L&L Energy Co. v. Sharp
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Cite as 2010 Ark. App. 422
ARKANSAS COURT OF APPEALS
DIVISION I
No. CA09-1263
Opinion Delivered
L & L ENERGY COMPANY, LINDELL
AND LETHA SHARP, INDIVIDUALLY
APPELLANTS
V.
CHESAPEAKE EXPLORATION, LLC
APPELLEE
May 12, 2010
APPEAL FROM THE WHITE
COUNTY CIRCUIT COURT
[CV-2007-673-1]
HONORABLE THOMAS HUGHES,
JUDGE
AFFIRMED
DAVID M. GLOVER, Judge
This is an action for cancellation of oil and gas leases and for quiet title by appellee,
Chesapeake Exploration, LLC (Chesapeake), against appellants L & L Energy Company and
Lindell and Letha Sharp, individually (collectively “Sharp”). In Chesapeake’s original petition
filed November 26, 2007, several other persons and entities were also originally named as
defendants, but were subsequently dismissed from the lawsuit and play no part in this appeal.
An amended petition was filed on August 22, 2008. Following the hearing on May 7, 2009,
the trial court issued its letter opinion on June 19, 2009, and a judgment in favor of
Chesapeake was entered on July 30, 2009. We affirm.
Standard of Review
The standard of review on appeal from a bench trial is whether the circuit court’s
findings were clearly erroneous or clearly against the preponderance of the evidence. Pianalto
Cite as 2010 Ark. App. 422
v. Pianalto, 2010 Ark. App. 80, ____ S.W.3d _____. A finding is clearly erroneous when,
although there is evidence to support it, the reviewing court, when considering all of the
evidence, is left with a definite and firm conviction that a mistake has been committed. Id.
Disputed facts and determinations of credibility are within the province of the fact-finder.
Jaramillo v. Adams, 100 Ark. App. 335, 268 S.W.3d 351 (2007). A trial court’s conclusions
of law, however, are given no deference on appeal. Id.
The Hearing
At the hearing, the parties introduced as a joint exhibit certain stipulated facts, which
included the following pertinent lease provisions:
1) Habendum Clause
Subject to the other provisions herein contained, this lease shall remain in force
for a term of __*__ years from this date (herein called “primary term”), and as long
thereafter as oil and gas, or either of them, is produced from the above described land
or drilling operations are continuously prosecuted as hereinafter provided. “Drilling
operations” includes operations for the drilling of a new well, the reworking,
deepening or plugging back of a well or hole or other operations conducted in an
effort to obtain or re-establish production of oil or gas; and drilling operations shall be
considered to be “continuously prosecuted” if not more than 60 days shall elapse
between the completion or abandonment of one well or hole and the commencement
of drilling operations on another well or hole. If, at the expiration of the primary term
of this lease, oil or gas is not being produced from the above described land but lessee
is then engaged in drilling operations, this lease shall continue in force so long as
drilling operations are continuously prosecuted; and if production of oil or gas results
from any such drilling operations, this lease shall continue in force so long as oil or gas
shall be produced. If, after the expiration of the primary term of this lease, production
from the above described land should cease, this lease shall not terminate if lessee is
then prosecuting drilling operations, or within 60 days after each such cessation of
production commences drilling operations, and this lease shall remain in force so long
as such operations are continuously prosecuted, and if production results therefrom,
then as long thereafter as oil or gas is produced from the above described land.
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Cite as 2010 Ark. App. 422
*Some leases specify a 3-year primary term, and some specify a 5-year term.
2) Shut-In Royalty Clause
If a well capable of producing gas or gas and gas-condensate in paying quantities
located on the leased premises (or on acreage pooled or consolidated with all or a
portion of the leased premises into a unit for the drilling or operation of such well) is
at any time shut in and no gas or gas-condensate therefrom is sold or used off the
premises or for the manufacture of gasoline or other products, nevertheless such shut
in well shall be deemed to be a well on the leased premises producing gas in paying
quantities and this lease will continue in force during all of the time or times while
such well is so shut in, whether before or after the expiration of the primary term
hereof. Lessee shall use reasonable diligence to market gas or gas and gas-condensate
capable of being produced from such shut in well but shall be under no obligation to
market such products under terms, conditions or circumstances which, in lessee’s
judgment exercised in good faith, are unsatisfactory. Lessee shall be obligated to pay
or tender to lessor within 45 days after the expiration of each period of one year in
length (annual period) during which such well is so shut in, as royalty, an amount
equal to $1.00 per net acre for the acreage covered by this lease as to which the
leasehold rights are, at the end of such annual period, owned by the lessee making such
payment . . . . [Ellipsis in original.]
3) Force Majeure Clause
All express provisions and implied covenants of this lease shall be subject to all
applicable laws, governmental orders, rules and regulations. This lease shall not be
terminated in whole or in part, nor lessee held liable in damages, because of a
temporary cessation of production or of drilling operations due to breakdown of
equipment or due to the repairing of a well or wells, or because of failure to comply
with any of the express provisions or implied covenants of this lease if such failure is
the result of the exercise of governmental authority, war, armed hostilities, lack of
market, act of God, strike, civil disturbance, fire, explosion, flood or any other cause
reasonably beyond the control of lessee.
The stipulation also included the following facts.
Robert Grubbs, appellants’
predecessor in interest, drilled and completed a natural gas well in October 1995, which
produced gas in paying quantities prior to the expiration of the primary term of the applicable
leases. Appellant Lindell Sharp purchased the gas well and associated leases owned by Grubbs
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as part of Robert Grubbs’s Chapter 7 Bankruptcy action. The assignment of the oil and gas
leases to Lindell Sharp was executed on June 1, 2000, and, effective February 13, 2002,
Lindell assigned the leases and the gas well to his company, appellant L & L Energy Company.
There was no production from the gas well between May 2000 and November 2000. The
pipeline that was used to market the gas well was conveyed from Grubbs to L & L Energy
Company by quitclaim deed dated February 18, 2005. In November 2008, the gas well was
recompleted and renamed. Finally, the stipulation included production records for the
original gas well and the recompleted gas well, including a record of the payment of
production and shut-in royalties to lessors under the leases.
Though several witnesses testified at the hearing, it is only necessary to briefly highlight
their pertinent testimony because, in large part, the testimony supplements the above joint
stipulations. Lindell Sharp testified concerning the background of his acquisition of the gas
well and pipeline from Grubbs, production from the well, shutting the well, and payment of
royalties. Jim Kelly, a land man with Chesapeake, testified concerning his opinion that the
leases had expired by their own terms because the gas well not only had not produced, but
was not capable of producing. Mills Bale, a production engineer with Chesapeake, testified
that it was his opinion the gas well was not capable of producing in paying quantities. Robert
Grubbs testified by deposition about his bankruptcy and the sale of the well; he stated that in
his opinion, the gas well had potential but that it had a lot of problems. Mike Webb,
president of Webb Energy Resources, Inc., testified that his firm marketed the gas from the
well for Sharp and that he made shut-in royalty payments when requested by Sharp and as
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Cite as 2010 Ark. App. 422
shown on the exhibit recording those payments. Finally, Lindell Sharp testified again, stating
his opinion that the well was capable of production and that none of the lessors had contacted
him prior to the lawsuit to say that the leases were terminated or that they were upset with
his handling of the property.
The Ruling
After hearing evidence in this case, the trial court made the following findings of fact
and conclusions of law:
a)
In March 2000, Robert Grubbs filed for Chapter 7 Bankruptcy protection.
Separate defendant, Lindell Sharp purchased the Holliman 1-28 well located in
Section 28, Township 9 North, Range 7 West, White County, Arkansas
(“Holliman 1-28”) and the leases owned by Robert Grubbs, Grubbs Energy
Company, and/or GEC Investments, LLC as authorized by the U.S.
Bankruptcy Trustee, Thomas E. Robertson, Jr. The assignment of oil and gas
leases to Lindell (a/k/a Lyndall) Sharp was executed June 1, 2000.
Subsequently, Lindell Sharp assigned the leases and the Holliman No. 1 to his
company, separate defendant, L & L Energy Company, by assignment,
conveyance and bill of sale, effective February 13, 2002. These leases were all
located in Section 28, Township 9 North, Range 7 West, White County,
Arkansas as follows:
....
b)
The primary term of each of the leases has expired.
c)
The Holliman 1-28 is the only completed oil or gas well located in Section 28,
Township 9 North Range 7 West, White County, Arkansas.
d)
Production from the Holliman 1-28 ceased in May 2000.
e)
In May of 2000, the Holliman 1-28 was not capable of production in
commercial quantities.
f)
Drilling operations were not commenced within 60 days from the cessation of
production from the Holliman 1-28 in May of 2000.
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Cite as 2010 Ark. App. 422
g)
There was no production from the Holliman 1-28 between May 1, 2000, and
November 30, 2000.
h)
Drilling operations were not commenced within 60 days from the expiration
dates of the primary terms of any of the leases.
i)
Some of the plaintiffs accepted royalty payments from [Sharp] after the
expiration of the primary term of the leases. The acceptance of royalties did
not estop the plaintiffs from asserting lease cancellations because the leases had
already automatically expired by their own terms, prior to acceptance of
royalties.
j)
In order for [Sharp] to pay shut-in royalties, the Holliman 1-28 well had to be
capable of producing commercial quantities of gas at the time it was shut-in.
It was not capable of producing gas in commercial quantities at that time.
k)
In this case, the subject leases expired under their own terms because there was
no actual production at the expiration of each lease’s primary term and
defendants failed to comply with the contractual substitutions for production
or the “Shut-in Royalty Clause.”
l)
The leases in question are also deemed cancelled because [Sharp] breached the
implied covenant of reasonable development.
m)
The oil and gas leases of the [Sharps] have expired.
Discussion
In this appeal, Sharp contends that the trial court erred in failing to apply the equitable
principles of waiver and estoppel to bar the lease cancellation claims of certain mineral owners
who had ratified the oil and gas lease, had accepted royalties and surface damages, and had
allowed drilling operations on the leasehold, without objection. We address only the portion
of this argument that focuses on the trial court’s refusal to apply estoppel based upon the
acceptance of royalties by mineral owners because, as demonstrated by the earlier recitation
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Cite as 2010 Ark. App. 422
of the findings of fact and conclusions of law, the trial court did not make any rulings
concerning ratification of the oil and gas leases, the payment of surface damages, or the
allowance of drilling operations on the leasehold without objection. Consequently, even
though Sharp presented these other arguments to the trial court, in the absence of a ruling by
the trial court, those arguments are not properly before us.
In its judgment, the trial court found that “the subject leases expired under their own
terms because there was no actual production at the expiration of each lease’s primary term
and Sharp failed to comply with the contractual substitutions for production or the ‘Shut-in
Royalty Clause.’” Sharp does not challenge this finding by the trial court. Based upon this
finding, the trial court concluded that the acceptance of royalty payments from Sharp after the
expiration of the primary term of the leases did not estop the lessors from asserting lease
cancellations. Sharp does challenge this conclusion by the trial court.
The parties acknowledge that there is not an Arkansas case that specifically addresses
equitable estoppel in a “royalty payment” context, as is presented here, and we have not
found one either. However, in 3 S UMMERS ON O IL AND G AS, § 19:8 (3d ed. 2008), the
authors explain:
Where a lease is made for a definite term of years, the acceptance of royalty
payments by the lessor after the expiration of that term may estop him to deny the
existence of the lease. Where, however, the duration of a lease is for a definite primary term
and as long thereafter as oil or gas is produced from the premises in paying quantities, acceptance
of royalty payments by the lessor after the expiration of the primary term does not estop her to
assert termination of the lease for failure of production as of the end of the primary term or
thereafter.
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(Emphasis added.) In the present case, the terms of the leases fall in the second category
(emphasized), and therefore the trial court’s refusal to apply the doctrine of estoppel is in line
with generally accepted oil and gas principles. Moreover, in Ladd Petroleum Corp. v. Eagle Oil
& Gas Co., 695 S.W.2d 99, 109 (Tex. App. 1985), the Texas Court of Appeals explained, in
the context of issues that might occur on remand:
We reject Ladd’s estoppel argument in regards to the acceptance of royalties.
Assuming the leases terminated because of cessation of production, the mere
continuance of the acceptance of royalties would not estop the Blair lessors from
challenging the lease. There must have been some affirmative act or concealment on
the part of the lessors, as well as reasonable reliance by Ladd. Here, the Blair lessors
made no such affirmative act.
Furthermore, once a lease terminates by its own terms, it cannot be ratified or revived.
(Emphasis added and citations omitted.) And, in Danne v. Texaco Exploration & Production,
Inc., 883 P.2d 210, 215 (Okla. App. 1994), the Oklahoma Court of Appeals explained:
It has been held in Oklahoma that acceptance of royalties does not estop the
lessor from asserting lease cancellation, if the lease has already automatically expired, by its
own terms, prior to acceptance of royalties. “[I]f a lessee should continue to make royalty
payments to the lessor after the lease has terminated according to its own terms, the
receipt of such payments will not work an estoppel against the lessor, and such lessor
may nevertheless assert that the lease has terminated.”
(Emphasis added and citations omitted.) As these cases from other jurisdictions make clear,
it is the automatic expiration of the lease, by its own terms, prior to the acceptance of royalties
that prevents the application of the principles of estoppel.
Here, again, the trial court specifically found that “the subject leases expired under
their own terms because there was no actual production at the expiration of each lease’s
primary term and Sharp failed to comply with the contractual substitutions for production or
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Cite as 2010 Ark. App. 422
the ‘Shut-in Royalty Clause,’” and that the royalty payments from Sharp were accepted by
the lessors after the leases had already automatically expired by their own terms. It was on that
basis that the trial court refused to apply the principles of estoppel in this case. We hold that
under the circumstances of this case, the trial court was correct in doing so, and we, therefore,
affirm.
Affirmed.
V AUGHT, C.J., and G RUBER, J., agree.
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