NO. 82-408
IN THE SUPREME COURT OF THE STATE OF MONTANA
MIAMI OIL PRODUCERS, INC., a
corporation; S . & J. OPERATING COMPANY, et al.,
Defendants and Appellants,
VS.
GERALD J. LARSON and HAZEL LARSON,
his wife, et al.,
Plaintiffs and Respondents.
Appeal from: District Court of the Seventh Judicial District,
In and for the County of Richland
Honorable L. C. Gulbrandson, Judge presiding.
Counsel of Record:
For Appellants:
Frisbee, Moore & Stufft, Cut Bank, Montana
For Respondents:
Crowley, Hauqhey, Hanson, Toole & Dietrich, Billings,
Montana
Submitted on briefs: December 30, 1982
Decided: March 24, 1983
Clerk
Mr. Justice Frank B. Morrison, Jr. delivered the Opinion of
the Court.
The Seventh Judicial District Court entered summary
judgment against Miami Oil Company, Inc., (Miami) and S & J
Operating Company and default judgment against the other
named defendants in an action to quiet title and obtain a
release of an oil and gas lease. Miami appeals.
In October, 1965, Hazel and Gerald Larson executed and
delivered to Sun Oil Company an oil and ga-s lease, consisting
of 520 acres in Richland County, Montana. The lease provided
for a primary term of five years.
On March 12, 1968, Sun Oil Company assigned to Miami
some or all of its interests in several oil and gas leases,
including interest in 320 acres subject to the 1965 lease
from Larsons. That year Miami commenced drilling operations
and in November, completed an oil well which produced in
sufficient amount to allow payment of royalties to the
lessors. Production from the lone well continued through
October, 1978. Subsequent to that month no royalty payments
were received by lessors.
In October, 1980, Larsonsl attorney sent a 1-etter to
Miami, noting that drilling activities had been discontinued
on Larsonsl property for the two preceding years and
requesting that Miami execute and return a release of its oil
and gas lease or assignment. Miami did not respond.
Larsons' attorney followed with a similar letter six weeks
later.
In January, 1981, after receiving no response to their
requests, the Larsons commenced this action against Miami.
They claimed the lease was terminated under its own terms
because no oil or gas had been produced since 1979 and no
drilling or reworking operations had been resumed or
commenced for more than ninety consecutive days.
Additionally, they claimed that Miami failed to release the
leasehold or assignment interest which it held within sixty
days of forfeit date as required by section 82-1-201, MCA.
Miami responded by filing a motion to dismiss for
failure to join indispensable parties. Thereafter, with the
court's permission, the Larsons filed an amended complaint
which named as parties plaintiff and defendant, those
individuals to whom the Larsons or Miami had previously
conveyed or a.ssigned interests in the mineral fee or
leasehold. Additionally, Kerry Petroleum Company, Inc., was
named as party plaintiff because the Larsons executed and
delivered to Kerry Petroleum an oil and gas lease dated July
28, 1981, which covered the same property subject to the 1965
lease and Miami's assignment therefrom.
Except for S & J Operating Company, one of Miami's
successors in interest, none of the newly named defendants
answered. Therefore, the Larsons moved for summary judgment
against Miami and S & J Operating Company, and default
judgment against the remaining defendants and thereby
requested an order: 1) quieting title in plaintiffs to the
real estate and leasehold rights and interest involved;
2) terminating all leases and assignments in which the
defendants were involved; 3) directing the defendants to
promptly file releases of the leases and interests in which
they are involved in Richland County; and 4) directing
defendants to either immediately plug the well involved as
required by the rules of the Montana Oil and Gas Conservation
Commission or to pay money damages to the plaintiffs in the
amount of the reasonable costs that plaintiffs will incur in
plugging the well. Additionally, the Larsons asked for
statutory damages of $100.00 and reasonable attorney's fees
and costs pursuant to section 82-1-202, MCA.
The District Court granted the relief requested by
plaintiffs when it entered its summary and default judgment
order, and specifically provided:
"3. None of the defendants own any right, title,
nor interest of any kind or character in either the
surface fee, or mineral fee, or leasehold interest
in any of said described land. None of the
defendants own any right, title or interest of any
kind or character in the properties and fixtures
placed by any of them on said described land.
"5. Plaintiff Kerry Petroleum Company is given 120
days after the date of this judgment to determine
whether the well on said described land can be made
producible. If so, when production ceases, it must
plug the well at its own expense. If such well
cannot be made producible, Kerry Petroleum Company
must notify simultaneously this court and counsel
for Miami Oil Producers, Inc. and S & J Operating
Company, who, within 35 days after such notice is
given, must plug the well drilled by them on said
described land in accordance with the rules of the
Montana Oil and Gas Conservation Commission. If,
within 35 days after the giving of notice by Kerry
Petroleum, the defendants Miami Oil Producers, Inc.
and S & J Operating Company do not file with the
Clerk of this Court notice that the well has been
plugged, Kerry Petroleum is ordered to plug the
well and the defendants, and each of them, are
ordered to pay the damages sustained by Kerry
Petroleum in plugging the well. The Court hereby
reserves judgment on the amount of such damages
until it is determined whether the well must be
plugged at defendant's expense."
The Court frames the issues before it as follows:
(1) Whether the instant oil and gas lease required the
Larsons to give Miami notice of lease termination?
(2) Whether the Larsons complied with demand for
release requirements under section 82-1-203, MCA, prior to
bringing this action?
(3) Whether the relief given by the trial court was
improperly beyond the scope of the pleadings?
The habendum clause of the Larson lease states:
"2. Subject to the other provisions herein
contained, this lease shall be for a term of five
years from this date (called 'primary term') and as
long thereafter as oil, gas or other mineral is
produced from said land hereunder or land with
which it or any part of it may be pooled, or
operations are conducted or this lease is otherwise
maintained as hereinafter provided."
It is followed by ten paragraphs, three of which are relevant
to the issue of termination. Those paragraphs state, in
pertinent part:
6 . . . . If such . . . cessation of production
occurs within ninety (90) days prior to or at any
time after the expiration of the primary term and
this lease is not otherwise maintained, this lease
shall nevertheless remain in force if production or
operations for drilling or reworking are commenced
or resumed on said land, or land pooled with such
land, or any part thereof, within ninety (90) days
after such ...cessation of production. Upon the
expiration of the primary term or at any time or
times thereafter when this lease is not otherwise
maintained, this lease shall remain in force so
long as any operations for drilling or reworking
are prosecuted on said land or land pooled with
such land, or any part thereof, with no cessation
of more than ninety (90) consecutive days, and, if
they result in production of oil, gas or other
mineral so long as oil, gas or other mineral is
produced. 'Produced' or 'production' within the
meaning of this paragraph and paragraph 2 hereof
shall mean produced or production in any quantity
so that royalties may be payable to Lessor as
herein provided.
7 . .. . Lessee shall have the right at any time
during the term of this lease or within one year
after the termination of this lease to remove all
properties and fixtures placed by lessee on said
land, including the right to draw and remove all
casing whether from producing or nonproducing wells
"10. The breach by Lessee of any obligation
arising hereunder shall not work a forfeiture or
termination of this lease or cause a termination or
reversion of the estate hereby created, nor be
grounds for cancellation hereof in whole or in part
save as herein expressly provided. In the event
that Lessor considers that operations are not at
any time being conducted in compliance with this
lease, Lessor shall notify Lessee in writing of the
fact relied upon as constituting a breach hereof,
and Lessee if in default, shall have sixty (60)
days after receipt of such notice in which to
commence the compliance with the obligations
imposed by virtue of this instrument. Neither
notice nor attempted compliance shall be evidence
that a breach has occurred. The service of said
notice shall be precedent to the bringing of any
action by Lessor on this lease for any cause, and
no such action shall be brought until the lapse of
sixty (60) days after service of such notice on
Lessee . . ."
Miami argues that since production commenced during the
primary term of the lease, the lease cannot be terminated
unless notice is given pursuant to paragraph 10 of the lease.
Miami relies on Consolidated Gas Co. v. Rieckhoff (1944), 116
Mont. 1, 151 P.2d 588.
In Rieckhoff, the oil and gas lease at issue contained,
inter alia, a habendum clause, which provided for a primary
term of two years or as long thereafter as oil or gas is
produced from said lands; a development clause, which
required that drilling be commenced within two years unless
the lessee pays for the privilege of deferring commencement
for one year; and a termination clause, which provided for
termination upon lessee's failure to commence drilling within
the specified time or failure to remedy breach within thirty
days after receipt of written notice from lessor specifying
the nature of lessee's default under the lease terms.
The issue before the Court in Rieckhoff was whether the
plaintiff's complaint constituted a cause of action under the
contract. The Court concluded it did not and said:
" ... the only contingency which would operate to
ipso facto terminate the contract and obviate the
necessity of notice would be the failure to
commence the well within the term. Since there was
no question but that the well was commenced in
time, the only thing which can operate to terminate
the contract would be a breach of the covenant to
diligently perform. Before the question of
diligence can be litigated, the plaintiff must,
under the terms of the agreement, allege and prove
that a notice of default was given and no
sufficient effort to remedy the default was made."
116 Mont. at 6, 151 P.2d at 590.
We would be compelled to accept Miami's argument if the
provisions of the Larson lease were comparable to the terms
of the Rieckhoff lease. However, they are not. The
inclusion of paragraph 6, the cessation of production clause,
clearly distinguishes the Larson lease from the lease
considered in Rieckhoff.
Under the terms of the Larson lease, termination may
result from one of three contingencies: (1) failure to
commence drilling operations within the specified time,
absent timely rental payments deferring commencement;
(2) failure to resume or commence drilling or reworking
operations or production within ninety days after production
has ceased, if the primary term has expired; or (3) failure
to remedy a breach of obligation within sixty days after the
lessee has received written notice from the lessor specifying
the facts relied upon as constituting the breach.
The habendum clause plainly provides for a lease term of
five years "and as long thereafter as oil, gas or other
mineral is produced from said land." The term "produced" is
consistently defined throughout the lease as "production in
any quantity so that royalties may be paid to the lessors as
herein provided." Under paragraph 6, if production ceases
after expiration of the primary term and drilling or
reworking operations are not resumed or commenced within
ninety (90) consecutive days after cessation of production,
the lease no longer remains in force.
Here, it is undisputed that production from Miami's well
ceased in October 1978. The record is devoid of any evidence
or even assertion that drilling or reworking operations were
resumed within ninety days of cessation. Therefore, the
lease automatically terminated, ipso facto, when Miami failed
to resume drilling or reworking operations within the period
specified in paragraph 6.
Furthermore, it is not proper to engraft the notice
clause upon the cessation of production clause, as Miami
suggests, and thus conclude that since production commenced
within the primary term, the lease is extended indefinitely
absent notice of breach, demand for compliance and lapse of
sixty days.
Paragraph 10 does not and should not effect the lease
term. It applies only when operations are not being
conducted in compliance with the terms of the lease. The
lessee is not obligated to extend the term of the lease by
resumption of its operations once production has ceased.
In discussing the relationship between similar notice
and cessation of production clauses in Lynch v. Southern
Coast Drilling Company (Tex. Civ. App. 1969), 442 S.W.2d 804,
the Texas Court of Civil Appeals aptly explained:
"Nor is expected testimony relating to lack of
notice to appellants of any claimed breach by them
of their obligations under the lease material to
any issue in this case. By its very language, the
lease provision relating to notice is applicable
only where lessor is claiming that 'lessee has not
complied with all its obligations under the lease.'
It is now well settled in Texas than an oil and gas
lease, such as the one before us, creates a
determinable fee in the lessee, and that the
provision to the effect that, after the expiration
of the primary term of five years, the lease shall
continue in force as long as oil or gas is produced
constitutes a special limitation upon the estate
transferred. (Citation omitted.) Nowhere in the
lease does the lessee undertake any obligation to
drill, to continue production after oil or gas is
discovered in paying quantities, or to commence new
drilling operations after existing wells have
ceased producing. (Footnote omitted.) When the
condition constituting the special limitation
occurred, the lease terminated by force of such
limitation, and not as a result of any default in
their obligations by lessees or of any breach by
lessees of any contractual duties imposed upon them
by the terms of the lease ...
"Since the special limitation imposes - obligation
no
on lessees to perform any duty, the clause
-
roviding for-notice has no application here.
?Citation o a t e d . ) ~ f t r t h h ~ r o d u c t i o n oil or
of
gas had ceased, the lease could be continued in
effect by the commencement, within ninety days, and
continuous prosecution of drillins operations. If
such drilling operations were not commenced within
the specified time, - lease automatically
the
terminated, and there was nothing lessees could do
'to correct, or begin to correct, the asserted
default. "' 442 ZW. 8T6-07.
2d at
We hereby adopt the reasoning and rule of the Lynch
case. The District Court committed no error by enforcing,
via the quiet title action, the plain terms of the lease
between the parties.
Miami next contends that the Larsons are not entitled to
relief because they failed to comply with the demand
requirements of section 82-1-203, MCA, prior to bringing this
action. Miami's position is that, prior to commencement of
an action for release of an oil and gas lease, each and every
owner of any partial interest in the leased land must serve
notice of demand for release upon each and every holder of
any type of interest in the leasehold. Since the Larsons
only made a demand for release upon Miami, and not any of the
other named defenda.nts, and since none of the other named
plaintiffs, excluding Kerry Petroleum, served notice of
demand for release upon Miami or the other named defendants,
the requirements of section 82-1-203, MCA, were not
fulfilled.
We reject Miami's argument.
The purpose of section 82-1-203, MCA, is to give a
lessee an opportunity to satisfy his statutory duty before he
is compelled to do so by the court and is subjected to
damages, attorney's fees and court costs.
Section 82-1-201, MCA, clearly provides that it is the
duty of the lessee, his successors or assigns to record a
release of an oil and gas lease within sixty days of its
forfeiture or termination. If the lessee either neglects or
refuses to execute the release, then section 82-1-202, MCA,
gives the lessor legal recourse. By bringing an action to
obtain the release, the lessor may also recover statutory
damages of $100.00, court costs, attorney's fees and any
damages that the evidence in the case warrants.
The record clearly indicates that the Larsons made
timely demands for release upon Miami. It also shows that
Miami has been extremely recalcitrant in discharging its
statutory duties.
Miami twice refused to execute a release when timely
demands were made by the Larsons prior to commencement of
this suit. After the suit was commenced, Miami again refused
to fulfill its statutory responsibilities. In July 1981
Kerry Petroleum requested a release from Miami and the names
and addresses of the other named defendants so that Kerry
Petroleum could submit Miami's executed release to them. Not
only did Miami refuse to execute the release, it refused to
supply the names and addresses of its successors in interest.
We will not reward Miami for its obstinance by
construing section 82-1-203, MCA, to require a demand for
release from each owner of a partial interest in the mineral
fee before an action for release by any owner can be
maintained. The purpose of section 82-1-203, MCA, is served
whether one or all the owners in interest in a mineral fee
demand(s) release of a lease after its date of forfeiture or
termination. If the notified lessee chooses to disregard his
opportunity to avoid litigation by executing a release within
twenty days after demand has been made, so be it. This Court
will not afford him further opportunity to extend his cloud
over the lessor's title by denying relief pending written
demands from the remaining owners in interest in the mineral
fee. Miami received that to which it was entitled under
statue.
Further, it will not be heard that a lessor's claim for
relief against a particular lessee will be defeated by
failure to make contemporaneous demands upon ea.ch and every
one of the lessee's successors in interest. To the extent
they may be prejudiced by lack of notice, it is for them to
raise the issue, not the lessee who has received that to
which he is entitled under section 82-1-203, MCA.
Miami's final argument is that the relief granted by the
District Court was improper and beyond the scope of the
pleadings.
This issue is raised for the first time on appeal. The
relief granted was specifically proposed by the Larsons in
their reply brief in support of their motion for summary
judgment. Rather than present its objections to the trial
court, Miami declined to exercise its opportunity to respond
and informed the District Court, via a letter to the Clerk of
Court, that the court should proceed to adjudicate the matter
as "[tlhere [was] nothing in the way of new matter in the
Plaintiff's Reply Brief."
The rule is well settled that this Court will not
consider issues on appeal which were not raised below. State
v. Johns (1982), Mont . - I - P.2d , 39 St.Rep.
2049.
As a final matter, the Larsons assert that this appeal
was frivolous and that the court therefore should award them
costs and attorney's fees.
Where there is a reasonable ground for appeal, a
respondent is not entitled to recover damages under Rule 32,
M.R.App.Civ.P., Bailey v. Ravalli County (1982), Mont .
, 653 P.2d 139, 39 St.Rep. 2010. Here, construction of
the lease and section 82-1-203, MCA, was reasonably at issue.
The respondent's request for attorney's fees on appeal must
be denied.
Affirmed.
We concur:
3~4.$,
& w d ,
Chief Jusitce
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Jut& ices Q
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