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KINGWOOD OIL COMPANY v. BELL

September 8, 1955

KINGWOOD OIL COMPANY, A CORPORATION, PLAINTIFF,
v.
KENNETH C. BELL, INDIVIDUALLY AND AS EXECUTOR TO CONTINUE THE BUSINESS OF WILLIAM BELL, DECEASED, BEATRICE MARY BELL, HELEN WILSON BELL, LOUISE BELL GOOD, CALVIN GOOD AND THE TEXAS COMPANY, A CORPORATION, DEFENDANTS.



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 undisputed.

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 "Shanafelt C".

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 agreement.

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 parties.

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 accomplish the

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 ...


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