Sunbelt Exploration Co. v. Stephens Production Co.

• Decision Date: 10 April 1995
• Docket Number: No. 94-1233,94-1233
• Citation: 320 Ark. 298,896 S.W.2d 867
• Parties: , 131 Oil & Gas Rep. 229 SUNBELT EXPLORATION CO., Harold Oliver, Mabel Oliver, Donald Newton, Arlaween Newton, Drucilla Jones, Shelvon Gregory, & Stanley Gregory, Appellants, v. STEPHENS PRODUCTION CO. & Chevron USA, Inc., Appellees.
• Court: Arkansas Supreme Court

Page 867

896 S.W.2d 867

320 Ark. 298, 131 Oil & Gas Rep. 229

SUNBELT EXPLORATION CO., Harold Oliver, Mabel Oliver, Donald Newton, Arlaween Newton, Drucilla Jones, Shelvon Gregory, & Stanley Gregory, Appellants, v. STEPHENS PRODUCTION CO. & Chevron USA, Inc., Appellees.

No. 94-1233.

Supreme Court of Arkansas.

April 10, 1995.

Dorsey Ryan, Matthew Horan, Fort Smith, for appellants.

Thomas A. Daily, Michael C. Carter, Douglas M. Carson, Fort Smith, for appellees.

GLAZE, Justice.

This case involves oil and gas leases and, as such, the facts leading to the present appeal are lengthy and complicated. Because the facts are important to our decision, they are set out below as simply as possible.

In the 1950s, the appellees Stephens Production Co. and Chevron USA, Inc. acquired oil and gas leases in the Arkoma Basin from the appellant lessors' predecessors in title. The leases provide for the payment of royalties on the basis of market value, with the royalties constituting the lessors' chief consideration for conveying their rights in the leaseholds. All of the land covered by the leases at issue were pooled by the Arkansas Oil and Gas Commission into the Gregory Unit. The Gregory Unit is adjoined by three other units, the Blakely Unit, the Gooch No. 1 Unit, and the Gooch No. 2 Unit. Stephens also holds all the leases in the adjoining three units, and the Gregory Unit lessors also own mineral interests in one or more of the adjoining three units. All four units, the Gregory, Gooch Nos. 1 and 2, and the Blakely, share a number of reservoirs at various depths which contain natural gas. The subject of this suit is the Dunn C or Paul Barton reservoir, (hereinafter the Dunn reservoir), which lies underneath all four units. ¹

In 1959, Stephens drilled the Gregory No. 1 well in the Gregory Unit, and in 1971, Stephens recompleted the Gregory No. 1 at two additional depths to reach the R. Barton and Dunn reservoirs. ² At the time, it was not known that the Dunn reservoir contained a fault located under the Gregory Unit which was caused by the breaking of the rock planes. The result of this fault was to divide the reservoir into two parts, trap the gas, and prevent the Gregory No. 1 well from producing or draining gas from the southern portion of the Dunn reservoir. No other wells were drilled in the Gregory Unit for more than thirty years. In 1961, Stephens and Chevron drilled a well in the Blakely Unit that produced from the Dunn reservoir, and between November 2, 1961, and September 17, 1985, they drilled offset wells in the Gooch units which produced gas from the Dunn reservoir on the south side of the fault. ³

In the late 1980s, appellant Sunbelt Exploration Company began looking for prospects in the Arkoma Basin. Not realizing that the Paul Barton and Dunn C reservoirs were one and the same and, thereby, concluding that Stephens and Chevron had abandoned their leaseholds in the Gregory Unit, Sunbelt purchased top leases from all the appellant Gregory Unit lessors. See Crystal Oil Co. v. Warmack, 313 Ark. 381, 855 S.W.2d 299 (1993) (top lease defined). By letter dated July 6, 1990, Sunbelt informed Stephens that Stephens' and Chevron's leases in the Gregory Unit were subject to judicial termination, and requested that Stephens release the undeveloped balance of the unit for exploration and production by Sunbelt. On July 11, Stephens responded that it was planning to drill in the unit and would do so.

Subsequently in October 1990, Stephens completed drilling the Gregory No. 2 well which reached the Orr reservoir and provided conclusive information that the Dunn reservoir did contain a fault. As a result, Stephens drilled the Gregory No. 3 and No. 4 wells for additional production of the Orr reservoir and the Dunn reservoir south of the fault. Chevron did not participate in the drilling of the three new wells, and instead entered into farm-out agreements with farmees who were unaware of Sunbelt's actions. ⁴

In June 1991, Sunbelt filed suit in federal court against Stephens and Chevron. That suit was dismissed for failure to join the lessors as indispensable parties. Subsequently, Sunbelt entered into agreements with the lessors that allowed Sunbelt to sue Stephens and Chevron, share any award with the lessors, and hold the lessors harmless for any litigation costs.

On November 26, 1991, Sunbelt and the lessors filed their complaint in circuit court against Stephens and Chevron "to try title" of the Gregory Unit leases, ejectment of Stephens as a trespasser, damages, an accounting, and other relief. Sunbelt ⁵ also claimed abandonment of the leases by Stephens, breach of the implied covenant to explore and further develop, and breach of express covenants to develop and protect from drainage. Finally, Sunbelt requested a declaratory judgment that the top leases it held were effective from the date of taking, and that the old leases with Stephens were abandoned effective that same date. In sum, Sunbelt requested judicial cancellation of Stephens' and Chevron's leases so that its top leases would then become effective. Exceptions were made for the Gregory No. 1 well and the rights of Chevron's farmees in the Gregory Nos. 2, 3, and 4 wells. Stephens and Chevron filed separate answers both challenging circuit court's subject matter jurisdiction, claiming Sunbelt's action was not to try title, but instead was for cancellation of oil and gas leases, and requested transfer to chancery court. Further, Stephens denied any breach or trespass, and pled affirmative defenses.

On May 12, 1993, the circuit court granted Stephens' motion to transfer to chancery court. Other motions were filed by the parties and other orders were entered which are not at issue on appeal.

The case was tried before the chancellor January 10 through 12, 1994. On May 11, following submission of post-trial briefs, the chancellor entered his judgment and opinion in favor of Stephens and Chevron, and dismissed Sunbelt's complaint with prejudice. On that same date, the chancellor entered an order nunc pro tunc modifying a clerical error in his judgment and opinion. On June 3, Stephens filed a motion for award of attorneys' fees. On July 5, the chancellor entered an order holding that he had jurisdiction of the matter and allowed Sunbelt to submit additional arguments. By opinion entered July 7, the chancellor awarded attorneys' fees against Sunbelt only and in favor of Stephens in the amount of $67,440.38 and in favor of Chevron in the amount of $19,621.47. Sunbelt appeals from the circuit court order of transfer, the chancellor's judgment and opinion, and the award of attorneys' fees.

First, we consider Sunbelt's challenge to circuit court's order of transfer and chancery court's jurisdiction over this matter. Sunbelt argues that because its complaint requested a writ of ejectment, the circuit court had jurisdiction and cites for support Henry v. Gulf Refining Co. of La., 176 Ark. 133, 2 S.W.2d 687 (1927). There, the lessee brought action in circuit court in ejectment against Gulf, where the lessee claimed the right to possession under mineral leases. However, Henry is distinguishable from the present case because in Henry: (1) there was no challenge to the court's jurisdiction, (2) the case involved determination of whether the lessee had performed under the express terms of the leases, (3) the parties claimed under a common source of title, (4) the lessee had been ousted from possession, and (5) the lessee was seeking adjudication of title and restoration of possession.

Here, Sunbelt does not contend Stephens' interest in the Gregory Unit terminated automatically under the terms of the lessors' leases with Stephens. Further, Sunbelt, by its own admission, held only top leases which by their definition are inferior to the original leases held by Stephens. See Crystal Oil Co. v. Warmack, 313 Ark. 381, 855 S.W.2d 299 (1993). Sunbelt's interest under a top lease cannot become effective until either Stephens concedes abandonment and voluntarily relinquishes possession, or there is a judicial determination that Stephens' leases are cancelled.

Cancellation of an oil and gas lease is an equitable remedy and is appropriate when a breach of the implied covenant of reasonable development is shown. Roberson Enterprises, Inc. v. Miller Land & Lumber Co., 287 Ark. 422, 700 S.W.2d 57 (1985); Blair v. Clear Creek Oil & Gas Co., 148 Ark. 301, 230 S.W. 286 (1921). Cancellation of instruments is one of the well-recognized grounds of equity jurisdiction. American Ins. Co. v. Mountain Home Sch. Dist. No. 9, 300 Ark. 547, 780 S.W.2d 557 (1989). Although Sunbelt mentions ejectment in its complaint, the complaint necessarily speaks in terms of cancellation of Stephens' leases. Considering the required remedy in these matters, we believe Sunbelt's request for a judicial determination of cancellation was both appropriate and controlling. And finally, we note that subject matter jurisdiction is determined from the pleadings. Union Pacific R.R. Co. v. State ex. rel. Faulkner County, 316 Ark. 609, 873 S.W.2d 805 (1994).

Having determined that jurisdiction was properly in chancery, we turn to Sunbelt's appeal from the chancellor's decision on the merits. At trial, Sunbelt alleged Stephens acted imprudently by failing to recomplete the Gregory No. 1 well earlier than 1971, by failing to discover the Dunn fault before 1990, and by failing to prevent drainage.

In his opinion and judgment on the merits, the chancellor held there was no evidence indicating that Stephens acted imprudently in not recompleting the Gregory No. 1 well to the Dunn reservoir prior to 1971. He found the evidence was essentially uncontroverted that in 1959, when the Gregory No. 1 was drilled, the technology was not available to show whether significant amounts of gas existed in the Dunn reservoir. Further in 1971, it was only Stephens' implementation of extraordinary measures which allowed...