Snowden v. JRE Investments, Inc.

2010 Ark. 276, 370 S.W.3d 215, 181 Oil & Gas Rep. 325, 2010 WL 2210644, 2010 Ark. LEXIS 318

• Court: Supreme Court of Arkansas
• Decided: June 3, 2010
• Docket: No. 09-1149
• Status: Published

Opinions

JIM GUNTER, Justice.

|! This appeal involves an oil and gas lease that extends by production. Chesapeake Exploration, LLC; Chesapeake Exploration, Limited Partnership; and Chesapeake Energy Corp. (collectively hereinafter referred to as “Chesapeake”), as lessee, maintains that its lease with Shelia and Danny Snowden was extended pursuant to the terms of the lease itself and by the application of Ark.Code Ann. § 15-73-201 (Repl.2009). This issue was fully briefed in cross-motions for summary judgment and each side was presented at a hearing before the circuit judge. The circuit court ruled in Chesapeake’s favor, and the Snowdens now appeal that decision. In addition, Chesapeake cross-appeals the circuit court’s order denying it certain equitable relief. We assumed jurisdiction of this case pursuant to our authority in Rule 1-2(b)(1) and (6) of the Arkansas Rules of the Supreme Court to reassign any case involving an |2issue of first impression and a substantial question concerning the validity, construction, or interpretation of an act of the General Assembly.

On appeal, the Snowdens assert the following: (1) that the circuit court erred in interpreting Ark.Code Ann. § 15-73-201 as extending the term of the lease to all lands under the lease rather than just to the producing section of land; (2) that the statute should be interpreted so that all its terms are given effect; and (3) that if determined to be ambiguous, this court should construe the statute in accordance with legislative intent. On cross-appeal, Chesapeake maintains that the circuit court erred in not suspending its drilling obligations under the lease while the litigation was ongoing. We affirm the circuit court’s decision on direct appeal, and we reverse its decision on cross-appeal.

On May 19, 2008, Shelia and Danny Snowden, as husband and wife, filed a complaint in Faulkner County Circuit Court against JRE Investments, Inc., and Chesapeake. The Snowdens owned mineral interests in approximately 1250 acres of land located in Faulkner County that they had leased to JRE by agreement on February 11, 2005, for three years. The lease contained an extension provision stating that the lease “shall remain in force for a primary term of three (3) years and as long thereafter as oil, gas or other hydrocarbons are produced from said leased premises or from lands pooled therewith.” A separate provision provided:

Notwithstanding anything contained in this Lease to the contrary, it is expressly agreed that if the Lessee shall commence operations as provided herein at any time while this Lease is in force, this Lease shall remain in force and its terms shall continue so long as such operations are prosecuted, and if production results therefrom, then as long as | .^production is maintained.

The lease also provided a definition for the term “operations” that included, but was not limited to,

[c]ommencing, construction of roadways, preparation of drillsite, drilling, testing, completing, recompleting, deepening, plugging back[,] repressuring[,] pressuring[,] maintenance, cycling, secondary recovery operations, or the production of oil or gas, or the existence of a shut-in well capable of producing oil or gas.

The lease was assigned to Chesapeake on September 16, 2005. On February 2, 2008, during the primary term of the lease, Chesapeake commenced drilling the “Jimmy Roberts” 8-13 1-29H well in Section 29 of Township 8 North, Range 13 West, Faulkner County on the Snowdens’ property. Section 29 included approximately 158 acres of the land owned by the Snow-dens. On February 13, 2008, Chesapeake filed an Affidavit of Drilling Operations and Lease Extension, noting that drilling had commenced in Section 29, which extended the lease as to all lands pursuant to the lease terms and Ark.Code Ann. § 15-73-201. The Jimmy Roberts 8-13 1-29H well was completed on March 29, 2008. Two additional “Jimmy Roberts” wells in Section 29 were drilled subsequent to the completion of the first well, the last of which was completed on September 9, 2008.

In their complaint, the Snowdens alleged that Chesapeake had violated Ark.Code Ann. § 15-73-204 by failing to release all sections of property except for the section containing the Jimmy Roberts well; that Chesapeake had violated Ark.Code Ann. § 5-37-226(a) by filing an Affidavit of Drilling Operations and Lease Extension clouding the Snowdens’ title; and that Chesapeake had violated the “depth clause” provision contained injjthe lease. The Snowdens requested that the circuit court nullify the Affidavit of Drilling Operations and Lease Extension; that Chesapeake be ordered to pay double the damages the Snowdens sustained by the cloud on their title; that Chesapeake be ordered to pay treble and punitive damages pursuant to Ark.Code Ann. § 5 — 37—226(c); and that Chesapeake release all mineral interests below the depth of 100 feet under the stratigraphic equivalent of the deepest depth of all wells drilled.

Chesapeake filed an answer on June 16, 2008, denying all material allegations in the complaint. It asserted a counterclaim asking the circuit court for a declaratory judgment that by commencing the drilling of the Jimmy Roberts well within the primary term of the lease agreement, it had complied with the terms of the lease agreement. Furthermore, Chesapeake maintained that it was entitled to a declaratory judgment suspending its drilling operations during the pendency of the lawsuit.

On January 5, 2009, Chesapeake filed a motion for summary judgment, asserting that it was entitled to judgment as a matter of law based on the terms of the lease agreement and § 15-73-201.¹ Chesapeake further requested a suspension of its drilling obligation during the pendency of the lawsuit. The Snowdens filed a cross-motion for summary judgment on February 13, 2009, asserting that they were entitled to judgment as a matter of law on the issue of liability.

A hearing on the summary-judgment motions was held March 2, 2009. On July 20, 152009, the circuit court issued a final decree in the case. The court found that Ark.Code Ann. § 15-73-201 was not ambiguous; that the lease agreement between the Snowdens and JRE, which had been subsequently assigned to Chesapeake, was valid; that Chesapeake commenced drilling within Section 29 of the leased land within the primary term of the lease; that Chesapeake completed the Jimmy Roberts well in Section 29 on August 23, 2008, so that pursuant to Ark. Code Ann. § 15-73-201, the lease continued to be in effect as to all sections for one year subsequent to August 23, 2008; and that the Snowdens were not entitled to relief based on the “depth clause” referred to in the lease.² The court found that § 15-73-201(b) required a lessee to drill at least one well per year to avoid the effect of subsection (a). The court denied with prejudice the Snowdens request to nullify the lease and granted Chesapeake’s summary-judgment motion. However, the circuit court denied Chesapeake’s request for equitable relief as to suspending its drilling obligations during the pendency of the lawsuit. The Snowdens filed a timely notice of appeal from the order on July 30, 2009, and Chesapeake filed a timely notice of cross-appeal on August 19, 2009.

This case presents an issue of statutory interpretation within the context of a grant of summary judgment. This court has repeatedly held that summary judgment, although no longer viewed as a drastic remedy, is to be granted only when it is clear that there are no genuine issues of material fact to be litigated, and the party is entitled to judgment as a matter |fiof law. Monday v. Canal Ins. Co., 348 Ark. 435, 73 S.W.3d 594 (2002). In this case, the parties filed cross-motions for summary judgment and did not dispute the facts. As such, the case was decided purely as a matter of statutory interpretation.

We review issues of statutory interpretation de novo, as it is for this court to decide what a statute means. Fewell v. Pickens, 346 Ark. 246, 57 S.W.3d 144 (2001). In this respect, we are not bound by the trial court’s decision; however, in the absence of a showing that the trial court erred, its interpretation will be accepted as correct on appeal. Harris v. City of Little Rock, 344 Ark. 95, 40 S.W.3d 214 (2001). The first rule in considering the meaning and effect of a statute is to construe it just as it reads, giving the words their ordinary and usually accepted meaning in common language. Raley v. Wagner, 346 Ark. 234, 57 S.W.3d 683 (2001). When the language of a statute is plain and unambiguous, there is no need to resort to rules of statutory construction. Stephens v. Ark. Sch. for the Blind, 341 Ark. 939, 20 S.W.3d 397 (2000). When the meaning is not clear, we look to the language of the statute, the subject matter, the object to be accomplished, the purpose to be served, the remedy provided, the legislative history, and other appropriate means that shed light on the subject. Id. The basic rule of statutory construction is to give effect to the intent of the General Assembly. Ford v. Keith, 338 Ark. 487, 996 S.W.2d 20 (1999).

Although organized as multiple points on appeal, the Snowdens’ argument is whether the circuit court erred in interpreting Ark.Code Ann. § 15-73-201 to grant summary judgment in favor of Chesapeake. The statute in question provides the following:

(a) The term of an oil and gas, or oil or gas, lease extended by production in quantities [ 7in lands in one (1) section or pooling unit in which there is production shall not be extended in lands in sections or pooling units under the lease where there has been no production or exploration.

(b) This section shall not apply when drilling operations have commenced on any part of lands in sections or pooling units under the lease within one (1) year after the expiration of the primary term, or within one (1) year after the completion of a well on any part of lands in sections or pooling units under the lease.

(c) The provisions of this section shall apply to all oil and gas, or oil or gas, leases entered into on and after July 4, 1983.

The Snowdens agree with the circuit court that the statute is clear and unambiguous but assert that the circuit court’s interpretation of it fails to conform to the principles of interpretation and is contrary to common-law principles regarding an implied covenant to develop. The Snowdens claim that reading subsections (a) and (b) together and in harmony with common-law principles requires a determination that production or drilling in one particular section or pooling unit within one year of the expiration of the primary term extends the lease only as to that particular section or pooling unit, not to all lands leased where production or drilling has not occurred. Because Chesapeake had only drilled in Section 29 as of the date of the summary-judgment hearing, the Snowdens maintain that the lease was extended as to that section only and that the lease has expired as to all other acreage. They cite Crystal Oil Co. v. Warmack, 313 Ark. 381, 855 S.W.2d 299 (1993), as support.

In response, Chesapeake contends that the language of the lease itself supports extension as long as there is production; that the statutory language is clear and unambiguous; that the circuit court correctly interpreted Ark.Code Ann. § 15-73-201 to extend the lease to all lands under the undisputed facts; and that the Snow-dens did not claim a breach of the common-law principle of implied covenant to develop to this case.

IsThis court has not yet had an opportunity to interpret Ark.Code Ann. § 15-73-201. In Crystal Oil Co., we recognized the passage of the statutory provision, but noted that the lease at issue was entered into prior to its enactment and was of no consequence. 313 Ark. at 385, 855 S.W.2d at 302. In Davis v. Ross Production Co., 322 Ark. 532, 910 S.W.2d 209 (1995), a case involving the breach of the implied covenant to develop, we noted the statute in passing because Davis suggested

that this court establish, as a matter of law, a specific, maximum time period of inactivity after which an oil and gas lease would be subject to cancellation for failure to drill and develop the leasehold. Davis cites ... § 15-73-201 ... wherein the General Assembly has provided that one year beyond the primary term of the lease or one year within completion of a well is a maximum time the lessee can hold by production, lands outside a unit or pool in which there has been no production or exploration. Davis suggests this court adopt a period of ten years, rather than one year, as a matter of public policy. We choose not to do as Davis requests. As we have stated many times, it is for the General Assembly, not the courts, to establish public policy.

322 Ark. at 541, 910 S.W.2d at 214 (internal citations omitted).

The lease in this case allowed for extension “as long thereafter as oil, gas or other hydrocarbons are produced from said leased premises or from lands pooled therewith” and as long as drilling operations were commenced within the primary term and “so long as such operations are prosecuted, and if production results therefrom, then as long as production is maintained.” Here, there is no dispute that Chesapeake commenced drilling on the Snowdens’ property within Section 29 prior to the end of the primary term and continued therewith until the well had been completed and began producing. Therefore, by the express terms of the lease it was extended past the primary term. The question presented to this court is whether § 15-73-201 operates to limit extension of the lease to just the area where ^production had occurred — Section 29 — or whether the lease was extended to all lands under the lease.

Applying the plain language of the statute, we must affirm the circuit court’s grant of summary judgment in favor of Chesapeake. The Snowdens claim that § 15-73-201(a) functions to limit the extension of these types of leases to only the sections or pooling units where production has occurred. They argue that the circuit court misapplied the statute in extending the lease to the entire acreage. The Snowdens are- correct that subsection (a) operates to sever producing sections or pooling units from non-producing sections or pooling units for the purposes of the extension of the lease. It is, in effect, a statutory Pugh Clause that modifies the normal language of a lease to provide that operations or production from a section or pooling unit will not hold the entire lease but, instead, only maintains the lease as to that part of the lease acreage which is actually producing. See 58 C.J.S. Mines and Minerals § 310 (2010). Consistent with a traditional Pugh Clause, subsection (a) severs producing units or sections from non-producing units or sections despite the fact that leased lands are normally considered indivisible. Id.

However, our analysis does not stop at subsection (a). The language of subsection (b) states that the section “shall not apply” where drilling has commenced on “any part of lands in sections or pooling units under the lease” within a year of the expiration of the primary term of the lease or within one year of the completion of a well on “any part of lands in | insections or pooling units under the lease.”³ Here, Chesapeake drilled on the Snowdens’ land in Section 29 within a year after the expiration of the primary term, and it commenced drilling and completed two additional wells on Section 29 within that year, the last well being completed on September 9, 2009.⁴ Thus, pursuant to the statute’s plain language, the circuit court properly granted summary judgment in favor of Chesapeake. Subsection (a) of the statute would operate to sever Section 29 — the producing unit — from the Snowdens’ other leased acreage for the purposes of extending the lease. However, by commencing drilling within a year of the expiration of the primary term, the statute unambiguously states that subsection (a) did not apply to sever the producing section from non-producing units. Therefore, the lease was extended to all lands under the Snow-dens’ lease, not just the producing section. Furthermore, Chesapeake completed its last well on September 9, 2009. Pursuant to subsection (b), Chesapeake had another year from that date to commence drilling on any section or pooling unit under the lease to continue to extend the lease to all leased lands, producing and non-producing, and prevent the operation of subsection (a), which would sever the lease as to non-producing sections or pooling units.

We note that throughout their arguments on appeal, the Snowdens refer to the implied covenant to develop. In Ezzell v. Oil Associates, 180 Ark. 802, 810, 22 S.W.2d 1015, 1018 In(1930), we discussed the implied covenant and defined it as follows:

So it may be taken as the well-settled rule in this state that there is an implied covenant on the part of the lessee in oil and gas leases to proceed with reasonable diligence in the search for oil and gas and also to continue the search with reasonable diligence to the end that oil and gas may be produced in paying quantities throughout the whole of the leased premises.

The Snowdens did not allege in their complaint that Chesapeake had breached the implied covenant. Rather, they only alleged a statutory violation. Therefore, the question of whether Chesapeake violated the implied covenant is not properly before this court, and we decline to address it.

By counterclaim, Chesapeake requested the circuit court suspend its drilling obligations under the lease for the pendency of the litigation. The trial court initially indicated an inclination to grant the relief, but in its written order, it denied the suspension of Chesapeake’s obligation. On cross-appeal, Chesapeake asserts that the circuit court erred in denying the request for equitable relief. Chesapeake maintains that due to the expense of drilling, it would be unfair to require it to proceed under its lease obligations despite not knowing whether the lease would be adjudicated valid. Because the Snowdens asserted that the lease had expired as to all lands not within Section 29, where the Jimmy Roberts well had been completed, Chesapeake asked the court to toll its obligations so that it would not have to risk drilling outside of Section 29 while the litigation process continued. Chesapeake cites several cases for support of its position, including Winn v. Collins, 207 Ark. 946, 183 S.W.2d 593 (1944).

The Snowdens respond and claim that none of the arguments made by Chesapeake [iawarrant reversal of the circuit court’s decision. Further, they submit that they never demanded that Chesapeake quit drilling in Section 29, where oil had been produced and there was no dispute that the lease was extended, but rather that they filed suit to clear title to land that they believed was no longer leased to Chesapeake. In other words, the Snow-dens claim that Chesapeake could fulfill its lease obligations by continuing to develop in Section 29.

In Winn, this court stated:

The appellants, by prematurely filing this suit, are estopped from claiming any forfeiture that might have occurred during the pendency of the suit; and the period of time from the filing of this suit until its final disposition is not to be counted against the appellees as a part of the year for the mining of the minimum of 12,000 tons of bauxite from the lease.

207 Ark. at 954-55, 183 S.W.2d at 598. Relying on persuasive authority, we quoted from Morgan v. Houston Oil Co. of Texas, 84 S.W.2d 312, 314 (Tex.Civ.App.1935):

It is well settled that when a lessor determines to forfeit or cancel an oil and gas lease, and puts the lessee on notice thereof, he cannot complain if the latter suspends operations under the contract, pending the determination of the asserted right of the lessor to forfeit or cancel.

Although Winn involved a lease to mine the solid mineral bauxite, and we acknowledged that oil-and-gas cases are often not applicable to solid-mineral situations, we applied the equitable principle despite that difference. Id. at 953, 183 S.W.2d at 597. In doing so, we found favor in the proposition that a lessee is not bound to expend money mining for minerals where the validity of the lease has been put in peril by the landowner. Id. at 953, 183 S.W.2d at 597.

We hold that the equitable principle referred to in Winn is applicable to the present case. Therefore, the circuit court’s decision on Chesapeake’s cross-appeal should be reversed. 11sHere, the Snowdens filed their complaint against Chesapeake alleging that its lease had expired as to all sections other than Section 29. Chesapeake believed its lease was still valid to all the Snowdens’ property under the lease. Pursuant to the equitable principle enunciated in Winn, Chesapeake was entitled to the equitable relief it requested because the Snowdens attacked the validity of the lease by filing suit and could not thereafter complain that Chesapeake failed to fulfill its obligations under the lease during litigation of the Snowdens’ claim. Thus, the circuit court erred in denying Chesapeake’s request to suspend its drilling obligations under the lease during the pendency of litigation.

Affirmed on direct appeal; reversed on cross-appeal.

DANIELSON, J., not participating. WILLS, J., dissenting in part and concurring in part.

1 . JRE adopted the arguments of Chesapeake.

2 . Although the trial court referred to August 23, 2008, as the date of the completion of the last well, we note that Chesapeake provided undisputed evidence that the last well on Section 29 was completed on September 9, 2008.

3 . The dissent would have us interpret subsection (b) of the statute as saying "any other part” of lands under the lease. Rewriting the statute is the legislature’s responsibility, not ours.

4 . Again, we note the discrepancy between the facts presented by Chesapeake that the last well was completed on September 9, 2009, and the trial court’s order finding the last well was completed on August 23, 2009.