San Mateo Community College Dist. v. Half Moon Bay Ltd. Partnership

• Decision Date: 05 June 1998
• Docket Number: No. A077049,A077049
• Citation: 76 Cal.Rptr.2d 287,65 Cal.App.4th 401
• Court: California Court of Appeals
• Parties: , 98 Cal. Daily Op. Serv. 5290, 98 Daily Journal D.A.R. 7343 SAN MATEO COMMUNITY COLLEGE DISTRICT, Plaintiff and Respondent, v. HALF MOON BAY LIMITED PARTNERSHIP et al., Defendants and Appellants.

Page 287

76 Cal.Rptr.2d 287

65 Cal.App.4th 401, 98 Cal. Daily Op. Serv. 5290,

98 Daily Journal D.A.R. 7343

SAN MATEO COMMUNITY COLLEGE DISTRICT, Plaintiff and Respondent, v. HALF MOON BAY LIMITED PARTNERSHIP et al., Defendants and Appellants.

No. A077049.

Court of Appeal, First District, Division 3, California.

June 5, 1998.

As Modified July 1, 1998.

Robert S. Sturges, Richard B. Gullen, Liccardo, Rossi, Sturges & McNeil, San Jose, for Defendants & Appellants.

Gregory A. Wedner, Bergman & Wedner, Inc., Los Angeles, for Plaintiff & Respondent.

PHELAN, Presiding Justice.

This appeal arises out of a quiet title action brought by respondent San Mateo County Community College District (the District) against Half Moon Bay Limited Partnership, Universal Organic Resources, Inc., George R. Kucera, La Honda Fields Limited Partnership, and Fred Golisano (collectively, appellants) who claim rights under an oil and gas lease entered into by the District and one Ivan Vovjoda on July 21, 1982. Appellants are the successors in interest to Vovjoda and American International Resources, Inc., a company to which Vovjoda assigned the lease in early 1986. Appellants appeal from the judgment and decree quieting title entered in favor of the District after a bench trial in August 1996 at which the trial court, interpreting the lease, concluded that it had terminated in July 1987. Although our reasoning differs in some respects from the rationale set forth in the trial court's statement of decision, we affirm the judgment.

FACTUAL AND PROCEDURAL BACKGROUND

1. The Lease

On July 21, 1982, the District leased 184 acres in San Mateo County to Ivan Vovjoda "for the production of oil, gas and other hydrocarbons." Paragraph 2 of the lease is the "habendum clause," i.e., the clause in a deed or lease setting forth the duration of the grantee's or lessee's interest in the premises. (Williams & Meyers, Manual of Oil and Gas Terms (8th ed.1991) p. 554.) Originally, paragraph 2 provided that the lease term was five years, "commencing July 21, 1982 and ending July 21, 1987, unless further extended as hereinafter set forth." The only other portion of the lease that addressed extension of the lease term was paragraph 3, which provided that the term might be extended by the mutual consent of both parties if the lessee were not in default with respect to any of the terms, covenants and conditions in the lease. ¹

In 1986, paragraph 2 was amended by adding the following language, which was inserted after the existing wording: "except that lessee may continue its operation past the termination date as to each well producing or being drilled at the time and in respect to which lessee is not in default. Lessee's right to continued operation as to said well(s) shall continue so long as such well(s) shall produce oil in paying quantities." This amendment is what is referred to as a "thereafter clause," i.e., a clause that provides for the continued validity of the lessee's interest after the expiration of the primary term, here, the initial five years, so long as a specified state of affairs continues. (Williams & Meyers, Manual of Oil and Gas Terms, supra, p. 1270.)

Subsequent paragraphs set forth the lessee's exploration, drilling and producing obligations. For example, paragraph 9 requires the lessee to commence exploration work within 90 days after the lease is awarded and all permits are obtained, and to prosecute drilling operations with reasonable diligence until oil or gas is found in "paying quantities." Paragraph 8 defines "paying quantities" as "sufficient quantities each year as will return a profit to Lessee over and above his operating but not his drilling or equipping costs in producing the oil and gas." The lease requires payment of an annual lease price of $1,840, as well as payment of 17.25 percent royalties on the value of all oil produced and removed from the land, on the net proceeds from the sale of gas sold and used off the premises, and on the net proceeds of any casinghead gasoline ² sold by the lessee. Paragraph 10 provides that, if oil or gas is not found in paying quantities in the first well, the lessee is required to begin drilling a second well within three months of completing or abandoning the first, and if oil or gas is not found in the second well, the lessee is required to continue drilling successive wells until oil or gas is found "in paying quantities." Paragraph 11 provides that, if oil or gas is found in paying quantities, the lessee is required to continue drilling additional wells, "subject to the provisions hereof and to the suspension privileges hereinafter set forth," until there are as many wells on the land "as shall equal the total acreage then held under [the] lease divided by twenty (20)," which in this case was nine wells. At that point, the lessee would hold the land free of further drilling obligations.

The "suspension privileges" referred to in paragraph 10 are set forth as follows in paragraph 20, the force majeure clause: "The obligations of Lessee hereunder shall be suspended while Lessee is prevented from complying therewith, in whole or in part, by strikes, lockouts, action of the elements, laws, rules and regulations of any federal, state, municipal or other governmental agency, acts or requests of any governmental officer or agent purporting to act under authority, exhaustion or unavailability or delays in deliver[y] of necessary materials and equipment, or other matters or conditions beyond the control of Lessee, whether or not similar to the matters or conditions herein specifically enumerated. It is expressly understood and agreed, notwithstanding any other provision of this lease inconsistent herewith, that all of Lessee's operations under this lease, including (but without limiting the generality hereof) the drilling and spacing of wells and the manner and rate of producing oil and/or gas therefrom, shall be conducted in accordance with any applicable law, whether now or hereafter enacted, of the United States and/or of the state in which said land is situated, and/or of any county or municipality or other governmental authority, and in accordance with regulations prescribed and/or orders issued under such law, and in the absence of any such law, may be conducted in conformity with any recommendation or request made in writing or published by any governmental authority or agency having legal juris diction [sic ], or in accordance with any plan or program of conservation or curtailment voluntarily followed by producers of crude oil in said state generally. Drilling and producing operations hereunder may also be suspended while the price offered generally to producers in the same vicinity for oil of the quality produced from said land is Twenty Dollars ($20) or less per barrel at the well, or when there is no available market for the same at the well."

2. History of Operations

In 1984, Vovjoda approached Fred Golisano, the president of Universal Loan Incorporated, to obtain financing to commence drilling. Golisano found a group of investors and formed Half Moon Bay Limited Partnership in order to fund the exploration, drilling and producing operations. The first well was drilled in 1984. According to Golisano, it produced in paying quantities, so it was decided to proceed with the second well. The second well was more promising than the first, but through Vovjoda's negligence it collapsed and had to be abandoned. There was never any production from the second well.

Because of the loss of the second well, the limited partnership and Golisano's company, Universal Loan Incorporated, sued American International Resources, Inc., the company to which Vovjoda had assigned the lease in 1986. The action resulted in a judgment in favor of the limited partnership, which levied on the American International Resources' interest in the lease and then acquired it at the sheriff's execution sale on August 13, 1987.

A document entitled "Production History," which was compiled by appellants' expert from information filed with the State Division of Oil and Gas, shows that the first well produced 1,330 barrels of oil in 1984 and 174 barrels in 1986. This document also shows that gas, in an unspecified unit of measurement, ³ was produced in 1984 and 1986, although Golisano testified at trial that until "recently" there was no market for gas. There was no production of any kind for the years 1985, 1987, or 1988. Golisano testified that before the sheriff's sale, the first well produced only small amounts of oil because gas pressure was impeding the flow of oil. When gas was vented and the pressure relieved, more oil flowed. Golisano claimed there was no way to produce oil without venting gas, but that venting gas was illegal. Public Resources Code section 3300 states that "unreasonable waste of natural gas" is "opposed to the public interest" and "unlawful," and that the "blowing, release, or escape of gas into the air shall be prima facie evidence of unreasonable waste." Neither appellants nor their predecessors were ever cited for venting gas while producing oil. ⁴

At some point after the sheriff's sale in August 1987, appellants installed a different type of pump and were able to produce an unspecified amount of oil, although they also continued to vent gas in their efforts to obtain greater production. Starting in 1989, appellants began to explore the possibility of selling gas to Pacific Gas and Electric Company (PG & E). PG & E was willing to purchase the gas and worked with appellants to estimate costs and to develop alternative scenarios for connecting the well to PG & E gas distribution lines. The record contains no information concerning what efforts, if any, were made to sell gas to PG & E or other potential purchasers before July 21, 1987.

Appellants do not dispute that as of July 21, 1987, no oil or gas was actually being produced from the well, and no new well was being...