Sieker v. Trust

• Decision Date: 19 July 2013
• Docket Number: No. 108,488.,108,488.
• Citation: 309 P.3d 1,49 Kan.App.2d 183
• Parties: Wanda SIEKER, Appellee, v. FAYE M. STEPHENS TRUST, et al., Appellants.
• Court: Kansas Court of Appeals

49 Kan.App.2d 183

309 P.3d 1

Wanda SIEKER, Appellee,

v.FAYE M. STEPHENS TRUST, et al., Appellants.

No. 108,488.

Court of Appeals of Kansas.

July 19, 2013.

Syllabus by the Court

1. In reviewing the sufficiency of the evidence in a case tried to the court, an appellate court reviews the trial court's findings of fact to determine if they are supported by substantial competent evidence and are sufficient to support the trial court's conclusions of law. In doing so, the appellate court does not reweigh conflicting evidence, evaluate witnesses' credibility, or redetermine questions of fact. The appellate court has unlimited review over the trial court's conclusions of law.

2. Every oil and gas lease in Kansas contains by implication a covenant to develop the leased property. The Kansas Deep Horizons Act, K.S.A. 55–223 et seq., codified this common-law principle. The Act implies in all oil and gas leases a covenant “to reasonably explore and to develop the minerals which are the subject of such lease.” K.S.A. 55–223.

3. An owner whose lands are burdened with an oil and gas lease is entitled to have those lands prospected for oil and gas within a reasonable period of time. A lessee is required to act as a reasonably prudent operator in developing the leased property. Whether a lessee has performed this duty is a question of fact. In the absence of a controlling agreement between the parties to the lease, neither the lessor nor the lessee is the sole arbiter of the extent to which the lessee's operations and development shall proceed or the diligence the lessee must exercise. The standard by which both are bound is what an experienced operator of ordinary prudence would do under the same or similar circumstances, having due regard to the interests of both.

4. Courts considering the diligence of a lessee's development of an oil and gas lease construe such leases to promote development and to prevent delay based on the theory that the lessor has a right to have the leased land developed as rapidly as possible.

5. In determining whether an oil and gas lessee has exercised reasonable diligence in its efforts to develop the leased land, courts consider a variety of circumstances such as (1) the quantity of oil and gas capable of being produced from the premises as indicated by prior exploration and development; (2) the local market or demand therefor and the means of transporting them to market; (3) the impact of the operations, if any, on adjacent lands; (4) the character of the natural reservoir; and (5) the usages of the business.

6. An inability to further develop land subject to an oil and gas lease does not excuse the lessee from the duty to develop and explore. Further, if the lessee with good reason believes there is no mineral to be obtained by further drilling, it should give up the lease. The lessee cannot hold onto the lease based on the mere possibility of further development. If the lessor's tract is not to be developed, then it is of no use or value to the lessee; and if the lessee has no real intention to develop the tract, then the lease has no purpose, and cancelling it would do the lessee no harm.

7. Historically, cancelling an oil and gas lease because of the failure of a lessee to develop the lease has been considered an extreme remedy because the cancellation works as a forfeiture, and courts have usually required a landowner to demand compliance with the implied covenant to explore and develop before granting the landowner's request to cancel the lease.

8. Cancellation of an oil and gas lease as a remedy for breach of an implied covenant is generally disfavored. But cancellation of the lease after a breach of the implied covenant to further develop and explore is an appropriate remedy in order to prevent an injustice to the lessor. While equity abhors forfeitures it likewise abhors injustice.

9. In considering whether to cancel an oil and gas lease because of the failure of a lessee to develop the lease, courts may consider whether the lessor received offers from other producers to develop the land.

10. Under the facts presented, the district court did not err in immediately cancelling the lease on 150 acres of a 160–acre tract burdened with an oil and gas lease since 1951 with production occurring on only 10 acres. The district court did not err in refusing to delay cancellation of the lease though the court is permitted to delay cancellation as provided in K.S.A. 55–226.

Timothy R. Keenan and Addie L. Baird, of Keenan Law Firm, P.A., of Great Bend, for appellant.

Robert E. Bauer and Greg L. Bauer, of Law Office of Bauer & Pike, LLC, of Great Bend, for appellee.

Before BUSER, P.J., McANANY and POWELL, JJ.

McANANY, J.

The Faye M. Stephens Trust appeals the termination of its oil and gas lease covering 150 acres owned by Wanda Sieker for failure to develop the lease. One hundred and sixty acres was originally leased by Sieker's predecessor, Emma Vogelsang, in 1950. A producing well was drilled in 1951 and occupied 10 acres of the tract. The remaining 150 acres remained undeveloped.

The Facts

The parties are well acquainted with the facts, which are set forth in the district court's well drafted and comprehensive memorandumdecision. For our purposes, the following brief summary will suffice.

The Faye M. Stephens Trust became the majority working interest owner in 2009. At that time, Sieker, either individually or acting through her son, Kenny, advised the Trust that she wanted it to release the undeveloped portion of the lease. This was followed by written demands in July and October 2009.

The Trust determined that further development would require 3D seismic testing on the lease. 3D seismic testing has been employed on about 90% of the wells currently drilled in Kansas. Because seismic testing could not be performed successfully without including testing of adjoining tracts, and because Credo Petroleum, the lessee on adjoining tracts, would not agree to participate, the Trust decided that further development of the lease was not possible at the time.

In February 2010, Sieker sued the Trust to cancel the lease on the undeveloped 150 acres. Sieker claimed the Trust breached the implied covenant to develop the lease as a reasonably prudent operator should. Following a bench trial, the district court cancelled the lease on the 150 acres, leaving the lease in place for the 10 acres where production was ongoing. On considering the Trust's motion to alter or amend the judgment, the court determined that the proper relief was to immediately cancel the lease on the undeveloped 150 acres and not to grant a conditional decree of cancellation to be effective if the Trust failed to exercise reasonable efforts to explore and develop the 150 acres within a reasonable time.

Implied Covenant of Reasonable Exploration and Development

In this appeal, the Trust argues that the district court erred when it found that it breached the implied covenant for reasonable exploration and development. To the contrary, the Trust contends it was willing to participate in a 3D seismic study but Credo Petroleum, probably in cahoots with Sieker, blocked its efforts to do so.

On appeal, we review the trial court's findings of fact to determine if they are supported by substantial competent evidence and are sufficient to support the trial court's conclusions of law. Hodges v. Johnson, 288 Kan. 56, 65, 199 P.3d 1251 (2009). In doing so, we do not reweigh conflicting evidence, evaluate witnesses' credibility, or redetermine questions of fact. In re Adoption of Baby Girl P., 291 Kan. 424, 430–31, 242 P.3d 1168 (2010). We have unlimited review over the district court's conclusions of law. American Special Risk Management Corp. v. Cahow, 286 Kan. 1134, 1141, 192 P.3d 614 (2008).

Every oil and gas lease in Kansas contains by implication a covenant to develop the leased property. Berry v. Wondra, 173 Kan. 273, 281, 246 P.2d 282 (1952); Greenwood v. Texas–Interstate P.L. Co., 143 Kan. 686, Syl. ¶ 1, 56 P.2d 431 (1936); Alford v. Dennis, 102 Kan. 403, Syl. ¶ 3, 170 P. 1005 (1918). The Kansas Deep Horizons Act, K.S.A. 55–223 et seq., codified this common-law principle. The Act implies in all oil and gas leases a covenant “to reasonably explore and to develop the minerals which are the subject of such lease.” K.S.A. 55–223.

An owner whose lands are burdened with an oil and gas lease is entitled to have those lands prospected for oil and gas within a reasonable period of time. 102 Kan. at 404, 170 P. 1005. A lessee is required to act as a reasonably prudent operator in developing the leased property. Kansas Baptist Convention v. Mesa Operating Limited Partnership, 253 Kan. 717, 732, 864 P.2d 204 (1993); Sanders v. Birmingham, 214 Kan. 769, 776, 522 P.2d 959 (1974).

“Whether a lessee has performed his duties under the expressed or implied covenants is a question of fact. In the absence of a controlling stipulation, neither the lessor nor the lessee is the sole arbiter of the extent, or the diligence with which, the operations and development shall proceed. The standard by which both are bound is what an experienced operator of ordinary prudence would do under the same or similar circumstances, having due regard to the interest of both.” Adolph v. Stearns, 235 Kan. 622, Syl. ¶ 1, 684 P.2d 372 (1984).

The Adolph court advanced the general principle that

“[t]his court, when speaking of these covenants, places great emphasis on the individual property rights and construes oil and gas leases to promote development and prevent delay upon the theory that the lessor has a right to have his land developed as rapidly as possible. To insure that end when a lease itself does not contain specific expressions regarding production or development, the law determines the intention of the parties and the court has imposed such duties upon the lessees. The legislature as a matter of public policy has by statute included the implied covenant to...