SOMONT OIL CO v A G DRILLING
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SOMON-f OIL COMPANY, [KC.; a Montana corporadon, ,4ppellant,'Cross-Respondent, _ #- d l r ,> A & G DRII.L.ING, [NC., CAVALIER P E T R O L . C&y4& I l~:g- , ~ ~ ~ ~ ~ ~ ~ ~ = ? $ ~ , ~ ~ ~ U ~ .p- ;:& INC., i\. G. WALLS u W ~JOE W-ALLS, JOHN Vi'ALLZ .. . ., ~d@~~i~,+ ' .,'... .&+-. .and STEWART HOWELL, all d/b/a C-W SOlKl. VENTIJRE akia CAVALIER-WALLS JOIN VENTURE, ,,, .4PPEQIL FROM: District Coitrt of the Ninth Sodicial District, In and for the County of Toole, The Honorahlc Marc G. Buyske, Judge presiding. C;OU&jSELOF RECORD: For Appellant: Gregory J. Hatlcy, Davis, Hatley, Haffeman & Tighe, Great Palls, Montana For Respondeiits: Douglas C. Allen, Corder & r\llen, Great Falls, Montana Shelby, Montaiia Richard L. Beatty, Attorney at La~v, For i\niicus Cunae: Tommy t1. Butler, Special Assislalit Attorney General, Montana Department ofNatura1 Res~turces Corrsewation. Helena: Montana and Kcnip J. LVilson (pro se). Crobt-ley: Haughey: Haulson, 'Toole & Dietrich, Billings, Montana Argued: h4ay 17, 2001 Submitted: May 17, 2001 Decided: June 2 1, 2002 Filed. . a Justice J i m Rcgnicr deli\-ered the Opinion oi'thc Coui?. "1 Soraont Oil Company. lnc.? Appellant/Cross-Rci;pc~ndc11~~ suit agaiiist filed &G Drilling, Inc., Cavalier Pctrolcurn, Inc., i\.G. Ll-alls, also knowrr as Joe C!~alls, John and Stelvart Howell, all doing business as C:-W Joint Venture, also known as Cavalier- Walls Joint Venture, Respondcitt~~C:ross-~4ppellants ("C-W"), in the Ninth Judicial District Court, -Toole County, to ler~nillate certain oil and gas leases held by C-W. Following trial, the jury rendered a verdict in favor of C-W. Somont appeals the judgment entered upon the jury .i-erdict and certain pre-trial and post-trial rulings issued by the District Court. C-CV cross appeals the District Court's award of attorney fees to Somont based on its determination that Sorncttit had standing to prosecute this action. Ll'e affirru in part, rc\;esse in part, iind remand for further proceedings consistent with this opinion. ?I2 The parties raise the following issues or1 appeal: (13 1. Did the District C:ourt err \%-hen concluded that Somont had standing to compel it C-W's release of certain oil and gas leases pursuant to $ 82-1-202(1), MCA? 14 1 2. Did the District Court err when it allo\ved thejury to consider oil prices, econon~ic considerations, and C-CV's financial condition iri determining whether oil and gas leases had tenninatcd due to a lack of production? BA<:KCROUNl> qj5 1111001, C-&"v'urchaseda number ofoil and gas lcases in the Kevin-Sunburst oil fieid in 'I'oole County, Montana. Most ofthese leases were established in the 1920s for a specified numbct ofycars, 1.e ,the ptiniary term. Conseqrrcntly. the primary terms on these leases hale long sltlcc exp~red liowcver. through barlous hahcndunl clauscs. tile conuacts pro\ idc tor rlie leases' extension of aii iiiciefinitr secondary tern. Pursuant to the habcndum ciauscs, the lcsscc shall maintain a viable lcaseliold interest as long as the lessee produces oil and gas in paying quantities from said lanci. Therefore, following its 1991 purchase, C-W held i t s Kevin-Sunburst leasehold properties pursuant to the contingencies ofthe liabendum clauses. 16 In late 1 ?97, Somont ofkred to purchase a number of C-W's Kevin-Sunburst leases. C:-\I: subsequently declined Sonlont's offer. Thereafter, on April 10,1998, Somont informed C-W that it had acquired new leases from the Kel~in-Sunburst lessors and that C'-W's leases had terminated due to a lack of production. Soniont demanded that C-W execute lcasc releases 011 the properties. C-W rcfused to execute the releases and on May 20, 1998, Somont filed stlit in the District Court to compel C-W's executio~iof the releases. The Ilisrriet Court issued a temporary restraining order which precluded C- W from commencing any operations on the leasehold properties prior to a show cause Ilearing set for May 28, 1998. '7 Following the May 28, 1998; show cause hearing, the District Court determined that Somont had not acquired the lessors' right to challenge or terminate C:-Ws existing leases for failure of production. Thcrcrore; the Ilistrict Court denied Somont's request for a preliminary injunction and vacated the temporary restraining order. <?onscquently,Somont obtained from the lessors an assigntncnt of "any and all rights that [the lessors] may have to any and all claims and demands that any previews oil and gas lease on tlte subject property forfeited due to the cessation of producttort from the has exptred, tcrmtriated or othertc~sc 3 lcased lands." C)n junc 12: 1908. Somont filcd an tiinended cotnplaint referencing the assignn~cnts.Subscyueiltly, C-W cxecuted rcleases on ttvcnty o r its leases brrt rcfuscd r o tenctcr rclcases or1 eight of the Kcvin-Sunburst leases. Thcrcfore, the parties proceeded to trial on ..vhethcr C-\V3s eight remaining leases had terminated due to a cessation of production. 18 ' Prior to trial, the parties raised two issues which ultimately &a\-erise to this appcal. First, in opposing Son~ont's motion for summaryjudgn~ent, C-LV insisted that Somont lacked standing to compel a rcleasc on five of the eight leases because Somont maintained no ownership interest in those leases. C-W conceded that Somont had standing to prosecute the remaining three becausc Son~orrt owned sonlc portion of those leases' mirreral estatc. The District Court del-ricd Sornont's motion for surnrnary judgment but concluded that Somolrt did have standing to challenge all eight leases. 79 Second, Somont filed a motion in limine with the District Court to exclude evidence of oil and gas prices as a j~tstification for C-IV's lack of production. Further, Somont proposed a jury instruction which stated thc jury could not consider oil prices_ economic considerations, or C-W's financial condition in determining whether the lack of production was justifiable as a tcniporary cessatiorl. The District Court denicd Sornont's motion in lirnine, in regard to tltc oil and gas prices, and rejected its proposed jury instruction. On May 1:: 1099, the case proceeded to trial. 7I0 .-It trial. Somont presented evidence indicating a lack ofproduction from the eight oil and gas leases d~rring specified period of time. the accounting period, prescribed by ihc a 4 District Court. C-W' argued that the lack of production was jusritkd as a temporary cessation. Thcrcforc, C-W inaintaincd that the temporary cessation of production doctrine prevented the leases' termination. C-W urcscnted evidence of reduced oil prices, a deflated economy, and the company's financial prcssuscs as justification for the cessation. After presentation of ail of tlie evidence, the District Court denied Somont's motion for judgment in as a matter of law and instructed the jury to consider "all surrounding circ~in~stanccs" determining whether C-W's leases had tern~inated lack of production. for 71 I On May 14, 1999, the jury rendered a special verdict in favor of C-LV. In so doing, the jury found that none of the eight leases terminated due to a lack of production. The jury stlso determined that Somont wrongfully intcrfercd with C-W's contractual and biisincss relationships with the lessors and awarded C-W approxi~nately S10,500 in damages. On May 21, 1')99'), the District Court entered judgment on the jury verdict and ordered that a hearing be held on June 4, 1999, to consider sortie remaining issues. On June 2, 1999, Somont renewed its motion for judgment as a matter of law and, in the alternative, moved for a new trial. The District Court denied both requests. On September 2; 1999; in its final order and judgment on the miscellaneous issues; the District Court ordered C-W to pay $30,867.50 in attorney fecs which Somont incurred in contesting C-lV's standing challenge on the twenty conceded lcascs. The District Court also ordered Somont to pay $40,221.25 in attorney fees incuned by C-W in defending the action as it pertained to the eight leases. 12 On appeal, Somont argues the District Cour-t erred in allo\ving the jury to consider oil prices, economic considerations, and C-LV's financial condition in determining whether the - 3 subject leascs terniinated due to a lack of production. i'hcreforc: Somonr appeals the ilistrict Court's judgmcnr on the jury vcrdict and nrdc: denying its motion for jrrcigmcnt as a nlattcr of lam. C% cross-appeals on the lssue of attorney fees, clatming Sornont lacked standrng -' 5 to prosecute ahis action '113 Did the Distrlct Court err when it concluded that Sotnont had stand~ng compel to C-LV's release of ccrta~n and gas lcases pursuant to 011 1 4 5 82-1-202(1), MCA? A district court's ruling on standing is a conclusion of law. Kiemarz 1 , . .4nder-.son (1997), 282 Mont. 139. 144, 035 P.2d 1122, 1125. The standard of revrcw of a district court's conclr~sions law is wlietlier the court's inte~rctation the law is correct. C ( ~ ~ O I I of of C,'ounty v. Union Ke.wrve Ch(11 C.h. (19951, 271 Mont. 459, 469, 898 P.2d 680, 686. ql15 Of the eight leases contemplated herein, Solnont ouns aportion ofthree of the leases' mineral estates. C-\V cotieedes that Sornont lias standing to compel its release of those three oil and gas leases pursuant to 5 82-1-202, MCA. tlowever, C-W argues that Sornont lacks itanding to compel C-W's release on the remaining f i e~ leases *I 16 Sect101182-1 -202(1), MCA, prov~des: If the lessee or assignee thereof neglects or refuses to execute a release as provided by this part, the owner of the leased premises may sue in any court of competent jurisdiction to obtain the release, and in such action he also rnay recover from tlte lessee. his successor. or assigns the sum of $1 00 as damages, all costs, together with a reasonable attorncy's fee for preparing and prosecuting the suit, and any additional damages that the evidence in the case \varrants. Prior to triai, the iessors ofthe tive leases m which Son~ont owns no niinerai eslate assigned to Sornnnt thc right to sue C-lk- to ccn~pcl C-W's relcase of i t s oil and gas lcases. C-iV insists that since Son~ont not the ownerqfrize le/iserlp/-enzises,Somoiit lacks the requisite is standing to compel C-!&''s release pursuant to 8 82-1-202, MC.4. TI7 Montana has long recognized the rule that rights arising from contracts between 11. private individuals are assignable, and that non-assignability is the exception. PVh~s1o1.t~ L>undorrl (1912); 46 Mont. 71, 82, 125 P. 136, 130. In the absence of a non-assignable clause, either party may generally make an assignment of rights under the contract. Forsytht. 1. . Elkins (l985), 21 6 Llont. 108, 113,700 P.2d 596,590-600. Further, all that is required to consiituic a "rcal party in interest," for pu~yoscs Rule 17(a), M.R.Civ.P., is that the paity of be vcsted with legal title. Mol~tillri~ '11 of C/*etl'itiWi~ircrgenlent1:. liergert (1 979), 181 Ass Mont. 442,440, 503 P.2d 1059, 1063. 1 18 1 Each of the original leases in question is a contract which provides for the assignment of rights. One of the rights associated with the oil and gas leases is the right to compel termination of a lessee's interest. While the assignment of rights provisions vary somewhat in language, the prevailing effect is that "the privilege of assigning ['the estate] in whole or in part is expressly a l l o ~ e d As rights arising from contracts are freely assignable and the .~ assignment xrcsted legal title in Somontl we hold that the District Court did not err in determining that Somont had standing to compel C:-LV's release of the leases in question. lSSIJE I'UO ci9 Did the District Court err when it aliowed the ji~y considcr oil prices, economic to considerations. and C'- W's financial condition in determining whether oil and gas leases had terniinated due to a lack of production? '0 2 A district court's d i n g on a motion in limine is an evidcntiary ruling. Spi~rlerv. Allen, 1999 MT 160, 7 29, 295 hlont. 139,lI 29; 983 P.2d 348, Ti 29, A district c o ~ ~has rt broad discretion in determining whether evidence is relevant and admissible and we ~vill not overturn its determination absent an abuse of that discretion. Spiwler, i j 29. 121 Further, a district court has broad discretion regarding the inst~xlctionsit gives or refuses to give to a jury. Schtcinntiter 1). S'ieplreizs, 1998 MT 58,121,288 Mont. 115,721, 056 P.2d 76,1/ 21. Il'e will not reverse a district coi~rt the basis of its instn~ctions on absent an abuse of that discretiotl. Sc/~ur~znclier, i j 21. When we examine whether particular jury instructions were properly given or refused, we must considcrthe instnictions in their entirety and in connection with the other instructions given and with the evidence introduced at trial. Scl~urr~acher, 22. The party assigning error to the trial court's instructions must show 7 prejudice in order to prevail. Schuir~ucl~er,22. Prejudice will not be found if the jury 71 instructions in their cntircty state the applicable law of the case. Scl1~~11c7cfier~ '1 22. 722 Prior to trial; Somont filed a niotion in limine seeking to exclude evidence of oil and gas prices as a justification for C-W's cessation of production. Tlre District Court denied Somont's motiott ill limine as it pertained to oil anti gas prices. Soon thereafter, Somont subrn~tted proposedjut 4 mstructlons to tlze Dlstrrct Court hoinont~s its proposed rnstrucirons contained thc fo!lowing direciiiw: 18. The fact that oil prices may be lokv; the cessation of production is for economic reasons or because the operators are in poor tlnancia,l condition cannot form the basis for a justifiable temporary cessation of production. 9 . Poor conditio~iof the oil market and/or low quality of oil although unprofitable to operate does not prevent an automatic rendering the .~vell termination of the lease when productio~i ceases. The District Court rejected the above proposed instructions and instead instructed the jury as follows: 16. A lease continues in existence so long as interruption of production in paying quantities does not extend for a period longer than reasonable or justifiable in light of a11 tile circurustances involved. 17. 4 lease is not terminated for failure to produce the moment production stops, nor does it terminate the instant production falls below aprofitable level. All surrounding circ~rn~stances must be taken into consideration before cancellation may be decreed. 71'hereforc, the jury was allowed to consider testimony regarding fluctuations in oil prices. economic concerns, and C-tt"s financial instability in detemiining mhether C-LV's lack of production was justified 723 Somont argucs that the Distrrct Court abused its discretion when it denled Somont's to motion rn lrmtne and fa~led eucludc 011 and gas prices. economle factors, and C-ti-'s financial cond~iionfroin the jury's considerat~on Sornont contends that this abuse in discretion sufficiently prcjudiccd Solnont to warrant a reversal of the District Court's judgn~cnt upon thejul) verd~ct.Lie agree ". 21 All ol'the oil and gas leases subjcct to this iitigation contain a habcndum ciause fixing the ultimate durarlor? of the lessee's inrerest. Oil and gas habendurn clauscs generally consist of two parts. the primary term, which establishes a definite period, and the secondary tel-m which is of indefinite duration. Robert E. Sullivan, Hurldbook of Oil arid Gas Lcrrr 6 40 (1955) The clause obligates the lessee to maintatn product~on the prcnltses and pay a on royalty to the lessor. The clause also provides that if the lessee fails to produce oil and gas \>1th111 primary term, the lease ~ 1 1automatteally terminate at the end of the prIma1;L term. the 1 If the lessee matntalns production throughout the prtmary term, the lease ~ 1 1 terminate 1 thereafter upon the cessatioll of production. See XfcCulloltg-12 Oil, Irzc 725 I. Kezek (W. Va. Once the lease transitions into the seeondar)i tern?, jurisdictions vary as to what circumstances mill precipitate terminatton ofthe lease upon the cessation ofproduetion. This jurisdictional dichoto~iiy been described as follows: has In a number of the producing states the co~irts treat termination of a lease as involving a cancellation or forfeiture in equity. In these states where production has ceased or is no longer deemed to be in paying quantities, cancellation of the lease will not be decreed where, in view of relevant circumstances. such decree \vould be unreasonable. In 'Tcxas and several otherjurisdictions termination of a lease under the habendum clause is treated as a determinable limitation on the lessee's estatc. j cessation of production results in automatic termination except in those \ cases where the cessation is deemed 'temporary.' Richard W. f-lemiiig~vay, Lair ~ f O i l iirzli Cns C; 6.4(0) (3d ed. !991) 42 10 Montana is an ownership-in-piacc state wit11 regard ro oil, gas and other n~inerais. -, P c ~ ~ ~v.i i,'ioizic jlCj58j, 134 Moot, i c 156. 152. 328 P.2d 655;65") Essentially, this means oil and gas leases transfer to the icssee a k e sitnplc determinable estate with the lessor retaining a pc>ssibilityof reverter, See k'lutqfiki 1,. ,J'tcvctzsor~ (lWO)l 80 Monr. 463. 476-77, 284 P. 553. 556. Therefore, upon tlte occurrence of a stated event? the lessee's interest auton~atically terminates. See Berrlrelole I , Lr*. Oil Cu. ( 1933), 95 Mont. 434, 447, 28 P.2d 8 7I . Here, as in most oil and gas leases operating pursuant to the conditions of the seconilary term, the event triggering automatic termination is the cessation of production in paying quantities. See Rertlrelotc, 95 Mont. at 448, 28 P.2d at 191. 727 This Court has defined paying quantities as the amount of production which v~ould pay a sinall profit over the cost of operation of the wcll, excluding from consideration the initial cost of bringing the wcll into production. Ber-rlrelore,95 :Mont. at 448,28 P.d at 191. Therefore, by paying quantities' very definition, the finder of fact must necessarily consider income generated from the property and the expenses incurred in its operation, thus iniplicating economic influences. See Eugene K ~ ~ n tOil nflrl C;cls z, C.'lzr.irtiu/zv. 43 .,. 4 26.7(d) (1987). In Oil C:orp. (1073), 161 Mont. 420, 506 P.2d 1369)1 C'ourt articulated the this tcsr to determine v-hethe; production in paying quantities has ceased. We stated: -I lie test for determining whether there was suf3icient production ~ or whether the lessee was acting wit11 reasonable diligence in producing and ~~larketing gas from the leased lands is the diligence which would be the exercised by the ordinary p r ~ ~ d e n ~ operator having regard to the interests of both lessor and lessee. I'his is a y~restionof fact that will depend upon the facts and circurtistances of each case. Ci2ri.sticm, 161 Vont. at 427-28. 506 P.2d at 1373 (citarions oniitted). 7'11~s. oil and gas an Icrasc which ijiis to prod:icc i n paying cirtantities terminates ripon cessation. '28 tIowcveri in an effort to rtiitigate against the harshness of the automatic ternlination rule, courts developed the temporary cessation of production doctrine. Pursuant to this cioctrine, once a plaintiff establishes that an oil and gas lease has halted production, the burden shifts to the defendant to prove that the cessation was temporary and not pemlancnt. ,See Eiclrnlclr1 v. Leilvell Kcsot~rcesCotp. (Kan. C:t. App. 1994), 875 P.2d 171, 174. A temporary cessation in production will not trigger an automatic termination of the lease as contemplated in the habendum clause. Kuntx, Cj 20.8(d). 'There is some dispute between Somont, C-W, and Amicus Curiae as to whether Montana has adopted the tcmporary cessation of production doctrine, and? if so, to what extent. Therefore: to clarify any ambiguity, Lye hereby adopt the temporary cessation of production doctrine as it applies to the oil and gas arena. (129 Most jurisdictions1 in determining whether a cessation of production is temporary or permanent, consider the cause of the cessation, the time reasonably required to restore production, and the diligence exercised by the lessee in restoring production. Kuntz, 3 26.8(e). What constitutes a reasonable time and diligence will depend on the particular facts presented. See Cobh v. ~Vatztl-(21 I'i,~clit~e Gi1.s Ch.qf',,ltiz. (jth Cis. I990), 807 F.2d 1307. 1309. EIowcvcr,jurisdictions vary significantly on which causes contributing to the cessation may be considered in the tcrnporary cessation of production analysis, Those jurisdictions nhtch treat termmatloti as a canccllat~on forfeiture ~u equtty generallj hold that "the ledse or 12 continues in fbrcc unless tilc period of ccssatic~n. vielved it1 thc ligi~r ofuii rile circ~m/.srcznc~cs, is tbr. an ~ii-rreasiinable ritnc.'' See, e.g.. Cbitrer v. ifiit-ml (Okia. 1058), 330 P.2d 2 i 7: 2 19 (emphasis added). Conversely. ownership-in-place jurisdictions generally lirnit temporary cessations to rnecbktnical or production breakdowns. See Henlingway, 3 6.4(B). 130 Mere, Somont established at trial that the leases failed to product: in paying quantities during the accounting period prescribed by the District Court. At that point the C.'hrisficln analysis, iinplicating economic factors, concluded. In turn. C-LL7asserted that the failure to produce in paying quantities was justified as a temporary cessation. The parties argued to the District Court the circumstallces which the linder of fact may consider in evaluating whether thc cessatioii was tc~iipot-aiy. TIie District Court agreed with C-W that the jury should co~~sider surrounding circun~stances," "all which, in this case, included oil prices, economic concerns, and C-W's financial condition. Sornont insists the District Court erred in its ruling and urges this Court to follouz other om-nership-in-pIace.j~irisdictions' treatment of the temporary cessation of production doctrine. Texas is one such o~vnership-in-place jurisdiction and we arc inclinect to follow its lead on this issue. '3 1 in kVui.sotr v. lioc.l~irril1 (Tex. 1941). 155 S.W.2d 783, the lessee of an oil aiid gas lease ceased oil production due to the dcpressed marked for low gravity oil. The lessor filed suit for a judgment declaring the lease terminated. The lcssee insisted that the temporary cessation of production doctrine precluded termination of the lease. The Supreme Con11of 'Texas coi~claded to prevcnt termination ol'thc lease pursuant to the temporary cessation that of production doctrine, the cessation rllust bc "due to [a] sudden stoppage of the well or some 13 ,, ~:ieclyanica]br~.akclovxn tlic cqnipmcn? usid in connection therctvith, or t l ~ c of like. R'~tsi~iz, , - 5 S.L$".2d at 784. 'i'hcrcFare. i - the court held that the lease had ter1ninali.d bccause the oil market did not prevent operation of the well. "3 kf~?lnisciiz; 155 S.iV.2d at 784. Adopting Iexas's narroixj temporary cessation of production test comports with the principles in Montana that: (1) oil and gas leases are to be construed liberally in favor of the lessor and strictly against the lessee: and (2') while forfeitures are usually not favored in the law, duc to the peculiar nawrc of oil and gas leases, forfeitures are here favored.' Clrrisricin, 101 Mont. at 425. Further, Texas's temporary cessation of production standard properly balances t l ~ e interests oftlie lessor and lessee. The diligent lessee who takes immediate steps to rectify a stidden halt in production will not lose his or her investment. Similarly, a lessee's self-serving voluntary cessation \vill not subordinate the lessor's interest in generating income via production. See Bruce M. Kramer, Tlze Tetnpot.a~y(i.ssillion L)oc,tri~re: A I'rczciiccll Ke,~p(onse (in ideologiciil l~ilenznzn, Baylor I.. Rev. 5 10, 545, (1991). ro 43 533 in summary, actions comtnenced to terminate oil and gas leases invoke tivo distinct inquiries: ( 1 ) Is the lease producing in paying quantities'?; and (2) If not. was the cessation in production pcrniailent or temporary? As to produeti011 in paying quantities, econon~ic consideratioiis arc absolutely relevant. Flo\veverl those very economic considerations should not factor into the temporary versus pernlancnt cessation analysis. A cessation in production While the "forfeiture" terminctlogy is semantically incorrect for ownersliip-inplace jurisdictions, the principle espoused in the statement remains soulid in Montana jurisprudence. will only be deemed temporary when it is caused by a sudden stoppage of thc well or a mechanical br~akdotvr:of the equipment used in connection with the well, or the like, !34 We disagree wit11 Justice Trie\vciier's cl~aractcrization ,Qimsori v. Tcrrf-iii~ i Cir. of (O!' I943), 132 F.2d 363. It is true that, in Stinzso/~, Xinth Circuit declined to terminate an oil the lease when the well ceased production due to the lack of market. Notvever, the analysis in Sri~rlson focused solely on the first prong of the two-part test articulated above. In effect, the n'inth Circuit held that a genuiiic lack of market will not compel termination of an oil lease ~vhen well is fully capable of producing in paying quarrtities. In other words, if there is the a lack of market; if the lease is capable of producing in paying quantities; and if the lessee is using reasonable diligence to market the product, Montana law will deem the lease as one which is "producing in paying quantities" and never reach the temporargr cessation of production issue. '/35 7'hc concepts discussed in Sfit?zsonwere later reiterated in C/2risric211, alluded above. as Our holding today ltas done nothing to disturb the principles discussed in Stinzsort and Cl~ristiml. equitable notions contcniplated therein remain valid considerations but apply The only to the "producing in paying quantities" prong ofthe two-part test. Once it is determined that a lease is not producing in paying quantities, the analysis shifts to the temporary ccssatioii of production prong where thc equitable principles no longer hctor into the equation. As such, the specific evidence referenced by Justice Cotter maintains no relevance to the inquiry implicated herein and the jury shollld not have been instructed to consider it. ";6 .*tccordingly,we hold that the District Court abused its discretioil in allowing the jury ro consider nil prices. econon~ic c~rnsiderations; <'-W7sfillancia1 condirion in determining and whcti~er C-W's cessation was justified as temporary. Fuilher. the District Court's abuse in discretion sufficiently prejudiced So~nont warrant a new trial. to *37 Somont insists it is entitled to judgmcnt as a matter of law. Somont urges this Court to remand the matter to the District Court for an entry ofjudgment in favor of Somont. \lTe decline to do so. '38 The sta~ldard review in appeals from a judgment notwithstanding the verdict made of pursuant to Rule 50(b), hZ.R.Civ.P., is the same as that for review of a motion for a directed verdict, and a directed verdict may be granted only where it appears as a matter of law that a party could not prcvail upon any view of the evidence including the legitimate inferences to be drawn therefrom. IiJ.iirz v. CifyoJ'Nozemirn (lW")(t), Mont. 507,510,028 P.2d 228, 279 220. An implicit precursor to the "any view of the evidence" language is the requisite presentation of evidence. Here, C-W presented its evidence under a misinformed standard. C-W has not yet had an opportunity to present its evidence in accordance with the temporary cessation of production factors adopted herein. It would be premature to say that C-W cannot prevail on any view of the evidence. Therefore, we decline Somont's invitation to remand this case h r an cntry ofjudgment in its favor. T30 Finally, following the jury verdict, the Ilistrict Court awarded attorncy fees in the amount of 330,867.50 to Somont and 546,221 2.5 to C-LV purstiant to 5 82-1-202(1): LICA. Section 82-1 -202(1). 'LlCA. does permit the prevailing party to recover reasonable attorney fees incurred in p;oscculiag i.;r &fcltding il;c action. i l w v e ; , il: light of our holding, the I)isiric- ~ a a fwit! h.cti.; reconsider tke attorney fce issuc fo!lowing the disposition ofthis i a;; v 4 Reversed and rernandcd for a new trial. LVe C,'oncur: District Court Judge Richard Sinionton s~ttnig for Just~ce in helson District Court Judge Richard .A. Sirnonton, sitting in for Justice Jamcs C. Ncisoni concurs. 731 i concur iri tile C'outt's Opinion. Furthcmmorc, I would like to respond to the disscnls because I think tlrcir positions change what I understand has been traditionally, and should bel the law in Montana regarding oil and gas development. 942 If our goal is the encouragement of oil and gas production rather than speculation, allowing the retention of leases without working them is contrary to that goal. 1n this casel there has been no production from sorue wells for three years. In some cases electric meters have been disconnected for two years. When production ceases so there is not even a question of whether there is production in paying quantities, the secondary term of the lease tcnninates as production is a condition precedent to thc continuation of thc leasc. Since lack of production terminates thc secondary term, the only issue should then be whether the lack of production is excusable. The teinporary cessation of production doctrine was developed to provide that excuse. 743 The dissents would include, as elements of that doctrine, variables such as oil prices, !he oil markat, and production costs of the operator. Equity, or a justifiable excuse to stop production, should 11otbe dependent upon the efficiency of the operator. If C-LtTwere having financial problems, and i f production was not profitahlc for it, it should have cvelcomcd the opportunity to walk away from the lease and give another operator the chance to produce at a profit for itself and t l ~ e mineral owner. Ifow equitable is it to the mineral owncr who is at the mercy of the operator or producer to decide unilaterally what is profitable and whether to continue production? 18 744 The leases are prcparcd and printed by the producer. Often times the minerai owner tvill malcc changes in ti3c languliye of thc printed fomn~ attach an addendum rhat will bc part or of the lease. If the producer wsnts factors sucli as market price, cost of production. and market availability to be factors in the secondary term of the lease, it can include that language as a part of the lcase and make it contractual. 115 1 agree that any doctrine oftemporary cessat~on ofproduction that precludes forfeiture of the secondary term of the least: should be llmited to acts of God and mechamcal problems, coupled with a diligent effort by the producer to remedy them. 746 The position of the majority results in the development of minerals for the benefit of both the lessor and the icssce and ultl~natclyfor the benefit ofthe consumer. The test for a temporary shut-down IS fairly clear and eonsistei~t ~ t h u development. ~ i s t r i cC'ourt-~ud~e t Richard A. S~monton Sitting in for Justice James C. Nelson Jrtsllcc 'l'erry N ,'lricweiler concurring and dissenting. ~ 3 - 1 ;tincur with the rni~jixritf's -..conclusion that the rights associated wit11 the oil and gas !cases at issue in this cilsc were assignable and that pursuant to their assignment, Somont Oil Company, Inc., had standing to bring this action in the ilistrict Court. 738 1 dissent from the majority's conclusion that the District Court erred \+hen it allowed the jury to consider oil prices, economic considerations, and C-W's financial condition when it detern~ined\+-hetherthe oil and gas leases at issue had been termitlated due to lack of production. I would conclude that the District Court's evidentiary nlling, as well as its instructio~ls the jury, reflect the more reasoilable approach to termination of oil and gas to ieases for failure to produce and was 111ore consistent with previous interpretations of Montana law on this subject. 749 The issuc in this case was simply whether production had ceased pennanently within the meanlng ofthe secondary tern? of the habendurn clauses of the leases at issue. There are several standards elnployed in the various jurisdictions around the country for determining .ivhethcr cessation i s temporary and reasonable or permanent, 'Phey are hest sumtnarired by tltc Oklahoma Supretne Court in C b t r l o . v. IYiirl.ei~(Okla. lc)58), 330 P.2d 217. 7'50 in C'otrlet., thc plaintiffheld a leasehold estate in oil and gas under lands ov-neclby the defendants. The tcrril of'thc lease was for onc ycar "and as long thereafter as oil and gas or either of them, is produced from said land by the lessee." Plaintiff suspended productio~l during a dispute with co-tenants b ~ t resumed production six months later when ownership t rights had bccn clarified. When defendants sotight to remove him kom the land titr fhilurc 20 rc produce, hc brought an action to quiet titic to his ieasehoici interest. Plainiii'i'conicnded that since / l ~ c~ssation c iffpro13~1~1ion telliporary~ for good rcason. he had not ceased was and clause. The d~strtct court agrccd production aithln tlrc meaning of thc seco~~dar> '51 On appca!, the Oltlahorna Supreme Cuurt, in a case of first Impression, noted that other courts i n the country hiid taken various approaches in their determination of what circumstances will justify termination of a lease after the primary term. It suni~iiarired those approaches as follows: The Kentucky court. in the case of Lanih v. I;ilt~syclile, 205 Ky. 597, 266 S.W. 253, 254, had before it a factual situation much the same as here involved. In that opinion it was said, 'XOI. a]-c wc uilling to adopt the rule that a lcasc ih~liichis to continue for a definite pcriod, and so long as oil or gas is produced ill paying quantities, ipso facto terminates whenever production or development ceases for a brief period oftime. On that the only fair the contrary, wc have reached the co~lclusion and just rule is to hold that !he lease continues in force un!ess the period of cessation, viewed in the light of all the circumstances is for an unreasonable time.' The quoted ntle seems to be the most equitable one in such cases. One much more favorable to the lessee is followed in Louisiana where, 'in order to cancel the lease, there must be some evidence that the wells thereon are no longer capable of producing oil or gas in paying quantities; or that the lcssec, in closing down the wells, has done so with the intention of abandoning satne.' Gsorl v. S~lrf'Oil i ) . ; 195 La. 248> 106 So. 330, 341. In Tcxas, the rule is C much Inore favorable for the lessor although, there, it 'has been niodified vvheii there is only a temporary cessation ofproduction duc to sudden stoppage of the \\ell or some mechanical breakdown of the equipment used in connection therewith, or the like.' hVat.sotz v. l~oc~l~t~zill, 137 Tcx. 565, 155 S.W.2d 753.784. Aftcr- thorough dclibcration, we coiiclude that the rule quoted above from the Lunzb v. 1'rir~syc.klc. is the soundest and most equitable and the case same is adopted. l,h~der rule, the controili~ig that factual finding is whether or not the tcmporary stoppage in productio~i was for an unreasonable length of lirnc. ",i2 In Steti~ar-r . AI>Z(<~-(ZO~CIS <,'oljrl.(Okla. 1979); 604 P.2d 854. 858? the Oklahoma Y H~ S Supreme Court clarified that: A decree of lease ca~icellation may be rendered where the record shows that the well in suit was not producing in paying quantities and there are no compelling equitable considerations to justify continued production from the unprofitable well operations. 753 In Strt+!n/-t,the court concluded that whether or not the period of suspensiori is on reasonable depe~ids "all sursounding circumstances." 604 P.2d at 855. The Ilistrict Court's instructions to the jury were consistent with the rule adopted by the Oklahoma Supreme Court in Coiner and elaborated on in ,!tevt:nrr and further reflect the approach takcn in our prior case la\.;. Because the contract !anguage is the same and the effect on the parties is the same, I would apply thc equitable principle in the same fashion. 754 In Stitt~soriv. T~z/*rcurt Cir. 1942j, 132 F.2d 363, the Ninth Circuit Court of (9th Appeals. in the only decision to this date which attempted to summarize Montana law on the subject at issue, reflected an approach similar to that adopted by the Oklahoma Supreme Court. In Stimsotz, the question was whether an oil and gas lease automatically terminated upon temporary cessation of production of oil based on a lack of market. The secondary claiise i n that lease also provicicd that the lease was to continue for as long after the primary iernm "as or1 or gas, or erther of them, IS produced." Durlng the secondary term. the lessee ceased productio~i a period of about fourteen ~nonths iaek of a market. The lessor thr for brought a s ~ t iin cyriiiy for cancellation of thc lease. tiowc.evcr9 district court found that t rhc the lessee had exercised reasonable diligence in attempting to find a marlct a ~ i d denied the relief sought by the plaintiff. $55 I, - 011 appeal, the Ninth Circuit noted that although Montana law controlled, therc was no rtported Montana ease d~rectly pornt. Therefore, tt d~seussed on se\eral Montana cases including Rerrlzelote v. Loy Ol Lh. (1933), 05 Mont. 434, 28 P.2d 187 (relied on in tlie i majority opinion) which interpreted similar lease pro~isions. It characterized this Court's decision in Wertlielote as follows: As a whole, it is to bc gathered from the opinion that if tlre lessee uses reasonable diligence to market the gas and is unable to do so, the lease remains in effect. it difficulty with the opinion as authority here is that the court does not clearly relate its discussion to the 'thereafter' clause. Nevct-theless it does appear to assimilate that clause with the implied covenant to use reasonable diligence to market. 1156 Characterizing this Court's prior decision in Se:evcr.solzv. Nr~rsto~v (1936), 103 Mont. 526, 63 P.2d 1022, the Ninth Circuit stated that: The court thought that while tlie statutory action for cancellation is an action 'andcourts should at law, rjcverthelcss the principle ofequitable reliefgoverns~ in such a case seek to do equity as between the parties,' 103 hlont. at page 534, 63 P.2d at page 1025. In conclusion, the hlntli C ircult In Srrnztori held that In the situation beibrc us tlie enforced ciosing doiin ofthe weiis involved 110 loss from drainage. There was no intention to abandon the lease. And the storage of the oil underground was as effective as its storage in surface tanks, and obi-iously more economical. What the lessee did mas in the muruai interest of the parties. 557 Based on its revie\%- Montana case law and the equitable considerations cited by the of court, the Ninth Circuit affirmed the federal district cout-t's refiisal to cancel the parties' lease. 'rhere was no discussion of a hreakdomn of equipment nor suggestion that ilontana mould follow the harsh Texas rule in that ease 758 Finally, this Court in C%r-isiiun A.A. Oil Corp. (1973), 1 0 1 Plont. 420,427-28,506 Y. P.23 1369, 1373, in s p ~ t e its obsercation that forfe~turcs favored in oil and gas leaser, of are held that: The test for determining lqhether there was sufficient production or whether the lessee was acting with reasonable diligence in producing and marketing the gas from the leased lands is the diligence which would be exercised by the ordinary prudent operator having regard to the interests of both lessor and lessee. Sullivani t_lr2r1dliook ofOi1 und Gas Lntv, s 91, p. 173, (;(IS Lei~ses, ed., s 16.02, pp. 16-49. This is a question of 2d 2 Brown, Oil mr~d fact that will depend upon the facts and circumstances of each case. Berthelore v. Loy Oil Co.?95 Mont. 434,28 P.2d 187. '159 This Court in C'lzristii~rrnoted that what may be reasonable with regard to oil production nil1 bi: different from r hat is reasonable \c~th \ regard to gas production. Lye did not elaborate on how the rule \&ouldbe dlffct-ent for 011 and gas productton. Homever. I would conclude that tl:osc itre simply cire~irnstancer be taken into consideration by the to finder of fact iihen d c t e n n ~ n ~whether temporary cessat~on i~g mas reasonable qj60 ., . ' r o foiiow the more arbitrary and inequitable approachtaken by the majority bascd on Texas decisional law and the distinction bet~vcen "forfcit~tre equity" and "ownership in arid place" exalts form over substance and denies the fact finder in tliis case and future cases the opportun~ty cousldcr many reler ant c~~cumstances to regard~ng temporary suspension of the production. ?iOl Furthermore, while in the authorities relied on by the majority there is substantial discussion about the rights of the lessor, it is worth noting that the lessor in this case did not feel sufficiently aggrieved by C-W's conduct to cancel the leases in question. Only Somont, nhlch sought to interfere w ~ t h C-Ll"s contractual relattonsh~psfor its oun benefit, brought this action .i62 For these reasons, I dissent from the majority opinion. I would affirm the judgment of the District Court. Justice Patricia 0. Cotter joins in the foregoing concurrence and dissent. i-1 i i i i Justice Just~cc i%arricia 0. Cotter concurs and dissents. #:63 1 concur in Justice 7riei.i'eiler3sconcurring and disset~tiilg Opinion. i write scparaicij to set hrth some of tile evidence irrtroduced at trial which tl-ie jury considereci, and which I believe was necessary to and uncierscored the correctness of their decision. 4:64 The jury heard evidence that other producers, including Somont, often simply walked until spring, when faced with frozen wells requiring repair. The away from \veils and ~vaited jury also heard evidence that when the price of oil is low, wells are often shut down. In addition, they heard testimony from a Long-time operator in the Kevin-Sunburst area, R. D. McPhillips, to the effect that C. W. acted as a prudent operator in light of all [he circumstances. Sornorll offered no independent testimotiy lo tlle contrary. 1165 Another matter upon which the jury heard evidence arose out of the counter-claim of C. W. against Sornont. C. W, introduced evidence at trial that after Somont's attempts to purchase the leases in 1997 were rebuffed by C. W., Somont started investigating C. W.'s finances. It contacted the president of a bank to disc~~ss potential of the hank breclosing the against C, W,?and also contacted other mineral owners of C. W.'s leases; asking them to give Sornont new leases. C. W. therefore argued that part of its cessation of production resulted from Somont's interference with its financing. The jury had every right to take this information into account in determining whether C. LV.'s failure to produce in paying q~~antities justified as a temporary cessation. was 766 i f Clli.z.sriiln 1. A.A. Oil Cl~rp., still good law, and this Court's reliance upotr it at . is 22 (ofits Opinion cedainly suggests rl~at is, I do not see how ajury can make an infon~~ed it hctuai determination ofv;heiher the icssee has exercised the diligence of an ordinary prudeill operator. witbout iakiiig into accourrr all r-eleva~it factors. including oil prices, pour cor:ditions on t l ~ c market, financial conditions of the operator, and what other prddenr operator5 do oil under the same or similar circumstances. I therefore join in Justice Trieweiler's concurring and dissenting oplmon. I too ~vould affirm the judgment of the District Court Justice
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