Tucker v. Hugoton Energy Corp.

• Decision Date: 09 July 1993
• Docket Number: No. 68344,68344
• Citation: 253 Kan. 373,855 P.2d 929
• Parties: Mary TUCKER, et al., Appellants/Cross-Appellees, v. HUGOTON ENERGY CORP., et al., Appellees/Cross-Appellants.
• Court: Kansas Supreme Court

Page 929

855 P.2d 929

253 Kan. 373

Mary TUCKER, et al., Appellants/Cross-Appellees, v. HUGOTON ENERGY CORP., et al., Appellees/Cross-Appellants.

No. 68344.

Supreme Court of Kansas.

July 9, 1993.

Syllabus by the Court

1. Where the trial court has made findings of fact and conclusions of law, the function of an appellate court is to determine whether the findings are supported by substantial competent evidence and whether the findings are sufficient to support the trial court's conclusions of law. Substantial evidence is evidence which possesses both relevance and substance and which furnishes a substantial basis of fact from which the issues can reasonably be resolved.

2. Where the trial court's findings of fact and conclusions of law are inadequate to disclose the controlling facts or the basis of the court's findings, meaningful appellate review is precluded.

3. A litigant must object to inadequate findings of fact and conclusions of law in order to give the trial court an opportunity to correct them. In the absence of an objection, omissions in findings will not be considered on appeal. Where there has been no such objection, the trial court is presumed to have found all facts necessary to support the judgment.

4. Generally, under the habendum clause of an oil and gas lease, oil or gas must be produced in "paying" or "commercial" quantities in order to perpetuate a lease beyond its primary term. Paying quantities is synonymous with commercial quantities. Although the phrase "in paying quantities" may not appear in an oil and gas lease, it implicitly is a part of the habendum clause.

5. It is generally accepted that the phrase "in paying quantities" in the "thereafter" provision (extension clause) of the habendum clause of an oil and gas lease means production of quantities of oil and gas sufficient to yield a profit to the lessee over operating expenses, even though the drilling costs or equipping costs are never recovered and even though the undertaking 6. Shut-in royalty clauses enable a lessee under appropriate circumstances to keep a nonproducing lease in force by the payment of shut-in royalties. Such a clause by agreement of the parties creates constructive production. The fact a lease is held by payment of shut-in royalties does not excuse the lessee from its duty to diligently search for a market and reasonably develop the leasehold. The "shut-in" royalty clause does not apply to circumstances where a well could be capable of producing a profit but for the time being is not maintained because a limited market exists.

as a whole may thus result in a loss to the lessee.

Gregory J. Stucky, Fleeson, Gooing, Coulson & Kitch, Wichita, argued the cause, and David G. Seely, of the same firm, was with him on the briefs, for appellants, cross-appellees.

Timothy E. McKee, Triplett, Woolf & Garretson, Wichita, argued the cause, and Robert J. Knapp, of the same firm, and Jim H. Goering, Foulston & Siefkin, Wichita, were with him on the brief, for appellees, cross-appellants.

LOCKETT, Justice:

This appeal arises from eight consolidated lawsuits tried to the court in which plaintiffs/appellants claimed certain of defendants' oil and gas leases had automatically terminated because the leaseholds had failed to produce gas in commercial quantities. The trial court ruled in favor of the plaintiffs in two cases and against them in six cases. Plaintiffs in those six cases appeal, claiming the trial court: (1) failed to make sufficient findings of fact to conclude the wells were producing or capable of producing gas in paying quantities; (2) erred in finding the shut-in royalty payments perpetuated the leases; and (3) erred in considering the suit as an equitable action for lease forfeiture rather than a legal action to terminate the leases. Defendants cross-appeal, claiming the trial court erred by not entering judgment in their favor on grounds the plaintiffs were estopped from claiming the leases terminated.

Plaintiffs-lessors are (1) certain landowners of the lands covered by the defendants' oil and gas leases involved in these lawsuits and (2) Plains Resources, Inc. (Plains). Defendants-lessees are (1) Hugoton Energy Corporation (Hugoton), (2) Plains Petroleum Operating Company (PPOC), (3) Hamilton Brothers Oil and Gas Corporation, (4) Texaco, Inc., (5) Mesa Mid-Continent Limited Partnership, and (6) Mesa Operating Limited Partnership. Defendant Hugoton is the successor operator to PPOC. The other defendant-lessees owned smaller working interests in the gas units but did not operate the units.

The wells involved in this lawsuit are in the Bradshaw Field in Hamilton County, Kansas. They were initially drilled in the 1960's by Kansas-Nebraska Natural Gas Company, Inc., now KN Energy, Inc. (KN Energy). The primary term of the various oil and gas leases expired long ago. Each of the wells has produced gas only and each produced gas nearly every month until the mid-1980's. KN Energy initially operated the wells and owned a substantial interest in the associated leasehold estates. It also owned the gathering and pipeline system which transported the gas produced from those wells.

Gas from these wells is of relatively low quality. The wells have relatively low deliverability, and they produce significant amounts of water. Because the wells produce large quantities of water, they cannot be turned on and off to meet current demands. They, therefore, require a high level of maintenance.

In 1983, KN Energy formed Plains Petroleum Company, a wholly owned subsidiary. KN Energy transferred its gas units in the Bradshaw Field to this new corporation and then entered into a Gas Purchase Contract for all the gas produced from the units.

As the price of gas increased, KN's sale of gas drastically decreased because of a decline in industrial gas sales. KN lost substantial sales, for instance, when a major commercial customer, a gas-fired energy plant, switched to coal. As a result of On September 13, 1985, Plains Petroleum Company became independent of KN Energy. Plains Petroleum Company then formed a wholly owned subsidiary, Plains Petroleum Operating Company, on December 1, 1986, and transferred its Bradshaw Field interests and the KN Energy gas purchase contract to PPOC.

the decline in gas sales, KN's purchases of natural gas under the gas purchase contract also declined.

In 1986, the wells involved in this appeal encountered mechanical problems and production from the wells ceased. PPOC elected not to repair and produce those wells because of the high cost of maintenance. The wells remained off production for more than three years, each subsequently resuming production at a different time. During those periods in which the wells were not producing, PPOC tendered "shut-in" royalty payments which were accepted by the lessors.

In 1989, PPOC decided to sell its properties in the Bradshaw Field. It prepared and distributed a Sales Brochure which contained information regarding its Bradshaw Field properties, including revenue and operating expense information for the wells for the 28-month period from January 1987 through April 1989. The brochure indicated that operating expenses exceeded revenues for each of the wells during that period.

In the summer of 1989, Plains Resources determined that the leases at issue had terminated because the wells were not producing in paying quantities or were not capable of producing in paying quantities. Consequently, Plains acquired new oil and gas leases covering the properties associated with the wells. In November 1989, Hugoton became the successor in interest to the original lessees when it acquired PPOC's leases covering those same properties.

Plaintiffs brought this action to terminate Hugoton's oil and gas leases.

TRIAL COURT DECISION

After reviewing the evidence, the trial court found that all the leases involved in the lawsuit had valid shut-in royalty payment provisions; when the six wells involved in this appeal were first shut down in 1986 it was for mechanical reasons; and PPOC subsequently chose to invoke the shut-in royalty payment provisions of the leases rather than to repair the wells because PPOC would not be able to recover its costs of repair at the price being paid by and the limited market available through KN Energy.

As relevant to this appeal, the trial court concluded that when the wells were shut down and shut-in royalty payments made, there was no market available for the sale of the natural gas that could be produced from the wells. The court also concluded that prior to and after the shut-in period, four of the wells were producing in paying quantities and were capable of producing in paying quantities when shut in and that, as to two of the wells, repairs had commenced within the time frame required by the leases but that a sufficient period of time had not passed to determine whether the revenue from the sale of gas would exceed the Lease Operating Expense (LOE).

The trial court refused to terminate defendants' leases in those six cases.

As noted previously, plaintiffs in those six cases appeal, and defendants cross-appeal. Because the record does not support plaintiffs' conclusion that the trial court considered this to be an equitable action for lease forfeiture rather than a legal action to terminate the leases, we do not address plaintiffs' third claim of error.

INSUFFICIENT FINDINGS OF FACT AND CONCLUSIONS OF LAW

Plaintiffs first claim the trial court's findings of fact and conclusions of law were insufficient to support its determination that the wells were producing or capable of producing gas in paying quantities. Plaintiffs, however, did not raise this issue with the trial court.

Where the trial court has made findings of fact and conclusions of law, the function of an appellate court is to determine whether the findings are supported by substantial competent evidence and whether the findings are sufficient to support ...