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 ,
A. A. OIL CORPORATION, a c o r p o r a t i o n ,
GORDON CHRISTIAN and LORENE CHRISTIAN,
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: -, January 22, 1973
Filed:
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. Gas from Christian
#2 was f i r s t purchased by Montana-Dakota U t i l i t y Co. 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." Subsequently, on July 1 ,
1941, the primary term was extended " * * * subject t o compliance with i t s
original and *** 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 amend-
ments 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 dis-
trict 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 con-
tinuing 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 commence-
ment 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 here-
of 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 exer-
cised 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
transportation. Gas must be stored below ground and i s moved to the market
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. 2 Williams,
Oil & Gas Law, § 853, p. 388.
The parties t o the lease involved here may well have had t h i s prob-
lem 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. Berthelote v . Cole, supra; 2
Williams, Oil & Gas Law, 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 equipp-
ing 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. Byrne
f a i l e d t o meet h i s burden o f p r o o f . 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, R.C.M.
1947. 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 pro-
ducing 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 tak-
e
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 equit-
able 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 .