Summary
In Sunburst Oil Refining Co. v. Callender, 84 Mont. 178, 274 P. 834, this court held that the reservation of an overriding royalty would stamp an instrument as a "sublease".
Summary of this case from Irwin v. Marvel Petroleum Corp.Opinion
No. 6,361.
Submitted January 15, 1929.
Decided February 13, 1929.
Oil and Gas Leases — Mechanics' Liens — Drawing Casing from Producing Well — Injunction — Judgment-roll — Evidence — Admissibility — Parties — "Assignment" — "Sublease" — Fixtures — Rights of Holder of Overriding Royalty — Obligations of Lessee — Rights of Purchaser at Mechanic's Lien Foreclosure Sale — When Well a Commercial Producer. Judgments — Judgment-roll in Action to Which Person not a Party Admissible in Evidence in Subsequent Action Against Such Person, for Certain Purpose. 1. Though the rights of one not made a party to an action are not affected by the resultant judgment, the judgment-roll therein is admissible in a subsequent action, for the purpose of making out a prima facie case as to the rights of the party introducing it, in and to the subject matter of the action in which the judgment was entered. Same — When Judgment-roll Admissible in Evidence Though Judgment not Final. 2. While, generally, a judgment-roll is admissible in evidence only after the judgment has become final on appeal, where a mechanic's lien claimant upon securing judgment of foreclosure at once had some of the property covered by the lien sold on execution in partial satisfaction of his claim, the judgment-roll in the foreclosure suit offered in evidence in a proceeding brought by an interested party to enjoin the claimant from proceeding further under the execution, for the purpose of establishing his right to proceed, was properly admitted irrespective of whether the judgment had become final on appeal or not. Oil and Gas Leases — Mechanics' Liens — Lessor and Assignor of Lease not Necessary Parties to Foreclosure Suit. 3. In a proceeding to foreclose a mechanic's lien instituted by an oil well driller under sections 8339 and 8375, Revised Codes 1921, asserted against a leasehold interest, neither the lessor nor, in the case of an assigned lease, the assignor, is a necessary party. Same — Fixtures — What Subject to Mechanic's Lien. 4. In the case of an oil well drilled on leased ground, the well becomes a part of the land and of the leasehold, as does also the casing, and the well and casing are subject to a mechanic's lien for labor and material furnished in drilling the well. Same — Mechanic's Lien Foreclosure — Necessary Parties. 5. All parties having an interest in the property upon which a mechanic's lien is claimed must be made parties to the foreclosure proceedings. Same — "Assignment" — "Sublease" — Definition — Holder of Overriding Royalty Necessary Party to Mechanic's Lien Foreclosure Suit. 6. An assignment of an oil lease includes the whole estate of the assignor in the lease; anything short of this is a sublease; therefore where the transferor reserves an overriding royalty, the instrument, though called an assignment, is in fact a sublease; the royalty holder becomes, in effect, a joint lessee with the transferee, entitled to share in the production without payment of a part of the operating expenses, and as such a necessary party to a mechanic's lien foreclosure proceeding against the transferee. Same — Purchaser at Mechanic's Lien Foreclosure Sale Acquires Interest of Lessee Only. 7. The purchaser at a mechanic's lien foreclosure sale in a suit against the lessee of oil land acquires only the rights of the latter in the leasehold and the personal property placed on the land by him in pursuit of the oil operations; the purchaser may do all the lessee could have done but no more. Same — Construction of Lease — Right of Lessee to Draw Casing at Any Time — Rule. 8. In construing an oil lease, the instrument must be read as a whole and every part of it must, if possible, be given effect, one portion being used to explain another in order to bring harmony to the whole; and under that rule, held, that where a lease provided that the lessee should have the right at any time to remove all fixtures and draw the casing, such provision, read in connection with the remaining portions, gave such right only when oil was not discovered in paying quantities or after a producing well had ceased to flow. Same — Right of Lessee to Remove Casing Subject to Rights of Others Interested. 9. An agreement in an oil lease giving the lessee the right to remove fixtures or remove casing is subject to the limitation that removal thereof does not violate any express provision of law, and that the interest of the public, or of a third person in particular, shall not be injuriously affected thereby; hence a lessee or his successor in interest (purchaser at mechanic's foreclosure sale) may by judicial decree be prevented from drawing the casing if it would be inequitable to do so. Same — Discovery of Oil and Gas in Paying Quantities — Obligation of Lessee. 10. Where oil or gas is discovered in paying quantities under a lease, the operation of the well and consequent production of royalty becomes a part of the obligation of the lessee which he cannot evade except by breach of his contract. Same — Injunction on Suit of Holder of Royalty to Prevent Removal of Casing — Showing Required. 11. To entitle the holder of an overriding royalty under an oil lease to an injunction to prevent the drawing of the casing of a well, the plaintiff must be able to show that his rights would thereby be injuriously affected, i.e., that the well was producing oil in paying quantities. Same — When Well a Commercial Producer. 12. If an oil well pays a profit, though small, to the lessee over operating expenses, it may be said to be a commercial producer. The question is one of fact, and though due weight should be given to the judgment of the lessee, the court in determining whether or not the production is sufficient to warrant enjoining the lessee from drawing the casing at the instance of a royalty holder, is not bound by the lessee's opinion. Same — Injunction to Prevent Removal of Well Casing — Evidence — Sufficiency — Case at Bar. 13. Held, on a review of the evidence in a suit to enjoin the purchaser at mechanic's lien foreclosure, as successor of the lessee of oil land, to draw casings from wells, that the wells were producing in paying quantities, contrary to the holding of the trial court, that therefore the interests of plaintiff holder of an overriding royalty would be injuriously affected by the removal of the casings, and hence that the court erred in dissolving an injunction pendente lite.
Appeal from District Court, Cascade County; H.H. Ewing, Judge.
Mr. Homer G. Murphy, and Messrs. Hurd, Rhoades, Hall McCabe, for Appellant, submitted a brief; Mr. Murphy argued the cause orally.
Mr. Louis P. Donovan, for Respondent, submitted a brief, and argued the cause orally.
The judgment-roll in Callender v. Crossfield Oil Syndicate, with sheriff's return of sale pursuant to judgment therein, was properly admitted in evidence. It may be admitted that the judgment obtained by Callender in the Mechanic's Lien foreclosure suit, is not conclusive as against appellant herein. It was not offered, or received on any such theory. It was, however, a necessary link in respondent's chain of title to the casing, tubing and rods which he sought to remove from the leasehold premises, and showed the source of plaintiff's title. The admissibility of the offered evidence is settled by the provisions of the statute. Sec. 10512, Rev. Codes 1921; see, also, Wells-Dickey Co. v. Embody, 82 Mont. 150, 266 P. 867; sec. 365, Freeman on Executions, 2d ed., 1205, 1206.) Nor is it at all material that the time for appeal from the judgment in the case of Callender v. Crossfield Oil Syndicate (Mont.), 275 P. 273 had not expired. In the absence of a stay of proceedings obtained pursuant to section 9735, Id., the judgment creditor was entitled to proceed with the execution of the judgment. (Secs. 8344, 9416, Id.) Nor is it material that the removal of the casing etc. may do some damage to the real estate. ( Stritzel-Spaberg Lumber Co. v. Edwards, 50 Mont. 49, 144 P. 772.)
It is admitted that the appellant owns a twenty per cent overriding royalty upon the 80-acre tract in question. But the interest so reserved to appellant was not chargeable with respondent's lien, and no lien was claimed thereon. The appellant was, therefore, neither a necessary nor proper party to the lien foreclosure action. (See Horn v. Clark Hardware Co., 54 Colo. 522, 45 L.R.A. (n.s.) 100, 131 P. 405; Harrington v. Miller, 4 Wn. 808, 31 P. 325; Southard v. Moss, 2 Misc Rep. 121, 20 N.Y. Supp. 848; affirmed in 141 N.Y. 607, 36 N.E. 740; Missoula Mercantile Co. v. O'Donnell, 24 Mont. 65, 60 P. 594, 991; 40 C.J. 400.)
Counsel are in error in assuming that the lienor's right to sell and remove the improvements placed upon the premises by the Buffalo Oil and Gas Company and the Crossfield Oil Syndicate is limited by the terms of the contract between the appellant and Hesla, the predecessor in interest of Buffalo Oil and Gas Company and Crossfield Oil Syndicate. The law, however, in this jurisdiction is settled that the right of the mechanic to sell and remove such improvements cannot be limited by the terms of the contract between appellant and Hesla. ( Montana Lumber Mfg. Co. v. Obelisk M. C. Co., 15 Mont. 20, 37 P. 897.)
The lease in this case, under which the improvements were erected upon the property, reserved to the lessee "the right at any time to remove all machinery and fixtures placed on said premises, including the right to draw and remove casing." Appellant made "an assignment of said lease" to O.O. Hesla, and Helsa in turn "sold, assigned, transferred and set over unto said Buffalo Oil and Gas Company, a corporation, all the right, title and interest of the said O.O. Hesla" In the assignment to Hesla, appellant reserved no part of the term of the lease. The conveyance is, therefore, one of assignment, rather than one of sublease. "Thus `an assignment of a lease' signifies a parting with the whole term." ( McNamer Realty Co. v. Sunburst Oil Gas Co., 76 Mont. 332, 247 P. 166.) It does not lose its character as an assignment by the mere fact that the transfer affects only a portion of the premises included in the original lease. (35 C.J. 989.) Nor does the fact that appellant reserved an overriding royalty make the instrument in question one of sublease rather than an assignment. "The fact that a letting of the entire term reserves a new rent to the original lessee does not render it a sublease." (35 C.J. 990, citing Sexton v. Chicago Storage Co., 129 Ill. 318, 16 Am. St. Rep. 274, 21 N.E. 920; Indianapolis Mfg. etc. Union v. Cleveland etc. R. Co., 45 Ind. 281; Craig v. Summers, 47 Minn. 189, 15 L.R.A. 236, 49 N.W. 742; Stewart v. Long Island R. Co., 102 N.Y. 601, 55 Am. Rep. 844, 8 N.E. 200.)
Hesla, and his successors, therefore succeeded to the benefit of the provision above quoted, which gave to the original lessee the right to draw and remove casing and remove machinery. (35 C.J. 995, 996; see, also, Summers on Oil and Gas, p. 644, sec. 210; Thornton, Law of Oil and Gas, secs. 217, 653, 859; Cassell v. Crothers, 193 Pa. 359, 44 A. 446; 19 Michigan Law Review, at 166.)
The trial court was fully justified in reaching the conclusion that the wells were not producing oil in paying quantities. There is no express or implied covenant in this lease or the assignments thereof which requires the assignee to operate any well or wells at a loss to himself. When the lessee's share of the oil produced is insufficient to pay the cost of production, the well cannot be deemed a commercial or paying well, and in determining the cost of operation, account must be taken of the depreciation of the salvage value of the casing in the ground and other equipment, interest upon such salvage value, the cost of repairs, pulling and cleaning wells and all other costs reasonably necessary in the operation of the wells, as well as such costs as salary, royalties, license tax, lubricating oil, etc. In the absence of express agreement to the contrary, all that the law expects of an oil lessee is to prosecute the development in the manner, and to the extent that an ordinary prudent operator would do. (Summers on Oil and Gas, p. 427, sec. 134.)
The respondent's right to draw and remove the casing from the well is not dependent upon a special provision to that effect contained in the decree, because it is expressly given by statute. (Sec. 8344, Rev. Codes 1921; see, also, Grand Opera House Co. v. Maguire, 14 Mont. 558, 37 P. 607; Big Three Lumber Co. v. Curtis, 130 Miss. 74, 93 So. 487; Midland Coal Lumber Co. v. Ferguson, 61 Mont. 402, 202 P. 389; William Cameron Co. v. Trueheart (Tex.), 165 S.W. 58.)
Upon the face of the record, the plaintiff is the owner of a mere overriding royalty. The execution of the oil and gas lease by Zimmerman to the plaintiff and L.C. Stevenson, did not vest in the lessee any title to the oil or gas or other mineral in the ground. ( Homestake Exploration Co. v. Schoregge, 81 Mont. 604, 264 P. 388.) It follows that the reservation of a royalty interest contained in the agreement between plaintiff and O.O. Hesla did not have the effect of reserving to the plaintiff any title to the oil, gas or other mineral in the ground. The oil and gas lease is itself a mere chattel interest. ( Homestake Exploration Co. v. Schoregge, supra; secs. 6727, 6723, Rev. Codes 1921; Graciosa Oil Co. v. Santa Barbara County, 155 Cal. 140, 20 L.R.A. (n.s.) 211, 99 P. 483; Walla Walla Oil, Gas Pipeline Co. v. Vallentine, 103 Wn. 359, 174 P. 980; Wheeler v. McIntyre, 55 Mont. 295, 175 P. 892; Jeffers v. Easton, Eldridge Co., 113 Cal. 345, 45 P. 680; Duff v. Keaton, 33 Okla. 92, 42 L.R.A. (n.s.) 472, 124 P. 291.) Transfers of a lease are governed by the law of transfers of personal property. (15 Cal. Jur. 748, sec. 163.) Provisions of the statute which make a docketed judgment a lien upon real estate do not have the effect of causing a judgment so docketed to become a lien upon an oil and gas lease. ( Summerville v. Stockton Mining Co., 142 Cal. 529, 76 P. 243; First Nat. Bank v. Dunlap, 122 Okla. 288, 254 P. 729; Nicholson Corporation v. Ferguson, 114 Okla. 16, 243 P. 195; Beren v. Marshall, Oil Gas Corp., 122 Kan. 134, 251 P. 192; 8 O. G. Legal Service, 142.) The reservation of overriding royalty is, therefore, simply a personal property interest subject to termination whenever the holder of the oil and gas lease exhausts the lease or forfeits it or surrenders it under the provisions of the surrender clause.
If the right to an injunction exists at all in favor of the owner of an overriding royalty, it would seem that it must exist in favor of every owner of an overriding royalty, regardless of the amount or value of his interest. If the property right of an overriding royalty owner is of such a character that it can be protected in the present case, then every overriding royalty owner having a 1/64 of one per cent should be entitled to the same protection. No case can be found in the books where an injunction of the character sought in this suit has been granted upon the petition of an overriding royalty owner.
Appeal from a judgment dissolving an injunction pendente lite and dismissing a proceeding to enjoin the drawing of casings from four producing oil wells.
In 1922 Mose Zimmerman and others leased a 320-acre tract of land in Toole county to the Sunburst Oil Gas Company (now the Sunburst Oil Refining Company) and L.C. Stevenson, for a term of ten years and as long thereafter as oil and gas should be produced therefrom in paying quantities, reserving as rental fifteen per cent of the oil or gas produced, to be delivered in kind or paid for at the market price, at their option. Stevenson thereafter assigned his interest in the lease to plaintiff, making it the sole lessee.
In 1923 plaintiff made what is designated an "assignment" of its lease, in so far as it covered an 80-acre subdivision of the tract leased, to O.O. Hesla, trustee, reserving an overriding royalty of twenty per cent of the oil produced, to be delivered in kind. Hesla assigned to the Buffalo Oil Gas Company. During the year 1923 the Buffalo Company drilled two producing wells on its leasehold, and in 1926 entered into a contract for the sale of its rights to the Crossfield Oil Syndicate for the sum of $17,000, $7,000 of which was to be paid on execution of the contract and the balance in deferred payments, and which contract required the Crossfield Syndicate to comply with the terms and conditions of the lease, including the delivery of plaintiff's twenty per cent of the oil produced from the wells then on the tract and from all wells thereafter drilled thereon. The syndicate made the down payment and was thereupon let into possession and forthwith drilled a third producing well, for the drilling of which it paid, and entered into a contract with this defendant to drill well No. 4, he to furnish everything necessary — "a turnkey job" — the contract price for which was $7,250. Defendant completed his contract, bringing in a fourth producing well, but was not paid the contract price.
Within six months after completing his contract, defendant herein filed a mechanic's lien against the leasehold and all improvements, including the four producing wells thereon, and thereafter foreclosed his lien by action wherein he made the Crossfield Syndicate and the Buffalo Oil Gas Company defendants. He secured judgment and decree on December 27, 1927, upon which execution was issued and levied upon the property described in the lien, and, on January 17, 1928, defendant became the purchaser at execution sale of all of the personal property on the premises, and, on February 4, 1928, at a like sale he became the purchaser of the leasehold interest described.
Between January 17 and February 2, 1928, defendant removed from the land all fixtures and improvements placed thereon by, or at the instance of, the Crossfield Syndicate and Buffalo Oil Gas Company, with the exception of the casing in the wells, and was then preparing to draw the casing, when plaintiff brought this action, alleging that such act would destroy the wells and jeopardize the leasehold and contiguous oil lands for oil development purposes, in all of which plaintiff had an interest. Plaintiff secured an injunction pendente lite, but, on the hearing to make such injunction permanent, the court dissolved the injunction and dismissed the proceeding. From the order dissolving the injunction pendente lite and the judgment of dismissal, plaintiff has appealed.
1. On the trial, plaintiff having rested, the defendant sought [1, 2] to establish his right to draw the casing from the wells by the introduction in evidence of the judgment-roll in the lien foreclosure proceeding. The judgment-roll was admitted over the objection of plaintiff, and this ruling is made the basis of plaintiff's first assignment of error, counsel contending that the roll was not admissible, as plaintiff was not a party to the proceeding and its interest was not affected thereby, and, further, that the judgment had not become final.
While a person not made a party to an action is not bound by the judgment therein (sec. 10558, Rev. Codes 1921; Conrow v. Huffine, 48 Mont. 437, 138 P. 1094), and his rights, if any, are not affected thereby ( Soliri v. Fasso, 56 Mont. 400, 185 P. 322), such a record is admissible for the purpose of making out a prima facie case, as to the rights of the party introducing it, in and to the subject matter of the action in which the judgment is entered ( Wells-Dickey Co. v. Embody, 82 Mont. 150, 266 P. 869; sec. 10512, Rev. Codes 1921; Freeman on Executions, 2d ed., 1205).
As to the judgment not being final, the general rule is that a judgment-roll is admissible only after the judgment has become final (Jones on Evidence, 3d ed., 595; Noe v. Matlock, 64 Mont. 35, 208 P. 591), but this is because only a final judgment will ordinarily affect the rights of the parties. A party dissatisfied with a judgment may stay execution thereon pending an appeal by complying with the provisions of section 9735 of the Revised Codes of 1921; but, if no stay is secured, a judgment creditor may, at any time within six years after judgment, proceed to execution. (Sec. 9416, Id.) Here the record discloses that, regardless of whether an appeal was taken or was not taken, the property was sold at execution sale in partial satisfaction of the judgment prior to the commencement of this action; the reason for the above rule ceased, and the rule should not, therefore, apply. (Sec. 8739, Id.)
The proof thus adduced, however, but establishes a prima facie defense, which may be overcome by evidence showing that the rights thus acquired by defendant cannot be exercised in such manner as to destroy the rights of plaintiff, a stranger to the foreclosure judgment and decree.
2. It is next asserted that the court erred in dissolving the injunction pendente lite and in rendering judgment of dismissal on the ground that plaintiff had an interest in the lease which could not be defeated by the proceedings had or affected by any rights acquired by the defendant.
It is contended by counsel for the defendant that the plaintiff assigned its lease, merely reserving to itself a new rent and therefore it was neither a necessary nor a proper party defendant in the lien foreclosure proceeding, and its rights are no more to be considered than are those of the owners of the land leased.
Undoubtedly, having drilled well No. 4 and furnished all [3] fixtures and equipment necessary to complete the well and equip it for operation, and not having been paid for his labor and material, defendant had a lien upon the property on which he did the work and placed the improvements, on compliance with Chapter 91, Part V, Revised Codes of 1921 (sec. 8339, as amended by Chapter 23, Laws of 1925, and sec. 8375, as amended by Chapter 152, sec. 1, Laws of 1923). He could foreclose such lien in the manner therein provided, and, in such a proceeding to foreclose a lien asserted against a leasehold interest only, neither the lessor nor, in the case of an assigned lease, the assignor, is a necessary party to the proceeding. ( Horn v. Clark Hardware Co., 54 Colo. 522, 45 L.R.A. (n.s.) 100, 131 P. 405; Harrington v. Miller, 4 Wn. 808, 31 P. 325; Southard v. Moss, 2 Misc. Rep. 121, 20 N.Y. Supp. 848; affirmed 141 N.Y. 607, 36 N.E. 740; 40 C.J. 400.) Further, in case of an assignment of a lease, the mere reservation of a new rent would not make the assignor a necessary party (35 C.J. 990, and cases cited), and the fact that some injury would result to the real estate from the removal of fixtures therefrom is no ground for preventing such removal ( Stritzel-Spaberg Lumber Co. v. Edwards, 50 Mont. 49, 144 P. 772).
Again, when an oil well is drilled under a lease, the well, [4] the hole in the ground, becomes, of necessity, a part of the land and a part of the leasehold, but the hole in the ground without casing amounts to nothing as a well, and therefore the casing, inserted in the ground and to be left there as long as the well is in use, becomes a part of the well, and, consequently, of the leasehold, the well and casing being subject to a mechanic's lien for the labor performed and material furnished in drilling it. ( Devine Thomas v. Taylor, 12 Ohio Cir. Ct. Rep. 723; Haskell v. Gallagher, 20 Ind. App. 224, 67 Am. St. Rep. 250, 50 N.E. 485.)
3. However, it is admitted that the plaintiff herein owns a [5, 6] twenty per cent overriding royalty which it duly reserved from the operation of the transfer of its lease, and the question now arising is as to whether, by this reservation, it retained an interest in the lease, as all parties who have an interest in the property upon which the mechanic's lien is claimed must be made parties to the foreclosure proceeding. (40 C.J. 396; Soliri v. Fasso, above.) Herein the "property" is the leasehold interest; did the plaintiff "assign" all of the interest therein and merely reserve a "new rent"?
An assignment of a lease signifies a parting with the whole "term," which includes not only the whole of the unexpired time, but also the whole estate of the assignor — all his interests in the lease. (35 C.J. 988; Dunlap v. Bullard, 131 Mass. 161.) Anything short of this is not an assignment but a sublease. (35 C.J. 990.) Thus we have held that where, in an instrument, the first party reserved an overriding royalty and a portion of the time the lease was to run, although called an assignment, the instrument was in fact a sublease. ( McNamer Realty Co. v. Sunburst Oil Gas Co., 76 Mont. 332, 247 P. 166.)
The reservation of the portion of the time, however, was not necessary to stamp the instrument as a sublease, as an assignment of all of the interest of the assignor, except reserved royalty, is not an abandonment of a lease ( Emerson v. Little Six Oil Co. (C.C.A.), 3 F.2d 265), and an overriding royalty, properly reserved and protected, attaches as an interest in the lease (Mills-Willingham, Law of Oil and Gas, sec. 128, and cases cited; Homestake Exploration Co. v. Schoregge, 81 Mont. 604, 264 P. 388.)
While testing and exploring for oil or gas, the lessee has but the right to seek a profit from the land, but, on discovery and production, the oil itself becomes the property of the lessee, and the percentage reserved as an overriding royalty, being an interest in the lease, becomes the property of the royalty holder, to be delivered to him in kind under the provisions of this transfer; if oil is produced, therefore, this interest becomes a substantial one, which should be protected. Such a transfer is therefore not an assignment but a sublease, and the royalty holder becomes, in effect, a joint lessee with his transferee, entitled to share in the production without a payment of a part of the operating expenses, and it cannot be said that the reservation is a new rent.
Conceding, for the purposes of this opinion, that the [7] defendant established his right as a purchaser at execution sale to draw the casing from the wells, as against the defendants in the foreclosure proceeding, as this plaintiff had a substantial interest in the lease and was not made a party to the lien foreclosure proceeding, it is not bound by the judgment in that proceeding, and its interest cannot be jeopardized by any action taken under that judgment.
No matter what the rights of a purchaser at forced sale on foreclosure of a mechanic's lien may ordinarily be, therefore, the only rights which the defendant can assert in this action, as against this plaintiff, are those which he acquired by the purchase of the rights of the Crossfield Syndicate in the leasehold and in the personal property placed on the 80-acre tract by it. By the involuntary transfer, defendant stepped into the shoes of the syndicate, and was then in a position to do all that the syndicate could have done, but nothing more.
4. Defendant contends that the lease itself grants to the [8, 9] lessee the right to draw the casings at any time. It is true that the lease contains a provision that "the parties of the second part shall have the right at any time to remove all machinery or fixtures placed on the premises including the right to draw and remove casing"; but the lease must be read as a whole, and each and every part of it must, if possible, be given effect; one portion must be used to explain another in order to bring harmony to the whole. ( Steven v. Potlatch Oil Refining Co., 80 Mont. 239, 260 P. 119.) The quoted clause must be read in connection with the other provisions of the lease. ( Slane v. Curtis (Wyo.), 269 P. 31.) So read, the phrase "at any time" refers to that part of the term which is dependent upon oil or gas being found in paying quantities. ( Sheller v. Shivers, 171 Pa. 569, 33 A. 95.)
The lease in question requires the drilling of a well 2,000 feet in depth, unless oil or gas in paying quantities is found at a lesser depth, and, if this well is successful, the lessee is required to drill out the demised premises in accordance with the best practices of experienced operators. Clearly it was not the intention of the parties, in inserting the above provision in the lease, that, immediately on the completion of a commercial oil well, the lessee might draw the casing and destroy the well, but, reading the provision for drawing casings in connection with the provision for drilling to a certain depth in testing the tract, it becomes apparent that such a right was given only in case oil was not discovered in paying quantities or, perhaps, after a producing well had ceased to yield oil in paying quantities. ( Slane v. Curtis, above.)
It is said that "it is a well settled rule that casing in wells, derricks, engines, and other machinery and appliances placed upon the land by the lessee for testing, developing and operating the land for oil and gas purposes are trade fixtures. They may, therefore, be removed at any time during the existence of the lease, or within a reasonable time after its termination" (Summers on Oil and Gas, 644); but, like the provision for such removal in the lease, this rule must be read with reference to the provisions of the lease, and can apply only to removal at a proper time, with due regard to the rights of others.
The right to remove fixtures is subject to the limitation that the agreement for removal does not violate any express provision of law and that the interest of the public generally, or of third parties in particular, shall not be injuriously affected by its fulfillment (Elwell on Fixtures, 2d ed., 215); and a lessee may be prevented from drawing the casing from a well, even at the termination of his lease, by judicial decree, where it would be inequitable to do so (Summers on Oil Gas, 645, citing Southwestern Oil Co. v. Kimball Oil Co. (Tex.Civ.App.), 224 S.W. 1111; Powers v. Bridgeport Oil Co., 238 Ill. 397, 87 N.E. 381. See, also, Ohio Oil Co. v. Griest, 30 Ind. App. 84, 65 N.E. 53).
Unlike the leasing of lands and tenements for the ordinary trade purposes, the chief consideration for the leasing of land for the exploration for oil and gas is its testing to discover if [10] it contains oil or gas, and, if discovered, its development. If oil or gas is discovered in paying quantities, the operation of the well and consequent production of royalty to the owner becomes a part of the obligation of the lessee, which he cannot evade except by a breach of his contract.
As the successor of the Crossfield Syndicate, the defendant must assume the burdens of the lease along with its benefits (sec. 8750, Rev. Codes 1921), and must so use his rights as not to infringe upon the rights of another (sec. 8743, Id.).
This plaintiff had an interest in the lease on the 80-acre [11] tract, and still held its lease upon the remainder of the 320-acre tract. The evidence is clear that the drawing of the casing would not only destroy the wells on the 80, but tend to destroy the entire leasehold interest in the tract and adjoining tracts, by subjecting the whole structure to the danger of flooding the oil sands with water. Such action would, then, come within all of the limitations placed above upon the right of a lessee to remove fixtures from the leasehold.
However, in order to enjoin the drawing of the casing by a lessee, the moving party must show that his rights would be injured thereby. ( Martel v. Hall Oil Co., 36 Wyo. 166, 52 A.L.R. 91, 253 P. 862, on rehearing, 36 Wyo. 166, 52 A.L.R. 91, 255 P. 3.) It may be conceded that, if the wells were not producing oil in paying quantities, the lessee would be at liberty to draw the casing, providing he did so in such manner and with such safeguards as not to injure another thereby, and to prevent the creation of a nuisance. It therefore becomes important to determine whether these wells were producing oil in paying quantities, or capable of such production.
We think the true criterion for determining whether a well is [12, 13] a commercial producer is: Will it pay a profit to the lessee, over operating expenses, for its operation? If it will, although the profit may be small and may never repay the cost of development, the well may be said to produce oil in paying quantities. (Mills-Willingham on Oil and Gas, 122, and cases cited.) The question is one of fact to be determined from the evidence, and, while due weight is to be given to the judgment of the lessee, the court is not bound by his opinion. ( Union Gas Oil Co. v. Adkins (C.C.A.), 278 Fed. 854; Parks v. Sinai Oil Co., 83 Okla. 295, 201 P. 517; Dickey v. Coffeyville Co., 69 Kan. 106, 75 P. 398; Gypsy Oil Co. v. Ponder, 92 Okla. 181, 218 P. 663.)
The defendant testified that he did not consider these wells commercial wells, and expressed what he termed his "private opinion" that, in order to constitute a commercial well, a well should produce 10 barrels of oil a day. On cross-examination, he admitted that he did not know what was considered a commercial well in the field in which these wells were located, and his testimony was further discredited by his reply in the foreclosure proceeding, a part of his own exhibit, which alleges that, "since the completion of said wells, the same have been used and operated * * * and production of oil in commercial quantities has been obtained therefrom, and is still being obtained therefrom." This reply was verified August 4, 1927.
The testimony on the part of plaintiff shows that, during the calendar year of 1927, the four wells were hooked up to a single pumping plant and operated by one man, who was paid $250 per month, although pumpers could be hired at from $125 to $135 per month. This man also pumped two outside wells for which he received $65 per month. During that period, although No. 2 well was out of commission practically all of the time and No. 1 well a part of the time, due to the negligence of the lessee, the wells produced 5,662.37 barrels of fluid, of which ten per cent was water, leaving a production of oil of 5,096.14. The lessee's interest in the oil was sixty-five per cent or 3,312.49 barrels. During that period oil sold at $1.45 per barrel, but immediately thereafter the price went up, finally reaching $1.75 per barrel. The gross receipts from the sale of the oil saved to the producer in 1927 was therefore $4,803.11.
In view of the testimony regarding the reasonable wages of a pumper and the necessity of overseeing the work done, it would seem that the most that should be charged against operating expenses for this item would be the $250 per month, less the $65 received for pumping outside wells, or a yearly charge of $2,220.
Other expenses shown by the plaintiff amounted to approximately $100 per year, while defendant's counsel suggests others which should be considered, such as a license tax of two per cent on the gross, amounting to $147, cleaning well No. 2, $200, general taxes, not figured, renewing cups, etc., all of which operating expenses, however, cannot be shown to reach a total of $2,800 per year, thus leaving an excess, or net profit to the operator of more than $2,000, even in the manner in which the wells were pumped. If we do not deduct the $65 per month paid by other owners to the pumper, it would add but $780 to the operating expenses, and leave a net profit to the operator of more than $1,200.
It is therefore apparent that the evidence strongly preponderates in favor of a finding that the wells were producing oil in paying quantities, and against any implied finding to the contrary.
Under the above rules announced, as successor of the Crossfield Oil Syndicate, the defendant could not draw the casing and thus destroy the producing wells. The court therefore erred in dissolving the injunction pendente lite and in dismissing the action.
The judgment and order from which the appeal is taken are reversed, and the cause is remanded to the district court of Cascade county, with direction to grant the permanent injunction.
MR. CHIEF JUSTICE CALLAWAY and ASSOCIATE JUSTICES GALEN, FORD and ANGSTMAN concur.
Rehearing denied March 8, 1929.