No. 89-498
IN THE SUPREME COURT OF THE STATE OF MONTANA
1991
NOEL L. SUNDHEIM, BERTHA SUNDHEIM
and LEONA M. JOHNSON,
Plaintiffs and Appellants,
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.
APPEAL FROM: District Court of the Fifteenth Judicial District,
In and for the County of Roosevelt,
The Honorable M. James Sorte, Judge presiding.
COUNSEL OF RECORD:
For Appellant:
Charles L. Neff; Bjella Neff Rathert Wahl & Eiken;
Williston, North Dakota
For Respondent:
Loren J. OIToole; OtToole & OtToole; Plentywood,
Montana (for Reef Oil Corp. & Andy Hiestand)
W. Anderson Forsythe; Moulton, Bellingham, Longo &
Mather; Billings, Montana (for Woods Petroleum)
Submitted on Briefs: January 31, 1991
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Decided: February 14, 1991
Filed: "..
Clerk
Justice R. C. McDonough delivered the Opinion of the Court.
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 ~istrictCourt 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
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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
llsoldn Reef Oil. Before this lfsalent
to 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,
5 27-2-202(l), 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. Danielson (1979), 184 Mont. 203, 602 P.2d 571, where we
stated:
The offset drilling rule generally requires the lessor
. . . to serve written notice'or demand upon the lessee
or its assigns to drill an offset well as a precondition
to the latter's duty to drill. Supra, at 584.
Based upon this language, the District Court interpreted U.V.
Industries very narrowly to hold that the Sundheims could not bring
an action for breach of the implied covenant to protect. All
parties to this action agree that no written notice or demand was
served.
In U.V. Industries the plaintiffs brought a lawsuit alleging
that the defendants failed to protect their leasehold from drainage
and were liable for damages. The case involved four defendants.
Two of the defendants owned an interest in a well, which was
located on adjoining property. Apparently, this well caused the
drainage to the plaintiff's leasehold.
Faced with these facts, we held that written notice or demand
was not required to be given the two defendants who held interests
in the adjoining well. We based this conclusion upon the fact
that these two defendants, through their ownership of the draining
well, obviously knew of the necessity to protect the plaintiff's
leasehold. Thus, application of the notice requirement was
unnecessary. Two other defendants who held no such interest, were
not deemed to have any knowledge of the drainage. Therefore, it
was held that they must be given notice of their obligation to
protect before any duty on their part would arise.
The District Court interpreted U.V. Industries to hold that
written notice or demand is always a prerequisite to a lawsuit for
breach of the covenant to protect, unless the defendant owns the
adjoining well which is draining the plaintiff Is property. The
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Sundheims, on the other hand, maintain that under U.V. Industries,
written notice or demand is only required when the defendant does
not have knowledge of the drainage. According to Sundheims, a
notice requirement in a situation when a defendant already has
knowledge would be wholly unnecessary. Because there is evidence
which tends to establish that Reef Oil and Hiestand knew of the
draining of their leasehold, the Sundheims further argue that the
District Court erred in granting summary judgment based upon lack
of notice.
We agree with the Sundheims' interpretation of U.V.
Industries. There is no sound reason to require a lessor to give
a lessee notice of drainage in an action for damages, if the lessee
already has such knowledge. Under the implied covenant to protect,
a lessee is charged with the duty to act as a reasonable operator
and to protect the leaseholderlsinterest. This duty requires the
lessee to manage the leasehold in such a manner as to bring profit
to both himself and the lessor. Obviously, if the lessee failed
to drill an offset well, while knowing the leasehold was being
drained, he would fail to meet this duty. In such a circumstance,
he should not be excused for the sole reason that the lessee failed
to comply with a requirement that is unnecessary.
Our conclusion on this issue is consistent with the overall
holding of U.V. Industries. Both the defendants and the District
Court based their conclusion upon a single statement which occurred
in a lengthy and complicated opinion. However, the statement
relied upon must be read and understood within the context of the
entire opinion.
In U.V. Industries, we stated that generally a lessor must
"serve written notice or demand upon a lessee to drill an offset
well as a precondition to the latter's duty to drill." U.V.
Industries, 602 P.2d at 584. However, as rationale for this
general rule we quoted a passage from an earlier case which stated:
" ... A usual implied covenant is one against drainage,
which is not here involved. The necessity of drilling
offset wells is not brought about by the acts of the
lessee, but by those of third parties, unless the lessee
owns adjoining acreage. Hence, before a breach of an
implied covenant could be claimed as substantial, the
necessity of protecting the leased premises must be
brought home to the lessee in some manner by reasonable
notice or demand on the part of the lessor." (Emphasis
supplied.) Berthelote v. Loy Oil Co. (1933), 95 Mont.
434, 446, 28 P.2d 187, 190.
As this passage clearly indicates, it is only reasonable
notice which is required as a precondition to the duty to drill an
offset well. The passage does not indicate that written notice
is required. Moreover, a close reading of U.V. Industries reveals
that the written notice requirement was mentioned only once.
Throughout the rest of the opinion, this Court spoke in terms of
reasonable notice, or notice.
Clearly, the reasonable notice requirement is satisfied when
the lessee has knowledge of drainage. Section 1-1-217, MCA,
defines notice as follows:
1-1-217. Notice--actual and constructive. (1)
Notice is:
(a) actual whenever it consists of express
information of a fact;
(b) constructive whenever it is imputed by law.
(2) Every person who has actual notice of
circumstances sufficient to put a prudent man upon
inquiry as to a particular fact has constructive notice
of the fact itself in all cases in which, by prosecuting
such inquiry, he might have learned such facts.
As this statute indicates, a person is deemed to have
constructive notice when he is in possession of all of the relevant
facts and circumstances. Certainly, constructive notice rises to
the level of reasonable notice as required by Berthelote v. Loy Oil
Co. (1933), 28 P.2d 187, 94 Mont. 434. Therefore, we now clarify
our earlier holding in U.V. Industries and hold that before a
lessee's duty to drill an offset well arises, he must have
reasonable notice of the necessity to protect the leasehold. Such
notice can either be express, from the lessor, or constructive,
gained from the surrounding circumstances. Further support of this
holding is found in the general rule that oil and gas leases are
to be construed liberally in favor of the lessor and against the
lessee. See Clawson v. Berklund (1980), 188 Mont. 48, 610 P.2d
1168; Thomas v. Standard Development Co. (1924), 70 Mont. 156, 224
P. 870.
This rule is only applicable to those cases in which a lessor
is seeking relief in the form of damages, however. If he is
seeking other forms of relief, such as forfeiture of the lease, he
must give written notice in order to give the lessor a chance to
cure the breach. See Summers, Oil and Gas Volume 2 5 412 (1990).
The burden of proof is upon the lessor to establish the fact
that the lessee knew of the drainage. Therefore, upon remand, the
Sundheims must prove that both Reef Oil Corporation and Frank
Hiestand knew or should have known that the Sundheim leasehold was
being drained by the adjacent wells.
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B. The Implied Covenant to Reasonably Develop the Leasehold.
As their second issue, the Sundheims argue that the District
Court erred in granting summary judgment on their claim that Reef
Oil and Frank Hiestand breached the implied covenant to reasonably
develop the leasehold. The District Court held that this covenant
was not breached because the Sundheims accepted delay rental
payments. As further justification for its ruling, the court held
that the covenant to reasonably develop does not arise until after
production has been obtained on the leasehold. Because we uphold
the lower court based upon the prior reasoning, we will not review
the latter.
In short, the Sundheims maintain that their acceptance of
delay rental payments does not excuse the defendants from
fulfilling their duty to reasonably develop their leasehold. They
argue that because oil was discovered and pumped in paying
quantities from the Sundheim No. 1 well, Reef Oil and Frank
Hiestand had a continuing duty to further develop the leasehold.
According to Sundheims, the payment of delay rentals has no bearing
on this duty.
We need not dwell upon the legal intricacies of the Sundheims'
argument. The issue can be resolved through resort to the clear
wording of the leases. Paragraph 2 of these leases states:
It is agreed that this lease shall remain in force for
a term of three years from date and as long thereafter
as oil or gas of whatsoever nature or kind or either of
them is produced from said land or premises pooled
therewith or drilling operations are continued as
hereinafter provided. If prior to discovery of oil or
gas on said land or on acreage pooled therewith, lessee
should drill a dry hole or holes thereon, or if after
discovery of oil or gas production thereafter should
cease for any cause, this lease shall not terminate if
lessee commences additional drilling or reworking
operations within sixty (60) days thereafter or (if it
be within the primary term) commences or resumes the
payment or tender of rental on or before the rental-
pavinq date next ensuinq after expiration of three (31
months from the date of completion of a dry hole or
cessation of production. (Emphasis added.)
Paragraph 4 of the leases states:
If operations for the drilling of a well for oil or gas
are not commenced or if there is no oil or gas being
produced on said land or on acreage pooled therewith as
hereinafter provided on or before one year from the date
hereof, this lease shall terminate as to both parties
unless the lessee on or before that date shall pay or
tender to the lessor . . . the sum of $320.00 which
shall operate as a rental and cover the privilege of
deferring the commencement of operations for drilling of
a well for twelve months from said date. In like manner
and upon like payments or tenders the commencement of
operations for drilling of a well may be further
deferred for like periods of the same number of months
successively.
According to these two sections of the Sundheim leases, Reef
Oil had a duty to explore for or produce oil and gas from the
Sundheim leasehold. If it failed to adequately carry out this
duty, the terms allowed the Sundheims to terminate the lease.
However, Reef Oil could, instead of engaging in drilling or
production operations, make delay rental payments of $320.00 per
year. Upon payment of this sum, Reef Oil was excused from the
drilling and operating requirements contained in the lease.
It is undisputed that the delay rental payments were made by
Reef Oil and were accepted by the Sundheims. Therefore, by the
terms of the contract, Reef Oil was not impliedly required to
engage in further development of the Sundheim leasehold. The
rental clauses contained in the lease were presumably bargained for
and are supported by consideration. We will not look beyond these
express provisions in order to impose a duty upon Reef Oil which
is in contravention of their terms. In short, the rental clause
contained in the Sundheim leases relieves Reef Oil of all drilling
obligations save that of offset drilling. Williams & Meyers, Oil
and Gas Law § 835.1 (1990). See also Hemingway, Law of Oil and Gas
9 8.10 2d Ed. (1983). The duty to drill an offset well is imposed
through the covenant to protect, not through the covenant to
reasonably develop. Therefore, there was no breach of the
development covenant and summary judgment on this issue was
properly granted.
C. Prudent Operator/Reasonable Man Standards
The Sundheims maintain that Reef Oil and Frank Hiestand, in
addition to breaching implied covenants to the lease, also
violated the prudent operator standard. This standard is best
understood through analogy to the reasonable man standard of tort
law. Simply stated, the prudent operator is a reasonable man
engaged in oil and gas operations. He is a hypothetical oil
operator who does what he ought to do not what he ought not to do
with respect to operations on the leasehold. Williams and Meyers,
Oil and Gas Law .
§ 806.3 (1990)
Sundheims argue that Reef Oil and Frank Hiestand breached this
obligation because they did not develop the leasehold. Instead,
they took the lease for speculative purposes, and while they were
searching for an individual to commence drilling operations
substantial drainage occurred. The District Court granted summary
judgment in favor of the defendants on this count. It held that
the prudent operator standard was not in itself an independent
cause of action and the prudent operator standard is applied in
conjunction with and serves to define the other implied covenants.
We agree with the District Court. We have previously held
that the Sundheims have presented a valid cause of action for
breach of the implied covenant to protect. The duty to act as a
prudent operator underlies this contractual obligation. In order
to prevail on this issue, the Sundheims must prove at trial that,
under the circumstances of their case, Reef Oil and Frank Hiestand
did not act as reasonably prudent operators to prevent drainage.
Proof of this issue necessarily entails a showing that actual
drainage occurred and that an offset well would have produced oil
in paying quantities. Williams and Meyers, Oil and Gas Law 5 822
(1990).
Proof of the second element of the above test would
necessarily establish that the defendants failed to act as
reasonably prudent operators and, assuming drainage can be
established, that they breached the covenant to protect. This rule
of law is supported by the rationale that a reasonably prudent
operator would drill an offset well if he could gain a profit and
if it was necessary to protect the value of the lease. On the
other hand, no breach of this standard, could be established if it
cannot be shown that such a well could be drilled at a profit to
the lessee. Accordingly, in such circumstances there would be no
breach of the covenant to protect.
It is clear from the facts of this case, that the Sundheims
allegations of breach of the covenant to protect and breach of the
prudent man standard are one in the same. Proof of one necessarily
entails proof of the other. Therefore, the District Court
correctly granted summary judgment dismissing the allegation
alleging breach of the prudent operator standard.
11. Woods Petroleum Corporation.
The District Court granted summary judgment in favor of Woods
Petroleum Corporation on the grounds that all claims against it
were barred by the statute of limitations. This action was brought
on the 30th day of January 1986. The applicable statutes of
limitations in this case are eight years for breach of the terms
of a written contract, 5 27-2-202(1), MCA, three years for
allegations of negligence, 9 27-2-204, MCA, and two years for
damage to property, 5 27-2-207, MCA. All parties agree that the
eight year statute should apply to those counts alleging breaches
of covenants arising out of an oil and gas lease. Therefore, it
is clear that Sundheims' claims under such counts are barred.
The leases executed between the Sundheims and Woods Petroleum
were executed on May 11, 1967 and May 23, 1967. They were subject
to a ten-year primary term. Therefore, by their express language,
the leases expired in May of 1977, unless production of oil and gas
continued after this date. The applicable provision that supports
this conclusion reads:
It is agreed that this lease shall remain in force for
a term of ten years from date, and as long thereafter as
oil or gas or either of them, is produced from said land
by the lessee, its successors or assigns ...
It is undisputed that production ceased on the Sundheim No.
1 well in July of 1977. The well was abandoned and cemented, and
Woods Petroleum performed no further activity on the well after
this date. The Sundheims themselves stated, in their complaint,
that the well was abandoned in July of 1977. Given these
admissions, it is clear that the issue presented is a matter of
law, and is properly resolved through summary judgment.
Absent a reworking clause Montana law dictates that cessation
of production by the lessee after the primary term automatically
terminates the lease. Miami Oil Producers Inc. v. Larson (1983),
203 Mont. 225, 661 P.2d 1260. The primary terms in the Sundheim
lease terminated in May of 1977. Production on the Sundheim
leasehold ceased in July of 1977. According to Miami Oil, the
lease automatically terminated on that date. Once the lease
terminated, all obligations on Woods Petroleum's part also ended.
The date for the beginning of the statute of limitations was in
July of 1977. The Sundheims brought their lawsuit on January 30
of 1986. This date is outside of the eight year statute and all
claims against Woods Petroleum are barred.
Through a convoluted interpretation of the lease, the
Sundheims attempt to extend the termination date to May of 1978.
Through reliance upon this erroneous argument, they attempt to
save their lawsuit against Woods from the statute of limitations.
We do not find it necessary to fully evaluate this argument. The
clear language of the lease speaks for itself.
Next, the Sundheims argue that this Court should toll the
statute of limitations on equitable principles. However, they have
not come forward with any evidence or sufficient reason to delay
its operation. The Sundheims have offered no proof of fraud or
concealment on the part of Woods Petroleum. Carlson v. Ray
Geophysical Division (1971), 156 Mont. 450, 481 P.2d 327. On the
contrary, the Sundheims were well aware of their injury in 1977
when they stopped receiving royalty checks. Mr. Sundheim knew that
the reason the royalty checks stopped was that production on the
Sundheim No. 1 well ceased. The District Courtls order dismissing
Woods Petroleum is affirmed.
111. Rule 11 Sanctions
The District Court granted Reef Oil's motion for Rule 11
sanctions and assessed a sum of $13,924.90 against the Sundheims
and their attorneys. Apparently, the District Court determined
that the Sundheims repeatedly misrepresented the holding of U.V.
Industries. During argument and briefing at the lower court level,
the Sundheims maintained that U.V. Industries1 notice requirements
were inapplicable to this case, because the Sundheims were seeking
damages, while the plaintiffs in U.V. Industries were seeking
forfeiture. A close reading of U.V. Industries however, reveals
that it was a case for damages.
While it is true that the Sundheims erroneously misinterpreted
the U.V. Industries decision, we disagree with the District Court's
decision to assess sanctions. We note that later on in the
proceedings, the Sundheims changed tactics and argued for a change
in the law to not require notice in cases seeking damages. Their
argument is amply supported by the authorities. At least two
treatises on Oil and Gas Law state that a lessor suing for breach
of the covenant to protect need not give notice or demand
protection, if he is only seeking damages. See Hemingway, Oil and
Gas 5 8.11 2d.Ed. (1983); Merrill, Covenants Implied in Oil and
Gas Leases 5 113 (1964) . Because the Sundheims argument finds
support in the law and because this opinion holds in their favor
on the notice issue, we hold sanctions were not warranted.
Conclusion
The District Court's order awarding summary judgment in favor
of Reef Oil Corporation and the estate of Frank Hiestand on the
issues of breach of the covenant to develop and the prudent
operator standard are affirmed. Summary judgment dismissing Woods
Petroleum Company is also affirmed. The District Court's orders
granting summary judgment to Reef Oil and Frank Hiestand on the
issue of breach of the covenant to protect and its order granting
Rule 11 sanctions is reversed. This case is remanded for
proceedings consistent with this opinion.