Sundheim v. Reef Oil Corp., 89-498

CourtUnited States State Supreme Court of Montana
Citation247 Mont. 244,806 P.2d 503
Docket NumberNo. 89-498,89-498
PartiesNoel L. SUNDHEIM, Bertha Sundheim and Leona M. Johnson, Plaintiffs and Appellants, v. REEF OIL CORPORATION, a Montana corporation, Woods Petroleum Corporation, a foreign corporation, and Andy Hiestand, as Personal Representative of the Estate of Frank Hiestand, deceased, d/b/a Saratoga Production Company, Defendants and Respondents.
Decision Date14 February 1991

Charles L. Neff; Bjella Neff Rathert Wahl & Eiken, Williston, N.D., for plaintiffs and appellants.

Loren J. O'Toole, O'Toole & O'Toole, Plentywood, for Reef Oil Corp. & Andy Hiestand.

W. Anderson Forsythe, Moulton, Bellingham, Longo & Mather, Billings, for Woods Petroleum.

McDONOUGH, Justice.

Plaintiffs, Noel Sundheim, Bertha

Sundheim and Leona Johnson (hereinafter referred to as Sundheims) appeal from an order of the Fifteenth Judicial District, Roosevelt County, granting summary judgment in favor of defendants, Reef Oil Company, the estate of Frank Hiestand, and Woods Petroleum Corporation. We affirm in part and reverse in part.

The issues presented for our review are:

1. Whether the District Court correctly granted summary judgment on the Sundheims' allegations of breach of the implied covenants to protect and reasonably develop the leasehold and breach of the prudent operator standard, which were asserted against Reef Oil Company and the estate of Frank Hiestand;

2. Whether the District Court correctly granted summary judgment in favor of Woods Petroleum Corporation on the grounds that Sundheims' claims against it were barred by the statute of limitations;

3. Whether the District Court correctly assessed Rule 11 sanctions against Sundheims and their attorney.

The Sundheims are the owners of mineral interests in land located in Roosevelt County in northeastern Montana. In May of 1967, they entered into oil and gas leases covering these interests. Those leases were entered into with W.C. Kaufman and they had ten year primary terms.

On March 10, 1969, the leases were assigned to Woods Petroleum Corporation. In 1974, Woods Petroleum entered into a Dry Hole Contribution Agreement with Anadarko Production Company, which had a lease on land adjacent to the Sundheim leasehold. Woods agreed to provide financial assistance in drilling a well on a lease held by Anadarko. In return, Anadarko promised to share all well data and structural information obtained through drilling the well. Anadarko found oil and the well initially produced 596 barrels of oil a day.

Woods Petroleum decided to drill its own well on the Sundheim leasehold. This well, Sundheim No. 1, was completed in March of 1975 and had an initial production of 419 barrels per day.

In 1976, production on the Sundheim No. 1 well began to decline. In an effort to increase production Woods installed a pumping unit on the well. Production, however, continued to decline and in 1977 the sucker rods broke and production ceased.

Following this breakdown, Woods Petroleum considered whether further investment should be made to rework the well and reestablish production. Woods determined that no more than $20,000.00 would be spent on reworking the well. According to an internal memorandum, its engineers determined that low production was caused by reservoir conditions. No mention is made of the possibility that the well was not producing large enough amounts of oil due to mechanical problems. Some work was then done on the well; however due to Woods' belief that the decline in production was caused by reservoir conditions, the well was cemented in, on July 20, 1977.

Following this discontinuance, Reef Oil Corporation contacted Woods Petroleum. Reef Oil was interested in acquiring the open well bore, tubing, wellhead, tanks and other equipment still intact and left at the well in return for Reef Oil assuming responsibility for operating and eventually plugging the well. Woods agreed to this arrangement and in July of 1978 the Sundheim No. 1 well was "sold" to Reef Oil. Before this "sale" took place Reef Oil entered into new oil leases with the plaintiffs. These leases provided for a term of three years and contained provisions for annual delay rentals of $1.00 per acre per year.

According to deposition testimony, Reef Oil did not have the financial ability to redrill the well. Apparently, it was Reef Oil's intent to acquire the well and then attempt to interest others to develop the prospect. Reef Oil retained E. Earl Norwood, a certified petroleum geologist to do an in-depth geologic analysis. Norwood reported the decline in production was caused by mechanical problems and was not caused by reservoir conditions. This conclusion is supported by another engineer, Robert M. Watkins. According to Mr. Watkins, the well's low production probably resulted because it was not backflushed with fresh water to clear out salt accumulations which restricted the flow of oil.

Reef Oil did not have the financial ability to rework the well. Consequently, nothing was done with it until the early part of 1980, when Reef Oil assigned the Sundheim leasehold to Frank Hiestand. In 1981, Heistand worked out a farmout arrangement with a Canadian Oil Company who drilled a new well, the Sundheim No. 2 well, which was 300 feet to the south of the Sundheim No. 1 well. This new well yielded only salt water. According to the Sundheims, as much as 145,000 barrels of oil were drained from their leasehold by adjacent oil wells during the time period between 1977 and 1981.

On January 30, 1986 the Sundheims filed a complaint against Reef Oil Corporation, Woods Petroleum Corporation, Frank Hiestand and American Penn Energy. American Penn Energy was dismissed by stipulation of the parties. In their amended complaint against the remaining three defendants, the Sundheims set forth three separate counts alleging that the defendants breached the implied covenant to protect their leasehold from drainage, the implied covenant to reasonably and prudently develop the leasehold, and the implied covenant to reasonably and prudently operate the existing Sundheim No. 1 well. Frank Hiestand subseqeuntly died and Andy Hiestand, the personal representative of his estate was substituted as a party-defendant.

On February 17, 1987, Reef Oil moved for summary judgment. Reef's motion was granted on May 18, 1987. In its memorandum in support of its order of summary judgment, the District Court held that the Sundheims were barred from bringing an action for breach of the implied covenant to protect from drainage because they had not served written notice upon Reef Oil and demanded it drill an offset well. The court further held that Reef Oil did not breach the implied covenant of reasonable development because the Sundheims accepted delay rentals and because this covenant does not arise until after production has been obtained on the leasehold. The District Court dismissed Sundheims' third cause of action on the ground that the implied covenant to prudently operate a well is not an independent cause of action.

Woods Petroleum moved for summary judgment in January of 1988. The District Court granted this motion and held that any claims against Woods Petroleum were barred by the statute of limitations, § 27-2-202(1), MCA. On August 4, 1989, the District Court dismissed Hiestand from the action for the same reasons contained in its order granting summary judgment in favor of Reef Oil. Finally, the District Court, believing that the Sundheims' attorneys purposely misled it, assessed Rule 11 sanctions against the plaintiffs and their attorney in the amount of $13,924.90. This appeal followed.

I. Reef Oil Corporation and Frank Hiestand.

As stated above, the Sundheims based this lawsuit on three separate allegations. In summary, their amended complaint alleged that the defendants breached the implied covenants of protection, to reasonably develop the leasehold and to prudently operate the existing well. As a result, Sundheims allege the defendants are liable for damages. The District Court granted summary judgment in favor of defendants Reef Oil and Frank Hiestand on each of these counts. We will discuss each issue separately.

A. The Implied Covenant to Protect from Drainage.

Each of the Sundheims' allegations are based upon covenants which have been implied by common law, into oil and gas leases. The purpose of the implied covenants is to fully effectuate the intentions of the parties to a lease. Obviously, the primary intention is to produce oil and gas for a profit and to obtain royalties for the lessor. U.V. Industries Inc. v. Danielson (1979), 184 Mont. 203, 602 P.2d 571. To insure this result is obtained the courts have implied, through the express terms of oil and gas leases, certain duties which must be performed by the lessee. These duties include the covenant to protect from drainage and the covenant to reasonably develop the leasehold, both of which are at issue in the case now before us.

The Sundheims maintain that Reef Oil Corporation and Frank Hiestand breached the covenant to protect their leasehold from drainage. In their brief, the Sundheims estimate that as much as 145,000 barrels of oil were drained from their leasehold by adjacent oil wells. They further argue that Reef Oil and Hiestand, in accordance with their duty to protect, should have drilled offset wells in order to capture the oil before it was drained. Because these defendants failed to drill such wells, they breached the covenant to protect, and are therefore liable for damages for the value of the oil drained from Sundheims' leasehold.

The District Court did not reach the merits of the Sundheims' argument because it found that they were barred from asserting their claim due to the fact that they failed to give written notice of the drainage or demand that an offset well be drilled. In reaching its conclusion, the court relied upon U.V. Industries Inc. v....

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4 cases
  • Smith v. Amoco Production Company, 84,076.
    • United States
    • United States State Supreme Court of Kansas
    • 21 Septiembre 2001
    ...a part of the written lease as if it had been expressly listed in the lease. 190 Okla. at 50. See also Sundheim v. Reef Oil Corporation, 247 Mont. 244, 806 P.2d 503 (1991) (the parties agreed that the 8-year statute of limitations relating to 272 Kan. 72 written contracts applied to the cov......
  • Cafer v. Ash
    • United States
    • Court of Appeals of Kansas
    • 26 Junio 2015
    ...authority they cite from other jurisdiction also all involved oil and gas leases, so is not helpful here. See Sundheim v. Reef Oil Corp., 247 Mont. 244, 806 P.2d 503 (1991) ; U.V. Indus., Inc. v. Danielson, 184 Mont. 203, 602 P.2d 571 (1979)holding modified by Sundheim v. Reef Oil Corp., 24......
  • Custody of R.R.K., In re, s. 92-424
    • United States
    • United States State Supreme Court of Montana
    • 27 Agosto 1993
    ...is demonstrated. We conclude, therefore, that Rule 11 sanctions were not warranted in this situation. See Sundheim v. Reef Oil Corp. (1991), 247 Mont. 244, 258, 806 P.2d 503, 512. Did the District Court err in ordering the Kolpins to pay Jeff Kolpin's share of the children's attorney's fees......
  • Walters v. McCormick, 94-35684
    • United States
    • United States Courts of Appeals. United States Court of Appeals (9th Circuit)
    • 24 Enero 1996
1 books & journal articles
  • CHAPTER 16 LEASE CLAUSE FLOW SHEETS
    • United States
    • FNREL - Special Institute Land and Permitting (FNREL)
    • Invalid date
    ...the 90 day limitation was an express condition of the continuance of the leasehold estate. DELAY RENTAL CLAUSE Sundheim v. Reef Oil Corp., 806 P.2d 503 (Mont. 1991). Pursuant to the delay rental clause, acceptance of payments by lessor relieved lessee of all drilling obligations including t......

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