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Belden v. Tri-star Producing Co.





APPEAL from the Circuit Court of Fayette County; the Hon. PAUL M. HICKMAN, Judge, presiding.


At issue in this appeal are the rights under certain oil and gas leases covering 40 acres of Fayette County land. This land was and is owned by several individuals collectively referred to as the "Breeze heirs" and thus the tract is known as the "Breeze lease" or the "Breeze land." The precise question presented is whether a 1938 oil and gas lease covering that land expired under the terms of the habendum clause in that lease.

On July 18, 1938, the then owners of the Breeze land entered into an oil and gas lease with the Minerva Oil Company as lessee. The lessors reserved unto themselves the then customary one-eighth royalty, which would become three-sixteenths in the event that production exceeded a specified level. The lease was to remain in effect for one year "and as long thereafter as oil or gas or either of them is produced from said land by lessee." No mention was made in the lease of the possibility of pooling or unitization or of the rights of the parties should either occur.

Wells were drilled and oil was produced on the Breeze land, but by the early 1950's it became apparent that a secondary recovery program would be required to extract the maximum amount of oil. To that effect, Minerva joined with Shell Oil Company and Austin Stewart, the operators of adjacent oil leases, and a waterflooding secondary recovery program was decided upon in an agreement dated September 15, 1954. It was contemplated that all lessors in the proposed North Louden Flood Unit, which would include the Breeze land, would agree to unitize their interests and be paid royalties out of the total production of oil from the Unit.

In 1956, Shell petitioned the Illinois Department of Mines and Minerals for approval of the North Louden Flood Unit and the proposed waterflooding to take place in the Unit. In the petition, Shell recognized that certain royalty owners, including all the Breeze heirs, had not consented to unitize their interests, but it was promised that the flooding operations would be conducted in such a way as to protect the rights of these royalty owners. A hearing on Shell's petition was held in Springfield on April 18, 1956. Two of the Breeze heirs appeared on behalf of themselves and the other Breeze owners. Both Francis Breeze and Hattie Breeze expressed no objection to Shell's secondary recovery program, but neither wished to share in the total production from the Unit. Instead, they insisted upon receiving royalties only from the oil production on the Breeze land.

The Department of Mines and Minerals approved Shell's plan on May 3, 1956. None of the Breeze owners signed a unitization agreement, and thus during the secondary recovery operations oil from the Breeze lease was stored in a separate tank on the Breeze land, and royalties were paid to the Breeze heirs only from the sale of oil from this separate tank. The record does not indicate whether oil production from the Breeze lease was continuous during Shell's direction of the secondary recovery operations, but oil was obtained from that land during 1966. In July of that year, Shell transferred its working interests in the North Louden Unit to R.H. Troop. Troop wrote to the royalty owners in the Unit and requested that they sign division orders which would allocate royalties according to the percentages established in the unitization agreement reached ten years earlier. Again, none of the Breeze owners consented to unitize their royalty interests.

Troop began to operate the Breeze lease in 1966, although Minerva Oil Company did not assign its interests in the 1938 lease to him until March of 1967. Claude Moore, Troop's production superintendent, recalled in an evidentiary deposition taken in 1977 that when Troop commenced work on the Breeze land in 1966, there were three production wells located on the land, as well as several water injection wells. Of these three producing wells, only one was in a functioning capacity, another well was missing a pumping unit and the third consisted only of the casing in the hole. The single producing well yielded about a half barrel of oil each day, but 75 or 80 barrels of water were produced along with each half barrel of oil. According to Moore, it took until October of 1967 for Troop to extract a single tank of oil from the Breeze land, and, that month, the oil was sold to the Sohio Petroleum Company. Out of the proceeds of that sale, Troop tendered royalty checks to each of the current Breeze royalty owners. Four of these checks were for $14.60 and four were for $3.65. One check in each amount was accepted by certain of the Breeze heirs but the rest were refused.

Troop continued to recover oil from the Breeze tract until approximately 1968, when the producing well equipment was struck by lightning. After the October 1967 sale of oil, less than a tank of oil was obtained from the Breeze land, and, according to Moore, this oil remained unsold when he left Troop's employ in April of 1974. Moore remembered that, although work was done on the Breeze lease after 1968, no oil was produced from it between that year and 1974.

In 1970, W.L. Belden, an independent oil producer and the original plaintiff in this case, was contacted by several of the Breeze heirs about their lease. They informed him that there had been no oil production from their property for two or three years, and, upon personal inspection, Belden discovered that the lease was indeed idle. He continued to watch the land for two or three more years and noticed no further activity. The Breeze heirs again contacted Belden in 1974 or 1975, and he returned to the Breeze land once more, only to find it still without oil production. He then prepared an oil and gas lease of the property with himself as lessee, which was signed by all the Breeze heirs between April 23, 1975, and July 7, 1975. It was recorded in Fayette County on July 21, 1975. Since the 1938 oil and gas lease executed by the Breeze family had not been released, the 1975 lease to Belden is referred to as a "top lease."

Meanwhile, R.H. Troop died on May 15, 1975. In February of that year, Troop had sold all of the equipment and wells comprising the North Louden Unit to John Homeier. Tri-Star Producing Company, a defendant, succeeded to the operation of the Unit effective March 1, 1975. Richard Koons, who served as vice-president of Tri-Star until January 1976, testified that no oil was being produced on the Breeze lease when Tri-Star took over the Unit and its operations. He did not know when the last oil had been obtained from the land prior to March 1975.

Tri-Star's time records, as identified by Mary Youther, a Tri-Star bookkeeper, show that Tri-Star men and equipment were initially used in an attempt to restore production on the Breeze lease on May 22, 1975. The first bill from an independent oilfield contractor to Tri-Star concerning work specified to have been on the Breeze lease is dated April 22, 1975. It would serve no purpose to summarize the voluminous evidence pertaining to the work performed to restore production on the Breeze land after these dates. Suffice it to say that personnel from Tri-Star or from independent contractors hired by Tri-Star were frequently on the production equipment on that land up to the September 1979 trial date.

According to Richard Koons, oil commenced to again be extracted from the Breeze land by Tri-Star on approximately October 1, 1975. Lon Rogers, who was employed as a pumper for Tri-Star, also recalled that oil was produced on the Breeze lease some time in the fall of that year. Ralph Wright, who worked as a gauger for the oil purchaser, Sohio Pipeline Company, was assigned to gauge the oil output on the North Louden Unit beginning in 1973. He stated that he first gauged oil from the tank on the Breeze lease in 1976. A tabular summary of production on that lease between March 1975 and June 1979 introduced into evidence by stipulation corroborates Wright's testimony. It indicates that no oil was produced from the Breeze land until May 1976, even though oil production was largely continuous after that date.

Before the top lease was granted to Belden, an affidavit was executed by several of the current Breeze heirs in which they stated that no oil or gas had been produced on their property for 36 months before March 17, 1971. This document was recorded on March 14, 1974. After he obtained the top lease, Belden wrote to Richard Koons at Tri-Star. In a letter dated August 26, 1975, Belden informed Koons of the top lease and noted that he had obtained affidavits of nonproduction on the Breeze tract. He wrote:

"We are aware that you have been doing some work on this tract and understand from the original oil and gas lease, in favor of Minerva Oil Company, that equipment may be removed from this tract. We are assuming that this is the work that you may be doing. We trust you will complete this work in such a manner as not to damage any sands in the productive areas in the formations, as we plan to develop and complete productive wells in the very near future."

Koons replied to Belden by letter dated September 3, 1975. He stated that Tri-Star had acquired Troop's interests in the Breeze land and that Tri-Star intended "to do the necessary work required of these interests and operate these interests in accordance with its rights."

On September 30, 1975, Belden filed his complaint in the present case. He alleged that the lease upon which Tri-Star's claims were based had expired by its own terms, by reason of cessation of production, and in support of this allegation, an affidavit from Claude Moore was attached to the complaint. That affidavit, which had been recorded on August 29, 1975, proclaimed that no oil was produced from the Breeze land between March 1, 1970, and September 1, 1973. The complaint also alleged that Tri-Star was wrongfully interfering with Belden's use of the Breeze land and had not removed its equipment from the property. Belden requested that the original Minerva lease be declared to have expired by its own terms. He also sought an injunction to prevent Tri-Star from interfering with his operation under his 1975 lease and to require Tri-Star to remove its personal property from the leasehold and to plug the existing wells.

Belden filed an amendment to his complaint on June 17, 1976. In count II, he claimed that Tri-Star had begun extracting oil from the Breeze land on May 5, 1976, and he sought an injunction preventing further removal of that oil. Count III re-alleged the facts pleaded in count II and requested punitive damages for the actions taken by Tri-Star.

The case proceeded to a bench trial in September 1979. Various parties were added and dismissed before that time in order to ensure proper representation of all interests in the Breeze land and leases. Patricia Belden, as the executrix of the estate of W.L. Belden, deceased, was substituted as the plaintiff. Following the presentation of evidence, including that discussed above, Tri-Star tendered to the clerk of the court a check in the amount of $12,229.03, which represented the royalty said to be due the Breeze heirs for oil production on their land through June 1979.

In its judgment of October 30, 1981, the trial court found that the 1938 Minerva lease was still in effect, that the North Louden Flood Unit was a valid water flood unit, and encompassed the Breeze lease, and that Belden had knowledge of the continuing production activities on the Unit. It was also stated that the 1938 lease had not been abandoned and that "it would be inequitable for plaintiff to prevail." Judgment was entered in favor of the defendants' on count I of the complaint, and in view of this disposition, the trial court concluded that counts II and III could not be maintained, and therefore ordered that they be dismissed.

An appeal from that judgment has been perfected by the plaintiff. In this court, it is argued that the 1938 Minerva lease expired under its habendum clause by virtue of the nonproduction from the Breeze land. It is claimed that the trial court erred in basing its decision on the existence of the North Louden Unit and on production from the Unit, because the ...

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