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John O. Schofield, Inc. v. W. S. Howard

June 12, 2000

JOHN O. SCHOFIELD, INC., PLAINTIFF-APPELLANT AND CROSS-APPELLEE,
AND
W. S. HOWARD, PLAINTIFF,
V.
SAM H. NIKKEL, DEFENDANT-APPELLEE AND CROSS-APPELLANT,
AND
FARM BUREAU OIL COMPANY, DEFENDANT-APPELLEE,
AND
H. WAYNE GIFFORD AND MINERAL DEVELOPMENT, INC., DEFENDANTS



The opinion of the court was delivered by: Justice Hopkins

No. 93-L-3

Appeal from the Circuit Court of Wayne County. Honorable Larry O. Baker, Judge, presiding.

The plaintiff, John O. Schofield, Inc. (Schofield), is Stephen Wilson's assignee and successor in interest. Schofield claims that defendant Sam H. Nikkel orally agreed to convey to Wilson an interest in all oil and gas leases acquired in an area known as the Boulder Field Unit (Boulder Field) in exchange for Wilson's geological services. Nikkel maintains that he agreed to convey to Wilson only an interest in the portion of Boulder Field known as lease A, the lease promoted by Nikkel.

Schofield appeals the trial court's judgment denying its claim for specific performance of the oral agreement. Schofield asks this court to reverse the trial court's ruling that Schofield's acceptance of proceeds of oil produced by lease A of Boulder Field bars Schofield's claim of interest in lease B by either estoppel or ratification. Schofield requests this court to award it 1/64 of 75% carried working interest in lease B, in addition to a judgment in the amount Schofield would have earned on the interest in lease B had Nikkel conveyed it to Wilson. Nikkel cross-appeals, asserting that the trial court erred in finding an enforceable oral agreement between Nikkel and Wilson and in finding that the Department of Mines and Minerals' unitization order did not bar the collateral attack in the trial court through the doctrine of res judicata or collateral estoppel. Defendant H. Wayne Gifford has been dismissed from both the appeal and the cross-appeal. Plaintiff W.S. Howard is also not a party to this appeal or cross-appeal.

We affirm the trial court's judgment in favor of Nikkel for reasons other than those relied on by the trial court.

FACTS

John Prior, an independent oil and gas producer and an oil field drilling and construction contractor, acquired from the Bureau of Land Management in 1987 an oil and gas lease, known as lease A in Boulder Field, covering portions of the Carlyle Lake Recreation Area.

Testimony of oral agreement

Wilson, a petroleum geologist, testified that in late 1986 and early 1987, he provided Nikkel, who was in the business of acquiring oil and gas leases for third parties, with Illinois Geological Survey 102, which included information pertinent to Boulder Field. After his meeting with Wilson, Nikkel learned that Prior had acquired lease A of Boulder Field. Nikkel met with Prior, and in June 1987, Prior assigned his interest in lease A to Nikkel. In a letter of agreement, Prior and Nikkel acknowledged that not only would Nikkel acquire lease A from Prior, but he would also have the opportunity to acquire future interests within Nikkel's and Prior's area of mutual interest, which covered four sections in the area of Boulder Field.

Wilson testified that after Nikkel returned to Wilson, Nikkel seemed confident he could acquire the leases from Prior. Wilson then provided Nikkel with scout check tickets, production information, a copy of a Illinois State Geological Survey publication, a computer-generated map, and one or two electric logs. Wilson stated that he and his assistant each spent approximately 80 hours exerting effort with respect to Boulder Field. Wilson testified that at that time, he and his assistant each charged $25 an hour.

Wilson testified he had a clear understanding that Nikkel agreed to give Wilson a 1/32 overriding royalty interest in the entire Boulder Field in exchange for Wilson's services. Wilson explained that he later agreed with Nikkel to reclassify his interest in Boulder Field from a 1/32 overriding royalty interest to a 1/64 of 75% carried working interest. An overriding royalty interest is not subject to any costs or expenses, whereas a carried working interest, as interpreted by the parties herein, is subject to its proportionate share of operating expenses but is not subject to costs of drilling and completing.

Wilson testified that, as a petroleum geologist who provided information on specific drilling prospects, he always received an interest in all of the wells drilled and in all of the leases acquired in the entire prospect area and that his agreements were almost always oral. Wilson also testified that he believed that if the area were to be unitized, he would receive his 1/64 x 75% carried working interest in the entire Boulder Field.

At trial, Nikkel testified that he never undertook to acquire any leases for Wilson on contract wells or other projects. Nikkel testified that the only information that Wilson provided on Boulder Field was Illinois Geological Survey Bulletin 102, a known geological survey. Nikkel testified that he conversed later with Wilson, mentioning to Wilson that he was interested in arranging a deal, but Wilson appeared uninterested. Nikkel testified, however, that Wilson subsequently provided to Nikkel a computer-generated map, one or two scout tickets, and one or two electric logs, all of which were unsolicited and were not used in Nikkel's presentations because Nikkel provided his own maps and selling exhibits to promote the well on lease A of Boulder Field. Nikkel admitted that he intended to compensate Wilson for showing Nikkel the Illinois Geological Survey Bulletin. Nikkel testified that the information Wilson provided to him from Illinois Geological Survey Bulletin 102 encompassed an area that includes what is now known as lease A and lease B of Boulder Field.

In November 1987, the government canceled approximately 121.04 acres in lease A that had been leased to Prior. Nikkel testified that after he raised the funds to do the initial drilling and obtained production on the first well on lease A of Boulder Field, Nikkel gave Wilson, in January 1988, a partial assignment of oil and gas lease, which Nikkel intended to be a 1/64 of 75% carried working interest in lease A. The written assignment from Nikkel to Wilson was executed in January 1988 and conveyed a 1.5625% carried working interest in the real estate originally acquired by Prior in lease A, minus the 121.04 acres retracted in 1987.

Additional acreage covering Boulder Field was nominated for lease by the Bureau of Land Management in December 1988. Effective January 1, 1989, Prior acquired the second lease from the United States government, now known as lease B in Boulder Field. Although the 1987 agreement between Nikkel and Prior required Prior to assign lease B to Nikkel, on November 1, 1992, Prior assigned lease B to Gifford to commence operations.

Lease A thus became the amount of acreage that was initially obtained from the Bureau of Land Management by John Prior, less the 121.04 acres retracted from him, and lease B became that acreage acquired in the second transaction between Prior and the Bureau of Land Management in January 1989.

Wilson testified that in 1989 he refused to pay lease acquisition and leasehold costs on the balance of the ground in Boulder Field. Jack Alexander, from J & F Energy, as the operator of lease B, testified at trial that had Wilson paid the $1,000 due for lease acquisition costs on lease B, then Wilson would have been credited with his proportionate share of lease B. As a result of Wilson's refusal, the operators told Wilson he would be forfeiting his interest in lease B.

Wilson received $2,000 to $3,000 in proceeds from his interest in lease A of Boulder Field from January 1988, the date of Nikkel's assignment to Wilson, until March 1991. Wilson, in March 1991, assigned his interest, which he believed to be a 1/64 of 75% carried working interest in the entire Boulder Field, to Schofield for $9,500. Although the assignment purportedly conveyed lease A and lease B of Boulder Field, Wilson did not "warrant title to the aforedescribed leases of lands."

Expert testimony of custom and usage

The geology experts at trial, Marshall Daniel and John Basnett, testified that generating a prospect involves developing an idea to find oil and gas by using skills and available geological data to interpret and generate geological maps, scout tickets, different well information, production information, and any other available information. The experts testified that operators often compensate the geologist with a generation fee of an overriding royalty interest in the prospect generated, along with an hourly compensation for watching the well, and that these agreements are generally oral. The experts testified that the custom and usage in the Illinois oil and gas industry regarding a geologist who generates a prospect in exchange for acquiring an interest is that the geologist receives an overriding royalty interest, or other agreed-upon interest, in all wells within the prospect area or area of mutual interest, which may encompass more than one lease and which may expand as the prospect develops. One of the experts testified, however, that had he generated the underlying prospect, he would have performed additional work, including making additional maps, bringing the data up-to-date, and showing the operator his ideas and giving him reasons why the particular prospect would be a viable place to explore.

Unitization proceeding of Department of Mines and Minerals

In January 1992, Nikkel and Gifford, the respective owners/operators of lease A and B of Boulder Field, filed a petition with the Illinois Department of Mines and Minerals (the Department) to unitize the leases pursuant to statute. See 225 ILCS 725/23.1 through 23.16 (West 1998). Unitization is a method of combining separate leases to allow for the operation of the field as a single unit. The proceeds of the unit are then distributed proportionately to the owners according to their interest as fixed by a final order of the Department in the unitization proceeding.

The unitization petition set forth the owners of interest in leases A and B. Schofield was listed as having a 1.5625 carried working interest in lease A and no interest in lease B. The petition indicated that consistent with the operating agreement, Schofield, as assignee of Wilson, could acquire an interest in lease B upon payment of its proportionate share of the drilling costs in lease B. Similarly to Wilson, Schofield refused the offer, claiming an ownership interest in lease B by virtue of its assignment from ...


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