreme Court of Wyoming.

Dec. 29, 1982.

Robert J. Pickett of Pickett, McKinney & Smith, Rock Springs, and John S. Pfeiffer of Gorsuch, Kirgis, Campbell, Walker & Grover, Denver, Colo., for appellant.

John C. Brooks and J.E. Vlastos of Vlastos, Reeves & Murdock, Casper, for appellees.

Before ROSE, C.J., RAPER, THOMAS and ROONEY, JJ., and SAWYER, District Judge.

ROSE, Chief Justice.

The present dispute arises out of a contractual relationship between Rainbow Oil Company, ¹ the appellant, and John J. Christmann, ² one of the appellees, in which Christmann brought suit seeking specific performance of the contract. Rainbow responded charging Christmann with breaching the agreement and seeking its reformation. In its judgment, the district court ordered specific performance, refused to reform and found generally in favor of the appellee and against the appellant in all respects. It is from this judgment that Rainbow Oil Company appeals.

THE FACTS

Rainbow Oil Company is, and at all times pertinent to this litigation was, the owner of federal oil and gas lease Number W-0131513 in the Labarge field located in Lincoln County, Wyoming. In early 1973, Rainbow was advised by the United States Geological Survey (U.S.G.S.) that this lease was subject to forfeiture if Rainbow did not undertake a program of reworking and modernizing its operations. At that time ten wells were in place on one-half of the quarter section covered by the lease. These wells had been drilled in the 1920's and by the early 1970's they were in a state of disrepair with only eight of them producing oil. We will refer to this part of the leasehold as "Old Rainbow."

Being in poor financial condition and unable to comply with the U.S.G.S. directive, Rainbow sought to sell its interest in the lease and, to this end, the appellant's president, Jeanne Cailliez, retained appellee Stuart McKinley to assist in finding a buyer for the property. While Mr. McKinley was searching for potential buyers, he was contacted by John B. Roden who inquired about the availability of the property. Roden Rainbow Oil Company entered into a farmout agreement with John Christmann on August 26, 1975 according to the terms of which Christmann was to drill some test wells on the undeveloped portion of the lease, after which he would assume operating control of "Old Rainbow" for the purpose of reworking and modernizing the ten existing wells. It was the purpose of Rainbow to have the leasehold developed in accordance with the U.S.G.S. directive while minimizing the financial risks associated with such a program. It was Christmann's intent to formulate an agreement which would allow him to become the sole operator of the Rainbow properties. These objectives formed the basis of the contract between the parties.

was the chief executive officer of Roden Drilling Company and Big Springs Exploration, Incorporated, the former being a wholly owned subsidiary of the latter. John Roden's interest in the lease was shared by appellee Vernon Delgado who was the president of appellee Sublette Properties, Incorporated and, through the efforts of Roden and Delgado, Mr. Christmann was contacted about the leasehold. Mrs. Cailliez knew of the mutual interest which Delgado, Roden and Christmann shared with respect to the Rainbow property, and meetings were held to discuss possible participation of these individuals concerning the development of the Rainbow lease.

THE CONTRACT

The farmout agreement executed in August of 1975 provided:

"1. We agree to commence by Sept. 15, 1975 the drilling of a well to test the recently developed sand on the Texaco lease at approximately 1,600' which offsets this acreage to the north. This well is to be an offset to the Texaco well. Upon completion of the above well we agree to drill two additional wells in the south one-half of the lease, at locations of our choice, to test the same pay section. These wells to be drilled at the sole cost, risk and expense of the operator, thereby earning for the operator all rights down to 100' below the deepest well drilled, and include the right to produce from any commercially productive zone penetrated.

"2. When the operator of the above wells has received from their production an amount equal to the cost of drilling, equipping and producing them, Rainbow Oil Co. will be entitled to 25% of the net profit derived from the production. Should prudent operation dictate the drilling of more than the three obligation wells, the additional wells will be drilled on the same basis. Allowable production expense items will include production taxes, royalties, lifting cost (field expenses) and the standard monthly per well overhead charge (for bookkeeping, accounting and auditing).

"3. We agree that as soon as Roden Drilling Company has finished their present drilling for Belco we will use their rig and drill a well at a legal location on the above lease to test the Bear River formation at approximately 8400' which will earn for the operator all rights down to 100' below the depth drilled. Said well to be drilled in a good and workmanlike manner, completed as a producer, or plugged and abandoned at our sole cost, risk and expense.

"4. When the operator has recovered the cost of drilling, equipping and producing the above well from the production therefrom, Rainbow Oil Company will be entitled to 25% of the net profits therefrom.

"5. Upon completion of the above drilling program we agree to take over operation of Rainbow Oil Company's ten wells and initiate a program of reworking, deepening, redrilling or other accepted oil field operations which, in our sole judgment, will produce the greatest ultimate return from the property. This program will be at the sole cost, risk, and expense of the operator. The operator will be allowed to recover the cost of this project out of one-half of the net income from these ten wells with the other one-half going to Rainbow Oil Co. Upon recovery by the operator of his cost of reworking, equipping and producing the ten wells "6. If any of the parties of interest herein elect to sell their interest, the party so inclined shall get a bona fide offer in writing from the prospective purchaser. This written offer shall be submitted to the other parties of interest who shall have 30 days of prior right to purchase said interest at the same figure.

Rainbow Oil Company will thereafter be entitled to 25% of the net profit therefrom.

"7. Rainbow Oil Company or their representative shall have access to all operations conducted on the lease and will receive daily drilling reports and copies of all cores, tests and logs which are made by the operator, access to all financial records, and the right to request an audit by a recognized firm.

"8. It is agreed by all of the parties hereto that Mr. Stuart M. McKinley or Barbara C. McKinley is to receive an overriding royalty of 2% for Mr. McKinley's services in consummation of this agreement.

"9. If the above constitutes your understanding of our agreement, please so indicate by signing in the space provided below and returning three copies to the undersigned. This agreement shall be binding upon the heirs, successors, and assigns of all parties hereto."

As can be seen from the above, the farmout agreement first required that Christmann and his partners ³ drill three wells on the undeveloped south one-half of the leasehold which we will hereafter call the "New Rainbow." The operator was also required to drill one gas well in the "New Rainbow" area. These wells were in fact drilled and, under a subsequent agreement between appellant and appellee Christmann, 16 oil wells were drilled on "New Rainbow" all of which were producers. This drilling program was completed by June of 1978. As the contract reveals, after completion of the drilling program on "New Rainbow," the operator Christmann was to take over the ten existing wells on "Old Rainbow" for the purpose of carrying out a rework program. This provision was calculated to satisfy the U.S.G.S. directive issued to Rainbow Oil Company in 1973.

It is to be recalled that the contract further provides that each of the parties is given a right of first refusal which purports to afford each party the opportunity to purchase the interest of any party or interest owner who decides to sell. The parties also provided for a 2% overriding royalty to be conveyed to Stuart McKinley as consideration for his services in assisting in the formulation of the agreement. Finally, it was the purpose of the agreement to relieve Rainbow Oil Company of the financial risks associated with development, while also guaranteeing the company a 25% share in the proceeds. ⁴

APPELLANT'S CONTENTIONS

Problems arose when Rainbow Oil Company refused to relinquish control of "Old Rainbow" to Christmann after his drilling program on "New Rainbow" was completed in June of 1978. Rainbow Oil Company's financial condition had improved while Christmann and associates were discharging their obligations on "New Rainbow," thus enabling Rainbow Oil to do some reworking and redrilling on "Old Rainbow." Christmann made at least four demands on Rainbow Oil in an effort to enforce his right to control "Old Rainbow" once his drilling program on "New Rainbow" was finished, but all were refused, whereupon he stopped payment to Rainbow Oil of its share of the proceeds being derived from the production on "New Rainbow." Christmann then brought the present action seeking specific performance of the agreement and, as mentioned previously, Rainbow Oil Company "A. The Court Erred In Finding That The Transfers Of The Interests of Christmann, Roden, Delgado and Roden Drilling Company Were Not Sales Within The Meaning Of The...