Sieker v. Faye M. Stephens Trust

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No. 108,488

IN THE COURT OF APPEALS OF THE STATE OF KANSAS

WANDA SIEKER,
Appellee,

v.

FAYE M. STEPHENS TRUST, et al.,
Appellants.

SYLLABUS BY THE COURT

1.
In reviewing the sufficiency of the evidence in a case tried to the court, an
appellate court reviews the trial court's findings of fact to determine if they are supported
by substantial competent evidence and are sufficient to support the trial court's
conclusions of law. In doing so, the appellate court does not reweigh conflicting
evidence, evaluate witnesses' credibility, or redetermine questions of fact. The appellate
court has unlimited review over the trial court's conclusions of law.

2.
Every oil and gas lease in Kansas contains by implication a covenant to develop
the leased property. The Kansas Deep Horizons Act, K.S.A. 55-223 et seq., codified this
common-law principle. The Act implies in all oil and gas leases a covenant "to
reasonably explore and to develop the minerals which are the subject of such lease."
K.S.A. 55-223.

3.
An owner whose lands are burdened with an oil and gas lease is entitled to have
those lands prospected for oil and gas within a reasonable period of time. A lessee is
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required to act as a reasonably prudent operator in developing the leased property.
Whether a lessee has performed this duty is a question of fact. In the absence of a
controlling agreement between the parties to the lease, neither the lessor nor the lessee is
the sole arbiter of the extent to which the lessee's operations and development shall
proceed or the diligence the lessee must exercise. The standard by which both are bound
is what an experienced operator of ordinary prudence would do under the same or similar
circumstances, having due regard to the interests of both.

4.
Courts considering the diligence of a lessee's development of an oil and gas lease
construe such leases to promote development and to prevent delay based on the theory
that the lessor has a right to have the leased land developed as rapidly as possible.

5.
In determining whether an oil and gas lessee has exercised reasonable diligence in
its efforts to develop the leased land, courts consider a variety of circumstances such as
(1) the quantity of oil and gas capable of being produced from the premises as indicated
by prior exploration and development; (2) the local market or demand therefor and the
means of transporting them to market; (3) the impact of the operations, if any, on
adjacent lands; (4) the character of the natural reservoir; and (5) the usages of the
business.

6.
An inability to further develop land subject to an oil and gas lease does not excuse
the lessee from the duty to develop and explore. Further, if the lessee with good reason
believes there is no mineral to be obtained by further drilling, it should give up the lease.
The lessee cannot hold onto the lease based on the mere possibility of further
development. If the lessor's tract is not to be developed, then it is of no use or value to the
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lessee; and if the lessee has no real intention to develop the tract, then the lease has no
purpose, and cancelling it would do the lessee no harm.

7.
Historically, cancelling an oil and gas lease because of the failure of a lessee to
develop the lease has been considered an extreme remedy because the cancellation works
as a forfeiture, and courts have usually required a landowner to demand compliance with
the implied covenant to explore and develop before granting the landowner's request to
cancel the lease.

8.
Cancellation of an oil and gas lease as a remedy for breach of an implied covenant
is generally disfavored. But cancellation of the lease after a breach of the implied
covenant to further develop and explore is an appropriate remedy in order to prevent an
injustice to the lessor. While equity abhors forfeitures it likewise abhors injustice.

9.
In considering whether to cancel an oil and gas lease because of the failure of a
lessee to develop the lease, courts may consider whether the lessor received offers from
other producers to develop the land.

10.
Under the facts presented, the district court did not err in immediately cancelling
the lease on 150 acres of a 160-acre tract burdened with an oil and gas lease since 1951
with production occurring on only 10 acres. The district court did not err in refusing to
delay cancellation of the lease though the court is permitted to delay cancellation as
provided in K.S.A. 55-226.

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Appeal from Barton District Court; MIKE KEELEY, judge. Opinion filed July 19, 2013. Affirmed.

Timothy R. Keenan and Addie L. Baird, of Keenan Law Firm, P.A., of Great Bend, for appellant.

Robert E. Bauer and Greg L. Bauer, of Law Office of Bauer & Pike, LLC, of Great Bend, for
appellee.

Before BUSER, P.J., MCANANY and POWELL, JJ.

MCANANY, J.: The Faye M. Stephens Trust appeals the termination of its oil and
gas lease covering 150 acres owned by Wanda Sieker for failure to develop the lease.
One hundred and sixty acres was originally leased by Sieker's predecessor, Emma
Vogelsang, in 1950. A producing well was drilled in 1951 and occupied 10 acres of the
tract. The remaining 150 acres remained undeveloped.

The Facts

The parties are well acquainted with the facts, which are set forth in the district
court's well drafted and comprehensive memorandum decision. For our purposes, the
following brief summary will suffice.

The Faye M. Stephens Trust became the majority working interest owner in 2009.
At that time, Sieker, either individually or acting through her son, Kenny, advised the
Trust that she wanted it to release the undeveloped portion of the lease. This was
followed by written demands in July and October 2009.

The Trust determined that further development would require 3D seismic testing
on the lease. 3D seismic testing has been employed on about 90% of the wells currently
drilled in Kansas. Because seismic testing could not be performed successfully without
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including testing of adjoining tracts, and because Credo Petroleum, the lessee on
adjoining tracts, would not agree to participate, the Trust decided that further
development of the lease was not possible at the time.

In February 2010, Sieker sued the Trust to cancel the lease on the undeveloped
150 acres. Sieker claimed the Trust breached the implied covenant to develop the lease as
a reasonably prudent operator should. Following a bench trial, the district court cancelled
the lease on the 150 acres, leaving the lease in place for the 10 acres where production
was ongoing. On considering the Trust's motion to alter or amend the judgment, the court
determined that the proper relief was to immediately cancel the lease on the undeveloped
150 acres and not to grant a conditional decree of cancellation to be effective if the Trust
failed to exercise reasonable efforts to explore and develop the 150 acres within a
reasonable time.

Implied Covenant of Reasonable Exploration and Development

In this appeal, the Trust argues that the district court erred when it found that it
breached the implied covenant for reasonable exploration and development. To the
contrary, the Trust contends it was willing to participate in a 3D seismic study but Credo
Petroleum, probably in cahoots with Sieker, blocked its efforts to do so.

On appeal, we review the trial court's findings of fact to determine if they are
supported by substantial competent evidence and are sufficient to support the trial court's
conclusions of law. Hodges v. Johnson, 288 Kan. 56, 65, 199 P.3d 1251 (2009). In doing
so, we do not reweigh conflicting evidence, evaluate witnesses' credibility, or
redetermine questions of fact. In re Adoption of Baby Girl P., 291 Kan. 424, 430-31, 242
P.3d 1168 (2010). We have unlimited review over the district court's conclusions of law.
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American Special Risk Management Corp. v. Cahow, 286 Kan. 1134, 1141, 192 P.3d 614
(2008).

Every oil and gas lease in Kansas contains by implication a covenant to develop
the leased property. Berry v. Wondra, 173 Kan. 273, 281, 246 P.2d 282 (1952);
Greenwood v. Texas-Interstate P. L. Co., 143 Kan. 686, Syl. ¶ 1, 56 P.2d 431 (1936);
Alford v. Dennis, 102 Kan. 403, Syl. ¶ 3, 170 Pac. 1005 (1918). The Kansas Deep
Horizons Act, K.S.A. 55-223 et seq., codified this common-law principle. The Act
implies in all oil and gas leases a covenant "to reasonably explore and to develop the
minerals which are the subject of such lease." K.S.A. 55-223.

An owner whose lands are burdened with an oil and gas lease is entitled to have
those lands prospected for oil and gas within a reasonable period of time. 102 Kan. at
404. A lessee is required to act as a reasonably prudent operator in developing the leased
property. Kansas Baptist Convention v. Mesa Operating Limited Partnership, 253 Kan.
717, 732, 864 P.2d 204 (1993); Sanders v. Birmingham, 214 Kan. 769, 776, 522 P.2d 959
(1974).

"Whether a lessee has performed his duties under the expressed or implied covenants is a
question of fact. In the absence of a controlling stipulation, neither the lessor nor the
lessee is the sole arbiter of the extent, or the diligence with which, the operations and
development shall proceed. The standard by which both are bound is what an experienced
operator of ordinary prudence would do under the same or similar circumstances, having
due regard to the interest of both." Adolph v. Stearns, 235 Kan. 622, Syl. ¶ 1, 684 P.2d
372 (1984).

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The Adolph court advanced the general principle that

"[t]his court, when speaking of these covenants, places great emphasis on the individual
property rights and construes oil and gas leases to promote development and prevent
delay upon the theory that the lessor has a right to have his land developed as rapidly as
possible. To insure that end when a lease itself does not contain specific expressions
regarding production or development, the law determines the intention of the parties and
the court has imposed such duties upon the lessees. The legislature as a matter of public
policy has by statute included the implied covenant to explore and develop all oil and gas
leases when such covenants are not contained in the lease K.S.A. 55-223." 235 Kan. at
626.

In determining whether an operator has exercised reasonable diligence in its
efforts to develop the land, the court must consider a variety of circumstances such as

"'the quantity of oil and gas capable of being produced from the premises, as indicated by
prior exploration and development, the local market or demand therefor or the means of
transporting them to market, the extent and results of the operations, if any, on adjacent
lands, the character of the natural reservoir—whether such as to permit the drainage of a
large area by each well—and the usages of the business.' [Citation omitted.]" Fischer v.
Magnolia Petroleum Co., 156 Kan. 367, 374, 133 P.2d 95 (1943).

Here, the district court based its decision in part on the fact that lessees on nearby
properties had successfully undertaken efforts to drill additional wells and to pursue
further development. In addition, oil prices and demand had increased, and Sieker was
approached by a prospective lessee who was able to conduct the 3D seismic study. Thus,
termination of the lease would probably result in further development for the landowner.

In Berry, our Supreme Court found that an inability to further develop the land
does not excuse the lessee from the duty to develop and explore. 173 Kan. 273, Syl. ¶ 2.
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There, the lessee faced financial constraints preventing him from further development.
Here, the Trust has the financial ability to drill additional wells, but it is unable to
participate in 3D seismic studies that would provide it with the knowledge of whether and
where to drill. But Credo Petroleum apparently does have the ability, so the district court
found forfeiture to be appropriate because Sieker then would have an opportunity for
further development of this 60-year-old lease.

In Sauder v. Mid-Continent Corp., 292 U.S. 272, 277, 54 S. Ct. 671, 78 L. Ed. 2d
1255 (1934), the district judge cancelled a lease, noting that the lessor in that case "had
no present intention of further exploring and developing, unless and until developments
in the immediate vicinity should convince them that it would pay to take such action."
The Sauder Court framed the issue as follows:

"The matter in dispute is the respondent's alleged failure to comply with its obligations.
The petitioners say that, if the lessee with good reason believes there is no mineral to be
obtained by further drilling it should give up the lease; the respondent insists that as there
is only a possibility of finding mineral, no prudent operator would presently develop, but
the mere possibility entitles it to hold the lease, because it is producing oil from a portion
of the area." 292 U.S. at 279.

The Sauder Court rejected the lessee's intention to hold onto the lease based on the mere
possibility of further development. 292 U.S. at 279-82.

Here, substantial evidence supports the district court's finding of breach of the
implied covenant for reasonable and further development. Experts for both parties
testified that a 3D seismic study should be conducted in order to determine whether
further drilling would be fruitful. The district court noted that the property had been
burdened with an oil and gas lease since 1951 with production occurring on only 10
acres. The parties stipulated that the next step that a reasonably prudent operator would
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take in satisfying its requirements would be to further develop and explore the lease
through a 3D seismic study. Although the ability to further develop the lease may now be
out of the Trust's hands due to the fact that it cannot find other parties willing to join it in
a 3D seismic study, the Trust cannot continue to hold the lease on the 150 acres
indefinitely in the hopes that someday there will be a 3D seismic study in which it can
participate.

The district court found: "The defendants did nothing and basically sat on their
rights and did not go forward with additional development. The evidence showed there
has been 3D seismic done throughout land all around and surrounding this particular
lease over the years." As this further development occurred in the surrounding areas,
Stephens did not participate.

The Trust argues that Credo Petroleum has singlehandedly blocked its attempts to
further develop the land by blocking its participation in the 3D seismic study. However,
this assertion ignores the history of the case. At the time the lawsuit was filed, no
additional exploration or production had been undertaken for nearly 60 years.

We are unable to review the exhibits that were relied on by the district court in
making its ruling because they were not included in the record on appeal. As the
appellant, the Trust has the burden of showing error by the trial court. Based on our
review of the limited record, it is clear that the Trust has failed to demonstrate that the
district court's ruling was not supported by substantial evidence.

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The Remedy

The Trust argues that the district court erred in imposing an unfair remedy. It asks
that we direct the district court to enter a decree cancelling the lease in the future if it fails
to further develop the lease within a reasonable time.

But Sieker sought cancellation of the lease, not an order compelling the Trust to
develop the lease. K.S.A. 55-226 provides remedies for breach of an implied covenant to
further explore or develop a lease. It states:

"If the court determines that the lessee has failed to comply with [the implied
covenant to explore and develop], the court may grant the lessee a reasonable time in
which to comply, or the court may issue an order terminating the lessee's right to such
subsurface part or parts as are the subject of such action. The court may enter such other
orders as the interests of the parties and equity may require." K.S.A. 55-226.

Here, the district court concluded that Sieker had no adequate remedy at law and was
entitled to a cancellation of the lease covering the nonproducing 150 acres.

As recently noted by this court in Lewis v. Kansas Production Co., 40 Kan. App.
2d 1123, 1127, 199 P.3d 180 (2009):

"Historically, cancelling an oil and gas lease was an extreme remedy. Because cancelling
a lease works [as] a forfeiture, courts have usually required a landowner to demand
compliance with the implied covenant to explore and develop before granting the
landowner's request to cancel an oil and gas lease."

In Lewis, a panel of this court noted that K.S.A. 55-229 explicitly provided that the
remedies provided in K.S.A. 55-226 are "merely a codification of the preexisting
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common-law requirements." 40 Kan. App. 2d at 1128. See Amoco Production Co. v.
Douglas Energy Co. Inc., 613 F. Supp. 730 (D. Kan. 1985) (K.S.A. 55-229 preserves the
common-law remedies in their original form). Thus, we turn to the available common-
law remedies.

"Forfeitures are not favored. [Citation omitted.]" Greenwood, 143 Kan. at 694. See
Robbins v. Chevron U.S.A., Inc., 246 Kan. 125, 134, 785 P.2d 1010 (1990) (forfeiture of
oil and gas leases as a remedy for breach of an implied covenant is generally disfavored).
But cancellation of the lease after a breach of the implied covenant to further develop and
explore is an appropriate remedy in order to prevent injustice. Thurner v. Kaufman, 237
Kan. 184, 189, 699 P.2d 435 (1984).

The Trust claims that a demand must be made upon the lessee to further develop
the real property before seeking the remedy of cancellation. See Storm v. Barbara Oil
Co., 177 Kan. 589, 599, 282 P.2d 417 (1955). As the court stated in Greenwood, 143
Kan. at 694:

"While it has been held that, under certain conditions, notice to explore is not a condition
precedent to bringing an action for forfeiture, yet the fact a suit is brought without any
demand having been made by the landowner upon the lessee that further development be
made, has some bearing on the question of whether the conduct of the lessee is such that
the landowner is entitled to the rather harsh remedy of forfeiture."

Here, Sieker contacted the Trust by phone and sent two demand letters. The content of
the letters is in dispute. It is unclear whether Sieker ever made a request for further
development or merely demanded termination of the lease. However, the Trust has not
provided the letters in the record on appeal, and the district court found that the Trust had
notice that Sieker was seeking further development and exploration of the 160-acre tract
of land. Thus, the Trust fails to show that the district court erred in making this finding.
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In Alford, the defendant was the lessee of two separate tracts of land under the
same contract. One tract contained 716 acres upon which the lessee had drilled 25 oil
wells, gas wells, and dry holes. But no exploration or development had been undertaken
on the other 220-acre tract. The lessor brought an action to have the lease on the 220-acre
tract cancelled for breach of the covenant to further develop and explore. Our Supreme
Court held that if the lessor's tract was not to be developed, then it was of no use or value
to the lessee; and if the lessee had no real intention to develop the tract, then the lease had
no purpose and cancelling it would do them no injury. 102 Kan. at 406. "While equity
abhors forfeitures it likewise abhors injustice." 102 Kan. at 406.

In considering whether to cancel a lease, the courts may consider whether the
lessor received offers from other producers to develop the land. Berry, 173 Kan. at 283.
As in Berry, Sieker has come forward with evidence that another party is ready and
willing to further develop and explore the tract of land. The Trust is not in a position to
conduct a 3D seismic study and proceed with further development. However, Sieker has
found a party who is willing to do so.

The Trust claims the district court should have imposed a conditional cancellation
rather than a forfeiture. See Rook v. James E. Russell Petroleum, Inc., 235 Kan. 6, 17-18,
679 P.2d 158 (1984).

In Lewis, a panel of this court reversed the district court's cancellation of an oil and
gas lease and remanded for further proceedings. 40 Kan. App. 2d at 1134. As in this case,
the district court stated that forfeiture was the appropriate remedy because it appeared
futile to give the lessee more time to comply. But an important distinction is that the
court found in Lewis that no demand for compliance had been made prior to filing suit.
The court stated that the language of the letter that the lessor gave to the lessee gave "no
reason to believe that [the plaintiffs] would accept efforts to negotiate immediate
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development. This is probably the reason why the trial court concluded that no demand
for compliance was given in this case." 40 Kan. App. 2d at 1133.

Here, the district court found that Sieker communicated his desire that the land be
further developed. We do not have the benefit of the precise language of the letters sent
to the Trust, but its attempt to contact other parties about the possibility of joining a 3D
seismic study shows that it understood the letter to be a request for further development.

In Vonfeldt v. Hanes, 196 Kan. 719, 414 P.2d 7 (1966), the lessor brought an
action to cancel a lease for violation of the implied covenant to reasonably develop the
lease. The lessee stated that he had no present plans for drilling, and he would only
consider drilling on the land in relation to a secondary recovery operation. The lessee
complained that the lessor would not join him in the secondary recovery operation. The
district court found it "somewhat incongruous" for the lessee to insist that the lessor and
he should go into business together. 196 Kan. at 723. The court upheld cancellation of the
lease.

Sieker argues the facts in Vonfeldt are substantially similar to the present case. In
both cases, the lessee refused to further develop and explore the land without joining
another party in its endeavor. The Trust complains that Credo Petroleum is blocking its
efforts to further develop the lease, but the Trust does not assert that Credo Petroleum
owes it any kind of duty or obligation to join in a 3D seismic study.

The district court noted that additional time for the Trust to further develop the
lease would be futile. There is no point in allowing it to continue holding the lease to the
entire 160-acre tract with no plans for further development or exploration in the
foreseeable future. Under the unique facts of this case, a conditional cancellation would
not be a practical or adequate remedy. The district court had the authority to impose the
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remedy of lease cancellation, or forfeiture, under K.S.A. 55-226, and it did not err in
doing so.

Affirmed.