Serhienko v. Kiker, 11039

• Decision Date: 20 August 1986
• Docket Number: No. 11039,11039
• Citation: 392 N.W.2d 808
• Parties: Renee SERHIENKO; Ramona Romanyshyn; Kathryn Mularchek; Mercy Anheluk; Joseph Romanyshyn; and Joseph Romanyshyn as Trustee for Regina Romanyshyn and Roxanna Romanyshyn, minor children, Plaintiffs, Appellants, and Cross- Appellees, v. Russell L. KIKER, Jr., an individual; and Martin Oil Company, a foreign corporation, Defendants, Third Party Plaintiffs, Appellees, and Cross- Appellants, and Any unknown persons claiming any right, title or interest in any of the oil and gas in and under the following property in the County of Billings, and State of North Dakota: The South Half of the Northeast Quarter (S 1/2NE 1/4) and the Southeast Quarter (SE 1/4) of Section Three (3); the South Half of the Northwest Quarter (S 1/2NW 1/4) and the North Half of the Southwest Quarter (N 1/2 SW 1/4) of Section Ten (10); all in Township 143 North, Range 98 West of the 5th P.M., Defendants, v. GULF OIL CORPORATION, Third Party Defendant.
• Court: North Dakota Supreme Court

Page 808

392 N.W.2d 808

Renee SERHIENKO; Ramona Romanyshyn; Kathryn Mularchek;

Mercy Anheluk; Joseph Romanyshyn; and Joseph Romanyshyn as Trustee for Regina Romanyshyn and Roxanna Romanyshyn, minor children, Plaintiffs, Appellants, and Cross- Appellees, v. Russell L. KIKER, Jr., an individual; and Martin Oil

Company, a foreign corporation, Defendants, Third

Party Plaintiffs, Appellees, and Cross-

Appellants,

and

Any unknown persons claiming any right, title or interest in

any of the oil and gas in and under the following property

in the County of Billings, and State of North Dakota: The

South Half of the Northeast Quarter (S 1/2NE 1/4) and the

Southeast Quarter (SE 1/4) of Section Three (3); the South

Half of the Northwest Quarter (S 1/2NW 1/4) and the North

Half of the Southwest Quarter (N 1/2 SW 1/4) of Section Ten

(10); all in Township 143 North, Range 98 West of the 5th

P.M., Defendants, v. GULF OIL CORPORATION, Third Party Defendant.

No. 11039.

Supreme Court of North Dakota.

Aug. 20, 1986.

Freed, Dynes, Reichert & Buresh, Dickinson, for plaintiffs, appellants, and cross-appellees; argued by George T. Dynes.

Bruce E. Bohlman, Grand Forks, for defendant, third party plaintiff, appellee, and cross-appellant Russell L. Kiker, Jr. Appearance by Marvin L. Kaiser, Williston.

Graybill & Craig, Wichita, Kan., for defendant, third party plaintiff, appellee, and cross-appellant Martin Oil Co. Appearance by J.B. Craig.

Pearce & Durick, Bismarck, for third party defendant. Appearance by Lawrence A. Dopson.

GIERKE, Justice.

The plaintiffs appeal from a judgment and amended judgment of the district court which dismissed their action seeking cancellation of two oil and gas leases and damages for slander of title. Defendants Russell L. Kiker, Jr., and Martin Oil Company (Martin) have cross-appealed from a portion of the amended judgment dismissing their counterclaims against the plaintiffs. We affirm in part, reverse in part, and remand for further proceedings.

The plaintiffs collectively own 240 of the mineral acres in Billings County described as follows:

"Township 143 North, Range 98 West of the 5th P.M.

"Section 3: S 1/2NE 1/4, SE 1/4

"Section 10: S 1/2NW 1/4, N 1/2SW 1/4"

The oil and gas interests owned by the plaintiffs were leased to Kiker through two leases executed on October 6 and 7, 1977, for primary terms of five years and ten years, respectively. The controversy in this case centers upon a cessation of production clause contained in each lease. That clause states in pertinent part:

"If prior to discovery of oil or gas on said land, or on acreage pooled therewith, lessee should drill a dry hole or holes thereon, or if after discovery of oil or gas production thereafter should cease for any cause, this lease shall not terminate if lessee commences additional drilling or reworking operations within sixty (60) days thereafter, or (if it be within the primary term) commences or resumes the payment or tender of rental on or before the rental-paying date next ensuing after the expiration of three (3) months from the date of completion of a dry hole or cessation of production."

During August 1978 a producing well, known as the Symionow Well, was completed by Gulf Oil Corporation (Gulf) in Section 10 on property pooled by agreement of the plaintiffs. The Symionow Well was a marginal producer. On June 27, 1980, still within the primary term of both leases, production from the Symionow Well ceased. During a two-week period in July 1980, Gulf conducted tests on the Symionow Well. This operation included pulling the tubing and running a pipe inspection log. Gulf determined that serious casing leaks existed which prevented the well from producing oil and gas. This problem was similar to that encountered by Gulf with other wells it operated in the Little Knife Field. On July 29, 1980, Gulf removed the workover rig from the Symionow Well site and, except for routine maintenance visits by the pumper, all physical activity on the site ceased for approximately seven and one-half months. No delay rental payments were tendered on or before October 6 or 7, 1980, the anniversary dates of the leases.

After evaluating the test data, Gulf decided in October 1980 to develop a special casing liner as a possible remedy, a technique that previously had not been used in the Little Knife Field. Gulf decided to install the liner in a well known as the Kostelnak Well, which had problems similar to those encountered with the Symionow Well, to test whether the liner concept was feasible from an engineering standpoint. The Kostelnak Well, in which the plaintiffs had no interest, was chosen by Gulf for installation of the liner because of its greater producing capacity and because Gulf was the only working interest holder, thereby obviating the need for obtaining consent from other parties.

In late December 1980 and early January 1981, Kiker tendered delay rental payments to the plaintiffs, which they refused to accept and returned to him. By mid-January 1981, the special liner had arrived and Gulf installed it in the Kostelnak Well, but because of other problems at the well site, production was not restored. Gulf, however, determined that the concept of the liner was feasible and could be used in the other wells located in the Little Knife Field.

During March 1981, Gulf returned to the Symionow Well and attempted to perforate another zone to determine whether sufficient additional quantities of oil and gas could be recovered to justify the cost of installing the special liner to correct the casing leaks. Pumping operations were continued until May 3, 1981, when Gulf determined that no oil or gas could be obtained from the additional zone. No liner was installed and the Symionow Well was abandoned. In the meantime, Martin, pursuant to a farm-out agreement with Kiker, had staked a well on March 12, 1981, in Section 3 on lands pooled by agreement of the plaintiffs. The well was completed on August 1, 1981, and it produced oil in commercial quantities.

The plaintiffs, in February 1981, served written demands upon Kiker and Martin pursuant to Sec. 47-16-36, N.D.C.C., that the two oil and gas leases be released of record. Kiker and Martin replied pursuant to the statute and asserted that the leases were in full force and effect. The plaintiffs instituted the present action against Kiker and Martin in September 1981 seeking cancellation of the leases and damages for slander of title. The plaintiffs claimed that the leases expired by their own terms because of the failure to timely pay delay rentals. Kiker and Martin asserted that the leases remained in effect because reworking operations were commenced within 60 days after the Symionow Well ceased production, and counterclaimed for damages for malicious prosecution. Kiker and Martin also brought a third-party action against Gulf seeking contribution or indemnity and asserting negligence in its operation of the Symionow Well.

Following a bench trial on the issue of liability alone, ¹ the trial court dismissed the plaintiffs' action. The court determined that, "as a matter of law, 'reworking operations' as contemplated in the leases commenced" on the Symionow Well within 60 days from the date that production ceased; that the actions of Gulf "were those of a prudent operator" and that Gulf "exhibited good faith and a bona fide intent to restore production" of the well; that reworking operations included "the testing and evaluation of the casing problems" on the Symionow Well and "the efforts of Gulf to determine the engineering feasibility of a liner in the Little Knife Field that could be used" on the well; that the "subsequent determination of engineering feasibility and recompletion of the well constituted additional reworking operations in an attempt to restore production;" and that Gulf's reworking operations "held the ... leases through the time that operations were commenced by Martin ... which culminated in a producing oil well in Section 3, ..." In a subsequent separate order incorporated into the amended final judgment, the court granted the plaintiffs' motion for partial summary judgment dismissing Kiker and Martin's counterclaims for malicious prosecution. The court also dismissed as moot Kiker and Martin's third-party action against Gulf. These appeals followed.

The oil and gas leases involved in this case are "unless" leases. ² An "unless" clause does not obligate the lessee to do an act but provides that the lease shall terminate unless the lessee does some act. The "unless" clause does not state a condition subsequent upon which the lease may be forfeited, but it is construed as a clause of special limitation and if delay rental payments required by the lease are deficient in either time or the amount of payment, the lease terminates automatically, without any requirement of notice or demand on the part of the lessor. Borth v. Gulf Oil Explor. & Prod. Co., 313 N.W.2d 706, 709 (N.D.1981); Norman Jessen & Assoc. v. Amoco Prod. Co., 305 N.W.2d 648, 651 (N.D.1981); Schwartzenberger v. Hunt Trust Estate, 244 N.W.2d 711, 716 (N.D.1976); Schank v. North American Royalties, Inc., 201 N.W.2d 419, 426 (N.D.1972); Woodside v. Lee, 81 N.W.2d 745, 746 (N.D.1957). Likewise, the 60-day clause at issue in this case, which is commonly found in "unless" lease forms [see 8 H. Williams and C. Meyers, Oil and Gas Law, Manual of Terms, 905-906 (1984) ], is also a clause of special limitation and a failure to comply with its terms results in the automatic termination of the lease. See Taylor v. Buttram, 111 So.2d 576, 579 (La.Ct.App.1959); Miami Oil Producers, Inc. v. Larson, 203 Mont. 225, 661 P.2d 1260, 1263 (1983); Hall v. McWilliams, 404 S.W.2d 606, 608 (Tex.Civ.App.1966); 3 H. Williams, Oil and Gas Law Sec. 615.5(3) (1985). There is no dispute in this case that the tender of delay rental payments was untimely. Thus, the leases terminated automatically unless the lessee commenced ...