SOMON-f OIL COMPANY, [KC.;
a Montana corporadon,
,4ppellant,'Cross-Respondent,
_
#-
d l
r ,>
A & G DRII.L.ING, [NC., CAVALIER P E T R O L . C&y4& I l~:g- , ~ ~ ~ ~ ~ ~ ~ ~ = ? $ ~ , ~ ~ ~
U ~ .p- ;:&
INC., i\. G. WALLS u W ~JOE W-ALLS, JOHN Vi'ALLZ .. . ., ~d@~~i~,+
'
.,'... .&+-.
.-
and STEWART HOWELL, all d/b/a C-W SOlKl. VENTIJRE ,,,
akia CAVALIER-WALLS JOIN VENTURE,
.4PPEQIL FROM: District Coitrt of the Ninth Sodicial District,
In and for the County of Toole,
The Honorahlc Marc G. Buyske, Judge presiding.
C;OU&jSELOF RECORD:
For Appellant:
Gregory J. Hatlcy, Davis, Hatley, Haffeman & Tighe, Great Palls, Montana
For Respondeiits:
Douglas C. Allen, Corder & r\llen, Great Falls, Montana
Richard L. Beatty, Attorney at La~v,Shelby, Montaiia
For i\niicus Cunae:
Tommy t1. Butler, Special Assislalit Attorney General, Montana Department
ofNatura1 Res~turces Corrsewation. Helena: Montana
and
Kcnip J. LVilson (pro se). Crobt-ley: Haughey: Haulson, 'Toole & Dietrich,
Billings, Montana
Argued: h4ay 17, 2001
Submitted: May 17, 2001
Decided: June 2 1, 2002
Filed. .a
Justice J i m Rcgnicr deli\-ered the Opinion oi'thc Coui?.
"1 Soraont Oil Company. lnc.? Appellant/Cross-Rci;pc~ndc11~~ suit agaiiist
filed &G
Drilling, Inc., Cavalier Pctrolcurn, Inc., i\.G. Ll-alls, also knowrr as Joe C!~alls, John
and Stelvart Howell, all doing business as C:-W Joint Venture, also known as Cavalier- Walls
Joint Venture, Respondcitt~~C:ross-~4ppellants
("C-W"), in the Ninth Judicial District Court,
-Toole County, to ler~nillate
certain oil and gas leases held by C-W. Following trial, the jury
rendered a verdict in favor of C-W. Somont appeals the judgment entered upon the jury
.i-erdict and certain pre-trial and post-trial rulings issued by the District Court. C-CV cross
appeals the District Court's award of attorney fees to Somont based on its determination that
Sorncttit had standing to prosecute this action. Ll'e affirru in part, rc\;esse in part, iind remand
for further proceedings consistent with this opinion.
?I2 The parties raise the following issues or1 appeal:
(13 1. Did the District C:ourt err \%-hen concluded that Somont had standing to compel
it
C-W's release of certain oil and gas leases pursuant to $ 82-1-202(1), MCA?
14
1 2. Did the District Court err when it allo\ved thejury to consider oil prices, econon~ic
considerations, and C-CV's financial condition iri determining whether oil and gas leases had
tenninatcd due to a lack of production?
BA<:KCROUNl>
qj5 1111001, C-&"v'urchaseda number ofoil and gas lcases in the Kevin-Sunburst oil fieid
in 'I'oole County, Montana. Most ofthese leases were established in the 1920s for a specified
numbct ofycars, 1.e ,the ptiniary term. Conseqrrcntly. the primary terms on these leases hale
long sltlcc exp~red liowcver. through barlous hahcndunl clauscs. tile conuacts pro\ idc tor
rlie leases' extension of aii iiiciefinitr secondary tern. Pursuant to the habcndum ciauscs, the
lcsscc shall maintain a viable lcaseliold interest as long as the lessee produces oil and gas in
paying quantities from said lanci. Therefore, following its 1991 purchase, C-W held i t s
Kevin-Sunburst leasehold properties pursuant to the contingencies ofthe liabendum clauses.
16 In late 1 ?97, Somont ofkred to purchase a number of C-W's Kevin-Sunburst leases.
C:-\I: subsequently declined Sonlont's offer. Thereafter, on April 10,1998, Somont informed
C-W that it had acquired new leases from the Kel~in-Sunburst
lessors and that C'-W's leases
had terminated due to a lack of production. Soniont demanded that C-W execute lcasc
releases 011 the properties. C-W rcfused to execute the releases and on May 20, 1998,
Somont filed stlit in the District Court to compel C-W's executio~iof the releases. The
Ilisrriet Court issued a temporary restraining order which precluded C- W from commencing
any operations on the leasehold properties prior to a show cause Ilearing set for May 28,
1998.
'7 Following the May 28, 1998; show cause hearing, the District Court determined that
Somont had not acquired the lessors' right to challenge or terminate C:-Ws existing leases
for failure of production. Thcrcrore; the Ilistrict Court denied Somont's request for a
preliminary injunction and vacated the temporary restraining order. undorrl (1912); 46 Mont. 71, 82, 125 P. 136, 130. In the absence of a non-assignable
clause, either party may generally make an assignment of rights under the contract. Forsytht.
1.
. Elkins (l985), 21 6 Llont. 108, 113,700 P.2d 596,590-600. Further, all that is required to
consiituic a "rcal party in interest," for pu~yoscs Rule 17(a), M.R.Civ.P., is that the paity
of
Ass
be vcsted with legal title. Mol~tillri~ '11 of C/*etl'itiWi~ircrgenlent1:. liergert (1 979), 181
Mont. 442,440, 503 P.2d 1059, 1063.
1 18
1 Each of the original leases in question is a contract which provides for the assignment
of rights. One of the rights associated with the oil and gas leases is the right to compel
termination of a lessee's interest. While the assignment of rights provisions vary somewhat
in language, the prevailing effect is that "the privilege of assigning ['the estate] in whole or
in part is expressly a l l o ~ e d As rights arising from contracts are freely assignable and the
.~
assignment xrcsted legal title in Somontl we hold that the District Court did not err in
determining that Somont had standing to compel C:-LV's release of the leases in question.
lSSIJE I'UO
ci9 Did the District Court err when it aliowed the ji~y considcr oil prices, economic
to
considerations. and C'- W's financial condition in determining whether oil and gas leases had
terniinated due to a lack of production?
'0
2 A district court's d i n g on a motion in limine is an evidcntiary ruling. Spi~rlerv.
Allen, 1999 MT 160, 7 29, 295 hlont. 139,lI 29; 983 P.2d 348, Ti 29, A district c o ~ ~has
rt
broad discretion in determining whether evidence is relevant and admissible and we ~vill
not
overturn its determination absent an abuse of that discretion. Spiwler, i j 29.
121 Further, a district court has broad discretion regarding the inst~xlctionsit gives or
refuses to give to a jury. Schtcinntiter 1). S'ieplreizs, 1998 MT 58,121,288 Mont. 115,721,
056 P.2d 76,1/ 21. Il'e will not reverse a district coi~rt the basis of its instn~ctions
on absent
an abuse of that discretiotl. Sc/~ur~znclier,
i j 21. When we examine whether particular jury
instructions were properly given or refused, we must considcrthe instnictions in their entirety
and in connection with the other instructions given and with the evidence introduced at trial.
7
Scl~urr~acher, 22. The party assigning error to the trial court's instructions must show
71
prejudice in order to prevail. Schuir~ucl~er,22. Prejudice will not be found if the jury
instructions in their cntircty state the applicable law of the case. Scl1~~11c7cfier~
'1 22.
722 Prior to trial; Somont filed a niotion in limine seeking to exclude evidence of oil and
gas prices as a justification for C-W's cessation of production. Tlre District Court denied
Somont's motiott ill limine as it pertained to oil anti gas prices. Soon thereafter, Somont
subrn~tted proposedjut 4 mstructlons to tlze Dlstrrct Court hoinont~s
its proposed rnstrucirons
contained thc fo!lowing direciiiw:
18. The fact that oil prices may be lokv; the cessation of production is for
economic reasons or because the operators are in poor tlnancia,l condition
cannot form the basis for a justifiable temporary cessation of production.
9 . Poor conditio~iof the oil market and/or low quality of oil although
rendering the .~vell unprofitable to operate does not prevent an automatic
termination of the lease when productio~i ceases.
The District Court rejected the above proposed instructions and instead instructed the jury
as follows:
16. A lease continues in existence so long as interruption of production in
paying quantities does not extend for a period longer than reasonable or
justifiable in light of a11 tile circurustances involved.
17. 4 lease is not terminated for failure to produce the moment production
stops, nor does it terminate the instant production falls below aprofitable level.
All surrounding circ~rn~stances must be taken into consideration before
cancellation may be decreed.
71'hereforc, the jury was allowed to consider testimony regarding fluctuations in oil prices.
economic concerns, and C-tt"s financial instability in detemiining mhether C-LV's lack of
production was justified
723 Somont argucs that the Distrrct Court abused its discretion when it denled Somont's
motion rn lrmtne and fa~led eucludc
to 011 and gas prices. economle factors, and C-ti-'s
financial cond~iionfroin the jury's considerat~on Sornont contends that this abuse in
discretion sufficiently prcjudiccd Solnont to warrant a reversal of the District Court's
judgn~cnt
upon thejul) verd~ct.Lie agree
".
21 All ol'the oil and gas leases subjcct to this iitigation contain a habcndum ciause fixing
the ultimate durarlor? of the lessee's inrerest. Oil and gas habendurn clauscs generally consist
of two parts. the primary term, which establishes a definite period, and the secondary tel-m
which is of indefinite duration. Robert E. Sullivan, Hurldbook of Oil arid Gas Lcrrr 6 40
(1955) The clause obligates the lessee to maintatn product~on the prcnltses and pay a
on
royalty to the lessor. The clause also provides that if the lessee fails to produce oil and gas
\>1th111 primary term, the lease ~ 1 1automatteally terminate at the end of the prIma1;L term.
the 1
If the lessee matntalns production throughout the prtmary term, the lease ~ 1 1 terminate
1
thereafter upon the cessatioll of production. See XfcCulloltg-12 Oil, Irzc I. Kezek (W. Va.
725 Once the lease transitions into the seeondar)i tern?, jurisdictions vary as to what
circumstances mill precipitate terminatton ofthe lease upon the cessation ofproduetion. This
jurisdictional dichoto~iiy been described as follows:
has
In a number of the producing states the co~irts treat termination of a
lease as involving a cancellation or forfeiture in equity. In these states where
production has ceased or is no longer deemed to be in paying quantities,
cancellation of the lease will not be decreed where, in view of relevant
circumstances. such decree \vould be unreasonable.
In 'Tcxas and several otherjurisdictions termination of a lease under the
habendum clause is treated as a determinable limitation on the lessee's estatc.
j cessation of production results in automatic termination except in those
\
cases where the cessation is deemed 'temporary.'
iirzli Cns C; 6.4(0) (3d ed. !991)
Lair ~ f O i l
Richard W. f-lemiiig~vay,
42
10 Montana is an ownership-in-piacc state wit11 regard ro oil, gas and other n~inerais.
-,
P c ~ ~ ~v.i i,'ioizic jlCj58j, 134 Moot,
i c 156. 152. 328 P.2d 655;65") Essentially, this means oil
and gas leases transfer to the icssee a k e sitnplc determinable estate with the lessor retaining
(lWO)l 80 Monr. 463. 476-77, 284 P.
a pc>ssibilityof reverter, See k'lutqfiki 1,. ,J'tcvctzsor~
553. 556. Therefore, upon tlte occurrence of a stated event? the lessee's interest
terminates. See Berrlrelole I , Lr*. Oil Cu. ( 1933), 95 Mont. 434, 447, 28 P.2d
auton~atically
8 7I . Here, as in most oil and gas leases operating pursuant to the conditions of the
seconilary term, the event triggering automatic termination is the cessation of production in
paying quantities. See Rertlrelotc, 95 Mont. at 448, 28 P.2d at 191.
727 This Court has defined paying quantities as the amount of production which v~ould
pay a sinall profit over the cost of operation of the wcll, excluding from consideration the
initial cost of bringing the wcll into production. Ber-rlrelore,95 :Mont. at 448,28 P.d at 191.
Therefore, by paying quantities' very definition, the finder of fact must necessarily consider
income generated from the property and the expenses incurred in its operation, thus
iniplicating economic influences. See Eugene K ~ ~ n tOil nflrl C;cls
z, 4 26.7(d) (1987). In
C.'lzr.irtiu/zv. 43
.,. Oil C:orp. (1073), 161 Mont. 420, 506 P.2d 1369)1 C'ourt articulated the
this
tcsr to determine v-hethe; production in paying quantities has ceased. We stated:
-I lie test for determining whether there was suf3icient production
~
or
whether the lessee was acting wit11 reasonable diligence in producing and
~~larketing gas from the leased lands is the diligence which would be
the
exercised by the ordinary p r ~ ~ d e n ~
operator having regard to the interests of
both lessor and lessee. I'his is a y~restionof fact that will depend upon the
facts and circurtistances of each case.
Ci2ri.sticm, 161 Vont. at 427-28. 506 P.2d at 1373 (citarions oniitted). 7'11~s. oil and gas
an
Icrasc which ijiis to prod:icc i n paying cirtantities terminates ripon cessation.
'28 tIowcveri in an effort to rtiitigate against the harshness of the automatic ternlination
rule, courts developed the temporary cessation of production doctrine. Pursuant to this
cioctrine, once a plaintiff establishes that an oil and gas lease has halted production, the
burden shifts to the defendant to prove that the cessation was temporary and not pemlancnt.
,See Eiclrnlclr1 v. Leilvell Kcsot~rcesCotp. (Kan. C:t. App. 1994), 875 P.2d 171, 174. A
temporary cessation in production will not trigger an automatic termination of the lease as
contemplated in the habendum clause. Kuntx, Cj 20.8(d). 'There is some dispute between
Somont, C-W, and Amicus Curiae as to whether Montana has adopted the tcmporary
cessation of production doctrine, and? if so, to what extent. Therefore: to clarify any
ambiguity, Lye hereby adopt the temporary cessation of production doctrine as it applies to
the oil and gas arena.
(129 Most jurisdictions1 in determining whether a cessation of production is temporary or
permanent, consider the cause of the cessation, the time reasonably required to restore
production, and the diligence exercised by the lessee in restoring production. Kuntz, 3
26.8(e). What constitutes a reasonable time and diligence will depend on the particular facts
presented. See Cobh v. ~Vatztl-(21 I'i,~clit~e
Gi1.s Ch.qf',,ltiz. Cis.
(jth I990), 807 F.2d 1307.
1309. EIowcvcr,jurisdictions vary significantly on which causes contributing to the cessation
may be considered in the tcrnporary cessation of production analysis, Those jurisdictions
nhtch treat termmatloti as a canccllat~on forfeiture ~u equtty generallj hold that "the ledse
or
12
vielved it1 thc ligi~r
continues in fbrcc unless tilc period of ccssatic~n. ofuii rile circ~m/.srcznc~cs,
ritnc.'' See, e.g.. Cbitrer v. ifiit-ml (Okia. 1058), 330 P.2d 2 i 7: 2 19
is tbr. an ~ii-rreasiinable
(emphasis added). Conversely. ownership-in-place jurisdictions generally lirnit temporary
cessations to rnecbktnical or production breakdowns. See Henlingway, 3 6.4(B).
130 Mere, Somont established at trial that the leases failed to product: in paying quantities
during the accounting period prescribed by the District Court. At that point the C.'hrisficln
analysis, iinplicating economic factors, concluded. In turn. C-LL7asserted that the failure to
produce in paying quantities was justified as a temporary cessation. The parties argued to
the District Court the circumstallces which the linder of fact may consider in evaluating
whether thc cessatioii was tc~iipot-aiy. TIie District Court agreed with C-W that the jury
should co~~sider surrounding circun~stances,"
"all which, in this case, included oil prices,
economic concerns, and C-W's financial condition. Sornont insists the District Court erred
in its ruling and urges this Court to follouz other om-nership-in-pIace.j~irisdictions'
treatment
of the temporary cessation of production doctrine. Texas is one such o~vnership-in-place
jurisdiction and we arc inclinect to follow its lead on this issue.
'3 1 in kVui.sotr v. lioc.l~irril1
(Tex. 1941). 155 S.W.2d 783, the lessee of an oil aiid gas lease
ceased oil production due to the dcpressed marked for low gravity oil. The lessor filed suit
for a judgment declaring the lease terminated. The lcssee insisted that the temporary
cessation of production doctrine precluded termination of the lease. The Supreme Con11of
'Texas coi~claded to prevcnt termination ol'thc lease pursuant to the temporary cessation
that
of production doctrine, the cessation rllust bc "due to [a] sudden stoppage of the well or some
13
,,
like. R'~tsi~iz,
~:ieclyanica]br~.akclovxn tlic cqnipmcn? usid in connection therctvith, or t l ~ c
of
, - 5 S.L$".2d at 784. 'i'hcrcFare.
i - the court held that the lease had ter1ninali.d bccause the oil
market did not prevent operation of the well. 155
kf~?lnisciiz; S.iV.2d at 784.
"3 Adopting Iexas's narroixj temporary cessation of production test comports with the
principles in Montana that: (1) oil and gas leases are to be construed liberally in favor of the
lessor and strictly against the lessee: and (2') while forfeitures are usually not favored in the
law, duc to the peculiar nawrc of oil and gas leases, forfeitures are here favored.' Clrrisricin,
101 Mont. at 425. Further, Texas's temporary cessation of production standard properly
balances t l ~ e
interests oftlie lessor and lessee. The diligent lessee who takes immediate steps
to rectify a stidden halt in production will not lose his or her investment. Similarly, a lessee's
self-serving voluntary cessation \vill not subordinate the lessor's interest in generating
income via production. See Bruce M. Kramer, Tlze Tetnpot.a~y(i.ssillion L)oc,tri~re:
A
I'rczciiccll Ke,~p(onse (in ideologiciil l~ilenznzn, Baylor I.. Rev. 5 10, 545, (1991).
ro 43
533 in summary, actions comtnenced to terminate oil and gas leases invoke tivo distinct
inquiries: ( 1 ) Is the lease producing in paying quantities'?; and (2) If not. was the cessation
in production pcrniailent or temporary? As to produeti011 in paying quantities, econon~ic
consideratioiis arc absolutely relevant. Flo\veverl those very economic considerations should
not factor into the temporary versus pernlancnt cessation analysis. A cessation in production
While the "forfeiture" terminctlogy is semantically incorrect for ownersliip-in-
place jurisdictions, the principle espoused in the statement remains soulid in Montana
jurisprudence.
will only be deemed temporary when it is caused by a sudden stoppage of thc well or a
mechanical br~akdotvr:of the equipment used in connection with the well, or the like,
!34 We disagree wit11 Justice Trie\vciier's cl~aractcrization ,Qimsori v. Tcrrf-iii~ i Cir.
of (O!'
I943), 132 F.2d 363. It is true that, in Stinzso/~, Xinth Circuit declined to terminate an oil
the
lease when the well ceased production due to the lack of market. Notvever, the analysis in
Sri~rlson
focused solely on the first prong of the two-part test articulated above. In effect, the
n'inth Circuit held that a genuiiic lack of market will not compel termination of an oil lease
~vhen well is fully capable of producing in paying quarrtities. In other words, if there is
the
a lack of market; if the lease is capable of producing in paying quantities; and if the lessee
is using reasonable diligence to market the product, Montana law will deem the lease as one
which is "producing in paying quantities" and never reach the temporargr cessation of
production issue.
'/35 7'hc concepts discussed in Sfit?zsonwere later reiterated in C/2risric211, alluded above.
as
Our holding today ltas done nothing to disturb the principles discussed in Stinzsort and
Cl~ristiml. equitable notions contcniplated therein remain valid considerations but apply
The
only to the "producing in paying quantities" prong ofthe two-part test. Once it is determined
that a lease is not producing in paying quantities, the analysis shifts to the temporary
ccssatioii of production prong where thc equitable principles no longer hctor into the
equation. As such, the specific evidence referenced by Justice Cotter maintains no relevance
to the inquiry implicated herein and the jury shollld not have been instructed to consider it.
";6 .*tccordingly,we hold that the District Court abused its discretioil in allowing the jury
c~rnsiderations; <'-W7sfillancia1 condirion in determining
ro consider nil prices. econon~ic and
C-W's cessation was justified as temporary. Fuilher. the District Court's abuse in
whcti~er
discretion sufficiently prejudiced So~nont warrant a new trial.
to
*37 Somont insists it is entitled to judgmcnt as a matter of law. Somont urges this Court
to remand the matter to the District Court for an entry ofjudgment in favor of Somont. \lTe
decline to do so.
'38 The sta~ldard review in appeals from a judgment notwithstanding the verdict made
of
pursuant to Rule 50(b), hZ.R.Civ.P., is the same as that for review of a motion for a directed
verdict, and a directed verdict may be granted only where it appears as a matter of law that
a party could not prcvail upon any view of the evidence including the legitimate inferences
to be drawn therefrom. IiJ.iirz v. CifyoJ'Nozemirn (lW")(t), Mont. 507,510,028 P.2d 228,
279
220. An implicit precursor to the "any view of the evidence" language is the requisite
presentation of evidence. Here, C-W presented its evidence under a misinformed standard.
C-W has not yet had an opportunity to present its evidence in accordance with the temporary
cessation of production factors adopted herein. It would be premature to say that C-W
cannot prevail on any view of the evidence. Therefore, we decline Somont's invitation to
remand this case h r an cntry ofjudgment in its favor.
T30 Finally, following the jury verdict, the Ilistrict Court awarded attorncy fees in the
amount of 330,867.50 to Somont and 546,221 2.5 to C-LV purstiant to 5 82-1-202(1): LICA.
Section 82-1 -202(1). 'LlCA. does permit the prevailing party to recover reasonable attorney
fees incurred in p;oscculiag i.;r &fcltding il;c action. i l w v e ; , il: light of our holding, the
I)isiric- ~ a a fwit! h.cti.; reconsider tke attorney fce issuc fo!lowing the disposition ofthis
i a;;
v4 Reversed and rernandcd for a new trial.
LVe C,'oncur:
District Court Judge Richard Sinionton
s~ttnig for Just~ce
in helson
District Court Judge Richard .A. Sirnonton, sitting in for Justice Jamcs C. Ncisoni concurs.
731 i concur iri tile C'outt's Opinion. Furthcmmorc, I would like to respond to the disscnls
because I think tlrcir positions change what I understand has been traditionally, and should
bel the law in Montana regarding oil and gas development.
942 If our goal is the encouragement of oil and gas production rather than speculation,
allowing the retention of leases without working them is contrary to that goal. 1n this casel
there has been no production from sorue wells for three years. In some cases electric meters
have been disconnected for two years. When production ceases so there is not even a
question of whether there is production in paying quantities, the secondary term of the lease
tcnninates as production is a condition precedent to thc continuation of thc leasc. Since lack
of production terminates thc secondary term, the only issue should then be whether the lack
of production is excusable. The teinporary cessation of production doctrine was developed
to provide that excuse.
743 The dissents would include, as elements of that doctrine, variables such as oil prices,
!he oil markat, and production costs of the operator. Equity, or a justifiable excuse to stop
production, should 11otbe dependent upon the efficiency of the operator. If C-LtTwere having
financial problems, and i f production was not profitahlc for it, it should have cvelcomcd the
opportunity to walk away from the lease and give another operator the chance to produce at
a profit for itself and t l ~ e
mineral owner. Ifow equitable is it to the mineral owncr who is at
the mercy of the operator or producer to decide unilaterally what is profitable and whether
to continue production?
18
744 The leases are prcparcd and printed by the producer. Often times the minerai owner
tvill malcc changes in ti3c languliye of thc printed fomn~ attach an addendum rhat will bc part
or
of the lease. If the producer wsnts factors sucli as market price, cost of production. and
market availability to be factors in the secondary term of the lease, it can include that
language as a part of the lcase and make it contractual.
115 1 agree that any doctrine oftemporary cessat~on
ofproduction that precludes forfeiture
of the secondary term of the least: should be llmited to acts of God and mechamcal problems,
coupled with a diligent effort by the producer to remedy them.
746 The position of the majority results in the development of minerals for the benefit of
both the lessor and the icssce and ultl~natclyfor the benefit ofthe consumer. The test for a
temporary shut-down IS fairly clear and eonsistei~t ~ t h
u development.
Richard A. S~monton
~ i s t r i cC'ourt-~ud~e
t
Sitting in for Justice James C. Nelson
Jrtsllcc 'l'erry N ,'lricweiler concurring and dissenting.
-..- conclusion that the rights associated wit11 the oil and gas
~ 3 - 1 ;tincur with the rni~jixritf's
!cases at issue in this cilsc were assignable and that pursuant to their assignment, Somont Oil
Company, Inc., had standing to bring this action in the ilistrict Court.
738 1 dissent from the majority's conclusion that the District Court erred \+hen it allowed
the jury to consider oil prices, economic considerations, and C-W's financial condition when
it detern~ined\+-hetherthe oil and gas leases at issue had been termitlated due to lack of
production. I would conclude that the District Court's evidentiary nlling, as well as its
instructio~ls the jury, reflect the more reasoilable approach to termination of oil and gas
to
ieases for failure to produce and was 111ore consistent with previous interpretations of
Montana law on this subject.
749 The issuc in this case was simply whether production had ceased pennanently within
the meanlng ofthe secondary tern? of the habendurn clauses of the leases at issue. There are
several standards elnployed in the various jurisdictions around the country for determining
.ivhethcr cessation i s temporary and reasonable or permanent, 'Phey are hest sumtnarired by
tltc Oklahoma Supretne Court in C b t r l o . v. IYiirl.ei~(Okla. lc)58), 330 P.2d 217.
7'50 in C'otrlet., thc plaintiffheld a leasehold estate in oil and gas under lands ov-neclby the
defendants. The tcrril of'thc lease was for onc ycar "and as long thereafter as oil and gas or
either of them, is produced from said land by the lessee." Plaintiff suspended productio~l
during a dispute with co-tenants b ~ t resumed production six months later when ownership
t
rights had bccn clarified. When defendants sotight to remove him kom the land titr fhilurc
20
rc produce, hc brought an action to quiet titic to his ieasehoici interest. Plainiii'i'conicnded
that since / l ~ c~ssation
c iffpro13~1~1ion telliporary~ for good rcason. he had not ceased
was and
production aithln tlrc meaning of thc seco~~dar>
clause. The d~strtct
court agrccd
'51 On appca!, the Oltlahorna Supreme Cuurt, in a case of first Impression, noted that
other courts i n the country hiid taken various approaches in their determination of what
circumstances will justify termination of a lease after the primary term. It suni~iiarired
those
approaches as follows:
The Kentucky court. in the case of Lanih v. I;ilt~syclile,
205 Ky. 597,
266 S.W. 253, 254, had before it a factual situation much the same as here
involved. In that opinion it was said,
'XOI. a]-c wc uilling to adopt the rule that a lcasc ih~liichis to
continue for a definite pcriod, and so long as oil or gas is
produced ill paying quantities, ipso facto terminates whenever
production or development ceases for a brief period oftime. On
the contrary, wc have reached the co~lclusion that the only fair
and just rule is to hold that !he lease continues in force un!ess
the period of cessation, viewed in the light of all the
circumstances is for an unreasonable time.'
The quoted ntle seems to be the most equitable one in such cases. One
much more favorable to the lessee is followed in Louisiana where, 'in order to
cancel the lease, there must be some evidence that the wells thereon are no
longer capable of producing oil or gas in paying quantities; or that the lcssec,
in closing down the wells, has done so with the intention of abandoning satne.'
Gsorl v. S~lrf'Oil i ) . ; 195 La. 248> 106 So. 330, 341. In Tcxas, the rule is
C
much Inore favorable for the lessor although, there, it 'has been niodified
vvheii there is only a temporary cessation ofproduction duc to sudden stoppage
of the \\ell or some mechanical breakdown of the equipment used in
137 Tcx. 565, 155
connection therewith, or the like.' hVat.sotz v. l~oc~l~t~zill,
S.W.2d 753.784.
Aftcr- thorough dclibcration, we coiiclude that the rule quoted above
from the Lunzb v. 1'rir~syc.klc. is the soundest and most equitable and the
case
same is adopted. l,h~der rule, the controili~ig
that factual finding is whether or
not the tcmporary stoppage in productio~i
was for an unreasonable length of
lirnc.
",i2 In Steti~ar-r . AI>Z(<~-(ZO~CIS <,'oljrl.(Okla. 1979); 604 P.2d 854. 858? the Oklahoma
Y H~ S
Supreme Court clarified that:
A decree of lease ca~icellation
may be rendered where the record shows
that the well in suit was not producing in paying quantities and there are no
compelling equitable considerations to justify continued production from the
unprofitable well operations.
753 In Strt+!n/-t,the court concluded that whether or not the period of suspensiori is
reasonable depe~ids "all sursounding circumstances." 604 P.2d at 855. The Ilistrict
on
Court's instructions to the jury were consistent with the rule adopted by the Oklahoma
Supreme Court in Coiner and elaborated on in ,!tevt:nrr and further reflect the approach takcn
in our prior case la\.;. Because the contract !anguage is the same and the effect on the parties
is the same, I would apply thc equitable principle in the same fashion.
754 In Stitt~soriv. T~z/*rcurt Cir. 1942j, 132 F.2d 363, the Ninth Circuit Court of
(9th
Appeals. in the only decision to this date which attempted to summarize Montana law on the
subject at issue, reflected an approach similar to that adopted by the Oklahoma Supreme
Court. In Stimsotz, the question was whether an oil and gas lease automatically terminated
upon temporary cessation of production of oil based on a lack of market. The secondary
claiise i n that lease also provicicd that the lease was to continue for as long after the primary
iernm "as or1 or gas, or erther of them, IS produced." Durlng the secondary term. the lessee
thr
ceased productio~i a period of about fourteen ~nonths iaek of a market. The lessor
for
brought a s ~ t iin cyriiiy for cancellation of thc lease. tiowc.evcr9 district court found that
t rhc
the lessee had exercised reasonable diligence in attempting to find a marlct a ~ i d
denied the
relief sought by the plaintiff.
I, -
$55 011 appeal, the Ninth Circuit noted that although Montana law controlled, therc was
no rtported Montana ease d~rectly pornt. Therefore, tt d~seussed
on se\eral Montana cases
including Rerrlzelote v. Loy Ol Lh. (1933), 05 Mont. 434, 28 P.2d 187 (relied on in tlie
i
majority opinion) which interpreted similar lease pro~isions. It characterized this Court's
decision in Wertlielote as follows:
As a whole, it is to bc gathered from the opinion that if tlre lessee uses
reasonable diligence to market the gas and is unable to do so, the lease remains
in effect. it difficulty with the opinion as authority here is that the court does
not clearly relate its discussion to the 'thereafter' clause. Nevct-theless it does
appear to assimilate that clause with the implied covenant to use reasonable
diligence to market.
1156 Characterizing this Court's prior decision in Se:evcr.solzv. Nr~rsto~v
(1936), 103 Mont.
526, 63 P.2d 1022, the Ninth Circuit stated that:
The court thought that while tlie statutory action for cancellation is an action
at law, rjcverthelcss the principle ofequitable reliefgoverns~ 'andcourts should
in such a case seek to do equity as between the parties,' 103 hlont. at page 534,
63 P.2d at page 1025.
In conclusion, the hlntli C ircult In Srrnztori held that
In the situation beibrc us tlie enforced ciosing doiin ofthe weiis involved 110
loss from drainage. There was no intention to abandon the lease. And the
storage of the oil underground was as effective as its storage in surface tanks,
and obi-iously more economical. What the lessee did mas in the muruai
interest of the parties.
557 Based on its revie\%- Montana case law and the equitable considerations cited by the
of
court, the Ninth Circuit affirmed the federal district cout-t's refiisal to cancel the parties' lease.
'rhere was no discussion of a hreakdomn of equipment nor suggestion that ilontana mould
follow the harsh Texas rule in that ease
758 Finally, this Court in C%r-isiiun A.A. Oil Corp. (1973), 1 0 1 Plont. 420,427-28,506
Y.
P.23 1369, 1373, in s p ~ t e its obsercation that forfe~turcs favored in oil and gas leaser,
of are
held that:
The test for determining lqhether 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 interests of
both lessor and lessee. Sullivani t_lr2r1dliook
ofOi1 und Gas Lntv, s 91, p. 173,
2 Brown, Oil mr~d (;(IS Lei~ses, ed., s 16.02, pp. 16-49. This is a question of
2d
fact that will depend upon the facts and circumstances of each case. Berthelore
v. Loy Oil Co.?95 Mont. 434,28 P.2d 187.
'159 This Court in C'lzristii~rrnoted that what may be reasonable with regard to oil
production nil1 bi: different from r hat is reasonable \c~th
\ regard to gas production. Lye did
not elaborate on how the rule \&ouldbe dlffct-ent for 011 and gas productton. Homever. I
would conclude that tl:osc itre simply cire~irnstancer be taken into consideration by the
to
finder of fact iihen d c t e n n ~ n ~whether temporary cessat~on
i~g mas reasonable
.,
.
'
qj60 r o foiiow the more arbitrary and inequitable approachtaken by the majority bascd on
Texas decisional law and the distinction bet~vcen"forfcit~tre equity" and "ownership in
arid
place" exalts form over substance and denies the fact finder in tliis case and future cases the
opportun~ty cousldcr many reler ant c~~cumstances
to regard~ng temporary suspension of
the
production.
?iOl Furthermore, while in the authorities relied on by the majority there is substantial
discussion about the rights of the lessor, it is worth noting that the lessor in this case did not
feel sufficiently aggrieved by C-W's conduct to cancel the leases in question. Only Somont,
nhlch sought to interfere w ~ t h
C-Ll"s contractual relattonsh~psfor its oun benefit, brought
this action
.i62 For these reasons, I dissent from the majority opinion. I would affirm the judgment
of the District Court.
Justice Patricia 0. Cotter joins in the foregoing concurrence and dissent.
i-1
i i
i i
Justice
i%arricia 0. Cotter concurs and dissents.
Just~cc
#:63 1 concur in Justice 7riei.i'eiler3sconcurring and disset~tiilgOpinion. i write scparaicij
to set hrth some of tile evidence irrtroduced at trial which tl-ie jury considereci, and which I
believe was necessary to and uncierscored the correctness of their decision.
4:64 The jury heard evidence that other producers, including Somont, often simply walked
away from \veils and ~vaited
until spring, when faced with frozen wells requiring repair. The
jury also heard evidence that when the price of oil is low, wells are often shut down. In
addition, they heard testimony from a Long-time operator in the Kevin-Sunburst area, R. D.
McPhillips, to the effect that C. W. acted as a prudent operator in light of all [he
circumstances. Sornorll offered no independent testimotiy lo tlle contrary.
1165 Another matter upon which the jury heard evidence arose out of the counter-claim of
C. W. against Sornont. C. W, introduced evidence at trial that after Somont's attempts to
purchase the leases in 1997 were rebuffed by C. W., Somont started investigating C. W.'s
finances. It contacted the president of a bank to disc~~ss potential of the hank breclosing
the
against C, W,?and also contacted other mineral owners of C. W.'s leases; asking them to give
Sornont new leases. C. W. therefore argued that part of its cessation of production resulted
from Somont's interference with its financing. The jury had every right to take this
information into account in determining whether C. LV.'s failure to produce in paying
q~~antities justified as a temporary cessation.
was
766 i f Clli.z.sriiln 1. A.A. Oil Cl~rp., still good law, and this Court's reliance upotr it at
. is
22 (ofits Opinion cedainly suggests rl~at is, I do not see how ajury can make an infon~~ed
it
hctuai determination ofv;heiher the icssee has exercised the diligence of an ordinary prudeill
factors. including oil prices, pour cor:ditions
operator. witbout iakiiig into accourrr all r-eleva~it
on t l ~ c market, financial conditions of the operator, and what other prddenr operator5 do
oil
under the same or similar circumstances. I therefore join in Justice Trieweiler's concurring
and dissenting oplmon. I too ~vould
affirm the judgment of the District Court
Justice