U. V. Industries, Inc. v. Danielson, 14755

• Decision Date: 01 November 1979
• Docket Number: No. 14755,14755
• Citation: 184 Mont. 203,602 P.2d 571
• Parties: , 18 A.L.R.4th 127 U. V. INDUSTRIES, INC., a corporation, et al., Appellants, v. Russel D. DANIELSON, Robert V. Danielson, and Myrna Brodhead, Respondents.
• Court: Montana Supreme Court

Page 571

602 P.2d 571

184 Mont. 203, 18 A.L.R.4th 127

U. V. INDUSTRIES, INC., a corporation, et al., Appellants, v. Russel D. DANIELSON, Robert V. Danielson, and Myrna Brodhead, Respondents.

No. 14755.

Supreme Court of Montana.

Submitted Sept. 18, 1979.

Decided Nov. 1, 1979.

Crowley, Haughey, Hanson Tool & Dietrich, Billings, Cale Crowley, argued, Billings, for appellants.

Raymond K. Peete, argued, Billings, for respondents.

DALY, Justice.

This matter is before this Court on certification from the United States District Court for the District of Montana. Plaintiffs-respondents are grantees under a mineral deed from the owner and lessor of the oil and gas beneath the E1/2 of section 10 in Richland County, Montana. Defendants-applicants are the lessee and its assigns under the "Danielson" oil and gas lease covering this tract; some of the applicants are or were also lessees under the "Lewis" oil and gas lease covering an adjacent tract, the NW1/4 of section 10. On May 12, 1975, respondents, the grantees, brought suit in state District Court in Richland County, requesting damages from the applicants for the period between February 3, 1970 and September 14, 1972, for failure to drill an offset well to protect their oil interests from drainage by a producing well on an adjacent tract of land (Lewis lease). The case was removed to the United States District Court for the District of Montana, which has certified several issues to this Court for declaratory judgment regarding applicable Montana law, on application of the lessees pursuant to Rule 1 of the Rules of this Court.

The facts in this case are complex, but the parties are in substantial agreement as to those facts, which follow in summary form. There are two oil and gas leases involved in this suit the "Danielson" lease covering the E1/2 of Section 10, and the "Lewis" lease covering the adjacent NW1/4 of Section 10. On December 30, 1968, Hilda Danielson, respondents' mother and predecessor in interest, executed a five-year primary term, "unless delay rentals" oil and gas lease ("Danielson" lease) to applicant Empire State Oil Co., which subsequently assigned it to the other applicants. This lease contained a clause providing that no change in ownership of the mineral interest would be binding upon the lessee until it received written notice thereof. On July 24, 1970, Mrs. Danielson conveyed her interest to her five children, three of whom are respondents, in a mineral deed subject to the existing lease. The deed was recorded on September 20, 1971.

Meanwhile, a producing well was completed by King Resources Co. on the adjacent Lewis tract on February 3, 1970. Two of the applicants, U. V. Industries, Inc. (through its predecessor United States Smelting, Refining and Mining Company), and Wolf Corporation were at relevant times part owners of this leasehold interest in the Lewis tract. Under the dates July 1 and July 26, 1972, U. V. Industries received letters on behalf of two of the plaintiffs demanding that U. V. Industries drill an offset well in the NE1/4 and compensate them for drainage resulting from production from the well on the adjacent Lewis lease. This demand was refused. U. V. Industries first received a copy of the mineral deed from Mrs. Danielson to her five children on August 2, 1972. All delay rentals through December 1972 were paid and accepted.

Prior to September 14, 1972, the spacing of wells drilled on Section 10 was governed by statewide spacing orders issued by the Board of Oil and Gas Conservation. The statewide spacing order governing well spacing in the formation and depth to which the Lewis well was drilled in effect at the time the well was drilled provided that one well could be drilled and operated on each quarter section (160 acres). This order was changed by the Board's Order No. 16-71 of May 13, 1971, which provided that one well could be drilled and produced on 320 acres at this depth. Under the May 13, 1971 order, the 320 acre spacing unit would be composed of two contiguous north-south or east-west quarter sections designated by the lease operator, which did not necessarily have to be within the same section.

On September 14, 1972, the Montana Oil and Gas Conservation Board held a hearing at which respondents and applicant U. V. Industries were represented. The Board issued a specific well spacing order superseding the statewide spacing order for the particular production field involved in the present controversy (Lonetree Creek field). This order designated the N1/2 of Section 10 as a production spacing unit. The designated well spacing unit includes the existing, producing Lewis well on the NW1/4 and it also includes the NE1/4 owned by the respondents, where they are alleging applicants had a duty to drill an offset well. Subsequently, on September 15, 1972, all parties entered a voluntary pooling and unit agreement covering this field.

Respondents brought the present action seeking damages under the common law "offset drilling rule." The common law theory implies in every oil and gas lease a covenant on the part of the lessee to protect the premises of his lessor from drainage of an adjacent producing well by drilling an offset well.

The threshold issue is: (1) Whether or not the common law judicial remedy of a civil suit for damages in state District Court under the offset drilling rule has been abolished by enactment of the 1953 Montana Oil and Gas Conservation law; i. e., does the Board of Oil and Gas Conservation have exclusive jurisdiction to determine such controversies? If this question is determined adversely to applicants, there are several subsidiary issues:

(2) Was the lessor or her grantees (respondents) required to serve written notice or demand on the lessee or its assigns (applicants) to drill an offset well; if so, did the lessee have a reasonable time thereafter in which to comply; and, when does the obligation of the lessee, if any, to pay damages commence?

(3) What is the effect of the "no change in ownership until written notice" clause in the lease and certain provisions of the mineral deed on the rights of the parties?

(4) What is the appropriate statute of limitations?

The applicants' contentions are as follows:

Issue # 1. Enactment of the 1953 Oil and Gas Conservation Act, sections 82-11-101 et seq., MCA, has eliminated and abolished actions to prevent drainage by producing wells on adjacent land based on the common law offset drilling rule theory. The power to conduct public evidentiary hearings, issue subpoenas, establish well spacing units, order involuntary pooling of interests within the same, grant or deny permission to drill wells, prevent waste and protect correlative rights is now committed by statute to the discretion of the Board of Oil and Gas Conservation. State District Courts, therefore, no longer have jurisdiction to entertain and decide an isolated part of the whole scheme of discretionary administrative determinations vested in the Board by statute. Involuntary pooling of interests within a well spacing unit by order of the Board affords the same kind of relief as was formerly granted by the common law judicial remedy of a civil suit for damages in the state District Court under the offset drilling rule. At any time after they acquired their interest and before the Board order of September 14, 1972, plaintiffs-respondents had the statutory right to apply to the Board of Oil and Gas Conservation for relief but did not do so. No implied covenant can exist which would authorize a District Court to require a lessee to drill an offset well without permission of the Board, or one which would, if drilled, violate statutory purposes or restrictions or a valid order of the Board, nor award damages if the lessee failed to do so.

Second, the same issues of fact regarding the extent and location of the reservoir or pool with respect to the lands, and whether or not the Lewis well does in fact drain oil from beneath the NE1/4, are involved in both a common law action based on implied covenant and any statutory proceedings before the Board. Plaintiffs-respondents cannot collaterally impeach the Board's determination of these same factual issues, which it has already decided and which are Res judicata. Furthermore, the District Court cannot invade the power to make discretionary determinations vested by statute in a state board such as where, how many, and under what circumstances wells can be drilled and the spacing and pooling thereof. It cannot substitute its discretion for a valid discretionary order made by the Board.

Third, plaintiffs-respondents waived their right, if any, to require applicants to drill an offset well to protect them from drainage by a producing well on the Lewis tract by their acceptance of delay rental payments through December 1972.

Issue # 2. The following arguments need only be considered if the Court determines the threshold issue adversely to the applicants; that is, if the Court decides that the remedy of a civil suit for damages in the District Court is still available for a lessee's breach of the implied covenant to protect his lessor from drainage by drilling an offset well. First, the lessor or her grantees were required to serve written notice or demand on the lessee or his assigns (applicants) to drill an offset well. This is required under the common law drilling rule. Berthelote v. Loy Oil Co. (1933), 95 Mont. 434, 28 P.2d 187. Since no notice or demand was made until the demand letters of July 1 and July 26, 1972, applicants could not be under any duty to drill an offset well before those dates. Furthermore, the law gives a lessee a reasonable time in which to drill an offset well following demand by his lessor, and subjects the lessee to damages for failure to do so only after a reasonable time has passed. Applicants here did not have a reasonable time to comply after they received notice, because a reasonable time would be...