704 SMITIEE v. MOODY. [192 - SMITH V. MOODY. 4-4271 Opinion delivered May 4, 1936. 1. MINES AND MINERALS — OIL AND GAS LEASE. — Where, in an action to cancel an oil and gas lease for failure of lessees to proPerly perform the covenants for exploration, development and operation of the : lease, lessees testified that new wells could riot be • drilled: and operated except at a great loss, lessees were not damaged by the cancellation of the lease. .2, MINES AND MINERALS—CANCELLA TION OF LEASE. — Where, in an action to cancel lease for failure to properly develop the lease, the testimony is conflicting on the issue . whether the lessor had, by his conduct, estopped himself to insist on a forfeiture, the chancellor's finding and decree thereon will be affirmed. Appeal from Union Chancery Court, Second Division ; George M. LeCroy, Chancellor ; affirmed. Marsh te Marsh, for appellants. • ..Harry . C. Steinberg and C. E. Wright, for appellee. SMITH, J. . This suit was brought to cancel an oil and gas . lease upon the ground that the present owners .of the lease, and their predecessors in title have failed properlY to explore and develop it. An understanding of the issues upon which the decision turns requires a somewhat extended statement of the .facts. J. C. Moody, the landowner and the lessor, executed an 6i1 and gas:lease on March 28, 1922, to H. M. Johnsou, trustee,. covering 360 acres of land. Johnson assigned the leas ' e to Detroit-Suminerfield Oil and Gas Company, which company assigned 20 acres of the lease to Imperial 'Oil and Gas Company. This last-named company completed three wells on this 20-acre tract—the last in May, 1923. This 20-acre lease was formally •released and relinquished to the original lessor, and is not involved in this litigation. On May 7, 1923, the Detroit-Summerfield Company assigned to H. E. Clark, an undivided one-half interest in the remaining 340 acres and on May 22, 1923, assighed the other undivided one-half interest to Terry-Summer-field Oil Company, a corporation. In 1922, before making the two assignments last mentioned, the Detroit-Summerfield Company completed
ARK.] SMITH V. MOODY. 705 two wells referred to as well No. 1 and well No. 2.• From May, 1923, to March, 1925, Clark operated the property for the joint account of hithself and the Terry--Summer7 field . Company and between June, 1923, and February, 49,24, drilled six other.wells referred to as.wells Nos. 3, 4, 1 5, 6, 7 and 8. Al1 :of these wells except No. 8 were on the west property line of the lease. Well No. 8 was on • the: north line. No other wells have since been drilled. Clark operated all of these wells until March, 1925, except well No. 1,• which was 'abandoned. In. 1924. . In March, 1925, the Jemaining seven wells • were turned -over, to „the Terry-Summerfield—Company and J: ,W. - Wade., was placed in charge of . operations. • He , operated Ahem for the joint account of the owners until .February,.1934,.with the exception of wells.Nos. 2 and 4, which were abandoned in 1931. Well No, 8 was later abandoned in the: same year. The derrick and equipment on well No: 5 burned in June of the . same , year, and was not operated until it was • later reconditioned.. From June; 1931; until February, 1934, the Terry-Summerfield Company continued to, operate the three remaining wells, Nos. 3, 6 and 7, but not : efficiently. , • The Terry-Summerfield Company 'owned a lease on other lands referred to as the Smith Farm •which had not *been developcd and operated to the. satisfaction of the lessor,, of which fact complaint had been made and Moody was invited to. join in litigation to , cancel .both leases. On . February 6, 1934, the Terry-Summerfield Company assigned, its undivided one-half interest in.. the Moody lease, and the lease covering the . Smith Farm to Patterson and Smith. The ,as -sipiee Sinith was Mild Of the owners:of the Smith Farm and appears to have been prompted in the purchase of these leases by the deSire to have the Smith Farm lease properly developed. After acquiringthe lease .on the Smith Farm, and an undivided one-half interest in the other lease, Patterson and 'Smith junked .and pulled the, casings from the abandoned ,wells referred to above as wells 2, 4 and . 8 , and in May, 1934, rebuilt the derrick on well No. 5., They reconditioned wells 3, , 6 and 7, and have operated these three wells, and well No. 5 since doing so.
'706 SMITH V. MOODY. [192 ThiS suit : was filed: by the lessor, -Moody, on 'January 28;4935, 'for the 'purpose Of cancelling the feaSe, and after hearing much. testiinony that relief was *granted, eXcept that theleaSe was not cancelled as to- the forty acres . on Which the 'four' wells last-above referred to 'ate located: The storage• tanks; teol lense, boilers, ptimpS, pipe • lines -and' other equipthent are all- located 'on 'the forty acres s to -which the ; lease was not cancelled. This relief : was granted ! upon -the finding 'of fact contained in the decree ' f that the' : defendants and their predecessors In ! title have failed' to' properly perform the impliedcove--nantS• of the oil . :and gas' lease- herein involVed for the eXploration; 'development and 'operation of said' oil nand 'gas lease . " except as to the 'forty acres above mentioned 'which the , assikneeS of the lease Were allowed to- retain. 'It : is not 'questioned . that•a breach . of the implied covenant' to explore 'and develop affords' grOnnd for the cancellatien 'of an oil and gas' lease. Mansfield Gas Co. v.-Alexander, 97' Ark: 167,133 S. W. 837; Mansfield Gas 114 . 'Ark. 419,..169 'S. ANT : . 957; , Miller v. Mauney, 150-Ark: 161, 234 . S: W. 498; Ezzéll v. Oil Associates Inc., 180 Ark. 802,22 S. W. (2d) ' 1015. 1\TOr is it questioned: that these covenants . or COnditions require the expldration' and development of the entire lease, and are 'continuing : obligations resting upon' the lessee and his assignees which , are not satisfied' by the development of a 'portion • only • of thei leased property. : 'The' duties of the lessee and lis'assignee are : defined in the cases just cited. : See, 'also, Drummond v.' Alphih,176 Ark. 1052, 4 S. W. (2d)- 942 ;. Standard Oil' Company , v. Giller, 183 Ark. 776,- 38 S. W. (2d) 766.. • ' It appears from the facts' stated that the. last well drilled on the property Was 'in :February, 1924; 'which was' nearly' eleven years prior . to the institution of this suit,• and it' does not appear . ' to be : seriously questioned that this delay'wOul'd ordinarily 'support the finding that there • had been a- 'breach of' -the- implied- covenant to detelop, if there:were no facts to excuse : the delay or which operated to estop-the lessor from aSserting there Were ground§ • for . forfeiturey It i very earrieStly insisted that there is a valid excuse" for -the failiire to fur-
ARK.] SMITH V. MOODY. 707 ther develop, and• that:the lessor has estopped ,himself from clairning.a forfeiture. , . ; Much testimony was : offered as to the necessity of drilling .other wells, the contention. being that . the, yells now .producing were at the edge of the producing, fields, and that new . . wells could not,: be ..drilled and 'operated :except ,at great loss • .V . his contelltion, may be disposp4 of by saying that,. if true, the lessees . have not been dam-7 aged . ..by:,the cancellation Of so . much of. the contract pf lease as .cannot 'be profitably performed. . • The serious question in the case is the one . of. fact, whether the .lessor.had.eStopped, hiMself from claiming a forfeiture'.. The basis of this .contention. in substance is that the right to -cancel the lease,. if it exists, at.all; was known, to tholessor 'before .Patterson. and. Smith purchased their interest ;in it, and they were induced ,to purchase this interest through. conduct on •Moody's part• leading them to:believe that. the .validity of , the . lease was not and would, not be questioned. , Moody gave the Terry-Summerfield . Company,•a . lease on forty:acres of land not here involved .which it is,said was : a•part , of the consider-47 tion for • the assignment by..the„Terry-Summerfield. pany . of . the undivided' one-half interest to Patterson and Smith, and it is argued ;also that after. Patterson and Smith. had purchased this one-half . interest,. Moody stood . by And saw them expend . large. sums .of . money in reconditioningjhe . Wells that . are now . being operated: It is alleged also, that•Patterson . and , Smith .wpre ready to begin drilling on-the Smith Farm lease, and had.made arrangements to drill : :a deeper! well .011 .the Moodylease which was not done because tbe institution. of suit prevented that action.. It,,is argned also . that . the, .can, cellation• of the lease was 'inequitable. because m y demand had 'been made u.p,on.the lessees cm...their . assigns, to,proceed with the development.„ .• , • • . • • I-t:,appears reasonably certain, however,: that the . assignee, Smith, .was• fnlly apprized of . the, nondevelop, ment, ,and •of the complaint .on that account, Indeed; he was quite active in- demanding the proper:development of his:family property, •known as .tbe :Smith' Farm . and::suggested:. to , Moody that.,they..bring suit 'to :cancel! both
708 SMI1H V. MOODY. [192 leases -. in which Terry-SuMmerfield CoMpany' Was interested. Complaint appears also to ha,ve been'made to McFann, the agent of Clark, who owned the other undivided one-half interest, and this agent excused the delay by saying they would drill when and if they could get the Terry-Summerfield Company interest out of the way: McFann admitted that in 1930 or in 1931, Moody's son had taken . up the question of -drilling with . him, and he stated that "we were ready to drill the east-field, and if we could get the Terry-Suminerfield out, we would o -o ahead." It is true that Patterson and Sthith spent a large sum of money on the wells now operating which greatly increased their production. But this appears to have been no more than their duty required as assignees of the lease: Besides they are- the chief beneficiaries of this expenditure. The decree leaves these wells in their possession with the right to • continue their operation. Smith paid the Terry-Summerfield Company $2,000 in cash for the assignment to Smith and Patterson of the Moody leaSe and the Smith Farm lease, and in addition gave the Terry-Summerfield Company a lease on two forty-acre tracts not covered by any previous lease. Smith allocated . $1,250 of this money to the Woody lease and $750 to the Smith Farm lease. Moody testified that he did not know that P àtterson and Sinith 'were bnying the Terry-Summerfield lease until aiter they had bought it, and that he gave the Terry-Summerfield Company the lease on the additional forty acres to enable Clark to get Terry-Summerfield out of the Way. There is considerable testimony more or less conflicting upon these questions of fact, but we are : unable to saY that the chancellor's finding thereon is contrary to the preponderance of the evidence. The wells now in operation were reL conditioned not later than July, 1924, and nothing ap-.pears to have been said or done about further .drilling and development until about January, 1935, when Smith and Patterson offered to assign their interest in 120 acres of the Moody lease to procure the drilling of other and deeper wells. But this litigation was then in the- offing, and the offer of Patterson and Smith to procure some one
ARK.] 709 else to drill a well was but a belated offer to perform the duty of developing the lease under which the lessees and their assigns had at all times rested. The finding of the court that there was a failure to discharge this duty does not appear to be, clearly contrary to the preponderance of the evidence, , and the decree must be affirmed.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.