The opinion of the court was delivered by: Platt, District Judge.
Plaintiff, Kingwood Oil Company, herein referred to as
Kingwood, has brought this suit for a declaratory
judgment*fn1 against Kenneth C. Bell and Louise Bell Good,
devisees of William Bell, deceased, Beatrice Bell widow and
sole devisee of J. M. Bell, and the Texas Company. The amended
complaint is set out in Kingwood Oil Co. v. Bell, 7 Cir.,
204 F.2d 8. This cause was dismissed on motion in the district
court. The court of appeals reversed and remanded. The
defendants other than the Texas
Company have filed an answer and counterclaim. The Texas
Company has filed an answer taking a neutral position on the
result of the lawsuit, except claiming that it should be paid
its costs of producing oil under the unitization agreements.
Plaintiff has filed an answer to the counterclaim.
A controversy exists between Kingwood and the Bells over the
construction of assignments and agreements pertaining to a 1/2
interest in a 7/8 interest in oil and gas leases obtained by
William Bell, and the effect of the Texas Company agreements
thereon. The facts as shown by the evidence are largely
The oil and gas leases were in the Lake Centralia-Salem
Pool. In 1939 when production was at its height this was the
second largest producing area in the United States. The pool
was developed by the Magnolia, Shell, and Ohio Oil Companies,
and several independents. The field was developed in a rapid
manner when there were no limitations by the statutes of the
State of Illinois on the spacing or production of wells.
William Bell was an experienced and shrewd operator who
succeeded in obtaining oil and gas leases in this area. On
July 9, 1936 he obtained an oil and gas lease on 80 acres from
William G. Dodson and Daisy H. Dodson, his wife. He also
obtained an oil and gas lease on July 13, 1936 from James O.
Shanafelt and Nettie R. Shanafelt on 80 acres, known as
"Shanafelt A", and other tracts of about 25 acres known as
Kingwood had leased 70 acres in the pool but had disposed of
it and was anxious to operate again in the area. During the
summer of 1938 and prior to September 7, Joseph King,
president of Kingwood, now deceased, started negotiations with
William Bell to acquire an interest in his oil and gas leases.
Mr. Ben Taylor,*fn2 who was in charge of the land department
of Kingwood, testified that he was present at one of these
meetings between Kingwood and Bell at Bell's office in
Robinson, Illinois. He stated that Kingwood wanted to test for
oil on the leased area and Kingwood would drill, equip,
produce, and deliver to Bell 1/2 of the oil from the 7/8
working interest free of all expenses so long as oil could be
produced profitably. Bell wanted the wells drilled to the
McClosky lime regardless of what was encountered at a lesser
depth. King said he could not maintain a free ride for the
life of the property and the leases would have to be amended
when production of oil became unprofitable. Bell refused to
enter into such an agreement at the time, but stated when
production became unprofitable to Kingwood then the parties
would discuss the situation and make amendments to the
As a result of the discussions on September 7, 1938 Bell
executed an agreement*fn3 with Kingwood on each 80 acres
and therewith on September 12, 1938 Bell signed two
assignments to Kingwood for a 1/2 interest in his "Dodson" and
"Shanafelt A" leases. The consideration recited in the
assignments was $1 and other valuable consideration. The
assignments were delivered to a bank in escrow. When the first
well on each tract was drilled the assignments were to be
delivered. Kingwood complied with the requirements of the
escrow agreement and the assignments were delivered, and
recorded. The agreement provided that Kingwood would drill to
the McClosky producing formation and if oil was found in
paying quantities in the McClosky or before, Kingwood would
drill additional wells as fast as good business judgment would
dictate until the tract would be fully developed. It was
provided in the agreement that Kingwood was to bear all costs,
expenses and charges, including any damages occurring in the
production of oil. Kingwood was to carry insurance to hold
Bell and the leasehold estate harmless. Bell was to receive
1/2 of the oil free of all expenses, and the parties were to
execute pipeline, division, or other orders that might be
required. The agreement further provided for wells every 10
acres in sand area, and twin wells, if production justified.
In lime areas, one well to each 20 acres was specified. Bell,
or his representatives, were entitled to be present during
drilling, equipping and operating. Kingwood was to furnish
Bell with information concerning all operations. The agreement
was to be binding on heirs, successors, and assigns of the
In October, 1938 another assignment and agreement was
entered into between Kingwood and Bell on the 25 acres known
as "Shanafelt C" on essentially the same terms as the prior
agreement. Kingwood again complied with the agreement and the
assignment was delivered.
Across the southeast portion of 80 acres of "Shanafelt A"
was the right-of-way of the Missouri-Illinois Railroad
Company. Four wells were drilled by the railroad company on
this right-of-way, and about $360,000 worth of oil was
produced prior to November 1, 1940. Guy A. Thompson, trustee
of the railroad
company was in litigation with Magnolia Petroleum
Company.*fn4 After this decision in the United States Supreme
Court, Bell and Kingwood entered into negotiations with
Thompson, as trustee, for the settlement of their rights in
the oil. Thompson, the trustee, settled with Bell and Kingwood
on November 1, 1940 and each received $50,000 and a bill of
sale for the equipment. An oil and gas lease covering the
right-of-way was also executed by Thompson, trustee, to
Kingwood and Bell. Bell's interest in the equipment was
conveyed to Kingwood for the sum of $7500.00. These wells
produced until September, 1950 when the unitization agreements
went into effect. The oil produced on the right-of-way was
delivered to Bell without expense.
Kingwood produced oil in large quantities. Twin wells were
drilled in sand formations above the McClosky formation.
Kingwood drilled wells through the McClosky formation (2000 to
2075 feet below surface) to the St. Louis (about 2200 feet
below surface, and the Devonian strata (3300 to 3400 feet
below surface). No dispute arose between Bell and Kingwood or
between Kingwood and Bell's assignees over any oil produced
despite the fact that Kingwood's agreement to give a 50%
override*fn5 to Bell was unique in the field.
Problems arose due to inadequate facilities to get the large
production of oil out of the field. Pipeline facilities were
insufficient. Kingwood contacted Bell and they agreed to
purchase two 80,000 barrel tanks to store oil. Each paid half
for the purchase and construction of these tanks. The pipeline
facilities increased and the tanks were rented to Sohio for
$800 per month. Later the tanks were sold to Sohio for
$40,000. The rental and sale price were divided equally
between Kingwood and Bell.
Another episode occurred whereby a well was deepened to the
Trenton limestone (4500 to 4600 feet below surface). It didn't
look profitable, but the royalty owner was pushing for such a
well. Asa Lee, representing Kingwood, talked this over with
William Bell. An agreement was entered into between them. Bell
was to pay one-half of the costs of drilling but after oil was
produced the same provision was to be effective — delivery of
one-half of the oil to Bell without expense. This
letter-contract provided in part:
"This special agreement entered into because of
the unusual costs and risks involved is not
intended to change, nor shall it have the effect
of modifying any part of the existing agreement
for the development and operation of this
property hitherto entered into except and only
with respect to the costs of deepening Well No.
19 to the pay zone of the Trenton Limestone."
This well was successful and other wells were deepened under
similar arrangements. Each contained a statement:
"It is our understanding that the expenses of
this joint venture are being handled in the same
manner and proportion as the deepening job on the
Shanafelt A-19." (The first well deepened.)
Bell paid his expenses on these wells promptly.
One well was deepened to the St. Peter sandstone formation
at a depth of 5,266 feet. Bell paid his share of the costs of
drilling to make this test. It proved to be dry.
Kenneth Bell acted as executor under the last will of
William Bell until January, 1952. He employed Mr. L. A.
Mylius, a petroleum engineer, as appraiser in the Illinois
inheritance tax proceedings. His report stated that about the
end of 1957 "the William Bell interest might have to
contribute toward the expense to keep the lease operating."
The Attorney General refused to accept the Mylius report on
values and employed Mr. Leo B. Horton, a geologist of Mt.
Vernon, Illinois, as an appraiser for the State of Illinois.
Mr. Horton reported in part:
"It will, therefore, be necessary for Bell
Brothers, which will include the Estate of
William Bell, to make some adjustment of the
overriding royalty * * *"
The Bell interests in the leases were reported as working
interests rather than overriding royalties.
After the death of William Bell, Kenneth Bell became a
director of Kingwood and served for several years in that
capacity. Asa Lee, who was president of Kingwood from August,
1940 to March, 1950 testified that in 1949 a discussion
occurred between Kenneth Bell and himself in Bell's office in
Robinson, Illinois. Lee claimed that Bell admitted that the
secondary recovery program was not contemplated in the
original agreements, but he would see what could be done about
devising a new formula and getting all these interests to go
along. Kenneth Bell denied this conversation at Robinson, but
he did admit that he had a conversation about secondary
recovery with Lee in Oklahoma City. He stated that during this
conversation he said that if the operation ever proved to be
no longer economically feasible for Kingwood he and his
associates would be willing to discuss the matter. At a
stockholders meeting of the Kingwood Oil Company on March 2,
1950 the problem of secondary recovery*fn6 was again
discussed with Kenneth Bell.
On March 13, 1950 Kenneth Bell wrote to Kingwood
acknowledging a phone conversation of March 3, 1950 with James
F. Breuil, president of Kingwood, concerning a proposed
supplemental agreement to relieve Kingwood from the
agreements. In the letter Kenneth Bell stated they would not
enter into any such agreement but when it becomes uneconomic
for Kingwood to continue operating the leases under the
present agreements the Bells would be happy to consider the
matter. On March 17, 1950, Mr. Breuil replied that Kingwood
would "block the flood" by not signing the Texas Agreements
unless some relief was given to it. No agreement was reached.
All of the Kingwood-Bell leases were fully developed and
produced a large quantity of oil. The production, however,
reached its peak in 1940. About 1947 or 1948 general
discussions began in the field concerning the use of
artificial secondary recovery to get the remaining oil. About
that time Judge Lindley decided Ramsey v. Carter Oil Company,
D.C., 74 F. Supp. 481, affirmed*fn7 Cir., 172 F.2d 622,
holding that the royalty owner there could not be compelled by
the operator to join in the unitization agreement. After this
decision there was consideration of the plan of drilling
periphery wells on every lease, but this was found to be too
costly a system.
The Texas Company took the lead in the negotiations to
production of oil induced by water flooding the pool. Two
agreements7 designated as the unit operating and the
unitization agreement were prepared to be effective September
1, 1950 if signed by a sufficient number of operators and
royalty owners. The defendants signed these ...