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Gregory v. Sohio Petroleum Co.

May 22, 1953



MOREMEN, Justice. Appellants sought in the circuit court to cancel an oil and gas lease on their farm of about 140 acres. The chancellor refused to order forfeiture of the lease and, from this judgment, this appeal is prosecuted.

Appellants, Beverly Gregory and Lucille Gregory, on March 15, 1946, executed an oil and gas lease to Sohio Petroleum Company for a definite period of three years and as long thereafter as gas or oil was produced in paying quantities. By assignments, Thomas M. Egan became the owner of a portion of the lease covering 70 acres. J. H. Gilliam became the owner of three-fourths interest in the portion that covered another 70 acre tract and Nash Redwine became the owner of the remaining one-fourth interest in said leasehold. All of the foregoing interests were held subject to a graduated overriding royalty interest reserved by the Sohio Petroleum Company in seven-eights of the oil produced from the entire leasehold.

A few days before the expiration of the original term of the lease, the lessees commenced drilling and the well was completed about April 1, 1949. The initial production of this well was approximately 18 to 20 barrels of oil and 45 barrels of water per day but, within a few months, production declined to an average of 2 or 3 barrels of oil per day. This was the only well drilled.

About 15 months later, and on June 30, 1950, appellants addressed a letter to each of the appellees demanding that they continue the development of the leasehold and notified them that unless they commenced drilling a well on the undeveloped portion of their farm within 30 days, said lease would be cancelled and all the rights would be forfeited except as to the 10 acres which surrounded the producing well.

On September 18, 1950, appellants filed a petition in equity asking for cancellation of the lease except as to the 10 acre tract surrounding the producing well. A summons was served on the Sohio Petroleum Company, but a warning order was made for appellees, Thomas M. Egan and J. H. Gilliam, who were citizens of Evansville, Indiana, and appellee, Nash Redwine, who was a citizen of Mt. Vernon, Illinois. Sohio Petroleum Company filed a general demurrer and answer to the petition, but appellees, Egan, Gilliam and Redwine, did not enter their appearance to the action. At the February 1951 term of court, Sohio Petroleum Company, on its own motion, withdrew its general demurrer and answer from the record and, on February 7, 1951, because other appellees failed to appear or defend, the chancellor entered a judgment cancelling the lease except as to the 10 acre tract surrounding the well.

Thereafter, and on February 15, 1951, appellants executed a new oil and gas lease on their farm on all land, except the 10 acre tract, to John P. Anton who, in March of 1951, commenced drilling on said land and who has drilled several wells since then.

At the April, 1951 term of court, appellees, Egan, Gilliam and Redwine, under section 414 of the Kentucky Civil Code of Practice, filed a written motion to set aside the judgment of February 7, 1951, cancelling the old lease, asked for a retrial of the case, and tendered an answer to the petition which was later replaced by another answer.

In the first paragraph of the answer, appellees admitted the truth of certain allegations contained in the petition. In the second paragraph, appellees set out that the drilling operation which resulted in the producing well on the property cost approximately $10,747, and they had received from the sale of oil from said well the sum of $4,662. They further alleged that the Ohio Oil Company had drilled a well on lands adjoining appellants' property on the west and neither oil nor gas was found in commercial quantities; that wells had been drilled on land adjoining appellants' on the east and no gas or oil was discovered; that no wells had been drilled to the north or south of appellants' land which would require offset wells and that a geological study revealed there was no drainage of oil and gas from and through the lands of appellants. They further alleged that they had complied in good faith and with reasonable diligence to the implied obligation to develop the property, that appellees were entitled to operate the lease as a whole and that, under present conditions, no reasonably prudent operator would feel justified in drilling additional wells on appellants' property. In the third paragraph of the answer, appellees stated that if they were incorrect in their views, the mistake resulted from an honest difference of judgment between the appellants and appellees in which event the court should not declare the lease or any part thereof forfeited, but should define the rights of the parties and determine what wells, if any, should be drilled and give appellees an opportunity to comply with the order of the court.

At the June term of court, the motion to set aside the judgment was sustained and a retrial was had. At its conclusion the court entered a judgment in which it set aside its prior judgment of February 7, 1951, and ordered appellees to begin the drilling of a well within 90 days after final determination of the case by the court.

Appellants contend that the appellees did not present a valid defense to appellants' petition, argue that appellees were guilty of unreasonable delay in the development of the property, and insist that the mere fact appellees did not deem the property to be potentially productive or did not desire to spend money at that time on its development is no excuse for their failure further to develop the property. They contend that the appellees were holding it purely for speculative purposes.

We have held in numerous cases that a lessee will not be permitted to hold the land for speculative or other purposes for an unreasonable length of time. Monarch Oil, Gas & Coal Co. v. Richardson, 124 Ky. 502, 99 S.W. 668; Soaper v. King, 167 Ky. 121, 180 S.W. 46; Dinsmoor v. Combs, 177 Ky. 740, 198 S.W. 58; Hughes v. Bussville Oil & Gas Co., 180 Ky. 545, 203 S.W. 515; Reynolds v. White Plains Oil & Gas Co., 199 Ky. 243, 250 S.W. 973; Warfield Natural Gas Co. v. Allen, 248 Ky. 646, 59 S.W.2d 534, 91 A.L.R. 890.

We have also held that inasmuch as the lessee incurs all the financial hazards in connection with the drilling of a well under a lease of this type, the true test of proper action of the lessee is not to be found either in the extravagant expectations of the lessor or the unreasonable timidity of the lessee. In American Wholesale Corporation v. F. & S. Oil & Gas Co., 242 Ky. 356, 46 S.W.2d 498, 501, we said:

'The lessees were not the arbiters of the extent to which, or the diligence with which, the operations thereunder shall proceed; but both the lessors and the lessees were bound by the standard of what, in the circumstances, would be reasonably expected of an operator of ordinary prudence, having due regard to the interest of both.'

With this criteria in mind, it is necessary to examine the proof that was introduced in behalf of appellees. ...

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