Sandtana, Inc. v. Wallin Ranch Co.

• Decision Date: 02 December 2003
• Docket Number: No. 01-758.,01-758.
• Citation: 2003 MT 329,80 P.3d 1224
• Parties: SANDTANA, INC., a Montana Corporation, Plaintiff and Appellant, v. WALLIN RANCH COMPANY, a Montana Corporation; Brent H. Schellin; Nellie Jo Nicholson; and Klabzuba Oil and Gas, a Family Limited Partnership, Defendants and Respondents.
• Court: Montana Supreme Court

80 P.3d 1224

2003 MT 329

SANDTANA, INC., a Montana Corporation, Plaintiff and Appellant, v. WALLIN RANCH COMPANY, a Montana Corporation; Brent H. Schellin; Nellie Jo Nicholson; and Klabzuba Oil and Gas, a Family Limited Partnership, Defendants and Respondents.

No. 01-758.

Supreme Court of Montana.

Submitted on Briefs March 14, 2002.

Decided December 2, 2003.

For Appellant Jack L. Lewis and George N. McCabe, Jardine, Stephenson, Blewett & Weaver, Great Falls, Montana.

For Respondents Bruce A. Fredrickson, Crowley, Haughey, Hanson, Toole & Dietrich, PLLP, Kalispell, Montana; John R. Lee and Colby L. Branch, Crowley, Haughey, Hanson, Toole & Dietrich, PLLP, Billings, Montana.

Justice JAMES C. NELSON delivered the Opinion of the Court.

¶ 1 Sandtana, Inc. (Sandtana) brought this declaratory judgment action against the Wallin Ranch Company, Brent H. Schellin, Nellie Jo Nicholson (collectively, the Wallin group) and Klabzuba Oil and Gas (KOG) in the District Court for the Seventeenth Judicial District, Blaine County, seeking to confirm the validity of three oil and gas leases granted by the Wallin group to Wells Petroleum, Inc. (Wells). The District Court granted summary judgment in favor of the Wallin group and KOG and denied Sandtana's motion. Sandtana appeals. We affirm.

¶ 2 We address the following issues as reframed by the Wallin group and KOG:

¶ 3 1. Whether the District Court erred in determining that the Pugh clauses added to the subject oil and gas leases required that rentals be paid on or before the expiration of the primary term in order to extend the leases as to undeveloped sections.

¶ 4 2. Whether the District Court erred in determining that Sandtana's late tender of rentals caused the subject oil and gas leases to terminate as to all undeveloped sections.

FACTUAL AND PROCEDURAL BACKGROUND

¶ 5 Brent H. Schellin, Nellie Jo Nicholson, Robert J. Schellin, Karen Schellin and Susette Schellin are brothers and sisters. Robert is President of the Wallin Ranch Company. All of the lands described below are owned by the Wallin Ranch Company.

Township 35 North, Range 17 East, M.P.M.

Section 13: W½, SE¼

Township 35 North, Range 18 East, M.P.M.

Section 18: Lots 1, 4, SE¼SW¼, W½SE¼

Section 19: Lots 1-4, E½W½, E½

Section 20: S½NW¼, N½SW¼, SW¼SW¼, S ½NE¼

Section 21: SW¼NW¼, NW¼SW¼

Section 28: W½NW¼, N½SW¼

Section 29: N½NW¼, SW¼NW¼, S½, NE¼

Section 30: Lots 1,2, E½NW¼

Section 31: E½

Section 32: S½

¶ 6 At all times relevant to this action, the Wallin Ranch Company, Brent, Nellie Jo, Karen, and Susette owned mineral interests in the lands as tenants in common. On September 8, 1994, Brent, Nellie Jo and the Wallin Ranch Company leased to Wells in three separate "Producer 88" leases, their oil and gas interest rights in these tracts of land located in Blaine County, Montana. Each lease was for a primary term of five years. The first two paragraphs of each lease contained the following habendum, drilling operations, continuous drilling operations, and "paid up" lease provisions:

1. It is agreed that this lease shall remain in force for a term of (5) years from this date 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. [This first sentence is herein referred to as the "habendum clause."] 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; [This first portion of the second sentence is herein referred to as the "drilling operations clause."] and operations shall be considered to be continuously prosecuted if not more than ninety (90) days shall elapse between the completion or abandonment of one well and the beginning of operations for the drilling of a subsequent well. [This latter portion of the second sentence is herein referred to as the "continuous drilling operations clause."] If after discovery of oil or gas on said land or an 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 ninety (90) days from 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.

2. This is a PAID-UP LEASE. In consideration of the down cash payment, Lessor agrees that Lessee shall not be obligated, except as otherwise provided herein, to commence or continue any operations during the primary term. Lessee may at any time or times during or after the primary term surrender this lease as to all or any portion of said land and as to any strata or stratum by delivering to Lessor or by filing for record a release or releases, and be relieved of all obligation thereafter accruing as to the acreage surrendered.

¶ 7 Wells offered similar leases to Karen and Susette. In reviewing the lease for her portion of the mineral interests, Karen realized that the habendum clause potentially allowed the Lessee to put off drilling until the very last day of the primary term and thereby hold all of the leased lands indefinitely. Consequently, Karen refused to sign her lease. She eventually agreed to execute the lease if Wells would add an addendum to all of the family's leases including the already executed Wallin group leases. This addendum, generally referred to as a "Pugh clause,"¹ contained the following language:

Notwithstanding any language contained herein to the contrary, production from any well drilled hereunder shall not serve to extend the primary term of this lease, except as to the leased premise contained within the governmental Section in which a producing well is located. Lessee shall be entitled to extend this lease beyond the primary term as to leased premises located outside a governmental Section containing a producing well by paying or tendering to lessor on or before the expiration of the primary term an annual rental of one dollar per net acre which shall cover the privilege of deferring the expiration of said leased premise for 12 months from the expiration date of the primary term. Lessee has the option of extending for additional twelve month periods the expiration of any lease premises lying outside any governmental Section containing a producing well by paying or tendering to lessor, on or before the anniversary date of the expiration of the primary term, a rental amount escalating at the rate of $1.00 per net acre per year for each subsequent annual rental. However, lessee may not extend the primary term of any leased premises lying outside a governmental Section containing a producing well for more than five years beyond the primary term.

¶ 8 The Pugh clauses were duly executed and were submitted to the Blaine County Clerk and Recorder for recording on August 10, 1995. The leases granted by Karen and Susette were for a primary term of five years beginning June 1, 1995. Since the primary term of Karen's and Susette's leases expired almost nine months later than the Wallin group leases, the continued validity of Karen's and Susette's leases is not at issue in this action.

¶ 9 Sandtana is the successor in interest to Wells as to the Wallin group leases. Sandtana acquired the drilling rights to the leased lands on October 28, 1998. On September 7, 1999, the day before the leases were to expire, Sandtana commenced drilling a well on the Wallin Ranch in Section 19. By letter dated September 10, 1999, Sandtana, acting through J. Burns Brown Operating Co. (JBBO), mailed to each member of the Wallin group a check identified as being payment for shut-in royalties for the well in Section 19 and the delay rental of $1.00 per net acre for the leased acreage outside of Section 19.

¶ 10 On September 23, 1999, Robert returned these checks to JBBO on behalf of the Wallin group stating that based on the Pugh clause in each lease, Sandtana's option to extend the leases on acreage outside of Section 19 was conditioned upon the rental being paid on or before the expiration of the primary term. Since payment was not made until September 10, 1999, two days after the primary term expired, it was the Wallin group's position that the leases were not extended beyond the primary term for lands outside of Section 19.

¶ 11 On October 22, 1999, the Wallin group leased to KOG the same lands (except Section 19) that had been previously leased to Sandtana. These leases were recorded in the office of the Blaine County Clerk and Recorder on October 25, 1999.

¶ 12 Sandtana, meanwhile, spudded a well on the Wallin Ranch in Section 31 on October 22, 1999. This well was completed as a dry hole on October 24, 1999.

¶ 13 On January 7, 2000, KOG notified JBBO by letter that KOG intended to vigorously defend its leases. The following day, Robert, on behalf of the Wallin group, notified JBBO by letter that Sandtana's leases had expired and that Sandtana no longer had the right to drill on any land on the Wallin Ranch outside Section 19. Notwithstanding, Sandtana spudded a well on the Wallin Ranch in Section 20 on January 20, 2000. This well was completed as a dry hole on January 22, 2000.

¶ 14 Thereafter, Sandtana decided that it was precluded from further drilling by the cloud upon its leasehold title. Consequently, Sandtana commenced this action on April 12, 2000. In its complaint, Sandtana contended that there was not a "producing" well on the leased lands, therefore,...