CHRISTIAN v A A OIL CORP BYRNE

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No. 12230 I N THE SUPREME C U T O THE STATE O MONTANA OR F F 1973 GORDON CHRISTIAN and LORENE CHRISTIAN, h i s wife, P l a i n t i f f s and Respondents, A. A. OIL CORPORATION, a c o r p o r a t i o n , Defendant, and ROBERT E. BYRNE, Defendant and A p p e l l a n t ; -."------ROBERT E. BYRNE, Cross -Complainant and A p p e l l a n t , OIL CORPORATION, a c o r p o r a t i o n , GORDON CHRISTIAN and LORENE CHRISTIAN, A. A. Cross-Defendants and Respondents. Appeal from: D i s t r i c t Court of t h e Ninth J u d i c i a l D i s t r i c t , Honorable R. D. McPhillips, Judge p r e s i d i n g . Counsel o f Record : For Appellant: Nelson and K a l b f l e i s c h , Shelby, Montana James A. Nelson argued, Shelby, Montana For Respondents: Aronow, Anderson and B e a t t y , Shelby, Montana Robert G. Anderson argued, Shelby, Montana Church, H a r r i s , Johnson and Williams, Great F a l l s , Montana Douglas C. A l l e n argued, Great F a l l s , Montana Submitted: Filed: January 22, 1973 -, F 2 7 1973 B Mr. J u s t i c e Frank I . Haswell delivered the Opinion of the Court. P l a i n t i f f landowners, Gordon and Lorene Christian, brought t h i s action t o q u i e t t i t l e t o separate o i l and gas leases owned by A . A . Oil Corporation and Robert E . Byrne, defendants. This appeal i s from a judgment in the d i s t r i c t court of Toole County by t h e Hon. R . D. McPhillips, d i s t r i c t judge, s i t t i n g without a jury. Judge McPhillips found A . A . O i l ' s 1741.64 acre lease v a l i d , subject t o a top lease on the same lands in favor of Robert E. Byrne; and finding an 867.42 acre lease valid in favor of Byrne. Byrne now appeals from the judgment r e l a t i n g t o the larger lease only. On April 5, 1940, James and Bertha Christian executed an "unless" type o i l and gas lease t o John Reynolds covering a t r a c t of about 1740 acres i n Tool e County, Montana. Shortly t h e r e a f t e r , t i t l e t o t h i s leasahold entered was assigned t o A . A. Oil Corporation. The lease was amended twice, f i r s t i n 1941 and again 1946, each time extending the lease f o r f i v e year periods. Incorporated i n t o one of the amendments was a provision t h a t i n t h e event the lessor should believe the lessee t o be in d e f a u l t of any of t h e covenants, lessor was t o give lessee notice in writing specifying t h e alleged violation and lessee was t o have f o r t y - f i v e days within which t o remedy any e x i s t i n g breach. The primary term of the lease expired on July 1 , 1951. In 1950 an o i l and gas well known as Christian #I was completed, with an estimated natural gas flow of 250,000 t o 500,000 cubic f e e t of gas per day. Christian #1 well was plugged and abandoned i n 1958 without any o i l or gas having been commercial l y sold therefrom. The d i s t r i c t court a l s o found t h a t d r i l l ing of Christian #2 commenced on July 1 , 1951 and was completed l a t e r t h a t same year. #2 was f i r s t purchased by Montana-Dakota U t i l i t y Co. Gas from Christian In November, 1954, Montana Power Co. s t a r t e d purchasing natural gas from said well. Cost of operation and supervision f o r producing i s provided by Montana Power Co. There i s no evidence t h a t Christian #2 was ever plugged and abandoned. The d i s t r i c t court found t h a t a t the time of t h e t r i a l Christian #2 had an estimated gas production of 1,500,000 t o 3,000,000 cubic f e e t of gas per day. N evidence was offered t o show the capacity t o be any d i f f e r e n t o except the testimony of Jerry Branch, a geologist, who t e s t i f i e d he thought the well t o be noncomnercial. The d i s t r i c t court allowed Branch t o t e s t i f y over repeated objections that sufficient foundation was not laid and that he was n o t qua1 ified t o t e s t i f y on the subject. After hearing Branch's t e s t i - mony, the court sustained the objections and disregarded Branch's testimony. N f a c t s were presented as t o whether Christian #2 had s u f f i c i e n t o pressure to force gas into a nearby pipeline. Gordon Christian gave notice on August 14, 1963, stating that A. A . Oil had n o t paid royalties or r e n t a l s , had failed t o conduct exploration, and that the lease would be declared forfeited " * * * unless the breaches of the terms of said o i l and gas leases are corrected and remedied within forty-five (45) days of the date of service of said notice." On August 19, 1963, Gordon and Lorene Christian executed t o Robert Byrne an o i l and gas lease on the same lands involved in the A . A . Oil lease. Byrne gave the Christians a d r a f t f o r $1,741.64 in payment, b u t i t was not presented f o r payment f o r nearly two years a f t e r issued. On t h i s same day, the Christians requested that the lease be returned due t o the conflicting prior lease with A. A. Oil. Byrne refused and duly recorded the lease. In August of 1963, Gordon and Lorene Christian commenced a quiet t i t l e action on the t r a c t in question against A . A. Oil and Robert Byrne. The object of the s u i t was to extinguish the leasehold i n t e r e s t s of Byrne and the A. A. Oil Corporation. Byrne now appeals from the judgment ex- tinguishing his leasehold i n t e r e s t . Gordon Christian died in June, 1965 and his e s t a t e was probated in Toole County. In October of 1966, Lorene Christian as executrix of his e s t a t e petitioned the court f o r authority t o r a t i f y the A. A . Oil lease, reciting t h a t a settlement had been reached between A. A . Oil and the e s t a t e . Over objections of Byrne, the probate court permitted the settlement. In July, 1965 A. A. Oil conveyed t h e i r lease t o Bernice Lutz, who i s holding in trust f o r Cedor Aronow and others, with a reservation of an overriding royalty and retention of two gas wells. The s i g n i f i c a n t issues raised upon appeal are: (1) What e f f e c t does a notice clause have on the term of the 1ease a f t e r expiration of the primary term? (2) Was the d i s t r i c t court correct i n finding the A. A. Oil Corporation lease a valid lease? (3) Does the principle of equitable estoppel have any application t o the f a c t s as presented i n t h i s case? (4) Did the probate court have authority t o r a t i f y the settlement of the A. A. Oil lease? (5) I s the evidence of Branch, the geologist, concerning c o s t s and production admissible? (6) I s i t permissible f o r a landowner t o s h i f t the burden of proof t o an adverse intervening lessee t o prove an underlying o i l and gas lease invalid? In Montana o i l and gas leases are t o be construed l i b e r a l l y i n favor of the l e s s o r and s t r i c t l y against the lessee. Schumacher v . Cole, 131 Mont. 166, 309 P.2d 31 1 ; Thomas v . Standard Development Co., 70 Mont. 156, 224 P. 870. And f u r t h e r , while f o r f e i t u r e s a r e usually not favored i n the law, due t o the peculiar nature of o i l and gas l e a s e s , f o r f e i t u r e s a r e here favored. Solberg v. Sunburst Oil & Gas Co., 76 Mont. 254, 246 P. 168. The f i r s t issue, the e f f e c t a notice clause has on t h e term of the lease a f t e r expiration of the primary term, i s the principal issue upon appeal. In t h e original o i l and gas lease executed on April 5, 1940, the habendum clause provided I' *** t h a t this lease s h a l l remain i n force f o r a term of 5 years from t h i s date and as long t h e r e a f t e r a s o i l o r gas, or e i t h e r of them, i s produced from said land by the lessee." 1941, the primary term was extended " original and *** Subsequently, on July 1 , * * * subject t o compliance with i t s amended conditions." In paragraph (d) of t h e amended lease appears the following provisions: " ( d ) - That i n event l e s s o r has occasion t o charge t h a t lessee or assigns may n o t be carrying out his (or i t s ) obligations under intent of terms of lease and amendments thereof * * * Lessor shall notify Lessee i n writing, specifying the alleged breach and Lessee shall have the full period of forty-five days from and after date of service of such notice within which to remedy any existing breach * * * lease shall terminate at the option of the 1 essor" . Byrne contends that the above notice provision has no application to an expired oil and gas lease, citing Schumacher this Court held that an "unless" type oil and gas lease may expire automatically at the conclusion of the primary term without a declaration of forfeiture or notice to a lessee if such be the general intent of the lease. See also McDaniel v. Hager-Stevenson Oil Co., 75 Mont. 356, 243 P. 582. The Schumacher and McDaniel cases, however, can be distinguished. In those cases the Court found an automatic termination at the expiration of the primary term because no drilling, no payment of rentals, or anything else was ever done beyond the initial consideration for the lease. No notice is required and an "unless" type lease will automatically terminate if the lessee fails to commence drill ing, pay delay rentals, or comply with the other obligations in the habendum clause. But here the district court found that at the end of the primary term Christian #1 well had been drilled, having an estimated natural gas flow of 250,000 to 500,000 cubic feet of gas per day. In addition, A. A. Oil had commenced drilling the Christian #2 well. In light of these facts the district court was correct in finding that the A. A. Oil lease did not automatically terminate at the end of the primary term. . In Fey v A . A. Oi 1 Corp. , 129 Mont . 300, 285 P. 2d 578, an almost identical notice clause was present. There this Court ruled that the lessor who intends to claim forfeiture, where development is an element, has the duty to demand that development proceed or commence. In this respect, when an oil and gas lease contains a notice clause, compliance with that clause is necessary after expiration of the primary term of the lease where drilling has commenced, the well remains capable of producing, and the lessee is continuing to develop with reasonable diligence. After notice is given of claimed forfeiture, it is for the court to determine whether the amount of production or development is in accord w i t h the terms of the agreement. T h i s leads us t o the second issue involved i n t h i s appeal--whether the A. A . Oil lease continued in f u l l force and e f f e c t . The parties agreed t h a t the lease should continue in e f f e c t as long as o i l or gaswasproduced and the lessee exercises reasonable diligence in development. The 1941 amended 1ease specifically provides : "(e) - That i t i s understood and agreed t h a t the commencement of operations for development of o i l , and/or gas production upon said lands by lessee or assigns within the term of said lease and amendments thereof shall operate t o extend same and l e s s e e ' s rights, privileges and i n t e r e s t s as hereunder f o r and during such period of time as Lessee or assigns shall prosecute such operations with reasonable diligence a f t e r the term expiration hereof, and in the event o i l and/or gas in commercial quantity be discovered as a r e s u l t thereof, t h i s lease shall thereupon be and thereafter remain as f u l l y in force and e f f e c t as though such discovery had been accomplished within the term hereof as hereinbefore stated". The t e s t f o r determining whether there was sufficient production or whether the lessee was acting with reasonable diligence in producing and marketing the gas from the leased lands is the diligence which would be exercised by the ordinary prudent operator having regard to the i n t e r e s t s of both lessor and lessee. Sullivan, Handbook of Oil and Gas Law, S 91, p. 173, 2 Brown, Oil and Gas Leases, 2d ed., g16.02, p. 16-49. This i s a question of f a c t t h a t will depend upon the f a c t s and circumstances of each case. Berthelote v. Loy Oil Co,, 95 Mont. 434, 28 P.2d 187. The rule pertaining t o o i l i s different from gas due t o the peculiar characteristics of producing gas. Oil may be stored above ground in tanks or other receptacles and may be moved t o the market by various modes of Gas must be stored below ground and i s moved to the market transportation. only by pipeline. In addition, the product of a gas well can only be trans- ported to a market when the volume and pressure are sufficient. Oil & Gas Law, § 2 Williams, 853, p. 388. The parties t o the lease involved here may well have had t h i s problem i n mind. Paragraph ( c ) of the amended lease provides: " ( c ) - That i f natural gas only, or as long as natural gas only, i s found in comercially productive amounts on t h e lands covered by said leases and amendments thereto, Lessee Is and Assigns ' obl igations shall not require the producing of same until there is a commercial market a v a i l able f o r such natural gas * * *." Ordinarily, the mere discovery of o i l and gas is not s u f f i c i e n t under a lease continuing, a s i n t h e present case, f o r "as long t h e r e a f t e r as o i l o r gas i s produced." The o i l or gas must be withdrawn from t h e land and reduced t o possession f o r use i n commerce, especially where t h e real consideration f o r the lease i s the proceeds. Here we a r e dealing w i t h gas producing wells only. The discovery of gas i n commercial q u a n t i t i e s during the primary term s a t i s f i e s t h e " t h e r e a f t e r " provisions of the habendum clause f o r a period of time, and thereby extends t h e lease i n t o t h e secondary term. After t h e mineral i s discovered the lessee i s required t o use reasonable diligence i n operating the well and marketing t h e product within a reasonable time. Failure t o do so will r e s u l t i n termination of the lease under the habendum clause a f t e r t h e expiration of the primary term. Williams, Oil & Gas Law, Berthelote v . Cole, supra; 2 s 854, p. 394; Sullivan, Handbook of Oil and Gas Law, 5 4 1 , p. 97, 5 4 3 , p. 100. I t has been held s u f f i c i e n t , under a lease similar t o t h e one a t issue here, t o produce gas i n commercial q u a n t i t i e s , even though the gas i s not i n f a c t marketable because there was no available pipeline f a c i l i t i e s or no commercial market w i t h i n the area. Fey v. A. A. Oil Corp., 129 Mont. 300, 285 P.2d 578; Brown, Oil and Gas Leases, 2d ed., 5 5.06, p. 30. How- ever s a t i s f a c t i o n of t h e marketing covenant i n paragraph C of t h i s lease will not s a t i s f y the habendum clause i n d e f i n i t e l y . After a reasonable time t h e lease will expire i f there i s no production. The d i s t r i c t court found t h e prevailing price paid f o r gas by the pipeline owner of s i x cents per thousand cubic f e e t ( f i v e cents f o r t h e years 1953 t o 1956, s i x cents from 1956 t o 1970) was exceedingly modest and suggestive of the f a c t t h a t a market f o r the gas i n t h e quantity which t h e well was capable of delivering did not e x i s t . Christian #2 well had an estimated producing capacity of 1,500,000 t o 3,000,000 cubic f e e t of gas per day. B u t there was no evidence t h a t a commercial market was a v a i l a b l e t o purchase t h e gas. Further, t h e r e was no competent evidence t o show t h a t t h e gas w e l l d r i l l e d c o u l d n o t produce gas i n paying q u a n t i t i e s . This Court i n B e r t h e l o t e s e t down t h e r u l e i n r e f e r e n c e t o t h e " t h e r e a f t e r " clause t h a t t o continue t h e lease a f t e r t h e f i x e d term r e q u i r e s t h a t o i l o r gas i s produced i n paying q u a n t i t i e s . There t h i s Court upheld t h a t p a r t o f t h e i n s t r u c t i o n t o t h e j u r y which d e f i n e d "paying q u a n t i t i e s " t o mean p r o d u c t i o n i n such q u a n t i t i e s as w i l l pay a p r o f i t t o t h e lessee over o p e r a t i n g expenses, excluding t h e i n i t i a l c o s t o f d r i l l i n g and equipping the wells. This i s s t i l l t h e law i n t h i s s t a t e . Due t o t h e alignment of t h e p a r t i e s i n t h i s a c t i o n t o q u i e t t i t l e t h e burden r e s t e d upon Byrne t o prove t h a t t h e A. A. O i l we1 1 was incapable o f producing gas i n paying q u a n t i t i e s . Byrne was r e q u i r e d t o prove t h a t A. A. O i l d i d n o t use reasonable d i l i g e n c e i n marketing t h e gas. f a i l e d t o meet h i s burden o f p r o o f . Byrne Therefore, t h e d i s t r i c t c o u r t was c o r r e c t i n f i n d i n g t h a t t h e A. A. O i l lease continued i n f u l l f o r c e and e f f e c t . D i r e c t i n g our a t t e n t i o n t o t h e t h i r d i s s u e f o r review, Byrne r e l i e s upon t h e d o c t r i n e o f e q u i t a b l e estoppel, c i t i n g s e c t i o n 93-1301-6, 1947. R.C.M. Byrne contends t h a t t h e C h r i s t i a n s l e d him t o b e l i e v e that A. A. O i l ' s lease was e x p i r e d and showed him i n t h e a b s t r a c t o f f i c e w r i t t e n evidence o f t h e " n o t i c e " o f A. A. O i l ' s breach. The d i s t r i c t c o u r t , however, found t h a t Byrne was aware a t t h e time of o b t a i n i n g t h e lease t h a t A. A. O i l had a p r i o r lease o f r e c o r d covering t h e same land. Byrne examined t h e records i n t h e Shelby a b s t r a c t o f f i c e and r e l i e d thereon. Where t h e r e i s no r e l i a n c e on any a l l e g e d misrepresentation, e q u i t a b l e estoppel does n o t apply.. Next, Byrne contends t h a t t h e probate c o u r t , being a c o u r t o f l i m i t e d j u r i s d i c t i o n , had no a u t h o r i t y t o a l l o w t h e e x e c u t r i x o f t h e Gordon C h r i s t i a n e s t a t e t o compromise and s e t t l e t h e d i s p u t e w i t h A. A. O i l . It i s t r u e t h a t t h e probate c o u r t does n o t have j u r i s d i c t i o n over questions o f t i t l e t o r e a l property. Maury v. Jones, 25 F.2d 412 ( 9 t h C i r . 1928). But t h e probate c o u r t does have a u t h o r i t y t o a u t h o r i z e an e x e c u t r i x t o s e t t l e c l a i m s a g a i n s t the estate. The probate c o u r t here simply a u t h o r i z e d a compromise s e t t l e m e n t of a disputed claim involving the Gordon Christian e s t a t e and in no sense adjudicated t i t l e t o real property. Byrne also contends that the testimony of Branch, a local geologist, concerning costs of supervision and record keeping was admi ssi bl e. The d i s t r i c t court permitted Branch t o t e s t i f y i n t h i s respect b u t disregarded such testimony in i t s findings of f a c t because no proper foundation was l a i d . Branch i s a petroleum and consulting geologist qualified t o t e s t i f y as t o certain aspects of o i l and gas production. However, no proper foundation was laid concerning his qualifications t o give expert opinion evidence in the f i e l d of cost accounting or general operation of wells other than his admission t h a t he signed an operating agreement. To attack the A. A. Oil lease requires a qualified expert, such as a reservoir engineer, t o t e s t i f y as t o the reservoir capacity of the we1 1 , i t s bottom hole pressure or producing pressure, and whether the well was capable of producing in paying quantities. The final issue f o r review concerns the burden of proof. Byrne the claims that he relied upon/Christiansl intentions to obtain a release of the A. A. Oil lease. H contends t h a t the Christians are estopped from take ing a position favorable t o A. A. Oil which has the e f f e c t of placing the burden on him t o prove the validity of his own lease. This Court in Fiers v . Jacobson, 123 Mont. 242, 211 P.2d 968, comnented t h a t a claim of equitable estoppel may n o t be founded on a true statement as t o a party's present The intention with regard t o his future act. /Christians are not required t o take a position in favor of one lessee or the other. In the instant case the burden of proof rested on Byrne's shoulders to establish the invalidity of the prior A. A. Oil lease in order to e n t i t l e h i m t o judgment. This he failed to do. For the foregoing reasons, the judgment of the d i s t r i c t court i s affirmed. Associate Justice ~ s b o c i a t eJustices .

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