EL RIO OILS CANADA LIMITED v. CHASE

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District Court of Appeal, Second District, Division 2, California.

EL RIO OILS (CANADA) LIMITED v. CHASE et al.

Civ. 16864.

Decided: July 18, 1949

William A. Reppy, Oxnard, and Dolley, Knight, Woods & Hightower, Los Angeles, for El Rio Oils (Canada) Limited. Durley, Todd & Fox, Oxnard, Churchill, Teague & Romney, Ventura, for J. Warren Chase and others.

Plaintiff (hereinafter referred to as lessee) is the assignee of A. A. Weiss, who on January (16, 1937, leased from defendants (hereinafter referred to as lessors) a certain parcel of land for the purpose of exploring and drilling for oil and other petroleum products. The lease contained, among others, these provisions:

‘The Lessee shall pay Lessor, as royalty, for oil produced, an equal one-eighth (1/818) part of the value of all oil which may be produced and saved from said leased lands after deducting therefrom all oil used in the operation and development of said property and in pumping products from the said property elsewhere and after making the customary deductions for treatment, temperature, water and b. s., at the posted market price in the district in which the lease premises are located, for oil of like gravity, on the day the oil is run into the pipe line or tank; settlement to be made by Lessee on or before the 20th day of each calendar month for accrued royalty for the preceding month, or at Lessor's option, exercised not oftener than once in any one calendar year, upon six months previous notice, Lessee shall deliver into tanks maintained by Lessee on the leased premises or at the mouth of the well to pipe line designated by Lessor, Lessor's one-eighth part of said oil storage limited to thirty (30) days (this last provision being for the protection of the Lessor to insure him against an imposition of a fictitious price).

‘Lessee shall pay Lessor, as royalty on gas, one-eighth (1/818) of the net proceeds derived from the sale of gas from said property while same is being sold or used off the premises; settlement to be made by Lessee on or before the 20th day of each calendar month for gas sold during the preceding month, but nothing herein contained shall require lessee to market gas from said leased lands, unless said lands are being operated as a gas field. Lessee shall have the right, free of cost to him, to use gas required in the operation and development of said property and in the production and lifting of oil from said wells, and in pumping production and lifting of oil from said wells, and in pumping products from said property elsewhere. * * *

‘Time is of the essence of this agreement and lease.’

Lessee completed two wells on the property described in the lease. The oil obtained from the wells was of a low gravity and high consistency and lessee found few purchasers interested in buying the type of crude oil produced. Lessee, after the first year of production, injected distillate into the well in such a manner that it mixed with and thinned the native crude oil and made it easier to pump. Because of this method of production, a great deal more native crude oil was produced. The mixture resulting from the injection of distillate was slightly more valuable than the native crude but the cost of the distillate injected was greatly in excess of any increase in the value of the oil.

The purpose of lessee in injecting the distillate was not to increase the marketability of the crude but was for the purpose of increasing the production.

After this practice had been commenced, lessee rendered a statement to lessors in which it deducted from lessors' royalty 1/818th of the cost of the distillate injected by lessee into the well, and charged lessors 5 cents for each royalty barrel of oil for what was termed ‘a heating and treating charge.’ The oil injected was neither heated nor treated by the lessee. After objection by lessors to the deduction, lessee continued to make the same deduction but termed it ‘Royalty owner's share of operating overhead.’

A dispute ensued over a period of time between lessee and lessors relative to the basis upon which the royalty due lessors should be computed. Lessee being in default under the terms of the lease for non-payment of royalty in the sum of $5,229.59, notice of default was given by lessors according to the terms of the lease, which notice was ignored by lessee.

Lessee then filed an action for declaratory relief, in which suit lessors filed a cross-complaint seeking forfeiture of the lease. After trial, the court found that:

1. Lessee ‘voluntarily failed and refused to pay the full amount of said royalties; * * * (and) * * * voluntarily failed and refused to pay’ within 30 days after notice thereof, the sum of $5,229.59, which was due as a royalty under the terms of the lease.

2. It was true that lessee entered into an agreement with Douglas Oil Company and accepted a lower stated price for oil together with the obligation of Douglas Oil Company to deliver distillate as therein provided, for the purpose of evading its obligation to bear the entire production expense of injecting distillate in the wells, and for the purpose of attempting to establish an indirect method of charging lessor with a share of its expense.

Appeals

1. Lessors appeal from the provisions of the judgment granting lessee relief from the forfeiture of the lease.

2. Lessee appeals from the portions of the judgment which hold:

(a) That lessee, in computing cash royalty due lessors, is not entitled under the terms of the lease to make a deduction for a proportionate part of the cost of injecting distillate into the wells;

(b) That lessors are entitled when they elect to take their royalty in kind to take the oil without deducting the distillate injected into it;

(c) That it is proper to include as a part of the basis for computing the cash royalty the theoretical value to the lessee of a covenant in an oil purchase contract to return to lessee distillate equal in amount to that injected into the well;

(d) That the money royalty be predicated upon the contract price or market value of the oil, whichever is higher.

Lessors' Appeal

Question: Did the trial court erroneously grant lessee relief from the forfeiture of its rights and privileges under the oil and gas lease?

This question must be answered in the affirmative.

First: It is the general rule that fraud, illegality, or any unconscientious conduct by one seeking equitable relief from a forfeiture will prevent the court from granting a decree in his favor. (DeGarmo v. Goldman, 19 Cal.2d 755, 764 et seq., 123 P.2d 1; Blue Ridge Metal Mfg. Co. v. Proctor, 327 Pa. 424, 194 A. 559, 561.)

The trial court found that lessee had entered into an agreement with the Douglas Oil Company whereby it agreed to accept a lower price for oil produced from its wells than it would otherwise have obtained, plus an obligation of the Douglas Oil Company to deliver distillate to lessee without lessee's paying for it, for the purpose of evading its obligation to pay lessors the full royalty due lessors. This finding was fully sustained by the evidence. It is therefore obvious that lessee perpetrated a fraud upon lessors and that such conduct was unconscientious and therefore deprived it of the right to relief from the forfeiture of its rights and privileges under its lease decreed by the court.

Second: Equity will not relieve from a forfeiture caused by a wilful default, and a voluntary default is a wilful one. (Taylor v. United States Fidelity & Guaranty Co., 86 Cal.App. 382, 390, 260 P. 898; Parsons v. Smilie, 97 Cal. 647, 654 et seq., 32 P. 702.)

The trial court found that lessee voluntarily failed and refused to pay the full amount of the royalties due lessors and voluntarily failed and refused to pay $5,229.59 within 30 days after notice of default given prusuant to provisions of the lease. Therefore, the foregoing rule is applicable and the trial court erred in granting lessee relief from its forfeiture.

Third: The rule that forfeitures are not favored in law does not apply to oil and gas leases. (John v. Elberta Oil Co., 124 Cal.App.2d 744, 747 et seq., 13 P.2d 538.) Likewise it is the general rule that where time is made the assence of the agreement, a party may not obtain relief from a forfeiture of the agreement because of failure to comply with its provisions. (Glock v. Howard & Wilson Colony Co., 123 Cal. 1, 19, 55 P. 713, 43 L.R.A. 199, 69 Am.St.Rep. 17; Henck v. Lake Hemet Water Co., 9 Cal.2d 136, 143, 69 P.2d 849.)

The lease under consideration expressly stated ‘Time is of the essence of this agreement and lease.’ Hence the foregoing rules are applicable and the trial court should not have granted lessee relief from the forfeiture.

Lessee's Appeal

Questions: First: Did the trial court err in ruling that in determining the amount of royalty due lessors pursuant to the terms of the lease they should not be charged with a proportionate share of lessee's overhead or of the expense of injecting distrillate into the wells in order to increase production?

This question must be answered in the negative. The lease provided that lessee should pay lessors a one-eighth royalty on all oil produced ‘after making the customary deduction for treatment, temperature, water and b. s.’ The evidence disclosed that there was no treatment of the oil in any sense of the word. The oil was not subjected to any processing. Likewise evidence was introduced to show that it was the custom in the oil industry that the expense of injecting distillate as an aid in pumping and to increase production should be borne exclusively by lessee and that lessee should pay its own ‘overhead’ expense. In the absence of an agreement to the contrary, it was the custom in the oil industry that in computing a royalty, the lessee should not charge any portion of its overhead expense to the lessor.

In view of the rule that the power of an appellate court begins and ends with a determination as to whether there is any substantial evidence contradicted or uncontradicted which will support the trial court's finding of fact (In re Estate of Isenberg, 63 Cal.App.2d 214, 217, 146 P.2d 424), the foregoing evidence sustains the trial court's finding that lessee improperly attempted to charge lessors with a proportionate share of its overhead and of the expense of injecting distillate into the wells for the purpose of increasing production.

Second: Was the defense of the statute of limitations available to the lessee?

This question must be answered in the negative. A party relying on the defense of the statute of limitations must plead it, otherwise the defense is waived. (Union Sugar Company v. Hollister Estate Company, 3 Cal.2d 740, 744, 47 P.2d 273.)

In the present case lessee did not plead the statute of limitations or assert it in any other way in the trial court. Therefore, under the above stated rule, it has waived any right to rely upon the statute of limitations upon appeal.

In view of our conclusions, it is unnecessary to discuss other points argued by counsel for the reason that their decision would not in any way affect the results we have reached.

The conclusions of law are modified by striking therefrom the semicolon after the words ‘cross-defendant’ on line 3, page 94, of the Clerk's Transcript on appeal, and inserting in lieu thereof a period, and by striking the balance of paragraph 6 of said conclusions of law; also by striking paragraphs 7 and 9 of the conclusions of law. Likewise the semicolon after the words ‘cross-defendant’ in paragraph 5 of the judgment appearing on line 8, page 107, of the Clerk's Transcript on appeal, is stricken and a period is inserted in lieu thereof; also, the following words in said paragraph are stricken:

‘provided, however, that the cross-defendant shall be relieved from said forfeiture and reinstated as lessee under said oil and gas lease in the event that it shall, prior to the expiration of fifteen (15) days from the date of entry of this judgment, pay to the clerk of the above entitled court for the benefit of cross-complainants all sums of money for which judgment is given herein, including costs.’

Paragraphs 7 and 9 of the judgment, appearing on pages 109 and 110 of the Clerk's Transcript on appeal, are likewise stricken. The document denominated ‘Final Judgment’ appearing on page 112 et seq. of the Clerk's Transcript on appeal is also stricken.

In all other respects, the judgment of the trial court is affirmed.

McCOMB, Justice.

MOORE, P. J. and WILSON, J., concur. Rehearing granted; McCOMB, J., dissenting.