Youngs, C., James v. Old Ben Coal Company ( 2001 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 00-2190
C. James Youngs,
Plaintiff-Appellant,
v.
Old Ben Coal Company,
Defendant-Appellee.
Appeal from the United States District Court
for the Southern District of Indiana,
Evansville Division.
No. 97 C 148--Richard L. Young, Judge.
Argued January 19, 2001--Decided March 15, 2001
Before Flaum, Chief Judge, and Posner and
Ripple, Circuit Judges.
Posner, Circuit Judge. C. James Youngs,
the owner of a 400-acre tract of land on
which the Old Ben Coal Company has strip-
mining rights, brought this diversity
suit (governed by Indiana law) against
Old Ben for breach of contract, lost
after a bench trial, and appeals. Old Ben
caused the four oil wells on the land to
be plugged, and later, having removed all
the surface coal, ceased its coal-mining
activities. Youngs seeks specific
performance of what it claims to be Old
Ben’s contractual obligation to restore
the oil wells once Old Ben ceased its
mining activities. Whether Youngs has
such a right depends in the first
instance on a series of contracts
allocating rights in the tract in
question.
A fee simple in mineral-bearing land is
actually a bundle of separate property
rights, or as they are sometimes called
"estates," and the rights can be owned by
different persons. In 1949, the then
owner of the entire fee simple leased to
Bernard Bouchie the oil and gas estate in
the land, that is, the right to extract
oil and gas. The lessee was actually one
of Bouchie’s predecessors, but that is
one of a number of distracting and
irrelevant details that we shall ignore
in order to simplify our opinion. This
1949 lease is broadly worded and includes
a grant to the lessee of "the right at
any time to remove all machinery and
fixtures placed on said premises,
including the right to draw and remove
casing" (that is, pipe). The estate
itself, however, remained a part of the
fee simple.
In 1956, the fee simple, with the
exception of the oil and gas estate, was
sold to Youngs. The sale was expressly
subject to the 1949 lease of oil and gas
rights. In addition, the deed required
the buyer, that is, Youngs, along with
his successors and assigns, in the event
that he or they took any oil wells "out
of production," "to restore . . . said
wells to production in substantially the
condition that . . . they were in prior
to taking . . . them out of production."
In 1959 Youngs, whose fee-simple
interest included the coal estate in the
land, leased that estate, together with
the coal estate in adjacent parcels owned
by him, to Old Ben, subject to various
encumbrances, including the 1949 oil
lease and the restoration obligation in
the 1956 deed. The 1959 lease expressly
grants Old Ben the right to strip mine
the property and hence to destroy the
surface, destroy any structures (after
due notice to their owner) on the
surface, and destroy everything else down
to the seam of coal to be mined,
including any oil wells drilled pursuant
to leases executed after this lease (that
is, the 1959 coal lease). Youngs’s
exploitation of any other mineral estates
in the property was expressly
subordinated to Old Ben’s rights under
the lease.
Youngs did not own the oil and gas
estate in 1959, because it had been
excepted from the grant to him of the fee
simple in 1956. But he acquired that
estate in 1975 and shortly afterwards
sold the fee simple in the 400-acre tract
to Old Ben, while reserving as his
predecessor had done the oil and gas
estate. The reservation was expressly
subordinated to Old Ben’s rights under
the 1959 coal lease.
The upshot is that from 1975 on, Old Ben
owned all the estates in the tract except
the oil and gas estate, which remained in
Youngs’s hands; and Bouchie was the
lessee of that estate, operating the four
oil wells.
The production from the oil wells
dwindled. No oil was produced after March
1989, and the last royalty payment, made
by Bouchie to Youngs for 1989, was for
only $155. The previous year, 1988, it
had been $163, down from $3,941 in 1983.
Old Ben wanted to strip mine the area
occupied by the four wells, so in 1992,
with the oil wells unused, it paid
Bouchie, the lessee of the oil and gas
estate under the 1949 lease, to remove
the surface facilities (pumps, pipes, and
storage tanks) and plug the wells. It
then proceeded to strip mine the land
formerly occupied by them. So far as
appears, the price that Bouchie charged
Old Ben for the removal did not include
compensation for any loss of oil
production. There was no such loss,
because production had already ceased.
The strip mining of the areas occupied
by the wells was completed at some time
prior to 1995, the year that Youngs
discovered that the wells had been
plugged and demanded that Old Ben restore
them. Old Ben refused, precipitating this
suit.
An initial peculiarity about the suit is
that the 1956 grant, by which Youngs
acquired the 400-acre tract, required him
to restore the oil wells after coal
production ceased--yet the suit has him
seeking to impose that obligation on Old
Ben. The key date, however, from Youngs’s
point of view, is 1975, when he acquired
the oil and gas estate and therefore
became the obligee under the restoration
clause. The purpose of that clause in the
1956 grant was to obligate the owner of
the other rights in the land, including
most importantly the right to strip-mine
coal, to restore the oil wells, for the
benefit of the owner of the oil and gas
estate when the interfering uses, such as
strip mining, ceased, so that the
production of oil could resume. In 1975
Youngs became the owner of the oil and
gas estate and thus the beneficiary of
the restoration obligation. He argues
that Old Ben, as the coal operator,
became the obligor, since both the coal
lease, which was the original source of
Old Ben’s rights, and the deed by which
Old Ben acquired all the estates in the
land except the oil and gas estate from
Youngs in 1959, were expressly subject to
the restoration obligation.
There are several fallacies in this
argument. The first is that it overlooks
Bouchie’s rights. Youngs’s acquisition,
first of the 400-acre tract (1956) and
then of the oil and gas estate in the
tract (1975), were subject to Bouchie’s
preexisting rights conferred by the 1949
lease that he had obtained from the then
owner of the oil and gas estate. Those
rights, which later contracts to which
Bouchie was not a party could not
extinguish, included the right to
demolish the oil wells with no obligation
to restore them. So if when the oil wells
ran dry Bouchie decided to demolish them
Youngs could not object. But that is
exactly what happened--when the oil wells
ran dry, Bouchie decided to demolish
them. True, he was persuaded to this
decision by Old Ben’s money. Bouchie had
no incentive to incur the expense of
removing the wells, other than those
parts that might have salvage value, and
perhaps there were none; Old Ben did, to
enable it to strip mine the land that the
wells occupied. And so the stage was set
for a mutually advantageous deal between
Bouchie and Old Ben.
We do not understand how Bouchie’s right
to remove the wells could be thought
conditional on his deciding to do so
exclusively for his own purposes rather
than at the behest of someone else, who
wanted to use the land that the wells
occupied. Nothing in the 1949 lease would
have prevented Bouchie from assigning the
lease to Old Ben, which could then have
hired Bouchie or anyone else to do the
actual removal. Youngs could not have
blocked that transaction, and what
difference can it make that instead of
bothering with an assignment Bouchie and
Old Ben contracted directly for the
removal of the wells? Youngs argues that
under Indiana law an oil and gas lease
lapses after one year of nonproduction,
which in the case of Bouchie’s lease
would have been sometime early in 1989.
The argument is unsound. After one year
of nonproduction, the owner of the oil
and gas estate can file a statement with
the county recorder that the lease has
expired. Ind. Code sec. 32-5-8-1; Wilson
v. Elliott, 589 N.E.2d 259, 262 (Ill.
App. 1992); Salmon v. Perez, 545 N.E.2d
21, 24 (Ill. App. 1989) ("the statute
requires a one-year period of inactivity
and a written request of the property
owner before an oil and gas lease will
become null and void"). But Youngs never
did this. And so the lease was still in
force in 1992 when Old Ben contracted
with Bouchie for the removal of the
wells.
Even if the lease had terminated in
1989, Bouchie would have been entitled to
a reasonable time within which to
exercise his right under it to remove the
wells, a right that by its nature
persists after the expiration of the
lease by reason of nonproduction--the
lessee cannot reasonably be required to
exercise his right of removal while the
wells are still producing. The lease
authorized Bouchie to remove fixtures,
machinery, and casing "at any time," a
standard phrase in so-called "removal of
equipment clauses" and one that courts
have interpreted as authorizing the
lessee to remove the equipment before or
after the lease expires, so long as the
removal is done within a "reasonable
time." Hardy v. Heeter, 96 N.E.2d 682,
684 (Ind. App. 1951); Smith v. Mesel, 84
N.E.2d 477 (Ind. App. 1949); Michaels v.
Pontius, 137 N.E. 579 (Ind. App. 1922); 4
Eugene Kuntz, A Treatise on the Law of
Oil and Gas sec. 50.3, p. 293 (1990).
Since there appears to be no more
recoverable oil, and Youngs had indicated
no intentions with regard to the use of
the land after the end of oil production
and strip mining, three years might well
have been a reasonable time, though that
we need not decide.
If the lease had terminated in 1989 and
the wells had not been removed within a
reasonable time thereafter, and if
therefore they had been deemed abandoned
and so had reverted to Youngs as the
owner of the land to which they were
affixed, Youngs might have a claim
against Bouchie and Old Ben for having
destroyed his fixtures. That is not the
nature of his suit, but the issue of
Bouchie’s rights comes in indirectly. The
suit is based on Youngs’s express
reservation in the 1959 coal lease of the
right of restoration in the 1956
conveyance. It is on that reservation
that Youngs builds his argument that even
if Bouchie was entitled to remove the
wells, Old Ben could not do anything
directly or indirectly to bring about
their removal because in the deed that it
received from Youngs in 1959 it had
acknowledged its obligation to restore
the wells to their pristine condition
when it finished mining the coal.
But the 1959 conveyance, and any
reservations in it, were subject to the
1949 lease. By virtue of that lease,
Youngs could not prevent Bouchie from
demolishing the wells without obligation
to him until the lease was terminated,
which did not happen, as we have seen;
and that right of demolition would have
been impaired had Bouchie been precluded
from accepting Old Ben’s money to pay for
the demolition. This result can be
avoided, without reading the restoration
clause out of the 1959 conveyance, by
interpreting the clause to concern leases
on other parcels covered by the
conveyance of the coal estate to Old Ben
(for remember that Youngs owned, and
conveyed to Old Ben the coal estate in,
land adjacent to the land subject to
Bouchie’s oil lease) and future leases of
oil rights on the 400-acre tract itself.
Suppose that in 1960 Bouchie had
surrendered his lease, and the owner of
the oil and gas estate (which, remember,
had been carved out from the 1959
transaction, and came into Youngs’s hands
only in 1975) had granted another oil
lease, say to X Drilling Company. Suppose
that X had drilled several wells and
produced oil, yielding royalties to the
lessor. And suppose that later Old Ben,
as the coal lessee, had paid X to remove
the wells, as the coal lease of 1959
entitled it to do. If Old Ben then ceased
mining the tract, it would be obligated
to restore the wells. It wouldn’t matter
if the lease to X had not incorporated
the restoration clause or that Old Ben
might have paid X to demolish the wells.
Old Ben’s obligation to restore the wells
under the restoration clause would depend
only on its having ceased to mine for
coal. It is true that this obligation
would burden X, by making it less likely
that X could shift the expense of
demolishing the wells to someone else,
namely Old Ben. But X would have acquired
its lease with notice of the other
encumbrances on the property, including
the owner’s right to insist that his coal
lessee restore any oil wells on the
property to their pristine state when the
lessee ceased mining. The terms of the
lease would presumably have compensated X
for the fact that this encumbrance might
make the exercise of X’s right to remove
its wells more costly than it otherwise
would be. X would still be free to remove
the wells at its own expense; it just
would be less likely to be paid to do so
by Old Ben.
But Bouchie, having obtained his oil
lease before the restoration clause
entered the chain of title, did not hold
the lease subject to the clause. He
remained free by virtue of the priority
of his lease to do anything he wanted
with his oil wells--including accepting
payment from Old Ben to demolish them. A
conveyance of property is invalid to the
extent the seller tries to convey an
interest greater than he has. See, e.g.,
Ind. Code sec. 32-1-2-36; Crommelin v.
Fain, 403 So.2d 177, 181 (Ala. 1981).
Specifically, the conveyance of a fee
simple does not extinguish an existing
lease. Foertsch v. Schaus, 477 N.E.2d
566, 571 (Ind. App. 1985); Berman v.
Sinclair Refining Co., 451 P.2d 742, 745
(Colo. 1969); Plastone Plastic Co. v.
Whitman-Webb Realty Co., 176 So. 2d 27,
28 (Ala. 1965): Denco, Inc. v. Belk, 97
So. 2d 261, 265 (Fla. 1957). The
restoration clause was subject to the
earlier granted lease and could not give
Youngs more rights than his grantor had.
So far we have treated the issue of the
enforceability of the restoration clause
against Old Ben as an issue of general
contract and property law. See, e.g.,
Reese Exploration, Inc. v. Williams
Natural Gas, 983 F.2d 1514, 1518-19 (10th
Cir. 1993); Federal Land Bank v. Texaco,
Inc., 820 P.2d 1269, 1271 (Mont. 1991);
Bi-County Properties v. Wampler, 378
N.E.2d 311, 314 (Ill. App. 1978). But it
is also an issue of oil and gas law,
which by defining property rights in
these resources simplifies the
interpretation of contracts involving
them. As the district court pointed out,
under the oil and gas law of Indiana (and
generally) the oil and gas lessor retains
the rights to the use of the surface of
the land insofar as they can be exercised
without interfering with the lessee’s op
erations, a reversionary interest in any
oil left over when the lease terminates,
and a right to receive royalties on the
oil produced under the lease. Foertsch v.
Schaus, supra, 477 N.E.2d at 571;
Carrigan v. Exxon Co. U.S.A., 877 F.2d
1237, 1242 (5th Cir. 1989); Krone v.
Lacy, 97 N.W.2d 528, 533 (Neb. 1959); 3A
W.L. Summers, The Law of Oil and Gas sec.
572, p. 8 (1958). Missing is any right to
demand that the lessee leave his wells in
working condition for the benefit of the
lessor when the lease expires. In the
absence of an express condition in the
lease, that is not a right retained by
the lessor when he grants an oil and gas
lease. Hardy v. Heeter, supra, 96 N.E.2d
at 684; Smith v. Mesel, supra, 84 N.E.2d
at 478; Perry v. Acme Oil Co., 88 N.E.
859, 861 (Ind. App. 1909). This is one
respect in which oil and gas law differs
from standard property law; the default
rule is that the fixtures belong to the
lessee, not, as in the case of standard
property law, to the lessor. And anyway
there was an express right-to-remove
clause, as we have seen. So when in 1956
the owner of the oil and gas estate in
the 400-acre tract purported to reserve a
right to demand restoration of any oil
wells removed from the property, he was
reserving a right that he did not have;
it was not one of the rights he had
retained in granting the 1949 oil lease.
And so when Youngs obtained the oil and
gas estate in 1975 he did not obtain a
right to demand the restoration of oil
wells on the property. The 1949 lease had
given Bouchie carte blanche to deal with
the oil wells. They were his to remove,
abandon, sell, or demolish, as he wanted,
subject only to a statutory duty to cap
nonproducing wells. Ind. Code sec. 14-37-
8-1; Jarvis Drilling, Inc. v. Midwest Oil
Producing Co., 626 N.E.2d 821, 826-28
(Ind. App. 1993).
Youngs is attempting to enforce against
Old Ben a right that belongs to Bouchie.
Only if Bouchie had abandoned the wells
to Youngs could Youngs have complained
about Bouchie’s agreeing with Old Ben to
demolish the wells. The principle of oil
and gas law that defeats Youngs’s suit by
denying that a right of restoration is a
part of the oil and gas estate prevents
the interference with a previous lease
that we said would be caused if the
lessor could, by a subsequent lease,
deprive the previous lessee of the right
to assign his right of removal. That is
what Bouchie did in effect when he agreed
with Old Ben to destroy the wells.
There is still more that is wrong with
Youngs’s claim. The restoration clause
requires the restoration of the wells "to
production." The implication is that
there is still recoverable oil in the
ground--otherwise there will be no
production from the restored wells. The
evidence is uncontradicted that these
wells produced their last oil no later
than March 1989; and production had been
declining steadily for years. Maybe a few
more drops could be squeezed out by
heroic efforts, but production
commensurate with the expense of
restoring wells that have been completely
demolished--all surface facilities and
pipe removed and the wells themselves
plugged with cement--was out of the
question. Youngs claims that the issue of
production is not before us, but he is
wrong; Old Ben made it an issue in the
district court, and Youngs never tried to
present contrary evidence. Thus we can
infer that the object of this suit is not
to get Old Ben to restore the wells but
to force Old Ben to pay its way out of
the duty of restoration. Since the wells
were no longer producing when they were
destroyed, there is still another
argument against Youngs: the obligation
to restore is conditional on the wells’
having been taken out of production, and
they were not.
The exhaustion of the oil suggests a
deeper objection to the suit, one that
does not depend on the words "in
production" or "out of production." The
objection can be illustrated with the
facts of the well-known case of Groves v.
John Wunder Co., 286 N.W. 235 (Minn.
1939). The defendant as part of a larger
deal with the plaintiff promised to level
land owned by the latter, and broke his
promise. But because the Great Depression
had intervened between the making of the
agreement and the defendant’s refusal to
carry it out, the cost of leveling the
land--$60,000--would have greatly
exceeded the value of the land after it
was leveled--$12,000. Nevertheless the
plaintiff sued for, and won, the expense
of leveling, on the theory that he had
bargained for leveling come what may. The
analogy to the present case is evident:
Youngs is asking Old Ben to bear the cost
of restoring wells that when restored
will have no value. But Groves is not the
law in Indiana. City of Anderson v.
Salling Concrete Corp., 411 N.E.2d 728,
731-34 (Ind. App. 1980); see also
Peevyhouse v. Garland Coal & Mining Co.,
382 P.2d 109 (Okla. 1962); 3 E. Allan
Farnsworth, Farnsworth on Contracts sec.
12.20c, p. 356 and nn. 17-18 (1990).
Because the value of the plaintiff’s land
had fallen, the breach of contract did
not actually impose any loss on him, and
the only proper remedy for a harmless
breach is nominal damages. The effect of
the award of damages was to shift from
the owner of the land to the contractor a
part of the risk of the fall in land
values caused by the Depression. One
expects the risk of a fall of the value
of land to be borne by the owner of the
land rather than by a contractor. It is
the same here. Breach of a duty to
restore the wells to their mint operating
condition would impose no loss on the
owner of the oil and gas estate in the
land (Youngs), because there is no oil
left in the ground and so no value to be
obtained from oil wells. And one would
expect the risk of the oil running out to
be borne by the owner of the oil and gas
estate, who has the reversionary interest
in any oil that is left after the oil
lease has terminated, rather than by a
coal company. The owner of the oil and
gas estate gains if there is oil left in
the ground after the oil lease runs out,
and so he should lose if there is no oil
left.
This case is actually worse for the
plaintiff than Groves, because Youngs is
seeking, but not wanting, specific
performance. If he obtained the relief he
is seeking, that would just be a prelude
to a further negotiation with Old Ben.
Youngs does not want nonproducing wells;
he wants money to compensate him for a
loss that he has not sustained, since the
restoration of the wells would have value
for him only if there were oil left in
the ground. The essentially extortionate
transaction, a source of transaction
costs not offset by any social benefit,
for which an order of specific
performance would have set the stage is
another compelling objection, though less
to the claim underlying the suit than to
the relief sought, the grant of which
would be inequitable. Walgreen Co. v.
Sara Creek Property Co., 966 F.2d 273,
276 (7th Cir. 1992); Goldstick v. ICM
Realty, 788 F.2d 456, 463 (7th Cir.
1986); Milbrew, Inc. v. Commissioner, 710
F.2d 1302, 1306-07 (7th Cir. 1983);
Chicago & North Western Transportation
Co. v. United States, 678 F.2d 665, 667-
68 (7th Cir. 1982). Were there a right of
specific performance and to lost oil
revenues because of the failure to
restore the wells, then Youngs could
obtain damages as well; but neither
premise is supported.
On multiple grounds, then, the district
court was right to give judgment for Old
Ben and dismiss the suit.
Affirmed.